American Outdoor Brands slashed its earnings guidance for its fiscal year after reporting first-quarter results that fell short of expectations.
For the year ended April 30, 2018, the parent of Smith & Wesson, M&P and Thompson/Center Arms, now expects GAAP earnings between 77 and 97 cents, non-GAAP earnings in the range of $1.04 to $1.24 and sales between $700 million and $740 million. Previously, GAAP earnings were expected between $1.16 and $1.36, adjusted earnings between $1.42 and $1.62 and sales between $750 million and $790 million.
In the first quarter ended July 31 , sales dropped 37.7 percent to $129 million. The net loss came to $2.2 million, or 4 cents a share, compared with net income of $35.2 million, or 62 cents, for the comparable quarter last year.
Quarterly non-GAAP net income was $1.2 million, or 2 cents, compared with $37.7 million, or 66 cents, for the comparable quarter last year.
Under its guidance, sales were expected to range between $140 million and $150 million, GAAP earnings between 1 cent and 6 cents and non-GAAP profits between 7 cents and 12 cents.
On a conference call with analysts, James Debney, CEO, said the results reflected lower than anticipated shipments in its Firearms segment, consistent with the softening in wholesaler and retailer orders, partially offset by increase revenue from its Outdoor Products and Accessories segment, which grew organically at 11.4 percent.
Firearms revenue for the quarter also faced a challenging comparison to last year’s higher level of firearms demand, which the company believes was driven by concerns for personal safety and the potential for increased firearm legislation.
Regarding the Firearms segment, Debney noted adjusted NICS background checks declined 11.2 percent in the quarter. NICS related to handgun purchases declined 7.1 percent, while NICS related long gun purchases declined 16.8 percent.
“Despite the year-over-year decline, adjusted NICS checks this quarter was still 5.8 percent higher than two years ago, a good indication of long-term consumer demand for firearms,” said Debney.
The company’s Firearm units shipped into the consumer channel in the first quarter slumped 39.1 percent. Handgun units shipped on that basis fell 39.1 percent while handgun units shipped were off 34.6 percent.
Debney said the company believes handgun shipments were impacted by an “extremely successful promotion” on its M&P Shield pistols initiated in April that pulled sales from the fourth quarter.
“As a result of our promotion, our monthly market analysis indicates that we gain significant market share in the first quarter as a large number of consumers purchased the Shield pistols that we have previously shipped into the channel in Q4,” said Debney. “In fact our research indicates that we grew our Shield share of the total handgun market by more than 5 percentage points, an incredible result.”
In the overall market, Debney said heightened channel inventory at retail locations from multiple manufacturers, including American Outdoor Brands, also contributed to lower orders in the first quarter. Despite the challenges, American Outdoor Brands’ distributor inventory in its Firearms segment decreased slightly versus the end of Q4 to a total of 231,000 units at the end of Q1.
Added Debney, “Even with this favorable decline, the company’s weeks of sales at distributors remained above its targeted eight-week threshold at the end of Q1, since then sales weeks have increased, which is typical during the slow summer months, when sales velocity usually settles at the lowest level of the year.”
American Outdoor Brands acquired Gemtech, a provider of suppressors, to support its Firearms division. Stated Debney, “We view this acquisition of somewhat opportunistic, allowing us to enter the suppressor category plus potential favorable changes in legislation and at the time when the market is particularly soft. These elements combine to make Gemtech an excellent fit with our long-term strategy.”
In its Outdoor Products and Accessories segment, which includes its Electro-Optics division, the 11.4 percent organic growth reflected expanded offerings. Overall revenue more than doubled due to three acquisitions in its last fiscal year.
During the quarter the Accessories division e Bubba Blade, a premium knife brand for fishing, hunting and kitchen use.
“Bubba Blade products are a natural fit with our Accessories division, which already have strong knife and tool business as a result of our Taylor knife acquisition last year,” said Debney. “I’m excited about Bubba Blade because its products deliver features and benefits that are very popular with consumers and are protected by strong intellectual property. This also represents our exciting first step into the sizable fishing accessories market.”
Other brands in the Outdoor Products & Accessories segment include Crimson Trace, 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, UST and Imperial.
Both Gemtech and Bubba Blade transactions closed after the end of the quarter for an aggregate purchase price of $22 million and are expected to generated about $7 million of combined revenue in the current fiscal year.
Looking ahead, Debney noted that the elevated inventories and heightened promotions are compounding the challenges presented by the seasonally-slow summer months.
“We expect the current situation to continue through our second quarter followed by what we believe will be improved channel conditions during the second half of our fiscal year,” said Debney. “During that time we believe channel inventory will normalize as we move through what is historically the busiest retail period of the year, the fall and winter shopping seasons.”
He also noted that August adjusted NICS results published on Thursday showed a sequential increase from July of 12.6 percent. Added Debney, “This resulted in an encouraging indicator that the normal seasonality we have come to expect will play out in the second half of our fiscal year.”
To help jumpstart demand, the company has “meaningful new product launches” planned for coming months across firearms categories and plan to build inventories to support holiday selling and the wholesale and buying group trade shows that occur in January and February. The company also plans to remain promotional as necessary. Stated Debney, “We believe consumers right now are seeking compelling promotions and we fully intend to participate as required to protect and grow our market share.”
Other strategies include a heightened focus on expense control, completing its new distribution center by next spring and further expanding in the rugged outdoor market to mitigate the cyclical impact of the Firearms business.
“We plan to carefully manage and leverage our balance sheet to make targeted acquisitions of small reasonably sized businesses and/or investments in major organic growth initiatives that fit our strict criteria that’s 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 our record of solid execution and long-term shareholder value creation,” said Debney.
Photo courtesy Smith & Wesson