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Why Shares of American Outdoor Brands Are Firing Blanks Today

By Lou Whiteman – Aug 30, 2019 at 10:37AM

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Tariffs are expected to eat into the firearm manufacturer's results in the quarters to come.

What happened

Shares of American Outdoor Brands (SWBI 0.78%) tumbled more than 15% on Friday morning after the firearm manufacturer lowered its outlook for the current quarter and the full fiscal year. Soft demand continues to weigh on the stock, but it is the trade war and tariffs that are really delivering the body blow to this small-cap stock.

So what

After markets closed Thursday, American Outdoor Brands said it expects fiscal second-quarter non-GAAP (adjusted) earnings of $0.03 to $0.07 per share, well below the $0.20-per-share consensus estimate. For the full year the company now expects to make between $0.70 and $0.78 per share, below the $0.82 consensus.

A handgun with a lock and chain surrounding it.

China is the big unexpected headwind American Outdoor Brands is fighting, but gun control efforts continue to hang over the stock as well. Image source: Getty Images.

The company, manufacturer of Smith & Wesson brand firearms, earned $0.03 per share in its fiscal first quarter, a penny shy of estimates. Gross margin of 38.7% was below the 40% estimate due to increased promotions and marketing activities to make up for tepid demand. It's been a difficult climate for gun manufacturers as retailers, in the wake of some high-profile shootings, are increasingly feeling pressure to limit sales.

The bigger concern for now is China, with American Outdoor Brands warning it expects a headwind of $5 million, or $0.06 per share, in the second half of its fiscal year due to tariffs and trade disruptions. CEO P. James Debney on a call with investors said the company has done what it can to mitigate the impact of tariffs, but that there is only so much that can be done quickly.

"Our supply chain in China is relatively sophisticated compared to those available in other low-cost countries, so rapid change is difficult," Debney said. "In addition, to bring in an entirely new manufacturer online takes time, and the duration of the tariff is still very unclear."

Now what

Following Friday's sell-off, shares of American Outdoor Brands are down nearly 50% for the year and are trading at a multiyear low. The company is ramping up a new Missouri distribution facility that should help streamline operations and eventually help offset some of the tariff costs, but it could be fiscal 2021 before the impact of the new facility is really felt.

American Outdoor shares are certainly cheap relative to recent history, but given the lack of clarity on issues outside the company's control, including trade wars and firearm demand, there is no sure reason for them to climb any time soon.

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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