Smith & Wesson Brands, Inc. (SWBI) Q1 2022 Earnings Call Transcript

Smith & Wesson Brands, Inc. (SWBI -0.32%)
Q1 2022 Earnings Call
Sep 01, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. first-quarter fiscal 2022 financial results conference call. This call is being recorded. At this time I would like to turn the call over to Chris Scott, acting general counsel, who will give us some information about today's call.

Chris Scott -- Acting General Counsel

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, market share demand, and consumer preference for our products, as well as inventory conditions related to our products, growth opportunities and trends, and conditions in our industry in general.

Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties that could cause our actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by our statements today. These risks and uncertainties are described in detail in our securities filings, including our reports on Forms 8-K, 10-K, and 10-Q, which you can find on our website at smith-wesson.com, along with a replay of today's call. Our actual results, levels of activity, performance, and achievements could differ materially from those expressed or implied by our statements today, and we expressly disclaim any obligation to update any forward-looking statements. I have a few important items to note about our comments on the call today.

First, we referenced certain non-GAAP financial results on this call. Our non-GAAP financial results exclude acquisition-related amortization, one-time transition costs, COVID-19 expenses, spin-related stocks compensation, and the tax effect related to each of these exclusions. Reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in our securities filings and also in today's earnings press release. Our securities filings and today's earnings press release can be found on our website.

Also, when we reference EPS, we are always referencing fully diluted EPS. Finally, when we discuss NICS results, we were referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on the FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than the purchase of a firearm. Please remember that adjusted NICS background checks are generally considered to be the best available proxy for consumer firearm demand at the retail counter.

Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel. Before I hand the call over to our speakers today, I want to remind everyone that unless otherwise indicated, any reference to income statement items during this call refers to results from continuing operations. Joining us on today's call are Mark Smith, president and chief executive officer; and Deana McPherson, chief financial officer. With that, I will turn the call over to Mark.

Mark Smith -- President and Chief Executive Officer

Thank you, Chris, and thanks, everyone, for joining us. First, as always, I would like to thank the entire Smith & Wesson team for a tremendous start to FY '22. Continuing on the momentum from the record-breaking FY '21, the results for the first three months of the new year were the highest ever for our first quarter, both in terms of revenue and profitability, and marks the fifth straight record-breaking quarter. Even with the difficult comps versus the very strong results from last year, increased manufacturing capacity due to our flexible model combined with increased market share and consumer preference for our products drove nearly a 20% increase in sales year over year.

This is a great accomplishment, but more impressive is when we take a step back. The two-year compounded growth rate for the company at the end of our first quarter was nearly 170% and really puts into perspective the market share gains that the team has been able to achieve over the last 18 months. But simply outproducing the competition during the surge period that we experienced in our industry, will only lead to short-term share gains. In order to hold those gains long term, we need to ensure that during these times, we are working just as hard, if not harder, in sales and marketing, developing marketing plans and programs to connect with the consumer, launching new products, strengthening channel partnerships, etc., so that we are ready and waiting when the supply inevitably catches up with the demand.

We have heard time and again from our customers that we have earned the title of Clear Market Leader throughout the past year and a half by outperforming the industry and delivery of our product, and we intend to hold that leadership position into the future regardless of market conditions. We continue to make significant investments in connecting with our consumers in new and unique ways for our industry, keeping ahead of trends, understanding and targeting drivers of purchase intent, and developing a feedback loop that ensures that our product portfolio, marketing message, and ultimately our brand always resonates with our loyal consumer, and remains the number one firearm brand in the industry going forward. Here are just a few of the recent highlights. We've begun shipping interactive kiosks to major retail locations across the country.

These state-of-the-art touch screen displays are a very unique and effective point of sale tool to connect with that consumer who is ready to make a purchase at a retail store. They prominently carry Smith & Wesson branding, and by using a disabled inert product, allows the user to safely physically handle and interact with Smith & Wesson firearms without having to request assistance from a retail associate. The interactive screens are remotely controlled, allowing our team to customize the content as needed and provide up-to-date relevant information on popular products, as well as video content designed to inform and entertain. Not only do these kiosks highlight the Smith & Wesson brand, they provide a very approachable and safe way for the first-time or newer consumer to learn about and handle firearms.

We launched the next phase of our GUNSMARTS program that we've highlighted on previous calls. The new content follows the natural evolution of the firearms ownership and proficiency journey by starting to include advanced concepts in the training videos. In addition to helping the new consumer gain confidence and skills, these new instructional videos are now broadening the reach of the program to include seasoned members of the firearms community, while still keeping the millions of new firearm consumers engaged with our brands. Our GUNSMARTS videos have been viewed nearly 4 million times, and are widely hailed among our consumers and our industry partners as the gold standard for training and outreach to new consumers.

In August, we launched a full-scale coordinated national advertising campaign across all media and advertising platforms, from billboards to radio to television and digital with the goal to reach over 180 million impressions, with empowering messaging that will resonate with existing and potential firearms owners from all walks of life. And finally, the highly successful launch of the M&P12 shotgun has opened up an entirely new category for the iconic Smith & Wesson brand, and we couldn't be more excited about the potential that this brings. This entry into the shotgun market generated nearly 3 million impressions and 300,000 engagements on social media and email in the first 24 hours, making this one of our most talked-about product launches ever. Within 48 hours of introduction, we had received orders reflecting 43% of our first-year forecast.

The success of the launch and the buzz generated by Smith & Wesson reentering the shotgun market after more than a decade reaffirms our brand's loyal following and our ability to continuously wow our consumers and the marketplace. With an extremely healthy new product pipeline, stay tuned for a steady cadence of exciting new products over the next 12 months. So, of course, the tangible results from all this hard work is measured by our ability to continue outperforming the competition when the inventory becomes available at the retail level. And as the country started opening up at the beginning of the summer, although the demand for firearms remains very strong, we did start to see a return to normal summer seasonality during our first quarter, which allowed our channel partners to be able to begin stocking some inventory again for the first time in over a year.

As a result, many of the consumers who had been limited to only the products in stock, now have the ability to choose from a wider selection of products and brands, and new consumers that entered the firearms community over the past year started to come back for subsequent purchases, and Smith & Wesson continued to be the brand of choice. Comparison of our unit sales in the quarter versus the NICS results in the same time timeframe show that even after adjusting for the estimated channel inventory build, we held our market share gains in handguns, matching the NICS number for the period nearly exactly. And we actually continue to gain market share in long guns, outperforming NICS in this category in spite of not participating in hunting with Thompson/Center Arms during the period. Now before I hand the call over to Deana to cover financials, I wanted to highlight one last thing from our financial statements.

Our team has delivered nearly 170% two-year compounded growth, record revenues, five straight quarters in a row, sustained market share growth, several major product launches, including entrants into a brand new category, executed marketing campaigns, GUNSMARTS, rebranding initiatives, consumer research studies, etc., all while not just holding operating costs flat but actually reducing them, and not just in relative terms in dollars spent. The restructuring of the business over the past years since the spin transaction and our subsequent commitment to driving efficiency in all of our business functions and processes have created a nimble, efficient, and effective organization, which is flexible and profitable in any market condition. The results speak for themselves in our impressive operating and EBITDAS margins. And combined with our capital allocation strategy of returning value to the shareholders, positions us very well long term for consistent delivery of healthy returns.

With that, I'll turn the call over to Deana to cover our financial results before we take questions.

Deana McPherson -- Chief Financial Officer

Thanks, Mark. Revenue for our first quarter was $274.6 million, a $44.7 million or 19.5% increase over the prior year's first quarter. This increase is exceptional, considering that it is on top of last year's enormous increase, and results in a two-year compounded increase of nearly 170%. The increase in sales over the prior year was possible due to an increase in capacity that was implemented in our second quarter last year, and all the more remarkable given that the first quarter of last year had inventory on hand at the beginning of the year, while inventory at the beginning of this year was very low.

As Mark noted, when summer started, demand began to seasonally soften as people began to get outside to enjoy summer sports and recreation for the first time in over a year. Reports from our channel checks indicate that consumer foot traffic remains elevated above 2019 levels, but is lower than it was during 2020 at this time when the pandemic was still fairly new and fear for personal safety was at a very high level. Because of our ability to deliver, some of our very high volume products are now more available within the channel than they have been in 18 months. Gross margin in the first quarter of 47.3% was 710 basis points above the 40.2% realized in the prior year comparable quarter.

This increase in margin was due to increased production and the impact of two price increases since the prior year's first quarter, one in November and one on June 14. Margins were slightly negatively impacted by increased volume-related spending, some inflation impacts, increased depreciation on machinery purchases, and compensation-related costs associated with increased headcount. However, it is important to note that production output in the first quarter of this year was 42.6% higher than in the prior year's first quarter, while fixed production costs were only 8.1% higher, demonstrating our ability to control costs while flexible growing manufacturing output. Operating expenses of $30.1 million for our first quarter were $3.6 million lower than the prior-year comparable quarter, due entirely to spin-related costs in the prior-year quarter.

Excluding those costs, operating expenses were flat to the prior year in spite of increased volume-related shipping costs and customer allowances due to the synergy savings realized from the spin, primarily in compensation-related areas, again, demonstrating our ability to control costs. The increase in revenue and gross margin combined with a strong expense containment led to a net income of $76.9 million, a $33.6 million increase over the prior year. This increased profitability combined with an over $7.2 million reduction in share count resulted in earnings per share of $1.57 compared with $0.77 in the prior year. Finally, adjusted EBITDA of $109.6 million was $37 million higher than the prior year, and a record 39.9% of revenue.

During the first quarter, we generated $109.1 million of cash from operations, and spent $5.8 million on capital equipment, resulting in over $100 million in free cash in the quarter. We spent $40 million to repurchase approximately 2 million shares of our common stock and paid $3.8 million in dividends resulting in the company ending the quarter with over $170 million of cash and no bank debt. As we announced on our call last June, our board of directors authorized an additional $50 million share repurchase program, for which we have not yet repurchased any shares. Because of the timing of our spin-off of the outdoor products business last August and the Safe Harbor rules regarding tax-free spins, this authorization represents the final value that we're able to execute until August 2022.

So, we are biding our time and intending to be opportunistic for this program. Consistent with our dividend strategy, our board has authorized a payment of a $0.08 per share quarterly dividend to shareholders of record on September 14, with payment to be made on September 28. Looking forward to our second quarter of fiscal 2022, for the past four quarters, we have shipped every firearm we can produce. We are now at a point where we're able to begin to rebuild inventory in the channel and replenish our own inventory so that our customers can order and receive products ahead of the consumer coming in their door.

Our distributor inventory as of today is approximately eight weeks of supply, which is our target level, and this return to a more normalized level has been expected. However, our internal inventory levels are still well below our target, and so we expect that our internal inventory levels will continue to be replenished throughout our second quarter. Remember, inventory in the channel and in our warehouse is a good thing. We expect there will continue to be periods where demand outstrips our ability to produce in having inventory on hand helps us continue delivering to our customers while we work with our supply chain to adjust capacity.

This is part of our flexible manufacturing strategy, which works well in times of increasing demand and works equally well when demand decreases as we are able to reduce our capacity without reducing our ability to absorb overhead. As always, our production schedule is important in order to understand our cost and margin structure. Our first quarter had 58 operating days, and our second quarter will have 59 operating days due to our two-week shutdown that crosses over two quarters. We continue to monitor our supply chain for indications of stress related to our increase in demand or issues related to the pandemic.

At this time, we've seen nothing to indicate a concern. But as always, supply chain risks are subject to change, and our team continues to develop contingencies to offset and avoid any interruptions. And finally, our effective tax rate is approximately 24%. With that, operator, can you please open the call to questions from our analysts?

Questions & Answers:

Operator

[Operator instructions]. Our first question comes from the line of Mark Smith of Lake Street Capital. Your line is open.

Mark Smith -- President and Chief Executive Officer

Hi, guys. First question, you addressed it a bit on the call, but just as far as pure consumer demand and kind of foot traffic within the retailer, you know, what you guys are seeing today? And if you're seeing even some shift within that demand, you know, more toward hunting rifles or any shifts that you're seeing in consumer demand would be great.

Sure. Hey, Mark. Yeah, the demand continues to be pretty strong. I think, you know, NICS results just came up today, and you know, I mean, it's -- obviously, we're lapping some pretty tough comps with the, you know, historic demand levels we saw this time last year throughout the summer.

I think the difference between this year and last year is this year we saw our normal seasonality, you know, that we usually see in the summertime. But when you look at the stack chart of the NICS results, you know, this year versus, frankly, the last ten years, this is by far the second-biggest year ever on record versus all of those previous years, except our -- obviously, the last year. So, the demand continues to be strong. You know, in terms of what we're seeing recently, we're anecdotally hearing that, you know, the fall is kicking off like it always does, and traffic is picking up just even in the last few days and weeks, even versus where it was, you know, since the beginning of August.

So, you know, the point there is, I think we're entering into our normal seasonal period. And you know, if you look at that stack chart of NICS, you know, usually the fall and the early winter is kind of the busiest periods that we get into in the firearms industry. I think the second part of your question was about the mix. And usually, this time of year we see a lot of -- you know, the fall kind of kicks off with hunting as people start to, you know, kind of the weather is cool, and they start to think about getting out there and enjoying the outdoors and doing some hunting.

And that, you know, tends to kind of bring the rest of the firearms industry along with it this time of year. I think the difference this year is, you know, and I think you can see it if you look at the NICS detail from the results that just came out today. Handguns are definitely leading the way versus, you know, previous years.

OK. And as we look at your new product mix, it looks solid during the quarter. You know, as we look at kind of your launch calendar, you should be expecting more new product launches maybe over the next 12 months than we saw over the prior 12 months?

Yeah. I think, you know, I kind of addressed it in the prepared comments, but yes, we have a very robust new product pipeline. And as I said, I think we talked, you know, during the surge in the last few quarters. We had kind of said, look, we're kind of building up a backlog if you will of new products because it doesn't make any sense for us to launch them now, you know, just because we're sold out and everything we can make, and we're going to be strategic and smart about that.

And you saw the shotgun launch here. You know, that was -- we've been ready with that one for, you know, frankly, for a little while here, but you know, it made sense for us to do that now as we had a little bit of capacity availability. And we've launched that out extremely successfully, and we have plenty more, let's just say in the -- you know, waiting in the wings behind it.

OK. And talking about the shotgun, just as we look at long guns, that business looked good for your numbers, especially on volume during the quarter. You didn't include the shotgun launch, but you know, how do you feel about, you know, how the shotgun launch has gone so far, and then your opportunity in long guns and this includes shotguns, you know, outside of that kind of typical MSR platform?

Yeah, we've talked about it on, you know, when talked about divesting the Thompson/Center Arms brand that we were going to be coming back in with the -- you know, into the shotgun and long gun market, and the more traditional, if you will, hunting categories under the Smith & Wesson brand. And you know, this is the first of that strategy. You know, we're immediately beginning to execute on that. I think the shotgun area is -- that shotgun market, that category is great for us.

I think it fits well with our brand, and I think, you know, we're starting off with more of a self-defense shotgun, but we very much intend to continue that expansion into that category. And we will, as we said before when we divested again at the Thompson/Center Arms business, we will be getting back in on the bolt action side as well.

OK. And last one, just any updates on Thompson/Center?

We're still going through the sale process, so nothing to update there yet.

All right, great. Thank you, guys.

Yup.

Operator

Thank you. Our next question comes from Scott Stember of C.L. King. Your line is open.

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

Good evening, guys.

Mark Smith -- President and Chief Executive Officer

Hey, Scott.

Deana McPherson -- Chief Financial Officer

Hey, Scott.

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

Deana, you were talking about -- it seems like you're back to your eight weeks threshold from a comfort level, from an inventory standpoint. Are you saying that your customers are pretty much where they need to be as well? And then also maybe just talk about the commentary about the internal inventory, and you know, how far below you are, probably, below what you really wanted it to be.

Deana McPherson -- Chief Financial Officer

Yeah. So, yeah, the channel certainly started to rebound and fill up. There are still pockets of areas where, you know, the customers are looking for more inventory. You know, we are definitely still sending out as many revolvers as we possibly can.

So, there are areas where, you know, we could do more, but yeah, they're in, I think, a reasonably good place, and I think that's because we were able to ramp up our volume and get them the inventory that they wanted. With regard to our internal inventory, we have, over the many years, had a lot more finished goods than we have right now. We'd like to have quite a bit more. So, we'll take a little bit of time to be able to ramp back up to that, certainly through the second quarter and probably further into the year to get us to where we want to be, and that really does depend on how much the fall season starts to kick back in.

Our ability to ramp will be based on, you know, how much of more inventory goes out from our consumers, so it'll take us a little bit of time. And if you look back in history, you'd see that, you know, we're very comfortable holding quite a bit of inventory, and what we have right now is still not a lot.

Mark Smith -- President and Chief Executive Officer

Scott, this is Mark. If you go back to '18 -- calendar '18 and calendar '19 in the fall, you know, at the end of our Q2, I think, you kind of take a look at our "typical inventory levels," we're not going to be able to get there. You know, current projections say that, you know, we're just not going to be able to rebuild those levels of inventories, but we will be able to kind of, you know, start to put a little bit of inventory back into the warehouses. So, we're pretty -- we're still pretty tight even as we sit here today.

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

OK. And the promotional environment, now that inventories across the channel are back to normal, I know you guys are doing some work with the GUNSMARTS program, but could you just talk about where it is now, is it back to a more normalized environment, or is it still very, very low, way below historical levels?

Mark Smith -- President and Chief Executive Officer

The promotional environment is definitely way below historical levels. There's no -- you know, we were just at trade shows over the last few weeks and there is -- you know, it's -- there are no promotions. Everybody is still selling. We do channel checks multiple times a week in different areas of the country, and I can tell you that it's extremely rare to hear even a retailer who's offering anything but full MSRP.

So, I mean, I think, as we said earlier, and I think, we went -- the difference between this year and last year is, we went through "normal summer seasonality," and I think everybody is very much expecting, and we are as well, that we're going to be getting into a pretty -- you know, as we go into our typically heavy or typically busy season, it's going to be a good busy season, and there's no reason to be running promotions.

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

Got it. All right, that's all I have right now. Thank you.

Mark Smith -- President and Chief Executive Officer

All right. Thanks, Scott.

Deana McPherson -- Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from Cai von Rumohr of Cowen. Your line is open.

Cai von Rumohr -- Cowen and Company -- Analyst

Yes. Thanks so much. So, your G&A has been running under $18 million for the third quarter. How should I think about where that G&A, you know, is going to be in the next couple of quarters?

Mark Smith -- President and Chief Executive Officer

I think, you know, we've pushed pretty hard on -- you know, as we talked to you guys at the end of last quarter, you know, that efficiency through -- you know, driving efficiency into the business, and everything we do in the back office, and that restructuring we did right after the spin transaction. I think that, you know, will it fluctuate a little bit here and there? You know, of course, it will, but you know, I think that's in terms of order magnitude, Cai, you can even expect that that's going to continue going forward.

Cai von Rumohr -- Cowen and Company -- Analyst

So, basically somewhere below -- near the current level, I mean, obviously, it could go up some, but it's not going to be -- shouldn't jump appreciably from where we are, is that essentially the way to think about it?

Mark Smith -- President and Chief Executive Officer

It is, yeah. I mean -- you know, I think it's pretty impressive what everybody is doing, the projects and deliverables that everybody is doing to achieve over the last year -- you know, 1.1 billion last year. And with that G&A, there is no reason to increase it going forward.

Cai von Rumohr -- Cowen and Company -- Analyst

And you know, your gross margin was particularly impressive. Maybe give us some color about how we should think about, you know, where that might be over the next couple of quarters?

Mark Smith -- President and Chief Executive Officer

Yeah. I think, you know, if you -- again, going back to the model that we talked about on the Analyst Call at the end of last quarter, you know, look, we went through a normal summer seasonal demand period. But if you, again, look at the next stack chart, you know, we're going to be -- you know, this is the second busiest year ever so far on record and no indication that this is not going to continue. So, we're going to be at or above the top end of that model.

Cai von Rumohr -- Cowen and Company -- Analyst

OK. And then the shotgun, you mentioned that you're at 43% of the expected orders right out of the box. How should we think about shipments? I mean, did you ship -- have you been shipping 43% in the first couple of weeks, or you know, how should we think about the shipping profile for the shotgun?

Mark Smith -- President and Chief Executive Officer

Yeah, that's a great question, Cai. We -- you know, we're a little more successful with that project, obviously, than we thought we were going to be coming out of the gates. That was very, very well received by the marketplace, and so we're currently investigating increases in capacity there. That product I mentioned earlier that we are strategic in the launch of that because it is -- it does take a lot of capacity to produce that product, so we're investigating increasing that production right now.

Our capacity on it is fairly limited at this point. So, we are seeing --

Cai von Rumohr -- Cowen and Company -- Analyst

And then your June price hike, how big was that?

Deana McPherson -- Chief Financial Officer

Three percent, Cai.

Cai von Rumohr -- Cowen and Company -- Analyst

OK, great. And last one, do you have any comments on the New Jersey legal challenge?

Mark Smith -- President and Chief Executive Officer

You know, we don't really comment too much on ongoing legal matters, Cai. But I mean, suffice it to say, obviously, you know, we didn't fully respect that the attorney general has the authority to investigate issues. Obviously, you know, we didn't feel that that subpoena was appropriate. And so, you know, we're going to respect the court's decision on that, and move forward from there.

Cai von Rumohr -- Cowen and Company -- Analyst

Great. Thank you very much.

Mark Smith -- President and Chief Executive Officer

All right.

Deana McPherson -- Chief Financial Officer

Thanks, Cai.

Operator

Thank you. [Operator instructions] At this time, I'd like to turn the call over to CEO Mark Smith for closing remarks. Sir.

Mark Smith -- President and Chief Executive Officer

All right, thank you. Thanks, everyone, for joining us. Once again, I just want to say thanks to all my fellow Smith & Wesson team members for yet another record-breaking quarter. And just as a reminder, remember that we will be holding our Virtual Annual Stockholder Meeting on September 27 at 12 noon Eastern Time.

The details of the meeting, including the call information, is provided in our filings and the communication that was sent out to all of our stockholders. With that, stay safe. Look forward to speaking with everybody next quarter.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Chris Scott -- Acting General Counsel

Mark Smith -- President and Chief Executive Officer

Deana McPherson -- Chief Financial Officer

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

Cai von Rumohr -- Cowen and Company -- Analyst

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