American Outdoor Brands, Inc. quarterly report, Q3 FY2021

American Outdoor Brands, Inc. — Form 10-Q Summary

Reporting period: The filing covers the three and nine months ended January 31, 2021 (fiscal Q3 and first nine months of fiscal 2021), compared with the periods ended January 31, 2020. The financial statements are unaudited. On August 24, 2020, the company separated from Smith & Wesson Brands, Inc. (SWBI) and became an independent public company. Accordingly, fiscal 2021 results combine pre-separation carve-out results and post-separation standalone results; prior-period figures are carve-out results and may not be directly comparable.

Financial performance and position

Metric	Three months ended January 31	Nine months ended January 31
Net sales	$82.6 million, up 90.7%	$212.2 million, up 70.7%
Gross margin	45.2%, up 1.1 percentage points	46.3%, up 4.6 percentage points
Operating income (loss)	$10.2 million; prior period loss $1.8 million	$22.2 million; prior period loss $10.5 million
Net income (loss)	$8.0 million; diluted EPS $0.56	$17.2 million; diluted EPS $1.20
Adjusted EBITDAS (non-GAAP)	$15.8 million; prior period $3.4 million	$40.3 million; prior period $9.2 million
Cash from operating activities	Not provided as a quarterly figure	$17.1 million; prior period use of $0.7 million

At January 31, 2021, cash and cash equivalents were $45.5 million, versus $0.2 million at April 30, 2020. Current assets were $178.4 million and current liabilities $38.1 million. The company had no revolving-credit borrowings; the full $50 million facility was available, subject to its borrowing base. Total liabilities were $63.7 million, including $27.0 million of operating lease liabilities; the filing reports no outstanding debt borrowings.

Investing activities used $3.1 million in the nine-month period, including $2.6 million for property and equipment and $0.5 million for patents and software. Financing activities provided $31.3 million, including transfers from the former parent and its $25 million cash capitalization at separation. Receivables rose to $56.1 million and inventories to $73.7 million from April 30, reflecting higher sales and planned inventory purchases.

Changes versus the prior comparable periods

• Sales grew in both channels. Third-quarter e-commerce sales rose 129.0% to $36.5 million; traditional-channel sales rose 68.5% to $46.2 million. For the nine months, e-commerce sales increased 149.4% and traditional-channel sales 39.9%.
• Management attributed growth primarily to heightened consumer demand for self-protection and outdoor activities, online purchasing, retailer replenishment, new products, and pandemic-related shifts. The filing also cites the company’s logistics and e-commerce investments.
• Margin gains reflected favorable product mix and lower promotional spending, partly offset in Q3 by higher tariffs, discounted sales of slower-moving inventory, and increased labor and overhead. Nine-month margin improvement was partly offset by inventory write-downs, discounted inventory sales, and tariffs.
• Operating expenses increased 29.8% in Q3 and 21.8% for the nine months, but declined as a share of sales. Q3 selling, marketing, and distribution costs rose with freight, commissions, advertising, and distribution labor. Standalone-company costs and stock compensation also affect comparisons after separation.
• Net interest income was lower because related-party notes receivable were settled at separation. The prior-year results included interest income from SWBI.

Outlook, commentary, and risks

• The company provided no specific sales or earnings guidance. It expects approximately $4.0 million of fiscal 2021 capital expenditures and expects inventory to increase in Q4 for new-product launches, higher-priced products, and supply-chain risk mitigation.
• Management expects to fund operating needs with operating cash flow, cash balances, and the credit facility, while continuing to invest in brands, product development, talent, and potential growth opportunities. It cautions that standalone costs may differ materially from historical allocations and affect profitability and cash flow.
• Risks include COVID-19-related sourcing, manufacturing, shipping, and retailer disruption; cost or availability pressures for products and materials; demand forecasting and excess inventory; reliance on large customers; competition and pricing pressure; firearms regulation; and the success of new products and e-commerce.
• One customer represented 28.4% of Q3 sales and 29.1% of nine-month sales. Two customers represented 31.4% and 11.2% of receivables at January 31, 2021.
• The company is involved from time to time in litigation and other claims, including product liability, intellectual property, commercial, employment, and governmental matters. The filing does not provide a quantified loss estimate or describe a specific material proceeding.
• The 18-year sublease for company offices and warehouse from SWBI resulted in a $24.5 million right-of-use asset and lease liability at commencement. Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether unusually strong pandemic-era demand and channel replenishment are sustainable, and how consumer demand and retailer inventory evolve.
• Whether gross-margin gains persist given tariffs, freight and labor costs, product mix, promotional activity, and discounted inventory sales.
• The cash-conversion impact of rising receivables and planned inventory builds, including whether inventory aligns with demand and new-product launches.
• The effect of recurring standalone public-company costs and separation-related spending on future profitability and operating cash flow.
• Customer concentration, supply-chain exposure, and the terms and covenant requirements of the secured $50 million revolving credit facility.