American Outdoor Brands, Inc. (NASDAQ:AOUT) Q2 2023 Earnings Call Transcript December 1, 2022
American Outdoor Brands, Inc. beats earnings expectations. Reported EPS is $0.29, expectations were $0.28.
Operator: Good day everyone and welcome to American Outdoor Brands Inc. Second Quarter Fiscal 2023 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations for some information about today's call.
Liz Sharp: Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies and vision; our strategic evolution; our market share and market demand for our products; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties.
Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments on today's call. First, we reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, shareholder cooperation agreement costs, technology implementation, acquisition costs, other costs and income tax adjustments.
The reconciliations of GAAP financial measures to non-GAAP financial measures whether or not they are discussed on today's call can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today's call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. And with that, I will turn the call over to Brian.
Brian Murphy: Thanks Liz and thanks everyone for joining us. Our second quarter performance demonstrates our ability to successfully navigate ongoing challenges in the macroenvironment while executing on our long-term strategy. While it's too early to see what our economy will deliver as we move into the new calendar year, I believe our recent results reflect our ability to remain focused, identified those elements we can control, executing accordingly and best positioning our company for success over the long term. In the second quarter, we achieved net sales growth of 14% above our pre-pandemic levels of fiscal 2020 and we introduced several new innovative products, while strengthening our balance sheet and marking a number of achievements that support our strategic priorities and reflect our dedication to leveraging our culture of innovation to deliver solutions for consumers in the moments that matter.
Our E-commerce platform is an important part of our brand growth strategy and it represents an investment we made prior to the pandemic and our spin-off just over two years ago. While our E-commerce sale declined compared to the year ago quarter, driven by our online retailers, our E-commerce channel grew over 171% compared to pre-pandemic level. Within our E-commerce channel is our direct-to-consumer business which is largely comprised of our outdoor lifestyle brand. Direct-to-consumer sales remain strong in the quarter, delivering year-over-year growth of over 119%. Consider our direct-to-consumer sales to be one gauge how well our brands resonating with consumers, since those sales are not typically impacted by issues that of hindered retailers, such as inventory levels or limited to open to buy dollars.
Direct-to-consumer category also includes MEAT! Your Maker, meat processing equipment, and Grilla outdoor cooking products. Together these two brands generated nearly 10% of our total net sales and help our outdoor lifestyle category generate over 55% of our total net sales in the second quarter. We remain excited about growth opportunities in our outdoor lifestyle category, which consists of products related to hunting, fishing, camping, outdoor cooking and rugged outdoor activities and which delivered growth of more than 22% over the pre-pandemic second quarter of fiscal 2020. We believe continue to grow in this category as a percentage of our total net sales will help mitigate fluctuations in our shooting sports category, which has been more susceptible to short term cyclicality.
Turning to our traditional sales channel, which consists of customers that operate out of physical brick and mortar stores, sales declined in the quarter, largely the result of a continuation of the factors we laid out last quarter. Namely, retailers placed fewer orders in response to lower consumer foot traffic, while they work to lower their inventories across all of their offerings, limiting their open to buy dollars. This activity had its biggest impact on our shooting sports category, which includes personal protection products, such as laser sights, and sales of shooting accessories to firearm OEMs, dealers and distributors. By way of an update, initial national media reports on Black Friday shopping appear to be generally favorable for both online and brick and mortar retailers.
With Bloomberg reporting year-over-year increases in the 2% to 3% range for both categories. The good news since increased foot traffic should help lower retailer inventories and improve their available open to buy. Innovation is a key element in our long-term strategy and new products launched within the past two years generated 30% of our second quarter net sales. We continue to leverage our Dock & Unlock process to deliver a steady flow of organically developed exciting new products in the second quarter. Let me tell you about a few of those. Adding to our bestselling line of meat grinders, we launched a line of MEAT! Your Maker Dual Grind Grinders, which retails between $450 and $700 based on different size options. These dual grind grinders help simplify and save time processing, bypassing meet through a separate course and find plate simultaneously.
We introduced our MEAT! Your Maker Kitchen Knife set, which is made with high quality German steel blades, premium G-10 handles and includes a unique storage solution. We designed these knives specifically for our meat customers, and we market them through our DTC channel. We also launched a MEAT! Your Maker Butcher Knife set with proprietary non slip grips, as well as a premium leather knife carrier for safe and convenient transportation and storage of cutlery. And I just want to add here that we're very impressed with the continued brand loyalty that we've developed under the meat brand as consumers continue to flock to our websites and provide us with great reviews and feedback. Lastly, we launched two BOG tripods lines, the Sherpa and the Infinite.
These innovative tripods which can be used for everything from hunting to photography, incorporate proprietary features, deliver enhanced versatility and functionality and provide a compact and lightweight platform for hunters, for whom BOG has become synonymous with premium hunting accessories. During the quarter, we attended the National Association of Sporting Goods Wholesalers Expo, where the Caldwell Claymore was recognized as the best new accessory. The Claymore Clay Target Thrower is our first meaningful entry into the shotguns sports market. Some of you have joined us at SHOT Show in January when he first unveiled this innovative foot operated clay thrower to the public. The show gave us a great opportunity to demonstrate the innovation of the claymore which provides all the benefits of an electric clay thrower without requiring a battery.
The buzz of the show was incredible and people were lined up to give it a try. We are now shipping the claymore to customers. We are excited about the opportunity addressed by each of these new offerings. As a company that thrives on innovation, intellectual property is one of our most valued assets. And you'll find it within several of the products I just outlined in a great many more across our portfolio. Investing capital in organic growth remains the top priority in our strategic plan. And our Dock & Unlock process continues to fuel the innovation pipeline that will support our long-term growth. This power of innovation is apparent with our MEAT! Your Maker brand, which was developed internally launched in late fiscal 2020 and delivered trailing 12-month revenue of $8.7 million at the end of Q2.
Stay tuned for updates on several exciting new products we have planned for MEAT, Bubba, Grilla and many of our other brands in the new year. Our strategy also includes a focus on utilizing our leverageable business model as we grow. On our last call, we announced that we would consolidate our Crimson Trace operations in Wilsonville, Oregon, as well as our Grilla operations in Holland, Michigan, and Dallas, Texas, into our Missouri facility. I'm happy to report that we recently completed both of those consolidations right on schedule. Andy will provide more detail but savings from these consolidations will help us move closer to our long-term profitability objectives. Current environment of high inflation and rising interest rates makes it difficult to predict future consumer spending patterns as we head into the new year.
Nevertheless, we are encouraged by the fact that consumer participation in the outdoors is at its highest level in years. We are also encouraged by recent reports in our industry, which indicate that once someone begins to participate in the outdoors, they're likely to continue as a nimble, innovative, an emerging growth company with a portfolio of strong brands that resonate with our core consumers. We are excited about the growth opportunities these trends present for our brands in the long term. As such, our focus will remain on executing our long-term strategic plan while we carefully managed the elements within our control. While we do so we will continue to invest in our infrastructure and our robust new product pipeline, seeking out opportunities to lower costs where we can and ensuring we remain well positioned to achieve our long-term plan, which is to reach $400 million and beyond in net sales and EBITDAS margins in the mid to high teens.
With that, I'll turn it over to Andy to discuss our financial results.
Andy Fulmer: Thanks, Brian. Net sales for Q2 were $54.4 million, a decrease of 23.1% compared to the prior year, and an increase of 14% over the pre pandemic second quarter of fiscal 2020. E-commerce channels accounted for roughly 42% of our sales in the quarter at $22.7 million, representing a decrease of 17.5% from Q2 of last year, but a significant increase of over 171% over the pre pandemic second quarter of fiscal 20. The recent year-over-year decrease was driven by reduced orders from our online retailers offset by a 119% increase in our direct-to-consumer business. Net sales in our traditional channels, which consists of brick-and-mortar retailers decreased 26.6% in the second quarter, compared to last year, which we believe is due to lower foot traffic at most retailers locations during the period, combined with their continued efforts to reduce their overall inventories.
Gross margins came in strong for the quarter, increasing 100 basis points over the prior year to 47.7%. During Q2, we benefited from lower inventory reserves, and reduced tariff and freight costs as we delivered on our commitment to reduce inventory levels going forward. GAAP operating expenses for the quarter were $26.1 million, $1.6 million lower than Q2 of last year. Within OpEx, our variable selling and distribution costs decreased in dollars due to the overall reduction in net sales. But they increased as a percentage of net sales year-over-year due to higher outbound freight costs. On our last call, we discussed efforts to contain costs where appropriate as we navigate through the current economic landscape. Marketing dollars spent declined from last year due to reductions in advertising and lower compensation costs and our G&A spend remained flat to last year.
It's important to note however, that the majority of the advertising savings were related to the timing of digital advertising, which will now move to our third quarter. Non-GAAP operating expenses in Q2 were $21.3 million, compared to $22.7 million in Q2 last year. Non-GAAP operating expenses, exclude intangible amortization, stock compensation, and certain non-recurring expenses as they occur. As Brian indicated, we remain focused on leveraging our business model. Our performance in Q2 demonstrated that focus when we announced the consolidations of our operations in Oregon, Texas and Michigan, into our main facility in Columbia, Missouri. During Q2, our operations team did an outstanding job efficiently tackling these consolidation projects.
As of mid-November, our assembly, warehousing and distribution functions for all of our brands are now being conducted entirely from our Columbia facility. As we discussed on our last call, these consolidations will help us simplify operations, maximize warehouse efficiency, and leverage the cost of our Missouri facility. We expect the net cost savings from the consolidations will be roughly $1.5 million on an annualized basis. And we'll begin to see savings in our fourth fiscal quarter this year. GAAP EPS for Q2 was $0.03 as compared with earnings of $0.32 last year. And non-GAAP EPS for Q2 was $0.29 compared to $0.58 last year. Our Q2 figures are based on our fully diluted share count of approximately 13.6 million shares. For the full year, we expect our fully diluted share count to be roughly 13.7 million shares.
Adjusted EBITDAS for the quarter was $6.4 million, compared to $11.7 million last year. Turning to the balance sheet and cash flow, I'm pleased to share that we continue to strengthen our balance sheet during Q2, ending with net debt leverage of virtually zero, while returning capital to our shareholders through our share repurchase program. We ended the quarter with $16.4 million of cash down just $1.1 million sequentially from the first quarter. We're very pleased with this result given the cash outflow for our ERP implementation as planned, and roughly $750,000 spent for share repurchases. Positive operating cash flow for the second quarter was $1.1 million compared to operating cash outflow of $22.1 million last year. Recall that last year's outflow was driven by large bills and accounts receivable and inventory.
Accounts receivable in Q2 this year increased sequentially over Q1 by $8.6 million due to the increase in net sales. We offset this increase with a $9.2 million decrease in inventory, all while maintaining strong gross margins. You'll recall last quarter we discussed that we had commenced targeted inventory reduction initiatives. I'm very pleased to report that our team has done a great job executing on those initiatives. And we're actually a bit ahead of schedule. We will continue to focus on inventory reduction going forward driving further cash conversion. Turning to capital expenditures, we are lowering our CapEx spending plans for full fiscal 23 by roughly $500,000 to a range of between $7 million and $7.5 million. Breaking that amount down, we now expect to spend between $4.6 million and $5.1 million on product tooling and maintenance CapEx and we still expect our ERP project to come in at $2.4 million.
Now a brief update on our ERP implementation. As I've shared before, we are utilizing a multi phased go live approach with our new ERP system, Microsoft D365. I'm pleased to report that we successfully went live with Phase 1 on October 1 with a small portion of our business as planned. So kudos to the entire AOB team. Our tiered go live decision was a good one. In the Phase 1 process, we identified the need for some system enhancements that we've now designed into the final phase, which is Phase 2. While these changes will extend the timeline just a bit by about 60 days, they will improve our operational efficiency on day one and the new system. And despite the new February go live date, we don't expect to add any cost to the project. So great result and again, great job to the entire team.
For fiscal 2023, our expectations for one time ERP costs haven't changed. We still anticipate spending a total of $1.7 million in onetime OpEx for implementation cost as well as $500,000 in duplicative costs to operate both our current and new ERP systems in parallel through February, both amounts will be treated as non-recurring implementation costs when calculating non-GAAP operating expense and adjusted EBITDAS. We ended Q2 with $20 million outstanding on our $75 million line of credit, keeping our net debt leverage ratio near zero. Last week, we paid down an additional $10 million, leaving us with just $10 million outstanding on the line of credit as of today. We focus on maintaining a very strong balance sheet so that we remain well positioned to address our three capital allocation priorities, which in order of priority are first to invest in organic growth.
Second, to seek complimentary acquisitions, and third to return capital to shareholders. Our Dock & Unlock formula serves as the foundation for long term cash flow generation. That cash in turn funds further organic growth as well as the ability to capture attractive M&A opportunities when they arise. Ultimately, access cash generated by this process can be returned to shareholders when that is the best use of capital at any given point in time. We demonstrated our willingness to do that when our board authorized a $10 million share repurchase program in September. And during Q2, we repurchase roughly 84,000 shares at an average price of $8.97 per share. Now, turning to our outlook, in our view, retailers and distributors remain cautious regarding their inventory levels, and consumer spending patterns going forward are still undetermined.
That said, we believe our brands are performing consistently with long term positive consumer outdoor trends. As a result, we continue to believe our net sales for fiscal 2023 could exceed pre pandemic fiscal 2020 levels by as much as 25%. To refresh you on our revenue flow by quarter, we expect typical seasonality to occur in fiscal 2023 with Q1 as our lowest net sales quarter, Q2 and Q3 as the highest net sales quarter, and Q4 coming in higher than Q1. We've noted in previous calls our returned to a more normalized promotional environment, consistent with the environment prior to the pandemic. As a result, we plan to participate in seasonal promotional programs, mostly in our shooting sports category, as well as other promotional events with our retail partners in the second half of fiscal 2023.
As such, we expect gross margins in the second half of fiscal 2023 to be consistent with margins in the second half of fiscal 2022. With regard to OpEx, we expect Q3 OpEx spending to be higher than Q2 due to additional selling and marketing costs relating to annual industry trade shows, such as Shot Show and ATA in January, as well as the advertising spend, I discussed earlier. Lastly, we expect Q4 OpEx spend will be slightly higher than Q1, mainly due to the higher sales volume. Going forward, we plan to continue identifying areas for cost containment, where it makes sense in the short term, while being mindful of long-term investments needed to grow the business and execute on our strategic objectives. With that, operator, let's open the call for questions from our analyst.
To continue reading the Q&A session, please click here