Smith & Wesson Brands, Inc. reported sales plunged 69.3 percent in the fiscal first quarter ending July 31, to $84.4 million. Sales were also down 11.6 percent versus the pre-pandemic first quarter of 2019 due to extensive inventory correction in the marketplace.
On a call with analysts, Mark Smith, president and CEO, said the sales decline reflects a return to a more normal demand pattern at retail for firearms, combined with temporary headwinds from inventory corrections within the channel.
Smith said Smith & Wesson had estimated that Q1 would be between 10 percent to 20 percent versus historical levels during a normal year due to this inventory correction, with sales coming at the more-optimistic end of that projection.
“The industry experienced our first normal summer slowdown in three years,” said Smith. “And in addition to the usual seasonal foot traffic decline throughout the period, our channel partners were also selling through existing inventories. And therefore, we believe manufacturer orders were artificially depressed compared to retail pull-through.”
Encouragingly, even with this lower retail activity, unit inventory of Smith & Wesson products within its distribution and strategic retailer accounts dropped significantly throughout the quarter and are now seen largely within target ranges for this time of year.
Also, order rates have also rebounded since the end of the first quarter, indicating that inventories across the marketplace are in better balance as Smith & Wesson enters the typically busy fall and winter seasons.
Also encouragingly, Smith & Wesson’s profits were above the pre-pandemic first quarter of 2019, reflecting what Smith called the company’s “no-matter-what motto.”
“The team delivered impressive bottom line profits, which far exceeded this comparable quarter, not just in relative percentages but in absolute dollars,” said Smith. “And we fully expect to continue that discipline in cost control and promotional spending, which, combined with the pickup of order rates over the past few weeks, as I just mentioned, bodes well for continued strong profitability over the remainder of the year.”
Smith & Wesson reiterated goals for the full fiscal year, including cash generation of $75 million, cash on hand of $100 million, gross margins of 32 percent to 42 percent and EBITDAS at 20 percent to 30 percent of revenue.
On a reported basis, earnings were $3.3 million, or 7 cents a share, down 95.7 percent from $76.9 million, or $1.57, for the comparable quarter last year due to the year-over-year revenue decline and margin pressures.
Compared to the first quarter of 2019, earnings were up 50 percent from $2.2 million, or 4 cents, a year ago.
On an adjusted basis, earnings tumbled 93.4 percent to $5.1 million, or 11 cents, compared with $77.1 million, or $1.57, a year ago. Adjusted earnings were up 132 percent against profits of $2.2 million, or 4 cents, in the first quarter of 2019.
Adjusted earnings exclude costs related to the planned relocation of its headquarters and certain manufacturing and distribution operations to Tennessee, the spin-off of American Outdoor Products in August 2020, COVID-19-related expenses, and other costs.
Adjusted EBITDAS fell 85.7 percent to $15.7 million, or 18.5 percent of sales, from $109.6 million, or 39.9 percent of sales, last year. Adjusted EBITDAS were down 9.2 percent compared with adjusted EBITDAS of $17.3 million, or 18.2 percent, in the first quarter of 2019.
Gross margin was 37.3 percent compared with 47.3 percent in the comparable quarter last year but in line with the 37.3 percent achieved in the comparable quarter in fiscal 2020. Excluding relocation costs, gross margin would have been 38.8 percent, 150 basis points better than the first quarter of 2019.
The decrease in margin from last year’s high was due primarily to a combination of reduced sales volumes across nearly all product lines; unfavorable fixed cost absorption due to lower production volume and employee-related costs associated with the relocation, partially offset by decreased compensation costs due to vacancies and favorable inventory valuation adjustments. Additionally, discipline in promotions during the current quarter resulted in ASPs that were approximately 50 percent above fiscal 2020 and handguns, even higher than year-ago levels.
Operating expenses of $27.6 million for the first quarter were $2.5 million lower than the prior year’s comparable quarter, primarily due to lower sales-related expenses, including co-op advertising, freight and decreased compensation-related costs driven by temporarily unsold positions attributed to relocation. These factors offset temporary cost reductions, which were increased legal and professional fees and employee costs associated with the relocation.
Looking ahead, Smith said that with demand normalizing and manufacturers’ added capacity, the industry is returning to the seasonal cadence typical throughout much of pre-pandemic history. He said distributors and retailers adjust inventory level targets to align with the normalized demand and manufacturers adjust capacity.
“Throughout the past few months, the industry navigated through the inflection point from the largest surge in history,” said Smith. “So unsurprisingly, this dynamic became more pronounced.”
He said Smith & Wesson believes this created a “considerable disconnect” over the summer between shipments from manufacturers and corresponding NICS firearms background check data.
“Looking forward, however, as indicated by NICS data and our channel partner feedback, interest in the shooting sports remains healthy and elevated relative to pre-pandemic levels, reflecting millions of new participants and continued support from core enthusiasts.”
He said distributor inventory of Smith & Wesson products is “very comfortable” and currently sits at 14.5 weeks of supply, typical at this time of the year near the fall and winter hunt season. Smith added, “This, combined with the order rate jump we’ve seen in the most recent few weeks, gives us confidence that our sales forecast and production plans are firmly aligned with the current market. And again, we believe that the inventory correction we experienced over the past few months is now behind us.”
Nonetheless, the return to a more normalized environment has allowed inventory of competitive brands to largely return to pre-pandemic level availability, driving a “more competitive” market.
Smith said that while the company took advantage over the last few years of its ability to better fulfill orders than many competitors in a scarce inventory marketplace, Smith & Wesson still expects to benefit in a more normalized selling climate due to its strong brand name, which is “indexing extremely high across the entire customer spectrum.”
He also said a new national branding campaign highlighting its employees had received “very positive reviews,” and a strong pipeline of innovation is expected to support sales growth in the coming quarters. Recent launches include the first production revolver in the new .350 Legend caliber, shown lead photo, and the first full metal frame M&P, both of which have exceeded expectations. Two other launches are planned by the end of the current quarter, and several more before the SHOT Show in January.
Smith said, “In conclusion, the firearms market fluctuations are exactly what our business model is designed for. We will capitalize on the demand surges while remaining nimble and efficient so that we are always profitable no matter what.”
Photo courtesy Smith & Wesson/.350 Legend Caliber
