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American Outdoor Brands Corporation (NASDAQ:AOBC)
Q2 2019 Earnings Conference Call
Dec. 6, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the American Outdoor Brands second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Liz Sharp, vice president of investor relations.

Ma'am, please go ahead.

Liz Sharp -- Vice President of Investor Relations

Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue; earnings per share; non-GAAP earnings per share; fully diluted share count and tax rate for future periods; our product development, focus, objectives, strategies and vision; our strategic evolution; our market share and market demand for our products; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends.

Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms 8-K, 10-K and 10-Q. You can find those documents, as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements.

Actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we reference certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude acquisition-related costs, including amortization, onetime transition costs, and changes in contingent consideration liability, fair value inventory step-up and the tax effects related to all those adjustments.

The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in today's form 8-K filing as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. For detailed information on our results, please refer to our quarterly report on Form 10-Q for the period ended October 31, 2018, and our annual report on Form 10-K for the year ended April 30, 2018. I'll now turn the call over to James Debney, president and CEO of American Outdoor Brands.

James Debney -- President and Chief Executive Officer

Thank you, Liz. Good afternoon and thanks, everyone for joining us. With me on today's call is Jeff Buchanan, our chief financial officer. Later in the call, Jeff will provide a recap of our financial performance, as well as our updated guidance.

We are pleased with our second-quarter operational and financial results, which reflect year-over-year increases in revenue and profitability in both our outdoor products and accessories segment and our firearms segment. In addition to delivering a solid quarter, we also made good progress on several initiatives that support our strategic plan. I will elaborate on that as I take you through our results. But please bear with me as I provide you with a bit more detail than usual on today's call.

With that, let's get started. Our outdoor products and accessories segment, a strategically important market that we first entered just four years ago with our acquisition of Battenfeld Technologies, grew 10.2% year over year and generated gross margins of 45%, or more than 30% of our total revenue in the quarter. Sales growth occurred in both our hunting and shooting product categories, as well as our cutlery and tool product categories and came from a variety of retailers, particularly our online retailers. A result of good work by the team and partnering with key customers to focus on several of our growth brands and our strong product portfolio.

In our firearms segment, year-over-year growth in revenue of 10.2% and higher gross margins reflected a consumer preference for many of our products, including our very popular M&P Shield 380 EZ pistol, which we launched less than a year ago. This growth also reflects the success of two bundled promotions that we booked in Q1 and shipped in Q2. These bundled promotions demonstrate our unique ability to create packages featuring our popular consumer brands and multiple products from across our shooting, hunting and rugged outdoor businesses. For example, one of these bundles offered the M&P Shield 380 EZ pistol from our firearms division, along with a handgun safe from our outdoor products and accessories division.

By offering bundles like this, we delivered greater value for consumers with brands they know and trust. And in the case of this bundle I just described, we also delivered an immediate safe storage solution for the new firearm buyer. Moreover, we also capture incremental sales for our firearms business while improving financial performance, including gross margins, across multiple divisions of our company. The advantages we will gain through our new logistics facility in Missouri, which I will address a bit later in the call, will further enhance our ability to create profitable promotions like these in the future.

As you know, we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, not directly to end consumers. That said, adjusted NICS background checks are generally considered to be the best available proxy for firearms demand. In Q2, background checks for handguns declined 8.8% year over year, while our units shipped to distributors and retailers declined just 1.9%. For the same period, background checks for long guns declined 11.2% year over year while our units shipped to distributors and retailers increased 14.1%.

By way of a NICS update, adjusted NICS results for the month of November were issued this week. While November NICS were down about 10% on a year-over-year basis, we were encouraged to see that normal seasonality appeared to be in play. We were also encouraged to see that Black Friday sales came in at the fourth highest day for background checks ever recorded by the NICS system. We recently presented our Spring 2019 show specials to our distributors, buying groups and strategic retailers and the feedback has been very positive.

At this time each year, promotions are a normal and highly anticipated part of our industry show season. Here I am talking about channel promotion, such as buy five M&P Shield pistols and get one free. Judging from the positive feedback, we believe that the strength of our promotions this year is appropriate. We are hearing from distributors, as well as large and small retailers, that our promotions are a strong match with the current market environment.

Back to the second quarter, distributor inventory of our firearms decreased to a total of 135,000 units at the end of Q2 versus 145,000 units at the end of Q1. This is a significant decline from last year's distributor inventory of 213,000 units, a time when distributors could frequently fill orders from retailers out of their own inventory rather than placing incremental orders on us. This year's lower levels have served to remove slack in the system, creating a tighter connection between ourselves and those retailer orders. Since the end of Q2, distributor inventories have begun to increase in preparation for show season, which is to be expected.

Our current weeks of sales at distribution remain above our eight-week threshold. Turning now to new products, innovation to support our organic growth strategy remains the highest priority across our entire business. Within each division, creative new product development teams are focused on innovating for the consumer, to meet their needs, wants and desires. In our electro-optics division, new product launches demonstrated our focus on expanding our addressable market, an important part of our growth strategy for the division.

Crimson Trace has long had a dominant leadership position in the market for laser sights designed for personal production. The company's reputation is built on innovation, quality and performance, creating a recognizable brand that is trusted by consumers and manufacturers alike. In fact, when we acquired Crimson Trace, we knew that the company's strong brand gave it permission to move into new product categories that could tap into consumer trends and deliver us beyond the $120 million retail laser sight market. With our recent entry into sights and scopes, we've expanded our addressable market to $1 billion, and that represents only a third of the $2.9 billion electro-optics market that includes product categories we have yet to explore.

We recently conducted analysis to identify three distinct consumer segments in this market, which we've named protection, tactical and sport. Protection has been the core of the Crimson Trace brand, but our research indicates that the Crimson Trace brand would resonate with consumers in the tactical and sport segments as well. Keeping the voice of the consumer in mind, our product plans began to take shape as you will see in several new products that we've recently launched. For instance, in Q1, we entered the market for tactical lights, a product which addresses consumer trends toward personal protection.

In Q2, Crimson Trace further expanded the addressable market by introducing rifle scopes in short, medium and long-range applications for the sport segment, specifically hunting and target shooting. We also expanded our offering in the protection segment with the introduction of five new and innovative red dot sights for pistols and long guns, products that we believe will also resonate with the tactical and sport segments of our consumer base. Many of these products have been rolled out under an updated and expanded brand identity that aligns to our key consumer segments. You can see that exciting new look by visiting the Crimson Trace website.

To be clear, these are new products in a very large market we are now just addressing, but we believe we have the brand, the products and the team that enables us to penetrate these markets and deliver some exciting growth in the years to come. Lastly, it is important to note that Crimson Trace has maintained a successful OEM business for many years, partnering with many companies in the industry to create value-added product combinations for a variety of firearms manufacturers. Crimson Trace's entry into the tactical lights and the rifle scopes provide numerous incremental OEM opportunities to continue growing this part of the business, including opportunities within our own firearms division. In fact, one of the two bundled promotions I mentioned earlier included our M&P 15 22 rim-fire rifle, combined with a red green dot rifle scope from our electro-optics division and a rifle case from our outdoor products and accessories division.

Turning now to our outdoor products and accessories division, our new facility in Missouri will serve as the new home to this business in calendar year 2019. The team is eager to move in, with the space purposefully designed to encourage collaboration and experimentation among marketing, product development and engineering groups, reflecting our emerging entrepreneurial culture. The new facility significantly expands our product development and engineering resources, enabling our brand teams to address opportunities more quickly with unmatched rapid prototyping, product testing and commercialization capabilities. The outdoor products and accessories division has also been hard at work attracting and recruiting new talent that brings heightened focus to each of the 16 complementary brands.

Over the past year, we have added brand managers, graphic designers, visual designers, social media specialists, e-commerce support, product designers and product engineers. This investment has already began to bear fruit. Over the next year, consumers will begin to see exciting brand refreshers and packaging updates from several of our key brands, including Frankford Arsenal, Bog, Hooyman and Bubba Blade, as well as innovation in existing product categories and entry into entirely new categories with disruptive products, where our brands have permission to play. Over the years, we believe this strategy will create significant upside potential for our brand portfolio and resonate with our fall consumers' preferences.

In total, our outdoor products and accessories division expected to launch more than 250 new products in calendar-year 2019, up from approximately 150 in 2018. With new product captivation plans in place that connect product launches with the timing of consumers' Outdoor activities and shopping habits, combining this with prolific and well-timed de-marketing support should give our outdoor products and accessories business a tailwind as it settles into its new location in Missouri, and begins to harvest the benefits of our investments. Lastly, in our firearms division, new product innovation is guided by growing consumer trend, ensuring that our products lead the competitive marketplace by addressing the needs, wants and desires of each relative consumer segment that we address. This process is highlighted in Q1 with the launch of several new products, including our Performance Center SW22 Victory for target shooters, our Thompson/Center T/CR22 for hunters and plinkers and our Performance Center T/C Long Range Rifle, a product which addresses the current strong consumer trend for long-range shooting.

This exciting new entry was supported by a cross-divisional marketing activation plan that included a new annual competition targeted toward long-range shooters. The competition, called The Caldwell Lead The Challenge, is designed to drive social media engagement, long-term customer loyalty and advocacy for our T/C and Caldwell brands. In Q2, we launched our new M&P45 M2.0 compact pistol. This is another great addition to the M&P polymer pistol family and one that delivers the highly regarded M&P feature set with a four-inch barrel, a size popular with law enforcement.

We also introduced a version of this new pistol that includes a factory-installed Crimson Trace tactical light. Our work here continues in the current quarter, as the team is busily preparing for a major new product launch at SHOT Show in January, stay tuned. Now turning to a discussion of our new logistics and customer services facility in Missouri. This is an important strategic initiative that will serve to centralize the logistics, warehousing and distribution operations for all of our businesses, facilitating growth and housing efficiencies and allowing us to better serve customers across our entire organization.

In fact, our mission is to deliver best-in-class levels of service to all of our customers at the lowest possible cost. We believe this new division will provide us with a sustainable competitive advantage in the marketplace. So we are investing substantial resources into this state-of-the-art facility and its systems are an evolutionary step for our business. At this point, building construction is complete.

Our the material handling system is fully installed, and we are beginning to occupy the facility with key members of our logistics and customer service team, as well as key members of our IT team, whose focus is on meticulously testing every aspect of the new system. Their third task will involve rigorous testing of various mechanical elements of the new material handling systems. In parallel, our IT teams will begin a series of interface, system, process and software testing. Please note, we established SAP as the ERP platform for our company years ago, and it works very well for us, therefore given our current use of, and familiarity with the platform, its implementation in a new facility does not prevent any substantial challenges.

We are executing to a very structured plan, and we are transitioning our businesses into this facility in distinct phases. It is a plan designed to significantly mitigate risk and maintain optimal control and will begin this month with initial testing of our most highly compliant products. In the process of putting the hardware and the software through its paces, the team will initially run test products through the system, gradually transitioning live products into the system as it is vetted. This process is a methodical and careful testing approach that will continue as long as required.

Over that time, as I noted earlier, our existing systems will run in parallel until the new facility is fully operational and running smoothly. Looking out a bit further to fiscal 2020, we plan to physically integrate our existing outdoor products and accessories division, which is currently housed in a nearby location, as well as one of its brands, UST, a camping and survival accessories business based in Jacksonville, Florida that we acquired in 2016. Overall, the new logistics facility will allow us, over time, to physically eliminate three separate office and warehouse locations in Missouri and Florida and to cease using a third-party logistics provider. These actions will not only improve our operating costs, they will serve to bring all our brands together under one roof, making the creation of everything from new products to bundled promotions much more efficient.

The results and the in-depth update we shared today, demonstrate that we are positioning ourselves well to address an ever-increasing portion of the overall shooting, hunting and rugged outdoor enthusiast market. We continue to gain traction, evidenced by the fact that nearly one-third of our revenue in the second quarter came from our growing outdoor products and accessories segment. Offering consumers a broad and growing portfolio of highly trusted brands and products is core to our organic growth strategy. Creating an operating environment and an infrastructure to support that growth, and our expansion into new brands and product categories, is a key to our long-term success.

I am very pleased with our progress, and I believe that we have an exciting journey ahead of us. We are just getting started. With that, I'll ask Jeff to provide more detail on our financial results and our updated guidance. Jeff?

Jeff Buchanan -- Chief Financial Officer

Thanks, James. Revenue for the quarter was $161.7 million, an increase of 8.9% from the prior year. Revenue from our firearms segment was $111.8 million, an increase of 10.2%, and revenue from our outdoor products and accessories segment was $56 million, also an increase of 10.2%. Intercompany eliminations were $6 million.

In Q2, the total company gross margin was 34.9% compared to 34.2% in the prior year. The firearms gross margin was 29.8% and the outdoor products gross margin was 46%. Those segments delivered slightly improved gross margins over the prior year. In the quarter, GAAP operating expenses were $45.1 million compared to $42.8 million in Q2 of last year.

On a non-GAAP basis, operating expenses were $39.2 million as compared to $38.2 million in the prior year. Although we had cost savings in many areas, we registered a slight increase in OPEX primarily because we did not accrue for incentive compensation in the prior year. For the second quarter, EPS came in at $0.12 as compared with $0.06 last year. Our non-GAAP EPS, which excludes amortization related to prior acquisitions, was $0.20 as compared with $0.11 in the year-ago quarter.

Adjusted EBITDAS in the second quarter was $26.7 million or a 16.5% EBITDA margin improvement over the 15.5% margin for Q2 of last year. Now turning to the balance sheet, for the first six months of our fiscal year, we had positive cash flow from operations of $9.1 million. In Q2, operating cash outflow was $1.6 million and our net CAPEX, including expenditures for our logistics facility in Missouri, was $11.5 million. Thus in Q2, our free cash outflow was about $13.1 million as compared with free cash outflow of $1.5 million in Q2 of the prior year.

Free cash flow in this quarter is typically neutral to negative. As I have previously noted, we expect that the total cost of the logistics facility will be approximately $75 million. Of that amount, $3 million was spent in fiscal '18, $47 million will be financed through capital lease construction and approximately $25 million will be spent in this fiscal year. We also expect to spend approximately $23 million in this fiscal year for the rest of our business, primarily in new products and tooling, IT and maintenance.

Thus, the total expected cash outlay in fiscal '19 for CAPEX is approximately $48 million, just under $20 million, having been spent in the first six months and approximately $28 million expected to be spent in the back half of the year. During the quarter, we increased our internal inventory levels, which is normal as we move into the fall and holiday buying season. As we have noted before, inventory will probably remain at elevated levels as we are planning to maintain safety and buffer stock as we begin the transition to our new logistics facility later this year. There in Q2, we accessed $25 million on our line of credit.

Thus at the end of Q2, our balance sheet remains strong with just over $36 million of cash and about $148 million of total net borrowings to compare to last year's net borrowings at this time of over $220 million. We have $325 million available on our $350 million line of credit and that is expandable to $500 million. And now I'll discuss our guidance. For our full-year fiscal '19, we're revising our guidance upward to reflect our results this quarter.

We now expect our revenue to be in the range of $625 million to $635 million, with a full-year GAAP EPS of between $0.38 and $0.42, and non-GAAP EPS of between $0.69 and $0.73. We expect Q3 revenue to be between $155 million and $165 million, with GAAP EPS of between $0.01 and $0.05 and non-GAAP EPS of $0.09 and $0.13. Although the midpoint of this range is similar to Q2, we are expecting tighter margins due to seasonal promotional activity, the December holiday shutdown, a ramp in expenses for the logistics facility and increased OPEX due to trade shows. In both our quarterly and full fiscal-year numbers, our non-GAAP EPS excludes amortization and cost related to any acquisitions.

All of these estimates are based on our current fully diluted share count of 55 million shares and a tax rate for the remainder of the fiscal year of approximately 27%. James?

James Debney -- President and Chief Executive Officer

Thank you, Jeff. With that, operator, please open up the call for questions from our analysts. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Steve Dyer with Craig Hallum. Your line is now open.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Thank you. Good afternoon. When you guys start this fiscal year, I think you had said you anticipated, I think you called it flattish consumer demand. And it's been a decent amount, I think, softer than that.

I think adjusted mix is down about 10%, give or take, throughout that time, yet you guys continue to perform really pretty well. So I'm just wondering what you sort of attribute that delta to if it's gaining share, if it's something else that we may not be thinking about.

James Debney -- President and Chief Executive Officer

All right, Steve. I think it's really what, we covered in the prepared remarks, when you think about new products, the M&P Shield 380 EZ, has definitely been very successful and it's getting really good traction, it's got a good following, it's become a very popular firearm with the consumer, getting great feedback. I think the two bundled promotions that we did, they were very successful. And as we talked about on our last earnings call, they were really responsible for us increasing our guidance at that point.

We booked significant orders in Q1 and we've been shipping those in Q2, and we still have a bit more to ship actually, going forward in -- as we go into Q3. So tremendously successful there. And I think then just leveraging the other brands and firearms, leveraging the strong brands and product portfolio in the outdoor products and accessories segment. As I said, we're very excited about a lot of the new products there that have been launched already, in particular Crimson Trace, and the ones that we're about to launch in the outdoor products and accessories division.

So I just think it's a great team effort and a challenging market environment for firearms, which obviously remains two-thirds of our revenue. So we're pretty well connected in terms of our performance to what that part of the market doing, and you're right, it has been a bit softer than we thought it would be, but we were prepared for that.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

And I guess, just along those lines, long gun strength in the quarter, is that something similar? Just the right product at the right time or anything else you could point to there?

James Debney -- President and Chief Executive Officer

As we mentioned, one of the bundled promotions that was highly successful was a .22 rim-fire rifle, the M&P 1522, and that was combined with the red green dots -- red green dot sight that was sourced by Crimson Trace, i.e., the electro-optics division and also had a rifle case from our outdoor products and accessories division, that was tremendously successful. So that no doubt helped with our long gun sales and gave it a bit of momentum.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

And then just lastly, for me I guess, you've talked about the bundle extensively. Is there any -- you would sort of quantify how much that's helped you, I guess, year to date so far?

James Debney -- President and Chief Executive Officer

Not really. We haven't really -- well, we haven't given any detail. That's all. And I'm looking at Jeff right now.

He's talking about there's nothing...

Jeff Buchanan -- Chief Financial Officer

Other than to say, I think it definitely has helped us offset the weakness that you mentioned in NICS, so. But we haven't really specified how much it's helped.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. OK. I'll jump back in queue. Thanks, guys.

Jeff Buchanan -- Chief Financial Officer

Thanks, Steve.

Operator

Our next question comes from James Hardiman with Wedbush. Your line is now open.

James Hardiman -- Wedbush Securities -- Analyst

Hey, good morning – or good evening, I should say. How are you doing? A couple of questions for me. Along the same lines of the last question, we talked about how NICS has been somewhat softer than expected. But to the extent that you can see sort of your own retail trends, do you think demand for your products has been softer than expected? Or has it been generally in line with how you thought coming in the year?

James Debney -- President and Chief Executive Officer

Well, I think given that NICS has been lower than we expected, going back to our comments last year, and then we thought this year was going to be flattish, but really become sort of flat to down, more down than flat. So it comes back to, we had to work very hard to offset that headwind, and I think the team's done a great job for all the reasons I've listed, whether it's new products, created promotions, i.e. the bundles, working across divisions, the growth in the outdoor products and accessories segment in particular. You have to remember now, one-third of our revenue is non-firearms, it's a highly profitable segment for us now, and it's growing and it's growing fast.

So yes, we'll see firearms no doubt ebb and flow with the size of the market. But OP&A, outdoor products and accessories segment, continues to grow very successfully. Great brands, great team, great new product development process, lots of exciting things ahead of us there.

James Hardiman -- Wedbush Securities -- Analyst

Got it. And then as I try to cobble together some of the data points that you guys have given us, it seemed like the most impressive sort of combination is the fact that your shipments were able to significantly outperform the NICS numbers, while at the same time, your inventories were down substantially year-over-year. So I guess, a, does that, I know it's hard from where we sit, to really drop too many conclusions because we don't actually have the numbers, we just have percentages. But I guess, to aid to that point to market share gains and I guess, the real question is, as we move forward, do we think that relationship can persist? Can we continue to see, I guess, most notably handgun shipments, but really overall shipments outperform the NICS numbers as we move forward?

James Debney -- President and Chief Executive Officer

Again, we always take a step back and say everything is built into the guidance, and you heard what the guidance was from Jeff. But the teams are working in -- the respective segments are working extremely hard, particularly in the firearms side. We do have a major product launch coming up at SHOT Show. So we do know that, that will generate revenue in this fiscal year and continue to ramp-up as we enter into the next fiscal year as well.

So we're very excited about that. Going back to what you said about inventory, yes, a significant reduction at distributor inventory year on year. No doubt that's helping, as I said in the prepared remarks that we've got a closer connection to the retailer, because we they're ordering up the two-step distribution partner right now, that two-step distribution partner is very likely to place a replenishment order on us, so that's great news. So rather than them selling out their inventory because they want to reduce that inventory over time.

So I think we can definitely put that past us. And if you sort of do the math about that inventory reduction and look at what is NICS down versus last year, you can understand a relationship there in terms of -- as you look at our revenue this year versus last year as well as the firearms segment.

James Hardiman -- Wedbush Securities -- Analyst

Got it. And then just maybe lastly, just a clarification for me. We had talked previously about the OPEX for the year, being up about 10% on a non-GAAP basis, really good first half performance. Is that still how we should think about OPEX? Obviously that would suggest a pretty big uptick in the second half.

And if that's still on the table, how should we think about 3Q versus 4Q?

Jeff Buchanan -- Chief Financial Officer

The back half of the year, right now, we think like Q3 and Q4 will be about the same, and that the Q3 will be a bit higher than Q2. So in Q3, you have SHOT Show, variable selling expenses with outdoor products. And then by Q4, even though the SHOT Show and marketing expenses might go away, you have a ramp-up of our logistics. So I'm not sure if it's going to be up as much as we mentioned.

I think you can kind of run the numbers and see what it's going to be, based on the vehicle I just gave you.

James Hardiman -- Wedbush Securities -- Analyst

Yes. That's really helpful. Thanks, guys.

Jeff Buchanan -- Chief Financial Officer

Thanks, James.

Operator

Our next question comes from the line of Cai Von Rumohr with Cowen & Company. Your line is now open.

Jeff Molinari -- Cowen and Company -- Analyst

Hi, yes, good evening. Thanks for the – thanks for taking my question. This is actually Jeff Molinari on, in place of Cai. I had a question about the Missouri facility.

So when will that facility be fully operational? Will that be fiscal year '20 or calendar year 2020? And for the testing process, how long should that last? And then third, if we start to see -- when should we start to see kind of a build in buffer inventory? And for how many quarters should that be expected?

James Debney -- President and Chief Executive Officer

OK. I'll try and take it one piece at a time. So the timing of the new facility in Missouri going live, when will that be fully complete? That's very likely going to be late in the next calendar -- next year, so about halfway through our fiscal '20. That's when we believe the firearms division is going first, because that, because it has highly compliant products, so we need to be extremely vigilant and do a lot of testing to make sure our processes are working in that respect.

It's also the core of our business, two-thirds of revenue. So we will once we get the firearms transition out of the way first, and then we'll move on to the outdoor products and accessories segment, pretty much as I described in the prepared remarks. And regarding the inventory build, it's really there are already, we've had to think about long and hard about this, because we have to build inventory, because we know we're coming into, into the industry show season as well. So wholesalers and retailers alike are looking to build their inventory as well, it's the busy holiday season for consumer shopping.

So we need to be prepared for that. So really, we will think we've largely got that inventory balanced where we need it and in place. As ever, nothing's quite perfect. But we think we're pretty much 95% of the way there.

And then Jeff, I don't know how...

Jeff Buchanan -- Chief Financial Officer

How would you say on the inventory, just echo what James said, it's already, like mostly built. What you're going to see in the second half of the year is that inventory typically comes down for us in the second half of the year, as -- because that's the show season, a lot of our pie is dependent on sales, are typically in Q4. So you're not going to see an initial build, but you're not going go ahead and see the inventory, like come down, as we're going this testing phases and we begin shipping from both facilities until the logistics facility is ready. Like fully ready, I should say.

James Debney -- President and Chief Executive Officer

And just on the testing, the test, we're updated on that obviously, weekly. We're deeply involved ourselves on that. It's probably one of the largest strategic initiatives the company has ever undertaken. The testing is going really well.

So if we believe that we can accelerate the transition, we will. But at the same time, as I keep stressing, we have complete flexibility to slow it down. If we feel it may cause the slightest amount of disruption to the business, we don't want to risk our customer service levels at all, we don't want to risk generating revenue either. So we're very, very focused on getting it right first time around.

And as I said we've gained an incredible amount of experience over the years with SAP and other warehouse management systems. So there's a lot of work going on there as well as we interface these systems together.

Operator

Our next question comes from the line of Scott Stember with CL King. Your line is now open.

Scott Stember -- C.L. King & Associates -- Analyst

Good evening.

Jeff Buchanan -- Chief Financial Officer

Hey, Scott.

Scott Stember -- C.L. King & Associates -- Analyst

Can we talk about again the logistics center? The fourth quarter, you're talking about a ramp-up of cost. And is this strictly just related to the testing and the human capital related to ramping up the facility? Or is it running, I guess, double -- obviously, when you're going through a transition like this, you have to run, I guess double logistics sometimes just to make sure that you have adequate inventory? Just maybe walk us through what that is? And then maybe also, just for the full year of this year, related to that project, how much is being expensed in total?

Jeff Buchanan -- Chief Financial Officer

Hey, Scott. Well, so yes, the expenses are mostly, like double expenses. I think we mentioned this last time that, until we really finish moving UST in from Jacksonville, we're going to have this period of time where we have these double expenses. So that -- I mean, that's basically, as you hire people to run the warehouse in Missouri and security teams, et cetera, then you have to expense that.

Again, and also a lot of the IT expenses are capitalized until it's a go. And then those people that are currently being capitalized switch to being expensed. And we're sort of forecasting that to happen in Q4, our guidance takes that into account. Our depreciation and amortization is also going to like go up as you turn things on in Q4, we have a half year convention on depreciation, for example, so that will probably move up to a little over $14 million, which is right now, it's a little over $12 million.

Scott Stember -- C.L. King & Associates -- Analyst

OK. And just going back to the inventory in the channel, you talked about it being down dramatically, and that's great. But you also talked about it being about your eight weeks of threshold. Maybe just tie that together and it doesn't sound like you're that far above it?

James Debney -- President and Chief Executive Officer

Yes. We don't give much color to that. We just -- we're pretty binary, we just say whether we're above or below. But yes, it's normal.

You're really coming out of summer into fall. Consumer, foot traffic definitely starts to increase. You see sales increase directly correlating with the increase in foot traffic. We're getting into that busy holiday season.

So right now, we're just looking at results right up until the end of October. So you're really right in the middle of the pool there. So as we would anticipate, as we, history tells us, is you'll see the inventory drop, it should get back, we believe, below 8 weeks. But again, to Jeff's point, we are artificially holding our inventory higher than we normally would just because we want to mitigate risk to our customers in terms of, first, protecting their service levels and making sure our product is available, so protecting our top line and our profitability going forward.

So you won't see that dramatic inventory reduction that you normally see in Q4. Until we're comfortable there, the new logistics facility is up and firing on all cylinders.

Scott Stember -- C.L. King & Associates -- Analyst

All right. Just a last question I guess, on the pricing environment. It seems like, when you have this bundling program, obviously, there an effect to that on gross margins, but maybe just talk about how long this platform runs, does it run through the show season or does the show season replace all of those bundling programs or should there be a continuation of that throughout the year? And that's all I have.

James Debney -- President and Chief Executive Officer

I think our use of bundle promotions will continue into the future. I have no time line on it, to be perfectly honest. I mean, we'll do it as long as it provides value to the consumer. If it's not providing value to the consumer, it's not going to work.

So we'd have to think of some other approach. But the advantage that we have, we're sourcing all these internally. We have a fantastic sorting team in China, we're leveraging that. We have site of very low costs that we can get from some of the product that we source from China.

And we think that gives us a competitive advantage in the market going forward. So some these bundles we put together, perhaps aren't as expensive as people think they are.

Jeff Buchanan -- Chief Financial Officer

And show season is our typical type of promotion as James mentioned in the script, buy X, get one free. So that's the same thing that's done every year. And so the show season promotions are the same type of thing as we've done in the past.

Scott Stember -- C.L. King & Associates -- Analyst

All right. That's all I have. Thanks, guys.

Jeff Buchanan -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Ronald Bookbinder with IFS Securities. Your line is now open.

Ronald Bookbinder -- IFS Securities -- Analyst

Good evening and congratulations on a nice execution in a tough environment.

James Debney -- President and Chief Executive Officer

Thanks, Ron.

Ronald Bookbinder -- IFS Securities -- Analyst

You called out in the press release the strength of the outdoor and accessories at online retailers. How does the type and price point of product sales differ from what you shipped to the brick-and-mortar channel?

James Debney -- President and Chief Executive Officer

It really doesn't, to be honest. I mean, there may be some small differences in marketing support, for example, but it really doesn't differ. I mean, that's one of the challenges, it's always going to be is, managing the conflict that can occur between bricks-and-mortar and online retailers. But what we're seeing is that more bricks-and-mortar retailers are becoming online retailers at the same time.

So it's still evolving, it's still pretty fluid. I think there's obviously a long runway to go ahead of us in terms of what's happening with online retail sales, as we're going to – and we believe that they're going to increase. But bricks and mortar for us will always play an important part in our future, and we have many very, very strong bricks-and-mortar customers. And we have product, people want to go and actually handle in the store, look at and understand and talk to an educated sales associate about it as well.

So I think both play, both, and when I say both, I'm talking bricks-and-mortar and Internet retailers, are important to our future. And we understand that and we've built that into our strategic plans going forward.

Ronald Bookbinder -- IFS Securities -- Analyst

Your own online store for outdoor and accessories, how is the revenue growth there? And how did the gross margins differ from the company as a whole?

James Debney -- President and Chief Executive Officer

Our own online store sales are really small, to be honest. We're more focused on working with online retailers and obviously, they're major customers to us. So not much news there, Ron, at all. Obviously, when we do sell online or sales direct to a consumer, margins do expand fairly significantly.

But I don't want anybody to get carried away with that statement, it's a tiny part of our business.

Ronald Bookbinder -- IFS Securities -- Analyst

And you stated that you preferred to work with retailers. So is there an opportunity to team up with retailers, to let the consumer order firearms, like at your site, and then they pick up at a physical retailer, which you called drop ship to, especially on the higher-price specialty items that a retailer might not want to carry in stock or on hand.

James Debney -- President and Chief Executive Officer

Absolutely. That's an opportunity and how I describe it is, there is a retailer, no doubt bricks and mortar, who also has an online presence, and they have firearms online for sale. And that consumer can order that firearm from that retailer, decide which store for that retailer that they actually want to pick the product up from. And we can ship that product directly to that store.

Ronald Bookbinder -- IFS Securities -- Analyst

Are you finding...

James Debney -- President and Chief Executive Officer

That will be -- sorry, Ron. That will be one of the -- advantage of the new logistics facility in Missouri. So we're not there yet, Ron, being able to offer that, but for sure in the future, that's in the playbook.

Ronald Bookbinder -- IFS Securities -- Analyst

OK. Terrific. And would you find that, that would be higher priced, more specialty items that sort of a larger mass merchant might not bother to carry in stock and then just let people online?

James Debney -- President and Chief Executive Officer

It could be, for sure. Because you're right, some retailers don't want to, and it, to be honest is not smart, you don't want to carry one of every SKU that we offer, for example. So the online presence that the retailer has, they can offer the full assortment of our product, for sure. And then as long as we're good, shipping in a timely fashion and getting it to the stores, so that the consumer can get it in their hands and actually pick it up, do the transfer and so on, then yes, that could very well work.

Ronald Bookbinder -- IFS Securities -- Analyst

And the new distribution facility would enable you to really accomplish that?

James Debney -- President and Chief Executive Officer

Yes, for sure. And that goes back to what I was talking about in the prepared remarks, the technology and the systems that we're adopting here are truly are an evolutionary step for the company. They don't have anything like that right now. But we will with the new logistics facility in Missouri.

Ronald Bookbinder -- IFS Securities -- Analyst

OK. Great. Thank you very much and good luck in the new quarter.

James Debney -- President and Chief Executive Officer

Thanks, Ron. Take care.

Operator

[Operator instructions] We have a follow-up question from the line of Steve Dyer with Craig Hallum. Your line is now open.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Yes. Just a quick follow-up for me. So obviously, your diversification strategy a few years ago is starting to bear fruit in outdoor products. Is that something you're looking to be more aggressive with going forward? And then, I guess secondly, are there any other opportunities, maybe in the core firearms segment that looked potentially interesting to you, just given some of the distress in capacity still in the industry?

James Debney -- President and Chief Executive Officer

Yes is the answer. We are looking to grow the outdoor products and accessories segment as aggressively as we can. I mean, you've heard me just think about all the talent we've been hiring, for example. It's going to be about those brands, those products but most importantly, about the teams that we're putting together.

So we need talented people in those teams. And we really have put great teams together. So again, I'm excited about that, I think we have a long runway for growth ahead of us. It's going to be a really exciting journey.

Coming back to firearms, absolutely, it's the core of our business, we'll always keep a close eye, what's going on in the marketplace. There does seem to be a lot of change going on, there's a lot of variability in financial performance of some of the businesses that operate in the firearms space. So we'll just keep a close eye on that. But I think what's important for us is to continue in the direction of diversifying our revenues.

So simply put, firearms versus non-firearms, so non-serialized product versus serialized product. And our focus is going to be on that non-serialized product, but we will always reinvestment in the core of our business, and that's why you'll see us heavy in new product development. And we're calling out that we're excited about new product introductions at SHOT because they are real, revenue-generating opportunities. And you've heard us talk a lot about organic growth, whether it is the Firearm segment or it's the outdoor products and accessories segment.

But we're also, we'll keep a close eye on those M&A opportunities, should they rear their head at the appropriate time. But I would say again, what we'd really like are those smaller, low risk acquisitions, brands that may be a sleepy brands right now that we think that we can reinvigorate and create value. Those are going to be our focus going forward. Buying something distressed, to use your word, it's not as attractive, because it always comes with a lot of baggage, you can never figure out what's in the bag before you buy it.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. Thank you.

James Debney -- President and Chief Executive Officer

Thank you.

Operator

And our last question is our follow-up from Cai Von Rumohr with Cowen and Company. Your line is now open.

James Debney -- President and Chief Executive Officer

Hey, Cai.

Jeff Molinari -- Cowen and Company -- Analyst

Hey, guys. It's Jeff Molinari again.

James Debney -- President and Chief Executive Officer

Oh, sorry, Jeff.

Jeff Molinari -- Cowen and Company -- Analyst

No, it's OK. Just one last question here on the general market outlook, coming into the year, you guys are thinking flat to down for NICS, and now talking more like down. But kind of looking out further, when do you kind of think things start to turn around? Or is the visibility still pretty poor? And does democrats picking up majority in the House, or some governors at some states, does that change anything?

James Debney -- President and Chief Executive Officer

Well, Jeff, that is the million-dollar question. And I don't know the answer. All I'll say is, looking at history, when we think about adjusted NICS, it seems to be fairly consistent, in terms of its 10% down over the prior year. So as you think forward, what you can do is map that going forward as well, and that's what we'll build our plans around when it comes to the firearms segment.

And we just have to be prolific generators of great marketing content, reaching our consumers via social media, that's how they want to connect with us, and give them the right new products. And we have very talented new product development teams, great engineers, here in Springfield, Massachusetts, that are working hard to do exactly that. So you can see, you got to excite that consumer. It is no doubt an uncertain market.

All those macro influencers give the market a tailwind in the future, who knows.

Operator

And that concludes today's question-and-answer session. I would like to turn the call back to Mr. Debney for closing remarks.

James Debney -- President and Chief Executive Officer

Thank you, operator. I want to thank everyone across the American Outdoor Brands team for their commitment and dedication to excellence. We wish all of you a happy and healthy holiday season. Thanks again for joining us, and we look forward to speaking with you next quarter.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Liz Sharp -- Vice President of Investor Relations

James Debney -- President and Chief Executive Officer

Jeff Buchanan -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

James Hardiman -- Wedbush Securities -- Analyst

Jeff Molinari -- Cowen and Company -- Analyst

Scott Stember -- C.L. King & Associates -- Analyst

Ronald Bookbinder -- IFS Securities -- Analyst

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