Over the last month, we have had the trifecta of bad news for firearms investors and in particular American Outdoor Brands Corporation (AOBC) shareholders who are waiting anxiously for the next earnings release.
Ruger (RGR), the closest competitor to AOBC reported horrible revenue and earnings declines, with revenues declining 35% year over year and 20% quarter over quarter. Its $.53 EPS was also down 49% year over year. You can read my analysis and our discussion of the earnings in my article, “Ruger’s Weak Results Foreshadow American Outdoor Brands’ Losses?”.
Shortly after Ruger’s results, we were treated to the adjusted NICS data from the FBI which also showed continued bad data which has only accelerated even in light of the worst gun massacre in history, the Las Vegas shooting. Adjusted NICS data for October declined 18% year over year. We discussed these numbers in my article, “October NICS Data – Gun Sales Failed The Test.”
Immediately after the NICS data release, we were treated to Vista Outdoor (VSTO) Q2 earnings report which put an underline and exclamation mark to the bad results. Overall, the company’s net revenues were down 14% year over year, and if we look at just the shooting sports division, sales were down over 18% year over year. More importantly, the company reported a GAAP loss of $2.01 per share on markdowns and further revised full-year guidance significantly lower. We discussed these results in the article “Vista Outdoor: Yeah, It Was Bad!”.
Will American Outdoor Brands defy gravity when it reports in approximately two weeks? Or will the results be best digested after a few early glasses of eggnog and some leftover Thanksgiving turkey? (A bottle of wine or a 6 pack of Octoberfest is just as appropriate).
Based on Ruger’s and Vista’s earnings results combined with the adjusted NICS data for August, September and October, I am now expecting revenues of around $115 million for the quarter. I initially had this number at $120 million, which I estimated immediately after the previous earnings call. My own projections on the less optimistic range are in the $100 million range although I would hate to think of what that would mean for the stock.
I arrived at $115 million by taking the previous quarter’s numbers and estimates given by management, further adjusting them to the declines in the adjusted NICS data, and offsetting this slightly for the hope that the new line of M&P 2.0 pistols is gaining traction. Without this adjustment, I was looking at just about $101 million. I can also round those numbers down when we discuss competitive threats of the newly launched fifth-generation Glock pistols and the continued rebates from peers.
Unfortunately, the Wall St. estimates are still calling for $141 million and then an increase for Q3 and Q4. The “Street” was completely wrong on the Q1 numbers because I believe it is refusing to actually talk to gun people and instead focus on its Excel spreadsheets and 2016 results.
The Estimize community consensus is even slightly higher at $143 million. I queue this up to more “hope” rather than realistic expectations.
Keep in mind though, for the previous 20 quarters or so, AOBC has either BEAT or met estimates. The previous quarter’s flop was atypical. I still believe many analysts are hoping that the rules of gravity do not apply to AOBC and it will be back to beating sandbagged results. Why sandbag? Perhaps some executive compensation being based on it? Who knows.
On the earnings per share basis, I estimate a best-case scenario for a break-even quarter on a non-GAAP basis. On a GAAP basis, I believe we may see a much larger loss depending upon whether or not AOBC decides to take one-time impairments such as what we saw with Vista.
The Street estimates a non-GAAP EPS of $.08 to the $.09 consensus of Estimize users. I believe we will have a twofold situation develop that will push earnings down. First, we will have the lower sales numbers as we have already discussed. On the other side of the cash flow statement, I believe we will have a number of developments.
First, I expect an increase in Sales, General and Administrative expenses as more consumers start claiming their massive mail in rebates.
Secondly, AOBC has continued to offer extended terms and other discounts to the distribution channels in order to stuff its inventories with products.
Thirdly, as it was discussed on the previous conference calls, AOBC is expected to continue to increase its inventory for both the holiday season and the new products, compounded by the already bloated inventories from lower sales in the first half of the year and the wrong bet on the presidential elections.
Finally, the lower sales are still facing the issue of the fixed costs and new expenses, such as the recent acquisitions and the new distribution center being built.
While I still have a few more channel checks to perform, I am fairly comfortable with the numbers in the article. I do not believe AOBC will defy gravity and will instead follow in its peers’ footsteps. After I perform the checks, I may further fine tune the numbers, and if so, I will try to publish another article or will post it in an instablog. My followers will get an instant notification if it happens, so if you have not done so already, hit that follow button next to my name.
I am fairly confident there are numerous shareholders of AOBC who are either discouraged or pissed off at me merely writing anything critical of their investment, but I would urge everyone to conduct their own research and channel checks, and combine it with my work and the work of others.
AOBC has all of the ingredients for a spectacular miss, just like Vista Outdoor, as opposed to Ruger which is significantly more fiscally responsible and has a much cleaner balance sheet.
Vista Outdoor after declining from the $40s to the low $20s was considered a “great deal” and as an investment poised for a massive jump, somehow being immune to the overall firearms industry woes. Those low $20s are now low teens after the stock fell over 30% on its guidance.
I urge this question, “What will a net loss from American Outdoor Brands mean for AOBC’s stock?”
At the very least, I urge concerned investors to buy some protection via PUT options which are quite cheap at the moment.
I do not want to make this sound as “I told you so”; however, the clues have been there for the last year as I have written about it and MANY brilliant Seeking Alpha users have commented in my articles and others, commenting on their own experiences as gun owners, gun dealers and 2nd Amendment supporters. Unfortunately, they are often silenced by either non-gun owners who want to live the gun lifestyle through buying shares of AOBC and analysts and institutions that try to apply traditional logic to a market which is in fact driven by fear and uncertainty rather than free market principles.
If you have not done so already, please take a look at a few of my favorite firearms articles:
Excitement For Gun Rights, Anxiety For Gun Investors Shot Show 2017: A Warning Shot Across The Bow? Gun Sales: Yeah. They’re Bad
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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