Talk about a rebound: American Outdoor Brands' (NASDAQ:SWBI) earnings for its fiscal 2019 first quarter turned a $0.02 per share loss last year into a $0.14 per share profit as the company produced solid results across the board.
Obviously the improving firearms market gave the Smith & Wesson owner a big lift as that's its biggest segment. But the outdoor business also saw significant gains with 14.5% overall growth driven by a better than 10% increase in organic sales. The outdoor products and accessories division, which includes its electro-optics business (e.g. laser sights, advanced aiming devices, magnifiers, scopes, and related products), now accounts for 25% of total revenue.
Things are looking up
The goal of American Outdoors' reorganization and rebranding last year was to smooth out the peaks and valleys of the firearms industry while gaining entrance into the much larger "rugged outdoors" industry. Management saw the opportunity to still provide investors with growth, but with much less volatility.
The business goals seem to be working out as planned: American Outdoor Brands stock rocketed over 40% in the trading session following the company's Aug. 30 earnings release.
That leap was probably a bit overdone, even with full-year sales guidance revised significantly higher to as much as $630 million, up from a $600 million forecast at the end of last quarter. Hitting that target would only represent a 3.8% increase over the company's fiscal 2018 performance, and still fall well below the $903 million it notched the year before. But it indicates that the market sees American Outdoor Brands benefiting from a gun industry that appears to have bottomed out.
The revision is also in marked contrast to the more somber outlook CEO James Debney provided after the fourth quarter, when he expected more industry bankruptcies and consolidation to drive uncertainty in the marketplace. At that time, he indicated that he didn't expect much good to happen before next year.
Better products, better pricing
Not that he was exuberant this time around, but Debney identified three things that enabled the gunsmith to increase its profitability this quarter:
- Better new-product sales.
- Reduced promotions.
- Progress in expense-reduction initiatives.
New products (those introduced in the last 12 months) represented 28.5% of total revenue in the quarter. They included the M&P 380 Shield EZ pistol, a firearm meant for personal protection that's lightweight, and, as its name implies, very easy to operate. The 380's reception by consumers surprised even management, and the company says sales continue to gain momentum.
Last year, American Outdoor Brands had to run a number of promotions, particularly last summer, when it discounted its original M&P Shield to make room in inventory for the 2.0 model. It didn't need a summer sale this time around, and saw a $10.6 million reduction in promotional consumer rebates for the quarter, which effectively increased the gunmaker's average selling price.
Sturm, Ruger has also seen a dip in promotional activity, which indicates gunmakers are able to enjoy some pricing strength this year that they haven't had in the past two years.
The bumps in the road
Not everything is as rosy as it appears. The revenue gains, for instance, were predicated on a new accounting standard that -- had it been in place last year -- would have resulted in essentially flat revenue for American Outdoor Brands. Even so, unit shipments into the consumer channel for some of the company's handguns were 22% lower year over year.
But that's not necessarily as bad as it seems. Last year, the introduction of the M&P Shield 2.0 created comparable results that the gunsmith had difficulty matching this year because the firearm was so popular at the time.
Shareholders should note one additional slight setback. American Outdoor Brands' acquisition of survivalist outfit Ultimate Survival Technologies (UST) in fiscal 2017 contained a contingent liability based on business performance valued at $1.7 million, which the company would have paid out had UST met certain performance goals. But last year, the fair value of the liability was marked down by $1.6 million, and today the liability is valued at just $60,000.
While the company doesn't have to pay out the performance bonus, it indicates that the acquisition hasn't lived up to its full potential, at least in the short-term. American Outdoor Brands is also closing a UST facility in Florida and merging it with its new logistics operation in Missouri, which should help the company save money over the long term.
The key takeaway
There's much higher confidence in the gun market as of late, which is lifting the stocks of all firearms makers, though none so much as American Outdoor Brands. Perhaps because Smith & Wesson sales fell hardest, the company is rebounding the most. But it is returning to growth -- and that could be a signal to investors to look again at this beaten-down stock.