As American Outdoor Brands (SWBI 1.33%) heads toward a split into two companies later this year, the firearms and outdoor gear manufacturer misfired with its fiscal third-quarter earnings report.

Both sales and profits came in lower than expected, and the outlook for the fourth quarter -- and possibly another quarter or two after that -- was not promising. Even though the end markets of both businesses seem robust, that did not help American Outdoor this period.

Man carrying rifle with laser sight

Image source: Crimson Trace.

Faltering firearms sales

Firearms sales in the third quarter came in at $127.4 million, a 3% increase year over year, but that was only because the company benefited from changes in when it has to pay its federal excise taxes. The shift boosted results by $10.1 million, meaning gun sales were around $117.3 million, or down 5%. 

American Outdoor said much of the shortfall was the result of several major retailers it supplies reducing their buying in the quarter. For the first half of the year their inventory restocking had followed normal patterns, but this quarter they changed their behavior. So even though retailers were selling out the front door, they were not replenishing in the store room, and American Outdoor doesn't know why.

Industry demand for firearms remains robust this year, as represented by National Instant Criminal Background Check System (NICS) data, but American Outdoor undershipped this period.

For example, background checks on handgun buyers were up almost 14% in the quarter, but shipments of Smith & Wesson firearms only rose 4.7% because of the shortfall from those key retailers. 

Lasers falling out of favor

The outdoor products and accessories business saw revenue of $43.3 million, also up 3%, as shooting, hunting, and cutlery products were in high demand, though it has seen an unexpected decline in its laser sight business. Several of its retail customers are in financial distress or went bankrupt, while one of them is making a big push into private-label camping equipment.

Co-president and CEO Brian Murphy, who will take over the executive responsibilities of the outdoor products segment when the company splits, said lasers had been the must-have accessory the past few years, and American Outdoor has made several acquisitions, positioning it as one of the largest players in the space, but demand has suddenly fallen.

It was noted that its primary Crimson Trace brand is an expensive product and consumers are still looking for discounts and deals, which may have been a factor in the decline.

A dim future

What may hurt American Outdoor products most (its stuck plummeted 31% lower following the release) was its outlook for the fourth quarter.

The strategic retailers that held back from buying firearms in the third quarter are expected to maintain that posture in the fourth. And the outdoor products business is going to be hit by the impact of the coronavirus outbreak in the period.

The vast majority of American Outdoor's outdoor products and accessories are sourced from China so the shutdown of factories and whole industries will play out in the coming months. Though virtually all of its suppliers are now operational again, there will be a negative impact, particularly if COVID-19 becomes a bigger issue here in the U.S.

As a result, American Outdoor lowered its full-year guidance for revenue of $650 million to $660 million, a sharp drop from the $680 million to $700 million forecast it provided at the end of the second quarter.

GAAP earnings expectations were also reduced to be between $0.25 and $0.29 per share, while adjusted earnings are forecast to fall in a range of $0.58 and $0.62 per share. That's a far cry from the prior guidance of GAAP EPS of between $0.41 and $0.49, and non-GAAP earnings of $0.76 to $0.84 per share.

Just over the horizon

The best that can be said is that this is likely to be a short-term situation. The strategic retailers that are holding off on purchasing will eventually need to restock, since demand is high and its outdoor gear suppliers are back to full production.

American Outdoor Brands was already trading at a deep discount and now goes for nine times forward earnings estimates and just a fraction of its sales. As the gunmaker is still generating healthy free cash flow, its stock is likely to represent even more of a bargain after it's done getting punished by the market.