Earnings Call Transcript - SWBI Q4 2024

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'll 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 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 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'll 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 '24, 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-on-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 sales 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. And 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 consumers' 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 SD 2.0 9 millimeter, 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 '25 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 EBITDAS of over $94 million. We delivered significant value to our stockholders, including $22 million in dividend payments and $10.2 million in share repurchases. And 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 continue 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&P 15 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 volume, 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 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 flow. 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 to $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 11 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 '25 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 '24. 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 slowdown, 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 '24, 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 consolidation. The expected benefits associated with automation and the reduced facility footprint will begin to be more fully realized later this year. Although we don't expect that the rate of inflation will materially change in fiscal '25, 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% to 5% higher due to compensation-related inflation, a more competitive market, and an increased investment in R&D. Adjusted EBITDAS is expected to grow at a similar rate to sales in fiscal '25. 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, Operator

Thank you. We will now start the question-and-answer session. Our first question comes from Mark Smith with Lake Street Capital. Please go ahead with your question.

Mark Smith, Analyst

Hi, guys. First question, I wanted to dig in a little bit more on ASPs in handguns. Certainly, seeing demand at kind of more of those entry-level prices and you guys put out a solid new product 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? Sure. In Q4, demand remained strong, as reflected in our average selling prices across our product range. Although we experienced a slight decline in ASPs, demand entering the slower summer season has shifted more towards entry-level price points. For Q1, we've already initiated a consumer rebate promotion and plan to enhance our offering in that category with new product launches in the coming days and weeks to capture more volume. This should provide a positive boost in Q2 and the latter half of the year. We still expect overall ASPs to remain stable. Long guns, particularly LAR products, will continue to perform well, but we anticipate a slight decrease in handgun ASPs in Q1. What are your thoughts on how you're performing with the Performance Center and higher-end handguns? We're hearing positive feedback on lower-end entry-level models, but there seems to be good demand for some of the more expensive handguns. How is that higher-end segment holding up for you? Some of our top-tier products include our large frame revolvers and Performance Center items. We have added and will continue to expand our production capacity in that area. Our metal M&P line is also considered a high-end product. As mentioned previously, we are increasing our capacity, which is expected to provide us with favorable momentum in the second half of the year. Okay. And then, I don't know if you guys gave it, but if you've got the number 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 I'd love to hear also some of the other new long guns on how those are performing. For Q4, we mentioned that the number was just under 30%, specifically 29.9%. Deana?

Deana McPherson, CFO

29.1%, yeah.

Mark Smith, Analyst

We are still maintaining a mix of high 20% to low 30% for our new products, and we expect that trend to continue. While the 1854 was significant in Q4, we have sustained that level for quite a while. The recent focus on the 1854 was due to its recent launch, but we plan to keep rolling out new products. The FPC has been successful, and the Sport III remains one of the top-selling models among our retailers. We will continue this momentum of introducing new products, and you can anticipate an ongoing contribution to revenue from new product launches. Okay, Deana, I realize you don't provide detailed formal guidance, but I want to summarize and ensure I understand everything correctly. At the end of your remarks, it seems you anticipate revenue growth in the mid- to high-single digits, a gross margin around the mid-30% range, and some pressure on operating expenses which may result in EBITDAS growth similar to revenue growth. Did I capture that accurately, or did I overlook anything?

Deana McPherson, CFO

No, I think I would say low 30s. I'm not sure if we'll be able to reach the mid-30s, but we are increasing our capacity. As mentioned earlier, we are consolidating facilities and enhancing automation at the Tennessee site. Looking at the entire year, we expect to be in the low 30s. It's worth noting that the fourth quarter was around 35%, but one quarter doesn't determine the entire year. We typically experience fluctuations throughout the year. The fourth quarter is usually our strongest, with the longest production days and no shutdowns, unlike the other quarters. As our capacity increases and we complete the automation and relocation process, we should start seeing improvements in the latter half of the year, possibly reaching the mid-30s, though the first half may be a bit lower.

Mark Smith, Analyst

Okay. I have a follow-up question. Mark or Deana, whoever wants to respond, it seems like you are expecting challenging conditions for consumers this summer. However, as you look towards the second half of the year, you anticipate some improvement in growth. It appears that you are projecting typical seasonal growth for new products, but you do not have any significant increase in demand due to the election factored into your forecasts, correct? We certainly anticipate a boost from the election as the campaign activity generally ramps up in late summer or early fall and extends through the election period. This will provide an additional impetus to our typical busy season. Additionally, we expect some beneficial effects in the second half from capacity expansions in certain categories where we have been limited. This will be complemented by the introduction of some exciting new products in the coming weeks, which will enhance our offerings in that entry-level price tier. So, while there is some influence from the election, there are also standard core business factors contributing to growth in the latter half of the year. Overall, we expect a strong year, with growth being more pronounced in the second half, as has historically been the case. Perfect. Thank you, guys. Thanks, Mark.

Deana McPherson, CFO

Thanks, Mark.

Operator, Operator

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

Matthew Raab, Analyst

Hey, this is Matthew Raab substituting for Steve. Most of my questions have been addressed, but could you elaborate on your marketing strategies? You mentioned that summer is usually a slower period. Are you considering vendor discounts? You talked about rebates, but what other marketing initiatives are you exploring with retailers?

Mark Smith, President and CEO

We are actively collaborating with retailers, and as we enter summer, our primary focus is on enhancing promotions. We will participate in promotions based on market conditions, which we anticipate will be competitive this summer, as indicated by recent NICS results. For instance, we've launched a consumer rebate program in early June and are implementing various targeted promotions with specific retailers and distributors, including incentives and other programs. We have a comprehensive strategy in place to engage with the channel, and we are currently working on these initiatives. Today, we even have several retailers at our facility for a roundtable discussion and brainstorming session.

Matthew Raab, Analyst

Okay, great. Thank you very much.

Mark Smith, President and CEO

Okay.

Operator, Operator

Thank you. And 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, operator, 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, Operator

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