Smith & Wesson Brands, Inc. (NASDAQ:SWBI) Q3 2024 Earnings Call Transcript
Smith & Wesson Brands, Inc. (NASDAQ:SWBI) Q3 2024 Earnings Call Transcript March 7, 2024
Smith & Wesson Brands, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.1. Smith & Wesson Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Third Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded. At this time, I would turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about the 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 costs related to the move of our headquarters and certain of our operations to Tennessee 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 will turn the call over to Mark.
Mark Smith: Thank you, Kevin, and thanks, everyone, for joining us today. Our team delivered another strong quarter on both the top and bottom line in Q3. We believe we gained market share as our shipments outpaced the overall firearms market, reflecting the continuing robust demand for our best-in-class innovative new products and sustained momentum in our core product portfolio. On the bottom line, our persistent focus on cost discipline combined with increasing production rates and solid operational execution against key initiatives, including our Tennessee move, drove better-than-expected EPS of $0.17. In consistent with our commitment to return value to our stockholders, we continued to buy back shares during the quarter and paid out $5.5 million in dividends.
Top-line revenue was up just under 7% over last year, whereas shipments were up almost 11%. This reflected mixed factors stemming from strong reception to the launch of our second-generation entry-level pistol, the SD 2.0 and holiday promotional activity. By category, our long gun shipments doubled versus the year-ago period, and our handgun shipments were largely flat, down less than 4%, while the overall market, as measured by NICS checks, was up only 5% in long guns and down 4% in handguns. This highlights the power of our new products, which made up over 20% of our sales in the quarter, led by the FPC, which continues to be the top-selling product for many of our channel partners. As we've covered many times before, an important factor in comparing our shipments to NICS is fluctuating inventory levels at retailers and distributors.
Notably, channel inventory levels during the quarter remained healthy, with unit inventories at our distributor, strategic retail partners actually decreasing, by about 12% throughout the quarter. This indicates strong consumer demand, and pull-through at the retail counter for Smith & Wesson products and reinforces our belief that, we gain market share in the quarter. And in spite of the mixed factors I mentioned earlier, ASPs also remained healthy during the quarter, and continued to trend in line with our expectations. As expected, and as Deana covered last quarter, handgun ASPs declined by about 6% versus a year ago, whereas long gun ASPs beat expectations, by improving by about 7%. These strong ASPs, combined with excellent operational execution, by our team in getting our new facility up and running, led to better-than-anticipated profitability, as we were able to ramp production in the quarter, and improve manufacturing absorption.
This drove gross margins of nearly 29%, in spite of some continuing duplicate costs, which will abate as we enter FY '25. Looking forward, with our internal inventory levels now at, or below target in almost every category, we are continuing to increase production in Q4, to meet demand. As such, we fully expect our fourth quarter gross margins, to further improve, and return to levels consistent, with our long-term model of 32% to 42%. We also anticipate these levels, to be sustained into FY '25, as the final remaining duplicate costs, from the Tennessee move, are phased out and we begin to fully realize the efficiency benefits, of our new, state-of-the-art facility. Finally, we attended SHOT Show in late January, and used this industry event, to announce a significant new product that I'd like to spend a few more minutes on.
Our new 1854 lever-action rifle, has the potential to be a major contributor, to growth for many years to come. We view it as a platform product for Smith & Wesson, and believe we are well positioned to execute on this vision, based on the rich heritage of our brand, loyal consumer base, and successful track record of building out other platform products, such as our M&P line. Lever-action has been a part of Smith & Wesson's DNA since the beginning. We owned the original lever gun patent that was granted 170 years ago in 1854 that, led to the development of the Volcanic, one of the first repeating firearms. This is why we named our lever-action rifle the 1854. As a category, we view lever-action today as very underserved. And believe that our heritage and authenticity give us a lot of brand permission, to look broadly at potential opportunities that intersect with lever-action, with new calibers, finishes, purpose-built extensions, and an entry into the broader hunting category.
The 1854 represents a significant white space opportunity for Smith & Wesson, and we're very excited, to put our award-winning new product development team, to work in expanding into this new area. In summary, we are very pleased with our third quarter results, and are looking forward to a strong finish to FY '24. We continue to expect the firearms market, to experience healthy demand throughout the 2024 election cycle, and with our deep pipeline and 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 to continue to delivering value for our stockholders. With that, I'll turn the call over to Deana to cover the financials.
Deana McPherson: Thanks, Mark. Net sales for our third quarter of $137.5 million were $8.4 million or 6.5% above the prior year comparable quarter. During the quarter, inventory in the distribution channel declined from October levels, in terms of actual units and weeks of inventory, indicating strong sell-through of our products at retail. As expected, ASPs declined from Q2 levels, due to promotions and a shift in mix and handguns, to lower priced products, while ASPs in long guns increased, due to new product introductions. Gross margin of 28.7% was better than anticipated at 3.3% above Q2 and 3.7% lower, than the comparable quarter last year. The decline from last year was due to the impact of operating the new Tennessee facility, combined with inefficiencies associated with the start-up of that facility, and inflationary factors in both material and labor, partially offset by higher sales volume, lower spend on the relocation, and the January 1, price increase.
It should be noted that, while the Tennessee facility is increasing costs at the margin level, some of this is due to geography on the P&L, as we are no longer operating the Missouri facility, which was entirely recorded in operating expenses. In addition, the cost savings associated with operating the Tennessee facility, have not yet been fully realized, as we are ramping up our operations, and have not begun some of the automation that will improve efficiencies. We also have yet to realize the savings associated with closing our Connecticut facility and the off-site Massachusetts 3PL location. Operating expenses of $28.1 million for our third quarter, were $438,000 higher than the prior year comparable quarter, primarily due to an increase in depreciation, on the new facility and legal costs.
Cash generated by operations, for the third quarter, was $25.4 million, $18.5 million better than last year, primarily due to receivables remaining relatively flat to last quarter, while inventory declined by $9.8 million. With capital spending of $18.2 million, most of which was related to our relocation, we generated $7.2 million in net free cash during the quarter. We continued to opportunistically repurchase shares, under our $50 million authorization. During the quarter, we repurchased approximately 71,000 shares at an average price of $12.88, for a total of $916,000. We paid $5.5 million in dividends, and ended the quarter with $47.4 million in cash and $65 million in borrowings on our line of credit. Subsequent to quarter end, we have already repaid $15 million on this line, and we continue to expect to be in a position to fully repay our line, before the end of the calendar year.
Finally, our Board has authorized our $0.12 quarterly dividend, to be paid to stockholders of record on March 21st, with payment to be made on April 4. Looking forward to our fourth quarter, as Mark noted earlier, demand has been good and channel inventory for our products is healthy, particularly when compared to last year when it was about 50,000 units higher. As is typical due to the seasonality in our industry, we expect our fiscal fourth quarter to be the highest quarter in terms of revenue. From Q3 to Q4 last year, sales grew 12.2%, with inventory in the channel declining. During our current Q4, we expect channel inventory to remain at the current low levels and demand to be stable. Therefore, we expect Q4 sales to grow, at a slightly higher rate sequentially than last year, in terms of both units and dollars.
Please note that we do expect ASPs, to increase slightly sequentially, due to mix in handguns and new products in long guns. As noted last quarter, we expect margins to rebound in the fourth quarter, with operating days increasing from 58 days in our third quarter to 64 days, and production levels increasing as the Tennessee facility begins to exit the start-up phase of operation. This means that we expect margin percentage for our fourth quarter to enter the low 30s. Operating expenses will likely be 5% to 7% higher than in Q3, with an increase in profit sharing driving the higher amount. As a reminder, our profit sharing paid to our employees each year represents, the lower of 15% of total wages, or 15% of operating profit. Because the fourth quarter is our highest profitability quarter, profit sharing will be higher, than in any other quarter.
Our effective tax rate is expected to be approximately 24%. Finally, we continue to expect to have a debt-free balance sheet, by the end of the calendar year, if not sooner. With less than $10 million left to spend on the relocation, capital investment for this project is winding down. 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 we please open the call to questions from our analysts?
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