American Outdoor Brands, formerly Smith & Wesson, reported fourth-quarter sales arrived at the high-end of its guidance due largely to market share gains by its Firearms division. However, company officials warned that earnings would decline sharply due this year due to still elevated firearms inventory levels in the marketplace and the company plans to be aggressive in maintain market share.
On a conference call with analysts, James Debney, president and CEO, said that while the company’s acquisitions over the last year of Crimson Trace, UST and Taylor Brands has helped establish its Outdoor Recreation division, the company remains largely reliant on the seasonality of its firearms business. Typically, Q1 is sequentially down from the prior Q4 due to the summer slowdown of consumer firearms buying, Q2 is generally flattish to Q1, Q3 then rises slightly due to the holiday shopping season, and Q4 is often its strongest quarter due to distributor selling shows.
Debney said he expects the seasonal impact on revenue to be “much more pronounced” in the first-half of fiscal 2018 due in part to an “extremely successful” promotion of M&P Shield pistol in its fourth quarter that will impact M&P Shield volume sold in the first quarter.
The M&P Shield success, according to the CEO, “occurred against a backdrop of ample channel inventory and cautious buying behavior by distributors and retail in most other product categories.” As a result, consumer sales of summer and early fall product are expected to be primarily filled by the inventory that currently exists in the channel at the distributor and retail levels. Debney added, “We believe the overall channel inventories will take, at least, another four to five months to work through.”
Finally, he added that the company is operating “in a heavily promotional environment that we believe is very likely to continue.” The promotional atmosphere is expected to particularly impact the company’s margins in the first and second quarter.
For the fourth quarter ended April 30, sales rose 3.6 percent to $229.2 million. Sales were expected to range between $200 million and $229.2 million.
Gross margin for the quarter was 39.6 percent compared with 41.6 percent for the fourth quarter last year.
Quarterly GAAP net income declined 22.2 percent to $27.7 million, or 50 cents per share, but came in well above guidance between 26 and 36 cents a share. Non-GAAP net income slumped 15.0 percent to $31.8 million, or 57 cents per share, topping internal guidance between 32 cents to 42 cents.
The sales growth in the quarter came from acquisitions made throughout fiscal 2017. In its Firearm segment, revenues declined from the prior year as “softness in the consumer market for firearms continued,” said Debney.
Firearms revenues were boosted by the “highly successful” M&P Shield promotion, which included its M&P Bodyguard 380 and SDVE pistols. Even with the success of that promotion, distributor inventory of its firearms nearly decreased by 12,000 units to a total of 232,000 units at the end of Q4. Debney said this was because a large portion of the sales driven by the promotion went to its direct retail customers, such as Cabela’s and Academy, and the two large buying groups the company serves.
“Obviously, those sales did not go through our distribution channel and therefore had minimal impact on those channel inventory,” said Debney. The company’s weeks of sales in the distribution channel were above its targeted eight-week threshold at the end of Q4, and they have since increased.
Adjusted NICS background checks during the fourth quarter declined 3.1 percent versus the prior year, while firearms unit shipped into the consumer channel for the same period was relatively flat.
Adjusted NICS checks for handguns, which comprised 74 percent of its Firearms segment revenue in the quarter, decreased 4.8 percent year-over-year. At the same time, handgun unit shift into the channel for the same period increased 4 percent. Said Debney, “We believe these results reflect strong market share gains, primarily as a result of our very successful strategic promotion.”
During the quarter, the company exercised the flexible manufacturing model that it has used in the past to manage periods of demand fluctuation. Late in the quarter, it reduced its outsource capacity for manufacturing, enabling the company to fully optimize our internal capacity and align production to better match consumer demand.
“While challenging in the short-term, this type of environment is not new to us,” said Debney.
In its Outdoor Products & Accessories segment, which includes its electro-optics division, revenue increased versus a year ago due to the acquisitions of Crimson Trace, UST and Taylor Brands. Without those acquisitions, revenue in the Outdoor Products & Accessories segment remained relatively flat, “which we believe is a good result in a market that is under pressure from multiple store closures,” said Debney.
American Outdoor Brands also during the latest quarter announced plans to establish a new 500,000 square foot distribution center in Missouri that will eventually operate as the central distribution facility for all its products. The facility will also create a platform for the efficient integration of any new business it may acquire. Construction is expected to be completed in three years. Lewis Hornsby, most recently with Vista Outdoor, has been hired as president of this new division
For its full year, sales climbed 24.9 percent to $903.2 million. GAAP income advanced 36.1 percent to $127.9 million, or $2.25 per share, while non-GAAP net income jumped 42.9 percent to $146.5 million, or $2.58 per share.
Looking ahead, Debney said the company’s flexible manufacturing model, along with higher gross margins in its Outdoor Products & Accessories segment, should help the company remain within its annualized gross margin target range of 37 percent to 41 percent. Promotional activity, however, is expected to bring its annual gross margin to the low-end of that range for fiscal 2018.
Debney said the company has scheduled “several meaningful new product launches” for this year and the success of its M&P Shield promotion demonstrates its ability to drive volume and take market share.
“We believe that consumers are seeking attractive promotions and we fully intend to participate as required to maintain and grow our market share,” said Debney. “As we navigate those changes over the course of fiscal 2018, we will continue investing in our company, both inorganically and organically.”
Debney also indicated that company plans to make “targeted acquisitions of small reasonably sized businesses that fit within our strict criteria that include strong brands and products that serve the needs, wants and desires of our core consumers; a market leadership position with plenty of runway for growth, a return on investment that exceeds our hurdle rate balance with an acceptable level of risk; and the opportunity to build upon the record of solid execution and long-term shareholder value creation.”
For its first quarter, American Outdoor Brands expects revenue to be between $140 million and $150 million, with GAAP EPS between 1 to 6 cents and non-GAAP EPS between 7 to 12 cents. In the first quarter of 2016, sales were $207.0 million, GAAP net income was 57 cents a share, and non-GAAP income was 62 cents.
For the full year, revenues are expected to land between $750 million and $790 million, with GAAP EPS of between $1.16 and $1.36, and non-GAAP EPS of between $1.42 and $1.62.
The Firearms segment includes Smith & Wesson, M&P, and Thompson/Center Arms. The Outdoor Products & Accessories segment includes provides shooting, hunting, and outdoor accessories, including reloading, gunsmithing, and gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems, and tactical lighting products. Brands in Outdoor Products & Accessories include Smith & Wesson, M&P, Thompson/Center Arms, Crimson Trace, Caldwell® Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal® Reloading Tools, Lockdown® Vault Accessories, Hooyman Premium Tree Saws, BOG POD, and Golden Rod® Moisture Control as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry, and Imperial.
Photo courtesy Smith & Wesson