American Outdoor Brands, Inc. (NASDAQ:AOUT) Q4 2023 Earnings Call Transcript

American Outdoor Brands, Inc. (NASDAQ:AOUT) Q4 2023 Earnings Call Transcript June 28, 2023

American Outdoor Brands, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $-0.13.

Operator: Good afternoon and welcome to the American Outdoor Brands Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Liz Sharp, Vice President of Investor Relations. Please go ahead.

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, 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, goodwill impairment, 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. Over the past three years, our industry experienced a surge in consumer demand caused by the COVID pandemic, followed by challenges stemming from high inflation and rising interest rates, which reduced consumer spending and drove retailers to focus on destocking their inventories. All of this change occurred in parallel with our first few years as a new public company. And while the factors driving this change were largely out of our control, they presented us with a unique opportunity to reconfirm our strategy and fine tune our focus towards areas we can control and where we can drive progress. The first of these is innovation. We are proud to have introduced several breakthrough products in fiscal ’23, planting the seeds for future growth.

We are reinventing the way people fish, manage their food plots, shoot clays and reload. Our cutting-edge offerings have been developed to meet the evolving needs of our customers, ensuring we stay ahead of the competition and capture new market opportunities. Second, we have completed critical infrastructure projects that lay the foundation for future growth. These initiatives include implementing a new ERP system that links our strategy with operations, consolidating our Oregon and Michigan facilities, and securing additional distribution space in our Columbia, Missouri facility to accommodate future planned growth. These strategic investments are now complete and they demonstrate our commitment to enhancing operational efficiency, optimizing resources and preparing for future expansion.

In parallel, we effectively managed our cash flow, generating $30.7 million in operating cash in fiscal ’23. By closely monitoring our financials and implementing stringent measures, we’ve been able to strengthen our financial position and ensure a solid foundation for future growth and profitability. This disciplined approach safeguards our ability to invest in key areas and seize promising opportunities as they arise. Lastly, despite being a larger, more stable standalone business with greater growth potential than at the time of our spin off three years ago, market forces have created the conditions for a lower stock price, leading us to opportunistically repurchase our own stock. This approach not only demonstrates confidence in our company’s potential, but we believe that it also helps enhance shareholder value, reinforcing our commitment to generating long-term returns.

Fiscal 2023 marked our second full year as an independent public company dedicated to building authentic lifestyle brands that help consumers make the most out of the moments that matter. On a three year basis, we delivered net sales growth of more than 14% over pre-pandemic levels, reflecting strength in our e-commerce channel and driven primarily by growth of nearly 34% in our outdoor lifestyle category, which consists of products related to hunting, fishing, camping, outdoor cooking and rugged outdoor activities. The markets we serve are large and growing. According to an Outdoor Industry Association report released just last week, the outdoor recreation base has grown in each of the last eight years, adding over 14 million participants since 2020 and now totaling over 168 million participants or 55% of the US population over the age of six.

In addition, consumer participation rates grew in 80% of the outdoor categories in 2022, including camping and fishing, large categories where our brands play. With our outdoor lifestyle category generating more than half of our net sales in fiscal 2023, we are truly ready for the future and excited to address this expanded outdoor market. Throughout the year, we continued to encounter choppy waters created by the shifting dynamics of retail supply and consumer demand in a post-pandemic environment. Despite those challenges, net sales for fiscal 2023 grew more than 14% above pre-pandemic levels of fiscal 2020. And while those sales declined on a year-over-year basis, our direct to consumer business, which largely consists of our outdoor lifestyle brands, delivered year-over-year growth of 76%, including our acquisition of Grilla Grills.

Because our direct to consumer sales are not impacted by retail inventory levels, we consider those sales to be an indicator of how well our brands are resonating with consumers. Our direct to consumer sales also include sales of MEAT! Your Maker, meat processing equipment. Both MEAT and Grilla are sold exclusively direct to consumer and together they generated nearly 13% of our total net sales in fiscal 2023. At our spinoff in 2020, our outdoor lifestyle category was less than half of our overall business. By the end of fiscal 2023, however, outdoor lifestyle made up 54% of our business and delivered growth of nearly 34% above pre-pandemic fiscal 2020. Given its large consumer markets and its favorable long-term participation trends, we believe this category will continue to grow as a percentage of our business over time.

Point of sale data we received from our retailers indicates that sales of our products declined in the year in the high single-digits. This is not a surprising result given the current environment. At the same time that our POS decline, however, data indicates that channel inventory of our products declined by 26%. We view this as an important positive dynamic and we continue to believe this will drive replenishment orders in the second half of calendar 2023. Our international business remains an exciting growth opportunity for us. During the year, we expanded our international sales resources by signing a firm in Europe to represent our many cutlery brands and our Crimson Trace Aiming Solutions brand. International net sales for fiscal 2023 approached $9 million, representing just under 5% of our business and demonstrating growth of more than 37% over pre-pandemic levels.

We’re in the early innings here, and we believe that international net sales could eventually comprise roughly 10% of our total annual net sales. Innovation is our core strength and therefore the key element in our long-term growth strategy. Our innovation engine fuelled by our Dock & Unlock process, is robust, and new products launched in the past two years generated over 25% of our fiscal 2023 net sales, a level consistent with prior years. Several new products we launched in 2023 have won industry awards. Most incorporate proprietary features and all of them, taken together, advance our strategy to enter new categories and expand our distribution channels. Here are a few examples. Shooting Clays has historically required owning a truck and lugging a large, bulky electric clay thrower and a heavy car battery into the field.

Photo by Molnár Bálint on Unsplash

So we created the Caldwell Claymore, a lightweight foot operated, durable and portable clay target thrower that is entirely mechanical and allows for convenient storage, transport and use in remote locations. No car battery needed. Those who carry a knife for daily tasks have always believed their everyday carry knife required frequent sharpening to remain useful. So we teamed up with Rage, a leader in replaceable blade technology for hunting to create the Schrade Enrage Knife Series, a unique industry collaboration that introduces hunters to our Schrade brand and introduces the broader consumer market to the concept of never sharpening their knives again. Millions of firearm owners know that reloading ammo, while cost effective, is a tedious and time consuming process that often yields inaccurate powder measurements, spillage of materials and damaged casings.

So we created the Frankford X-10 Progressive Reloading Press, an innovative ten station gear driven workhorse that reloads ammo in one smooth pull of a handle, making reloading easy and efficient even when switching calibers. Managing a plot of land has always involved spreading a variety of materials from seeds to fertilizer, using spreaders that are heavy, uncomfortable and deliver an inconsistent application of materials. So we created Hooyman Chest Spreaders designed for year round use and with innovative features that eliminate issues with traditional spreaders. Outperform the competition and take our Hooyman brand beyond hunting into farming, gardening and broader land management markets. And lastly, we expanded our ever growing BUBBA portfolio, a lifestyle brand known for its high-quality angling equipment.

By way of background, it may surprise you to learn that in the US there are more anglers that target Bass than there are golfers. Those 30 million anglers share a passion for the big catch, a quick weigh-in and a humane release back into the water. Until now, that process has meant using a traditional fish scale that is awkward to hold, hard to see, and uses little, if any, technology. In short, this was a big, sleepy market that lacked innovation, and our team knew it was a space where BUBBA had permission to play. So we entered the large underserved catch and release market with our BUBBA tournament-grade Pro Series, Smart Fish Scale, or the BUBBA Pro SFS, a revolutionary product that we believe will change the way people fish. The Pro SFS redefines the fishing experience by seamlessly integrating traditional angling practices with advanced technology.

Let me explain how. Beginning with the precision weight scale, the Pro SFS features a quick power up and delivers a highly accurate and consistent fish weight measurement in a sleek and durable design that incorporates BUBBA’s signature nonslip grip and waterproof technology. But the Pro SFS is much more than a scale. It serves as a comprehensive fishing data hub that captures real-time information about the catch such as the exact time of the catch, weather conditions at that time and the exact location of the catch via GPS. This data is automatically logged into the accompanying BUBBA app, creating a personal fishing log and empowering anglers with valuable insights that allow them to understand fish behaviour and optimize their fishing strategy.

The BUBBA app also features integrated tournament functionality, allowing any angler to quickly and easily launch a tournament, invite fellow anglers and distant locations and track the results in real-time directly on the app. And it utilizes a proprietary smart calling system that maximizes fishing time by eliminating the guess work of deciding which fish to keep. And lastly, while it’s rich in functionality, the Pro SFS has a user-friendly interface that ensures both seasoned anglers and newcomers alike can effortlessly navigate its features. The Pro SFS is the first product of its kind that gamifies fishing. Over two years in the making, it incorporates a number of patents and patents pending and has been designed entirely in-house from the industrial design to the app development to the user interface.

Not only is it a truly disruptive product, it also creates a new potentially sizable revenue opportunity through an app subscription that currently sells for 49.99 per year and has a monthly option as well. With approximately 30 million anglers in the US that target Bass alone, capturing even a small percentage of this very large market could generate significant revenue. The reception so far has been tremendous. The BUBBA Pro SFS had Major League fishing professionals singing its praises on social media before we even launch the product. And the consumer response has been overwhelmingly positive as well with a nearly perfect 4.9 star rating on the Apple App Store. We are extremely excited about the PRO SFS and you can count on hearing a lot more about it in the quarters to come.

The products I’ve shared today, along with many of the other products in the pipeline reflect our dedication to leveraging our culture of innovation to deliver solutions for consumers in the moments that matter. We believe that over time, our demonstrated ability to innovate will fuel our top line growth to 400 million and beyond, while our lean infrastructure will help deliver more of that growth to the bottom line. With that, I’ll turn it over to Andy to discuss our financial results.

Andrew Fulmer: Thanks, Brian. In fiscal 2023, we strengthened our balance sheet generated significant operating cash flow, controlled our costs, continue to invest for our long-term growth and demonstrated effective capital deployment all on navigating market challenges that included weakening consumer demand and cautious retailer inventory management. We ended the year with several significant achievements and highlights. So let me walk you through the details. Net sales for the year were $191.2 million, a decrease of 22.8% compared to fiscal 2022 and an increase of 14.2% over pre-pandemic fiscal 2020. Our Shooting Sports category was down 30.7% and our outdoor lifestyle category declined 14.3% compared to fiscal ’22. We believe these declines were mainly driven by reduced consumer spending as well as retailers’ efforts to lower their overall inventory levels.

Compared to pre-pandemic fiscal 2020, outdoor lifestyle increased 33.8% while Shooting Sports was down slightly by 2.2%. Outdoor lifestyle in fiscal 2023 represented nearly 54% of our total net sales compared to 48% of total net sales and fiscal 2022. Turning now to our traditional brick-and-mortar sales versus e-commerce. Net sales in our traditional channel decreased 30.7% compared to the year ago period and decreased 8% from fiscal 2020. Net sales in our e-commerce channel were down 10.5% compared to the prior year, but they were up almost 61% over fiscal 2020. E-commerce net sales of $87.2 million include our two direct-to-consumer-only brands, MEAT and Grilla. These two brands performed very well in the year and helped us grow our direct-to-consumer sales by 76% over fiscal 2022.

On a quarterly basis, net sales in Q4 came in above our expectations at $42.2 million, a decrease of 8% from the prior year quarter, driven by declines of 7.5% in Shooting Sports and 8.6% in outdoor lifestyle. On a three year basis, total net sales in Q4 declined just 2%. Turning to gross margin. We have built our operating model with a low level of fixed cost and complexity, an approach which helped us deliver strong gross margins in fiscal ’23 despite the year-over-year decline in sales. Fiscal ’23 gross margins were 46.1% compared to 46.2% in the prior year. The slight decrease was driven by product mix and a full return to pre-pandemic normalized promotions offset by lower freight costs. Turning to operating expenses. For the full year, GAAP operating expenses were $100.8 million compared to $170.8 million last year.

It’s important to note that fiscal ’22 included a noncash goodwill impairment charge of $67.8 million. Nevertheless, excluding that charge, GAAP OpEx still decreased by $2.1 million, mainly driven by lower variable selling and distribution costs from lower sales volumes, combined with reduced facility costs from the consolidation of Grilla and Crimson Trace into our Missouri headquarters. These decreases were partially offset by planned IT costs and onetime legal and advisory fees from a shareholder cooperation agreement. Non-GAAP operating expenses for fiscal ’23 were $80.5 million compared to $83.8 million last year. Non-GAAP operating expenses exclude goodwill impairment, intangible amortization, stock compensation and certain nonrecurring expenses as they occur.

GAAP EPS for fiscal ’23 was a loss of $0.90 as compared with a loss of $4.66 in the prior year. Excluding the impacts of the impairment and the related tax charges, fiscal ’22 GAAP EPS would have been a positive $0.71 per share. Fiscal 2023 non-GAAP EPS was $0.48 as compared to $1.77 last year. Our fiscal ’23 figures are based on our fully diluted share count of approximately 13.4 million shares. And for fiscal 2024, we expect our fully diluted share count will be about 13.5 million shares. Full year adjusted EBITDA was $12.8 million compared to $35 million in fiscal ’22. Turning to the balance sheet and cash flow. I’m extremely pleased with our efforts to further strengthen our balance sheet in fiscal 2023. We generated significant cash flow from operations, paid down debt and returned capital to shareholders through our share repurchase program.

We ended the year with cash of $22 million, an increase of $2.4 million over last year despite paying down $20 million on our line of credit and repurchasing approximately $3.5 million of our common stock. We generated $30.7 million in cash from operations and invested $4.8 million in CapEx, resulting in free cash inflow of almost $26 million. This is a fantastic result and compares to a free cash outflow of $24.5 million in fiscal ’22. In fact, it’s worth noting that since our spin-off, we have generated $45.5 million in operating cash and nearly $31 million in free cash flow. Our team did an excellent job of decreasing our inventory levels during the year, and we hit our goal of taking inventory below $100 million by year-end. While we expect inventory levels to decrease further by the end of fiscal 2024, we do expect some fluctuation quarter-to-quarter.

In fact, inventory levels in Q1 and Q2 of fiscal 2024 are likely to exceed $100 million due to our normal inventory build to support the hunting and holiday seasons and due to new products scheduled for launch later in the year. We plan to continue our focus on converting some of our slower-moving inventory to cash in fiscal 2024, helping us move toward our long-term normalized working capital targets. We ended the year with just $5 million outstanding on our $75 million line of credit. As a result, we remain in a negative net debt position, with up to $92 million in available capital. Turning to capital expenditures. We ended the year with CapEx of $4.8 million, below our estimate last quarter, due to lower spending on product tooling and maintenance as we push some projects into next year.

In fiscal 2024, we expect to spend between $6 million and $7 million in total CapEx with product tooling and maintenance of between $3.5 million and $4.5 million and onetime spend of approximately $2.5 million from purchasing assets related to our assumption of the full lease of our Columbia, Missouri facility. We’re excited to be operating effectively and efficiently on our new ERP system, Microsoft D365. CapEx spending on the project came in under budget in fiscal 2023 at $2 million. We also ended fiscal 2023 with a total of $1.3 million in onetime ERP cost and approximately $400,000 in redundancy costs to operate both D365 and our previous ERP in parallel. While the redundancy costs are now complete, we expect to spend roughly $300,000 in planned final onetime ERP costs in the first quarter of fiscal 2024 as we complete our final customization.

This amount will be treated as nonrecurring implementation costs when calculating non-GAAP operating expense and adjusted EBITDA. We view our ERP implementation as a complete success, not only did we go live without disruption, but we completed the project below budget. Over the past three years, we have built a strong balance sheet and demonstrated our ability and willingness to employ all three of our capital allocation priorities, organic growth, M&A and returning capital to shareholders, based on what is most opportunistic at the time. As we head into fiscal 2024, our balance sheet is even stronger, and we remain well positioned to continue optimizing our capital allocation strategy to address the opportunities we identify. We have been very disciplined in our approach to M&A, and we plan to maintain that discipline as we seek opportunities in fiscal 2024 and beyond.

In the meantime, we continue to return capital to shareholders through our stock repurchase program. As a reminder, the $10 million repurchase program is authorized through September 2023. In fiscal 2023, we repurchased 377,000 shares, which is roughly 3% of our outstanding stock at an average price of $9.34 a share. Now turning to our outlook. We remain excited about the year ahead. Despite the challenges and opportunities of the last three years that Brian outlined earlier, we have grown our business, built a strong balance sheet and created a leverageable business platform that is ready for growth. We believe that fiscal 2024 will deliver a return to growth, which will likely begin in Q3 and will yield full year growth for fiscal 2024 of up to 3.5%, supported by market share gains, expanded distribution and planned new product launches.

We expect our net sales in fiscal 2024 to follow a seasonal pattern with Q1 as the lowest net sales quarter, Q2 and Q3 as the highest net sales quarters and Q4 coming in higher than Q1. As a starting point, we expect Q1 of fiscal 2024 to be slightly lower than Q1 of fiscal 2023, and we expect a return to growth in Q3 and Q4. Turning to gross margins. We believe that fiscal 2023 brought a return to a more normalized promotional environment and we expect the same level of promotions in fiscal 2024. We also expect fiscal ’24 margins to improve from fiscal ’23 due to lower inbound freight costs and savings from the facility consolidations we completed in fiscal 2023. With regard to OpEx, we believe that overall OpEx for fiscal ’24 will increase slightly, mainly from higher selling and distribution costs netted by reductions from our facility consolidations, onetime legal and advisory fees and IT implementation costs.

Based on these factors, we believe our adjusted EBITDA since fiscal 2024 could increase by as much as 6.5% compared to fiscal 2023. With that, operator, please open the call for questions from our analysts.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mark Smith with Lake Street Capital. Please go ahead.

Mark Smith: Hi, guys. First off, can you just speak broadly about consumer trends a little bit during the quarter? And maybe more importantly, any insights you can give us on what you’re seeing since April with consumers?

Brian Murphy: Yes. Hey, Mark, it’s Brian. So in regards to consumer trends, we had alluded to previously about the convergence between POS sales at retail and the inventory at our retailers being driven down. So we’re seeing consistent trends, I would say, versus some of the more recent quarters, which has continued, I would say, continued strength with the consumer, especially at the higher price point items where we tend to play versus the kind of beginning to mid-price point. And then also the direct-to-consumer side of the business continues to do very well. So the consumer that’s willing to spend more money in some of those higher ticket items, we see continued strength.

Mark Smith: Perfect. And then I think Andy talked a little bit about it at the end the M&A outlook. Just curious kind of what you’re seeing out there in M&A markets? I know you said that you’re going to stay disciplined, but are you seeing valuations come down? Are you seeing maybe some increased opportunities to make some acquisitions here?

Brian Murphy: Yes. Good question. It’s Brian again. So on the M&A front, certainly, if you do not have your own pipeline of prospects, it’s — you’re not seeing a whole lot is my guess. So we’ve seen fewer banker-led deals come to market. That’s been pretty slow. But with that said, we do have — we are seeing quite a bit of activity on our own pipeline of targets that we’ve cultivated over the last few years. Some of those are situations where they might need to sell and others are founder-led businesses that would be a perfect size for us. That just frankly are looking for an exit. So, yes, we’re seeing activity, but it’s mostly through our own pipeline instead of M&A processes run by a banker. And then, sorry, you mentioned valuations, too.

I’ll touch on that real quick. I would say that valuation, there seems to be some correction there with sellers. And so we are seeing valuation expectations come down, which is a good sign for us. And at this point, too, we’re buyers. We’ll be very cautious and disciplined, but it’s — we’re in a good spot. It’s a good place to be in when we’re looking at deals.

Mark Smith: Excellent. Thank you guys.

Brian Murphy: Yes. Thanks, Mark.

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

Eric Wold: Thanks. Good afternoon, guys. I guess two questions. I guess, one, the 3.5% or as much as 3.5% net sales growth for the year. I know you talked about that turning positive in the back half. What are you assuming for retail point-of-sale sell-through and kind of in that assumption?

Andrew Fulmer: Hey, Eric. This is Andy. Yes, when we take a look at the back half of the year, we had a really good line review season last year, which kind of translates towards the back half of our year. And our discussions with retailers, we do see open-to-buy kind of improving and especially going into that period. And our inventory is in a great spot. We said we’re down 26% year-over-year. So that’s a great spot for us to go into the year. If you have any?