Although this will be the first quarter Vista Outdoor (NYSE:VSTO) reports earnings without its firearms business, it's still going to be heavily dependent on gun buyer demand, regardless of how its outdoor recreation equipment business performs.
Having sold the Savage Arms and Stevens brands this past summer because they were not seen as a core business, it still retained its ammunition operations, and it continues to service the hunting and shooting accessories markets. Together, those segments account for 67% of total sales, and it's likely the company will still rise and fall based on firearms sales, even though long guns are no longer in its portfolio.
With fiscal 2020 second-quarter earnings scheduled to be released on Thursday, Nov. 7, let's look at what investors might expect.
Guns still hold a lot of firepower
Vista Outdoor is trying to transform itself, but underneath the hood it's still running on the engine of gun sales.
Ammunition alone represents almost half of Vista's revenue, but the market has been soft as firearms sales have been slack -- though that's beginning to change. FBI background checks through the National Instant Criminal Background Check System (NICS) on potential gun buyers are up 7% this year through September compared with the same period last year, but they're also 3% higher than in 2016, which was a record year for the industry.
However, the FBI data also includes states that run checks on existing gun permit holders to see if they're still eligible to have them, which skews the numbers. The National Shooting Sports Foundation, a firearms industry advocacy organization, parses the NICS numbers to remove such records from the count, which gives a more accurate index of market demand. And even its figures show the industry is on the mend.
Although the data indicates that checks are down 1% from last year (and 15% from 2016), the adjusted figures for the past five months show year-over-year increases, with the last two months growing at double-digit rates.
Running low on ammo
A recovering gun industry would obviously help drive ammunition sales, which were down 1.5% last quarter. Vista remains the world's largest commercial ammunition manufacturer, with brands such as Federal, Speer, CCI, and Alliant Powder, and in addition to the civilian market it has substantial military contracts.
However, business in the third quarter and beyond is likely to be affected by two events that occurred this year: the bankruptcy earlier of one of its big distributors, and Walmart's (NYSE:WMT) decision to ban the sale of all handgun ammunition and certain long-gun rounds. The retail giant represented 14% of Vista's total sales and accounted for 20% of the ammunition industry's total.
While the consumer discretionary company will have opportunities to expand its ammo business, such as working with gun manufacturers to develop specialized rounds for their firearms, something it was unable to do before when its Savage Arms division was a competitor, it's still in a tenuous position.
Narrowing its focus further
It might not find much relief yet from the outdoor recreation equipment market, as Vista's action sports and outdoor recreation segments also recorded lower sales last quarter, though within those units there were different moving pieces.
Its Giro brand was able to grab the No. 2 position from Oakley in the snow-goggles space, but Vista wants to sell the action sports business. It had put it on the market previously but pulled it as it went into decline. Still, selling it remains its ultimate intention. Vista is just biding its time and nursing it back to health so it can get a better price.
Is it worth it for investors?
Because Vista Outdoor is in the midst of a transition, fiscal second-quarter earnings could still look messy. Analysts are looking for sales to fall 16% this quarter to $459 million, and they're forecasting a loss of $0.09 per share, compared with a $0.05-per-share profit last year.
Management doesn't give quarterly guidance, but its outlook for the year indicates adjusted earnings of $0.10 to $0.20 per share. The consensus view on Wall Street is for $0.18 per year, double what it recorded in 2018. It does trade at a fraction to its sales, but the outdoor market is slowing, meaning the coming year could still be a volatile one for Vista Outdoor investors.