American Outdoor Brands Overcomes Tough Odds in Q4

Rich Duprey, The Motley Fool

The fourth-quarter earnings report for American Outdoor Brands (NASDAQ: AOBC) looks like another indicator that the firearms industry's decline is reaching the bottom, with the gunmaker reporting revenues and earnings well in excess of management's expectations.

Net sales were $175.7 million, compared with $172 million in last year's fourth quarter, up 2.2% and ahead of management's forecast of $162 million to $172 million. GAAP earnings were $9.8 million, or $0.18 per share, versus $7.7 million, or $0.14, a year ago, far exceeding the $0.03 to $0.07 range management had guided toward. On an adjusted basis, earnings were $0.26 per share, versus $0.24 per share last year; that exceeded the expected $0.11 to $0.15 range.

Although the results were quite good and suggest the industry may be stabilizing at last, they were also a result of factors that investors shouldn't expect to see again anytime soon.

Smith & Wesson M&P 380 Shield EZ firearms

An ad for Smith & Wesson's M&P 380 Shield EZ. Image source: Smith & Wesson.

The burned hand learns best

A lot of growth that American Outdoor's Smith & Wesson brand has enjoyed over the past year is a result of discounting and promotional packages that are conditioning customers to expect a deal before buying. Much of the company's sales also came late in the quarter as distributors hurried to get bundled deals that were expiring at the end of April, and in time for spring gun shows.

That shows an industry that is still leery about stocking up too early, particularly since firearms distributor United Sports filed for bankruptcy earlier this month. In a big bet that Hillary Clinton was going to become president, it stocked up its inventory expecting a lot of fear-based buying. Gun dealers now don't need to be reminded of the slack market Donald Trump's presidency has introduced.

United Sports had been a distributor for American Outdoor at one time, but its relevance had faded markedly over the past 12 to 18 months. American Outdoor said the impact of its bankruptcy was negligible to its own financial performance. CEO James Debney also noted that he has no concerns over the distributors that remain, seeing them all as strong partners.

Yet the distributors are still cautious, and there is plenty of inventory for them to buy from other gunmakers should they need it. For that reason, American Outdoor is not expecting any runs on its products anytime soon.

Constantly improving product lines

And it especially won't happen now heading into the summer months, which are historically slow periods for the industry. The company says it expects the coming 2020 fiscal year to be backloaded, in no small part because much of its line and brand extensions and new product introductions tend to align with its other sales and releases.

New products are the drivers for the firearms maker, and it introduced over 100 new stock-keeping units (SKUs) this year, including 32 that it described as "meaningful" new products or extensions. They represented 20% of sales in fiscal 2019. And although that's down from the 29% they accounted for in the year-ago period, some of the more popular models were introduced later in the year, such as the M&P 380 Shield EZ, which is expected to have more of an impact this coming year. But the firearm is also cheaper than other models it sells, so that could affect sales totals.

Some wild cards remain

Tariffs could hurt American Outdoor's results, particularly if the duties on so-called List 4 goods that cover virtually all Chinese-made products are raised to 25%. It predicts that a worst-case scenario on tariffs would cost it as much as $3 million, though Debney also said he believes the gunmaker would be able to mitigate most of the impact through strategies most retailers are using, such as negotiating with suppliers for discounts, finding other countries to buy from, or switching up product mix.

American Outdoor Brands has not included such costs in its guidance for the coming year, but as we've seen, it still has a few moves left, and it could surprise the market once more.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.