American Outdoor Brands is an Interesting Company
American Outdoor Brands (AOUT) is a company with some interesting history, changing its name from Smith and Wesson to American Outdoor Brands, and then spinning off the firearm manufacturing division, Smith and Wesson, due to ‘change in political environment,’ according to the company itself. AOUT not only spun-off the most controversial business to keep the least controversial business, but also kept the business that provided higher margins than what Smith and Wesson gets to keep. So AOUT solved two problems with one solution.
American Outdoor Brands consists of different brands that cater to a wide range of consumers interested in outdoor recreational activities, such as hunting, camping, and fishing. AOUT has tried to distance itself from the firearm manufacturing business, but it is still involved in providing firearm accessories. 2020 and 2021 was a very unusual year for many businesses, as some witness their sales skyrocket while others were struggling to maintain customers. Sales not only went up more than 60% after the pandemic, but so has margins improved. Much of the sales were derived from excess demand caused by people having more time for recreational activities, so it is hard to say whether sales will stay consistent for the coming years.
Revenue for FY21 was $276 million with a gross margin of 46% and Net Income of $18 million. Cash flow from operations is more than $30 million, and the company does not have any debt or major liabilities. For FY20 and FY19, sales were $167 and $177 million respectively, and cash flow from operations was $8.5 million (2020) and $3.8 million (2019). For FY22, the company is expecting $280 million in sales and $42 million in EBITDA on the lower end, which I think should be on the higher end. While the sales amount is expected to go up, I think it will be due to higher prices rather than volume. It is true that the recreational industry has seen huge growth in new customers, this trend will not continue forever, at least at the same pace it did in 2020. I believe the company is being too optimistic based on the growth it has seen in recent years. I do expect sales to grow in the mid to high single digits in the future based on its focus on increasing their products and widening their consumer base. Majority of the business growth will be derived from sales and marketing, as there are many competitors in this space, selling similar products.
One of the interesting things I find for this company is that it introduces 250–300 new products every year, and about 35% of its sales comes from these new products. Also, the company is diversifying into other segments related to recreation activities. This gives the company a stronger business model to deal with in the future, especially given the uncertain regulatory environment that can indirectly impact American Outdoors’s business and directly impact Smith and Wesson’s business. While American Outdoor only has a small market share, it does seem to have a loyal customer base, which may be due to its association with Smith and Wesson. The company also focusses on e-commerce channels, which might appeal with the younger demographic.
One of AOUT’s major competitor is Vista Outdoor, which has 10x more revenue than AOUT, but lower margins. While AOUT’s revenue grew 67% in 2021, Vista’s revenue only went up 30%, which explains the higher multiple American Outdoor has compared to Vista. The company does have manufacturing contracts with third parties in Asia which might give it some flexibility on wage pressure compared to American manufacturing companies. Recently, due to negative sentiment in the market regarding higher COVID cases, and unrealistic optimistic expectations set by Wall Street analysts, many stocks have seen their stocks go down 10–20% on earnings, when material information disciplines the wild optimism. Similar story for AOUT as well, where they missed their recent earnings estimate. The recent announcement of $15 million share repurchase program will help boost EPS, and increase shareholder value by utilizing the excess cash it has on its balance sheet.
Overall, based on the business operations and analysis, I think American Outdoor Brands is worth $400–500 million, which is significantly higher than the $260 million market cap as of today. Their ability to maintain higher margins and launch new products successfully will help them compete with other competitors. While there is uncertainty in this business due to political factors, it is a risk that I am comfortable dealing with for the time being.