Shares of Vista Outdoor fell $2.19, or 13.1 percent, to $14.56 on Tuesday after the company announced plans to divest a number of brands and predicted earnings would erode significantly in the coming year. Brands hitting the selling block include Vista’s Sports Protection brands (e.g. Bell, Giro and Blackburn), Jimmy Styks paddle boards and Savage and Stevens firearms.
On a conference call with analysts, Christopher Metz, CEO, outlined the process that has led the company to disband many the company’s businesses. Three years ago, the company set a goal to become a leading consolidator in the growing outdoor sports and recreation market following the spin-off from the company’s predecessor company, ATK. He said, “A key tenet of the strategy was to be the largest participant in the highly fragmented market and balance the portfolio between Shooting Sports and Outdoor Products.”
Consequently, a number of acquisitions and “two equally sized segments” of Shooting Sports and Outdoor Products were formed, consisting of over 50 brands.
“As a result of that, our stock price was at an all-time high, and all was going according to plan,” said Metz. “The last 18 months has been a different story.”
He noted that some challenges over the last 18 months were internal, including “lagging” product innovation, business leader exits and planned synergies with acquisitions not materializing. Bankruptcies and consolidations impacted the broader outdoor recreation market as well as and, unexpectedly, the election of Donald Trump “turned the shooting sports industry upside down.”
“All of this put tremendous market pressure on both our Shooting Sports segment and the hunt/shoot-related portion of our Outdoor Products segment,” added Metz. “The bottom line is this, the company grew too fast and beyond its core. The portfolio became too diverse, and the pressure has mounted. We were too slow to make adjustments, and the ones we did make didn’t have enough of an impact to right the ship. This led to missed expectations and disappointment with our overall business, and our stock hit an all-time low.”
In the third quarter, Vista officials noted that they’d begun a process of reevaluating the company’s strategy and brand portfolio and at that time initially put eyewear assets under Bollé, Cébé, Serengeti within the Sports Protection business, up for sale. Said Metz, “This sale process is underway, and we have received very strong interest from potential buyers.”
Vista has now completed the evaluation of the company’s overall portfolio, and management defined several criteria to evaluate whether individual product categories are part of the company’s core. Vista Outdoor evaluated brands within the current portfolio based on their ability to do the following:
- Serve the company’s target consumer–the outdoor enthusiast
- Create cross-selling and other similar synergy opportunities
- Achieve market-leading positions and leadership economics
- Demonstrate omni-channel distribution capabilities
As a result of this evaluation, and with support from the company’s board of directors, Vista Outdoor will focus on achieving growth through market-leading brands in four categories: ammunition, hunting and shooting accessories, hydration bottles and packs and outdoor cooking products. Vista’s major brands in these areas include Federal Premium, CamelBak, Bushnell, Primos, Camp Chef and BLACKHAWK!.
Among the brands heading for the selling block, Metz said that similar to eyewear brands, Bell, Giro, Blackburn and Jimmy Styks within Vista’s Outdoor Products segment have little overlap with the company’s core product categories and also target a different consumer base.
“These are high-quality, innovative, iconic, well-respected brands in the marketplace,” said Metz. “However, we do not believe there’s a significant enough overlap between what we have identified as our core consumer and the road cycling, mountain biking, skiing or paddleboard enthusiast. Furthermore, the product design, marketing and distribution of these products are vastly different than our other identified brands. Therefore, we believe they can be more valuable under different ownership.”
In the Shooting Sports segment, both Savage and Stevens would require large investments in capabilities to develop new products that are outside Vista’s current long gun product offerings and position the business as a full-service firearms manufacturer. He added, “Additionally, Savage and Stevens cannot take advantage of omnichannel distribution and other core Vista competencies. While these brands deliver fantastic products, we believe the divestiture should unlock greater shareholder value. This is an important decision, but we believe it may be the correct decision to help Vista realize its full potential.”
On the other hand, focusing on the four designated product categories, ammunition, hunting/recreational shooting accessories, hydration bottles and packs and outdoor cooking products, will enable Vista to capitalize on market-leading positions and maximize operational efficiencies.
“By refocusing our efforts in these core categories, we are confident that we can achieve growth by deploying capital efficiently, both organically and via acquisitions, and drive operational improvements that will further increase the profitability,” said Metz. “Additionally, we are capable of expansion into adjacent categories via disciplined approach to an acquisition of leading brands in these areas. These categories and several adjacent markets represent a $71 billion market opportunity.”
Metz said the new approach differs from the company’s past approach because it aligns closer to Vista’s product development, manufacturing, sourcing, marketing and sales strengths.
Ammunition remains the “bedrock” of Vista’s business, and further prioritizing the category will enable Vista to invest more capital into the area to expand Vista’s leadership position. Vista is the global leader in ammunition for both law enforcement, military use and the commercial hunt/recreational shoot market.
In hunting/recreational shooting accessories, Vista holds several market-leading positions and sees “opportunities to recapture lost sales and profits with better leadership and execution,” as well as expansion further ahead.
In hydration, “where in the past we’ve missed some opportunities, we still hold a leadership position in bottles and packs. We believe, with changes we have identified already, we are well-positioned to leverage our product innovation capabilities and to further expand our product offering to meet the needs of our target consumer,” said Metz.
Finally, Vista successfully entered into the outdoor cooking category via the acquisition of Camp Chef a year ago and the business has grown approximately 25 percent since then. Said Metz, “We see significant opportunities to expand the strong foundation we have established there.”
Metz further said the businesses being retained hold three common characteristics:
- The businesses are all leaders in their competitive spaces to provide advantages such as scale that should support innovation and manufacturing procurement. Said Metz, “We know through our research that there’s a strong positive correlation with leading share position and leadership economics.”
- They’re all synergistic products that complement one another, allowing Vista to focus on market research on the same core consumer.
- They share an omnichannel distribution capability ideally suited toward reaching Vista’s target consumer. Metz added, “In other words, we can sell into brick-and-mortar retail, functional wholesalers and distributors and e-commerce channels essentially wherever and however our target consumer wants to purchase.”
Metz said the company anticipates completing all of the transactions by the end of Vista’s next fiscal year or within the next 24 months. He said, “If we fully realize all divestitures and make no acquisitions, we would expect Vista Outdoor to be an approximately $1.6 billion, fully delivered, consumer-focused company, with iconic brands serving a $71 billion market opportunity.”
Metz said Vista anticipates that a significant improvement in Vista’s capital structure will provide the resources necessary to invest in growth initiatives across the company’s core and adjacent categories to generate additional value. Going forward, Vista’s targeting a leverage ratio in the 2 to 3x range.
Vista announced the company’s transformation plan while reported earnings for the fourth quarter and year ended March 31 that came in slightly worse than guidance.
In the year, the loss came to $1.05 a share, slightly higher than guidance calling for loss between 90 cents to $1.00. That compares to a loss of $4.66 a share in the prior year. Adjusted EPS was 50 cents per share compared to $1.90 in the prior year and reached the lower end of guidance in a range of 50 cents to 60 cents.
Sales were $2.3 billion, down 9 percent from the prior year, but slightly above guidance of sales in a range of $2.24 billion to $2.26 billion.
For the fourth quarter, sales were $571 million, down 1 percent from the prior-year quarter. The decline was caused by lower prices across all ammunition categories due to market conditions in the Shooting Sports segment and lower sales in hydration, optics and water sports in the Outdoor Products segment. These declines were partially offset by increased firearms sales due to a product refresh in Shooting Sports and improved sales in outdoor cooking and Sports Protection product categories.
Adjusted gross profit was $112 million, down 22 percent. The decrease was primarily caused by unfavorable pricing in all ammunition categories, increased promotional activity and rebates within the Shooting Sports segment. These decreases were partially offset by favorable volume, product mix and cost savings within Outdoor Products.
Operating expenses were $125 million, compared to $130 million in the prior-year quarter. Adjusted operating expenses were $123 million, compared to $129 million in the prior-year quarter. The decrease in operating expenses was driven by lower expenses for customer collections compared to the prior period and cost savings initiatives, partially offset by increased incentive accruals.
Fully diluted EPS was 28 cents a share, compared to 2 cents in the prior-year quarter. Adjusted EPS was 22 cents, compared to 3 cents in the prior-year quarter.
Metz said that the heightened channel inventory and heavy promotional environment that has been impacting the Shooting Sports business since late fiscal 2017 “seems to have normalized at both the retail and wholesale channels.” He cautioned that the company will continue to look to maintain market share, “but we do expect the previous pricing actions to be replaced with a clear and rational pricing approach going forward across the industry.”
As it relates to pricing actions in the face of increasing commodity headwinds, Metz said Vista has so far “seen little negative reaction to the increases we took in January and April. If the current market conditions persist, we’ll continue to evaluate opportunities to adjust pricing further.”
In the Outdoor Products business, poor weather conditions in North America had an impact on the spring-related product categories, specifically impacting the cycling and golf businesses. However, in golf, “the launch of the new hybrid laser rangefinder is receiving strong reviews and likely could offset some of the pressure from poor spring weather,” said Metz.
Archery is performing well, as evidenced by the high demand for the SurroundView Blind. Hunting, recreational shooting accessories and related categories, while still negative, are all trending toward signs of improvement, with trailing 13-week trend improving over the 52-week trend and last month improving over the trailing 13 weeks.
Looking ahead, sales for the current fiscal year are projected in the range of $2.205 billion to $2.265 billion, slightly down from $2.3 billion. Earnings per share are projected in a range of 10 cents to 30 cents, well off from adjusted EPS of 50 cents.
Metz pointed to several factors contributing to the expected EPS decline this year. Vista anticipates approximately 40 per share of earnings pressure as the result of the current raw material market conditions. Volume and mix, net of pricing actions is expected to negatively impact the earnings approximately 35 cents per share. Additional interest expense and the higher tax rate is expected to bring down earnings by approximately 15 cents per share. Cost reductions and other efficiency initiatives are expected to partially offset these pressures by 60 cents per share. These initial actions include headcount and overhead cost reductions.
Fiscal year ’19 EBIT overall is projected to decline at about 12 percent when compared to prior year.
Regarding the expected slight sales decline, Metz said Shooting Sports sales have “modestly started to turn positive” over the last month and “greater improvement” is expected in the back half of fiscal year 2019. In the Outdoor Products segment, hunting/recreational shooting accessories are expected to “mirror the greater shooting sports market” and see improvement as the year progresses.
New product launches in Outdoor Products on helmets, goggles, ground blinds, optics, trail cameras, clay targets, outdoor cooking and bottles and packs, “all position us and position our portfolio well” for the second quarter and the balance of the year.
He added, however, “Overall, volume declines across the segments due to further market erosion and bankruptcy impacts, along with the loss of exclusivity in certain ammunition categories, will pressure the top line results. Market share gains, new product introductions and price increases will only partially offset these challenges.”
Photo courtesy Savage Firearm