Smith & Wesson Brands, Inc.

day everyone and welcome to Smith & Wesson Brands Inc fourth quarter and full 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 Smith & Wesson's general counsel who will give us some information about today's call thank you and good afternoon our comments today may contain forward-looking statements our use of the words anticipate project and

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 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. Fourth quarter proved more difficult than we anticipated, largely due to macroeconomic and industry trends. While the combination of lower sales and production volumes, along with mixed factors pressured margins, we were able to partially offset the bottom-line impact through disciplined cost management by leveraging our flexible manufacturing model. New products remain an area of strength. accounting for 44% of sales in the fourth quarter, and we will continue to lean into innovation as a point of competitive differentiation and to drive growth. Looking at market share for the fourth quarter, overall adjusted NICs was down 5.4%, with monthly year-over-year declines improving sequentially throughout the period, compared to an 8.4% decline in our shipments into the channel. On a category basis, similar to Q3, we believe we gained share in handguns as NYX was down 3.4% versus a 2.1% decline in our shipments into the sporting goods channel, driven by the strong performance of our innovative new products. In long guns, NYX was down 7.1% in Q4, while our shipments into the sporting goods channel declined 31.7% due to difficult comparisons. specifically softness in the MSR market and our lever action offering benefiting from last year's tailwinds associated with its launch as a new product. Average selling prices trended lower on a year-over-year basis, but were slightly higher sequentially, similar to what we experienced in Q3. Our overall ASPs in Q4 were down 4.5% versus a year ago, and continue to reflect mixed dynamics with higher ASPs in long guns being offset by lower ASPs in handguns. In long guns, our ASPs increased 11%, driven by higher price models like our lever action rifles. In handguns, our ASPs declined 6.3%, reflecting mixed shifts related to strong demand for our lower price products. Even in a tough market environment, we expect that our iconic brand should enable us to maintain strong ASPs as we move through fiscal 2026. Looking now at the overall firearms market, we continue to see consumers generally being cautious due to macroeconomic factors pressuring discretionary spending. While new product and lower price point offerings are still performing well, overall conditions suggest headwinds will likely persist in the near term. Despite these challenges, we remain well-positioned to succeed in this environment. Demand for firearms appears to be normal for the summer, based on feedback from our distributor and retail partners. Importantly, while channel inventory fluctuations obviously affect our shorter-term out-the-door shipments, our channel checks and internal data indicate we have continued to maintain our market share leadership position at the retail counter. Promotional activity across the industry has been consistent with expectations, and we've continued to use targeted efforts effectively to drive activity and manage inventory. Not surprisingly, inventory levels in the channel are being managed conservatively, and while distributor inventory was up about 5,000 units during the quarter, this represented only about eight weeks of supply. It's also worth noting that we are starting to see indications of smaller firearm manufacturers exiting the market. We view this as reflective of rational market behavior and something we are accustomed to seeing in our industry during a down cycle. And we may benefit from this dynamic. I'm happy to report that our balance sheet remains strong, and we continue to be disciplined in managing our business and allocating capital to drive sustainable, long-term value for stockholders. We are comfortable with internal inventory levels, which are very clean, and are proactively managing production schedules as needed. To that end, we are extending our normal summer shutdown by an extra week, which will help to better align inventory levels with demand as we enter the second quarter of fiscal 2026. As always, during a cyclical downturn, we will remain focused on additional cost control initiatives and driving sales through delivery against our robust new product pipeline, with several exciting new products slated for introduction later in Q1 and throughout the remainder of the fiscal year. As the normal seasonal activity picks up in the fall as we approach the hunting season, cash flow should build and hold steady through the balance of the fiscal year. We will continue to invest in innovation to help us to maintain our market share leadership position. In addition, we will continue to prioritize debt reduction along with paying our quarterly dividend. We remain well positioned for long-term success with a leading brand, rich legacy, and strong balance sheet. Before I hand the call over, and as always, I just want to thank our entire team of talented Smith & Wesson employees for their Tyler's 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 fourth quarter of $140.8 million were $18.4 million, or 11.6% below the prior year comparable quarter, with new products making up 43.9% of total revenue for the quarter. We believe that firearm market conditions have been negatively impacted by persistent inflation, high interest rates, and uncertainty caused by tariff concerns. That being said, the success of our new products has enabled us to maintain a leadership position in the categories of the firearms market in which we compete. Gross margin of 28.8%, with 6.7 percentage points below the prior year comparable quarter, reflecting lower overall production volume, the impact of lower-priced, higher-volume products such as the Bodyguard 380 and SD9, higher material content in certain of our newer long guns, and increased promotions, partially offset by lower spending and lower inventory reserves. Operating expenses of $27.4 million for our fourth quarter were $2.1 million lower than the prior year comparable quarter due to reduced profit-related compensation costs, including profit-sharing, and lower insurance costs, partially offset by accrued severance and relocation related to the retirement and replacement of our vice president of sales, and increased marketing costs related to the timing of industry shows and special promotions. Net income of $8.6 million in the fourth quarter was $18.7 million less than the prior year comparable quarter due in part to a $6.5 million sale of intangible assets in the prior year. The remaining $12.2 million reduction in net income was due to a combination of lower net sales and gross margin, partially offset by reduced profit-related compensation costs. Gap earnings per share of 19 cents was below the prior year comparable quarter of 59 cents, while non-gap earnings per share of 20 cents was also down from the 48 cents in Q4 fiscal 2024. Turning to cash flows, During the quarter, we generated $40.8 million in cash from operations and spent $7.3 million on capital projects, resulting in net free cash of $33.5 million. We paid $5.7 million in dividends, repaid $30 million on a revolving line of credit, and ended the quarter with $25.2 million in cash and $80 million in borrowings on our line. At the end of fiscal 2025, we had $92.3 million of loan availability. During our full fiscal year, we used $7.2 million in cash from operations and spent $21.6 million on capital projects, resulting in net free cash used of $28.8 million. The net cash usage was due primarily to a $29.3 million increase in inventory due to the softening of the market during the first half of our fiscal year. Our board has authorized our normal quarterly dividend of 13 cents we've paid to stockholders of record on July 7th with payment to be made on July 21st. Looking forward to fiscal 2026, we currently expect demand for firearms in fiscal 2026 to be similar to what we saw in fiscal 2025, remaining subject to economic headwinds such as inflation and the impact of tariff-related cost increases. Until such time as these issues begin to resolve, further speculation on full-year results will not be discussed. With near-term demand remaining soft, we believe our first quarter could be approximately 10% lower than last year, with margins also lower due to promotions and increased costs due to tariffs on raw materials that are capacity constrained in the United States, such as steel. With regard to pricing and ASPs, we expect our first quarter to be sequentially lower in the 5% to 10% range, particularly impacting long guns due to mix with handguns on the lower end due to promotions. We expect margins will remain under pressure due to low volume and cost increases, resulting in the loss of a few percentage points from last year. Operating expenses for the first quarter are expected to remain roughly flat to last year. Finally, our effective tax rate is expected to be approximately 30%. To that operator, can we please open the call to questions from our analysts?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing these star keys. One moment please while we poll for questions. Our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hey, guys. A handful of questions from me. First off, just digging more on the industry. Mark, you called out and you've been looking at some of the smaller competitors that it looks like are going away here. I'm curious how much of a near-term headwind is this presents as maybe we see some inventory that goes out at low prices and then maybe longer-term opportunities from this?

Yeah, I think some of these smaller players are going out. I don't see them. They were smaller players. I don't see a marked influx of of liquidation inventory into the channel that's going to have any really meaningful impact on us or any of the larger players that, you know, that have been around. So I think, you know, we view that more as, you know, frankly for us as, you know, I think, you know, you well know we've been around 170 years. We've, you know, we're very used to the cyclical environment of the industry and, you know, for us we view it as, you know, kind of a tailwind. Obviously that's market share that's available and, you know, we're the market share leader. You know, that's market share for us to take. So, you know, I don't think you think about it as there's going to be a flood of liquidated inventory coming in because, again, a lot of these guys are smaller players that, frankly, probably didn't have the capital to make that investment in big chunks of inventory. Okay.

And just as we think about ASPs and pricing, if you can kind of frame that around the competitive market, what you're seeing from peers, and, you know, is there a – do you feel like there's a need to take more maybe across the board cuts or discounting to maintain share given the current macro environment?

Yeah, you know, we don't view – you know, we – We very much believe that our brand, as I kind of covered in the prepared remarks, our brand, we don't need to take pricing cuts. We're still seeing some nice volume, even on our core line. I think, as you well know, a lot of our success in this year from a unit share growth and market share, taking market share has been due to new product, and I think that's and an entry-level new product with the bodyguard being extremely successful. So we'll participate in that entry-level pricing category through new product introductions. I don't think we have to be looking at discounting on our core line. Now, on our core line, there is a trend out there that there's more value provided through bundling, et cetera, is driving maybe that decision at the counter to Do we buy brand X or brand Y? What else do I get with it? And we're definitely participating in that, and we'll continue to look for opportunities to increase the value that we're providing to that consumer when they purchase a Smith & Wesson firearm. Whether it be through promotions, we just ran a very successful promotion on an optic rebate, and we'll be looking for other opportunities, whether it's through promotions or just having it bundled in the box. And that allows us, Mark, to maintain those ASPs. Okay.

In the next question, just kind of similar, as we think about the demand being down and consumers kind of pulling back here with tariff and inflationary pressure, are you seeing this across the board or are you seeing it more so in lower price handguns? Is there anything to call out just in consumer behavior in where you've seen maybe a certain consumer really pull back more than others?

Yeah, I think we're still seeing a little bit of that. I think it was actually you that kind of said that barbell, where the two areas of the market that are continuing to perform well is the very high end and the entry level. So I think, as you can expect, that consumer that's willing to pay the high end of the value on the pricing hierarchy is probably less impacted. or has saved up that money and is going to spend it on a higher-end firearm. So that purchase is still happening, but definitely the mid to lower tier is definitely trending towards the lower tier. So, again, that's something that we've been very successful with with the bodyguard, and we'll continue to look for some new products coming up here in the next quarter and throughout the rest of fiscal 26 that will take advantage of that.

And the last one for me, and I can jump back in the queue, is just as we think about an extra week of shutdown in the summer, is that all hitting in the July quarter? And if so, I assume that that fits into some of the guidance or some of the numbers that you talked about around July quarter.

No, that'll actually be an extension of the shutdown. I think, as you know, our shutdown is You know, our normally scheduled shutdown is the last week of July and the first week of August, which is one week in Q1 and one week in Q2. We'll actually be extending a second week in Q2. So it will be a second week in the second quarter. And just point out that this is, you know, something that we've done before. It's something that, you know, is kind of in the playbook for, you know, when we go through a sickle downturn. And, you know, so just help us to, you know, more appropriately align inventories as we come into Q2.

Okay. That's helpful. Thank you.

Thank you. Again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad and join the queue. Our next question comes from the line of Steve Dyer with Craig Hallam. Please proceed with your question.

Hey, thanks. This is Matthew Robb on for Steve. I just want to touch on tariffs for a minute. You guys talked about it on the call a little bit earlier. Just walk through the exposure there, particularly for steel, as you called out, and then any other commodities that may be impactful. And if you're able to quantify the impact to gross margin, that would be great as well. Thanks.

Sure. Hey, Matthew. Yeah, I mean, the tariffs, obviously it's a pretty volatile environment right now and not a whole lot of... a little uncertainty on how that's all going to end up fleshing out. So we've dialed in everything that we know into the numbers and into some of the commentary and color that Dina gave. All that's dialed into that, so that's as much as we're going to provide at this point. I mean, the impact for us is going to be perhaps less pronounced than it will be for some of our competition. Just to remind everybody that we are 100% American competition, made in a lot of our source, even our supply chain is U.S.-based. That said, we do still have some exposure from foreign source on some of our components and some of our raw materials. So the impact to us could be, obviously, as everybody kind of comes back on shore, obviously that drives up demand to the U.S. suppliers, and there's a high likelihood it will also drive up pricing on U.S. suppliers. So I guess we're closely monitoring it day by day and watching the developments as they come, and we're continuing to look for opportunities to offset those, pass them through as we can. Obviously, it's a tough environment such as this, but we do know that from the competitive landscape, there's several major competitors who are going to be passing through some of those costs. We'll continue to monitor that and look for opportunity to pass through, and then obviously we're looking for cost control initiatives. We have that state-of-the-art facility here in Tennessee that's up and running and very, very pleased with, and now we'll turn to making some investments back into our other facilities in Massachusetts and in Maine to look for further cost efficiencies there. We'll continue to monitor it and do our best to offset, but it's kind of, as you know, and everybody is facing right now, it's kind of a volatile market, just monitor it day by day.

Yep, yep, okay. And then secondly, on inventory, how should we think about the cadence of inventory reduction through the year? You mentioned that you're comfortable with inventory levels where they're at. Is there any sort of targeted stocking level that you have in mind for year end?

Yeah, I think you can expect that we'll have a significant inventory reduction throughout this year. As you saw in the financials, it was actually an inventory build in the fiscal year we just closed. This year we're expecting a significant inventory reduction, and obviously that will come with an AP reduction as well as you're looking at the balance sheet. So Q1, though, is our usually, you know, as we go through the summer, we talked about it many times before, we level load our plant. So, you know, Q1 being always the, you know, In a normal year, being the softest quarter, there will be an inventory build in Q1, and then it'll come down throughout the balance of the fiscal year as we sell that off through the busy period in the hunting season.

Okay, that's great. Thanks, guys. Appreciate it.

Thank you. Again, as a reminder, if anyone has any questions, you may press star 1 to join the queue and ask a question. Our next question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hey, guys. Just one quick follow-up as we think about the balance sheet. You know, in the past, you guys have talked about kind of debt repayment working through this year. I know you're not really giving guidance for the year, but any thoughts around kind of the balance sheet and ability to pay down debt through this year?

Yeah, we will give a little color there. I think you can expect very healthy cash generation in this year. As I just mentioned, we're going to be in an inventory reduction mode throughout the year, so that will be a nice conversion back to cash. And then you should expect also a significant reduction in the debt balance. We'll be using that cash to pay back down that debt and obviously reduce that debt service cost. Okay. Thank you.

Yep.

Thank you. And with one more reminder, pressing star 1 will join you into the queue. And we have reached the end of the question and answer session. Therefore, I'll now turn the call back over to Mark Smith for closing remarks.

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

Thank you, and ladies and gentlemen, this does conclude today's conference. You may disconnect your line at this time. We thank you for your participation. Have a great day.