American Outdoor Brands, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2023. The quarter is the company’s fiscal 2024 second quarter; comparative figures are for the same periods in 2022. Amounts below are in U.S. dollars unless stated otherwise. Financial statements are unaudited.
Business context
American Outdoor Brands designs, sources, markets, and sells outdoor lifestyle products and shooting sports accessories under owned and licensed brands. Products include hunting, fishing, camping, outdoor cooking, personal security, shooting accessories, and electro-optics. Most products are made by third-party manufacturers, primarily in Asia; some electro-optics products are manufactured at the company’s Missouri facility. The company reports as one operating segment.
Financial performance
| Metric | Three months ended Oct. 31, 2023 | Three months ended Oct. 31, 2022 | Six months ended Oct. 31, 2023 | Six months ended Oct. 31, 2022 |
|---|---|---|---|---|
| Net sales | $57.9 million | $54.4 million | $101.4 million | $98.1 million |
| Gross profit / margin | $26.5 million / 45.7% | $26.0 million / 47.7% | $46.2 million / 45.6% | $45.0 million / 45.9% |
| Operating income (loss) | ($22,000) | ($134,000) | ($4.1 million) | ($5.7 million) |
| Net income (loss) | $77,000 | $370,000 | ($4.0 million) | ($5.3 million) |
| Diluted EPS | $0.01 | $0.03 | ($0.31) | ($0.40) |
| Adjusted EBITDAS (non-GAAP) | $5.2 million | $6.4 million | $6.4 million | $7.8 million |
Quarterly sales increased 6.4%, but gross margin fell 200 basis points, primarily due to promotional discounts. Six-month sales rose 3.3%, with margin down 30 basis points. Operating expenses for the six-month period declined 0.8%; lower general and administrative costs partly offset higher selling, marketing, and distribution costs, including increased outbound freight. The quarter remained near operating break-even, while the six-month net loss narrowed year over year.
Sales mix and material changes
- For the quarter, outdoor lifestyle sales rose 14.3% to $34.6 million, while shooting sports sales declined 3.4% to $23.4 million. Six-month trends were similar: outdoor lifestyle increased 8.2%, while shooting sports declined 2.5%.
- Quarterly traditional-channel sales rose 8.7%; e-commerce sales rose 3.3%. For the six months, traditional channels increased 8.5%, while e-commerce declined 3.3%, partly reflecting reduced demand from a major e-commerce retailer.
- Management attributed traditional-channel growth to outdoor lifestyle demand, new hunting and rugged outdoor products, and retail sales of a brand previously sold only direct-to-consumer. New products accounted for 25.3% of quarterly sales and 23.5% of six-month sales.
- International sales increased 26.6% for the quarter and 15.3% for the six-month period, although domestic sales remained the larger share.
Cash, debt, and liquidity
- Cash and cash equivalents were $8.4 million at October 31, 2023, down from $22.0 million at April 30, 2023.
- Six-month operating cash flow was negative $3.2 million, compared with positive $6.2 million a year earlier. Working-capital use included a $13.6 million increase in receivables and a $9.4 million inventory build; accounts payable and accrued expenses provided partial offsets.
- Investing cash outflow was $1.6 million, including $0.8 million for patents and software and $1.0 million for property and equipment. Financing cash outflow was $8.8 million, including repayment of $5.0 million of borrowings and $3.8 million of share repurchases.
- No borrowings were outstanding on the $75 million revolving credit facility at October 31, 2023. Availability is subject to a borrowing-base calculation and covenants; the filing does not state a specific amount of borrowing availability.
- Current assets were $164.3 million and current liabilities were $34.0 million. Total liabilities were $57.7 million, including $24.6 million of operating lease liabilities.
- The company repurchased 425,527 shares for $3.8 million in the six months and had $9.5 million remaining under a new $10 million authorization expiring September 30, 2024.
Outlook, risks, and unusual items
- Management expects inventory at fiscal year-end April 30, 2024 to be below the October 31, 2023 balance. The inventory build was described as planned for seasonal demand and upcoming product launches.
- Fiscal 2024 capital expenditures are expected to be approximately $6 million to $7 million. Management expects to fund needs through operating cash flow, cash on hand, and available borrowings, but notes that financing may not be available on acceptable terms.
- Assignment of the Columbia facility lease is expected to take effect January 1, 2024, subject to conditions. The company would assume use of the full facility; estimated annual lease expense of $3.7 million would be $1.3 million above current sublease expense. Management expects savings from prior facility consolidation and distribution efficiencies to offset the increase. A $12.8 million increase in the right-of-use asset is expected upon effectiveness; the former parent would guarantee the lease.
- Key risks include consumer-demand weakness, competition and pricing pressure, customer concentration, inventory levels, supplier and freight disruption, product liability, tariffs, and regulatory or political changes affecting firearms-related products. The company cites potential port congestion and sourcing delays.
- The company is pursuing duty drawbacks related to China tariffs but accounts for any reimbursement as a gain contingency; no gain is recognized until resolved. The filing reports no material product-liability defense costs or settlements in the periods presented. Other ordinary-course litigation is discussed, but no clear quantified exposure is provided.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It disclosed no material changes to previously reported risk factors.
Important facts for investors to verify
- Reconcile the six-month loss figures: the financial statements report a $4.036 million net loss and diluted loss per share of $0.31, while the MD&A highlights describe a $3.9 million loss and $0.29 per diluted share.
- Monitor cash conversion and working capital, especially receivables and inventory, alongside management’s expectation that inventory will decline by fiscal year-end.
- Confirm the conditions and economics of the facility lease assignment, including whether expected operating savings offset the higher annual lease expense.
- Assess the effect of promotional discounting, freight costs, and the shift in sales mix on gross margins and adjusted EBITDAS.
- Track credit-facility availability and liquidity needs, as cash declined substantially and borrowing capacity is subject to borrowing-base and covenant terms.