Image source: aob.com
I once had a colleague relate to me a story in which her home was burglarized, and she defended herself and family with her trusty six-shooter revolver. "If Smith doesn't get you, Wesson will," she would say. Smith & Wesson has long been an American household brand known for its high quality firearms. Having been around since the 1850s, everyone is familiar with its products, and its reputation for being a leading manufacturer of firearms is well-established. Having undergone several acquisitions and mergers, S&W is now under the umbrella of American Outdoor Brands Corporation (NASDAQ:AOBC).
American Outdoor Brands Corp. is a holding corporation and leading manufacturer of both firearms and outdoor sports products, owning several brands including the well-known Smith & Wesson. Until 2016, the company was called the Smith & Wesson Holding Corp., but underwent a name change to signify its venture and transition from guns into overall outdoor recreation, as the company believes that sporting goods and outdoor gear will present an attractive market in the coming years. Furthermore, by taking a more general approach to sports and recreation as opposed to embracing its gun roots, the company can fly under the radar and mitigate the volatility brought on by swings in the gun business, which are often tied to political events and national tragedies. Even as the company grows its sporting business, firearms still account for a majority of its sales, and so special emphasis on the gun market should be considered when presenting an assessment of the company's financial outlook.
Between mid-2017 and Fall 2018, American Outdoor Brands saw a declining stock price amid decreasing gun sales, even breaching a five-year low at one point last August. The stock struggled to find a bid as gun sales continued to plunge, causing alarm for shareholders and corporate executives. With the election of Donald Trump, consumer demand for new guns steadily fell, cutting deep into AOBC's pockets. The declining revenue forced job and manufacturing cuts, while the company lowered its outlook on future sales. Furthermore, large carriers of AOBC's long rifles such as Dick's Sporting Goods (NYSE:DKS) and Kroger (NYSE:KR) stated that they would no longer sell the popular AR style rifles in the wake of the Florida school shooting which rocked the nation last year. Mutual funds and certain retirement funds have even launched their own "gun-free retirement funds" which will consist of no gun-sales backed assets in order to appease certain investors with a distaste for the gun industry. On its annual 10-k report, American Outdoor has even added "actions of social activists" to its list of risk factors. The results of the anti-gun sentiment and declining demand have been apparent, as firearm background checks have fallen off their 2016 highs. With so many negative catalysts stacked against it, there was no surprise when the company slashed its estimates going forward when its fiscal year ended in April 2018.
Image Source: Bloomberg
The company has sought to address these issues which it blames on social pressure. As sales declined throughout 2018, the company announced its intent to lower advertising spending and manufacturing costs in order to bring its production in line with consumer demand. CEO James Debney said to analysts that it could take up to two years before gun sales return to their pre-2017 levels, but that it will eventually happen.
I surmise that the company will not need to wait as long as anticipated before it sees signs of a turnaround; in fact, one might argue that a turnaround in gun sales has already begun. Sales of handguns rose a modest 5% in the quarter ending Oct. 31, while long rifle sales jumped nearly 20%, greatly fueling the company's bottom line. Retailers are boosting their inventory levels despite the decline in consumer demand, indicating that the major retailers and marketers anticipate a reversal in firearm background checks on the horizon. Additionally, American Outdoor has embarked on bundle promotion offers that combine shooting, hunting, and other outdoor accessories, which has also contributed to rising sales. The surprising increase in firearm sales allowed American Outdoor to easily beat earnings estimates for Q3, and the improved outlook has caused an improving stock price with raised guidance for the coming year.
Metrics and Initiatives
American Outdoor's position in the sporting and gun industry is improving as it enjoys the gun sales turnaround. In the most recent quarter, sales were $162 million compared with $148 million for the same quarter last year, representing a 9% increase. Margins are slightly improving as well, rising from 34.9% to 34.2%. Net income has nearly doubled from $0.12 per diluted share compared to $0.06 last year. Quarterly non-GAAP adjusted EBITDA has gone from 16.5% of net sales compared with 15.5% for the same quarter during the previous year.
Source: American Outdoor 10-k
As the company's financials return to pre-2017 levels, it has more wiggle room to tackle special projects and strategic initiatives that will safeguard its capture of market share in the gun industry. For example, American Outdoor is building a new logistics & service facility in Missouri which will centralize warehousing and distribution for all products, facilitate growth, capture efficiencies, and streamline the company's distribution process.
Though guns account for the vast majority of revenue, American Outdoor seeks to expand into adjacent and complementary markets. In 2016, it purchased Taylor Brands in order to expand production of knives, tools, and steel products. Later that year it purchased Crimson Trace, an electro-optics manufacturer in order to better supply sights and lighting accessories. These strategic initiatives reflect on the company's intent to diversify its products going forward and reach all segments of the outdoor recreation industry, providing high-quality products to not just gun enthusiasts and rifle hunters, but also outdoorsmen, hikers, campers, and other types of outdoor junkies.
As American Outdoor expands its complementary businesses and sees Smith & Wesson firearm sales improve, its market share will grow and cash flows strengthen. As its financial metrics are already healthy, American Outdoor is currently a strong buy heading into 2019, and should only be avoided pending some new horrific catalyst which will bring anti-gun social pressure on the company.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AOBC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.