American Outdoor Brands (NASDAQ:SWBI) will have a lot going on when it reports fiscal third-quarter earnings this week. Not only is it trying to turn around its firearms business at the same time that it's spinning off the division, but it also ousted its CEO for undisclosed misconduct, which throws the whole situation into confusion.
Although firearms make up the bigger business, management previously believed American Outdoor, the gear and accessories unit, had greater growth potential, and ex-CEO James Debney intended to stay with that business.
The company appointed two co-CEOs to take over for him -- one for the firearms business, the other for outdoor products -- and it's moving ahead with the the split later this year, so let's see what investors might expect when American Outdoor Brands reports on Thursday, March 5.
Gun sales on the rise
Wall Street is forecasting a 16% rise in revenue to $187 million and a 44% jump in earnings to $0.23 per share. That's likely predicated on improving conditions in the firearms market rather than gains for the outdoor products segment, which saw sales decline 15% year over year in second quarter.
Sturm, Ruger (NYSE:RGR) recently reported its fourth-quarter earnings, and though its own gun sales were down, it noted that adjusted criminal background checks performed by the FBI had risen 35% sequentially during the period and were up 5% year over year.
The National Shooting Sports Foundation, which adjusts the FBI raw data, saw an 18% surge in January. It wouldn't be surprising to see such gains in February and beyond as the presidential election year once again highlights stark contrasts between the candidates on the issue of gun control.
The great outdoors
The outdoor products segment could see improvement too. Debney noted during the last earnings call that the segment's weakness in the second quarter was largely the result of big orders received the previous year that didn't repeat. He said there were signs of strong consumer demand at retail, and he was expecting full-year revenue for the division to grow from fiscal 2019.
Now, that doesn't really say how strong the growth is, but 15 of American Outdoor's 19 brands have introduced new products that were unveiled at the industry SHOT Show in January, and that should create some momentum. New products tend to drive consumers to lift sales.
The only thing offsetting those projections is that the third and fourth quarters aren't particularly strong ones for the outdoor products segment. In contrast, the fourth quarter is the biggest sales period of the year for Smith & Wesson.
Higher gun sales could help what may still be lackluster outdoor gear results.
Giving it all away
American Outdoor waited until this past Friday to release its separation agreement with Debney. Though Debney did something so egregious that he was fired for it, the company is still going to pay him $1 million over the next 12 months in $83,000 installments while also granting him his stock options that would have otherwise expired. The gunmaker will extend their expiration date, which allows Debney to purchase over 160,000 shares at $8.89 per share, and it will vest his currently unvested restricted stock units (RSUs), more than 47,000 of them. Both sides also agree to keep quiet about the misconduct.
A strong year ahead
I wouldn't expect American Outdoor Brands to shoot out the lights in the third quarter, but it has been willing to meet the industry's promotional environment head-on to gain sales and market share.
Sturm, Ruger felt the effects of that environment when it reported lower sales, and Smith & Wesson's parent could be the beneficiary, even if it gives up a few points in profit margin as a result.