American Outdoor Brands Q3 2024 Earnings Call Transcript

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Provided by Quartr
March 7, 2024

There are 6 speakers on the call.

Operator

Good day, everyone, and welcome to American Outdoor Brands, Inc. Third Quarter Fiscal 20 24 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?

Speaker 1

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 as 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.

Speaker 1

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.

Speaker 1

1st, 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.

Speaker 1

And with that, I will turn the call over to Brian.

Speaker 2

Thanks, Liz, and thanks everyone for joining us. Delivered a solid Q3 and I'm very pleased with our results, which included top line sales growth, disciplined capital management and the unveiling of several strategically important product introductions that we believe expand our brand's runway for growth. I believe our results demonstrate our ability to remain focused on our long term strategy, while successfully navigating the near term environment. Our Q3 sales reflected growth of more than 23% over our pre pandemic Q3 of fiscal 2020, including our acquisition of Grilla Grills in fiscal 2022. For the Q3, we delivered net sales growth of 5%, a result that came in ahead of our expectations and was supported by our diverse portfolio, evidenced by stronger sales across a number of brands within our shooting sports and outdoor lifestyle categories, which both delivered net sales growth.

Speaker 2

In addition, our e commerce and traditional channels experienced net sales growth in the quarter. In our outdoor lifestyle category, which consists of products related to hunting, fishing, camping, outdoor cooking and rugged outdoor activities, we delivered 3rd quarter year over year growth of 2.8%. That growth was led by strength in our hunting and fishing related products and reflected the success of our strategy to identify incremental retail opportunities, including the expansion of our Meat Your Maker meat processing equipment into the retail channel last quarter. On a long term basis, our outdoor lifestyle category has grown more than 43% compared to the pre pandemic Q3 of fiscal 2020, including the Grilla acquisition. I believe this result reflects the success of our strategy to grow this part of our business.

Speaker 2

In fact, our Outdoor Lifestyle category comprised over 54% of our total net sales in the 3rd quarter. Turning now to our shooting sports category, which includes solutions for target shooting, aiming, safe storage, cleaning and maintenance and personal protection. We delivered growth of 7.6% compared to the prior year. This result was led by our ability to clear some slower moving inventory in the personal protection category, combined with stronger sales in shooting accessories. We are especially pleased with this result, given reports from firearm manufacturers in the quarter that continued to cite reduced consumer demand.

Speaker 2

With regard to channel sales in the 3rd quarter, we delivered sales growth in both our traditional and e commerce channels, reflecting our strategy to ensure that our brands meet the consumer wherever they shop. We also delivered sales growth in our domestic and international channels, reflecting our strategy to expand into international markets. In fact, our international sales grew by over 72% in the quarter, the result of introducing more of our lifestyle brands to the Canadian market. With regard to sell through, we gather point of sale and channel inventory data from retailers that represent about half of our sales. We were pleased with our POS results this quarter.

Speaker 2

POS sales increased for both our outdoor lifestyle and shooting sports categories. Now turning to innovation, which is core to our long term growth strategy. Our ability to innovate allows us to drive growth by entering new product categories, and it's driven by our dock and unlock process. Our approach often consists of creating a new product with proprietary IP and using that product to establish a beachhead for a given brand. From there, we fan out, developing incremental products that allow us to enter new product categories and move from that single point of entry to a full family of products that build upon the brand's familiarity and its loyal following.

Speaker 2

We've proven the success of this approach in the past with our Bubba brand, moving from a single manual fillet knife to a full family of fishing products that now includes our Bubba Pro Series Smart Fish Scale, which was rapidly adopted and is now the official scale for Major League Fishing. In the Q3, we again demonstrated the success of this approach by unveiling a number of innovative and internally developed new products under our Caldwell, Grilla and HUYMAN brands. I believe these products represent the tip of the iceberg as we execute against a robust new product pipeline that extends well into the next 5 years, providing us with a long term competitive advantage and uniquely positioning our brands to expand market share, enter new product categories and markets and broaden our distribution channels. Now let me share some of the exciting product details. In the field electric clay throwers, most powered by wires connected to a 40 pound car battery, Caldwell caught the attention of clay shooters last year when we introduced the world's 1st battery free, foot operated, clay thrower with a stackable clay hopper called the Claymore.

Speaker 2

It has been very successful to say the least. When developing the Claymore, we also stumbled upon a gap in the marketplace. There were few product offerings available between the 2 main types of clay throwers: handheld, which are generally entry level and lower priced and stationary clay throwers, which tend to be much more expensive. Our solution, the Caldwell Claymore Solo, which leverages the same battery free mechanics of the original Claymore, but loads and throws one play at a time instead of being stack fed. Because of this, it's remarkably light at just £15 half the weight of the original Claymore and competitively priced, filling a gap with innovation and extreme value.

Speaker 2

But we didn't stop there. We looked at the clay thrower market and wondered why consumers had to compromise throwing distance when choosing between the handheld thrower and a stationary one. We also recognize the benefit of being able to change the angle of the target with a handheld thrower. However, most likely ability to securely hold a clay in place when tilting the thrower before release. We solved both of these problems with the Caldwell Claymore pull up.

Speaker 2

Our new handheld thrower can easily launch clay targets over 55 yards, while our dual grip design combined with a unique holding clip enables users to easily launch targets off camber at a variety of angles. Next, we saw an opportunity for our new Grilla brand to fulfill its promise to help consumers evolve their backyard. One of the benefits of owning a brand that's entirely direct to consumer is the closer connection it brings to the actual user, including product ideas. Grilla consumers expressed frustration with the vertical smoker offerings from competitors. Feedback included lack of space, limited meat rack and hanging options, poor smoke generation and few options to control and monitor cooking.

Speaker 2

We've solved all of those problems with the new Mammoth vertical smoker, which features over 1600 square inches of smoking space, accommodates up to 10 racks and 24 hangars, puts out a generous amount of smoke using a proprietary lift heat deflector and utilizes our new Elfa Connect 2.0 controller to control and monitor cooking. The Mammoth absolutely hit the mark, and we continue to sell out each new container of Mammoth vertical smokers as they arrive, demonstrating the powerful nature of Grilla's connection with the consumer. Lastly, as our HUYMAN brand has expanded into land management products, we've identified several categories riddled with consumer pain points ripe for innovation. One such area is seed spreaders. Seed can be very expensive.

Speaker 2

And if you need to cover a large area, 2 considerations stand out speed and precision. After releasing our 1st seed spreader last year, the Huiman Chest mounted spreader, we turned our attention to high capacity spreaders. These are commonly mounted to vehicles including ATVs. We discovered that in addition to speed and precision, users had to overcome 2 additional pain points with the FIFO mounted spreaders: 1, an overly cumbersome attachment process and 2, frustration from seed spilling from the hopper anytime precision and distance adjustments were made. Our new 125 pound capacity HUYMAN vehicle spreaders solve all of these problems, enabling the user to attach our spreader in under 60 seconds and adjust the spreader's accuracy without compromising valuable seat.

Speaker 2

With these products in hand, we attended SHOT Show in January, an annual industry event that is generally focused on new shooting related products. Our Caldwell brand is always popular at SHOT and the new Claymore products were extremely well received. And while attendees weren't surprised to see Caldwell at the show, they were surprised and very interested to see a full Grilla Outdoor Kitchen setup, the new Mammoth Smoker, our Meat Your Maker meat processing equipment and our Hui Man product lineup, all of which were brand new to Schott and the reception was tremendous. But most importantly, we were able to expose these brands to an entirely new audience, retailers and adjacent distribution channels. Increased and expanded distribution channel opportunities are one of our 4 growth avenues that comprise our long term strategic plan, And they are particularly strategic given the current retail environment.

Speaker 2

As we said on prior calls, the surge in consumer buying during the pandemic allowed retailers in our industry to become less selective when stocking their shelves. But today's consumer is more discerning retailers have shifted towards careful inventory management, seeking out compelling products that consumers truly want. At AOB, we believe that by introducing a steady stream of innovative solutions backed by enthusiast brands, we can capture market share, gain new placement and expand shelf space with retailers looking to draw in the consumer. With that, I'll turn it over to Andy to discuss our financial results.

Speaker 3

Thanks, Brian. Our Q3 results included growing our net sales over last year, strengthening our balance sheet and returning capital to shareholders, all while navigating the environment of consumer uncertainty and cautious retailer behavior that have marked the last few quarters. Let me walk you through the details. Net sales for Q3 of $53,400,000 increased 5% over Q3 last year. These results were slightly ahead of our expectations by about $2,500,000 as certain orders we had originally expected in Q4 occurred in Q3.

Speaker 3

Compared to pre pandemic Q3 of fiscal 2020, net sales increased by 23.3% including the acquisition of Grilla. On a category basis, we saw growth in both outdoor lifestyle and shooting sports net sales. Compared to Q3 last year, outdoor lifestyle grew almost 3% driven by fishing and hunting products and shooting sports grew by almost 8% driven by increases in both personal protection and shooting accessories. Compared to pre pandemic Q3 of fiscal 2020, the outdoor lifestyle category grew by 43.1% as Brian mentioned and shooting sports grew by almost 6%. On a channel basis, traditional net sales increased by 8.1% and e commerce increased by 1.6% compared to Q3 last year.

Speaker 3

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. Direct to consumer sales in Q3 were up over the prior year, led by very strong Black Friday weekend sales of meat and Grilla as we outlined on our last call. That strength was somewhat offset by lower sales to online retailers. Turning now to gross margin. As we discussed on our last call, inventory purchases in the first half of fiscal twenty twenty four were higher than purchases in the first half of fiscal twenty twenty three, a period when we are actively driving down inventory levels in order to strengthen our balance sheet.

Speaker 3

The higher level of purchasing in Q1 and Q2 this year drove higher tariff and freight variances, which then must be amortized over inventory turns roughly 6 months later. That increased amortization combined with a slightly higher level of promotional 40 2.7% compared to 47.1% in the Q3 last year. Turning to operating expenses. GAAP operating expenses for the quarter decreased $1,300,000 to $25,700,000 The decrease was driven mainly by reduced G and A resulting from lower insurance and IT costs and lower rent expense due to facility consolidations we completed last year. On a non GAAP basis, operating expenses decreased in Q3 to $21,500,000 compared to $22,000,000 in Q3 of last year for the reasons I just outlined.

Speaker 3

Non GAAP operating expenses exclude intangible amortization, stock compensation and certain non recurring expenses as they occur. GAAP EPS was a loss of $0.23 for the 3rd quarter compared to a loss of $0.21 in Q3 last year. On a non GAAP basis, EPS was $0.08 in Q3 this year compared to $0.13 in the prior year. Our Q3 figures are based on our fully diluted share count of approximately 12,900,000 shares. For full fiscal 2024, we expect our fully diluted share count will be about 13,300,000 shares.

Speaker 3

Adjusted EBITDAS for the quarter was 2 point compared to $3,300,000 last year. Turning to the balance sheet and cash flow. Positive cash flow in the Q3 helped us continue to strengthen our balance sheet. We ended the Q3 with cash of $15,900,000 and no debt after repurchasing approximately $1,800,000 of our common stock. On prior calls, we've outlined that the seasonal nature of our business typically results in operating cash outflow in the first half of the year when we experience increases in accounts receivable and inventory.

Speaker 3

This is typically followed by positive cash inflow in the second half of the year as we collect those receivables and lower our inventory levels. This pattern is playing out as expected in fiscal 2024. We generated $13,000,000 of operating cash in Q3 and we expect to generate cash in Q4. Operating cash inflow in Q3 was mainly driven by a decrease in accounts receivable of $13,200,000 and a decrease of inventory of $9,100,000 netted by a decrease in accounts payable of $8,400,000 The team did an excellent job lowering our inventory levels more quickly than expected and therefore we expect inventories to be roughly flat from Q3 to Q4. Our balance sheet remains debt free.

Speaker 3

We ended the quarter with no outstanding balance on our $75,000,000 expandable line of credit and we now have total available capital of roughly $106,000,000 With regard to capital expenditures, we spent $3,700,000 on CapEx in the 3rd quarter, roughly $2,900,000 of this spending was from a planned one time purchase of assets relating to the full lease assumption of our Columbia, Missouri headquarters. We have lowered our planned CapEx spending for the full year by $500,000 and we now expect total CapEx spend for fiscal 2024 to be between $6,000,000 $6,500,000 of which approximately $3,000,000 to $3,500,000 is recurring. Finally, a key capital allocation priority for our company is returning capital to shareholders through our share repurchase program. In Q3, we repurchased roughly 210,000 shares for $1,800,000 at an average price of $8.50 per share. At the end of Q3, we had $7,800,000 of availability remaining on our $10,000,000 share repurchase program through September 2024.

Speaker 3

Now turning to our outlook. Our net sales outlook remains unchanged and we continue to believe that fiscal 2024 could deliver full year net sales growth of up to 3.5%. Turning to gross margins, we expect to see gross margins come in at approximately 44% on a full fiscal 2024 basis, which would imply a decline in Q4 gross margins from last year. This expected decline is due to the higher tariff and freight cost amortization that I discussed earlier. With regard to OpEx, we continue to believe that overall operating expenses will decline slightly on a GAAP basis for fiscal 2024 as a result of reductions from facility consolidations, lower one time legal and advisory fees and lower IT implementation costs offset by higher selling and distribution costs.

Speaker 3

On a non GAAP basis, we expect that OpEx will increase slightly mainly due to the higher selling and distribution costs. And recall here that we have SHOT Show in our 3rd 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 the full fiscal 2024 to be between 4.5% 5%. Brian?

Speaker 2

Thank you, Andy. I believe our 3rd quarter results demonstrate our ability to manage the 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 great portfolio of authentic lifestyle brands and a growing lineup of exciting and innovative products that continue to resonate with enthusiasts who are passionate about their outdoor activities. With that operator, please open the call for questions from our analysts.

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Mark Smith with Lake Street Capital Markets. Please go ahead.

Speaker 4

Hey, good afternoon, guys. This is Aaron on the line for Mark. Congrats on the quarter. So I guess to start, kind of just wondering if you can kind of unpack the inventory levels at retailers a little bit. I know you had some commentary in the prepared remarks there, but have you seen the improvement since last quarter?

Speaker 4

And I'm also just kind of curious, just on your general level confidence that you guys are going to see some progress there moving forward here?

Speaker 2

Yes. Was it Aaron?

Speaker 4

Correct.

Speaker 2

Yes. Okay. Aaron, this is Brian. So yes, we didn't we said, look, POS was up in the quarter. We didn't give any insight into inventory.

Speaker 2

Inventory was down in the channel, which is up a little bit in outdoor lifestyle because of meat part of the meat load in and the work with Academy. But excluding that on both sides of the fence, outdoor lifestyle and shooting sports, inventory was down, so that's positive. And I'd say just some context or color, we just like we said, we were at SHOT Show in Vegas and we meet with a lot of our big retailers. Inventory destocking just was not a top priority there. So we're mostly focused on getting into a normal cadence.

Speaker 2

Looking forward to the next year, the big theme that we took away was innovation, which obviously is where we play. That's one of our strengths. So less of a factor and I think we're seeing great pull through at retail right now.

Speaker 4

Great. That's very helpful. Thanks for that color. And then in previous quarters, you've sort of remained focused on growing organically through your innovation efforts. And I guess R and D has been sort of at a comfortable level for you guys.

Speaker 4

So does your confidence with internal innovation efforts, I'm just curious, does it affect your appetite on the M and A markets to any degree?

Speaker 2

Yes, this is Brian. It's a really good question. I think one of the things that most probably don't have as much insight into is we talked about where we have permission to play, where our brands have permission to play. And that permission to play for our brands is ultimately informs our 3 to 5 year, we say here we have 5 year growth plan of new products going forward. That's based on that permission to play.

Speaker 2

So when we look at acquisitions, we say, where don't our brands have permission to play or where can we augment maybe some of those plans? A good example of that would be with Grilla, right? One of the reasons we went up to Grilla in addition to being a great direct to consumer brand and it has this differentiation with modular kitchens is we were actually wanting to go into outdoor cooking with Meat Your Maker. And the more we went down that road and talking with consumers, we just felt like it wasn't the right fit. And so that's what helped give us the conviction to go after Grilla, was that we could take some of those innovations that we had developed and we call putting it in the vault.

Speaker 2

We could take them out of the vault and then use them for some of those brands that we go acquire. So it's really where don't we have where don't our brands have permission to play, but we do as a company. And then in some cases, where can we actually augment some of the innovation that we've already developed but may not have the right brand for. So that's really how we look at it and really helps inform our acquisitions.

Speaker 4

Great. Yes, totally understandable. Thanks for all that color and again congrats on the quarter.

Speaker 2

Yes, thank you. Thanks.

Operator

Thank you. The next question comes from Matt Koranda with Roth MKM. Please go ahead.

Speaker 5

Hey, guys. It's Mike Zabrin on for Matt. Maybe just starting on the sales guide. It implies a low single digit growth rate in the Q4, somewhere a bit below the 3rd quarter growth. Just any reason to expect the deceleration in growth in Q4?

Speaker 5

Or are we more so just being conservative given the continued caution from retailers?

Speaker 3

Hey, Mike. This is Andy. It's a great question. I would attribute it more to just the cyclical like quarter by quarter seasonal nature of our business. So typically Q2, Q3 are higher, Q4 is a little bit lower.

Speaker 3

So I wouldn't really put any more emphasis on that.

Speaker 5

Got it. Okay. And maybe on channel inventory, kind of talked about it earlier, but maybe just speak to what we're seeing in regards to sell in versus sell through at retail? And then, are there any areas where we see opportunity for higher load in benefit looking ahead?

Speaker 2

Sure. This is Brian. So yes, I mean, I think going back, gosh, 2 plus years, we talked about ultimately what we want to have is the closest link possible between sell in and sell through. We don't want to be have too much of our product in the channel. We want there to be as much of a tight link as possible.

Speaker 2

So that way when we see our POS data, it allows all of our internal teams, inventory management teams, our S and OP process to be able to order the right product and not have too much of it and get it here at the right time. So we feel like that link is pretty strong right now. We're not seeing a whole lot of slack in the system, at least with our company. And then I'm sorry, what was the second part of your question?

Speaker 5

Just any areas where we see opportunity for higher load in ahead? We talked about it happening a little bit in this quarter.

Speaker 2

Yes. I mean, so replans are we're seeing great replenishment right now. And then we've got new products that are always coming out. We've got some new products that are going to be hitting at the end of April in shipping to stores. So we'll see some benefit there.

Speaker 2

That should include some load ins. And then we haven't talked about NexJira, but certainly our conversations with retailers, line reviews that we had last fall that went very, very well, should go well for us and some load ins for those new products next year. In addition to new distribution, we've got some new retailers coming online that we're very excited about.

Speaker 5

Got it. That's great to hear. Last one for me. We talked about balancing internal innovation versus M and A earlier in the Q and A, but maybe just speak to, I guess, the app your appetite to be acquisitive in the near term, maybe the balance sheet looks great, but just any changes on this front? Have we seen anything interesting?

Speaker 5

Yes, any developments there?

Speaker 2

Yes. It's Brian again. And Andy, feel free to chime in. So generally, we tend to be just in terms of our philosophy, we tend to be a little bit more cautious when we see multiples go way up and the market becomes more frothy. We did gorilla over the last few years, but it was very selective and very targeted.

Speaker 2

So and then now we're seeing sort of the M and A market has come down, slowed down a little bit. We're seeing signs of it beginning to pick back up. We're seeing a few more decks from banks with sell side deals. And we're we couldn't be in a better cash position. We have dry powder.

Speaker 2

We have no debt. And so we're on the hunt. We are actively looking, meeting with companies directly or through advisors. But we've got a great pipeline that we're executing against and you never know when one's going to hit. But we've got a very clear perspective on who it is that we need to go after and we're executing on that.

Speaker 5

Got it. That's all for me guys. Congrats on the quarter.

Speaker 2

Yes. Thank you. Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the call back over to Brian Murphy for closing remarks.

Speaker 2

Thank you, operator. Before we close, I want to let everyone know that we'll be participating in the ROTH Conference in California on March 18 19 and hope to see some of you there. I want to also thank our employees for their dedication and our shareholders for their support. Thanks everyone for joining us today. We look forward to speaking with you again next quarter.

Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
American Outdoor Brands Q3 2024
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