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Vista Outdoor Completes Sale of Gun Business. Is Its Stock a Buy?

By Rich Duprey - Aug 7, 2019 at 4:41PM

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The outdoor recreational gear leader will now focus on its core business.

After more than a year of trying to sell its firearms business, sporting goods retailer Vista Outdoor (VSTO 1.79%) announced last month it had finally sold its Savage Arms and Stevens firearms brands to an investment group headed by the division's president and CEO.

While that suggests Vista had difficulty finding a buyer willing to delve into the volatile firearms market, the sale to someone close to the business indicates the unit has a better shot at being shepherded through the gun industry downturn by individuals with more than just a financial interest in its success.

Savage Arms Valkyrie rifle and scope.

Image source: Vista Outdoor.

Going back to its roots

Beyond firearms, Vista owns brands including Bell, Bushnell, CamelBak, Giro, and Camp Chef that span bicycling, camping, hiking, and more of the active outdoor lifestyle, growing into a company with some 50 brands in its portfolio. And though it has unloaded its firearms business for $170 million, it will remain the world's largest commercial ammunition manufacturer with brands such as Federal, Speer, CCI, and Alliant Powder.

Vista was spun off in 2015 from the sporting goods division of Alliant Techsystems, an aerospace and defense contractor that merged with Orbital Sciences to create Orbital ATK. Savage Arms was acquired a short time before the spinoff, so selling it -- along with some of Vista's other units -- allows the company to return to what it sees as its core business.

As part of the transformation plan Vista outlined last year, the outdoors gear seller wants to cut costs, pay down debt, and focus on market segments in which it thinks it can be a leader. The sale will see Vista receive $158 million at the close of the transaction, with another $12 million due in five years upon payment of a note Vista will hold.

It had originally thought it would receive as much as $210 million for the gun business, but reduced the amount last quarter. It had also said the sale was on track to be completed by its fiscal fourth quarter, but that deadline came and went, showing Vista was having trouble selling the business.

But now that a deal has been struck, the question for investors is, does returning to its roots make the outdoor gear company a buy?

A partner returns

There was an immediate payoff for Vista Outdoor upon announcing the sale. Sporting goods retailer REI announced it would begin buying from Vista-owned brands. It had stopped buying from Vista following the Parkland school shooting in Florida last year, not because it held any animosity toward firearms but rather, it said, because Vista hadn't appropriately participated in the national discussion on gun safety.

Whether the boycott by REI, Canada's Mountain Equipment Co-op (MEC), and others had any real impact on Vista's business is up for debate, but overall sales fell 11% last year. Although the decline was mostly due to the sale of its eyewear business and lower demand for ammunition, hunting, and shooting accessories, it was also brought down by lower demand for hydration and action sports goods. At least having REI back on board -- MEC hasn't commented yet -- gives Vista another outlet.

The irony is that it was only firearms that recorded any sales growth in 2018, with sales up almost 2%, while every other segment including ammunition saw revenue fall year over year. That wasn't all that different from rival American Outdoor Brands (SWBI 0.29%), which reported better than 6% growth in firearms sales in fiscal 2018 but somewhat anemic 1.2% growth in outdoor goods.

A better financial position

With proceeds from the firearms business sale going toward paying down $704 million in total debt, the deal will drive an improvement in Vista's financial position. That will go a long way toward helping the company achieve its transformation goals, but Vista still faces the challenge of driving nonfirearms revenue higher. That means investors might want to approach Vista cautiously until it shows that it's figured out how its turnaround will work out.

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Stocks Mentioned

Vista Outdoor Inc. Stock Quote
Vista Outdoor Inc.
$38.64 (1.79%) $0.68
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
$14.04 (0.29%) $0.04
Orbital ATK, Inc. Stock Quote
Orbital ATK, Inc.

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