Smith & Wesson Brands, Inc.

Good day, everyone, and welcome to the Smith & Wesson Brands, Inc. Third Quarter Fiscal 2025 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call. Please go ahead.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results. Our non-GAAP financial results exclude proceeds from a sale of land, relocation expense, and other costs. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS, and any reference to EBITDA is to adjusted EBITDAs. Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period. We believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our president and CEO, and Dena McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. Our top line revenue for the third quarter came in slightly below our target range. However, lower operating expenses and leveraging of our flexible manufacturing model, which is designed to ensure solid profitability regardless of demand conditions, allowed us to deliver on EPS and EBITS expectations. Our new products continue to perform very well, and we believe we gained share in those categories, with products introduced within the past year accounting for over 41% of our sales in the quarter. Innovation continues to be a core focus, with several exciting new products expected to be introduced during the final quarter of FY25 and throughout next year, and we expect to continue this strong momentum going forward. Looking at market share for the third quarter, adjusted NICs was down 4.5% as two months of year-over-year declines were followed by a small increase in January, while our shipments into the channel declined by 7.7% in the period. Breaking those numbers down, we believe we gained share in handguns, with overall handgun nicks down 4.1% in Q3, while our shipments into the sporting goods channel were only down 3%, driven by strong demand for the new Bodyguard 2.0. In long guns, nicks was down 3.9% in Q3, while our shipments declined 26.7%, due largely to outperformance in the prior year period of newly introduced products, specifically our FPC rifles. Additionally, the overall market for long guns in recent months has been driven by the seasonal hunting category, which currently only accounts for a small portion of our overall sales. While the introduction of our lever action rifle has been extremely positive and is helping with this dynamic, our product offerings in the category are still narrow and we expect this momentum to grow as we build out the line. It is also important to note that on a two-year basis, our Q3 long gone unit sales grew at a compounded annual rate of nearly 20%, well ahead of next. In our view, this provides a much better illustration of the momentum we have achieved and highlights the true long-term market share successes of our innovation strategy. Average selling prices, as expected, trended lower in Q3, with overall ASPs moderating to a 3.1% decline versus the prior year period. Mix was the primary factor in driving our overall ASPs. In handguns, our ASPs declined 7.8%, again reflecting strong demand for the new Bodyguard 2.0, which is priced at retail around $400, combined with lower revolver sales. In long guns, our ASPs increased 17.2% in Q3, driven by strong demand for our higher-priced lever-action rifles. Turning now to the overall firearms environment, macroeconomic conditions continue to bifurcate the market, with pressure on consumers' discretionary spend narrowing demand and heavily skewing to new products or lower price points. Our new product pipeline positions us very well in these conditions, with the success of our Bodyguard 2.0 as a great example, a unique, innovative product at a compelling price point. And as I mentioned earlier, we expect that our slate of introductions scheduled over the coming months will continue this momentum. Additionally, and also as mentioned earlier, our flexible manufacturing model allows us to participate in targeted promotions for our core products with two very successful promotions conducted during the holiday season on tactical rifles and revolvers and a current promotion active on our core line of pistols. Our balance sheet remains strong and we continue to be disciplined in managing our business and allocating capital to drive value for stockholders. Internal inventory levels are slightly elevated due to lower than anticipated Q3 sales combined with normal seasonality as we prepared for our typically busy fourth quarter. Through our robust monthly sales and operations planning process, which aligns production levels to sales forecasts, we expect to continue adjusting manufacturing to drive lower internal inventories throughout Q4. Channel inventory at distributors is very clean, currently at under nine weeks. Given these factors, we expect strong cash flows during Q4, and consistent with our capital allocation strategy, we expect to continue paying down our line of debt, pay our quarterly dividend of 13 cents per share, which Gina will cover in more detail in a moment, and continue to reinvest in innovation and manufacturing efficiencies. I'll also note that during the third quarter, we repurchased another 220,000 shares of our stock. With these purchases through the first nine months of fiscal 2025, we lowered our share count by more than 1.5 million shares net of dilution. And during the past 12 months, we have returned more than $49 million of capital to our stockholders through our stock repurchase program and strong dividend. Looking further forward, we anticipate that the firearms market will remain steady at current demand levels. And with our industry-leading innovation pipeline, continued disciplined cost control, state-of-the-art facilities, flexible manufacturing model, strong balance sheet, and our capital allocation model of returning value to stockholders, we believe we are well-positioned for continued success. Before I hand the call over, and as always, I just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication in putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Dina to cover the financials.

Thanks, Mark. Net sales for our third quarter of $115.9 million were $21.6 million, or 15.7% below the prior year comparable quarter. As we noted on last quarter's call, we expected post-election consumer demand to be relatively soft for our third quarter given the election results and the impact of persistent inflation. While our new products continue to perform very well, we are seeing lower demand for our core product portfolio, which is negatively impacting both our top line and margins. During the quarter, inventory in the distribution channel dropped by over 15,000 units, while holding steady in terms of weeks outstanding. Handgun ASPs declined for the second consecutive quarter, reflecting the impact of lower priced products and promotions. ASP for long guns increased due to the mix of higher priced products, including the introduction of additional lever action calibers. Gross margin of 24.1% was 4.6% below the comparable quarter last year due to unfavorable fixed cost absorption from lower production volumes and higher promotional costs partially offset by lower labor costs. Operating expenses of $23.8 million for our third quarter were $4.3 million lower than the prior year comparable quarter due primarily to a $2.3 million gain on the sale of property in Missouri. Excluding this one-time sale, operating expenses were $2.1 million lower than the prior year quarter due to lower costs associated with relocation and lower profit-related compensation expenses, which were slightly offset by higher R&D costs associated with new product development and selling and marketing costs associated with promotional activities. We ended the quarter with net income of $1.7 million, or 4 cents per share. On a non-GAAP basis, income per share was 2 cents. Cash used in operations for the third quarter was $9.8 million, compared with $25.4 million of cash provided in the prior year comparable quarter due to a larger increase in net working capital in the current quarter, combined with lower net income. We spent $6.3 million on capital projects in the third quarter, compared with $18.2 million in the prior year comparable quarter, primarily due to lower investment in the current year related to the relocation. We expect our capital spending for the year to be between $20 and $25 million. During the quarter, we repurchased approximately 220,000 shares at an average price of $12.94 for a total of $2.8 million. We paid $5.7 million in dividends and ended the quarter with $26.7 million in cash and $110 million in borrowings on our line of credit. Subsequent to quarter end, we've repaid $10 million on our line of credit and expect to repay additional amounts during the remainder of the fourth quarter. Finally, our board has authorized our 13-cent quarterly dividend to be paid to stockholders of record on March 20th, with payment to be made on April 3rd. Looking forward, we continue to expect full-year revenue to be down 5% to 10% from fiscal 2024, which is consistent with what we said last quarter. However, based on the softer demand trends we've seen across the industry in recent months, we now anticipate revenue at the lower end of this range closer to a 10% decline. This would put our fourth quarter down from the prior year quarter in the 2% to 5% range. With lower production levels during Q4, given our desire to reduce inventory, we expect manufacturing absorption to be a factor, resulting in lower margins than we historically have seen in our busiest quarter. As a result, fourth quarter margins will likely be several percentage points lower than our prior year fourth quarter, leading full year margins to end a few percentage points lower as well. Channel inventories expect to remain stable, and we believe the distribution channel remains cautious and will continue to manage their inventory carefully. We expect operating expenses for our fourth quarter to be in line with the prior year comparable quarter, with investments in research and development, promotions, and marketing programs offsetting lower profit-related compensation costs. Our effective tax rate is expected to be approximately 28%. Turning to the balance sheet, we expect to reduce inventory slightly during our fourth quarter while generating enough profit to repay additional amounts on our line of credit over and above the $10 million that we repaid in February. We believe that our ending leverage will be well under two times, which puts us in a good position to continue to invest in our business. As a reminder, our capital allocation plan continues to be invest in our business, remain debt-free, and return cash to our stockholders. To that operator, can we please open the call to questions from our analysts?

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Please proceed.

Hi, guys. I apologize. I missed a little bit of the call, but I wanted to just check on a few things first. First, new product sales looked really good, but as we look at sales of kind of non-new products or legacy products, if you will, can you just walk through, do you feel like it's consumer weakness that's kind of hurting there, or is there competitive pressures? Walk us through kind of what you're seeing there.

Hey, Mark. Yeah, sure. I think a large part of that is, frankly, the outperformance a little bit in the near term of some of those new products. I think that Bodyguard 2.0 specifically on the pistol side is probably cannibalizing a little bit of our own line. So I think overall, as we covered in the remarks, the pistol side, category. We're gaining share there, but you're probably seeing a little bit outsized, obviously, impact from the bodyguard versus the core line. And there's probably a little bit of internal cannibalization as well as obviously cannibalizing the competitive products. So I think, and that said, as we covered, I think you can see from the next results in February and the inflation continues to you know, pressure that consumer discretionary spend, and so it is a pretty competitive market out there. So, you know, I mean, the new products were, you know, it kind of used to be, you know, just gravy on the top. Now it's maybe a little bit of cannibalization of our own and obviously cannibalization of the competitors as well. So, you know, I think that's really what you're seeing.

Okay. And you talk about competitive environment. Maybe just talk, if you will, about kind of the industry environment as you look at distributors, as you look at everybody kind of through the channel, how you feel like everybody's behaving and kind of the health of the industry today?

Yeah, I think, you know, on that front, Mark, it's pretty good. I mean, I think, you know, the distributors, our distributor inventory is right at about eight and a half weeks right now. You know, so we're very comfortable. It's right on target. You know, everybody's doing a good job of making sure they hold the whole line, but not getting out over their skis. And I think the dealers are in the same boat. So I think as that market moves, we're seeing that right away. We're not having that hangover effect of excess inventory in the channel. So I think we're pretty We're pretty comfortable that the market is going to remain steady at where it's at right now. We don't see any major demand catalysts coming up here. Obviously, some can be unforeseen, but the biggest thing for us right now, again, is just that if we can see that economy start to turn around, that discretionary spend availability start to go up, which we're optimistic on over the long term, then that's going to be a nice tailwind for us. And we should see that demand increase translate to demand on Smith & Wesson pretty quick because, again, the channel inventory is really good right now.

Okay. And the last one for me, just topic of the day and the last few days certainly seems to be tariffs. Can you talk about any exposure that you guys see? And obviously it's an evolving situation, but we would love to hear your thoughts on tariffs, on any exposure there. And then also just regulatory environment, any changes that you're seeing, whether in states or at the federal level. And if you wanted to comment at all, any thoughts around the Supreme Court case that was just heard the other day.

Sure. I'll start off with tariffs. So I think you're well aware that we're an American-made product. A lot of our supply chain is domestic products. And so, you know, we do have some supply that comes in from overseas and from foreign countries that would be impacted by the tariffs. All of that, you know, has been kind of dialed into our numbers and to the guidance and the direction that Dena gave. So it's not in any way, shape, or form going to be a material impact to our numbers, you know, the rest of this year and next year, Mark. On the regulatory environment, we're pleased to see some good movement there from the current administration on really more stability on what the regulatory environment is going to look like going forward, which is really, obviously, as any business is what we need is we just need stability. We operate, obviously, we're proud to operate within the within the bounds of the regulations and laws that govern our industry. We just need stability, and we're happy to see that that looks like, at least in the foreseeable future here, that we're going to get that. So we're pleased. And then on the Supreme Court case, I think we really don't discuss ongoing litigation. I'll just suffice it to say I know we've got a lot of news coverage. We were happy to have our day in court. and we're really looking forward to the decision that should be coming out in early summer.

Excellent. Thank you, guys.

The next question comes from the line of Steve Dyer with Craig Howell. Please proceed.

Hi, guys. This is Matthew Robb on for Steve. Just starting on ASPs. Nice performance there on the long guns. Sounds like it was the 1854 mix, which is good to see. How do you think about the Q4 ASPs? It sounds like handguns are maybe flattish in any outlook for the long gun category.

Yeah, I think on the handgun side, I think I covered a little bit of that in the prepared remarks, but I think you're going to kind of see more of the same in Q4 as you saw in Q3, our mixed handguns. Right now, on the long gun side, the proportionate amount of lever actions that we're selling versus the MP-15 and the shotgun line should really kind of remain the same throughout Q4. And then on the handgun side, again, we have a couple new products coming out, but it shouldn't materially change that number.

Okay, got it. And then if you're willing to comment, not looking for sort of specific guidance, but can you frame kind of 2026 for us? What are you looking to accomplish within the company? Is it new product intros? Are you focused on market share, taking margins? Any color there would be great.

Sure. Yeah, I mean, I think as we look forward into 2026, 26, you know, we're still early days, you know, we still got this year to close out, but, you know, obviously we are, you know, we're starting to look out into the next 12, 18 months. I think, you know, as I talked about earlier, it's, you know, we expect the market to remain steady, you know, and this is, you know, Remember, this is the environment. I think if you look at a NICS chart and, you know, just kind of put a stacked 20-year chart on it, you're going to see that the NICS results that you're seeing right now are kind of trending with, you know, right along with where they historically have been if you kind of go back, you know. 15, 20 years and look at 2019, 2020 even. So, you know, for us, that's, you know, we talk a lot about our flexible manufacturing model, but that's exactly what the flexible manufacturing model is designed to do is, you know, is to react to those upswings, but also remain very profitable, you know, when the market returns to normal as it, you know, as it has. So for us, you know, how do we continue to grow? I mean, I think we're expecting, you know, obviously always planning for growth. I think this year that, you know, that growth is going to be fairly modest, you know, lacking any demand, you know, major demand catalysts. And then how do you do that? Well, that's new product, right? I mean, and that's, I think we've proven, you know, we're multiple, multiple awards for innovation. You know, I think we're kind of viewed as a frontrunner there in the innovation category within the firearms industry. We're going to continue that, and not just on our core line, but also how do we expand into other white spaces within the firearms market.

Okay, that's great. Thanks, guys.

Thanks, Matt.

And the next question comes from the line of Rommel Dianarcia with Aegis Capital Corp. Please proceed.

Good afternoon. You know, great. Thank you. Can we just talk about the handgun category for a second? You know, for years now, there's been a shift right to a smaller frame concealed carry. And we've heard that there's been a little more of acceleration here in the last few quarters. Would you say that that's, you know, the consumer trading, not just the lower price point is helping accelerate that? Or would you say that's just more continued acceleration? move to kind of a smaller frame concealed carry, that category. Obviously, you're well represented there with products like the Bodyguard 2.0. I wonder if you could just chat about that. Thanks.

Sure. I think it's a little bit of both. You're right that there's been a big trend towards concealed carry, you know, those concealed carry firearms. And, you know, and obviously, you know, that's been a, you know, the success of the Bodyguard, as I talked about, was a little bit of, a combination of the fact that it was a great concealed carry product, but it's also at an entry-level price point for a premier brand like Smith & Wesson. So it kind of hits both of those, and I think really that's the sweet spot that's driving the success of that product. So directionally for the handgun market, I think, as I talked about, it's kind of bifurcating a little bit. You've got definitely that entry level, but... even within every one of those categories, it's kind of going towards the lower end, you know, the entry-level price point products. And then there's also, you know, we're also seeing some success with, you know, things like our metal M&Ps, which are at the higher end, but it's something, you know, something unique and something different. You've got to give that consumer a reason to get excited about the product, about the brand, right? So that innovation is still successful on the high end. It's just, you know, you've got to have something compelling for that consumer to get excited about. So... You know, it really kind of is bifurcating to the, you know, to the entry level and to new product. And we can get up on the higher up on the ASP chain. We just got to have something that's, you know, exciting. And, you know, we've obviously found some success there with the metal M&P. And, you know, we're going to continue to look for things like that.

Okay. And maybe my follow-up question on switching to the long gun side. Mark, I think you talked about in your preferred comments, potential future product launches in that kind of traditional hunting category. Could you just remind us again what the potential margin impact of that would be if you have a shift in long guns, perhaps slightly away from MSRs to those more traditional categories? Thanks.

Sure. Yeah, I mean, the 1854 has been very successful, and as I said in the remarks, we definitely expect and plan to continue to build that line out across the entire category, multiple calibers that we're not into yet. Some of the most popular ones are still in the works. As far as margin, we don't really give too much color and guidance on margin by product line. What I can tell you is that the margins of the 1854 is not materially different from our core line of rifles.

Okay. Thanks very much. That's very helpful.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll hand the call back to Mark Smith for closing remarks.

Thank you, Operator, and thank you, everybody, for joining us today and your interest in Smith & Wesson. We look forward to speaking with you all again next quarter.

This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.