With their normal third quarter earnings announcement yesterday American Outdoor Brands (NASDAQ Global Select: AOBC) tossed a couple of unexpected surprises into what is normally a fairly formal (and boring) SEC required event for publicly-traded companies.
First, the company announced that as a result of unexpectedly poor results in their Electro-Optics division, they were restructuring their business units.
Essentially, AOBC is dismantling their Electro-Optics Division (and taking a subsequent hit in the goodwill value thereof) and rolling it into their Outdoor Products & Accessories operating unit. In its earnings release and subsequent analysts call, AOBC President and CEO James Debney explained the move as one that would “drive efficiencies and increase operating performance.”
Seems that 2015’s surprise acquisition of Crimson Trace, the Wilsonville, Oregon company that has dominated the laser sighting market it essentially created it nearly 20 years ago, hasn’t been performing nearly as well as had been expected. Having watched C-T routinely outpace its competition, that announcement was eye-opening for me. Granted, I’ve watched since the 2015 acquisition as companies that had formerly shared new product information with Crimson Trace quietly moved away from those collaboration. But I had dismissed that as a blend of semi-sour grapes or paranoia.
It was doubly surprising considering AOBC has continued a move into “electro-optics” via a major rollout of optics (including riflescopes and red dots) and the most recent acquisition: LaserLyte.
Granted, I’ve listened since 2015 as companies that routinely shared new product information with Crimson Trace before the acquisition told me they were moving away from the company.
But yesterday’s announcement confirmed that AOBC’s Electro-Optics business unit was faltering - to the point that Debney felt the need to make some fairly radical changes.
As was explained on an analyst call, the change would allow AOBC to focus on “improving corporate efficiencies via their existing supply chain while continuing to deliver the innovation and quality that our industry-leading Crimson Trace brand has earned under the leadership of Lane Tobiassen.”
Tobiassen, unlike the business group he’d led, wasn’t rolled up in the restructuring; he was promoted to President of the Firearms Division.
In that promotion, Tobiassen moves into the division that’s the primary contributor to overall corporate revenue, but also finds itself facing a softening market with increasing pricing pressures as nervous consumers go “bargain shopping.”
In fact, Debney not only recognized the challenge of softening demand, he cited the latest NICS numbers (down 12% over the comparable period last year) as the primary contributor to declining revenues at Crimson Trace and the Electro-Optics division.
That, however, may be where the overall variety of the AOBC portfolio can help counter the softening demand.
The gun companies in the AOBC portfolio have found success “bundling” products into packages.
While firearm margins remain thin, the ability to combine AOBC firearms with AOBC accessories (and their considerably wider margins) can enable the overall company to continue to sell guns - even in the soft marketplace - and enjoy healthy revenues.
Factor in Smith & Wesson’s continued success with their Shield and M&P 2.0 products and you can see why Debney’s optimistic going forward.
Those long-term positives, however, weren’t enough to sway investors caught off-guard and expecting a profit rather than a $5.7 million Q3 loss (about ten cents per share).
After-hours trading AOBC stock dropped 6.7% to $10.60/share.
AOBC doesn’t appear overly concerned over the Q3 changes, and “guidance” says they should be looking at net sales between $162-172 million, generating an “expected” GAAP diluted income between 3 and 7 cents per share.
As was demonstrated last night, the market expects those results- at a minimum.
It’s a challenging time across the outdoor industry, but especially in the firearms category.
And listening to analysts’ questions yesterday made me even more aware of a question that appears to be on everyone’s minds.
What will 2020 and the next election cycle mean for the industry?
Unfortunately, my crystal ball seems fogged up when it comes to answering that question with any confidence.
But as always, we’ll keep you posted.
—Jim Shepherd