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American Outdoor Brands May Have Some Surprises in Store for Q1

By Rich Duprey – Aug 24, 2019 at 9:00AM

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The firearms industry is showing signs of having hit an inflection point.

Although the U.S. firearms industry is slowly returning to normalcy, with declining sales looking as though they've reached a bottom, investors might not be expecting American Outdoor Brands (SWBI 1.77%) to show many surprises when it reports fiscal first-quarter earnings later this month.

When Sturm, Ruger (RGR 1.50%) reported results three weeks ago, the market hammered the gunmaker after sales and earnings tumbled, causing its stock to lose more than a quarter of its value. 

Smith & Wesson M&P9 M2.0 pistol

Image source: Smith & Wesson.

But Ruger is a bigger manufacturer of long guns than the Smith & Wesson owner, and that segment has been softer than handguns. Now that the market has cobbled together three consecutive months of higher adjusted background checks for potential gun buyers, albeit by an anemic 1.8%, American Outdoor's earnings may not seem as bad in comparison.

The gunmaker is due to report results on Thursday, August 29, so let's see what investors should be watching.

Road to recovery

The summer months are historically slow for gunmakers, and American Outdoor benefited from discounting and promotions in the surprisingly strong report for its fiscal fourth quarter. Firearms dealers had accelerated their purchase of guns to take advantage of special promotions that were expiring at the end of the quarter, so the company likely pulled forward some of its sales.

Moreover, a major firearms retailer ended up going bankrupt during the period, which continues to serve as a reminder to dealers to be cautious with their inventory.

Yet data from the FBI's National Instant Criminal Background Check System, as adjusted by the National Shooting Sports Foundation to eliminate checks on existing gun permit holders (to give a clearer indication of consumer demand) showed three consecutive months of growth through May, June, and July, the first time since 2017 the industry has posted back-to-back-to-back gains.

Chart of adjusted NICS data

Data source: National Shooting Sports Foundation. Chart by author.

Sales growth driver

As with Ruger, a significant portion of American Outdoor's sales come from new product introductions, and it unveiled over 100 new items last year, which accounted for one-fifth of total revenue. Because one of its more popular items -- the M&P 380 Shield EZ -- came out toward the end of the year, the gunmaker may see some carryover of demand into the new year, which could help offset some of the traditional weakness.

New products are also key to the outdoor segment of American Outdoor's business, and it introduced over 300 new items across the division, though they represent only 6% of total revenue. Yet most were introduced just this past January at the gun industry's SHOT Show, and their impact may be better felt throughout fiscal 2020.

Although the gunmaker expects the outdoors market to be strong in the coming fiscal year while weakness persists in firearms, American Outdoor Brands believes its overall results will be flat. The real revenue gains won't be realized until the back half of the year.

A low bar to get over

The company doesn't issue quarterly guidance but expects full-year revenue to be in a range of $630 million to $650 million, with adjusted earnings between $0.76 and $0.84 per share. Wall Street, however, is looking for 70% earnings growth this year and 15% long-term growth. For the coming quarter, analysts expect revenue to decline around 8% to a consensus estimate of $127 million, generating earnings of just $0.07 per share, just a third of what American Outdoor reported last year.

American Outdoor trades at about nine times expected earnings and at a fraction of its sales. It's been years since it traded at such a discount, and that was just before it began a sustained climb. With internal drivers in place for growth as the industry hopes to revert to the mean and enter a period of stable, sustainable demand, Smith & Wesson just might be on target for a surprise showing.

Rich Duprey 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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Stocks Mentioned

Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$10.35 (1.77%) $0.18
Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$52.04 (1.50%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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