American Outdoor Brands, Inc. (NASDAQ:AOUT) Q2 2024 Earnings Call Transcript

American Outdoor Brands, Inc. (NASDAQ:AOUT) Q2 2024 Earnings Call Transcript November 30, 2023

American Outdoor Brands, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.19.

Operator: Good day, everyone and welcome to American Outdoor Brands, Inc. Second Quarter Fiscal 2024 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, for some information about today’s call.

Liz Sharp: Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, could, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies and vision, our strategic evolution, our market share and market demand for our products, market and inventory conditions related to our products and in our industry, in general and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties.

Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at aob.com. Today’s call contains time sensitive information that is accurate only as of this time and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments on today’s call. First, we reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, shareholder cooperation agreement costs, facility consolidation costs, technology implementation, acquisition costs, other costs and income tax adjustments.

The reconciliations of GAAP financial measures to non-GAAP financial measures, whether they are discussed on today’s call, can be found in our filings as well as today’s earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today’s call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. With that, I’ll turn the call over to Brian.

Brian Murphy: Thanks, Liz, and thanks everyone for joining us. I’m pleased with our second quarter results, which demonstrated solid performance in sales and capital management, as well as ongoing progress in support of our long-term strategic objectives. We delivered net sales growth of 6.4%, a result that came in ahead of our expectations and that we view favorably, given that retailers continue to remain cautious about their inventories and available open to buy dollars in the quarter. Our second quarter sales also reflected long-term growth of more than 21% over our pre-pandemic second quarter of fiscal 2020, including our acquisition of Grilla Grills in fiscal 2022. We delivered year-over-year growth of more than 14% in our outdoor lifestyle category, which consists of products related to hunting, fishing, camping, outdoor cooking, and rugged outdoor activities.

On a long-term basis, our outdoor category has grown nearly 40% compared to the pre-pandemic second quarter of fiscal 2020, including the Grilla acquisition. I believe this result reflects the success of our strategy to grow this part of our business. In fact, our outdoor lifestyle category comprised nearly 60% of our total sales in the second quarter. Growth in our outdoor lifestyle category also reflects our strategy to seek out and place our brands where consumers expect to find them, whether online or in-store, as well as our strategy to drive sales through retail expansion opportunities. Accordingly, we were proud to join forces with Academy Sports and Outdoors in the second quarter to bring Academy customers a select lineup of our MEAT! Your Maker meat processing equipment.

Beginning in October, select MEAT products became available at all 270 Academy of retail locations and online. We originally launched MEAT in 2019 as a new, exclusively direct-to-consumer brand. Leveraging our Harvester Brand Lane teams existing infrastructure and consumer insights, MEAT quickly developed a loyal following of consumers who appreciate its premium, professional grade equipment quality, its commitment to user education, its industry leading lifetime warranty, and its authentic personality. Academy is an ideal partner for our initial entry of MEAT into brick-and-mortar stores, providing us with a great opportunity to introduce this exciting product lineup to a large number of new potential customers. Our shooting sports category saw a slight decline in second quarter net sales compared to the prior year, a result that is consistent with reports from firearm manufacturers citing ongoing heightened channel inventory and reduced consumer demand.

Although, we don’t produce firearms or ammunition, related products in our shooting sports category, include solutions for target shooting, aiming, safe storage, cleaning and maintenance, and self-defense. Turning now to channel sales in the second quarter. Sales growth in our traditional channel was strong, led by the initial shipments related to the MEAT launch I just discussed, and supported by strength in the hunting and fishing categories under our BOG and BUBBA brands. Net Sales in our e-commerce channel also increased year-over-year, driven primarily by sales for our largest online retailer. While promotions with that retailer in the shooting sports category came in higher than we originally anticipated, they were beneficial for two reasons.

First, they helped deliver several of our brands into the hands of consumers in this otherwise uncertain consumer environment. And second, they helped to lower channel inventories of our shooting sports products as well. With regard to sell-through, we gather point-of-sale and channel inventory data from retailers that represent about half of our sales. This quarter’s POS data was slightly down overall. Outdoor lifestyle was relatively flat, a result we were pleased with given the current environment. Our shooting sports category posted a year-over-year decline that was driven almost entirely by drop-in aiming solutions, which are primarily the sights and optics that attach to firearms. Sales of those products tend to follow adjusted NICS (ph) data more closely.

The balance of sales in the shooting sports category performed well relative to the underlying channel trends for the category. POS data also indicates that channel inventory of our products declined slightly in the quarter on a year-over-year basis, with a decline in the shooting sports category, partially offset by an increase in the outdoor lifestyle category, consistent with my earlier comments. Before I close out the sales discussion, I want to turn quickly to preliminary Black Friday weekend sales results. And these are direct-to-consumer sales for our Grilla and MEAT products. For the four-day period from Black Friday through Cyber Monday, on a combined basis, Grilla and Meat delivered nearly 40% year-over-year growth. Grilla had its largest single sales day ever on Black Friday, and MEAT had its largest single sales day ever on Cyber Monday.

Again, preliminary, but pretty exciting results. Now turning to Innovation. Innovation is core to who we are and a key element in our long-term growth strategy. We are reshaping enthusiast’s expectations of what it means to deliver in the moments that matter, whether it’s gamifying fishing with BUBBA’s new Smart Fish Scale, defining hunting rest stability with BOG’s Deathgrip line, or re-envisioning clay throwers that operate battery free with Caldwell’s Claymore line. As we court consumers who are increasingly discerning, we believe that by introducing a consistent stream of Innovative solutions backed by enthusiast brands, we’re able to capture market share and gain new placement. This innovation engine fueled by our Dock & Unlock process generated over 25% of our second quarter net sales.

While this time of year is typically quiet for us with regard to new product introductions. Our teams are hard at work on a number of new products and extensions that will begin unveiling across several of our Shooting Sports brands at the upcoming SHOT Show in January. In addition, we’re putting the finishing touches on launch plans for a very exciting new product from Grilla, you will hear about soon. We have introduced several Grilla products and accessories since the acquisition. This upcoming launch represents the first in a lineup of significant new Grilla innovations generated by our Dock & Unlock process. We’ve also ported Grilla over to our salesforce e-commerce platform and launched a brand new website. Visit us at grillagrills.com, check out our new Evolve Your Backyard campaign, and then stay tuned for a number of new Grilla products for launch under this campaign in the coming quarters.

Lastly, we were honored to receive recognition for our innovative achievements when we were recently named Accessory Manufacturer of the Year by the National Association of Sporting Goods Wholesalers. Our Caldwell brand took home honors as well for Best New Accessory. These awards are a testament to our creative teams under Caldwell and throughout AOB, whose teamwork and talent are at the very core of our success. With that, I’ll turn it over to Andy to discuss our financial results.

Andrew Fulmer: Thanks, Brian. As Brian mentioned, we are pleased with our results for the second quarter. We delivered net sales growth, we maintained a strong balance sheet, and we continued to return cash to shareholders through our share repurchase program, all while continuing to navigate market challenges stemming from cautious inventory management by retailers and reduced consumer demand. Let me walk you through the details. Net sales for Q2 came in above our expectations at $57.9 million compared to $54.4 million in Q2 last year, an increase of 6.4%. Compared to pre-pandemic Q2 of fiscal 2020, net sales increased by 21.3%, including the acquisition of Grilla. On a category basis, net sales and outdoor lifestyle increased by 14.3% over Q2 last year and included continued strength in our hunting and rugged outdoor products.

Conversely, net sales and shooting sports decreased by 3.4% compared to Q2 last year, a result that was an entirely driven by a decline in aiming solution products, which are sold to both firearm OEMs and consumers, and the sales of which tend to align more closely with adjusted NICs (ph). On a channel basis, traditional sales, which included our retail launch of MEAT! Your Maker products, increased by 8.7%, while e-commerce net sales increased by 3.3% over Q2 last year. As a reminder, our e-commerce channel includes direct-to-consumer sales from our own websites, as well as sales by online retailers that do not have brick-and-mortar stores. Turning to gross margin. Gross margin for Q2 decreased to 45.7% compared to 47.7% in Q2 last year. The decrease was mainly due to increased promotional activity in the current year that Brian mentioned.

Although, this promotional level was higher than we anticipated, we believe the programs were effective in driving net sales in this uncertain market. Turning to operating expenses. GAAP operating expenses for the quarter were $26.5 million compared to $26.1 million last year. The increase was driven mainly by higher variable selling and distribution costs, relating to the net sales increase, netted by decreases in IT, insurance, and lower rent due to facility consolidations we completed last year. On a non-GAAP basis, operating expenses in Q2 were up slightly to $22.3 million compared to $21.3 million in Q2 of last year for the reasons that I just listed. Non-GAAP operating expenses exclude intangible amortization, stock compensation, and certain non-recurring expenses as they occur.

GAAP EPS was $0.01 for the second quarter compared to $0.03 for the second quarter last year. On a non-GAAP basis, EPS was $0.25 in Q2 this year compared to $0.29 in the prior year. Our Q2 figures are based on our fully diluted share count of approximately 13.3 million shares. For full fiscal 2024, we expect our fully diluted share count will be about 13.5 million shares. Adjusted EBITDAS for the quarter was $5.2 million compared to $6.4 million last year. Turning now to the balance sheet and cash flow. We continue to maintain a strong balance sheet. We ended the second quarter with cash of $8.4 million and no debt, after repurchasing approximately $1.5 million of our common stock. Due to the seasonal nature of our business, our second quarter typically reflects operating cash outflow, which is the result of seasonal increases in both accounts receivable and inventory, and that was the case this quarter.

Then in the second half of the year, we typically generate cash from operations as we collect those receivables and lower our inventory levels. We expect this pattern to hold true for our second half of fiscal 2024 as well. Operating cash outflow for the second quarter was $8.4 million, driven mainly by an increase in accounts receivable of approximately $17 million. The higher level of AR resulted from the sequential net sales increase over Q1, as well as the timing of shipments, which were higher toward the end of the quarter. Our inventories grew by $4.2 million in the second quarter. The majority of that increase was driven by our decision to accelerate certain product purchases into Q2 in order to provide safety stock for a vendor change that will yield cost savings beginning in fiscal 2025.

The balance of the increase resulted from the need to capitalize a higher level of tariff-related variances in the quarter driven by product mix. We expect inventory to decline sequentially from our current level in Q3 and again in Q4, resulting in inventories just below $100 million by the end of fiscal 2024. We remain debt-free, ending the quarter with no outstanding balance on our $75 million expandable line of credit and total available capital of roughly $100 million. With regard to capital expenditures, we spent a net $745,000 on CapEx for the second quarter, mainly for product tooling and patent costs as expected. Our expectations for total CapEx spend for fiscal 2024 remain unchanged at between $6 million and $7 million. Included in this range is spending of between $3 million and $4 million for product tooling and maintenance and a one-time spend of approximately $3 million to purchase assets including warehouse racking, office furniture, and other fixtures, when we assume the full lease at our Columbia, Missouri facility on January 1st.

Returning capital to shareholders remains a key capital allocation priority, and the strength of our balance sheet has allowed us to return capital to shareholders opportunistically through our share repurchase program. Our prior share repurchase program expired in September, and in Q2, our Board of Directors approved a new share repurchase program of up to $10 million, effective October 2023 through September 2024. In the second quarter, we repurchased roughly 158,000 shares for $1.5 million at an average price of $9.46 per share. Now turning to our outlook. Our brands remain strong with consumers, and we continue to believe that fiscal 2024 could deliver full year net sales growth of up to 3.5%. As I noted earlier, Q2 net sales came in ahead of our expectations, a result that benefited from retailers placing orders earlier in the season than last year.

As such, we now expect Q3 to be relatively flat compared to Q3 last year, and we continue to believe Q4 will follow our typical seasonal pattern, delivering net sales that are higher than Q1 of fiscal 2024. Turning to gross margins. We expect to see gross margins come in at between 44% and 45% on a full fiscal 2024 basis, which would imply a slight decline in second half gross margins, as well as a decline in our full year adjusted EBITDAS expectations. I’ll walk you through those details now. With regard to margins, first, while second quarter sales came in ahead of our expectations and we are maintaining our full year sales outlook, we are opting to invest more in promotions than we had originally planned, as we continue to pursue our share of wallet in the current uncertain consumer spending environment.

Second, we are selectively discounting and converting to cash some of our slower moving inventory, primarily in shooting sports category. We believe the combination of these two initiatives will help us gain and protect market share while further building and strengthening our balance sheet. Third, inventory purchases in the first half of the year and predominantly in the second quarter represent both a higher dollar spend. as well as a mix of products that skewed towards higher tariffs, as I discussed earlier. Accounting treatment requires that the variances created by the difference between our standard costs and actual costs of purchased inventory, mostly tariffs, be amortized across the third and fourth quarters, and that will impact margins to a degree.

And lastly, freight savings that we secured earlier this year are only recognized as the underlying inventory turns over, generally six months down the road. So the benefit of those cost reductions won’t be fully recognized until our new fiscal year, which begins May 1st. With regard to OpEx, we believe that overall operating expenses will decline slightly on a GAAP basis for fiscal 2024 as a result of reductions from facility consolidations, one-time legal and advisory fees, and IT implementation costs offset by higher selling and distribution costs. On a non-GAAP basis, OpEx will increase slightly mainly due to the higher selling and distribution costs. And recall here that we have SHOT Show in our third quarter, which adds selling and marketing costs in Q3 that don’t occur in Q4.

Based on these factors, we expect our Adjusted EBITDAS margin for fiscal 2024 to be between 4% and 5.5%. As we enter fiscal 2025 in May, we expect to see the positive impacts on our Adjusted EBITDAs of the savings initiatives I’ve outlined in today’s call. With that, I’ll hand it back to Brian.

Brian Murphy: Thank you, Andy. In closing, we’re pleased with our second quarter performance. I believe our results demonstrate our ability to manage those elements within our control, delivering growth, innovation, and a loyal customer base for our popular brands, while prudently managing our capital to allow us to invest in our long-term growth. We have a number of reasons to be excited about the future. For instance, we’re on track to deliver total net sales growth of up to 3.5% this fiscal year in alignment with our initial expectations. POS sales at retail for our outdoor lifestyle brands remain relatively favorable and channel inventories for our shooting sports brands are significantly lower. We have many innovative, exciting new products and development across multiple brands in shooting sports and outdoor lifestyle that will begin launching in January and will continue launching through calendar 2024 and beyond.

We are extending the reach of our legacy D2C brands such as MEAT! Your Maker, with strategic retail partners. Our BUBBA brand was named the official scale of Major League Fishing earlier this year, and the new MLF season, which we believe will drive tremendous visibility for BUBBA, is set to kick off in January 2024. We have taken aggressive, preemptive actions with regard to facility consolidation and space optimization, free cost reduction, and a vendor change, all of which are designed to generate notable savings in fiscal 2025. Business consolidations are now complete, and we have the capacity and resources to grow organically and through acquisition without adding incremental costs. And lastly, the M&A landscape appears to be heating up a bit.

At the same time, our balance sheet remains extremely strong and we have no debt, affording us the ability to freely explore the growing number of acquisition opportunities we see on the horizon. To cap it off, we have a broad portfolio of authentic lifestyle brands including Caldwell, Grilla, BUBBA, and others that continue to resonate with enthusiasts who are passionate about their outdoor activities. We couldn’t be more excited about what lies ahead. With that, operator, please open the call for questions from our analysts.

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Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Mark Smith with Lake Street Capital Markets. Please go ahead.

Mark Smith: Hi, guys. First question for me, just wanted to dig in on adding MEAT into kind of traditional channel. Any additional insight you can give us on kind of the scale of that — maybe a way of asking this, would you still had growth in the traditional channel without adding in those MEAT sales into Academy?

Brian Murphy: Hey, Mark. It’s Brian. The short answer is, yes. We still have an increase despite the load in with MEAT! Your Maker. And in all signs to this point are very positive. We’re working with Academy to make sure that’s a successful launch. Also great to see that our e-commerce sales for the four days we mentioned in our prepared remarks from Black Friday to Cyber Monday saw tremendous traction. So all signs are positive at this time, but yes, the underlying trends within traditional were also very positive.

Mark Smith: Okay. Then shooting sports is obviously still a little bit tough. I’m curious, if we can just look at October at all, any call out as we saw NICS get better. Did you see increased demand as you look at point of sale data for some of your shooting sports products, or did that not really apply with that purely more so just firearms?

Brian Murphy: Yeah. This is Brian again. So I would say that we alluded to aiming solutions, dragging down the overall sales and shooting sports and that is definitely true. Our brands like Caldwell, Tipton, Wheeler, Frankford Arsenal, actually did very well, just given the other trends going on in the industry. So very pleased to see that in particular within categories that we’ve emphasized are good long-term steady categories. So really the difference there, the delta came on the aiming solution side.

Mark Smith: Okay. And then I just want to clarify, Andy, the EBITDAS margin guidance that you gave, can you just give that to us again?

Andrew Fulmer: Yeah. So the range that we’re expecting is between 4% and 5.5%.

Mark Smith: Okay. And…

Andrew Fulmer: Yeah. Go ahead.

Mark Smith: I was just going to say, it seems like a lot of that is the big driver of that is gross profit margin, looking for that to be down in the second half, and you walk through some of those reasons.

Andrew Fulmer: Yeah. Great question. So as I talked about in the prepared remarks, it’s really kind of, we kind of look at it in three pieces. So the majority is related to the investments that we’ve done in additional promotions and promotions we expect. So you saw a chunk of that in Q2. And really, like Brian talked about in his remarks, it’s protecting market share. We believe those are great investments to be relevant with our consumers. Second piece is kind of the higher tariff products that I talked about, a little bit above our expectations in Q2. And as I talked about actually on the Q1 call, those variances, the way that our accounting works is, when those variances are recorded, they amortize off in roughly six months because we have about six months’ worth of inventory.

So as those variances came in in Q2, we’re expecting those to amortize off in Q4. The final piece is really inbound freight variances. So like tariffs, those are also capitalized in the first half and will amortize off in the second half. One thing I did want to kind of clarify though, we have seen significant savings in inbound freight since, kind of the, I’ll call it the craziness of a couple years ago. What the delta relates to is more of a delay in timing of getting down to the expected rates which we’re seeing today, which is great. So it’s really just a timing issue of when those get amortized off in the second half of the year, and we expect that’ll provide a tailwind going into fiscal ‘25. And in fact, if you look at like an — almost like a pro forma, fiscal ‘24 pro forma basis on EBITDAS, between those our current inbound freight rates and also those vendor savings that both Brian and I talked about, that would add almost $3 million to the framework, that 4% to 5.5% that I talked about.

Mark Smith: Okay. That’s helpful. Thank you.

Andrew Fulmer: Thanks, Mark.

Operator: Thank you. The next question is from Eric Wold with B. Riley Securities. Please go ahead.

Eric Wold: Thank you. Good afternoon, everybody. First off, a couple of questions around the launch of MEAT into Academy. Is this exclusive to Academy for some point in time, you kind of reference partners, in your prepared remarks. Will the product mix broaden over time? Will anything ever be exclusive to retail? And then, how should we think about pricing at retail versus your DTC? Is it always going to be the same, or kind of what drives the Delta there?

Brian Murphy: Yeah. Eric, it’s Brian. So I love the interest around MEAT, and it was a really good first expansion of the brand, and we have plans to further expand it. And we teased at this for a few quarters, just around wanting to make sure that we had the right partner before we introduced the brand. We saw tremendous growth direct-to-consumer before beginning to introduce it. There were lots of things we wanted to do before that took place, obviously, the right partner. For us, merchandising is critical, making sure that the we can – the brand can show up in the way that consumers will expect it to show up. And then also there are some differences between, let’s say, the consumers that are shopping on our website and some of the consumers that are walking into Academy stores.

And so we have a slightly, there are some shared products between the two, but we do have some that are positioned more for Academy’s customers and for that retail placement. So they’re not one for one, and that’s intentional, really, because we want this to be a win-win, and so far that’s what we’re seeing. Over time, I think, again, we want to be careful with the assortment. We have ambitious plans to increase the assortment of MEAT, as we expand that product line over time. And I would expect you’d continue to see some version of that showing up at retail, but ultimately complementing what we have online and really being that good partner for retailers. And then your question about pricing. Pricing in general is, I would say, pretty similar when it comes to EBITDA contribution is the way that we look at it because while gross margins might be higher direct-to-consumer, you obviously have more support costs that go into selling and marketing that product to consumers, and you’re also shipping each of those.