American Outdoor Brands, Inc.

Good day, everyone, and welcome to American Outdoor Brands, Inc. Second Quarter Fiscal 2021 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, for some information about today's call.

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe, and other similar expressions is intended to identify those forward looking statements. Forward looking statements also include statements regarding our product development, focus, objectives, strategies, and vision, our strategic evolution, our market share and market demand for our products, market and inventory conditions related to our products and in our industry in general, and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at AOB.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments today. First, we referenced certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, transition costs, COVID-19 expenses, related party interest income, and the tax effect related to all of those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in our filings as well as today's earnings press release, which are posted on our websites. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today's call is Brian Murphy, President and CEO, and Andy Fulmer, Chief Financial Officer. And with that, I'll turn it over to Brian.

Thanks, Liz. I'm excited to join you on today's call and share what we believe are exceptional results for our second quarter. We believe our financial performance demonstrates the diversity and innovation of our brand portfolio as it continues to capture the attention of consumers. As a result, we deliver net sales growth of over 65% and our gross margins expanded by 690 basis points to nearly 47%. Based on our performance this quarter and our outlook for the second half, today we are raising our guidance for fiscal 2021. I want to especially thank our employees who helped us deliver outstanding results this quarter while positioning us for an exciting, groundbreaking first year as a public company. Their hard work and commitment to the health of their coworkers, combined with our award-winning products, made it possible for consumers to continue exploring their connection with the outdoors during these challenging times. To kick things off, I think it would be helpful to share with you some of the trends we're seeing across markets impacting our business. In general, we believe we're witnessing a new, higher foundational level of consumer participation in outdoor activities, responsible firearms ownership, and adjacent home-based hobbies that surround outdoor adventure. So what do I mean by that? Put simply, because of restrictions surrounding COVID-19, more people have been going outside. Data suggests that there's been a meaningful shift in the number of people engaging in outdoor activities, which we believe has driven a new, higher baseline, adding to a larger installed base of long-term participants when compared to 2019. We believe American Outdoor Brands, in particular, is uniquely positioned to benefit from this shift. Let me share some market information with you to further illustrate my point. First, camping participation has been on the rise in recent years. and saw further acceleration in 2020. According to a KOA study released in October, nearly 50% of campers surveyed said they went camping for the first time ever in 2020, or for the first time in recent years. In addition, a separate study by the Outdoor Industry Association in 2019 estimated that there were 42 million campers in the U.S., This, combined with the KOA survey outlining new camper trends in 2020, suggests that overall participation this year has been extraordinary compared to prior years. Further, KOA estimates that 82% of first-time campers have children in their household, which data suggests increases the likelihood that these new young entrants will be in the market for some time to come. Second, There is strong participation in firearms ownership and shooting sports, with a record number of new entrants this year. Background check data gathered by the FBI indicates that a record number of firearms have been purchased in calendar 2020, with background checks through November 30th numbering 19 million. The National Shooting Sports Foundation estimates that 40% of those checks represent individuals who purchased a firearm for the first time. suggesting about 8 million new consumers entered the market this year. This new and larger installed base of owners suggests strong future participation in shooting sports and the need for accessories. Third, hunting has also been on the rise this year, and many states across the U.S. have seen meaningful increases in the number of new hunters. A review of two recent Wall Street Journal articles indicates that hunting license sales are up more than 12% nationwide from last year, according to the National Shooting Sports Foundation. If the trend continues through the end of the year, they say, those licensed sales translate to one million more hunters this year than last. Michigan alone has seen a 67% year-over-year increase in new hunters through the end of November, with hunters under the age of 17 increasing nearly 100% during the same period. The introduction of new hunters is critical to the long-term growth and participation of hunting. Lastly, fishing has seen similar trends. According to the same Wall Street Journal article, the Recreational Boating and Fishing Foundation stated that there were 3 million more licenses sold nationwide this year than last, a 14% increase. In Louisiana alone, between March and July of this year, the Louisiana Department of Wildlife and Fisheries sold approximately 60% more basic fishing and saltwater licenses than for the same period in the prior year. In addition to creating a larger market for many of our brands, growth in hunting and fishing also has the benefit of generating more money for fish and wildlife agencies in support of wildlife management and sustainability. This, in turn, creates a more sustainable future for hunting and fishing in as participants return to these activities year after year. Whether measured by the record number of new firearm owners or by the extraordinary number of consumers who have taken their first camping trip this year, the data indicates to us that an outdoor renaissance is underway and that its effects may be long-lasting. Our four brand lanes, Defender, Marksman, Harvester, and Adventurer, positioned us well to capitalize on this increased participation in shooting sports, hunting, fishing, and camping, as well as address personal protection and home security needs. The sales momentum that began during our first quarter continued and remained steady throughout the second quarter. Net sales of over 79 million represented exceptional growth as we benefited from the activities I just outlined, combined with the normal seasonality, namely, the fall hunting and holiday seasons, which occur in our second quarter each year. We believe that sales growth across both our traditional and e-commerce channels in the quarter demonstrates that the investments we've made over time are paying off, and we continue to achieve our objective to place our brands wherever the consumer expects to find us, whether in a store or online. This strength is especially important in times like this, where consumer spending patterns are continually changing. In the second quarter, sales in our e-commerce channels grew over 213% compared to the prior year and included a notable increase in our direct-to-consumer sales. Net sales in our traditional channels grew as well, increasing by over 34% year-over-year. Turning to profitability, our adjusted EBITDAs performance for the quarter was also extremely strong. In addition to higher gross margins year over year, we delivered a greater percentage of profitability that fell to the bottom line, demonstrating, we believe, just how leverageable our business is, thanks to the unique structure of our brand lanes. I'm happy to report that during the quarter, we experienced growth across nearly all of our 20 brands and within each of the major activities we serve. In fact, nearly half of our brands experienced triple-digit sales growth in the quarter, Furthermore, of our top four selling products in the quarter, each came from one of our four brand lanes, demonstrating the diversity that we have built across our business. Our brand lanes provide us with what we believe is an ideal competitive advantage for developing exciting, on-trend, and highly innovative new products year after year that turn new consumers into lasting advocates as we take our brands from niche to known. In fact, it's not uncommon for us to launch over 300 new products annually. And as I've shared before, that process is rooted in our dock and unlock strategy. Once a brand is docked into one of four brand lanes, we can then begin to unlock a brand's true potential by leveraging the respective lane's resources, including brand marketing, product development, sourcing, and e-commerce. Our dock and unlock process is proprietary, was developed internally and we believe provides a meaningful moat for our brands as they grow. Our continued entry into new, larger, addressable markets utilizing this strategy continues to bear fruit as our brands progress along their transformation. Today I want to provide you with some examples, starting with a homegrown favorite, one where we believe that best growth is yet to come. In March of this year, we launched our newest brand, Meet Your Maker. This is a bold, fun, and contemporary brand that offers an innovative and affordable line of meat processing equipment, such as grinders, slicers, and dehydrators, sold direct to consumer at meetyourmaker.com. While the entire product line was conceived within our Harvester brand lane to address the meat processing needs of hunters, we are excited to share that these products are finding their way into home kitchens as well. Following the field of table trend and the desire of consumers to control every aspect of processing the food they harvest. Developed organically, completely in-house, and launched just nine months ago, Meet Your Maker has gone from literally non-existent to self-sufficient, quickly becoming a multi-million dollar brand in our portfolio, and it's just getting started. We believe we have several brands in-house that harbor the same exciting potential. In fact, Based on our research and consumer studies, we believe that most of our brands remain in their infancy and have yet to be fully explored. Specifically, this translates into three distinct priorities. First, expanding our brands by growing into new product categories. Second, entering new customer channels of distribution. And third, entering entirely new and larger addressable markets. We believe this strategy provides our brands with significant runway for long-term growth, and the Dock and Unlock strategy is designed to unleash that growth. Situated within our harvester brand lane is BOG, a brand with its origins in shooting sticks and rests used in hunting. That is well on its way to becoming a broader lifestyle hunting brand with versatile products that are engineered for the unknown. One of our newest product launches, which also enters us into the large game camera product category, demonstrates this evolution perfectly. For those of you who are unfamiliar with game cameras, these devices allow the user to monitor wildlife activity in a hunting area, and they represent a significant dollar investment for most hunters. Introduced in 2020, our Blood Moon game camera recently received a top-rated ranking from TrailCamPro.com. which is considered by many to be one of the leading reviewers of game camera performance and testing. Here's what they like, and I quote, excellent photos and videos, 20-plus months of battery life, and insanely fast detection capability, end quote. And we didn't just create a game camera for the sake of it. We built ours from the ground up to include a patent-pending removable viewing screen that allows the user to quickly adjust camera settings and flip through pictures on the fly without logging into their computer. Next up is an example from our Defender brand lane. Our LockDown brand began as a line of vault accessories, such as dehumidifying rods and vault organizers. Today, it is in the process of expanding beyond the vault with products that help consumers secure their lifestyle. Our new patent-pending LockDown puck recently received the Guns and Ammo Gun Tech of the Year Award for 2020. With built-in Wi-Fi, the puck pairs with a free logic app that allows the user to remotely monitor the humidity, temperature, and security status of any safe, cabinet, or other storage area. The puck allows the consumer to know that their firearms, jewelry, or other valuables are safe and secure from anywhere in the world. Lastly, In our adventurer lane, we are excited to include our UST brand, which provides another example of taking one of our brands from niche to known. UST has recently undergone a major brand relaunch. With its origins in camp accessories, such as lanterns and fire starters, we rebranded UST to expand into a broader offering that includes new, innovative, and higher ASP items geared around the camp lifestyle, such as tents, sleeping bags, and mattress pads. Let me highlight one of our especially exciting new products, the Monarch sleeping bag. The cocoon-like Monarch lends itself to a wide variety of environmental conditions with patent-pending wing sections that allow the user to transition from a 17-degree bag to a 37-degree bag. The wings can also be detached and used as a pillow. This fall, Backpacker.com listed our UST Monarch sleeping bag as the number one item on their list of the 27 best gifts for backpackers of 2020. These awards not only demonstrate the level of innovation that exists as a result of our brand-name structure, but they punctuate the very exciting path that these brands travel as they evolve from niche to known. And with that, I'll ask Andy to cover the financial results. Andy?

Thanks, Brian. I'm excited to share insights into what we believe are exceptional results for our Q2. We showed significant top-line growth, exceeded our own expectations with gross margins, and were able to leverage our fixed operating expenses to yield almost 20% adjusted EBITDA margins. Net sales for the quarter were $79.1 million, compared to $47.7 million in the prior year. an increase of approximately 66%. As Brian noted, almost half of our 20 brands experienced growth of over 100%, with nearly all brands showing some level of growth over last year. This performance was driven by the increased participation in outdoor activities, as well as our continued discipline with certain retailers to take a more balanced approach to their ongoing replenishment orders. as we've discussed on earlier calls. We believe this approach allows our shipments to be better aligned to underlying consumer demand at retail. Net sales in our e-commerce channels increased 213.4% over the prior year to $26.2 million. As a reminder, our e-commerce channels include our direct-to-consumer sales. They also include sales to retailer customers that do not traditionally operate a physical brick and mortar store, but instead generate most of their sales from consumer purchases on their retail websites. Sales in our traditional channels were $52.9 million, an increase of 34.3% over the prior year quarter. As Brian mentioned, we have made significant investments over time to ensure our brands are located where the consumer expects to find us. whether that is in a physical store, a retailer's website, or on our own branded online storefronts. We believe these results reflect our success in those efforts. Our Q2 gross margins were 46.9%, a 690 basis point increase from gross margins of 40% last year. We participated in some annual promotional programs in certain product categories as originally planned, and margins were unfavorably impacted by increased tariff costs and inventory reserves. All of that said, however, favorable product mix and the general lack of promotions on other products greatly offset these decreases and drove margins to levels that we haven't achieved since the introduction of tariffs. We have previously discussed our initiative to discount certain slower-moving inventory in order to convert that product to cash. We originally expected a portion of those sales to occur in our Q2, but due to shifts in timing, they'll now occur in the second half of the year. That initiative commenced in our current Q3, and so far, we have sold over $2 million of this slower-moving inventory with a goal of selling a total of $5 to $6 million across Q3 and Q4. When they occur, we expect these sales will yield minimal gross margins, and of course, we have already included that impact in our updated guidance. In the quarter, GAAP operating expenses were $27.5 million compared to $20.6 million in Q2 last year. The $6.9 million increase included $3.1 million of variable selling and distribution costs, about $740,000 from product development initiatives, over $600,000 from the build-out of our brand websites and the creation and distribution of marketing content, and $1.6 million from compensation-related expenses in G&A. Intangible asset amortization decreased approximately $700,000 from $4.7 million to $4 million. Consistent with Q1, our Q2 operating expenses were lower than planned, largely due to the impact of the pandemic, which obviously drove meaningful restrictions in travel and the elimination of most trade shows, including SHOT Show, where companies like ours launched the bulk of their new shooting sports and hunting-related products. In order to ensure that we keep our marketing momentum going, we plan to take those funds and redirect them into developing rich media content in support of our new product launches. Non-GAAP operating expenses in Q2 were $22.5 million compared to $15.3 million last year. Non-GAAP operating expenses exclude intangible amortization, stock compensation, and certain non-recurring expenses as they occur. For the second quarter, Gapped EPS was 52 cents as compared with an EPS loss of 3 cents last year. Our non-gapped EPS was 77 cents as compared to 20 cents in the year-ago quarter. These figures are based on our fully diluted share count of approximately 14 million shares. Adjusted EBITDAs came in at $15.8 million for a 19.9% EBITDAs margin compared to an 11.7% EBITDAs margin last year. The increase was driven by improvements in gross margin noted previously and what we believe is significant leverage of the fixed cost investments we have made in the business. Turning to the balance sheet and cash flow. On August 24th, we completed the spinoff and were capitalized with $25 million from our former parent company. We generated approximately $3.9 million in cash from operations during the quarter, and we had cash outflows of $1.1 million for capital expenditures and patent costs. We ended the quarter with a cash position of $33.9 million. Accounts receivable increased by approximately $16 million in the quarter, driven by the sequential increase in quarterly net sales of roughly $29 million. At the end of Q2, we successfully completed two initiatives that will help reduce our overall DSOs and should provide meaningful improvements in cash flow going forward. Inventory increased by approximately $4 million mainly due to our previously discussed investment to help mitigate potential pandemic-related supply chain risks, increased tariff costs that were capitalized, as well as new products arriving for launch in calendar 2021. Here I'd like to take a step back for a minute and talk about our long-term plans for inventory management and what you can expect to see. You'll recall Brian mentioned that we are focusing on higher ASP items in two of our brands. This initiative is actually taking place across many of our brands, and that higher ASP focus will increase our inventory values somewhat. In addition, as Brian noted, we launch a large number of new products each year, and our pipeline remains robust. Therefore, our inventory will reflect our preparation for those launches. We anticipate that new product timing and its velocity, along with our focus on higher ASP products, will combine to elevate our inventory values over time. While we anticipate this activity will be somewhat offset by sales of the slower-moving inventory I mentioned earlier, we believe it will still increase the inventory dollars on our balance sheet. That said, in total, we are actively managing our working capital turns remaining focused on maximizing our cash flow. At the end of Q2, we had no borrowings on our $50 million asset-based line of credit. As a reminder, this facility also provides an additional $15 million of availability under certain conditions. The combination of revolver capacity and the roughly $34 million of cash on our balance sheet gives us nearly $100 million of capital. We believe this level of resource prepares us adequately to support both our organic and inorganic initiatives, as we remain actively involved in looking for potential complementary acquisitions. Finally, we continue to expect approximately $4 million in total CapEx spending for the fiscal year, with a portion of that being one time in nature related to the spinoff. Now turning to our guidance. We are pleased to announce increases in our net sales, EPS, and adjusted EBITDAs guidance. Based on financial performance through Q2 and our expectations for continued strength in the second half of the year, we are now estimating full-year net sales in the range of $235 to $245 million, which would represent growth of roughly 40% to 46% year-over-year. With net sales in that range, we would expect full-year GAAP EPS in the range of $0.52 to $0.70 and non-GAAP EPS in the range of $1.49 to $1.67. We would also expect adjusted EBITDAs in the range of $34 to $36 million, which would represent growth of approximately 176% to 193% year over year. While our non-GAAP EPS guidance at the midpoint implies an increase of 45 cents in the second half of the year, you'll notice that our GAAP EPS is expected to decline. This is attributable to approximately $8 million of acquisition-related intangible asset amortization, as well as approximately $1.5 million in stock compensation that we anticipate we will record between Q3 and Q4. This effectively will take our GAAP EPS from its current $0.65 year-to-date to an estimated end-of-year midpoint of $0.61. Our Q2 tax rate of 24.7% includes discrete items related to the spinoff, and our guidance reflects a tax rate for the remainder of the year of approximately 27%. All of our estimates are based on our forecasted fully diluted share count of approximately 14.2 million shares. Brian?

Thank you, Andy. Calendar 2020 has delivered us a set of unprecedented circumstances. Among them is what we believe to be a new foundational level of participation in outdoor activities and firearms ownership. This healthy market has provided us with an opportunity to demonstrate how our unique brand lane structure combined with our dock and unlock strategy, allows us to expand our reach by maintaining a connection with the consumer and using that dialogue to fuel our innovative process. We believe our approach provides a truly unique and leverageable platform that will allow us to continue harnessing the power of our growing brand portfolio to drive our future growth and profitability. With that, operator, please open the call for questions from our analysts.

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from Mark Smith with Lake Street Capital Markets. Your line is now open.

Hi, guys. A couple questions for me here. Any categories or brands that were supply-constrained or overly supply-constrained during the quarter?

Hey, Mark. This is Brian. So, no, that's the short answer. Our supply chain was in good order this quarter, and we had no disruptions.

Okay. And then, you know, one thing that we've heard from some retailers in the space is strong out-of-season demand for certain products. For example, you know, this late fall, early winter fishing market. products doing really well. Can you talk about if you're kind of seeing these same trends, you know, in any categories like Bubba or camping as we kind of move into colder months?

Yeah, that's a great question. We, and I'm glad you asked that, we are, frankly, across the entire portfolio. I made mention that all four of our brand lanes were represented in our top four selling products. when we did that review prior to this call, and it was pretty evenly distributed. So certainly Bubba would fall into that same trend. So camping, some Arnoud sleeping bags, mattress pads, tents, the Bubba products, brands like Schrade, which is typically more of a summer brand, have done well even well into the fall.

Excellent. And then, you know, as we look at e-commerce and the growth that you've had there, can you guys walk through at all any of the impact that that had on gross profit margin or even on an EBITDA's margin basis?

Hi, Marcus, Andy. We can't really get into too much detail there. As Brian said in the prepared remarks, our direct-to-consumer was up. That was, again, a great result, and obviously those have higher margins. Outside of that, I can't really – get into too much detail.

Okay. And the last one for me, you guys talked a little bit about, you know, some new places, new addressable markets, you know, that you're really looking at. Can you give us any more insight into kind of what you're looking at and where these hot new categories you think maybe are?

Sure. Are you asking specifically about markets or some of the new product categories? Because we view the two... a little bit differently.

Why don't we talk about both of them then?

Okay, sure. So on the product side, so BOG was a good example of, you know, BOG, one of our hunting brands, definitely focused on the lifestyle side of hunting and going from those very specific products to begin with in shooting sticks and rests. to now getting into areas like game cameras, which I mentioned is a very large portion of the hunting purchases outside of the firearm itself. And also BOG has now gotten into ground blinds. We weren't there a year ago, but now getting into each of those different areas, they represent big categories in hunting and significant wallet share for those hunters. So, again, kind of progressing along where these brands have permission to play. And I can give you more examples, but that's a great one for, you know, how we're getting into some of these new product categories where our brands have permission to play. New addressable markets. So, you know, we talked about the lockdown puck. Getting into, you know, we say rethinking the vault is how we describe it internally. And so going from vault accessories, something very specific, for a specific use and we were a market share leader there inside the vault to now thinking outside of that and positioning lockdown as more of a techie, so high-tech, patent-pending technology with our logic system so that now it reaches outside of that traditional firearm owner and is accessible to other consumers who maybe want to secure something. Maybe it's their wine cellar. Maybe it's a humidor. something like that. So those are much bigger markets. Meat, another great example. Meat processing is estimated at $10 billion and obviously includes a wide array of different products. And you start getting into talking to markets like commercial and restaurants. We have a restaurant here in town in Columbia that uses our meat processing equipment. They love it so much. It's all commercial grade product. So Getting into some of those markets, some of our brands are being pulled more and more into those that we're finding, which was all part of our plan, and that speaks to the dock and unlock strategy.

Excellent. That's helpful. Thank you, guys. Yeah. Thanks, Mark.

Our next question comes from John Kernan with Cowan. Your line is now open.

Great. Annie, Brian, congrats on the momentum and the – Thanks, Thomas. upside on the quarter and for the year. I was just curious, can you walk us through what categories and brands in particular drove this material upside to your guidance relative to where it was three months ago on both the sales and really the EBITDA line?

Yeah. Hey, John, this is Brian. I would say There hasn't been a meaningful shift in our brand portfolios. If you look at the four brand lanes, Marksman, Defender, Harvester, and Adventurer, we haven't seen a significant shift outside of any seasonal changes. Obviously, in the fall, we tend to sell more hunting products. In the spring, we tend to sell more Bubba and UST going into the summer camping season. So outside of some of those seasonal trends, we really haven't seen a shift in our portfolio. Does that answer your question?

A bit. I mean, it sounds like it was pretty broad-based. There wasn't any one, you know, brand or category. What was seasonally strong was strong, and now as we look into spring, you expect that to kind of continue in the more seasonal spring and summer stuff. Yes.

Yes, that's correct. And, John, this is Andy. I can answer the EBITDA's question. So, When you look at, you know, you kind of take the guidance, the last guidance to this guidance, it implies almost a 38% contribution down to EBITDA. That really, as we talked about in the prepared remarks, that really goes to the leverageability of our platform. So, you know, our fixed costs were fixed, and you see that as revenues rise, we're able to really pull a lot of that down to the EBITDA line.

Yeah. And, John, maybe I'm just thinking more about your question. I think I have something here that may be more helpful. So if you think about the increase, let's say, in personal protection and 8 million, an estimated 8 million or so new firearm owners entering the market, that trend certainly impacts brands like Crimson Trace, which is all about aiming solutions and really helping, in particular, new buyers to as they enter the market. And then as they go to the range and practice firing that new firearm, brands like Caldwell, which is all about owning the range and helping them eliminate variables that make them miss, Caldwell, Tipton, Wheeler, Frankfurt, so gunsmithing tools, gun cleaning, all of those are part of that kind of phase two after that initial buyer purchases that firearm. And then we talked about the fishing, camping, hunting trends. So this fall, huge increase in hunting participation. So we certainly saw a bump from that with brands exactly like BOG and many others. So hopefully that gives a little bit more context to my original answer.

Yeah, that is helpful. It sounds like your firearms, hunting, fishing is really strong, and that really plays across your whole portfolio. Andy, maybe can you walk us through the puts and takes to gross margin and SG&A for the quarter, but also embedded in the guidance. You talked about the leverageability and the fixed cost leverage that you're generating now on this tremendous sales growth. So maybe just a little more detail and color, as much as you can give us on expectations for gross margin, SG&A, you know, in the back half.

Yeah, that's a great question, John. On the gross margin side during the quarter, as I said in the remarks, you know, we were pleased to see we participated in our annual promotional programs that we always do in certain product categories. But some of the other types of promotions, again, really weren't necessary, kind of dovetailing from Q1. So definitely favorable margins in Q2 with respect to that. The rest of the year, the way that I would kind of look at the rest of the year is – I would probably estimate, you know, we expect probably mid-40s as far as margin percentage, and that's really driven by what I said in the comments about the $5 million to $6 million of revenue on that slower-moving inventory that we expect kind of little to no margin on. So that has a pretty decent effect on gross margin percentage when you look at it like that. And then with respect to OPEX, I would say, you know, We expect Q2 to be kind of a peak level of OPEX, especially when you look at the variable selling and distribution costs that were related to the $79 million in revenue. And we also had a number of website costs from launches that we had in the quarter. So that'll drop a little bit going forward. But I think with that, hopefully you can kind of do the math based on our EPS and EBITDUS guidance.

Got it. That's helpful. Maybe one more final question from me, just What are you most excited about as we go into, you know, we change seasons here and we get into spring of next year? Just, you know, by brand and channel.

Yeah, this is Brian. Obviously, you know, for us, the adventurer lane hits its stride coming out of the winter season into the spring. And we've got some exciting new product launches planned for those brands in particular that you'll see in, I think should be well-received. Like I mentioned earlier in the call, we launch upwards of or more than 300 new products each year. So really beginning in January, I would say, through April and May, you're going to see a lot of new products coming out from all of our brands and should create quite a bit of excitement across the board. But, you know, UST is one that... I think very highly of, you know, we, again, went through a rebrand. We went from low ASP items to now much higher ASP items. Those products, tents, sleeping bags, mattress pads, have been very well received by our customer base and, in fact, have drawn a lot of interest there from certain large customers that we can report on more down the road. But that's That's where we're excited at. And then you've got brands like Meet Your Maker that is really appealing to a trend that transcends beyond just the hunting season and people's just personal interest in this field-to-table trend where they want to, again, control every aspect of preparing their own meat and then putting it on the grill. That's just they're becoming much more intimate in that process. So it's been really neat to watch, and I think our brands are well positioned.

That's great, guys. Thank you. Best of luck. Thanks. Thanks, John.

Our next question comes from Scott Stember with CL King. Your line is now open.

Good evening, guys. And, again, congrats on a great start to being a publicly traded company. Thanks, Scott. Thanks, Scott. You guys earlier talked about some new initiatives that you're really focusing on. One of them was new distribution areas. Can you maybe go a little bit more into that?

Sure. Scott, this is Brian. When I talk about new customer channels of distribution, we have brands such as Hooey Man. Hooey Man started out, again, this is also a good niche to known story, but Hooey Man started out primarily selling tree saws used for clearing shooting lanes for hunters. So they would go up in their stand and they want to make sure their shooting lane is clear of any branches. And that's where the brand started. But as part of our dock and unlock process, we saw Hooey Man more as a land management brand that could extend well beyond just tree saws. And so now we have, in the last year, we've come out with rakes, shovels, mallets, machetes, things like that that have a very distinct grip that has become pretty popular. We call it the H-grip. Well, that product, which would have been found traditionally in a sporting goods or sports specialty store, I should say, is now being pulled into new channels of distribution. So you can now find that brand in home and hardware type channels when a year ago you really wouldn't find them there, honestly. So areas like that where some of our brands are being pulled into those other sections. Wheeler is another great example. Wheeler was really known as a gunsmithing brand, but we're finding that consumers use that brand and use those products on their cars. fixing their cars, they use them on DIY projects in the home. And so more of those requests are finding their ways to our customers. And as a result, that's where those brands are beginning to pop up.

Got it. And just taking a step back, bigger picture, you talked about some of the new foundational layers within the market that should stick. But now with a vaccine coming around, could you just talk to that narrative of people being worried that with the vaccine coming out, you're going to see a whole bunch of people ditching their newly found outdoor activities. So, you know, essentially just talk about the stickiness that you see to what's happening here in the years to come.

Sure, sure. This is Brian again. I would say this is my perspective. You know, no one knows quite what's going to happen. I have looked at quite a few surveys, whether it's camping, fishing. Some of the industry associations out there have done a good job of trying to capture what portion of this is going to be sticky long-term. And it appears the overwhelming majority, at least the studies that I've looked at, show that people still intend to engage in these activities. And also, I believe... that there's already been a wallet shift. So if you look at some of the macro data out there and look at consumer spending just before COVID, and you can look at different parts of the U.S., so credit card and debit card spending, and there's a massive drop-off in kind of March-April timeframe, and then it begins to slowly come back up to really pre-COVID levels. It's pretty remarkable. And to me, that says that there has already been a wallet share shift of sorts, where some of those folks were spending that money on other areas of entertainment. Maybe it's going to a movie theater, going to sporting events. And obviously, there'll be some return to that once a vaccine is widely distributed. But people, at least, again, what we're seeing, intend to continue to now that they have this newfound activity that a lot of times they didn't have the time for before or to even try. And you look at camping, 50% of the people that they surveyed, KOA surveyed, said that they went camping for the first time ever or for the first time in recent years. So it's been a big shot in the arm for the industry. I know other public companies have said the same thing. And it just bodes well for the long-term viability. One last thing on this is just the youth. There was a statistic, I can't recall the source offhand, but essentially it polled adults who fish and asked them, you know, when did you start fishing before the age of 12? Ninety-one percent of the respondents said that they had started fishing before the age of 12. And so you can see there is a very sticky component to a lot of these activities that makes us very excited about the long-term growth in a new baseline.

Got it. And just a quick last question. In the back half of the year, is there anything you can give us as far as cadence between the two quarters? Should we assume, I guess, essentially evenly split across the board, whether it's revenues and margins? Anything you can give us?

Yes, Scott, this is Andy. What I would say is, you know, if you look at historically, the trends quarterly on revenue are relatively predictable. When you go, like, fiscal 18, 19, 20, you know, our peak is always in Q2, and then it kind of evens out in Q3 and 4. You might see, you know, we believe that Q3 will probably be a little higher than Q4. But, you know, you can kind of take a look at historical trends.

All right. That's very helpful. Thanks again, guys. Thanks, Scott. Thanks, Scott.

As a reminder, ladies and gentlemen, that is star, then one, if you'd like to ask a question at this time. Our next question comes from the line of James Hardiman with Wedbush. Your line is now open.

Oh, my apologies. I think I was in mute there. Thanks for taking my question. So a couple follow-ups on the guidance. Obviously, you put up an unbelievable number here in the second quarter, $79 million in terms of revenues. The back half guidance assumes a pretty big step down from there. You touched on this a little bit. How much of that is seasonality versus just conservatism, you know, hard to anticipate there? just how long this surge can last.

Yeah, James, this is Andy. That's a great question. When you take a look at Q1 and Q2 last year, those quarters were both down. Q1 was down almost 11%. Q2 was down almost 50%. So when you look at what we've done so far, and I don't want to take anything away from what we've done, but the comps were slightly easier. Probably the better comps, is to actually go back to fiscal 19. And if you go back to fiscal 19, those numbers in Q1, our current year numbers, 21 to 19, go 35% and 41%. So it starts to make sense as you look at our implied growth in the second half of the year is almost 28%. So that kind of gives you a little more perspective when you take a look at fiscal 19. Got it.

That's helpful. And then I wanted to dig in a little bit. I think it was a comment from you, Brian, when you were talking about some of the brand lanes and the idea that certain purchases would be maybe concurrent with a new firearm for people that are new to the sport versus follow-on. Can you dig into that a little bit? I'm curious how much of a ripple effect that there might be from all of these new customers that got into not only firearms, but maybe some of the other products, right? As you had that surge in demand, is there sort of a secondary effect from some of your brand lanes that we should be keeping in mind?

Sure. So I would say we'll start kind of in that pathway of, where the consumer walks into the store. And I would say there's kind of two, I'll start with Crimson Trace in this example. So Crimson Trace, we sell Crimson Trace directly to OEMs, folks like Smith & Wesson, who we have obviously a great relationship with, along with other OEMs. And now, so the Crimson Trace Red Dots, for example, are gaining a lot of momentum in the market And so we've seen an increase in demand from OEM partners. So when the customer goes into that store, there's a good chance there's a Crimson Trace red dot on that firearm to begin with, on that handgun. And if not, we're right there at the counter as well. So the dealer typically will try to get a sense for their comfort level and other things that they're interested in purchasing. But when it comes to aiming solutions, Crimson Trace really is really is the leader, in our opinion. And then from there, you know, there are other products that that consumer would look to buy, gun cases, you know, if they're looking to, and this is really very relevant for some of the new purchasers who tend to be a little bit more tech forward, a product like the puck. So, They're going to have to go home, store that firearm, and they want to know that it's going to be safe and secure and have constant connectivity to that. So we're able to sell them a product like that. And then also, just as I said, as they go along on this journey, so those are kind of some of the brands that tend to be closer to the purchase itself. But then as they go along and, again, go to the range when they are looking for ammo, and ammo obviously is still very much in shortage at many retailers, they may turn to things like reloading. So reloading is, for those on the call that don't know what that is, basically you're creating your own ammunition using different components. And so we sell, under our Frankfurt Arsenal brand, we sell different products and accessories that allow a user to essentially reload make their own ammunition safely. And so now they're able to make their own ammunition, go to the range, and use our Caldwell products when they get to the range, on and on and on. So that's kind of part of the process that we look at. And I think your other question, does that answer your question that I think your follow-up was around?

Let me just quickly ask. And so the idea is that Some of that, those follow-up brands that you spoke to that sort of post-purchase, do you think we're seeing the full brunt of that, or is that yet to come? And you're right. The second part of the question was, are there other sort of brand lanes that acted in a similar way to that, where there's sort of a, you know, accessorizing as opposed to, you know, some replacement that's years down the line? Sure.

Okay. So I would say... You know, the brands on the Marksman Defender side, certainly there is that pathway for the consumer from the point of purchase through to, you know, continuing to use those products. I think the timing of those is obviously the Defender, I would say the Defender brand lane is more closely aligned with that initial purchase. The Marksman lane is... If I had to put a best guess out there, we've seen data in different time periods, there's a little bit of a lag. So they typically get that firearm. They'll have a gun case that they'll walk out of the store with, a lockdown product that will help secure that firearm. And then if you can get time at the range, which maybe it's a month or two, they'll go to the range and then they'll see people wearing hearing protection and eye protection. They'll be like, oh, yeah, I suppose I should get some of that. And so that's when we make that sale typically. And they'll also see a field of green, a sea of green when they go to the range. And that means that a lot of people are using Caldwell shooting rests to help zero in their firearms. And then they'll go, oh, I should probably look into that. I suppose that would make me better at aiming and sighting my rifle or my handgun. So I think to put a bookend on the question, You know, we can see that anywhere from one month to, I would say, six months, and I think that's most of the sweet spot after that first firearm purchase. And then for the other brand lanes, you know, like Bubba, I'll just go Adventurer first. So like in Bubba, you know, people will be introduced to the brand typically through a fillet knife, you know, where they'll go out, fish come back to the dock and they'll need a means to fillet that fish. So Bubba, in my opinion, dominates the fillet knife industry. But we've taken that brand as part of this niche to known into a lifestyle fishing brand. And once they use that Bubba knife, it has a very distinct texture. We call it our Bubba Rubba. And it gets tackier as it gets wet. Well, we have that same texture on the other Bubba products. So If you're going to go out deep-sea fishing, and you can use a Bubba gaff above a net, which now we've done as part of expanding in some of these new product categories. So we see certain products like that really be the entryway into the broader brand portfolio, or sorry, the broader product portfolio within each of those brands. UST, another great example. They buy fire starters and lanterns, and they have a good experience with the brand. It's high quality. and now they start venturing into some of those other products like tents and sleeping bags or the other way around. You know, I saw a neighbor of mine this last summer. We were camping in our backyards at the same time with our kids, and I looked over, and, you know, they had a good – they had a UST tent, and they were curious about some of the other products that UST makes. So it's kind of across the board.

That's a lot of really good color. Appreciate it, Brian. Yeah, absolutely.

That concludes our question and answer session for today. I'd like to turn the call back to Mr. Murphy for closing remarks.

Thank you, Operator, and thank you, everyone, for joining us today. On behalf of all of us at American Outdoor Brands, we wish you all a very safe and healthy holiday season and a prosperous new year. We look forward to speaking with you again next quarter.

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