The big news coming out of Vista Outdoor’s earnings report last Thursday was the resignation of CEO Chris Metz, but analysts expressed more concerns about the eroding performance of the company’s organic businesses, particularly the Outdoor Products segment.

As reported, Metz voluntarily resigned as a result of Vista’s “board’s loss of confidence in his leadership.” Gary McArthur, a board member since 2015, was named interim CEO. Metz entered into an agreement to assist during the transition period.

Highlights of the quarter include:

  • Sales declined 5.0 percent to $755 million but were up 78 percent over the same period in fiscal year 2020, the last quarter before the pandemic. Sales were just ahead of Wall Street’s consensus estimate of $753.7 million.
  • Sporting Product sales were $402 million, down 13 percent over the prior year period and consistent with previous guidance. Sporting Product segment sales were up 98 percent over the same period in FY20. The year-over-year decline was driven primarily by lower shipments of pistol ammunition as channel inventory normalized and the timing of shotshell shipments, as well as the previously announced termination of the Lake City contract at the beginning of the quarter. EBITDA in the segment declined 20.4 percent to $124.1 million from $156 million, primarily driven by lower gross profit.
  • The Outdoor Products segment posted record sales of $353 million, up 5 percent over the prior year period and up 59 percent over the same period in FY20. The year-over-year gains were driven by acquired businesses and strength in golf, partially offset by declines in other organic businesses, primarily caused by reduced purchasing from international, big box, and other wholesale. EBIT declined 67 percent to $14 million due to lower gross profit in the organic businesses, as well as higher selling, general and administrative expenses related to acquired businesses. EBITDA in the segment declined 41.7 percent to $31.7 million due to lower gross profit in the organic businesses, as well as higher operating expenses related to acquired businesses
  • Sales for the fiscal year ended March 31 are now expected in the range of $3.06 billion to $3.08 billion, down 1 percent at the midpoint. (Previously, $3.05 billion to $3.15 billion, up 2 percent at the midpoint);
  • Adjusted EPS for the fiscal year is now expected in the range of $6.05 to $6.30, previously in the range of $6.00 to $6.50.

Shares fell 93 cents to $29.08 last Thursday after the news of the CEO’s exit and the report of quarterly results. On Monday, shares of Vista closed at $26.78, down $1.37.

William Blair reiterated its “Outperform” rating on Vista’s stock. Analyst Ryan Sundby said that while third-quarter sales and EBITDA largely in line with consensus forecasts, the organic business again showed continued declines across both the sporting products and outdoor products segments. Sundby wrote, “This reflects ongoing macroeconomic headwinds and associated pressures in the form of increased promotional activity and retail inventory buildups (across the broader outdoor category), which have closed down or significantly limited open-to-buy orders even for in-demand products such as Vista’s own stable of 12 power brands that generate more than $100 million in annual revenues.

He noted that while third-quarter results and management’s updated guidance were largely as expected, shares were under some pressure given the surprise departure of the CEO, which he said, “adds to a growing list of management positions that must be brought onboard as Vista moves through a period of significant operational and strategic change.”

He added, “With Vista’s enterprise value trading at roughly 5 times our current fiscal 2024 EBITDA estimate of $554 million, we continue to see value in the company’s shares, though acknowledge the recent organic sales declines, reduced profitability, and management turnover raise questions around the resilience of the business and Vista’s ability to reach our out-year forecast.”

Roth kept its stock rating at “Neutral” and price target at $27 while slightly lowering its estimates due to the firm’s fourth-quarter guidance update. Matt Koranda, Roth’s analyst in the space, said that on the positive, third-quarter results were in line with sales and ahead of consensus profit targets. He also said investors should be pleased that Vista still plans to spin the Outdoor Products segment. Negatives include Vista’s below-consensus fourth-quarter outlook, eroding organic metrics, and abrupt CEO departure. Koranda said he’s looking for stability in the Sporting Products segment and improving organic metrics in Outdoor Products to get more constructive.

He wrote, “To come off the sidelines, we would like to see a few things: (1) signs of stability/normalization in Sporting Products (understanding where revenue/margins normalize in the current down-cycle is critical); (2) more detail on the contribution of acquisitions and the organic performance of Outdoor Products (with all the moving pieces, it’s becoming challenging to determine the sources of margin weakness in Outdoor Products); and (3) lower consensus expectations for F2024 would also help us get more constructive.”

Koranda added that although Vista’s management expects to complete the spin of its Outdoor Products segment in the current calendar year, he would be surprised to see this happen much before midyear 2023 given the transitional management team with Metz’s exit following the department of Vista’s CFO, Sudhanshu Priyadarshi, last November. Koranda also believes it will take time to the need to “get SEC filings solidified and debt funding secured” for the remaining business.

B. Riley reiterated its “Buy” rating while lowering its price target from $45 to $41. Analyst Eric Wold said in a note that sales were in line and earnings came on the upside despite a “difficult inflationary cost environment with cautious retail inventory restocking patterns.”

Wold said ammo results were relatively in line with expectations with Sporting Goods segment sales down 13 percent. Wold expects quarterly sales to remain in this range throughout FY24 with retail inventory levels likely matching ammo consumption patterns. Wold also noted that Vista’s despite recently increasing some ammo pricing to offset cost pressures and those prices have stuck at retail. Wrote Wold, “Given some indications of retail pricing softness (but not out of control) in areas where demand levels warrant, we could be seeing a healthy return to more normalized pricing moves on supply/demand with a stronger consumption backdrop that is positive for the segment.”

Wold said the Outdoor Products segment should see normalized restocking patterns. Outdoor product segment. While Vista’s management noted that retailers in the outdoor space remain cautious on restocking, a return to more normalized restocking patterns in the quarters ahead as retailers amid an increasing level of low inventory levels or out-of-stock positions in certain categories.

Wold wrote, “Although we are using this opportunity to lower the bar with our FY23/FY24 estimates in this uncertain environment, we are reiterating our Buy rating and continue to view the planned business separation as an event that will enhance shareholder value.”

Jefferies maintained its “Hold” rating at a $26 price target. Analyst Anna Glaessgen said the third-quarter earnings beat came with a “mixed complexion” with the Sporting Goods segment surprising on the upside and the Outdoor Products segment coming in below expectations. She said Outdoor Products’ decline in adjusted EBITDA by 41 percent implies the organic business likely saw a decline of greater than 50 percent in the quarter.

Glaessgen said, “As the bull case centers on the presumed elevated multiple for Outdoor Products, lowered expectations for this business carry outsized stock implications.”

Glaessgen added that while the company reiterated that the Outdoor Products segment spin-off is still on track for the current calendar year, the CEO departure, following the CFO and IR leaving in the past few months, may present cause delays. She wrote, “With substantial leadership turnover in the past few months, we believe this shifts out the likely timing. With the bull case centered on the spin, shifting out the event may test holders’ patience.”

Monness, Crespi, Hardt & Co. maintained its “Buy” rating at a $38 price target.

Analyst James Chartier said he’s taking a “more conservative approach” to FY24, including lowering its FY24 EPS estimate to $5.11 from $5.76, based on flat sales. However, Chartier sees numerous potential tailwinds next year.

Chartier wrote in a note, “A full year of recent acquisitions should add 4 percent to sales next year. And, in outdoor products, we believe VSTO’s shipments for the last three quarters of FY23 could be lagging POS by nearly 10 percent, providing a possible tailwind to FY24. We see the potential for meaningful cost savings for outdoor products from lower ocean freight, other supply chain efficiencies and synergies from recent acquisitions. However, we expect management will take a cautious approach to guidance. And, while we see a tailwind from market share gains and increased capacity at Remington, the ammunition business is currently run-rating 8 percent below our FY23 forecast.”

Photo courtesy Vista Outdoor