Smith & Wesson Brands - Q4 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. fourth quarter and full fiscal 2024 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 (General Counsel)

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 a gain from the sale of certain intangible assets, costs related to an accrued legal settlement, 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 EBITDA is to adjusted EBITDA. Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are 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 (President and CEO)

Thank you, Kevin, and thanks everyone for joining us today. We are pleased to announce that Smith & Wesson delivered yet another strong quarter to close out fiscal 2024. I am very proud of the team's continuing discipline and execution against our strategic initiatives of strong brand messaging and marketing, best-in-class innovation, operational excellence, and business process efficiencies. Our results in FY 2024 again demonstrate that our relentless focus on these long-term strategies consistently reinforces our position as a market leader and delivers solid stockholder returns. Our Q4 top-line revenue was up 10% versus last year, driven by unit growth in both handguns and long guns. We believe this reflects robust market share gains as our shipments, once again, outpaced the overall firearms market, driven, once again, by excellent consumer reception to our new product offerings, as well as sustained demand for our core product portfolio.

On a full year basis, our revenue was up 12% year-over-year, and our unit shipments were up 13%, outpacing the market, where NICS was down by 5.4%. On the bottom line, the team delivered solid non-GAAP EPS of $0.45 in Q4. This was driven by increased production rates to meet demand for our new products and to maintain target inventory levels on our core offerings, as we mentioned last quarter. We also benefited from continuing stabilization of the Tennessee operations and have begun realizing the associated efficiencies.

Breaking those Q4 numbers down a little further, for the sporting goods channel, our long gun unit shipments increased by over 14% versus the year ago period, and our handgun shipments were up almost 8%, while the overall market, as measured by NICS checks, was down 6% in long guns and down 7% in handguns. Innovation continued to be a key driver, with new products making up just under 30% of sales, led by the 1854 lever-action rifle, which I'll cover in some more detail in a moment. Despite the outperformance in our out-the-door unit shipments into the channel, inventory levels during the period at our distributor and strategic retail partners remained healthy. Another bright spot for the quarter was our overall ASPs, which continued to hold at healthy levels in spite of the competitive landscape.

We believe this reflects the consumer's trust in the Smith & Wesson brand to deliver world-class quality firearms, innovation, and customer service. Handgun ASPs largely held steady, declining less than 2% versus the prior year quarter, mostly driven by mix factors associated with the introduction of the very popular new entry-level-priced SD9 2.0 9mm. Whereas long gun ASPs beat expectations by improving by nearly 11%. The long gun ASP increase was due to the highly successful launch of the 1854 lever-action rifle, which has been hailed by the industry and consumers as an instant classic and is in high demand. As I covered last quarter, this successful launch creates an exciting new white space opportunity for Smith & Wesson. Our near-term category expansion plans include the introduction of new line extensions this summer and throughout the hunting season.

We also expect to add significant new capacity this fall to support the strong demand for our new products, helping to propel our top-line growth in the second half. Turning now to the overall firearms market. We continue to expect healthy demand for firearms in FY 2025, and Smith & Wesson is well positioned to deliver another solid year of growth. At the same time, we are anticipating a much more competitive marketplace throughout the traditionally slower summer months this year, as consumer discretionary spending continues to be impacted by stubborn inflation, as you have likely seen from recent NICS results.

This is consistent with normal seasonal patterns for firearms demand, and we do expect offsetting tailwinds during our typical busy season throughout the second half, as the presidential election campaign activity ramps up in the fall, and we benefit from new product introductions, and we bring online additional capacity targeted at some of our new products where we are currently constrained. Throughout the slow period this summer, we will be aggressively pursuing market share through promotions and marketing campaigns, in addition to building inventory in preparation for the busy fall season and continuing our cadence of new product introductions. Specifically, with consumers increasingly price-sensitive as inflation impacts discretionary spending, we will be focused on addressing this with new entry-level price launches this summer, which we believe will provide tailwinds in Q2 and throughout the second half.

Finally, I just want to take a moment to thank our employees, past and present, for delivering another successful year. In fiscal 2024, we launched over 100 brand-new products, sales of which accounted for over 27% of our total revenue. As I mentioned earlier, we grew revenue and units shipped by nearly 12% and 13%, respectively, outpacing NICS, which was down by 5.4%. We generated more than $106 million in cash from operations, ending the year with over $60 million in cash on hand and only $40 million in debt and reduced inventory by $16.6 million. We improved GAAP EPS by $0.06, delivering $0.86 per share for the year, with EBITDA of over $94 million.

We delivered significant value to our stockholders, including $22 million in dividend payments and $10.2 million in share repurchases. All of this while successfully relocating our headquarters, distribution, and major portions of our operations into our new facility in Maryville, Tennessee. These accomplishments are only possible due to the commitment, day in and day out, of our amazing team, many of whom continued to show unwavering dedication, even though they knew that their roles would be relocating and they would ultimately be moving on from the company. This exemplifies the Smith & Wesson way, and I am personally tremendously grateful for the impact of each employee, past and present, on our great results this year and our bright future.

As we covered earlier, and as I said last quarter, we expect the firearms market to experience healthy demand through the 2024 election cycle and fiscal 25. And with our deep pipeline of new products, leading brand, new state-of-the-art facility now operational, strong balance sheet and, most importantly, world-class, dedicated employees, we are excited for another year of growth and to continue delivering value for our stockholders. With that, I'll turn the call over to Deana to cover the financials.

Deana McPherson (CFO)

Thanks, Mark. Net sales for our fourth quarter of $159.1 million were $14.4 million, or 9.9% above the prior year comparable quarter, with new products making up 29.1% of total revenue for the quarter. As Mark noted, the launch of the 1854 lever-action rifle in January was met with significant consumer interest. In addition, the new M&P15 Sport III and SD9 2.0 both performed well in their categories. Gross margin of 35.5% was 6.5 percentage points above the prior year comparable quarter, reflecting a combination of favorable fixed cost absorption due to increased production volumes, higher long gun ASPs driven by new products, increased sales volumes, and lower promotions, partially offset by the impact of inflation on material and labor costs and increased inventory reserves.

Operating expenses of $31.1 million for our fourth quarter were $7 million higher than the prior year comparable quarter due to increased profit-related compensation cost, costs, including profit sharing, which is now recorded in the quarter it is earned, and increased legal costs, combined with the impact of a year-to-date reclassification of sublease income from other income to operating expenses in the prior year. Net income of $26.1 million in the fourth quarter was more than double the prior year comparable quarter due to a combination of higher net sales, improved gross margin, and a $6.5 million sale of intangible assets, partially offset by profit-related compensation costs.

GAAP earnings per share of $0.57 was well above the prior year comparable quarter of $0.28, while non-GAAP earnings per share of $0.45 was also up from $0.32 in Q4 fiscal 2023. Turning to cash flows. During the quarter, we generated $43.6 million in cash from operations and spent $5.6 million on capital projects, resulting in net free cash of $38 million. During the quarter, we repurchased approximately 77,000 shares at an average price of $14.12, for a total of $1.1 million. Subsequent to year-end, we've already repurchased approximately 137,000 shares at an average price of $16.07, and we still have nearly $38 million remaining on our authorization.

We paid $5.5 million in dividends, repaid $25 million on our revolving line of credit, and ended the quarter with $60.8 million in cash and $40 million in borrowings on our line of credit. During our full year, we generated $106.7 million in cash from operations and spent $90.8 million on capital projects, resulting in net free cash of $16 million for the year. With less than $5 million remaining to be spent on the relocation and normal operating capital returning to our historical levels of $25 million-$30 million, our board has authorized an 8.3% increase in our quarterly dividend, raising it to $0.13, to be paid to stockholders of record on July 11th, with payment to be made on July 25th.

Looking forward to fiscal 2025, as Mark mentioned, we continue to expect healthy demand for firearms in fiscal 2025 and believe we are well positioned to deliver another year of solid growth, likely in the mid to high single digits. With near-term demand softer than we originally anticipated, sales will be more weighted to the second half of the fiscal year. We expect Q1 to be down approximately 10% from the prior year quarter in terms of units and dollars, as growth in long guns partially offsets a decline in handguns. We expect Q2 to rebound a bit as we approach the election, resulting in the first half being only moderately down to last year.

We expect the second half to benefit from normal seasonal increases, new product introductions, and investments in increased capacity, resulting in full-year revenue up mid- to high-single digits over fiscal 2024. We believe channel inventory is in a good spot, and therefore, we are not anticipating a material impact from changes in inventory, either internally or externally. With regard to pricing and ASPs, we expect some headwinds in handguns, particularly during normal summer slowdowns, but believe that long guns will remain reasonably strong due to new products. We expect margins to stabilize in the low 30%s for the full year, an improvement over fiscal 2024, with normal quarterly fluctuations impacted by both volume and operating days.

Margins will be affected by the full year impact of operating our Tennessee facility, which moves certain building costs out of distribution into cost of sales, combined with one-time costs associated with facility consolidations. The expected benefits associated with automation and the reduced facility footprint will begin to more be fully realized later this year. Although we don't expect that the rate of inflation will materially change in fiscal 2025, we should benefit from a more level-loaded manufacturing operation and stable channel inventory, which will help margins for the full year. With respect to the first quarter gross margin, we expect it to be in line with the prior year first quarter levels. Operating expenses for the full year will also likely be 3%-5% higher due to compensation-related inflation, a more competitive market, and an increased investment in R&D.

Adjusted EBITDA is expected to grow at a similar rate to sales in fiscal 2025. Finally, our effective tax rate is expected to be approximately 24%. With that, operator, can we please open the call to questions from our analysts?

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Mark Smith (President and CEO)

Hi, guys. First question, I wanted to dig in a little bit more on ASPs in handguns. You know, certainly seeing demand at kind of more of those entry-level prices, and you guys put out like a solid new product, you know, to meet that demand. So I guess I was surprised that ASPs held up as well, but any other insights you can give us into kind of mix and maybe products that are doing well within handguns?

Mark Smith (President and CEO)

Sure. Yeah, so Q4, the demand, you know, still held up pretty good, as you can see from our ASPs, from our entire product portfolio. You know, we were down a little bit on ASPs there, and that was, you know, as you said there, Mark, the, you know, the demand definitely as we're entered the slower summer season, is driven much more towards that, you know, the kind of the, where the volume play right now is, is in that entry-level price point. So, you know, we, we do anticipate in, in Q1, you know, we're gonna be... As you might have seen, we've already launched a, consumer rebate promotion.

We'll also be, you know, leaning into that category a little bit more with some new product launches coming up here in the next couple days and weeks, you know, to kind of, you know, get some more entrants into that, into that, where that volume play is, and that should give us a nice tailwind in Q2, in the second half. You know, so, you know, we'll, we still expect that, you know, that the overall ASPs to stay up. Long guns, definitely with the LAR, will be, you know, still be good, but, but those handguns will probably come down a little bit there in Q1.

Mark Smith (President and CEO)

Okay. Any thoughts on kind of how you're holding up as we think about, you know, Performance Center and kind of higher end, primarily in handguns? You know, kind of, you know, we're hearing, you know, the lower end entry level's pretty positive, but yet still pretty good demand at, you know, some of the more expensive handguns. Any thoughts around kind of how that higher end business is holding up?

Mark Smith (President and CEO)

Yeah, I mean, on some of our, our highest end products in that hierarchy are gonna be, you know, our large frame revolvers. Obviously, as you'd mentioned, our Performance Center products, you know, and, you know, we have added and we'll continue to, and to add capacity there, you know, our Metal M&P is also up there. So, you know, that's, we mentioned the prepared remarks, you know, we alluded towards adding some capacity. That's definitely an area where we're gonna be, you know, putting a little bit more capacity online to give us a nice tailwind there in the second half as well.

Mark Smith (President and CEO)

Okay. And then, I don't know if you guys gave it, but, you know, if you've got the numbers for the quarter of kind of new product mix in the quarter, and any additional insights into kind of how those new products are going. I know that you talked a bit about 1854, but, you know, I'd love to hear also some of the other new long guns on how those are performing.

Mark Smith (President and CEO)

Yeah, I think for Q4, we did give that number. It was just under 30%. I mean, just like, I think it was 29.9%. Deana?

Deana McPherson (CFO)

29.1%. Yep.

Mark Smith (President and CEO)

29.1%. So, you know, still holding up to that, you know, high 20%s, low 30%s, in terms of our new products. We, we anticipate that that's gonna continue. And yeah, that was, you know, a lot of the, the 1854 in Q4, Mark, but, you know, I mean, we've, we've kind of held that level for a long time. It's, you know, just, I mean, I think it more, was more weighted towards the 1854 just because it was the most recent launch. But, you know, we- we're gonna continue that cadence. You know, the FPC was, you know, obviously very successful. The Sport III continues to be, from a lot of our retailers, one of the number one selling, if not the number one selling, MSR out there. So, you know, we're gonna continue that cadence of new product.

We, you know, I think you can, you can expect that, that same level of new product, contribution to revenue going forward.

Mark Smith (President and CEO)

Okay. Then, Deana, just, I know you don't give as much on formal guidance, but just wanted to kind of sum up and make sure that we're looking at things right. At the end of your prepared remarks, sounds like, you know, looking for revenue to be up, you know, mid- to high-single digits, kind of a mid-30%-ish gross margin, and maybe some pressure on operating expenses that's gonna put EBITDA's growing at kind of a similar number to revenue. Did I sum that up, or did I miss anything in there?

Deana McPherson (CFO)

No, I think I'd say, I'd say low 30%s. I'm not sure... You know, we're gonna wait and see whether we can get to the mid 30%s, but, you know, we're bringing more capacity online. We are, as I said in my remarks, we're having the facility consolidation and ramping up automation at the Tennessee facility. So, you know, when we look at the whole year, we'll be in the, you know, in the low 30%s. I'd point out that, you know, fourth quarter was, I think, somewhere around 35%, but one quarter doesn't make the whole year, right? So, we'll have those fluctuations like we normally do. Fourth quarter for us is usually the best because production days are the longest. We have no shutdowns, where we have shutdowns in the other quarters.

So, as the capacity ramps up and as the automation and the, you know, full relocation process completes, then we'll start to see, you know, toward the back half of the year, where the numbers are, you know, are, getting back to where we used to have them. And, you know, we'll probably get to the mid-30%s, you know, on, on the back half, but, you know, the front half will be a little bit lower.

Mark Smith (President and CEO)

Okay. And maybe one follow-up on that. Just, Mark or Deana, whoever kind of wants to take it. You know, it sounds like summer, you know, you guys are expecting things to remain tough just with where the consumer is today. But it sounds like as you look at the back half, you know, seeing maybe some better growth, that that's not. That you guys are just looking for kind of typical seasonal growth and your outlook for new products and whatnot, but you're not expecting and nothing's built in for, like, a big ramp in demand around the election isn't really built into the numbers that you've given, right?

Mark Smith (President and CEO)

Yeah, I think, you know, we definitely expect a tailwind from, you know, the election, as the election campaign activity really kicks in, you know, usually towards the late summer or early fall, through the election period. So definitely there will be a tailwind there to our usual busy season. You know, but we've also got, you know, we're also gonna have some tailwinds in back half from, as I mentioned, some capacity additions on some of our categories where we're constrained, right? So we've got that coming online, as I mentioned. Where the volume play right now is in that lower price tier, that entry-level price tier.

We got a couple of really, really good, new products coming, you know, in the next couple of weeks, which will obviously also give a nice tailwind, where we can have some more deep entrants into, you know, a deeper product portfolio in that category. So yeah, it's, you know, it's a little bit of election, but it's also, you know, just standard core businesses as well in the back half. So yes, you know, you know, the overall year should be a nice growth. It's just, you know, it's gonna—as it has been historically, it'll be more weighted towards the back half.

Mark Smith (President and CEO)

Perfect. Thank you, guys.

Mark Smith (President and CEO)

Thanks, Mark.

Deana McPherson (CFO)

Thanks, Mark.

Operator (participant)

Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your questioning.

Matthew Raab (Equity Research Analyst)

Hey, guys. This is Matthew Raab on for Steve. Most of my questions have already been answered, but can you just talk about what you're doing on the marketing front? Obviously, you said kind of the summer is typically the slower, you know, weaker time of year. I mean, are you looking at the vendor discounts? Obviously, you talked about rebates. What other areas are you looking into for the marketing side, working with retailers? Anything there?

Mark Smith (President and CEO)

Yeah, we're very active in working with with retailers. It's you know, our our number one focus as we kind of come into the summer usually, and this summer is no different, is you know, you know, getting pretty aggressive on promotions. We're always gonna you know, participate as we find you know, as we see appropriate, depending on what the market conditions are. And this summer, you know, as I think you can see from NSSF results, it's gonna be competitive. So you saw that you know, we're pretty aggressive with the consumer rebate that just launched early June. We're also doing a whole bunch of channel.

While we always wanna focus on pull-through rather than push in on inventory, we all are also working with a lot of the retailers on some targeted promotions that, you know, individual retailers or, you know, with distributors on promotional programs, whether it be spiffs, et cetera. So we kinda, you know, have a pretty deep playbook here in terms of, you know, levers we can pull throughout the channel. And, you know, we're working pretty actively on that right now, actually, you know. As of today, we've got a number of retailers in our facility kind of doing a roundtable and brainstorming, so.

Matthew Raab (Equity Research Analyst)

Okay, great. Thank you very much.

Mark Smith (President and CEO)

Yep.

Operator (participant)

Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to Mark Smith for closing remarks.

Mark Smith (President and CEO)

All right. Well, thank you, everyone, and thank you, everyone, for joining us today and your interest in our company, Smith & Wesson. We look forward to speaking with everybody again next quarter.

Operator (participant)

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.