American Outdoor Brands, the parent of Smith & Wesson, reported year-over-year increases in revenue and operating profits in the third quarter ended January 31 with the help of successful promotions, but also delivered a soft outlook going forward with no signs of a pickup in firearms demand.

“The firearms market is pretty soft,” said James Debney, president and CEO, on a conference call with analysts.

Shares of American Outdoor Brands on Friday closed down $1.35, or 11.9 percent, to $10.02.

The glaring signal of weak demand for firearms was Tuesday’s release of adjusted NICS results for February showing firearms background checks down 12.6 percent year over year. Debney noted that the figure was the lowest adjusted NICS result for any February since 2011 “and certainly appears to validate the ongoing challenging market conditions that we have recently referenced.”

The February drop came after adjusted NICS checks improved 3.4 percent in January, the first monthly year-over-year improvement since March 2018, One analyst on the call described January’s showing as “little bit of a head fake.”

Debney said market observers shouldn’t have been surprised with the double-digit decline while noting that “it’s not an apples with apples comp right now.” The CEO was referencing last year’s mass shooting at a high school in Parkland, FL that left 17 dead and led to some panic buying due to fears over stricter gun laws. The shooting occurred on February 14.

Debney said comparisons “will not get easier” until the summer months.

On the positive side, he asserted that American Outdoor Brands wants a “stable market environment” that doesn’t face the ups and downs of “fear-based buying.” American Outdoor Brands’ bundled promotions, which feature packing two or more items together in a special deal, as well as some successful innovation is helping the company find growth in an overall environment seeing declines or flat growth. And inventories at distributors have been “pretty stable” over the last five or six quarters after a period a working down inventories to help limit margin pressure. In all, Debney believes the industry is managing slower growth well.

“Retailers, distributors are comfortable with our level of inventory now,” said Debney. “I will add that most are very optimistic and are looking forward to the future, running the business as well, managing their inventory and the cash well. So, there’s a lot of people, lot of distributors and retailers who are in very, very strong position. So, I think that’s great for the industry overall. What will happen in the market and we’ve all seen — you look at history, how volatile that can be who knows in that respect, but I think the key takeaway right now is that it’s stable, it’s manageable. We can grow, we can make money.”

In the third quarter, revenue reached $162 million, an increase of 2.9 percent over the prior year.

Revenues from Firearms segment were $123.6 million, an increase of 5.1 percent due to demand for several of its M&P branded firearms, combined with the success of “bundle” promotions, which were booked earlier in the year and continued to ship in the third quarter. Debney said the Firearms segment also improved gross margins due to healthy demand for its product. He said, “We successfully bundled promotions that we booked in Q1 and shipped in both Q2 and Q3. As a reminder, these bundled promotions demonstrate our unique ability to create packages featuring our popular consumer brands and products from across our entire business.”

Revenues in the Outdoor Products & Accessories segment were $41.9 million, a decrease of 6.3 percent due to lower sales in the Electro-Optics division. Sales in the Outdoor Products & Accessories division were up 4.3 percent. The Outdoor Products & Accessories segment overall generated gross margins of over 47 percent and generated more than 24 percent of total revenue in the quarter.

Debney said American Outdoor Brands has decided to merge the Electro-Optics business into the Outdoor Products & Accessories operating unit. Said Debney, “This restructuring will allow us to improve operating efficiencies while continuing to deliver the innovation and quality that our Crimson Trace brand has earned under the leadership of Lane Tobiassen.”

As a result of the realignment, Tobiassen has been promoted to president of its Firearms division, a position Debney occupied on an interim basis.

The quarter includes an impairment charge to write-of $10.4 million of the $54 million of total goodwill related to the Electro-Optics business. The division includes Crimson Trace Corp, acquired in 2016, and LaserLyte, a provider of laser training and sighting products acquired in January 2019. The goodwill write-off reflects general weakness in the business due to overall soft firearms market since Crimson Trace was acquired.

Said Debney, “While the impairment is relatively small. It is obviously a disappointment to us and it is driven by market conditions over the past several quarters. We maintain our positive long-term view of the Electro-Optics business and the strategic role it will play in our future growth.”

Outside Electro-Optics, organic growth in the Outdoor Products & Accessories division in the quarter came from both hunting and shooting product categories, as well as its cutlery and tool product categories, and came from a variety of retailers, particularly online retailers

Companywide gross margin for the quarter were 33.4, up from 29.8 percent in the prior year. The Firearms gross margin was 29.0 percent and the Outdoor Products gross margin was 47.1 percent. The improvement was driven mainly by the Firearms segment, which had higher production volumes, favorable spending and lower promotional costs versus the prior year.

American Outdoor Brands showed a loss of $5.73 million, or 10 cents a share, in the period against earnings of $11.4 million, or 21 cents, a year ago. The loss reflects the Electro-Optics write-off.

Also contributing to the loss was some duplicate expenses in the short term, as planned, due the ramp-up of its new logistics facility Springfield, MO.On a reported GAAP basis, operating expenses in the quarter were $56.1 million, including the impairment charge, compared to $41.1 million in the prior year.

The new facility will centralize the logistics, warehousing and distribution operations for all of its businesses with the full transition expected to be completed later in the calendar year.

Prior year GAAP results included a one-time, tax reform benefit of 17 cents a share. Excluding the impairment, quarterly GAAP net income in the current third quarter would have been $4.7 million, or 9 cents.

Quarterly Non-GAAP net income improved 89.4 percent to $8.9 million, or 16 cents, compared with $4.7 million, or 9 cents, a year ago. Results exceeded guidance calling for non-GAAP earnings in the range of 9 to 13 cents with the beat tied to improving margins.

Non-GAAP adjustments exclude a number of acquisition-related costs, including amortization, one-time transaction costs, fair value inventory step-up expense, one-time tax reform benefits, and the goodwill impairment from the Electro-Optics division.

In Q3, background checks for handguns declined 8 percent year-over-year, while the company’s unit shipped to distributors and retailers increased 10 percent. For the same period, background checks for long guns declined 7 percent year-over-year, while the company’s unit shipped to distributors and retailers increased nearly 12 percent.

Distributor inventories of its firearms in the quarter decreased 19.4 percent to 141,000 units year-over-year. Sequentially, distributor inventory increased slightly from 135,000 units. Since the end of Q3, distributor inventories have declined and current weeks of sales at distribution are near the company’s eight-week threshold.

Said Debney, “We have heard from our distributors and retailers that they are comfortable with their overall inventory levels and that our promotions are in match with the current weaker market conditions. The lower level of channel inventory in the current environment combined with our strong brands and promotional programs helped benefit our performance in the quarter.”

At the SHOT Show, more than 250 new products across all of divisions were launched. Highlights include Crimson Trace’s first entry into the rifle scope market as well as new red dot sights for pistols and long guns. In the Outdoor Products & Accessories division, major launches include Caldwell hydro sled, Frankford Arsenal M-Press, and a new hunting tripod, the BOG DeathGrip.

In Firearms, key launches included the Performance Center Ported M&P Shield M2.0, Performance Center M442 revolver, Crimson Trace laser grips and the Impact!SB Muzzleloader from the Thompson/Center line.

Debney said the company is currently in the later stages of the industry spring show season with distributors, buying groups and retailers and the company is “pleased with the positive results. Our promotions featured several new bundles, most popular among these have been the M&P15 SPORT II, combined with a rifle case and a Mag Charger, and our T/CR22 combined with a rifle sling and a Crimson Trace optic. These two bundles generated revenue beginning in Q3 and we believe pulled a small amount of revenue from Q4 into Q3.”

The company maintained its guidance for the year ended April 30. Sales are expected to range between $625 million and $635 million, up from $606.9 million a year ago. Non-GAAP earnings are expected to improve to a range between 69 to 73 cents, up from 46 cents a year ago.

For the fourth quarter, sales are expected to range between $162 million and $172 million, down to flat against $172 million a year ago. Non-GAAP profits are expected to range between 11 to 15 cents, down from 24 cents a year ago.

In the Q&A session, Debney said the company didn’t lift its earnings guidance for the year despite the third-quarter beat partly because February’s NICS results came in “much worse than most people expected” and the number of lower-end products dragging down margins in the marketplace. Said Debney, “There is just a lot of bargain hunting in the market.”

The company also expects to absorb expenses of 2 cents a share in the fourth quarter related to some “frivolous claims” tied to the bankruptcy of one of its distributors, Acusport.

Probed by a number of analysts about long-term growth prospects, Jeffrey D. Buchanan, EVP, CFO and treasurer, said the company still sees “excellent growth prospects” in its the Outdoor Products & Accessories segment.

In firearms, Buchanan noted that the company believes it has “managed to weather a fairly weak market through, I think, a lot of innovative promotional activity that is desirable for consumers, yet not overly costly for us. These bundled programs that we started last summer about nine months ago, and have continued, are really, I think, one of the things that has helped us continue to sort of meet expectations in a weak market.”

Debney also said the completion of the new DC will be “be extremely beneficial for us” once completed and will put the company in a better position to explore acquisitions. Said Debney, “we can start looking again at inorganic growth and we will be able to rapidly integrate what we’ve always called tuck-in acquisitions, and being able to harvest those synergies quickly will also make us competitive in any process we decide to enter and complete. So we’re very excited about that dimension of our overall strategy when it comes to our facility in Missouri.”

Image courtesy Smith & Wesson