American Outdoor Brands (AOBC), formerly known as Smith & Wesson, is under pressure (-9%) this morning after reporting 4Q17 (Apr) earnings results last night. The AprQ results were actually quite good, it was some weak guidance that is taking the stock down this morning.
In terms of quick background, AOBC is a provider of products for shooting, hunting, and rugged outdoor enthusiasts. It changed its name to American Outdoor Brands from Smith & Wesson around January of this year in order to reflect its more diverse offering and to reflect its expansion into new and larger markets. It reports two segments: Firearms and Outdoor Products & Accessories.
In its Firearms business, which operates under the Smith & Wesson name, AOBC makes a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, and firearm-related products for sale to gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement etc. Its firearm products are sold under the Smith & Wesson, M&P, Performance Center, and Thompson/Center Arms brands. It also sells its manufacturing services to other businesses in order to level-load its factories.
In its Outdoor Products & Accessories (OP&A) business, which currently operates under the names of Battenfeld Technologies, BTI Tools, Ultimate Survival Technologies, and Crimson Trace, AOBC makes reloading, gunsmithing, and gun cleaning supplies; cutting tools and accessories; flashlights; tree saws; shooting supplies; apparel; vault accessories; laser grips and laser sights; and a full range of products for survival and emergency preparedness.
Turning to the Q4 (Apr) results, non-GAAP EPS fell 14% YoY to $0.57, but that was much higher than prior guidance of $0.32-0.42. Revenue rose 3.7% year/year to $229.2 mln, which also was well above prior guidance of $200-220 mln. However, the guidance was disappointing as AOBC expects Q1 (Jul) non-GAAP EPS of just $0.07-0.12 and revenue of $140-150 mln. Both numbers are well below market expectations. For FY18, AOBC expects non-GAAP EPS of $1.42-1.62 and revenue of $750-790 mln. Both numbers are also below market expectations.
In its Firearms segment, AOBC introduced several important new products, including the Smith & Wesson M&P M2.0, which is a next generation full size polymer pistol and an important platform for the addition of new M&P pistols that the company plans to add in 2018 and beyond. Sales of its market-leading M&P Shield pistol designed for concealed carry remained strong. In AprQ, AOBC sold over 195,000 Shield units, reflecting what the company describes as tremendous consumer adoption rates and extraordinary market share gains. In its OP&A segment, AOBC completed three acquisitions that drove revenue growth and marked important progress in expanding this business into new markets that resonate with AOBC's core firearm and rugged outdoor enthusiast consumers.
On the call, management provided some color on the guidance. First, with regards to seasonality, AOBC believes that consumer sales will slow as they typically do in the summer and early fall and that those consumer sales will be primarily filled by the inventory that currently exists in the channel at the distributor and retail levels. Second, AOBC believes that the excess in the channel inventories will begin to subside in the late fall as firearm consumer foot traffic increases, which it seasonally does every year as indicated by NICS.
Third, AOBC believes the promotional atmosphere will continue and will have an impact gross margins, especially in fiscal Q1 (Jul) and Q2 (Oct). It should be noted that promotions are intended to increase or maintain AOBC's market share and/or an investment in the future of its business. That investment drives brand recognition and creates a solid foundation to optimize distribution of new products. And fourth, AOBC believes fiscal Q3 (Jan) and Q4 (Apr) will be positively impacted by upcoming new product introductions, several of which are significant.
In sum, it was a nice beat in Q4 (Apr) as sales of its concealed carry pistols remained strong. However, there does seem to be some excess inventory in the channel that will need time to be worked down. Also, there is more of a promotional environment going on right now which is impacting margins. That seems to have resulted in the weaker guidance.