American Outdoor Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2020. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context and reporting period
American Outdoor Brands sells outdoor, hunting, fishing, camping, shooting, and personal security products through e-commerce and traditional retail channels. It completed its spin-off from Smith & Wesson Brands on August 24, 2020. Accordingly, fiscal 2021 results combine pre-separation carve-out reporting with post-separation standalone reporting; the prior-year periods are carve-out results. Management cautions that prior allocations and results may not represent the costs or performance of the independent company.
Key financial results
| Metric | Three months ended Oct. 31, 2020 | Three months ended Oct. 31, 2019 | Six months ended Oct. 31, 2020 | Six months ended Oct. 31, 2019 |
|---|---|---|---|---|
| Net sales | $79.1 | $47.7 | $129.6 | $81.0 |
| Gross profit | $37.1 | $19.1 | $60.8 | $32.8 |
| Gross margin | 46.9% | 40.0% | 46.9% | 40.5% |
| Operating income (loss) | $9.6 | $(1.5) | $12.0 | $(8.7) |
| Net income (loss) | $7.3 | $(0.4) | $9.1 | $(5.4) |
| Diluted earnings (loss) per share | $0.52 | $(0.03) | $0.65 | $(0.38) |
| Adjusted EBITDAS (non-GAAP) | $15.8 | $5.6 | $24.5 | $5.7 |
Quarterly sales increased 65.7%; six-month sales increased 60.0%. E-commerce sales rose 213.4% in the quarter and 166.5% for the six months; traditional-channel sales rose 34.3% and 27.3%, respectively. Domestic sales accounted for most of the increase. The filing attributes growth to strong consumer demand, greater online purchasing, outdoor recreation participation, and retailer replenishment. New products represented 14.6% of quarterly sales and 12.3% of six-month sales.
Operating cash flow was $4.5 million for the six months, versus cash use of $1.9 million a year earlier. Investing cash use was $2.1 million, primarily capital expenditures and patents/software; financing provided $31.3 million, including a $25.0 million contribution from the former parent. Cash increased to $33.9 million from $0.2 million at April 30. The cash-flow improvement was partly offset by working-capital investment, including a $23.0 million increase in receivables and $13.6 million increase in inventory.
At October 31, current assets were $168.3 million and current liabilities $40.7 million. The company had no borrowings on its $50.0 million secured revolving credit facility; the full amount was available under the borrowing-base calculation. The facility matures in five years, has a $15.0 million increase option, and includes minimum debt-service-coverage covenants. Operating lease liabilities totaled $27.4 million, including a new 18-year sublease with the former parent. No other funded debt balance is reported.
Material changes versus the prior comparable period
- Revenue growth and higher gross margins drove a swing from operating and net losses to profitability. Management cited stronger volume, favorable product/customer mix, lower promotional expense, and better fixed-cost absorption.
- Gross margin improved by 6.9 percentage points for the quarter and 6.4 points for the six-month period. Discounted inventory and tariff costs partly offset margin benefits.
- Operating expenses rose 33.8% in the quarter and 17.7% over six months, including higher selling, marketing, distribution, compensation, and e-commerce investment. Six-month general and administrative expense declined, partly due to lower amortization and facility consolidation savings.
- Related-party interest income fell as notes receivable from SWBI were settled at separation. Related-party sales also declined; the 2020 results include only pre-separation related-party activity.
Outlook, risks, contingencies, and unusual items
- No quantitative revenue or earnings guidance is provided. Management expects to invest in brands, product development, talent, e-commerce, and potential growth opportunities. It expects inventory to increase or remain flat in the third and fourth fiscal quarters to support anticipated demand and product introductions.
- Management warns that standalone public-company costs may differ materially from historical allocations and could affect profitability and operating cash flows. Some transitional services continue under agreements with SWBI.
- COVID-19-related risks include renewed supply-chain or manufacturing disruption, import restrictions, and changes in consumer demand. Other risks include tariffs and input costs, demand forecasting, customer concentration, retailer private-label strategies, competition, and product liability or recalls.
- One customer represented 23.9% of quarterly sales and 29.5% of six-month sales; it also represented 33.9% of accounts receivable at quarter-end.
- The company is involved in ordinary-course litigation, including potential product liability, intellectual property, commercial, employment, and governmental matters. The filing does not provide a clear estimate of potential loss; management says it intends to defend claims and believes defense-cost accruals are adequate.
- Unusual transition-related items include costs to establish standalone functions and systems. Adjusted EBITDAS excludes transition costs, stock compensation, taxes, depreciation and amortization, interest, and certain other items; it is a non-GAAP measure and may not be comparable across companies.
Important facts for investors to verify
- Whether exceptional demand and e-commerce growth persist, and how much reflects pandemic-related or seasonal factors.
- Whether gross-margin gains continue after promotional, tariff, and discounted-inventory effects.
- The impact of standalone operating costs and the eventual end of transition services from SWBI.
- Customer concentration, receivable collections, inventory levels, and the effect of the large retailer’s private-label strategy.
- Availability under the revolver, compliance with its covenants, and obligations under the long-term lease arrangements.
- Potential litigation exposure and any material developments in supply-chain, tariff, or pandemic-related risks.