Any hoped for upbeat surprises in American Outdoor Brands' (NASDAQ:SWBI) quarterly report were shot down by higher dealer inventories outweighing positive trends in consumer demand. The firearms market remains very soft, and distributors remain cautious as a result.

With buyers having taken advantage of discounts that were ending at the end of the previous quarter, as the industry headed into the seasonally slow summer months, there was little motivation for dealers and distributors to buy more. And though consumers were showing more interest in buying guns, it was not a strong enough sentiment to warrant adding more merchandise.

Man looking at pistol at gun show

Image source: Getty Images.

On target for disappointment

American Outdoor Brands reported that revenue in its fiscal first quarter fell 11% to $123.7 million, well below analyst expectations of $127 million. Firearms sales were down 9% for the period while outdoor products were down 11%, but gross margins rose due to cost savings and inventory adjustments despite unfavorable product mix and increased promotional costs. Firearms represent 75% of American Outdoor's revenue; outdoor gear sales, the rest.

Earnings based on generally accepted accounting principles (GAAP) showed a loss of $0.04 per share, but when adjusted for acquisitions, they were $0.07 per share, in line with Wall Street's expectations.

Management isn't expecting the second quarter to be much better, and in terms of profits, the outlook is much worse than what analysts had been forecasting. American Outdoor is looking for net sales of $140 million to $150 million, down from almost $162 million last year. However, earnings are only expected to be in a range of $0.03 to $0.07 per share, well below last year's $0.20 per share, which is what Wall Street was also predicting for the second quarter.

Across-the-board headwinds

Part of the problem is obviously the weak firearms market. In the wake of mass shootings, the industry is seeing growing reluctance to sell firearms. Dick's Sporting Goods is considering doing away with its hunt department entirely. Having eliminated the segment in 125 stores, it has found sales and profits were higher with the categories it replaced it with, so it is now wondering whether it needs the business at all. Walmart also just announced it would stop selling ammunition for handguns and certain rifles and will ask customers not to openly carry firearms in its stores.

The trade war with China is also taking its toll. Much of the gear the rugged-outdoors company sells is currently sourced from China, where its supply chain is quite sophisticated. Other Asian countries that it could consider moving to can't acquire or procure all the material and components American Outdoor needs, meaning it would take a long time to make a transition. It's also uncertain how long the tariff situation is going to last.

CEO James Debney told analysts on the earnings conference call that while his team is doing its best to mitigate the increases, "as the tariff situation continues to escalate, opportunities to offset that impact have begun to rapidly diminish."

American Outdoor says it is running out of concessions it is able to wring out of its vendors, and it needs to be careful not to raise prices too much lest it become uncompetitive.

Maybe some distant hope

Basically, the gunmaker is in a wait-and-see mode. It is looking to the back half of fiscal 2020 -- starting in November -- for business to pick up. In firearms, there will be full swing for the hunting season and then the holidays. With a broad range of new products getting introduced later this year, which are typically a big driver of sales, American Outdoor is expecting big things to come.

Buyer demand seems to have finally begun a recovery, with three consecutive quarters of higher adjusted National Instant Criminal Background Check system checks, but the increases have been fairly anemic, and there's no groundswell on the horizon.

And tariffs remain a big wild card because there are more increases scheduled to come in September, October, and December. Although there is some hope of resolution as China now says it won't retaliate right away because its own economy is slowing down due to the trade tensions, it still means things may get worse for American Outdoor Brands before they get better -- and even then gains may not be so great.

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