Looking at the top-line numbers for Smith & Wesson Brands, Inc. over the last three years would lead one to believe that this is a company in trouble, as fiscal year sales plummeted nearly 55 percent from its peak of more than $1.0 billion in fiscal 2021. But that metric alone – shedding nearly $600 million in sales over two years – would only reveal part of the story as the company excelled during the surge in firearms demand during the pandemic with enough inventory to outpace its competition only to see that competition play inventory catch up, demand soften and channel inventories increase and promotions kicked in.
As channel inventories have re-balanced over the last year and promotions recede, the company believes it is well positioned for the fiscal year ahead.
Smith & Wesson Brands, Inc. reported net sales were $144.8 million for the fiscal 2023 fourth quarter ended April 30, a decrease of 20.1 percent from the comparable quarter in the prior year. Gross margin was reported at 29.0 percent of sales for the quarter, compared with 39.8 percent in the comparable quarter last year. GAAP net income was $12.8 million, or 28 cents per diluted share, compared with $36.1 million, or 79 cents per diluted share, for the comparable quarter in fiscal 2022.
Non-GAAP net income was $14.6 million, or 32 cents per diluted share, compared with $37.6 million, or 82 cents per diluted share, for the comparable quarter last year. GAAP to non-GAAP adjustments for income exclude costs related to the Relocation, COVID-19-related expenses, and other costs.
Non-GAAP Adjusted EBITDA was $30.3 million, or 20.9 percent of net sales, compared with $57.7 million, or 31.8 percent of net sales, for the comparable quarter last year.
“Fiscal 2023 ended with a very solid fourth quarter as the headwinds we faced from elevated channel inventory throughout the first half of the fiscal year abated,” commented Mark Smith, president and CEO, Smith & Wesson Brands. “Focused consumer promotions in the second half were successful in driving retail and distributor inventories down significantly, and we are now at or below targeted levels with every major customer. And most importantly, our retail market share data indicates that we’ve maintained our leadership position at the sales counter with the firearm consumer. Combined with lower inventory levels, this points to continued success throughout fiscal 2024.”
For the full fiscal 2023 year, net sales of $479.2 million represented a decrease of 44.5 percent, from fiscal 2022 net sales, which the company said was due primarily to a return to more normalized demand from the historic pandemic-related demand that lasted from March 2020 through the beginning of fiscal 2022, combined with a reduction in inventory within the distribution channel.
“We were pleased that inventory in our distribution channel continued to decline from January, resulting in five consecutive quarters of inventory reductions in the channel,” said Deana McPherson, EVP and CFO.
Sales of handguns decreased 42.2 percent to $360.7 million in fiscal 2023, primarily as a result of a return to more normalized demand for firearms as competing products became more available through the replenishment of depleted channel inventory, partially offset by net sales generated from increased shipments of new products, which represented 26.8 percent of sales in the period, combined with one price increase of 5 percent on select products.
Handgun unit shipments into the sporting goods channel decreased 48.4 percent from fiscal 2022, while overall consumer demand decreased 3.3 percent, as indicated by NICS background checks data. The company also said handgun inventory in their distribution channel declined by 44.4 percent during the fiscal year, which negatively impacted net sales.
Sales of long guns decreased 60.8 percent to $74.2 million in fiscal 2023. Similar to handgun sales, this decrease was primarily a result of lower demand for the majority of long gun products as competing products became more available through the replenishment of depleted channel inventory, partially offset by increased shipments of new products in the fiscal year, which represented 36.3 percent of sales in the period.
Unit shipments into the sporting goods channel decreased 59.9 percent from fiscal 2022, while overall consumer demand for long guns decreased 5.9 percent, as indicated by NICS. In addition, during the fiscal year, long gun inventory in their distribution channel declined by 49.6 percent, which negatively impacted net sales.
The company said it believes that overall firearm demand remains healthy, as indicated by NICS data, but has normalized from the surge levels experienced during much of calendar years 2020 and 2021. Smith & Wesson believes comparable shipments year-over-year underperformed in comparison to NICS primarily because of an over-replenishment of channel inventory during the first three quarters of fiscal 2022, at which time channel inventory peaked, and which led to distribution partners actively seeking to reduce inventory of products during fiscal 2023.
Other products and services sales decreased 12.1 percent to $44.3 million in fiscal 2023, primarily because of decreased sales of component parts and business-to-business sales, partially offset by increased sales of handcuffs.
New products, defined as any new SKU not shipped in the prior year, represented 25.8 percent of net sales for the 12 months ended April 30, 2023 and included three new pistols, one new modern sporting rifle, and many new product line extensions.
Gross margin for fiscal 2023 decreased by 11.1 percentage points from the prior fiscal year, primarily because of a combination of reduced sales volumes across nearly all product lines, the impact of inflation on raw material and finished parts, which increased approximately 9.6 percent over the prior year, the impact of inflation on labor costs, particularly as it relates to entry level positions, unfavorable fixed-cost absorption due to lower production volume, and expenses related to employee severance, partially offset by decreased compensation costs and favorable inventory valuation adjustments caused by amortization of variance capitalization offset by an increase in excess and obsolescence reserves. The company said it generally attempts to mitigate inflationary impacts with price increases, when and where possible, based on market dynamics, and process improvements, although their ability to utilize process improvements in recent periods has been constrained by factors related to the company relocation.
Operating expenses of $106.1 million for the year decreased $16.8 million from the prior fiscal year, representing 22.1 percent of net sales in fiscal 2023, compared to 14.2 percent of sales in fiscal 2022. Research and development expenses increased $288,000, primarily because of increased new product development costs, partially offset by decreased compensation-related costs. Selling, marketing, and distribution expenses decreased $6.2 million, primarily as a result of decreased compensation-related expenses, decreased co-op advertising expenses, decreased advertising costs, and decreased freight costs due to lower shipments, partially offset by increased spending on targeted customer promotions. General and administrative expenses decreased $10.9 million, primarily because of a decrease of $5.3 million in profit sharing expense, decreased profit-related compensation costs, lower costs associated with the Relocation, decreased legal-related expenses, and decreased bad debt expense, partially offset by increased travel and entertainment expenses. Fiscal 2023 general and administrative expenses were reduced by sublease income of $1.8 million, of which $1.6 million was reported in other income/(expense) in fiscal 2022.
Operating income from operations for fiscal 2023 decreased 80.8 percent from the prior fiscal year, to $48.4 million, or 10.1% of net sales, compared to 29.1 percent of net sales in fiscal 2022. The company attributed the decline to reduced sales volumes across nearly all product lines, unfavorable fixed-cost absorption, and increased spending on targeted customer promotions, partially offset by decreased profit sharing expense, decreased profit-related compensation costs, lower costs associated with the relocation, decreased legal-related expenses, decreased bad debt expense, favorable inventory valuation adjustments, and the change in classification of rental income.
Other income for fiscal 2023 decreased 94.8 percent to $150,000 for the year, primarily as a result of the reclassification of sublease income to general and administrative expenses and interest expense, as applicable, in the current fiscal year.
Net income for the year was $36.9 million, or 80 cents per diluted share, compared with net income of $194.5 million, or $4.08 per diluted share, for the prior fiscal year.
Inventory levels increased $40.5 million during fiscal 2023, as the company slowly ramped down production to minimize impact to employees and suppliers while replenishing stock to provide customers with a more robust selection of inventory and position the company for potential increases in consumer demand and plan for the relocation. During the second half of fiscal 2023, inventory balances decreased $16.3 million. While inventory levels, both internally and in the distribution channel, in excess of demand may negatively impact future operating results, the company said it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events, and consumer tastes. SWBI expects inventories to remain elevated as they begin the transition to the new facility in Maryville.
Looking ahead, McPherson said, “For fiscal 2024, we expect consumer demand to resemble demand in fiscal 2023; however, we anticipate an increase in our shipments given the significant decline in inventory in the distribution channel that we experienced during the first half of last fiscal year.”
With the relocation nearing the final phase, McPherson said the company’s board of directors has authorized a 12 cents per share quarterly dividend, which will be paid to stockholders of record on July 13, 2023, with payment to be made on July 27, 2023.
Photo courtesy Smith & Wesson
