AOUT - American Outdoor Brands Tries To Find New Markets For Its Products

2023-05-02 13:58:25 ET

Summary

• American Outdoor Brands, Inc. is a story of two pretty different exposures, one to marksmanship and the rest to outdoors-type exposures.
• The marksmanship products saw a major decline since civil concerns around COVID-19, and the election cycle pulled forward a lot of revenue.
• They are trying to find new markets for the marksmanship products, like gun safes for broader safe markets, gunsmithing products for automotive, and range-finding for general outdoorsmanship.
• The problem is recovery has been hampered by the fact that retailers are in the process of destocking these days, on top of concerns around discretionary expenditure and macro.
• Gross margins have risen thanks to cost controls, but it's been an uphill battle for American Outdoor Brands, Inc. in terms of revenue with few systemic catalysts. We don't want a company that's having such a hard time.

American Outdoor Brands, Inc. ( AOUT ), the spinoff from Smith & Wesson Brands, Inc. (SWBI) containing businesses related to outdoorsmanship and other marksman products, is struggling a bit in the current environment. While they were already seeing pressure from frontloaded sales in the marksman and defender businesses during the COVID-19 period, destocking is the next major sales break that's affecting the company's ability to maintain scale and profitability.

While the company does its best to launch compelling products, now trying to find new markets for some of its most ailing products, even with gross margin expansion they are likely to be under major pressure for the foreseeable future with no systemic support to discretionary spending considering the market environment. There are some nice recurring sources of revenue here, and markets are levered to civil unrest around increasingly contentious moments like elections, but investors should not expect things to pick up quite yet and drive down the multiple to levers more consistent with the businesses' current risk level.

Q3 Comments

Let's focus on some of the key elements around the segments. AOUT does not disclose segment data, only channel data, and any disclosures around specific products are sporadic and cannot be used to conclusively triangulate sales trends.

Starting with what we glean with a longitudinal view, American Outdoor Brands' share of the business of outdoors and adventure markets has grown from 53% in Q1 to 55% in the latest fiscal Q3 quarter . YoY declines in revenue are almost the same this quarter as they were in Q1, down around 25%. In Q1, the outdoorsmanship and adventure products actually did well thanks to the consolidation of Grilla and the success of MEAT! Your Maker. DTC sales are used to track this segment since these markets dominate that channel. In Q1, growth was around 26% in the category, now it's (approximately, based on DTC sales trends) around 37% , owing in part to consolidation effects but also a full period's worth of growth from the launch of compelling products like MEAT! Your Maker. This means that there must be even more incremental declines from the guns-related businesses compared to Q1, which is consistent with destocking trends at retailers but also worsening macro conditions.

For these ailing markets, which include products like laser sights, range-finding, gun-safes, products for reloading and gunsmithing, AOUT is attempting to build new markets in things outside of firearms. It gave examples in the FQ3 earnings call of how it is trying to launch products from its gun-safe line into general safes, and its gunsmithing products for general automotive markets, where apparently they already have some unintended customers. They are also making general range-finding and laser products that can be used in more cases than just for shooting. They are also launching more entry-level reloading products, where apparently the demographic for the reloading space is getting pretty old and newcomers aren't common.

While sales were down 27.4% in Q3, gross margins actually improved by 130 bps, and the fixed costs came down quite meaningfully by about 4% YoY. This is significant considering the tenor of inflation and how much that's been affecting fixed costs, especially associated to labor, of companies across the board. The substantial loss of scale has meant an almost -5% operating margin, down from a positive ~7% in the 9m period last year, despite the cost-saving initiatives.

Bottom Line

American Outdoor Brands, Inc. knows its markets, and we're quite optimistic about their ability to stem the bleeding in their weaker segments. However, due to the discretionary nature of their markets and the current macroeconomic conditions, we caution investors around expecting a major, or in fact any, meaningful rebound in results in the coming quarters. While destocking has compounded the problem of front-loaded revenues in previous periods, the macroeconomic backdrop is likely to pick up the slack in a quarter or two once the destocking trends normalize (remember destocking is a consequence of supply chain concerns are overstocking that we'd seen earlier in the year).

The current EV/EBITDA multiple for American Outdoor Brands, Inc. is around 10x EV/EBITDA. With a decent amount of recurring revenue in some of its consumable markets around reloading, but also for Schrade's foray into bow hunting and other hunting and lifestyle markets, it's not an ugly multiple. Moreover, these hobbyist markets tend to be sticky and attractive. However, with lacking catalysts for new scale and returns to profitability, and considering that the company at the current scale is unprofitable, a better multiple for American Outdoor Brands, Inc. would be appreciated.

The issue is that a compelling reason to buy isn't present for American Outdoor Brands, Inc., especially when there are so many other businesses that have been dislocated by markets for a similar valuation. Better not for now.

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