By Thomas J. Ryan

<span style="color: #999999;">American Outdoor Brands, dragged down by prolonged weakness in firearms, reported earnings before charges dropped significantly the first quarter ended July 31. Sales shrunk 10.9 percent to $123.7 million.

Sales were towards the lower end of guidance calling for sales between $120 million and $130 million.

Excluding a number of acquisition-related costs and other non-recurring costs, net income tumbled 85.5 percent to $1.7 million, or 3 cents per share, from $11.7 million, or 21 cents, a year ago. Results were likewise at the lower end of guidance that had projected adjusted earnings in the range of 3 to 7 cents.

With the charges, the quarterly net loss came to $2.1 million, or 4 cents a share, compared with net income of $7.6 million, or 14 cents, for the comparable quarter last year. Results came in below guidance in the range of a loss of 3 cents a share to earnings of 1 cent.

Revenue from the Firearms segment was $95.4 million, a decrease of 9.3 percent, and revenue from the OP&A (Outdoor Products & Accessories) segment was $33.2 million, a decrease of 10.8 percent. The OP&A revenue decline was as a result of the timing of shipments to a major customer, as well as the impact of the shipping conflicts stemming from the shuttering of a Jacksonville, FL.

Closing the Jacksonville facility eliminated 1000 square feet of office and warehouse space but the company was forced to prioritize firearm shipments over OP&A shipments, which in turn negatively impacted OP&A revenues for the quarter. The vast majority of those delayed OP&A shipments were completed at the beginning of Q2 and the company expects OP&A revenue to be up for the full year.

Gross margin for the quarter was 38.7 percent compared with 37.8 percent last year.

In the Firearms segment, gross margin increased to 37.1 percent. Although unfavorable product mix increased promotional costs and higher manufacturing spending negatively impacted gross margin that impact was more than offset by favorable manufacturing absorption and inventory variance adjustments.

In the Outdoor Products segment, gross margin declined to 42.4 percent, primarily as a result of tariffs and increased shipments to larger customers receiving discounted pricing.

GAAP operating expenses were $46.7 million, compared to $38.9 million in Q1 of last year. On a non-GAAP basis, operating expenses were $41.5 million as compared to $33.5 million in the prior year. Expenses were higher because of increased compensation, advertising and marketing costs.

On a conference call with analysts, James Debney, president and CEO, said that the during the quarter, NICS background checks for handguns increased 2.1 percent year-over-year, while the company’s units shipped to distributors and retailers decreased 7 percent. For the same period, background checks for long guns declined 2.2 percent year-over-year, while American Outdoor Brands’ units shipped to distributors and retailers declined 8.1 percent.

“This result was expected,” said Debney. “Recall last quarter, when we cautioned that a Q1 correction relative to adjusted NICS was extremely likely, given the success of our year-end promotions and our strong outperformance of the market in Q4.”

Most recently, July adjusted NICS background checks were up only slightly year-over-year. Debney said that while adjusted NICS appears to be following its typical slow summer seasonality, “this was the second-largest sequential monthly decline in the past four years, indicating to us that the consumer market for firearms remains very soft.”

Distributor inventory of the company’s firearms, increased sequentially from 127,000 units at the end of Q4 to 178,000 units at the end of Q1, in line with typical patterns as selling slow down and inventory builds up for the fall hunting and holiday shopping seasons. The inventories this year also reflect the success of the company’s Q1 buy-in programs. In addition, distributor inventory grew in the long gun category as the company proactively worked to reduce inventory of a certain product line with enough time for that inventory to clear out of the channel in advance of an upcoming new product launch. Since the end of Q1, distributor inventories have increased and remained above the company’s eight-week threshold.

<span style="color: #999999;">On tariffs, Debney said that since much of the company’s Outdoor Products & Accessories business involves China manufacturing, the company has been taking steps to mitigate their impact, including securing sources in other low-cost countries, but those opportunities “have begun to rapidly diminish.”

He added, “Our supply chain in China is relatively sophisticated compared to those available in other low-cost countries. So rapid change is difficult. In addition, to bring in an entirely new manufacturer online takes time and the duration of the tariff is still very unclear.”

Due to the tariffs, the company now expects full-year GAAP EPS to be between 41 and 49 cents, and non-GAAP EPS to be between 70 and 78 cents. Previously, guidance had called for GAAP EPS to be between 50 and 58 cents and non-GAAP EPS to be between 76 to 84 cents.

Revenue is still expected in the range of $630 million to $650 million. Said Jeff Buchanan, CFO, “Although, we expect the slowness in the firearms that we saw over the summer to continue for the next few months, we are planning some exciting new product introductions for the second half of the fiscal year. Thus, for the full year, we are maintaining our expectations.”

For the second quarter, guidance calls for revenue in the range of $140 million to $150 million, GAAP EPS between a negative 4 cents to breakeven, and non-GAAP EPS between 3 and 7 cents. In the year-ago second quarter,

Buchanan said, “The higher sequential revenue in the second quarter is not fully benefiting the bottom line estimate for several reasons, including the absence of favorable inventory variance adjustments, the impact of increased tariffs and increased promotional activities.”

The company’s 20 brands include Smith & Wesson, M&P, Thompson/Center Arms, Gemtech Caldwell, Crimson Trace, Wheeler, Tipton, Frankford Arsenal, Lockdown, BOG, Hooyman, Performance Center Accessories, Schrade, Old Timer, Uncle Henry; Imperial, BUBBA, UST, and LaserLyte.

Photo courtesy Smith & Wesson