Q4 2024 Smith & Wesson Brands Inc Earnings Call

Participants

Kevin Maxwell; Senior Vice President, Chief Compliance Officer, General Counsel, Secretary; Smith & Wesson Brands Inc

Mark Smith; President, Chief Executive Officer, Director; Smith & Wesson Brands Inc

Deana McPherson; Chief Financial Officer, Executive Vice President, Treasurer, Assistant Secretary; Smith & Wesson Brands Inc

Mark Eric Smith; Analyst; Lake Street Capital Markets

Matthew Raab; Analyst; Craig Hallum

Presentation

Operator

Good day, everyone, and welcome to Smith & Wesson Brands, Inc., fourth quarter and full fiscal 2024 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.

Kevin Maxwell

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, objective, 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 a gain from the sale of certain intangible assets, costs related to an accrued legal settlement, 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 EBITDA.
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 SBI 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 Deana McPherson, our CFO. With that, I will turn the call over to Mark.

Mark Smith

Thank you, Kevin, and thanks, everyone, for joining us today.
We are pleased to announce that Smith & Wesson delivered yet another strong quarter to close out fiscal 2024. I am very proud of the team's continuing discipline and execution against our strategic initiatives of strong brand messaging and marketing, best-in-class innovation, operational excellence, and business process efficiencies. Our results in FY24 again demonstrate that our relentless focus on these long-term strategies consistently reinforces our position as a market leader and deliver solid stockholder returns.
Our Q4 top-line revenue was up 10% versus last year, driven by unit growth in both handguns and long guns. We believe this reflects robust market share gains as our shipments once again outpaced the overall firearms market, driven once again by excellent consumer reception to our new product offerings as well as sustained demand for our core product portfolio.
On a full-year basis, our revenue was up 12% year on year and our unit shipments were up 13%, outpacing the market where NICS was down by 5.4%. On the bottom line, the team delivered solid non-GAAP EPS of $0.45 in Q4. This was driven by increased production rates to meet demand for our new products and to maintain target inventory levels on our core offerings, as we mentioned last quarter. We also benefited from continuing stabilization of the Tennessee operations and have begun realizing the associated efficiencies.
Breaking those Q4 sales numbers down a little further, for the sporting goods channel, our long gun unit shipments increased by over 14% versus the year-ago period, and our handgun shipments were up almost 8%. While the overall market, as measured by NICS Checks, was down 6% in long guns and down 7% in handguns.
Innovation continued to be a key driver, with new products making up just under 30% of sales, led by the 1854 lever-action rifle, which I'll cover in some more detail in a moment. And despite the outperformance in our outdoors unit shipments into the channel, inventory levels during the period at our distributor and strategic retail partners remained healthy.
Another bright spot for the quarter was our overall ASPs, which continued to hold at healthy levels in spite of the competitive landscape. We believe this reflects the consumers' trust in the Smith & Wesson brand to deliver world-class-quality firearms, innovation, and customer service. Handgun ASPs largely held steady, declining less than 2% versus the prior-year quarter, mostly driven by NICS factors associated with the introduction of the very popular new entry-level priced SD9 2.0 millimeter, whereas long gun ASPs beat expectations by improving by nearly 11%.
The long gun ASP increase was due to the highly successful launch of the 1854 lever-action rifle, which has been hailed by the industry and consumers as an instant classic and is in high demand. As I covered last quarter, this successful launch creates an exciting new whitespace opportunity for Smith & Wesson.
Our near-term category expansion plans include the introduction of new line extensions this summer and throughout the hunting season. We also expect to add significant new capacity this fall to support the strong demand for our new products, helping to propel our top-line growth in the second half.
Turning now to the overall firearms market, we continue to expect healthy demand for firearms in FY25, and Smith & Wesson is well positioned to deliver another solid year of growth. At the same time, we are anticipating a much more competitive marketplace throughout the traditionally slower summer months this year as consumer discretionary spending continues to be impacted by stubborn inflation as you have likely seen from recent NICS results.
This is consistent with normal seasonal patterns for firearm demand. And we do expect offsetting tailwinds during our typical busy season throughout the second half as the presidential election campaign activity ramps up in the fall and we benefit from new product introductions and we bring online additional capacity targeted at some of our new products where we are currently constrained.
Throughout the slow period this summer, we will be aggressively pursuing market share through promotions and marketing campaigns in addition to building inventory in preparation for the busy fall season and continuing our cadence of new product introductions. Specifically, with consumers increasingly price sensitive as inflation impacts discretionary spending, we will be focused on addressing this with new entry-level price launches this summer, which we believe will provide tailwinds in Q2 and throughout the second half.
Finally, I just want to take a moment to thank our employees, past and present, for delivering another successful year. In fiscal 2024, we launched over 100 brand-new products, sales of which accounted for over 27% of our total revenue. As I mentioned earlier, we grew revenue and units shipped by nearly 12% and 13%, respectively, outpacing NICS, which was down by 5.4%.
We generated more than $106 million in cash from operations, ending the year with over $60 million in cash on hand and only $40 million in debt and reduced inventory by $16.6 million. We improved GAAP EPS by $0.06, delivering $0.86 per share for the year, with EBITDAs of over $94 million.
We deliver significant value to our stockholders, including $22 million in dividend payments and $10.2 million in share repurchases, and all of this, while successfully relocating our headquarters distribution and major portions of our operations into our new facility in Maryville, Tennessee. These accomplishments are only possible due to the commitment day in and day out of our amazing team, many of whom continued to show unwavering dedication, even though they knew that their roles would be relocating and they would ultimately be moving on from the company. This exemplifies the Smith & Wesson way, and I am personally tremendously grateful for the impact of each employee, past and present, on our great results this year and our bright future.
As we covered earlier and as I said last quarter, we expect the firearms market to experience healthy demand through the 2024 election cycle and fiscal '25. And with our deep pipeline of new products, leading brand, new state-of-the-art facility now operational, strong balance sheet, and most importantly, world-class dedicated employees, we are excited for another year of growth and to continue delivering value for our stockholders.
With that, I'll turn the call over to Deana to cover the financials.

Deana McPherson

Thanks, Mark. Net sales for our fourth quarter of $159.1 million were $14.4 million, or 9.9%, above the prior year comparable quarter, with new products making up 29.1% of total revenue for the quarter. As Mark noted, the launch of the 1854 lever-action rifle in January was met with significant consumer interest. In addition, the new M&P 15 SPORT III and SD9 2.0 both performed well in their categories.
Gross margin of 35.5% was 6.5 percentage points above the prior year comparable quarter, reflecting a combination of favorable fixed cost absorption due to increased production volumes, higher long gun ASPs driven by new products, increased sales volume, and lower promotions partially offset by the impact of inflation on material and labor costs and increased inventory reserves.
Operating expenses of $31.1 million for our fourth quarter were $7 million higher than the prior year comparable quarter due to increased profit-related compensation costs, including profit sharing, which is now recorded in the quarter it is earned, and increased legal costs, combined with the impact of a year-to-date reclassification of sublease income from other income to operating expenses in the prior year.
Net income of $26.1 million in the fourth quarter was more than double the prior year comparable quarter due to a combination of higher net sales, improved gross margin, and a $6.5 million sale of intangible assets, partially offset by profit-related compensation costs. GAAP earnings per share of $0.57 was well above the prior year comparable quarter of $0.28, while non-GAAP earnings per share of $0.45 was also up from $0.32 in Q4 fiscal 2023.
Turning to cash flows. During the quarter, we generated $43.6 million in cash from operations and spent $5.6 million on capital projects, resulting in net free cash of $38 million. During the quarter, we repurchased approximately 77,000 shares at an average price of $14.12, for a total of $1.1 million. Subsequent to year end, we've already repurchased approximately 137,000 shares at an average price of $16.7, and we still have nearly $38 million remaining on our authorization.
We paid $5.5 million in dividends, repaid $25 million on our revolving line of credit, and ended the quarter with $60.8 million in cash and $40 million in borrowings on our line of credit. During our full year, we generated $106.7 million in cash from operations and spent $90.8 million on capital projects, resulting in net free cash of $16 million for the year.
With less than $5 million remaining to be spent on the relocation and normal operating capital returning to our historical levels of $25 million to $30 million, our Board has authorized an 8.3% increase in our quarterly dividend, raising it to $0.13 to be paid to stockholders of record and July 11 with payment to be made on July 25.
Looking forward to fiscal 2025, as Mark mentioned, we continue to expect healthy demand for firearms in fiscal '25 and believe we are well positioned to deliver another year of solid growth likely in the mid- to high-single digits. With near-term demand softer than we originally anticipated, sales will be more weighted to the second half of the fiscal year.
We expect Q1 to be down approximately 10% from the prior-year quarter in terms of units and dollars as growth in long guns partially offset a decline in handguns. We expect Q2 to rebound a bit as we approach the election, resulting in the first half being only moderately down to last year. We expect the second half to benefit from normal seasonal increases, new product introductions, and investments in increased capacity, resulting in full-year revenue up mid- to high-single digits over fiscal '24. We believe channel inventory is in a good spot, and therefore, we are not anticipating a material impact from changes in inventory either internally or externally.
With regard to pricing and ASPs, we expect some headwinds in handguns, particularly during normal summer slowdown, but believe that long gun will remain reasonably strong due to new products. We expect margins to stabilize in the low 30s for the full year, an improvement over fiscal '24, with normal quarterly fluctuations impacted by both volume and operating days. Margins will be affected by the full-year impact of operating our Tennessee facility, which moves certain building costs out of distribution into cost of sales, combined with one-time costs associated with facility consolidations.
The expected benefits associated with automation and the reduced facility footprint will begin to more be fully realized later this year. Although we don't expect that the rate of inflation will materially change in fiscal '25, we should benefit from a more level-loaded manufacturing operation and stable channel inventory, which will help margins for the full year.
With respect to the first-quarter gross margin, we expect it to be in line with the prior-year first-quarter level. Operating expenses for the full year will also likely be 3% to 5% higher due to compensation-related inflation, a more competitive market, and an increased investment in R&D. Adjusted EBITDA is expected to grow at a similar rate to sales in fiscal '25. Finally, our effective tax rate is expected to be approximately 24%.
With that, operator, can we please open the call to questions from our analysts?

Question and Answer Session

Operator

(Operator Instructions) Mark Smith, Lake Street Capital.

Mark Eric Smith

Hi, guys. First question, I want to dig in a little bit more on ASPs in handguns. Certainly seeing demand at kind of more of those entry-level prices and you guys put out a solid new product to meet that demand. So I guess I was surprised that ASPs held up as well, but any other insight you can give us into kind of mix and maybe products that are doing well within handguns?

Mark Smith

Sure. Yeah. So Q4, the demand still held up pretty good. As you can see from our ASPs from our entire product portfolio, we were down a little bit on ASPs there. And that was, as you said there, Mark, the demand definitely as we entered the slower summer season, is driven much more towards where the volume play right now is in that entry-level price point.
So we do anticipate in Q1, we're going to be, as you might have seen, we've already launched a consumer rebate promotion. We will also be leaning into that category a little bit more with some new product launches coming up here in the next couple of days and weeks to get some more entrants into where that volume play is, and that should give us a nice tailwind in Q2 and second half.
So we still expect that the overall ASPs to stay up. Long guns, definitely with the LAR, will still be good, but those handguns will probably come down a little bit there in Q1.

Mark Eric Smith

Okay. Any thoughts on how you're holding up as we think about performance center and higher end primarily in handguns? We're hearing the lower inventory level's pretty positive, but yet still pretty good demand at some of the more expensive handguns. Any thoughts around kind of how that higher-end business is holding up?

Mark Smith

Yeah. I mean, some of our highest-end products in that hierarchy are going to be on our large frame revolvers. Obviously, as you'd mentioned, our performance center products and what we have added and will continue to add capacity there. Our metal M&P's also up there on. So that's -- we mentioned in the prepared remarks, we alluded towards adding some capacity is definitely an area where we're going to be putting a little bit more capacity online to give us a nice tailwind there in the second half as well.

Mark Eric Smith

Okay. And then I don't know if you guys gave it, but if you've got the numbers for the quarter of new product NICS in the quarter and any additional insights into how those new products are going. I know that you talked a bit about 1854, but I'd love to hear also some of the other new long guns on how those are performing.

Mark Smith

Yeah. I think for Q4, we did give that number was just under 30%. I mean, I it think was 29.9%, Deana?

Deana McPherson

29.1%, yeah.

Mark Smith

29.1%. So still holding up to that high 20s, low 30s in terms of our new products. We anticipate that that's going to continue. And yeah, that was a lot of the 1854 in Q4, Mark, but I mean, we've held that level for a long time. It's just -- I mean, I think it was more weighted towards 1854 just because it was the most recent launch. But we're going to continue that cadence.
The FPC was obviously very successful. The Sport III continues to be, from a lot of our retailers, one of the number one selling, if not the number one selling MSR out there. So we're going to continue that cadence of new product. I think you can expect that that same level of new product contribution to revenue going forward.

Mark Eric Smith

Okay. And then just -- I know you don't give us much on formal guidance, but just wanted to sum up and make sure that we're looking at things right. At the end of your prepared remarks, sounds like looking for revenue to be up mid- to high-single digits, kind of a mid-30-ish gross margin and maybe some pressure on operating expenses. That's good, but EBITDA growing at kind of a similar number to revenue. Did I sum that up or did I miss anything in there?

Deana McPherson

No. I think I'd say low 30s. I'm not sure -- we're going to wait and see whether we can get to the mid-30s, but we're bringing more capacity online. As I said in my remarks, we're having the facility consolidation and ramping up automation at the Tennessee facility. So when we look at the whole year, we'll be in the low 30s.
I'd point out that fourth quarter was, I think, somewhere around 35%, but one quarter doesn't make the whole year, right? So we'll have those fluctuations like we normally do. Fourth quarter for us is usually the best because production days are the longest. We have no shutdowns where we have shutdowns in the other quarters.
So as the capacity ramps up and as the automation and the full relocation process completes, then we'll start to see toward the back half of the year where the numbers are getting back to where we used to have them. And we'll probably get to the mid-30s in the back half, but the front half will be a little bit lower.

Mark Eric Smith

Okay. And maybe one follow-up on that. Just Mark or Deana, whoever wants to take it. It sounds like summer you guys are expecting things to remain tough just with where the consumer is today. But it sounds like as you look at the back half, seeing maybe some better growth, that's not that you guys are just looking for kind of typical seasonal growth and your outlook for new products or whatnot. But you're not expecting, and nothings built in for like a big ramp in demand around the election isn't really built into the numbers that you've given, right?

Mark Smith

Yeah. I think we definitely expected a tailwind as the election campaign activity really kicks in usually towards the late summer or early fall through the election period. So definitely, there will be a tailwind there to our usual busy season. But we've also got -- we're also going to have some tailwinds in back half from, as I mentioned, some capacity additions on some of our categories where we're constrained. So we've got that coming online.
As I mentioned, where the volume play right now is in that lower price tier, that entry-level price tier. We got a couple of really good new products coming in the next couple of weeks, which will obviously also give a nice tailwind where we have some more deep entrance into -- a deeper product portfolio in that category.
So yeah, it's a little bit of election, but it's also just standard core businesses as well in the back half. So yes, the overall year should be a nice growth. As it has been historically, it will be more weighted towards the back half.

Mark Eric Smith

Perfect. Thank you, guys.

Mark Smith

Thanks, Mark.

Deana McPherson

Thanks, Mark.

Operator

Steve Dyer, Craig Hallum.

Matthew Raab

Hey, guys. This is Matthew Raab on for Steve. Most of my questions have already been answered. But could you just talk about what you're doing on the marketing front? Obviously, you said the summer is typically the slower, weaker time of year. I mean, are you looking at the vendor discounts? Obviously, you talked about rebates. What other areas are you looking into on the marketing side working with retailers, anything there?

Mark Smith

Yeah. We're very active in working with retailers. As you know, our number one focus as we come into the summer, usually in the summer is no different is going to be getting pretty aggressive on promotions. We're always going to come participate as we see appropriate, depending on what the market conditions are in the summer. As I think you can see from the NICS result, it's going to be competitive.
So you saw that we're pretty aggressive with the consumer rebate that just launched early June. We're also doing a whole bunch of channel. While we always want to focus on pull through rather than pushing on inventory, we are also working with a lot of the retailers on some targeted promotions that individual retailers or with distributors on promotional programs, whether it be SPFs, et cetera.
So we have a pretty deep playbook here in terms of levers we can pull throughout the channel, and we're working very actively on that right now, actually. Today, we've got a number of retailers in our facility doing a roundtable and brainstorming.

Matthew Raab

Okay, great. Thank you very much.

Operator

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Mark Smith for closing remarks.

Mark Smith

All right. Well, thank you, operator, and thank you, everyone, for joining us today and your interest in our company at Smith & Wesson. We look forward to speaking with everybody again next quarter.

Operator

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.