Q3 2025 Smith & Wesson Brands Inc Earnings Call
Speaker Change: Good day everyone, and welcome to the Smith & Wesson Brands' 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.
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 two adjusted Ebitdas.
Speaker Change: Before I hand, the call over to our speakers I would like to remind you that when we discuss mixed results. We are referring to adjusted net and metric published by the National shooting Sports Foundation based on F. B I next data.
Speaker Change: Adjusted next removes those background checks conducted for purposes other than firearms purchases.
Speaker Change: Adjusted mix is generally considered the best available proxy for consumer firearm demand at the retail counter.
Speaker Change: Because we transfer firearms only to law enforcement agencies, and federally licensed distributors and retailers and not two and consumers next generally does not directly correlate to our shipments more market share in any given time period, we believe mostly due to inventory levels in the channel.
Dinah Macpherson: Joining us on today's call are Mark Smith, our president and CEO and Dinah Macpherson, our CFO with that I will turn the call over tomorrow.
Speaker Change: Thank you, Kevin and thanks, everyone for joining us today.
Speaker Change: Our topline 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 EBITDA expectations.
Speaker Change: 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.
Speaker Change: Innovation continues to be a core focus with several exciting new products expected to be introduced during the final quarter of FY 'twenty five and throughout next year and we expect to continue this strong momentum going forward.
Speaker Change: Looking at market share for the third quarter adjusted <unk> was down four 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 seven 7% in the period.
Speaker Change: Breaking those numbers down we believe we gained share in handgun with overall handgun next down four 1% in Q3, while our shipments into the sporting goods channel, we're only down 3% driven by strong demand for the new bodyguard to point out.
Speaker Change: In long guns, Nix was down three 9% in Q3, while our shipments declined 26, 7% due largely to outperformance in the prior year period of newly introduced products, specifically our F. P C rifles.
Speaker Change: 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.
Speaker Change: 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 can we expect this momentum to grow as we build out the line.
Speaker Change: It is also important to note that on a two year basis. Our Q3 long gun unit sales grew at a compounded average annual rate of nearly 20% well ahead of next.
Speaker Change: 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.
Speaker Change: Average selling prices as expected trended lower in Q3 with overall E. S. P is moderating to a three 1% decline versus the prior year period mix was the primary factor in driving our overall asp's in handguns, our asps declined 7.8% again, reflecting strong demand for.
Speaker Change: The new bodyguard, two point, though which is priced at retail around $400 combined with lower revolve ourselves.
Speaker Change: In long guns are Asps increased 17, 2% in Q3, driven by strong demand for our higher priced lever action rifles.
Speaker Change: 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 too new to new products or lower price points.
Speaker Change: Our new product pipeline positions us very well in these conditions with the success of our bodyguard. Two point, though is a great example of a unique innovative product at a compelling price point.
Speaker Change: As I mentioned earlier, we expect that our slate of introduction schedule over the coming months, we will continue this momentum.
Speaker Change: 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.
Speaker Change: Our balance sheet remains strong and we continue to be disciplined in managing our business and allocating capital to drive value for stockholders.
Speaker Change: Internal inventory levels are slightly elevated due to lower than anticipated Q3 sales combined with normal seasonality as we prepared for our debt typically busy fourth quarter.
Speaker Change: Through our robust monthly sales and operations planning process, which aligns production levels to sales forecast, we expect to continue adjusting manufacturing to drive lower internal inventories throughout Q4.
Speaker Change: 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 <unk> 13 per share, which deanna will cover in more detail in a moment and continue to reinvest in innovation and manufacturing efficiencies.
Speaker Change: I'll also note that during the third quarter, we repurchased another 220000 shares of our stock with these purchases through the first nine months of fiscal 'twenty 'twenty five we lowered our share count by more than 1.5 million shares net of dilution.
Speaker Change: 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.
Speaker Change: 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 it continue.
Speaker Change: Success.
Before I hand, the call over and as always I just want to thank our entire team of talented Smith <unk> Wesson employees for their tireless dedication and putting their skills to work each and every day to make us successful.
Speaker Change: That I will turn the call over to Dina to cover the financials.
Dina: Thanks Mark.
Dina Macpherson: Net sales for our third quarter of $115 $9 million or $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.
Dina Macpherson: While our new products continue to perform very well they are seeing lower demand for our core product portfolio, which is negatively impacting both our top line and margins.
Dina Macpherson: During the quarter inventory in the distribution channel dropped by over 15000 units, while holding steady in terms of weeks outstanding.
Dina Macpherson: Handgun asp's decline for the second consecutive quarter, reflecting the impact of lower priced products and promotions.
Dina Macpherson: S P for long guns increase due to the mix of higher priced products, including the introduction of additional lever action calibers.
Dina Macpherson: 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.
Dina Macpherson: Operating expenses of $23 $8 million for 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 a property in Missouri.
Dina Macpherson: Excluding this one time sale operating expenses were $2 $1 million lower than the prior year quarter due to lower cost associated with the 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 cost associated with promotional activities.
Dina Macpherson: We ended the quarter with net income of $1.7 million or four cents per share.
Dina Macpherson: On a non-GAAP basis income per share was two cents.
Dina Macpherson: 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 networking capital in the current quarter combined with lower net income.
Dina Macpherson: We spent $6 $3 million on capital projects in the third quarter compared with $18 $2 million in the prior year comparable quarter.
Dina Macpherson: Merrily due to lower investment in the current year related to the relocation.
Dina Macpherson: We expect our capital spending for the year to be between 20 and $25 million.
Dina Macpherson: During the quarter, we repurchased approximately 220000 shares at an average price of $12 94 sites for a total of $2 $8 million.
Dina Macpherson: 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.
Dina Macpherson: Subsequent to quarter end.
Dina Macpherson: Repaid $10 million on our line of credit and expect to repay additional amounts during the remainder of the fourth quarter.
Dina Macpherson: Finally, our board has authorized a 13 cent quarterly dividend to be paid to stockholders of record on March 20th with.
Dina Macpherson: Payment to be made on April 3rd.
Dina Macpherson: Looking forward to.
Dina Macpherson: Continue to expect full year revenue to be down 5% to 10% from fiscal 'twenty 'twenty, four which is consistent with what we said last quarter.
Dina Macpherson: 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.
Dina Macpherson: This would put our fourth quarter and down from the prior year quarter in the 2% to 5% range.
Dina Macpherson: 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.
Dina Macpherson: 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.
Dina Macpherson: Channel inventory is expected to remain stable and we believe as a distribution channel remains cautious and will continue to manage their inventories carefully.
Dina Macpherson: We expect the 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.
Dina Macpherson: 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.
Dina Macpherson: 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.
Dina Macpherson: As a reminder, our capital allocation plan continues to be invested in our business remain debt free and return cash to our stockholders.
With that operator can we please open the call to questions from our analysts.
Dina Macpherson: Thank you.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: And our first question comes from the line of Mark Smith with Lake Street Capital markets. Please proceed.
Speaker Change: Hi, guys.
Speaker Change: Hey, I apologize I missed a little bit of the call, but I wanted to just check on few things first new product sales looked really good but it is we look at sales of kind of non new products are legacy products. If you will can you just walk through you know what do you feel like it's consumer weakness, that's kind of hurting there or.
Speaker Change: Or is there competitive pressures you know walk us through kind of what you're seeing there.
Speaker Change: Hey, Mark Yes sure.
Speaker Change: <unk>.
Speaker Change: A large part of that is frankly, the outperformance a little bit in the in the near term of some of those new products I think that that bodyguard two pointed out specifically on the on the personal side is probably cannibalizing a little bit of our own line. So you know I think overall as we covered in the remarks the pistol.
Speaker Change: Category, we're gaining share there, but you know you're probably seeing a little bit outsized you know obviously impacts on the body guard versus the core line and you know, there's probably a little bit of internal cannibalization as well as you know obviously cannibalizing that they owned the competitive products.
Speaker Change: Products. So I think you know.
Speaker Change: And that said you know as we as we covered I think you can see from the mixed results in February and you know the.
Speaker Change: Inflation continues to.
Speaker Change: 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, whereas you know kind of used to be you know just gravy on top now, it's maybe a little bit of cannibalization of our own them and obviously cannibalization.
Speaker Change: Cannibalization of the competitors as well. So you know I don't think I think that's really what you're saying.
Speaker Change: Okay.
Speaker Change: Can you talk about competitive environment, maybe just talk if you will about kind of the industry. As you look at distributors as you look at everybody kind of through the channel. How do you feel like everybody is behaving in kind of the health of the industry today.
Speaker Change: Yeah, I think you know on that front market, it's pretty good I mean, I think you know the the distributors or distributor inventory is don't read about eight and a half weeks right now and 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 you're going to do the dealers.
Speaker Change: We're in the same area in the same boat. So you know I think as that as that market moves we're seeing that right away, we're not having that kind of that hangover effect of excess inventory in the channel. So I think you know you know we're pretty we're pretty comfortable that the market is going to remain steady at where it's at right. Now you know there's nothing we don't see any major demand catalysts coming up here.
Speaker Change: You know obviously some can be unforeseen, but you know the biggest thing for US right. Now again, it's just that you know if we can get them. If we can see that economy starts to turn around the discretionary spend availability start to go up which we know were optimistic on over the long term then that's going to that's going to be a nice tailwind for us and you know and we will see we should we should see that demand increase translate to.
Speaker Change: Demand on Smiths, unless I'm pretty quick because again you know the channel inventory is really good right now.
Speaker Change: Okay and the last one for me just topic of the day and in the last few days certainly seems to be tariffs can you just talk about any exposure that you guys see and obviously, it's an evolving situation, but you would love to hear your thoughts on tariffs on any exposure. There and then also just you know regulatory environment any changes that you are.
Speaker Change: We're seeing you know whether in states or at the federal level and if you wanted to comment at all or any thoughts around.
Speaker Change: Supreme Court case, it was just heard the other day.
Speaker Change: Sure I'll start off with tariffs you know so I think you're well aware that we're you know we're an American made product you know we get a lot of our supply chain is domestic and so you know we do have some some supply that comes in from from overseas in and from foreign countries that would be impacted by the.
Speaker Change: Tariffs all of that you know has been kind of dialed into our numbers into the guidance that in the in the direction that that Dena gave so it's not in any way shape or form going to be material impact to the two are our numbers and you know for the rest of this year and in next year or so.
Speaker Change: On the regulatory environment, where we were you know were pleased to see some you know some some good movement. There from you know from the current administration on on.
Speaker Change: Really more stability on what on what the regulatory environment is going to look like going forward, which is where it really you know obviously as any business is what we need is we just need stability. We operate obviously, we're proud to operate within them.
Speaker Change: Within the bounds of the regulations and laws that govern our industry, we just need stability and we're glad we're happy to see that you know that looks like at least for the navy in the foreseeable future here that we're gonna get that so you know we're pleased.
Speaker Change: And then on Scream Court case, you know.
Speaker Change: I think you know we don't 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 the early summer.
Speaker Change: Excellent. Thank you guys.
Speaker Change: Alright.
Speaker Change: Our next question comes from the line of Steve Dyer with Craig Hallum. Please proceed.
Hi, guys. This is Matthew Rob on for Steve.
Speaker Change: Just starting on Asps.
Speaker Change: Nice performance there on the long guns. It sounded like it was the $18 54, a mix which is good to see.
Speaker Change: How do you how do you think about the Q4 asps it sounds like handguns or.
Speaker Change: Maybe flattish in la and any outlook for the long gun category.
Yeah, I think I'm on the handgun side, I think I covered a little bit of that in the prepared remarks, but the you know I think youre going to kind of see more of the same in Q4 as you saw in Q3, I'm you know our mix right.
Right now that they are on the long gun side. The you know the proportionate amount of lever actions that were selling versus you know the court.
Speaker Change: And then Pete 15, and shotgun line.
Speaker Change: Should really kind of remain the same.
Speaker Change: Throughout Q4, and then on the handgun side.
Speaker Change: We have a couple of new products coming out, but it shouldn't materially change that number.
Speaker Change: Okay got it.
Speaker Change: And then if you're willing to comment not looking for sort of specific guidance, but can you frame kind of 2026 for US you know what what are you looking to accomplish within the within the company is it new product intros are you focused on market share.
Speaker Change: Taken margins any any color there would be great.
Speaker Change: Sure Yeah, I mean, I think as we look forward into 'twenty 'twenty six you know we're still we're still early days you can always still got you 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, yeah as I talked about earlier, it's we expect the market to remain steady.
Speaker Change: You know and this is you know what I mean.
Speaker Change: Remember this is the environment I think if you'd look at it Nick's chart and you know, it's kind of a stacked 20 year charter out and Youre going to see that the you know the the mixed 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.
Speaker Change: 15, 20 years and look at 2019 2020, even so so 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 as you know is to react to those upswings, but also be remain very profitable you know when the when the market returns to normalize. It you know as it has so for US you know.
Speaker Change: 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 that growth is going to be fairly modest.
Speaker Change: Lacking any demand you know major demand catalysts and then how do you do that how well that's new product right I mean, and that's I think we've proven now were.
Speaker Change: Multiple multiple awards for innovation I think we always kind of viewed as a as a front runner there and the innovation category within the firearms industry, we're going to continue that and not just on our core line, but also you know how do we expand into other white spaces, and you know and within the firearms.
Speaker Change: The market itself.
Speaker Change: Okay. That's great. Thanks, guys.
Speaker Change: Thanks, Matt.
Speaker Change: And the next question comes from the line of Hormel.
Speaker Change: Yeah Nice here with Aegis Capital Corp. Please proceed.
Speaker Change: Hi, good afternoon.
Speaker Change: Hi.
Yes.
Great. Thank you can we just.
Talked about the the handgun category for a second.
Speaker Change: For years now there's been a shift to 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 down to lower price point is helping to accelerate that or would you say that's just more continued move to kind of a small frame concealed carry.
Speaker Change: That category, obviously, you're well represented there with.
Speaker Change: Products like the bodyguard Chicano I Wonder if you could just chat about that.
Sure I think it's a little bit of both.
Speaker Change: You're right that there's been there's been a big trend towards concealed carry.
Speaker Change: You know those concealed carry firearms and.
Speaker Change: And then obviously you know that's been a you know.
Speaker Change: The success of the bodyguard and like as I talked about was it a little bit of.
A combination of the fact that it was a great concealed carry a product, but it's also at an entry level price point for us from a trip for our Premier brand like Smith, <unk> Wesson and so you know it's it kind of hits both of those and I think you don't really that's the sweet spot that we you know that's driving the success of that product. So directionally for the for the handgun market I think you know as like as I talked about it.
Speaker Change: Kind of bifurcate it a little bit you've got that you're definitely that and you know that.
Speaker Change: That entry level and you know.
Speaker Change: 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 there's also you know we're also seeing some some success with you know things like our metal Mlps, 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.
Speaker Change: So that innovation is still successful on the high end. It's just now is you've got it you got to have something compelling for them to for that for that consumer to get excited about so you know it's it really kind of is bifurcated two that you know to the entry level and to enter new product and we can't get up on that.
Speaker Change: On the higher up on the E S P.
Speaker Change: Chain, we just got to have something that's exciting and you know we obviously found some success there with the metal M and P. And you know we're going to continue to look for things like that.
Speaker Change: Okay, and then maybe as my follow up question on switching to the long gun side Mark.
Speaker Change: Mark I think you talked about in your prepared comments potential future product launches and 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, yeah, perhaps slightly away from msr's to to those more traditional categories. Thanks.
Speaker Change: Sure Yeah, I mean, the the 18 54 has been a very successful and you know as I said in the remarks, we definitely expect to and plan to continue to build that line out for you know across the entire category multiple calibers that we're not into yet some of the more some of the most popular ones where you know.
Speaker Change: <unk> are still are still in the works so as.
Speaker Change: As far as margin, we don't really give too much color and guidance on margin by product line, but what I can tell you is that they you know the margins of the 18 54 is not materially different.
Speaker Change: From our from our core line of of rifles.
Speaker Change: Okay. Thanks, very much that's very helpful.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, there are no further questions at this time.
Speaker Change: On the call back to Mark Smith for closing remarks.
Speaker Change: Thank you operator, and thank you everybody for your joining us today and your interest in Smith <unk> Wesson, we look forward to speaking with you all again next quarter.
Speaker Change: This concludes today's conference you may disconnect your lines at this time.
Speaker Change: Enjoy the rest of your day.
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