Smith & Wesson Brands Incorporated (SWBI), a leader in firearm manufacturing, reported a challenging first quarter of fiscal 2025 with lower-than-expected net sales and a net loss. However, the company remains optimistic, maintaining its full-year outlook with expectations of top and bottom line growth.
Smith & Wesson's flexible manufacturing model has allowed it to adapt to market conditions, and with the introduction of new products like the Bodyguard 2.0 and the 1854 lever action rifle, the company is poised to capture increased demand in the upcoming busy fall season. The company also announced a new $50 million share repurchase program and aims to have a debt-free balance sheet by the end of the fiscal year.
Key Takeaways
- Smith & Wesson reported lower-than-anticipated firearm demand in Q1 but expects a rebound in the fall.
- New products, including the Bodyguard 2.0 and the 1854 lever action rifle, have been positively received.
- The company plans to maintain profitability through increased sales and earnings over fiscal 2024.
- A new $50 million share buyback program has been authorized, demonstrating confidence in the company's financial health.
- Smith & Wesson aims for a debt-free balance sheet and expects to generate at least $75 million in operating cash annually.
Company Outlook
- Despite a slow start, Smith & Wesson expects significant sales growth in Q2 and mid to high single-digit revenue growth for the full year.
- Gross margins improved in Q1 and are expected to continue improving, with a full-year target in the low 30s percentage range.
- Operating expenses are projected to be higher in Q2, with an effective tax rate of around 25%.
Bearish Highlights
- Q1 net sales fell below expectations and the company reported a net loss.
- Cash used in operations increased due to a rise in inventory levels.
- Operating expenses are expected to be 15% higher in Q2 compared to Q1.
Bullish Highlights
- Smith & Wesson's flexible manufacturing model allows for quick adaptation to changing market demands.
- The company's new product launches have been met with enthusiasm, likely bolstering future sales.
- Share buyback activity has accelerated, underscoring the company's commitment to shareholder value.
Misses
- Revenue for the first quarter was lower than anticipated at $12.9 million.
- The company experienced a net loss due to decreased revenue and increased interest expense.
Q&A Highlights
- Mark Smith and Deana McPherson expressed confidence in the company's revenue growth trajectory.
- The company expects Q3 and Q4 to be strong, with added capacity boosting revenue further.
- Smith & Wesson is negotiating their current credit facilities for greater flexibility.
Smith & Wesson's report highlights the cyclical nature of the firearms industry and the company's strategic responses to these fluctuations. Despite the slow start to fiscal 2025, the company's introduction of new products and its flexible manufacturing system position it well for the remainder of the year. The authorized share repurchase program and the commitment to a debt-free balance sheet reflect the management's confidence in Smith & Wesson's financial stability and future performance. Investors and analysts will be watching closely as the company navigates the challenges of the industry while aiming for sustained profitability and growth.
InvestingPro Insights
As Smith & Wesson Brands Incorporated (SWBI) navigates through a challenging start to fiscal 2025, the company's financial health and strategic initiatives remain key focal points for investors. According to InvestingPro data, SWBI has a market capitalization of $565.3 million and operates with a moderate level of debt, which aligns with the company's goal of achieving a debt-free balance sheet by year-end.
InvestingPro Tips reveal that Smith & Wesson has raised its dividend for four consecutive years, showcasing a commitment to returning value to shareholders even amidst a tough quarter. This dividend growth is supported by a solid financial base where liquid assets exceed short-term obligations, indicating short-term financial resilience. Moreover, analysts predict that SWBI will be profitable this year, which is corroborated by the company's profitability over the last twelve months.
In terms of valuation, SWBI is trading at a P/E ratio of 19.03, which suggests that the market has factored in future earnings potential to some extent. However, given the company's high P/E ratio relative to near-term earnings growth, investors may want to consider the implications of this valuation in light of the recent downward earnings revisions by analysts.
The InvestingPro platform offers additional insights, with a total of 8 tips available for SWBI, including more detailed financial metrics and analyst predictions. These tips can provide investors with a deeper understanding of the company's financial health and future prospects.
InvestingPro Data also highlights a dividend yield of 3.66% as of the last dividend ex-date in July 2024, which is attractive to income-focused investors. The company's robust return of 35.58% over the past year further underscores its strong performance in the market. With a fair value estimation by analysts at $18 and InvestingPro's fair value at $15.02, there appears to be a consensus on the company's value potential.
As Smith & Wesson continues to unveil new products and maintain its operational efficiency, these InvestingPro insights can help investors gauge the company's financial trajectory and investment potential.
Full transcript - Smith & Wesson Brands Inc (SWBI) Q1 2025:
Operator: Good day everyone, and welcome to Smith & Wesson Brands Incorporated First Quarter Fiscal 2025 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call.
Kevin Maxwell: Thank you and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results. Our non-GAAP financial results exclude relocation expense and other costs. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS and any reference to EBITDAS is to adjusted EBITDAS. Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we're referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our President and CEO; and Deana McPherson, our CFO. With that, I will turn the call over to Mark.
Mark Smith: Thank you, Kevin, and thanks everyone for joining us today. Overall firearms demand during our first fiscal quarter was softer than we anticipated, but our results once again proved the resiliency of our flexible manufacturing model, which allows us to adapt quickly to any market conditions and still deliver on bottom-line profitability targets. And importantly, while the usual summer seasonality was more pronounced this year, demand has already begun to rebound as we enter the busy fall season, and our outlook for the balance of fiscal 2025 has not changed. We continue to expect to grow sales and earnings over fiscal 2024. We believe continued inflationary pressure on consumer discretionary spending was the primary driver of the lower foot traffic reported by our channel partners throughout the summer. Yet despite these headwinds, we still delivered nearly $10 million of EBITDAS, which was in line with expectations, and again proves the resiliency of our flexible manufacturing model. Profitability was aided by our disciplined cost management as well as gross margins, which improved 80 basis points versus a year ago, in part reflecting higher fixed cost absorption as we continued to ramp capacity and realize efficiencies in our Tennessee operations. On the revenue side, during our fourth quarter call, we shared our view that the firearms market was expected to be much more competitive over the near term, primarily due to pressure on consumer discretionary spending from factors like high inflation. While we were directionally accurate, the magnitude of the weakness was more pronounced than we anticipated. Adjusted NICS was down 3% during our first quarter from the comparable period last year, and while NICS was up 4% during July, this growth appears to have been driven mostly by the hunting category, where we are still early in establishing a foothold. We also continue to see heightened promotional activity across the industry, especially around lower-priced entry-level handguns. While the introduction of our entry-level price Bodyguard 2.0, which I'll cover in a moment has been a huge success, the launch occurred late in the quarter, resulting in somewhat limited shipments during Q1. On this note, we continue to be pleased with ASPs, which held overall and were up fractionally versus a year ago, and up over 5% from Q4 despite a highly competitive market throughout the summer. This was consistent with the expectations we shared on the Q4 call and we continue to believe it reflects our consumers’ deep loyalty and trust in the Smith & Wesson Brand. The success of the 1854 lever action rifle continued to be the key factor in driving the nearly 32% year-over-year increase in our long gun ASPs. In handguns, ASPs were down over 9% due to focused promotional activity in this category to stimulate demand as well as mix factors associated with the successful launches of several entry-level price products combined with the lower overall pistol shifts. On the innovation front, we continue to maintain a solid cadence of new product introductions and in total our new product portfolio continues to perform very well, accounting for over 41% of sales in the first quarter. As I mentioned earlier, in Q1, we introduced the Bodyguard 2.0, which is the next-generation of the very popular Bodyguard line that we introduced in 2010 and has been a huge success. Our product management and engineering teams packed this tiny pistol with all the features that our consumers desire in an everyday defensive concealed carry firearm. In addition, demand for our 1854 lever action rifle remains robust for the models we've launched so far, with many more introductions coming as we continue to build out this line throughout the remainder of the fiscal year. As a reminder, we view the lever action as a major platform opportunity with a multi-year pipeline of potential growth drivers. Both the 1854 and the Bodyguard production will also be supported by significant capacity expansion throughout the remainder of the fiscal year. Turning now to the balance sheet as usual, we've been building inventories throughout the summer to support the strong demand for our new products and prepare for the busy fall season ahead. The nearly $30 million increase in internal inventory at the end of the first quarter was slightly elevated versus expectations, simply due to the softer market, but also reflects very clean channel inventories and is indicative of our confidence in the outlook for the balance of the year as we still expect to end the year with inventory levels flat to last year, excluding new product launches. Finally, from a capital allocation standpoint, we accelerated our buyback activity in Q1 with the repurchase of nearly 871,000 shares for nearly $13 million in addition to paying our regular quarterly dividend. In total, for the past 12 months, we have repurchased nearly 1.7 million shares. With CapEx normalizing this year, coupled with our strong profitability and cash generation outlook, buybacks will remain a priority to drive long-term value for stockholders. As we announced earlier today, our Board of Directors has also just authorized a new $50 million buyback program to replace the program that is set to expire in mid-September. In summary, once again, I am very proud of our team's commitment and discipline to deliver on our key strategic initiatives around brand, marketing, innovation, operational excellence, and driving shareholder value. Despite a very challenging environment in Q1, we still delivered on our bottom line profitability targets and as we look forward with new capacity coming online for our very popular new products, strong pipeline innovation and typically busy firearms demand season now upon us, we expect to more than offset these temporary headwinds during the balance of the fiscal year and continue to expect top and bottom line growth for the full year. With that, I'll turn the call over to Deana to cover the financials.
Deana McPherson: Thanks, Mark. Net sales for our first quarter of $88.3 million were $25.9 million or 22.7% below the prior year comparable quarter. During the quarter, inventory in the distribution channel remained relatively flat from the prior quarter in terms of actual units, indicating positive sell-through of our products at retail. As expected, handgun ASPs declined slightly from Q4 levels due to promotions and a shift in mix to lower priced products, while ASPs for long guns increased due to the mix of higher priced products and lower overall volume. Although revenue was below our expectations, we were pleased with new product launches this quarter and began to see positive momentum from a demand perspective as we neared the end of the first quarter. Gross margin of 27.4% was 0.8% above the comparable quarter last year due primarily to increased absorption on higher production, lower inventory reserve adjustments, a small price increase that went into effect in January 2024, and lower relocation costs, partially offset by higher promotional costs. As a reminder, we typically generate lower margins in our first quarter due to reduced operating days resulting from our summer operating shutdown. We continue to target margins in the low 30s for the full year. Operating expenses of $26.1 million for our first quarter were flat to the prior year comparable quarter. It should be noted that the prior year included a $2 million impairment of distribution equipment as part of the relocation. Excluding that impairment, operating expenses rose during the current quarter due to increased new product development costs, increased compensation-related costs, the timing of the NRA show in May of this year versus April of last year, increased promotional costs, and higher legal cost loss partially offset by the lack of profit sharing due to our operating loss this quarter. The lower revenue combined with an increase in interest expense due to outstanding borrowings resulted in a $2.1 million net loss or a $0.05 loss per share. On a non-GAAP basis, our loss per share was $0.02 and in line with expectations. Cash used in operations for the first quarter was $30.8 million, compared with cash generated of $40.6 million in the prior year comparable quarter due to a net working capital increase of $38.6 million, driven by a $30 million increase in inventory. We expect inventory to return to prior year levels by the end of the year excluding new products. We spent $4.7 million on capital projects this quarter compared with $32.1 million in the prior year comparable quarter, primarily due to the relocation being nearly completed during fiscal 2024. We expect our capital spending for the year to be between $25 million and $30 million. We continue to opportunistically repurchase shares under our $50 million authorization. During the quarter, we repurchased approximately 871,000 shares at an average price of $14.75 for a total of $12.9 million. We paid $5.9 million in dividends and ended the quarter with $35.5 million in cash and $70 million in borrowings on our line of credit. Absent any opportunistic share repurchase opportunities or compelling capital investments, we continue to expect to be in a position to fully repay our line before the end of the fiscal year. As disclosed in our press release today, our Board of Directors has approved a new $50 million share repurchase program that will become effective on September 20, the day after the current authorization expires. This new program positions us to opportunistically repurchase shares for another 12 months. Just to recap, the expiring $50 million authorization through July 31, we have already repurchased nearly 1.7 million shares at an average price of $13.84. Finally, our board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on September 19th, with payment to be made on October 3rd. Looking forward to our second quarter, as Mark noted earlier, demand during the summer was slower than we expected, but we started to receive reports of improved foot traffic in August. Channel inventory remains stable and at healthy levels. Overall, inventory is about 12% higher than last year at this time, but nearly 30% below this time two years ago, when we last experienced a similarly slow first quarter. As we experienced two years ago, we expect our second fiscal quarter sales to grow significantly over the first quarter, and we expect to be in the range of 5% to 10% above Q2 fiscal 2024. We remain confident with the expectation we shared with you on the Q4 call, that our full-year revenue will be up mid to high single-digits compared to fiscal 2024. We expect gross margins to improve in the second quarter on the increased sales volume, but don't expect to hit the 30% level yet due to operating days being impacted by the second half of our summer shutdown. We do continue to expect that we will achieve the low 30s for margin for the full year due to increased operating days in the second half. Operating expenses in Q2 will likely be about 15% higher than in Q1, with half the increase driven by profit sharing and the remaining portion driven by promotions, sales activity, and distribution costs associated with the increased volume. Our effective tax rate is expected to be approximately 25%. Finally, as I noted earlier, absent opportunistic share repurchases or other new opportunities to invest in our business, we continue to expect to have a debt-free balance sheet by the end of the fiscal year. With little left to spend on the relocation, capital investments for this project is nearly complete. Consistent with prior commentary, we expect to generate operating cash of at least $75 million annually and normal capital spending requirements are approximately $25 million per year, providing significant excess cash flow. As a reminder, our capital allocation plan continues to be, invest in our business, remain debt-free, and return cash to our stockholders. With that operator, can you please open the call to questions from our analysts?
Operator: [Operator Instructions] Our first question is from Mark Smith with Lake Street Capital. Please proceed.
Mark Smith: Hi guys. First question for me, just wanted to dig into the inventory just a little bit. It looks like a lot of that was finished goods. Maybe walk through kind of your confidence level on being able to kind of push through and work your way through these finished goods here in Q2 or into Q3?
Mark Smith: Yeah. As you pointed out, the majority of the inventory bill was in finished goods. And as we -- I think you know Mark, been around a while, the inventory in the summertime always grows. It did grow a little bit beyond expectations simply because as we mentioned in the prepared marks, July was a little bit below expectations. But as we kind of look forward now to coming into this fiscal year, kind of, we usually don't do this, but to give you a little color that August has been very, very strong so far. So while -- I think the summer slowdown occurred came -- probably came a little early and lasted a little longer than we anticipated, the flip side to that is it's kicked -- the fall pickup has kicked in a little sooner as well. So that inventory that we built is in good high-volume [A-SKUs] (ph) and is already starting to move back out the door again.
Mark Smith: Okay. And then I wanted to look at just ASP within long guns, specifically up pretty significantly here. Was this primarily 1854s that drove ASPs higher in long guns? And then any insight into how you feel about your mix of the rest of the long gun business? Is it mixing okay? How you feel like demand is for kind of more traditional MSR platform firearms?
Mark Smith: Yeah. The uptick in the ASPs for long guns definitely was driven by the 1854 combined with the overall lower shipments of the rest of the core line on long guns throughout the summer months. So obviously an outsized impact then of 1854. As we kind of come into the more traditional busy season here in the fall, I think that's going to come -- that's going to level back out and normalize again. So I think if you're thinking about ASPs for the back half of the year and into Q2, it's kind of probably go back to same type of levels as you saw in Q4.
Mark Smith: Okay. And then you talked about a little bit on the call, but what are you seeing competitively as we enter the kind of important fall and holiday season, especially around pricing? And in the same vein, any insights into kind of how you feel about some of the rebate programs that you guys were running here pretty recently?
Mark Smith: Yeah, I think to start off with the rebate program we ran recently. So that was very successful. The idea there was to kind of obviously stimulate as much demand as we possibly could. And I think that rebate definitely met our expectations, and that was great. As we look now forward to the fall, we expect to continue promotional activity strategically. And I don't think that, that competitive environment is going to be as bad as it was during the summer. I think it's going to start to wane a little bit. As I said, we saw the NICs results for August were pretty strong. And I think the field reports that we've been getting is that the foot traffic has definitely improved. And so I think that should take some of the pressure off on the promotional environment. That said, as we go into the summer, sorry as we go into the holiday season there will always be some promotional activity happening, but I don't think it's going to be anything unusual that we haven't seen before in the past.
Mark Smith: Okay. And then I think the last question for me, we heard from one of your retailers earlier this week, and they talked about, demand within firearms being better at kind of the higher-end products and the lower-end kind of entry products. While that mid-range has been tough, do some of your products -- that newer products that you've launched kind of fit within a barbell strategy and does it make sense? I'm thinking kind of 1854 versus maybe Bodyguards, which I wouldn't say are entry-level, but certainly a smaller kind of handgun.
Mark Smith: Yeah. I think the success of the Bodyguard that I mentioned in the prepared remarks, the Bodyguard has been extremely well received by the marketplace. I think it's a combination of the fact that, yes, it is kind of hitting on that entry-level price point, but it's also -- it's in that price point and feature-packed with everything that our consumers are looking for in a defensive concealed carry pistol. So that one is doing very, very well. 1854 is, as you mentioned, and some of our retailers have pointed out, is that, that consumer at the high end, it tends to be a little bit more inflation-proof or recession-proof. And so those, yes, those categories up there. And that, we have a lot of our product portfolio that kind of fits into that, that higher end. And that's kind of where we've been trying to push those ASPs up and really command the brand, command the value that the Smith and Wesson brand deserves with a lot of the revolvers and et cetera. So we have a pretty, pretty good, we're comfortable with the breadth of the line and the pricing hierarchy.
Mark Smith: Excellent. Thank you, guys.
Mark Smith: Thanks, Mark.
Operator: Our next question is from [Steve Dyer] (ph) with Craig-Hallum Capital Group. Please proceed.
Matthew Raab: Hi, guys. This is Matthew Raab on for Steve. I guess I'll just start with the revenue outlook of mid-single-digit to high-single-digit growth for the full year. I think that implies something like 15%, 16% revenue growth in the second half. What gives you the confidence that, that is doable at this point? And then sort of on the cadence there, sort of implying 8% revenue growth in Q2 and then in the back half ramping, is that kind of the right way to look at that?
Mark Smith: Yeah, I'll just cover the confidence portion and I'll turn over to Deana for some of the more detailed financial questions. On the confidence side, Matthew, I think if you go back and look at kind of a quote-unquote, normal year. This is the volatility of the firearms industry sometimes. And two years ago, I believe our Q1 to Q2 ramped in the mid-40% range. And we're very much expecting and have been encouraged by the results so far in the first month, that, in fact, this will be another very similar situation. And so that's just kind of the volatility of the firearms market and how usually the revenue just kind of falls in a normal year, which we expect this to be a good healthy, but also normal year in terms of seasonality. And I'll hand it over to Deana for the numbers.
Deana McPherson: Yeah. So I guess the way to think about it is that, if you compare to last year's $125 million or so, I said on my call -- on the call notes 5% to 10% above that quarter. So it's 5% to 10% above the $125 million. And then the rest, we look at more operating days in the back half of the year, more opportunity in the way that the nature of the way our quarters fall, we get Christmas in the second -- in the third quarter, and we get the really busy winter season in the fourth quarter. So those would be growth over last year also. So not as much as Q1 to Q2, but consistent growth on a quarter-to-quarter basis like we would normally have.
Mark Smith: Yeah. And, Matthew, one last thing on that. I'll just point out that Q3 and Q4 are usually our two biggest quarters. In addition, as I mentioned in the prepared remarks, there's some significant capacity coming online in late Q2, which will definitely buoy those usually strong quarters even further.
Matthew Raab: Okay, great. And then on capital allocation, added the $50 million buyback. Should we just kind of view this as more of a balanced approach between leverage and the buyback kind of going forward?
Deana McPherson: Yeah. I think we look at opportunity to invest in the business first as our first priority. We look at where we are in our forecast for where we are with leverage, and then we look at where the stock price is. We'd love to always be able to take more shares off the table, but we've got to have a measured approach and be opportunistic when we can. I will say, we are looking at our current revolver to give us more flexibility there. We're in the process of negotiating that because that comes due in the next year. So we'll pay attention to what our opportunities are there as well.
Matthew Raab: Okay, great. That is it for me. Thank you.
Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mark Smith for closing remarks.
Mark Smith: I'd like to thank everybody for joining us today, and we look forward to speaking with you on the second quarter call.
Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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