Sportsmans Guide (SGDE) 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                                        to                                         .

Commission File No. 015767

The Sportsman’s Guide, Inc.

(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction	41-1293081 (I.R.S. Employer Identification Number)
of incorporation or organization)

411 Farwell Ave., So. St. Paul, Minnesota 55075
(Address of principal executive offices)

(651) 451-3030
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero           Accelerated filerþ           Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of August 10, 2006, was 7,334,627 shares.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits
SIGNATURES
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE SPORTSMAN’S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)

	June 30,		December 31,
	2006		2005
ASSETS
Current Assets
Cash and cash equivalents	$	8,459	$	14,050
Accounts receivable – net		2,767		4,437
Inventory		36,884		34,238
Promotional material		4,609		4,462
Prepaid expenses and other		4,608		3,761
Deferred income taxes		1,960		2,027
Total current assets		59,287		62,975
Property and Equipment – Net		2,522		2,325
Other Assets
Goodwill		17,205		17,205
Trade and domain name		10,200		10,200
Other intangibles		1,060		1,185
Total other assets		28,465		28,590
Total assets	$	90,274	$	93,890
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	23,198	$	26,687
Accrued expenses		6,077		8,772
Income taxes payable		1,582		2,616
Deferred revenue		6,626		7,833
Returns reserve		1,380		2,045
Customer deposits and other liabilities		2,867		3,199
Total current liabilities		41,730		51,152
Long-Term Liabilities
Deferred income taxes		916		769
Total long-term liabilities		916		769
Total liabilities		42,646		51,921
Commitments and Contingencies		—		—
Shareholders’ Equity
Common Stock-$.01 par value; 36,800,000 shares authorized; 7,333,627 shares issued and outstanding at June 30, 2006, 7,318,564 issued and outstanding at December 31, 2005		73		73
Additional paid-in capital		10,002		8,618
Accumulated other comprehensive income		351		280
Retained earnings		37,202		32,998
Total shareholders’ equity		47,628		41,969
Total liabilities and shareholders’ equity	$	90,274	$	93,890

The accompanying condensed notes are an integral part of these consolidated financial statements.

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THE SPORTSMAN’S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

For the Three Months and Six Months Ended
June 30, 2006 and 2005

(In thousands, except per share data)

	Three Months Ended June 30,					Six Months Ended June 30,
	2006		2005			2006			2005
Net sales	$	69,231	$	63,778		$	140,879		$	128,356
Cost of sales		48,394		44,334			97,922			88,878
Gross profit		20,837		19,444			42,957			39,478
Selling, general and administrative expenses		17,823		15,476			36,501			31,948
Earnings from operations		3,014		3,968			6,456			7,530
Interest expense		—		(82	)		(1	)		(146	)
Miscellaneous income, net		168		91			304			159
Earnings before income taxes		3,182		3,977			6,759			7,543
Income tax expense		1,182		1,470			2,555			2,779
Net earnings	$	2,000	$	2,507		$	4,204		$	4,764
Net earnings per share:
Basic	$	.27	$	.35		$	.57		$	.67
Diluted	$	.24	$	.31		$	.51		$	.59
Weighted average common and common equivalent shares outstanding:
Basic		7,329		7,120			7,326			7,113
Diluted		8,321		8,175			8,273			8,120

The accompanying condensed notes are an integral part of these consolidated financial statements.

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THE SPORTSMAN’S GUIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

For the Six Months Ended
June 30, 2006 and 2005

(In thousands)

	2006			2005
Cash flows from operating activities:
Net earnings	$	4,204		$	4,764
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		637			763
Deferred income taxes		214			294
Share-based compensation		1,135			—
Tax benefit related to exercise of stock options		167			110
Change in deferred compensation		71			(10	)
Changes in operating assets and liabilities:
Accounts receivable		1,670			1,518
Inventory		(2,646	)		(5,884	)
Promotional material		(147	)		(383	)
Prepaid expenses and other		(847	)		(435	)
Other long-term assets		33			(744	)
Income taxes payable		(1,034	)		210
Accounts payable		(3,489	)		(1,012	)
Accrued expenses		(2,695	)		(1,787	)
Customer deposits and other liabilities		(2,204	)		(2,064	)
Cash flows used in operating activities		(4,931	)		(4,660	)
Cash flows from investing activities:
Purchases of property and equipment		(742	)		(451	)
Other		—			(17	)
Cash flows used in investing activities		(742	)		(468	)
Cash flows from financing activities:
Payments on long-term debt		—			(5	)
Proceeds from exercise of stock options		82			72
Cash flows provided by financing activities		82			67
Decrease in cash and cash equivalents		(5,591	)		(5,061	)
Cash and cash equivalents at beginning of the period		14,050			8,616
Cash and cash equivalents at end of the period	$	8,459		$	3,555
Supplemental disclosure of cash flow information
Cash paid during the periods for:
Interest expense	$	28		$	144
Income taxes	$	3,209		$	2,165

The accompanying condensed notes are an integral part of these consolidated financial statements.

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THE SPORTSMAN’S GUIDE, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1: Basis of Presentation

     The Sportsman’s Guide, Inc., or the Company, is a multi-channel direct marketer of value-priced outdoor gear, general merchandise and golf equipment/accessories. The Company markets its high-quality products through catalogs and ecommerce websites. The Company currently has two reportable business segments, The Sportsman’s Guide, or TSG, its original business, and The Golf Warehouse, or TGW, acquired in 2004.

     TSG markets and sells value-priced outdoor gear and general merchandise, with a special emphasis on outdoor clothing, equipment and footwear through catalogs and two ecommerce websites,www.sportsmansguide.com andwww.bargainoutfitters.com. TGW markets and sells name-brand golf equipment and baseball/softball equipment, apparel and accessories through three ecommerce websites,www.TGW.com,www.baseballsavings.com andwww.softballsavings.com, catalogs and one retail store.

     The accompanying consolidated financial statements are unaudited and reflect all adjustments which are normal and recurring in nature, and which, in the opinion of management, are necessary for a fair presentation thereof. Reclassifications have been made to prior year financial information wherever necessary to conform to the current year presentation. Results of operations for the interim periods are not necessarily indicative of full-year results.

     In preparing the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.

     The accompanying consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

     The Company’s fiscal quarter ends on the Sunday nearest June 30 for 2006 and 2005, but for clarity of presentation, all periods are described as if the three and six month periods end June 30. Fiscal second quarters 2006 and 2005 each consisted of 13 weeks.

     The significant accounting policies of both business segments are the same as those described in Note A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.

Note 2: Share-Based Compensation

     Commencing January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R,Share Based Payment(“SFAS 123R”), which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The Company recorded $567,000 and $1,135,000 of related share-based compensation expense, included in both cost of sales and selling, general and administrative expenses, for the quarter and six months ended June 30, 2006, respectively. For the quarter ended June 30, 2006, the share-based compensation expense, net of tax, reduced net earnings by $443,000, thus reducing basic earnings per share by $0.06 and diluted earnings per share by $0.05. For the six months ended June 30, 2006, the share-based compensation expense, net of tax, reduced net earnings by $886,000, thus reducing basic earnings per share by $0.12 and diluted earnings per share by $0.10.

     As of June 30, 2006, there are approximately $2.6 million of unrecognized share-based compensation costs related to non-vested awards. The unrecognized share-based compensation costs are expected to be recognized as follows: $1.1 million in the remainder of 2006, $1.4 million in 2007 and $0.1 million in 2008.

     Prior to adopting SFAS 123R, the Company accounted for share-based compensation under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, or the intrinsic value method. The Company has applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not been restated.

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     The following table illustrates the effect on net earnings and earnings per share as if the Company had applied the fair value method of accounting for stock options (in thousands, except per share data):

	Three months		Six months
	ended June 30,		ended June 30,
	2005		2005
Net earnings as reported	$	2,507	$	4,764
Deduct: Total share-based employee compensation expense under the fair value method for all awards, net of related tax effects		392		768
Pro-forma net earnings	$	2,115	$	3,996
Earnings Per Share:
Basic – as reported	$	.35	$	.67
Basic – pro-forma		.30		.56
Diluted – as reported	$	.31	$	.59
Diluted – pro-forma		.27		.51
Weighted average common and common equivalent shares outstanding:
Basic – as reported		7,120		7,113
Basic – pro-forma		7,120		7,113
Diluted – as reported		8,175		8,120
Diluted – pro-forma		7,888		7,867

     The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: zero dividend yield; expected volatility of 44% to 48% in 2005, 48% in 2004, and 62% in 2003; risk-free interest rates of 3.65% in 2005, 2.87% to 3.87% in 2004, and 3.18% in 2003; estimated forfeiture of 2% in 2005, 2% to 5% in 2004 and 2% in 2003; and expected life of 3 to 5 years in 2005 and 2004 and 5 years in 2003.

     The Company’s stock options generally vest ratably over three years of service and have a contractual life of 10 years. The Company reserved a total of 2,752,500 shares of common stock for issuance under the 1991, 1996, 1999 and 2004 Stock Option Plans of which 1,750,701 shares remain outstanding. Option transactions during the six month period ended June 30, 2006 are summarized as follows:

	Number of			Weighted Average
	Shares			Exercise Price
Outstanding at December 31, 2005		1,765,764		$	9.64
Exercised		(9,013	)	$	6.23
Outstanding at March 31, 2006		1,756,751		$	9.66
Exercised		(6,050	)	$	4.18
Outstanding at June 30, 2006		1,750,701		$	9.68

	Number of		Weighted Average
	Shares		Exercise Price
Options exercisable at June 30, 2006		1,193,204	$	7.59

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     The following table summarizes information concerning currently outstanding and exercisable stock options.

			Weighted Average
			Remaining	Weighted Average				Weighted Average
Range of Exercise Prices	Number Outstanding		Contractual Life	Exercise Price		Number Exercisable		Exercise Price
$   1.97 –   2.67		197,955	5 years	$	2.05		197,955	$	2.05
3.92 –   4.50		494,750	4 years		4.39		494,750		4.39
10.77 – 15.57		915,496	8 years		13.05		452,999		12.51
17.00		142,500	9 years		17.00		47,500		17.00
		1,750,701					1,193,204

Note 3: Net Earnings Per Share

     The Company’s basic net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to the stock options, when dilutive.

     For the three months and six months ended June 30, 2006, 992,711 and 946,552 common share equivalents were included in the computation of diluted net earnings per share.

     For the three months and six months ended June 30, 2005, 1,054,764 and 1,006,986 common share equivalents were included in the computation of diluted net earnings per share.

     All outstanding options during the three months and six months ended June 30, 2006 and 2005 were included in the computation of diluted earnings per share because the average market price of the common shares during the period exceeded the exercise price of the options.

Note 4: Repurchase of Common Stock

     On May 6, 2005, the Company announced that its board of directors authorized a plan to repurchase up to ten percent of its outstanding common stock in the open market or in privately negotiated transactions over the next 12 months. No shares of common stock were repurchased under this plan during the three and six months ended June 30, 2006. No shares of common stock were repurchased under this plan during the three months ended June 30, 2005.

Note 5: Segment Information

     The Company operates in two business segments. TSG markets and sells value-priced outdoor gear and general merchandise, with a special emphasis on clothing, equipment and footwear through main, specialty and Buyer’s Club Advantage^TMcatalogs and two ecommerce websites. TGW markets and sells golf equipment and baseball/softball equipment, apparel and accessories through three ecommerce websites and catalogs.

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     Business Segment Comparisons (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
Net Sales
The Sportsman’s Guide	$	46,787	$	43,164	$	102,235	$	93,411
The Golf Warehouse		22,444		20,614		38,644		34,945
Total	$	69,231	$	63,778	$	140,879	$	128,356
Earnings from Operations (1)
The Sportsman’s Guide	$	977	$	2,086	$	3,135	$	4,430
The Golf Warehouse		2,037		1,882		3,321		3,100
Total	$	3,014	$	3,968	$	6,456	$	7,530
Depreciation and Amortization
The Sportsman’s Guide	$	194	$	255	$	403	$	526
The Golf Warehouse		120		115		234		237
Total	$	314	$	370	$	637	$	763
Capital Expenditures
The Sportsman’s Guide	$	284	$	263	$	508	$	325
The Golf Warehouse		81		41		234		126
Total	$	365	$	304	$	742	$	451

(1) Commencing January 1, 2006, the Company adopted SFAS 123R, which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The adoption of SFAS 123R decreased earnings from operations for the three months and six months ended by approximately $567,000 and $1,135,000. The Company has applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not been restated.

     During the three months ended June 30, 2006, TSG incurred approximately $777,000 of expenses in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc. TSG’s earnings from operations have been reduced accordingly.

Business Segment Assets (in thousands):

	As of June 30,
	2006		2005
Assets
The Sportsman’s Guide	$	47,236	$	41,882
The Golf Warehouse		43,038		39,589
Total	$	90,274	$	81,471

Note 6: Pending Merger

     On May 4, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with VLP Corporation, a Delaware corporation (“VLP”), and Panther Subcorp, Inc. a Minnesota corporation and a wholly owned direct subsidiary of VLP (“Subcorp”). VLP is a wholly owned subsidiary of Redcats USA, Inc., a Delaware corporation.

     Pursuant to the terms of the Merger Agreement, Subcorp will be merged with and into the Company with the Company continuing as the surviving corporation and a wholly owned subsidiary of VLP (the “Merger”). At the effective time of the Merger, each issued and outstanding share of common stock, par value $.01 per share, of the Company, other than any shares held by shareholders who perfect their rights as dissenting shareholders under the

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Minnesota Business Corporation Act, will be converted into the right to receive $31.00 in cash. In addition, each outstanding option to purchase shares of the Company’s common stock granted pursuant to the Company’s stock incentive plans will be cancelled and the holder of the option will be entitled to receive an amount in cash equal to the amount, if any, by which $31.00 exceeds the exercise price of the option.

     Completion of the Merger is subject to customary closing conditions including (1) approval of the Company’s shareholders, (ii) expiration of the Hart-Scott-Rodino waiting period and (iii) the absence of any law or order prohibiting or enjoining the Merger. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including (i) the accuracy of the representations and warranties of the other party and (ii) material compliance of the other party with its covenants.

     The Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period on June 9, 2006. On July 28, 2006, the Company mailed its proxy statement for the special meeting of shareholders to be held on August 25, 2006 for the purpose of voting on the proposal to approve the Merger Agreement. The parties currently expect that the Merger will be completed shortly following the shareholder approval at the special meeting.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a multi-channel direct marketer of value priced outdoor gear, general merchandise and golf equipment/accessories. We market our high-quality products through catalogs and ecommerce websites. We currently have two reportable business segments, The Sportsman’s Guide, or TSG, our original business, and The Golf Warehouse, or TGW, acquired in 2004. TSG markets and sells value-priced outdoor gear and general merchandise, with a special emphasis on outdoor clothing, equipment and footwear through catalogs and two e-commerce websites,www.sportsmansguide.com andwww.bargainoutfitters.com. TGW markets and sells name-brand golf equipment and baseball/softball equipment, apparel and accessories through three ecommerce websites,www.TGW.com,www.baseballsavings.com andwww.softballsavings.com, catalogs and one retail store.

     Our business was founded in 1970 and incorporated as TSG in 1977. Over time, our product offerings and marketing efforts have broadened from the deer hunter to include those interested in pursuing and living the outdoor lifestyle in general and the value-oriented outdoorsman in particular. In 1992, we began our value-pricing strategy of offering outdoor equipment and supplies at discount prices, later adding government surplus, manufacturers’ close-outs and other merchandise lines. In 1994, we began to publish specialty catalogs, which allowed us to utilize a customized marketing plan to individual customer groups. We established TSG’s Internet presence in 1996 and completed the launch of TSG’s online retail store in April 1998. TSG’s sales generated through the Internet have grown rapidly since that time with Internet related sales accounting for approximately 55% and 53% of total catalog and Internet sales for the three and six months ended June 30, 2006. In the fall of 2000, we began to aggressively promote and sell the Buyer’s Club membership program. In addition, unique catalogs (Buyer’s Club Advantage^TM) were developed and promoted to members only, allowing us to maximize sales and profitability from our best customers.

     On June 29, 2004, we acquired The Golf Warehouse, L.L.C. TGW is an on-line and catalog retailer of golf and baseball/softball equipment, apparel and accessories. TGW markets and sells golf and baseball/softball related merchandise primarily through its websites,www.TGW.com,www.baseballsaving.com,www.softballsavings.com and through catalogs. The majority of TGW’s sales are generated through the Internet. TGW’s first catalog was published in the winter of 2002.

Fiscal Year

     Our fiscal quarter ends on the Sunday nearest June 30 for 2006 and 2005, but for clarity of presentation, all periods are described as if the quarter end is June 30. Fiscal second quarter 2006 and 2005 each consisted of 13 weeks.

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Critical Accounting Policies and Use of Estimates

     Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on a periodic basis and are based on historical experiences, if available, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

     The following include the critical accounting policies that we believe require significant estimation and management judgment. The critical accounting policies of both business segments, where applicable, are the same as described in the following paragraphs.

Revenue Recognition

     We recognize sales at the time of shipment from our distribution center or from our factory direct vendors’ distribution center. We record sales generated as a result of our factory direct or drop ship arrangements when the third-party factory direct vendor confirms to us the shipment to our customer. We record sales for gift certificates as gift certificates are redeemed for merchandise. Prior to redemption, the certificates are recorded as a liability for the full-face amount of the certificates. We record sales generated under the Buyer’s Club 4-Pay Plan at the time of shipment along with related shipping and handling revenue. Amounts billed to customers for shipping and handling are recorded as sales at the time of shipment and shipping costs are included in cost of sales.

     At the time of shipment, we record a provision for anticipated merchandise returns, net of exchanges, based upon historical experience and current expectations. If our estimates for these merchandise returns are too low, and we receive more merchandise returns than we estimate, our reported net sales may not accurately reflect our operating results for a given period and our results of operations in subsequent periods may be adversely affected. Our estimates for merchandise returns have not been materially inaccurate in the past.

     TSG’s customers can purchase one-year memberships in our Buyer’s Club for a $29.99 annual fee. TSG also offers two-year memberships for $59.97. Club members receive merchandise discounts of 10% on regularly priced items and 5% on ammunition. Membership fees, net of estimated refunds for club member cancellations, are deferred and recognized in income on a straight-line basis over the remaining membership term. Estimated refunds are recorded as a liability and reduced when refunds are given or upon membership expiration.

Promotional Materials and Advertising Costs

     Promotional materials consist of prepaid expenses for internal and third party direct costs incurred in the development, production and circulation of our catalogs. These costs are primarily composed of creative design, pre-press production, paper, printing, postage and mailing costs relating to the catalogs. All such costs are capitalized as prepaid promotional materials and are amortized as advertising expense over the estimated useful lives of the catalogs. The amortization of our promotional materials is intended to match revenues with expenses. The estimated life of the catalog or expected period of future benefit ranges from four to six months from the in-home date of the catalog with the majority of the costs amortized within the first month. We estimate the in-home date to be one week from the known mailing date of the catalog. The expected life of each catalog is determined based on a detailed marketing forecast, in which we consider our historical experience for similar catalogs as well as current sales trends. These forecasts are updated frequently during the most active period of selling for each catalog to determine the expected future life of each catalog. We monitor changes to the forecast and adjust the amortization amount accordingly. If the expected period of future benefit is not as we estimate, our reported selling, general and administrative costs may not accurately reflect our actual promotional materials and advertising costs, which may adversely affect our results of operations in subsequent periods.

     The ongoing cost of developing and maintaining our customer list is charged to operations as incurred. All other advertising costs, such as ads and affiliate commissions, are expensed as incurred.

Share-based Compensation

     Commencing January 1, 2006, we account for our options issued to employees under the recognition provisions of Statement of Financial Accounting Standards No. 123R,Share Based Payment (“SFAS 123R”), which requires all share-

10

based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield, expected volatility, risk-free interest rates, estimated forfeiture, and expected life.

     Prior to adopting SFAS 123R, we accounted for share-based compensation under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, or the intrinsic value method. We applied the prospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not been restated.

Income Taxes

     We account for income taxes under the provisions of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax benefits and obligations attributable to differences between their carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using the current effective tax rate.

     In determining our provision for income taxes, we use an effective tax rate based on annual income, anticipated permanent tax differences, statutory state income tax rates and the expected effect of expensing share-based compensation.

Results of Operations

     The following table sets forth, for the periods indicated, information from our Consolidated Statements of Earnings expressed as a percentage of net sales:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		69.9			69.5			69.5			69.2
Gross profit		30.1			30.5			30.5			30.8
Selling, general and administrative expenses		25.7			24.3			25.9			24.9
Earnings from operations		4.4			6.2			4.6			5.9
Interest expense		—			(0.1	)		—			(0.1	)
Miscellaneous income (expense)		0.2			0.1			0.2			0.1
Earnings before income taxes		4.6			6.2			4.8			5.9
Income tax expense		1.7			2.3			1.8			2.2
Net earnings		2.9	%		3.9	%		3.0	%		3.7	%

Comparison of Three Months Ended June 30, 2006 and 2005

	The Sportsman’s Guide				The Golf Warehouse				Consolidated
	2006		2005		2006		2005		2006		2005
Net sales	$	46,787	$	43,164	$	22,444	$	20,614	$	69,231	$	63,778
Earnings from operations	$	977	$	2,086	$	2,037	$	1,882	$	3,014	$	3,968

Net Sales.Consolidated net sales for the three months ended June 30, 2006 of $69.2 million were $5.4 million or 8.5% higher than sales of $63.8 million during the same period last year. The increase in net sales for the second quarter was primarily the result of increased Internet sales at both TSG and TGW.

     As of June 30, 2006, TSG’s Buyer’s Club membership had increased to approximately 425,000, up approximately 8.4% over the membership count one year ago.

     Sales generated through the Internet for the three months ended June 30, 2006 were approximately 55% of TSG’s total Internet and catalog sales compared to approximately 49% during the same period last year. The majority of TGW’s total sales for the three months ended June 30, 2006 and 2005 were generated through the Internet. Sales generated through the Internet are defined as those that are derived from our websites, catalog orders processed through the Internet and Internet

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offers placed by telephone. Internet related sales continue to grow, quarter over quarter, as we continue to make enhancements to our websites and implement and improve upon various marketing and merchandising programs.

     Gross returns and allowances for the three months ended June 30, 2006 were $3.8 million or 5.3% of gross sales compared to $3.3 million or 4.9% of gross sales during the same period last year. The increase in gross returns and allowances, as a percentage of gross sales, was primarily due to increased footwear and clothing sales at TGW, which historically have a higher return percentage than other product categories.

Gross profit.Consolidated gross profit for the three months ended June 30, 2006 was $20.8 million or 30.1% of net sales compared to $19.4 million or 30.5% of net sales during the same period last year. The decrease in consolidated gross profit, as a percentage of net sales, was primarily from lower product margins due to promotional pricing and a higher sales increase in the hard lines, which traditionally have lower product margins, offset somewhat by improved shipping and handling margins. Our gross profit (net sales less cost of sales) may not be comparable to those of other entities since some entities do not include the same cost elements within their definition of cost of sales.

Selling, general and administrative expenses.Consolidated selling, general and administrative expenses for the three months ended June 30, 2006 were $17.8 million or 25.7% of net sales compared to $15.5 million or 24.3% of net sales for the same period last year.

     For the second quarter, consolidated selling, general and administrative expenses, as a percentage of net sales, were higher compared to the same quarter a year ago primarily as a result of expenses incurred of $777,000 in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc., the adoption of SFAS 123R requiring all share-based compensation payments to be recognized as an operating expense and higher advertising costs in relation to net sales primarily from aggressive Internet marketing campaigns. The share-based compensation included in selling, general and administrative expenses approximated $458,000 for the second quarter. The Company has applied the modified prospective method in adopting SFAS 123R, accordingly, periods prior to adoption have not been restated.

     The increase in consolidated selling, general and administrative expenses for the second quarter of 2006, in dollars, compared to the second quarter of 2005, was primarily due to increased advertising spending in the Internet marketing programs coupled with increased catalog circulation, expenses incurred in connection with the pending merger and the expense related to share-based compensation applied on a modified prospective method.

     Total consolidated catalog circulation during the second quarter of 2006 was 11.9 million catalogs compared to 11.0 million catalogs during the same period last year. Total consolidated catalog circulation included 1.8 million (two editions) catalogs mailed by TGW during the second quarter of 2006 compared to 1.6 million catalogs (three editions) during the same period last year. TSG mailed eight catalog editions consisting of three main catalogs, three Buyer’s Club AdvantageÔ catalogs and two specialty catalog editions during the three months ended June 30, 2006 and 2005.

     Consolidated advertising expense for the three months ended June 30, 2006 was $9.0 million or 13.1% of net sales compared to $7.8 million or 12.3% of net sales for the same period last year. The increase in consolidated advertising expense, as a percentage of net sales, compared to the same period last year was primarily due to more aggressive Internet marketing campaigns. The increase in consolidated advertising expense, in dollars, in the second quarter of 2006 was primarily due to increased advertising spending in the Internet marketing programs coupled with an increased catalog circulation.

Earnings from operations.Earnings from operations for the three months ended June 30, 2006 were $3.0 million compared to $4.0 million for the same period last year. The decrease in earnings from operations was largely due to the adoption of SFAS 123R, which approximated $567,000 and required all share-based payments to be recognized in the statement of earnings as an operating expense and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc. aggregating approximately $777,000.

Interest expense.There was no interest expense for the three months ended June 30, 2006 compared to $82,000 for the same period last year. Interest expense incurred in the second quarter of 2005 was related to the debt from the acquisition of TGW.

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Income taxes.Income tax expense for the three months ended June 30, 2006 was $1.2 million compared to $1.5 million for the same period last year. The income tax expense for the three months ended June 30, 2006 and 2005 reflects our anticipated effective tax rates for the year.

Net earnings.As a result of the above factors, net earnings for the three months ended June 30, 2006 were $2.0 million compared to $2.5 million for the same period last year. The adoption of SFAS 123R decreased net earnings for the quarter by approximately $443,000 and the merger related expenses incurred in the quarter decreased net earnings by approximately $513,000.

Comparison of Six Months Ended June 30, 2006 and 2005

	The Sportsman’s Guide				The Golf Warehouse				Consolidated
	2006		2005		2006		2005		2006		2005
Net sales	$	102,235	$	93,411	$	38,644	$	34,945	$	140,879	$	128,356
Earnings from operations	$	3,134	$	4,430	$	3,322	$	3,100	$	6,456	$	7,530

Net Sales.Consolidated net sales for the six months ended June 30, 2006 of $140.9 million were $12.5 million or 9.7% higher than sales of $128.4 million during the same period last year. The increase in net sales for the first half of 2006 was primarily the result of increased Internet sales at both TSG and TGW.

     Sales generated through the Internet for the six months ended June 30, 2006 were approximately 53% of TSG’s total Internet and catalog sales compared to approximately 47% during the same period last year. The majority of TGW’s total sales for the six months ended June 30, 2006 and 2005 were generated through the Internet. Sales generated through the Internet are defined as those that are derived from our websites, catalog orders processed through the Internet and Internet offers placed by telephone. Internet related sales continue to grow, quarter over quarter, as we continue to make enhancements to our websites and implement and improve upon various marketing and merchandising programs.

     Gross returns and allowances for the six months ended June 30, 2006 were $7.7 million or 5.2% of gross sales compared to $7.1 million or 5.3% of gross sales during the same period last year.

Gross profit.Consolidated gross profit for the six months ended June 30, 2006 was $43.0 million or 30.5% of net sales compared to $39.5 million or 30.8% of net sales during the same period last year. The decrease in consolidated gross profit, as a percentage of net sales, was primarily from lower product margins due to promotional pricing and a higher sales increase in the hard lines, which traditionally have lower product margins, offset somewhat by improved shipping and handling margins. Our gross profit (net sales less cost of sales) may not be comparable to those of other entities since some entities do not include the same cost elements within their definition of cost of sales.

Selling, general and administrative expenses.Consolidated selling, general and administrative expenses for the six months ended June 30, 2006 were $36.5 million or 25.9% of net sales compared to $31.9 million or 24.9% of net sales for the same period last year.

     Consolidated selling, general and administrative expenses, as a percentage of net sales, were higher compared to the same period a year ago primarily as a result of the adoption of SFAS 123R requiring share-based compensation payments of approximately $916,000 to be recognized as an operating expense, expenses incurred of approximately $777,000 in connection with the pending merger, as well as higher advertising costs in relation to net sales primarily from aggressive Internet marketing campaigns.

     The increase in consolidated selling, general and administrative expenses for the first half of 2006, in dollars, compared to the first half of 2005, was primarily due to increased advertising spending in the Internet marketing programs coupled with increased catalog circulation, expenses incurred in connection with the pending merger and the expensing of share-based compensation.

     Total consolidated catalog circulation for the six months ended June 30, 2006 was 25.6 million catalogs compared to 24.3 million catalogs during the same period last year. The catalogs mailed during the first half of 2006 include 3.1 million

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catalogs (five editions) circulated by TGW compared to 3.0 million catalogs (five editions) circulated by TGW in 2005. TSG mailed 18 catalog editions consisting of six main catalogs, six Buyer’s Club AdvantageÔ catalogs and six specialty catalog editions during the six months ended June 30, 2006 compared to 17 catalog editions consisting of six main catalogs, six Buyer’s Club AdvantageÔ catalogs and five specialty catalog editions during the six months ended June 30, 2005.

     Consolidated advertising expense for the six months ended June 30, 2006 was $19.2 million or 13.6% of net sales compared to $16.8 million or 13.1% of net sales for the same period last year. The increase in consolidated advertising expense, as a percentage of net sales, compared to the same period last year was primarily due to more aggressive Internet marketing campaigns. The increase in consolidated advertising expense, in dollars, in the first half of 2006 was primarily due to increased advertising spending in the Internet marketing programs coupled with an increased catalog circulation.

Earnings from operations.Earnings from operations for the six months ended June 30, 2006 were $6.5 million compared to $7.5 million for the same period last year. The decrease in earnings from operations was largely due to the adoption of SFAS 123R, which approximated $1.1 million and required all share-based payments to be recognized in the statement of earnings as an operating expense and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc. aggregating approximately $777,000.

Interest expense.Interest expense for the six months ended June 30, 2006 was $1,000 compared to $146,000 for the same period last year. Interest expense incurred in the first half of 2005 was related to the debt from the acquisition of TGW.

Income taxes.Income tax expense for the six months ended June 30, 2006 was $2.6 million compared to $2.8 million for the same period last year. The income tax expense for the six months ended June 30, 2006 and 2005 reflects our anticipated effective tax rates.

Net earnings.As a result of the above factors, net earnings for the six months ended June 30, 2006 were $4.2 million compared to $4.8 million for the same period last year. The adoption of SFAS 123R decreased net earnings for the six months by approximately $886,000 and the merger related expenses incurred in the six months decreased net earnings by approximately $513,000.

Seasonality and Quarterly Results

     The majority of TSG’s sales historically occur during the second half of the year. The seasonal nature of the business is due to TSG’s focus on outdoor merchandise and related accessories for the fall, as well as winter apparel and gifts for the holiday season. We expect this seasonality will continue in the future. In anticipation of increased sales activity during the third and fourth fiscal quarters, TSG incurs significant additional expenses for hiring employees and building inventory levels.

     TGW’s business is also seasonal. Sales leading up to and during Father’s Day and the Christmas holiday selling seasons have historically contributed to a higher percentage of TGW’s annual sales and net earnings than other periods. TGW also incurs higher expenses related to building inventory to meet higher demand during these seasons.

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     The following table sets forth certain unaudited financial information for each of the quarters shown (in thousands, except per share data):

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2006
Sales	$	71,648	$	69,231
Gross profit		22,120		20,837
Earnings from operations (1)		3,442		3,014
Net earnings (2)		2,204		2,000
Net earnings per share:
Basic (3)		.30		.27
Diluted (4)		.27		.24
2005
Sales	$	64,578	$	63,778	$	61,549	$	92,215
Gross profit		20,034		19,444		19,489		31,886
Earnings from operations		3,562		3,968		3,506		7,028
Net earnings		2,257		2,507		2,189		4,500
Net earnings per share:
Basic		.32		.35		.30		.61
Diluted		.28		.31		.26		.53

(1)	Earnings from operations for the three and six months ended June 30, 2006 were decreased by approximately $1.3 million and $1.9 million with the adoption of SFAS 123R on January 1, 2006 and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc.
(2)	Net earnings for the three and six months ended June 30, 2006 were decreased by approximately $1.0 million and $1.4 million with the adoption of SFAS 123R on January 1, 2006 and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc.
(3)	Basic net earnings per share for the three and six months ended June 30, 2006 were decreased by approximately $.13 and $.19 with the adoption of SFAS 123R on January 1, 2006 and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc.
(4)	Diluted net earnings per share for the three and six months ended June 30, 2006 were decreased by approximately $.11 and $.17 with the adoption of SFAS 123R on January 1, 2006 and expenses incurred in connection with the pending merger with VLP Corporation and Panther Subcorp, Inc.

     Per share amounts set forth above have been adjusted to give effect to the 3-for-2 split of our common stock paid on April 15, 2005 to shareholders of record on March 25, 2005.

Liquidity and Capital Resources

     We meet our operating cash requirements through funds generated from operations and borrowings under our revolving credit facility.

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Working Capital.We had working capital of $17.6 million as of June 30, 2006 compared to $11.8 million as of December 31, 2005, with current ratios of 1.4 to 1 and 1.2 to 1, respectively. The increase in working capital of $5.8 million was primarily due to a reduction in accounts payable and accrued expenses.

     We purchase large quantities of manufacturers’ closeouts and direct imports. The seasonal nature of the merchandise may require that it be held for several months before being offered in a catalog. This can result in increased inventory levels and lower inventory turnover, thereby increasing our working capital requirements and related carrying costs.

     TSG’s Buyer’s Club members are entitled to participate in a credit plan with no finance charges, known as the “Buyer’s Club 4-Pay Plan”. Under this plan, TSG charges Club members’ credit cards for four consecutive monthly payments. TSG had outstanding customer receivables of $1.6 million at June 30, 2006 compared to $3.1 million at December 31, 2005. This 4-Pay program will continue to require the allocation of working capital, which we expect to fund from operations and availability under our revolving credit facility.

     On June 29, 2004, we entered into an amended Credit Agreement with Wells Fargo Bank National Association, providing a revolving line of credit up to $15.0 million and a term loan of $12.5 million, expiring September 30, 2007. The revolving line of credit is for working capital and letters of credit, and the proceeds from the term loan are for financing acquisitions of other business operations. Letters of credit may not exceed $10.0 million at any one time. Funding under the credit facility, if combined borrowings under the line of credit and term loan exceed $20.0 million, is limited to a collateral base of 50% of eligible inventory plus 75% of eligible trade accounts receivable. Borrowings from the revolving line of credit and term loan bear interest at the bank’s prime rate less 0.15% or, at our option, fixed term LIBOR plus 2.5 percentage points, provided certain financial ratios are met. The revolving line of credit and the term loan are collateralized by substantially all of our assets.

     All borrowings are subject to various covenants (while the term loan remains outstanding), which include funded debt to earnings before interest, income taxes, depreciation and amortization and a fixed charge coverage ratio. The covenants were amended in December 2005 prior to the repayment of the term loan. The new covenants include current ratio, minimum tangible net worth, total liabilities to tangible net worth ratio and minimum net earnings. The agreement also prohibits the payment of dividends to shareholders without consent of the bank. As of June 30, 2006, we were in compliance with all applicable covenants under the amended Credit Agreement. We had no borrowings against the revolving credit line as of June 30, 2006 and December 31, 2005. Outstanding letters of credit were $3.6 million at June 30, 2006 compared to $1.5 million at December 31, 2005. The term loan has been repaid in its entirety.

Operating Activities.Cash flows used in operating activities for the six months ended June 30, 2006 were $4.9 million compared to $4.7 million for the same period last year. The increase in cash flows used in operating activities was primarily the result of increased vendor and accrued expense payments when compared to the same period last year.

Investing Activities.Cash flows used in investing activities during the six months ended June 30, 2006 were $0.7 million compared to $0.5 million during the same period last year. Capital expenditures during the first half of 2006 and 2005 included computer equipment, leasehold improvements and warehouse and office equipment.

Financing Activities.Cash flows provided by financing activities during the six months ended June 30, 2006 were $82,000 compared to $67,000 during the same period last year. The increase in cash flows provided financing activities during the first half of 2006 was largely due to the proceeds from the exercise of stock options during the six months ended June 30, 2006. On May 5, 2005, we announced that our board of directors authorized a plan to repurchase up to ten percent of our outstanding common stock in the open market or in privately negotiated transactions over the next 12 months. There were no repurchases of our common stock during the first half of 2006 or 2005. We did not borrow under the revolving line of credit during the first half of 2006 or 2005.

     We believe that cash flows from operations and borrowing capacity under our revolving credit facility will be sufficient to fund operations for the next 12 months and the foreseeable future. Future acquisitions or other transactions may require us to obtain additional sources of financing.

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New Accounting Pronouncements

     In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of FIN 48 on our consolidated financial position and results of operations.

Forward-Looking Statements

     This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as “may,” “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate” and similar expressions to identify forward-looking statements. These forward-looking statements involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including general economic conditions, a changing market environment for our products and the market acceptance of our product offerings as well as the factors set forth in Item 1A “Risk Factors” to our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

     We invest our excess cash in money market funds. The market risk on such investments is minimal. We are exposed to market risk from changes in the U.S. interest rates on borrowings under our credit facility. We import certain items for sale in our catalogs and websites, however, substantially all of our purchase orders are issued in U.S. dollars.

Item 4. Controls and Procedures

     Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are control and other procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

     There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     On May 10, 2006, we were served with a class action complaint brought by Tom Krajewski on behalf of shareholders of The Sportsman’s Guide, Inc. in the District Court for Dakota County, Minnesota naming us and members of our board of directors. The complaint alleges that our directors engaged in self-dealing and breached their fiduciary duties in connection with the proposed sale of The Sportsman’s Guide, Inc. to Redcats USA, Inc. The complaint seeks equitable relief only, including enjoining consummation of the merger.

     On June 21, 2006, a class action complaint brought by Glen Hutton on behalf of shareholders of The Sportsman’s Guide, Inc. was filed in the District Court for Dakota County, Minnesota naming us and members of our board of directors. The complaint contains substantially identical allegations and seeks the same relief as the complaint brought by Tom Krajewski. We believe that the allegations contained in both complaints are without merit and we intend to vigorously contest both matters.

Item 6. Exhibits

     (a) Exhibits

31	Rule 13a-14(a)/15d-14(a) Certifications
32	Section 1350 Certifications

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE SPORTSMAN’S GUIDE, INC.
Date: August 10, 2006	/s/ Charles B. Lingen
	Charles B. Lingen
	Executive Vice President of Finance and Administration/Chief Financial Officer

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