Earnings Call Transcript - SWBI Q2 2026

Operator, Operator

Day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I'd now like to turn the call over to Kevin Alden Maxwell, Smith & Wesson's general counsel. Will give us information about today's call. Thank you. Please proceed.

Kevin Alden 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, 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 one-time costs related to the grand opening event for the Smith & Wesson Academy. 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. 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 mix results, we are referring to adjusted mix, 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 mix 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, mix 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 Peter Smith, our President and CEO, and Deana L. McPherson, our CFO. With that, I will turn the call over to Mark.

Mark Peter Smith, President and CEO

Thank you, Kevin. And thanks everyone for joining us today. We were pleased with our second quarter results which continued to demonstrate the strength of the Smith & Wesson brand, the ongoing success of our innovation strategy, and our disciplined focus on managing operations and allocating capital. As we anticipated, excellent efficiency in our business allowed us to deliver solid profitability of $15 million of EBITDA, on net sales of nearly $125 million. We also saw great results on our balance sheet, with a significant reduction in inventory, thanks to our disciplined sales and operations planning process, which ensures our factories are right-sized to demand levels. This generated healthy operating cash flow of over $27 million in the quarter. Further, our new products continue to be a significant catalyst accounting for nearly 40% of sales in the quarter. I'm proud to see our award-winning engineering and design teams continuing to deliver products that resonate with consumers. Looking at market dynamics, we believe that the market continues to be healthy and stable, following normal seasonal trends. And that our brand strength, award-winning product portfolio, experienced team, and disciplined management allowed us to continue gaining share during the quarter. In handguns, our unit shipments into the sporting goods channel were down 1.9%, versus mix being up 2.9%. However, when we adjust for channel inventory fluctuations in the period to understand true consumer demand, we had a 12,000 unit decrease in distributor inventory during Q2. This indicates that our handgun sell-through at the retail counter was actually up 7.7%, which we believe reflects market share growth. As I just mentioned, this was driven by the continued success of our entire line of new products as well as solid performance from the core line. In long guns, our shipments into the sporting goods channel declined 5.1%, while mix was down 8.3%. When we adjust for inventory fluctuations in the channel, we did underperform the overall long gun category during the period. However, this represents typical category seasonality for us, as demand for long guns in the fall season is heavily weighted towards the traditional hunting segment where we currently have a relatively limited presence. In summary, on the overall market, our handgun outperformance far outweighed the impact of long gun seasonality. After inventory fluctuation adjustments, our total firearm unit shipment into the sporting good category were up 3.3% versus the market being down 2.7%. This represents solid results for the fall period, which, again, is heavily weighted to the hunting category. Importantly, the strength of our brand allowed us to outperform the market in unit sales without sacrificing our average selling prices, which actually increased in Q2. Overall ASPs were up 3.5% versus a year ago, including a 2.1% increase in handguns to $418, and a 10.2% increase in long guns to $602. We also saw growth sequentially with overall ASPs up 6.5%, comprised of a 3.7% increase in handguns and a 15.1% increase in long guns. While our focus on innovation is a key factor in supporting ASPs, the growth we delivered in Q2 also illustrates the strength of the Smith & Wesson brand, which allows us to largely avoid having to be reactive in our promotional participation. On that note, our balance sheet remains strong, and I'm particularly pleased with our inventory position as we move into the seasonally stronger second half of the fiscal year. We ended the quarter with $183 million of inventory, which was down from $196 million a year ago and from $203 million at the end of Q1. The team has done an incredible job managing production and inventory, ensuring we are aligned with consumer demand across our portfolio as well as retail and distributor inventory levels. Channel inventory at distributors continues to be very clean, declining over 5% sequentially and over 15% year on year. Positioning us to quickly convert incremental demand into shipments as we move into our typically busy second half of the fiscal year. In addition to putting us in a strong competitive position, as I mentioned earlier, focus on inventory management drove significant operating cash flow of over $27 million. Finally, just a quick update on our new Smith & Wesson Academy that I mentioned on our last call. Our grand opening ceremony was held on September 12, and we'd like to thank all of the federal and state senators, congressmen, congresswomen, industry personalities, customers, and influencers who made the trip to help us celebrate this latest milestone in Smith & Wesson's long legacy. Our goal with this state-of-the-art purpose-built facility is to offer tailored situational training to our current and prospective law enforcement members, federal agency personnel, and military customers, as well as offer training classes to consumers of all skill levels looking to learn from the best of the best to enhance their firearms proficiency. As I mentioned on our last call, we are proud to have Mark Cochiolo leading the operations and training at the academy. Mark is a retired US Navy SEAL who proudly served as a member of the elite SEAL Team Six, and after retirement, returned to San Diego where he spent the next sixteen years as a firearms instructor, training over 4,000 Navy SEAL candidates in that time. I'm happy to report that just over two months in, we have already had the pleasure of hosting dozens of current and prospective law enforcement customers and held our first consumer training classes. The feedback has been overwhelmingly positive, and we look forward to continuing to exceed the expectations of our professional and consumer customers with this new addition to the Smith & Wesson brand experience. I encourage anyone interested to visit our website for more details or to sign up for a training class. As we look forward to the future, we remain focused on our proven strategy of innovation-driven growth, disciplined cost management, and maintaining our strong balance sheet. Our capital allocation strategy remains unchanged. We will invest in our business, maintain financial flexibility, and return value to stockholders. With our industry-leading innovation pipeline and continued strong market positions, we believe we are well positioned for continued success. Before I hand the call over to Deana, I just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication in putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Deana to cover the financials.

Deana L. McPherson, CFO

Thanks, Mark. Please note that all comparisons are between the 2026 and the 2025 unless stated otherwise. Net sales for our second quarter of $124.7 million were $5 million or 3.9% below the prior year. During the quarter, distributor inventory in terms of actual units declined by over 5% from the end of the prior quarter and by 15% compared with October 2024. This indicates continued positive sell-through of our products at retail and a good position for us as we look forward to the coming months. Handgun ASPs increased slightly from Q1 levels due to strong demand for certain premium products, partially offset by promotions and continued demand for lower-priced products. Long gun ASPs increased due to the mix of higher-priced products and slightly increased overall volume. Gross margin of 24.3% was down 2.3% versus a year ago, due primarily to decreased absorption on temporarily lower production. As we focus on inventory optimization and an 80 basis point negative impact from tariffs, partially offset by lower promotion costs and lower federal excise taxes as a result of the favorable outcome of a recent audit. Operating expenses of $26.2 million were $733,000 lower than a year ago, with increases in selling and marketing costs related to the grand opening of the Smith & Wesson Academy being more than offset by lower G&A primarily due to lower legal costs. The lower revenue and associated margin resulted in net of $1.9 million compared with $4.5 million in the prior year period. Earnings per share during the second quarter was 4¢ compared with 10¢ a year ago. Cash generated from operations during the second quarter was $27.3 million compared with cash used from operations of $7.4 million in the prior year quarter, due primarily to lower inventory and income taxes paid. Inventory decreased $20 million versus an increase of $6.2 million in the prior year quarter. We spent $11 million on capital projects in the second quarter, compared with $3.3 million a year ago, but the increase primarily related to the Smith & Wesson Academy. We expect our capital spending for the year to be between $25 and $30 million. We paid $5.8 million in dividends and ended the quarter with $27.3 million in cash and investments and $90 million in borrowings on our line of credit. Since the end of Q2, we have so far repaid $15 million on the line, bringing our total borrowings on our line of credit to $75 million. Finally, our board has authorized our quarterly dividend to be paid to stockholders of record on December 18, with payment to be made on January 2. Looking forward to our third quarter, although we continue to see uncertainty regarding macro conditions, including tariffs, we believe that the strength of our brand, product assortment, and new product offerings should allow us to continue performing well. Therefore, we expect our third quarter sales to be 8% to 10% over our Q3 fiscal 2025 sales with no significant impact either negatively or positively from channel inventory. With two additional operating days and an increase in production to meet demand during our busiest quarter in Q4, we expect Q3 gross margins to increase by a few percentage points both sequentially and year over year. Operating expenses in Q3 will likely be about 15% higher than in Q2, with increases due to the SHOT Show in January, new product development costs, increased promotions, and increased profit sharing. Additionally, we expect continued healthy cash generation through the second half of the fiscal year. Our effective tax rate is expected to be approximately 28%. With that, operator, can we please open the call to questions from our analysts?

Operator, Operator

Thank you. With that, we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick one moment while we poll for questions. And our first question comes from the line of Mark Eric Smith with Lake Street Capital. Please proceed with your question.

Mark Eric Smith, Analyst

Yeah. Hey, guys. Yeah. Alex on the line. Mark Eric Smith today. Thanks for taking my questions. First one for me, you noted an 80 basis point headwind in the quarter. Could you just walk us through, you know, what you're seeing in input costs right now, steel, components, tariffs, and how you're thinking about gross margins over the next couple of quarters?

Mark Peter Smith, President and CEO

Sure. Hey, Alex. This is Mark. Yeah. The, you know, we're mostly a US-based manufacturer, and in the global economy that we do have some source components from overseas. You know, I think our impact from tariffs, you know, you can probably expect it to pick up a little bit as we go through the back half of the year just, you know, as we work through some of the inventory that we had already in stock from, kind of the pre-tariff days. But, you know, it shouldn't have a material impact on our profitability as we go through the back half.

Deana L. McPherson, CFO

Okay. That's great. Next oh, sorry. Go ahead. I would just say one other point. The back half of the year, we have more operating days. And as I said on the prepared remarks, given that inventory has declined and we're now ramping back up, absorption will probably be favorable. So you'll see a little bit of positive impact that should be able to offset that impact of tariff cost.

Mark Eric Smith, Analyst

Okay. That's great. Second one for me. You know, OpEx looked really clean this quarter, specifically G&A. You is this a level you feel you can hold on to, or should we expect G&A to tick up as we move through the rest of the year?

Mark Peter Smith, President and CEO

Yeah. I mean, our operating expenses are usually fairly consistent year to year. So, you know, we always have an increase for SHOT Show in January. So I think, you know, you can kind of look at how we've performed on operating expenses in past years and Q3 and Q4, and, you know, I think you can kind of expect that to be held in line. You know, we're pretty disciplined in managing the OpEx line in general. And so I hope that that performance in Q3 and Q4 continues like last year. I think you can expect the same cadence this year.

Mark Eric Smith, Analyst

Okay. That's great. And then last one for me. You know, it sounds like you're seeing some nice tailwinds given the Q3 outlook. Any early thoughts on how Q4 is shaping up from where you sit today?

Mark Peter Smith, President and CEO

Yeah. We've been really pleased with the performance in Q2 and the first half of the year. You know, the strength of the brand is really showing through and resonating; new products are doing very, very well across the board. You know, we expect that we'll continue to focus on innovation. It's one of the core strategies that our marketing and design teams are continuing to hit it out of the park with blockbuster launches. And, you know, as you can see in the kind of the color and guidance for Q3, we expect that to continue into Q3. And for Q4, as I said in the prepared remarks, the market is stable, normal, kind of back to how it always performs, which puts our Q4 as our strongest quarter this year. I don't think it's gonna be any different. I think you can expect somewhere between high single-digit to low double-digit growth in Q4 over Q3 this year.

Mark Eric Smith, Analyst

Alright. That's great. Thanks for answering my questions.

Mark Peter Smith, President and CEO

Thank you. You got it. Thanks, Alex.

Operator, Operator

Thanks, Alex. And our next question comes from the line of Rommel Dionisio with Aegis Capital. Please proceed with your question.

Rommel Dionisio, Analyst

Thank you very much. I know SHOT Show is still about a month away, but I wonder if you've already had some conversations with retailers and distributors. I wonder if you could just give us a little heads up in terms of the feedback you're receiving with regards to revenue for new products, outlook for calendar 2026, and the industry overall? Thank you.

Mark Peter Smith, President and CEO

Yeah. Great. Thanks, Rommel. I mean, the conversations we've been having with our distributors, retailers, and all of our channel partners have been very positive around Smith & Wesson. And it really underscores the comments we made in the prepared remarks about the market share gains. You know? So, the portfolio is performing extremely well. The strength of the brand is really starting to show through, so I think they're very pleased. Their inventory is in a great spot, as we covered earlier. You know, we always target about eight weeks of supply, and we're right there, right at eight weeks right now. So, you know, their inventory is very clean across the line and performing efficiently for them. So, they’re very pleased with the Smith & Wesson brand. As far as SHOT Show and what we have coming up there, keep your eye out. Obviously, as you know, we don't give any forward guidance on new products, but I’ll just say that we expect for the back half of this year to absolutely continue that momentum on new products. They continue to do really well for us in a competitive environment; really what drives the needle for us, and frankly, any consumer goods company. So we're going to keep the foot on the gas there.

Rommel Dionisio, Analyst

Great. Look forward to hearing about that. Thank you.

Mark Peter Smith, President and CEO

Thanks, Rommel.

Operator, Operator

Thank you. And with that, there are no further questions at this time. I'd like to pass it back to Mark Peter Smith for any closing remarks.

Mark Peter Smith, President and CEO

Alright. Thank you, operator. And thank you everyone for joining us today and your interest in Smith & Wesson. We look forward to speaking with everybody again next quarter.

Operator, Operator

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time. Have a wonderful day.