In December 2016, we initiated coverage on American Outdoor Brands(NASDAQ:AOBC) with a buy call, and today, we look to evaluate that thesis in light of the just reported earnings. Briefly, the stock caught our attention after seeing the massive nosedive it has taken following the U.S elections. Feel free to review our prior work to understand why we liked AOBC stock.
We believed the downturn in AOBC stock. would continue more, but longer term, this appeared to be an amazing opportunity.
While AOBC stock. is still a gun stock, it has been trying to diversify away from this to provide goods for outdoor enthusiasts. There has been positive momentum in the name, but the stock is still down 25% from our call, thanks to very negative pressures this year.
Oddly, the more firearm friendly the outlook, the worse the gun stocks do short-term. But we are looking longer-term at AOBC stock..
Let us be clear. It was a good quarter, with strong top and bottom lines. In fact, AOBC has been demolishing analyst estimates for some time. That is the kind of stock you want to own, even though the short-term has been rough. Let us look at a few of the key highlights of the quarter:
During the quarter, the company completed the purchase of substantially all of the assets of Gemini Technologies, Incorporated (“Gemtech”), a provider of high quality suppressors and accessories for the consumer, law enforcement, and military markets, for $10.9 million. The company also completed the purchase of substantially all of the assets of Fish Tales, LLC, a provider of premium sportsman knives and tools for fishing and hunting, including the knife brand, Bubba Blade™, for approximately $12.1 million.
As for the financials related to AOBC stock., here are the details:
Net sales were $148.4 million, in-line with the company’s guidance range, compared with $233.5 million for the second quarter last year, a decrease of 36.4%.
Gross margin for the quarter was 34.2% compared with 41.8% for the second quarter last year.
Net income was $3.2 million, or $0.06 per diluted share, compared with net income of $32.5 million, or $0.57 per diluted share, for the comparable quarter last year.
Adjusted net income was $6.3 million, or $0.11 per diluted share, compared with $39.1 million, or $0.68 per diluted share, for the comparable quarter last year.
Adjusted EBITDA was $23.1 million, or 15.5% of net sales, compared with $72.4 million, or 31.0% of net sales, for the comparable quarter last year.
James Debney, American Outdoor Brands Corporation President and Chief Executive Officer, commented, “Our results for the second quarter were within our guidance range despite challenging market conditions. Lower shipments in our Firearms business reflected a significant reduction in wholesaler and retailer orders versus the prior year, and were partially offset by higher revenue in our Outdoor Products & Accessories business. Total revenue for the quarter faced a challenging comparison to last year, when we believe strong consumer demand was driven by personal safety concerns and pre-election fears of increased firearm legislation.”
“In Firearms, shipments of our new M&P branded polymer products in full-size, compact, and concealed carry models helped to offset lower orders in other product categories. While we were pleased that our firearm inventory at distributors declined slightly during the quarter, we believe that orders were negatively impacted by heightened channel inventory from multiple manufacturers at retail. As expected, our internal inventories peaked during the quarter, as we prepared for a number of new firearm product launches. Since then, we have reduced our internal production output levels and our outsourced capacity to help lower inventories and better balance production to demand. For the second half of fiscal 2018, our focus remains on ensuring that our internal manufacturing resources are aligned with demand. In addition, we intend to introduce several exciting new products, and execute on long-term organic growth initiatives that support our vision of being the leading provider of quality products for the shooting, hunting, and rugged outdoor enthusiast,” concluded Debney.
Jeffrey D. Buchanan, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, commented, “We ended the quarter with cash of $68.2 million and net debt of approximately $223 million. While cash flow for our second quarter was flat, as expected, we are forecasting positive cash flow for the balance of our fiscal year, as we lower our internal inventory levels in conjunction with the upcoming holiday buying season, new product launches, and winter distributor buying shows which take place during our fourth fiscal quarter.”
Make no mistake results are being improved diversifying away from just the firearm side of the business. However, sales of firearms and accessories are still the big money maker. With the impact of new acquisitions bolstering revenues and earnings per share, there is room to run higher. Looking ahead for AOBC stock, and considering the history of the company’s earnings reports, we see no reason why these expectations will not only be met but also exceeded. There is a lot to like here, including shareholder value creation substantial buybacks this year.
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