Smith & Wesson Brands, Inc.
Q4 2021 Earnings Call Transcript

Published: 17 Jun 2021

[Operator:]

Good day, everyone and welcome to Smith & Wesson Brands, Inc. Fourth Quarter and Full Fiscal 2021 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Robert Cicero, General Counsel, who will give us some information about today’s call.

[Robert Cicero:]

Thank you and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of the words, anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, strategic evolution, market share and demand for our products as well as inventory conditions related to our products, growth opportunities and trends and conditions in our industry in general.

[Mark Smith:]

Thank you, Rob and thanks, everyone for joining us. As we bring our fiscal year to a close, first and foremost, I would like to take a moment to reflect on the unbelievable accomplishments of the Smith & Wesson employees in these last 12 months. As with the rest of the nation each and every member of our team has faced adversity in their personal and professional lives this year that we could not have ever imagined just 18 short months ago. And yet, as they have always done, the Smith & Wesson team rose to the challenge without hesitation, immediately jumping into action to redesign workstations, develop rigorous disinfectant programs, expand PPE requirements, secure cleaning and disinfecting supplies, repurpose manufacturing assets to make PPE for frontline workers in our communities, setup home offices, alter work procedures to minimize exposure risk, implement temperature scanners, and the list just goes on and on. But the most impressive and humbling thing to see was how our unbelievable family of employees came together to support each other throughout the most challenging times we have seen in our lifetime and made sure the company they love never missed a beat. Whether as our order entry team, working tirelessly to manage the influx of new orders, our operations team ramping production by over 60% in a few short months, our AP and AR teams keeping up with the immense volume of transactions that came along with this, our human resources team thinking outside the box to recruit almost 300 new employees in the midst of a pandemic, our sales team continuing to safely visit customers and make sure that their needs were met. Our customer service team handling heavy call volume to ensure our reputation for world class service never faltered and every other employee and function in the organization, the impressive results that Smith & Wesson delivered this year and the long-term success of the business simply would not be possible without them. Because of this firmly held belief, our company has maintained a longstanding profit sharing program. And earlier today, we announced to our employees that this year we will be distributing over $14 million to eligible employees, which will be 15% of each employee’s annual wages. In addition, the company achieved a very significant milestone in fiscal 2021, surpassing $1 billion in sales for the first time in our 169-year history. As I said, this would not have been possible without all of our employees. And so, in recognition of this milestone, we will also be awarding every employee who is not eligible for our management bonus program, a special bonus of $1,200 per full-time employee and $600 for temporary workers, pro rated for the months of service during the fiscal year and to be paid next Thursday, June 24. Congratulations to each of you and thank you to our entire Smith & Wesson family.

[Deana McPherson:]

Thanks Mark. As Mark noted, for the fourth consecutive quarter, we are reporting record revenues due to a combination of increases in capacity that were implemented in response to ongoing heightened demand and increase in average selling prices due to the lack of promotions being offered, combined with a 3% price increase that was implemented in November and an increase in operating days during the quarter. Revenue for the quarter reached $322.9 million, a $129.9 million or 67.3% increase over the prior year comparable quarter. The fourth quarter is typically our strongest quarter of the year, with 65 operating days. Finally, the introduction of our very popular Shield Plus, which began shipping during the middle of the quarter contributed to the strong fourth quarter performance.

[Operator:]

Our first question comes from Mark Smith with Lake Street Capital.

[Mark Smith:]

Hi guys. Great quarter. Just wanted to hit a little bit, if you could give us any additional detail on new products, specifically Shield Plus, and you gave some great detail there. But kind of if new products are skewing heavier in your sales mix now than maybe they historically have, and then any insight into kind of your outlook on new products and how that can help going forward?

[Mark Smith:]

Sure. Yes. So, I think as we talked about maybe on the last call, our approach to new products right now in this environment where capacity constrained is to be a little bit more strategic or judicious, if you will, on launching them into the market, just given the fact that we are capacity constrained. So, we really want to make sure that the products that we are launching are – the goal right now is to obviously just keep our loyal consumer is excited about our brand, keep us fresh, etcetera, make sure that we are closing any of those big white spaces that we see out there, and the Shield Plus is a great example of that and obviously, been very, very successful and very well received by the market. As we go forward into the next fiscal year, we are going to continue that approach. But I will say that, that new product pipeline is extremely healthy. The NPD team has done a tremendous job. We have got a lot of new products teed up and kind of waiting in the wings. And we have got plans, as I mentioned on the prepared remarks for 12 of those to be launched into the marketplace over the next year. So, it will be a bit of a heavier year this year than it was last.

[Mark Smith:]

Okay, great. And then as we look at average selling price, it moved higher. It’s continued to move a little higher. You took the 3%. It looks like especially in long guns, have you maybe had more success in price increases in long guns rather than handguns or anything you can talk about on the ASP as far as any pushback that you are getting or just used to take pricing?

[Mark Smith:]

Sure. First of all, on pushback, no pushback whatsoever on pricing, I think our customers understand that, a, we are capacity constrained and b, there has been some inflation impacts that I think are very well-publicized out there in just in general. So, no pushback on price increases. As far as the ASP though, and the increase in there, I think the majority of the driver there Mark, is going to be promotional, is lack of promotional activity overall is that we just don’t need to participate. And we see that going forward here, we know we don’t foresee any need in the near future to be participating in promotional activity. On the long gun side, what you are seeing there is a little bit that the – as we announced at the beginning of May, we deemphasized the TC brand as we are coming back into hunting under the Smith & Wesson brand, and you will see that coming up here in the next – or beginning into that in the next few months. But a lot of that ASP on the long gun side is going to be that.

[Mark Smith:]

Okay. And the last one for me is really just looking at the cost side. Deana talked a little bit about some inflation. Where are you seeing that? Where are you seeing any pressure on the cost side?

[Mark Smith:]

Yes. I mean, we have managed to hold off a lot of the cost increase, but we are seeing some, obviously, that’s just across the entire manufacturing supply chain just in the U.S. in general, not just in firearms, I think, is pretty well publicized, we are seeing inflation. We have passed on a lot of that. That was, I mean, you saw the price increase that we just went into effect earlier this week. So, we have been able to pass on so far, we have either been able to mitigate it or pass it through, so.

[Mark Smith:]

Excellent. This is helpful. Thank you, guys.

[Mark Smith:]

Thanks Mark.

[Deana McPherson:]

Thanks Mark.

[Operator:]

Our next question comes from Cai von Rumohr with Cowen & Company.

[Cai von Rumohr:]

Yes. Thanks so much and pretty extraordinary quarter.

[Mark Smith:]

Thanks Cai.

[Cai von Rumohr:]

Could you comment, Mark, a little bit on availability of labor? I think at one point, you mentioned that kind of with the payouts from the government that basically it was tough to get workers. How is your ability to get workers?

[Mark Smith:]

It’s still a challenge. What I will say, and I will give kudos to our HR team, they have been able to kind of think outside the box and do some creative – and come up with some creative ideas to get some labor in. So, it hasn’t impacted our ability, obviously, as you can see from the results, materially to ramp production, but we are having to work twice, 3x as hard to get those – to get the labor in. So, it’s just it’s definitely still continuing to have an impact on labor availability. However, due to the hard work of the team, we have been able to kind of stave it off.

[Cai von Rumohr:]

Got it. And so I think everybody recognizes you are in a cyclical industry, but not many companies I follow have net cash positions. As you look forward from what you see, assuming we are going to see some deceleration how do you think about what kind of balance sheet are you going to be net – you want to stay net cash positive or would you take on debt because interest rates are so low? And give us some color how you think about all of that, if you could.

[Mark Smith:]

Yes, it’s a great question. And we will talk in much more detail tomorrow on the Analyst Day presentation about this, Cai. But the short answer to your question is, we do intend to remain zero debt, net cash positive. And we will talk some more tomorrow on this as well. But I think you can expect that, as you mentioned, we are in a cyclical industry, and you saw over $300 million in cash generated from operations this year. That – we don’t expect that will ever drop below $75 million range. So – and we intend to always remain net cash positive.

[Deana McPherson:]

Yes. It’s our stated strategy, Cai, to keep the zero debt and use cash to reinvest in the business, to pay the dividend, to buy back stock as we can. As you know, you probably remember, we are limited on how much stock we can buyback for the rest of the year until we get to the anniversary, the second anniversary of the spin. But our intention is to build a little bit of a war chest, be prepared for the next time we can do stock buybacks and return cash back to our investors.

[Cai von Rumohr:]

Refresh my memory, what is the limit? You just passed the new authorization of $50 million. So, how much of that can you buy?

[Deana McPherson:]

So, we think based on the stock price that we can do, we could do the rest of that through August of next year, but probably not a lot more than that. There is a safe harbor limit when you do a spin. But generally speaking, you don’t want to purchase more than 20% of your outstanding shares. And so we are at 14% in the first 10 months. So, that’s just behind the 50, which is okay because where we are on cash and our ability to keep generating, we raised the dividend. And we have lots of ideas. We are reinvesting in marketing and doing some other things there. So, we are pretty comfortable with where we are.

[Cai von Rumohr:]

Excellent. And then you mentioned the day 65 in the fourth, 58 in the first. Just so we can kind of – for modeling purposes, can you walk us through how many days you had in the first – each of the first three quarters and kind of how those days look like this year?

[Deana McPherson:]

Yes, I sure can. I have that right here. So last year, fiscal ‘20 was 59, 59, 56, 65. Fiscal ‘22 will be 58, 59, 56, 65. So pretty close.

[Cai von Rumohr:]

Okay. Was fiscal ‘20 – was that fiscal ‘20 that was 65? I thought you were – you said 68 in the fourth quarter of ‘21?

[Deana McPherson:]

No, 65. So 59, 59, 56, 65.

[Cai von Rumohr:]

Got it. Okay. So it’s essentially relatively close.

[Deana McPherson:]

Yes, very close. There’s one less operating day in ‘22 than there is in ‘21, just based on the way that the weekends or holidays fall.

[Cai von Rumohr:]

Got it. And so I don’t know if you can give us – obviously, you have not been giving guidance, but can you give us any color about how you think about the opportunities for the year in terms of results qualitatively even?

[Mark Smith:]

Yes. Obviously, we can’t give any quantitative notes or color as you know that we’re not giving guidance, but I think what we can tell you is that the firearms market still continues to be very active. I think it’s widely known the ammunition shortages continue. There’s still a lot of interest in firearms. May was the second highest NICS checks – adjusted NICS checks ever on record. So while it was a deceleration versus last year, last year, it was a pretty tough comp and still remains, if you look at kind of the stack chart is just in a different stratosphere from where it was in 2019. So we expect that the market will continue to remain elevated. Obviously, we’re going to be comping to a pretty tough year, though, as we go forward. So we’re pretty optimistic. I think we’ve done a great job of taking market share and not just sitting back on our laurels and enjoying the fact that the operations team is cranking out product. We’ve also done a whole lot of work on the marketing side to be ready for any eventuality in terms of that. So we’re pretty – as I mentioned in my prepared comments, we’re pretty excited about the long-term.

[Cai von Rumohr:]

Terrific. Thanks so much.

[Deana McPherson:]

Thanks, Cai.

[Mark Smith:]

Okay.

[Operator:]

Our next question comes from Scott Stember with CL King.

[Scott Stember:]

Good afternoon, guys. Congrats on the very strong results and thanks for taking my questions. You were just talking about the market, and obviously, May, despite the fact that it decelerated, was still one of the best months on record. But in general, what are you hearing from your guys about the attitudes with regards to usage, right? Do you have any additional stats beyond what you gave last quarter about people hitting the ranges and just out there and actually using their guns versus prior surges where it was more stockpiling?

[Mark Smith:]

Yes. I think we – as we’ve talked about, and I think it’s been very well publicized, the influx of new firearms owners over the last year, 8 million in 2020 and probably another 2 million or 3 million on top of that since the end of 2020. So you’re probably talking north of 10 million new firearms owners coming into the marketplace. A lot of those are new entrants into the market, excited about it, excited about using their product, learning – becoming proficient. And as you know, and we talked about quite a few times, we’re doing a lot on that to try and reach out to those folks, how do we talk to them, where do they – where – what are the best channels, what messaging should we be sending, the GUNSMARTS videos, but beyond that, social media, etcetera, reaching out on non-endemic advertising and how do we engage with those new consumers. I think a lot of those new consumers are going to – and again, as we’ve talked about, expanding the demographics of the traditional firearms owner making it less of less of a partisan, if you will – gun ownership less of a partisan issue and more of just an American issue or American right and passion. So I think that’s good for us, for Smith & Wesson, and good for us as an industry. In terms of the here and now right now, I think we’re seeing a little bit of a summer seasonality like we’d normally always do this time of year, but the anecdotal feedback we’re getting from our retailers it’s summer seasonality, but it’s not – it’s not back to 2019 by any way, shape or form. So it’s maybe down off of November, December. We usually have our peaks, but it’s at a different level than it was 2 years ago.

[Scott Stember:]

Got it. And much has been made with a lot of people with the economy opening back up and people going back to some of their previous outdoor or just activities in general, you’re not hearing anything to suggest at some of these newer owners that have guns are just walking away, just trying to get a sense if you’re hearing there?

[Mark Smith:]

No, we’re not hearing anything to that effect.

[Scott Stember:]

Alright. And then lastly, just following up on the last question before that, you talked about ammunition shortages and the impact that’s having on new gun sales. Can you just maybe expand upon that? Is that getting any worse, any better or is it just going to probably be the same headwind for this year coming up?

[Mark Smith:]

We are hearing a little bit of pockets of folks being able to get a little bit of ammunition on the shelf. But I will say the general answer is no, it’s not getting any better. It’s not getting any worse either. I think that’s just kind of remains to be an issue. And I mean, I think the ying and the yang of that for us, frankly, is that yes, it can have a dampening effect on the firearm sales, but it also shows a pretty strong continued interest in shooting sports in general. So I think that’s a bit of a headwind for us in the firearm sales, but it’s also a bellwether for the industry in general.

[Scott Stember:]

Got it. Alright. That’s what I have. Thanks.

[Mark Smith:]

Alright. Thanks, Scott.

[Operator:]

Our next question comes from James Hardiman with Wedbush Securities.

[James Hardiman:]

Hey, good afternoon. Wanted to circle back to this manufacturing capacity, we talked about the difference in operating days, 4Q versus 3Q. By my math, I guess, to about a 6% sequential benefit, if you want to call it that, 4Q versus 3Q. But you actually grew shipments more like 24%, and handgun shipments were up 30%. So obviously, I understand that production capacity and shipments aren’t quite the same thing. But maybe fill us in on how you’re able to accomplish that, especially given, I think, what you noted was a key supplier shutting down, which – where you lost a little bit of time.

[Deana McPherson:]

Yes. So we lost a little time. That lost little time is for Q1. That did not impact Q4.

[James Hardiman:]

Okay.

[Deana McPherson:]

Okay. So, that comment referenced kind of the first quarter look forward, but there is a definite mix issue or a positive benefit of mix, what it takes to make certain products versus other products, you can make certain products faster. The other thing is that you might notice a little bit of inventory change. We were gearing up for a ship plus launch at the end of January. We had already made the product in January, and had put it into inventory so that we could stock our distributors and dealers ahead of time. So you would see more sales in the beginning part of March. Mark noted that we sold an awful lot of those Shield Pluses during the quarter. And so those would – we would have been starting to stock those up in Q1. So – sorry in Q3. So Q4 ended up taking advantage of that.

[James Hardiman:]

That is really helpful. And so as I think about modeling this going forward, should I not then think about sort of the fourth quarter shipment numbers as the sort of max capacity? It seems like what you’re saying is that maybe more than what your actual production capacity use assuming that you’re going to be making as much as you can, at least for the next couple of quarters, which is what it sounds like you’re saying. Should we assume that there’s been – that it’s maybe closer to the third quarter level, obviously, adjusted for the difference in production days?

[Deana McPherson:]

Right. Yes, I think that’s a great way to look at it. And then sort of layer in the fact that Q3 had a lot more holidays, it was a little bit lighter. I think it’s 56 days. And then consider that we did have a bit of a supply chain disruption in May that we’ve recovered from, but that you’re not operating on 100%, as you might always do. So I think about looking at Q3, we didn’t add capacity in we just were able to turn around some mix and then take advantage of the Shield Plus launch.

[James Hardiman:]

Got it. That is extremely helpful. And then just lastly, the most difficult one to actually know, but how long do you think it takes before you’re able to get back to – obviously, you have to make some assumption about retail here. But given where inventories are, how long do you think it takes to replenish end market inventories from here?

[Mark Smith:]

Yes, obviously, there’s a lot of factors that go into that, James. But obviously, the biggest lumping, the demand levels, right? So where do they go from here? And do they stay elevated? And we believe they will versus 2019. But what will the seasonality look like, etcetera. But I think the one thing on inventories to just note is that while we are hearing some anecdotal feedback from some of the retailers that they’re definitely able to get some pockets of inventory back on the shelf again in certain categories. There are other categories that remain sold out. For example, for us, revolvers is pretty short supply out there and just in general. And our distributor inventories remained at one week. And that’s the number that Deana gave there is actually as of today, not as of the end of a quarter. So there’s still a significant restocking that’s going to have to take place. When that happens, I guess, is going to be a factor of the demand.

[James Hardiman:]

Got it. Mark and Deana, thank you.

[Deana McPherson:]

Thank you.

[Mark Smith:]

Thanks, James.

[Operator:]

Our next question comes from Rommel Dionisio with Aegis Capital.

[Rommel Dionisio:]

Hi, good afternoon. Thanks. First question, on the professional channel unit shipped, obviously, a smaller portion of your business in sporting goods, but those big jump on the handgun side. And I wonder if you could just talk about that a little bit. It just doesn’t seem – I mean, it’s a 52% increase year-over-year, and that doesn’t seem to be a sector of the industry that is all that cyclical? I wonder, was that a big contract or new products? So what really kind of drove that handgun increase?

[Deana McPherson:]

So I’ll have to drive you back, Rommel, to – it’s a great question. And because it is a smaller part of our business, we didn’t actually focus in our prepared remarks. But last year, in the fourth quarter, we were moving from state to commerce. So a lot of the ability to ship internationally were really held up by the government. And the other thing is that the European governments were hit really hard earlier than United States with COVID-19, and they actually shut down a lot of the shipments in and out. The freight carriers couldn’t get product in and out. So, that was more of the state the commerce stuck between January and February and then in March and April, the impact of COVID on all of the European and other countries that would normally receive shipments for the professional sales.

[Rommel Dionisio:]

Okay. But Deana, wouldn’t that have impacted the fiscal ‘21 as well? Or was that pretty much wrapped up by, what, April of a year ago?

[Deana McPherson:]

Yes. Yes, it’s been wrapped up. Europe has been accepting shipments, and commerce has been running for over a year now. So if you look at February, March, April of this year compared to February, March, April of fiscal ‘20 is sort of night and day as to the way that Europe has been receiving product and the way that commerce has been running, there’s not any holdups in-licensing when you want to ship international anymore.

[Rommel Dionisio:]

Okay, great. Thanks very much.

[Deana McPherson:]

You are welcome.

[Mark Smith:]

Thanks, Rommel.

[Operator:]

I’m not – showing no further questions in queue at this time. I’d like to turn the call back to Mark Smith for closing remarks.

[Mark Smith:]

Thanks, operator. And I just want to thank everybody for joining us today. Once again, congratulations to my fellow Smith & Wesson team members for a record-breaking year. And just as a reminder, please note that, as we mentioned earlier, we will be conducting an Analyst Day presentation tomorrow at 9

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.