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Why Shares of American Outdoor Brands Dropped Friday Morning

By Lou Whiteman – Updated Apr 12, 2019 at 9:22AM

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Solid quarterly results were offset by worries about anemic future demand.

What happened

Shares of American Outdoor Brands (SWBI 2.18%) -- the rebranded Smith & Wesson -- fell more than 10% Friday morning despite the firearm and sporting goods company reporting fiscal third-quarter results that came in ahead of estimates. Investors were more focused on the company's outlook for the future and worries about anemic demand for firearms.

So what

American Outdoor Brands made $0.16 per share in its fiscal third quarter, beating estimates by $0.04 per share, on sales of $162 million that were above consensus and were 3% higher than the same three months a year prior. The company said its results were boosted by a good market reception to new products and the impact of bundled promotions but admitted to "ongoing weakness in the firearms market."

A gun locked by a padlock and chain.

Investments in firearms manufacturers tend to ebb and flow along with talk of gun-control regulations. Image source: Getty Images.

Investors in firearms manufacturers have been recalibrating expectations due to data that suggests decreased interest in firearms, with adjusted numbers from the National Instant Criminal Background Check System (NICS) down 12.8% year over year in February, the third time in the last four months the year-over-year number has fallen by at least 7.8%. There has been a long-running worry among investors that fears of tighter future regulations leading up to the 2016 election pulled gun purchases forward, depressing current demand, and the NICS data has done nothing to quell that fear.

American Outdoor, for the full fiscal year, expects to earn between $0.69 and $0.73 per share on sales of between $625 million and $635 million, implying some potential weakness relative to the consensus for $0.72-per-share earnings on $632 million in revenue.

Check out the latest earnings call transcript for American Outdoor Brands.

Now what

American Outdoor has some catalysts on the horizon. The company is finally moving into a new, modernized distribution center that should eventually result in lower costs and gross-margin improvements, though the timing of those benefits is unclear, as the company will run two distribution systems in parallel for much of the calendar year while the new facility ramps up.

More broadly, American Outdoor's shares are unlikely to fire on all cylinders until demand for its core product improves.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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