Why Vista Outdoor Has Upside
Vista Outdoor Inc. (NYSE:VSTO) could produce an improving stock price performance after its modest 2% gain over the past year.
The outdoor sporting goods company has changed its structure, is investing in its website and is releasing increasingly innovative new products.
Changing structure
The company reorganized its structure in third-quarter 2020 in order to improve its efficiency and productivity as well as increase its ability to quickly respond to changing consumer tastes.
As part of this initiative, Vista Outdoor's brands will become increasingly autonomous, enabling the company to be more innovative in terms of the range and types of products it sells. This could help to differentiate its products from those of its rivals, as well as strengthen its competitive position.
Vista Outdoor has also focused on implementing successful strategies across its different divisions and has gradually reduced its range of products so that it concentrates on its most profitable items. This could improve the company's financial performance in coming quarters.
In addition, the company reduced its debt by $55 million in the third quarter in order to reduce its leverage, which could lower its overall risk and lower the amount it spends each year on interest payments.
Innovation
Vista Outdoor has also unveiled a range of innovative products that could strengthen its market position. For example, it released a new golf speaker in the third quarter that, in addition to playing music, provides information such as the distance to the next hole. It can be paired with the user's mobile phone through an app, and may prove to be popular as smart speaker sales are expected to rise at an annualized rate of over 33% through 2025.
Additionally, the company brought 16 new websites online in 2019, boosting its e-commerce sales potential by increasing its exposure to online consumers. It also plans to migrate all of its brands to a new website structure, which could improve the company's efficiency and catalyze its bottom line.
Potential challenges
The company's financial performance in fiscal 2019 was negatively impacted by tariffs placed on imports from China. The phase one trade deal between the U.S. and China means no additional tariffs will be applied on imported goods, but existing tariffs are set to remain in place. They are likely to act as a drag on the company's profitability.
Vista reported in its third-quarter results that the spread of coronavirus could disrupt its supply of imported goods from China. The outbreak has caused factory closures across the country, though the company said in its third-quarter results that it was too early to determine the exact impact it is having on its finances.
In response, the company is working with the U.S. government to have its products removed from the various tariff lists. It is also seeking to shift its manufacturing locations to non-Chinese alternatives and is working closely with its suppliers in China to share the costs of tariffs.
It has successfully absorbed a large portion of the additional costs caused by tariffs through a range of efficiency measures and was able to increase its gross profit during fiscal 2019. This trend could continue and may help to offset the overall impact of tariffs on the future performance of the business.
Outlook
Market analysts forecast Vista Outdoor will return to profitability in fiscal 2020, followed by a 90% increase in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 50 may not be cheap, but its growth strategy could catalyze its stock price in the coming years.
Disclosure: The author has no position in any stocks mentioned.
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This article first appeared on GuruFocus.
