Given continued weak consumer demand in general for firearms coupled with heightened channel inventory of firearms at retail, American Outdoor Brands said it expects to see flat sales in firearms over the next 12 to 18 months.

The prediction comes as the parent of Smith & Wesson, Battenfeld Technologies and Crimson Trace once again lowered its outlook for the fiscal year ended April 30 due recent sluggish background checks on gun buyers.

The company also reported sales for the third quarter that came in below company guidance, although earnings were above.

In the quarter ended January 31:

  • Sales slumped 32.6 percent to $157.4 million;
  • Gross margin eroded to 29.8 percent from 42.5 for the third quarter last year;
  • GAAP net income fell 64.9 percent to $11.4 million, or 21 cents per share, from $32.5 million, or 57 cents, a year ago. Included in the latest results is an estimated, one-time, income tax benefit of $9.4 million resulting from the tax reform.
  • On a non-GAAP basis, profits tumbled 87.5 percent to $4.7 million, or 9 cents per share, from $37.6 million, or 66 cents, a year ago. Non-GAAP results exclude a number of acquisition-related costs, including amortization, fair value inventory step-up and backlog expense, one-time transition costs, corporate rebranding expenses, changes in contingent consideration and the impact of tax reform.
  • Non-GAAP adjusted EBITDA was $20.0 million, or 12.7 of sales, compared with $67.6 million, or 28.9 percent, for the comparable quarter last year.

When it reported second-quarter results on December 7, the company expected sales in the range of $170 million and $180 million, GAAP income in the range of 1 and 4 cents and non-GAAP income per share in the range of 7 to 10 cents.

On a conference call with analysts, James Debney, president and CEO, said lower shipments in firearms were driven by a reduction in wholesaler and retailer orders versus the prior year and were partially offset by double digit revenue growth within its Outdoor Products & Accessories segment.

Regarding the Firearms segment, Debney noted that adjusted NICS results for the third quarter and particularly for the month of January were “far lower than what can be attributed to seasonality.” January saw the lowest adjusted NICS results in the last six years.

In the third quarter, background checks for handguns declined 8.8 percent while the company’s unit shipped into distributors and retailers declined 38.3 percent. Despite that decline, Debney said the company believes it maintained its share leadership position in consumer handguns largely because retailers fulfill consumer demand for firearms using their existing inventory of its products. Said Debney, “For this reason, we also believe our unit sales relative to NICS results indicated channel inventory reduction efforts by wholesalers and retailers were successful in the quarter.”

Gross margins in its Firearm segment in Q3 were 23.4 percent, impacted by lower production volumes, which resulted in lower absorption of fixed overhead cost per unit. Those gross margins were also impacted by the continued promotional environment and the company used promotions in its M&P and Thompson/Center product lines to defend its market share.

On the positive side, distributed inventory of the company’s firearms decreased to a total of 175,000 units at the end of Q3 versus 213,000 at the end of Q2. While still likely higher than required, Debney said that based on conversations with one of its large distributors, firearm inventory conditions at retail have improved as well.

On the product front, Debney called out the recent launch of the concealed carry pistol, the M&P380 SHIELD EZ that plays up an easy slide manipulation. Brands in the Firearms segment include Smith & Wesson, M&P, Thompson/Center Arms and Gemtech.

In the Outdoor Products & Accessories segment, which includes its electro-optics business, revenue grew 10.9 percent year-over-year, a combination of inorganic and organic growth. Gross margins in Outdoor Products & Accessories of 48.2 percent in Q3

Debney inferred that successful innovation continues to drive growth in the segment while noting that the company launched nearly 150 new products across shooting, accessories, cutlery, tools and survival products at the SHOT Show and highlighted new items from Bubba Blade, M&P and Crimson Trace.

Other brands in the Outdoor Products & Accessories include Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG POD, Golden Rod Moisture Control, Schrade, Old Timer, Uncle Henry, Imperial and UST.

Commenting on current market conditions, Debney said that while the company’s new product development pipeline is robust and channel inventory levels appeared to be improving, “we believe that the new lower levels of consumer demand we saw reflected in the January adjusted NICS results may persist with some time.”

As a result of the expected softness, American Outdoor Brands in the third quarter eliminated its containment outsourcing and reduced headcount by 200 plus individuals, which represents the 13 percent reduction in total manufacturing personnel. Over the past 12 months, total manufacturing personnel has been reduced by about 25 percent.

Said Debney, “We will focus on optimizing our manufacturing resources to align capacity with demand while preparing for a number of meaningful new product launches, reducing cost across the entire organization and generating cash, growing our business and particularly our outdoor products business organically through the development of new products across our well known and respected consumer brands. “

Debney said the company still believes believe the firearms market will eventually return to long-term growth, but it will likely be a “lower to slower pace than experienced in the last 10 years.”

The company further anticipates most of its organic growth will come from the Outdoor Products & Accessories segment, which now makes up of approximately 25 percent of sales and 40 percent of gross profit. Added Debney, “For this reason, we will continue to aggressively work to expand our product offering across this segment of our business. At the same time, we will continue to invest in our new distribution center and important strategic initiative design to lower overall cost structure and harvest energies from acquisitions.”

American Outdoor Brands has been in the headlines because a Smith & Wesson rifle was used in the Parkland school shooting. Debney commented on the tragedy at the close of his formal presentation. “We share the nation’s grief over this incomprehensible and senseless loss of lives, and we share the desire to make our community safer. Through our membership and work with the National Shooting Sports Foundation, we will continue to support the development of effective solutions that accomplished that objective while protecting the rights of the law-abiding firearm owner.”

Asked about the impact from Dick’s move to stop selling modern sports rifles (MSRs), Debney said MSR sales to Dick’s is “extremely small; it’s actually one-tenth of one percentage points of our total sales.”

He declined to speculate on the impact if other major chains, citing Bass Pro, which also owns Cabela’s; Academy; and Sportsman’s Warehouse, follow suit. But he noted that MSRs represent between 10 to 12 percent of its sales.

Asked by another analyst if the company had seen any signs of the bump-up in firearms sales at retail that have followed other tragedies due to fear of stricter gun laws arriving, Debney said, “The only report that we’ve heard of is some increased foot traffic in firearms resellers, and that is translating into some level of increased sales, but beyond that, no.”

For the fiscal year ended April 30, sales are now expected to land in the range of $597 million to $601 million versus a range of $650 million and $675 million provided on December 7. Earnings are now expected between 31 and 33 cents, down from 57 to 67 cents previously.

On September 8, a revision of its guidance called for sales between $700 million and $740 million and non-GAAP earnings in the range of $1.04 to $1.24. In June, its outlook for the year was first set at sales coming in between $750 million and $790 million and adjusted earnings between $1.42 and $1.62.

Photo courtesy Smith & Wesson