Smith & Wesson Brands, Inc. Price & Performance (SWBI)

Reconciliations of GAAP financial measures to non GAAP financial measures can be found in our SEC filings and in today's earnings press release. Of which is available on our website. Also when we reference EPS, are always referencing fully diluted EPS and any reference to EBITDAS is to adjusted EBITDAS. Before I hand the call over to our speakers, I would like to remind you that when we discuss NIICS results, we are referring to adjusted NIICS. A metric published by the National Shooting Sports Foundation, which based on FBI NIICS data. Adjusted NICS removes those background checks conducted Adjusted mix is generally considered the best available product for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed not to end consumers, Nix 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 Smith, our President and CEO and Deena McPherson, our CFO. With that, I will turn the call over to Mark. Thank you, Kevin, and thanks everyone for joining us today. Our top line revenue for the third quarter came in slightly below our target range.

However, lower operating expenses and leveraging of our flexible solid profitability regardless of demand conditions. Our 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. 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. We expect to continue the strong momentum going forward. Looking at market share for the third quarter, adjusted months of year over year declines were followed by a small increase in January, while our shipments into the channel declined by 7.7% in the period. Breaking those numbers down, we believe we gained share in hand handguns with overall handgun mix down 4.1% in Q3, while our shipments into the sporting goods channel were only down 3%. Driven by strong demand for the new Bodyguard two point zero. In long guns, NICS was down 3.9% in Q3, while our shipments declined 26.7% due largely to outperformance in the prior year period of newly introduced products, specifically our FPC rifles. 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.

While the introduction of our lever action rifle that's been extremely positive and is helping with this dynamic, Our product offerings in the category are still narrow and we It is also important to note that on a two year basis, annual rate of nearly 20%, well ahead of NICS. 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. Average selling prices as expected trended lower in Q3 with overall ASPs moderating to a 3.1% decline versus the prior year period. Mix was the primary factor in driving our overall ASPs. In handguns, our ASPs declined 7.8%, again reflecting strong demand for the new Bodyguard two point zero, which is priced at retail around $400 combined with lower revolver sales. In long guns, our ASPs increased 17.2% in Q3, driven by strong demand for our higher priced lever action rifles. Turning now to the overall firearms environment. Macroeconomic conditions continue to bifurcate and heavily skewing to new products or lower price points. Our new product pipeline positions us very well in these conditions. With the success of our Bodyguard two point zero as a great example, a unique innovative product at a compelling price point.

And as I mentioned earlier, we expect that our slate of introductions scheduled over coming months will continue this momentum. Additionally, and also as mentioned earlier, our and a current promotion active on our core line of pistols. Our balance sheet remains strong and we continue to be disciplined in managing our business and allocating capital to drive value for [indiscernible] Internal inventory levels are slightly elevated due to lower than anticipated Q3 sales combined with normal season as we prepared for our typical busy fourth quarter. Through our robust monthly sales and operations planning process, which aligns production levels to sales forecasts, we expect to continue adjusting manufacturing to drive lower internal inventories throughout Q4. 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 pay our quarterly dividend of $0.13 per share, which Gina will cover in more detail in a moment, and continue to reinvest in innovation and manufacturing efficiencies. I'll also note that during the third quarter, we repurchased another 220,000 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 1,500,000.0 shares net of dilution.

And during the past twelve months, we have returned more than $49,000,000 of capital to our stockholders through our stock repurchase program and strong dividend. Looking further forward, we anticipate that the firearms market will remain steady at current demand levels. 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 stockholders, we believe we are well positioned for continued success. Before I hand the call over and as always, I just want to thank our entire team of talented Smith and Wesson employees for their Tyler's dedication in putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Dina to cover the financials. Thanks, Mark. Net sales for our third quarter of $115,900,000 were $21,600,000 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 in given the election results and the impact of persistent inflation.

While our new products continue to perform very well, we are seeing lower demand for our core product portfolio, which is negatively impacting both our top line and margins. During the quarter, inventory in the distribution channel dropped by over 15,000 units, while holding steady in terms of weeks outstanding. Handgun ASPs declined for the second consecutive quarter, which reflecting the impact of lower priced products and promotions. ASP for long guns increased due to the mix of higher priced products including the introduction of additional lever action calibers.

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.

Operating expenses of $23,800,000 for our third quarter were $4,300,000 lower than the prior year comparable quarter, due primarily to a $2,300,000 gain on the sale of property in Missouri. Excluding this one time sale, Opera due to lower costs associated with the relocation and lower related compensation expenses, we was slightly offset by higher R and D costs associated with new product development selling and marketing costs associated with promotional activities. We ended the quarter with net income of $1,700,000 or $0.04 per share On a non GAAP basis, income per share was $0.02 Cash used in operations for the third quarter was $9,800,000 dollars compared with $25,400,000 of cash provided in the prior year comparable quarter, to a larger increase in net working capital in the current quarter combined with lower net income. We spent $6,300,000 in capital projects in the third quarter compared with $18,200,000 in the prior year comparable quarter, primarily due to lower investment in the current year related to the relocation. We expect our capital spending for the year to be between $20,000,000 and $25,000,000 During the quarter, we repurchased approximately 220,000 shares at an average price of $12.94 We paid $5,700,000 in dividends and ended the quarter with $26,700,000 in cash and $110,000,000 in borrowings.

On our line of credit. Subsequent to quarter end, we repaid $10,000,000 on our line of credit and expect to repay additional amounts during the remainder of the fourth quarter. Finally, our Board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on March 20, with payment to be made on April 3. Looking forward, we continue to expect full year revenue to be down 510% from fiscal twenty twenty four, which is consistent with what we said last quarter. 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. This would put our fourth quarter down from the prior year quarter in the 2% to 5% range. With lower production levels during Q4, given our desire to reduce inventory, expect manufacturing absorption to be a factor. Resulting in lower margins than we historically have seen in our busiest quarter. As a result, fourth quarter margins will likely be leading full year margins to end a few percentage points lower as well. Channel inventory is expected to remain stable and we believe the distribution channel remains cautious and will continue to manage their inventory care We expect 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.

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 $10,000,000 that we repaid in February.

We believe that our ending leverage will be well under two times puts us in a good position to continue to invest in our business. As a reminder, our capital allocation plan can remain debt free and return cash to our stockholders. With that operator, can we please open the call to questions from our analysts?

Thank you. It may be necessary to pick up your handset And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Please proceed. Hi, guys.

I apologize, I missed a little bit of the call, but I wanted to just check on a few things. [indiscernible] new product sales looked really good. But as we look at sales of kind of non new products or legacy products, if you will. Can you just walk through, do you feel like it's consumer weakness that's kind of hurting there? Or is there competitive pressures? Walk us through kind of what you're seeing there. Hey, Mark. Yes, sure. I think a large part of that is frankly, the that Bodyguard two point zero specifically on the pistol side is probably cannibalizing a little bit of our own line. So I think overall that as we covered in the remarks, the pistol category we're gaining share there. But you're probably seeing a little bit outsized, obviously, impact from the Bodyguard versus the core line and there's probably a little bit of internal cannibalization as well as obviously cannibalizing the competitive products. So I think and that said, as we covered and I think you can see from the NICS results in February and the inflation continues to pressure that consumer discretionary spend. And so it is a pretty competitive market out there.

So I mean the new products whereas it kind of used to be just gravy on the top, now it's maybe a little bit of cannibalization of our own and Okay. 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 you feel like everybody's behaving and kind of the health of the industry today? Yes. I think on that front, Mark, it's pretty good. I mean, I think the distributors our distributor inventory is right at about eight point five weeks right now. So we're very comfortable. It's right on target. Everybody's doing a good job of making sure they hold the whole line, but not getting out over skis. And I think the dealers are in the same boat. So So I think 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 we're pretty comfortable that the market going to remain steady at where it's at right now. There's we don't see any major demand catalysts coming up here.

Obviously, some can be unforeseen, but the biggest thing for us right now again is just that if we can see that economy start to turn around that discretionary spend, availability start to go up, which we we're optimistic on over the long term, then that's going to be a nice tailwind for us. And we'll see we should see that demand increase translate to demand channel inventory is really good right now.

Okay. And the last one for me. Just topic of the day and the last few days certainly seems to be tariffs. You 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 regulatory environment, any changes that you're seeing whether in states or at the federal level in if you wanted to comment at all, any thoughts around Supreme Court case, it was just heard the other day?

Sure.

I'll start off with tariffs. So I think You're well aware that we're an American made product. It's We a lot of our supply chain is domestic. So we do have some supply that comes in from overseas and from foreign countries that would be impacted by the tariffs. All of that has been kind of dialed into our numbers into the guidance that the direction that Dina gave. So it's not in any way shape or form going to be material impact to our numbers for the rest of this year and next year. Year. So on the regulatory environment, we were pleased to see some some good movement there from the current administration stability on what the regulatory environment is going to look like going forward, which is where really, obviously, as any business is what we need as we just need stability. We operate, obviously, we're proud to operate within the balance of the regulations and laws that govern our industry. We just need stability and we're happy to see that that looks like at least in the foreseeable future here that we're going to get that So we're pleased. And then on Supreme Court case, I think we don't we really don't discuss ongoing litigation.

I'll suffice it to say, I know we 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 early summer.

Excellent. Thank you, guys. Our next question comes from the line of Steve Dyer with Craig Hallum. Hi, guys. This is Matthew Rob on for Steve. Just starting on ASPs, nice performance there on the long guns.

Sounds like it was the eighteen fifty four mix, which is good to see. How do you think about the Q4 ASPs? It sounds like handguns are maybe flattish and any outlook for the long gun category?

Yes.

I think on the handgun side, I think I covered a little bit of that in the prepared remarks. But I think you're going to kind of see more of the same in Q4 as you saw in Q3. Our mix right now on the long gun side, the proportionate amount of lever actions that we're selling versus the core the MMP-fifteen and the shotgun line should really kind of remain the same. [indiscernible] Q4 and then on the handgun side, again, we have a couple of new products coming out, but it shouldn't materially change that number.

Okay, got it. And then you're willing to comment not looking for sort of specific guidance, but can you frame kind of 2026 for us? What are you looking to accomplish within the company? Is it new product intros? Are you focused on market share? Taken margins? Any color there would be great.

Sure. Yes, I mean, I think as we look forward into 2026, we're still early days. We still got this year to close out, but obviously, we are starting to look out into the next twelve, eighteen months. I think as I as I talked about earlier, it's we expect the market to remain steady And this is remember, this is the environment. I think if you look at Nick's chart, and just kind of put a stack twenty year chart on it, you're going to see that the NICS results that you're seeing right now are kind of trending with right along with where they historically fifteen, twenty years and look at 2019, 2020 even. So So for us, that's we talk a lot about flexible manufacturing model, but that's exactly what the flexible manufacturing model is designed to do is to react to those upswing but also be remain very profitable when the market returns to normal as it has. So for us, how do we continue to grow? I mean, I think we're expecting obviously, always planning for growth. I think this year that growth going to be fairly modest. Lacking any demand major demand catalyst. And then how do you do that?

Well, that's new product right? I mean, and that's I think we've proven. We're multiple, multiple awards for innovation. I think we're kind of viewed as a front runner there in the innovation category within the firearms industry. We're going to continue that. And not just on our core line, but also how do we expand into other white spaces within the firearms. Market.

So Okay. That's great. Thanks guys. Thanks, Matt.

And the next question comes from the line of Rommel Dionarcia Smith Aegis Capital Corp. Good afternoon.

Great. Thank you. Could we just talk about the the handgun category for a second? For years now, there's been a shift, right, 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 [indiscernible] lower price point is helping to accelerate that or would you say that's just more continued move to kind of a smaller frame concealed carry that category. Obviously, you're well represented there with products like the Bodyguard two point zero. I wonder if you could just chat about that. Thanks.

Sure. I think it's a little bit of both.

You're right that there's been a big trend towards concealed carry [indiscernible] obviously that's been the success of the bodyguard is as I talked about was a little bit of a combination of the fact that it was a great concealed carry product, but it's also at an entry level price point for for a premier band like Smith and Wesson. So it's kind of hits both of those and I think really that's the sweet spot that we that's driving the success of that product. So directionally for the handgun market, I think as I talked about, it's kind of bifurcating a little bit. You've got that. You definitely that entry level and But even within every one of those categories, it's kind of going towards the lower end, the entry level price point products. And then there's also we're also seeing some some success with things like our metal M and Ps, which are at the higher end, but it's something unique and different. You've got to give that consumer a reason to get excited about the product, about the brand, right? So that innovation is still successful on the high end. It's just you've got to have something compelling for them for that consumer to get excited about.

So it really kind of is bifurcating to the entry level and to new product And we can get up on the On the higher up on the ASP. Chain. We just got to have something that's exciting and we obviously found some success there with the metal M and P and we're going to continue to look for things like that. Okay.

And maybe my follow-up question on switching to the long guns side. Mark, I think you talked about in your prepared comments potential future product launches in that kind of traditional hunting category. Could you just remind again what the potential margin impact of that would be you have a shift in long guns, perhaps slightly away from MSRs to those more traditional categories.

Sure. Yes, I mean the 1854 been very successful and as I said in the remarks, we definitely expect and plan to continue to build that line out for across the entire category, multiple caliber that we're not into yet, some of the more Some of the most popular ones were are still in the works. So as far as margin, we don't really give too much color and guidance on margin by product line Ronald. But what I can tell you is that the margins of the eighteen fifty four is not materially different from our core line. Of rifles.

Okay. Thanks very much. That's very helpful.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll hand the call back to Mark Smith for closing remarks.

Thank you, operator, and thank you everybody for your joining us today and your interest in Smith and Wesson. We look forward to speaking with you all again next quarter.

This concludes today's conference. You may disconnect your lines at this time.

Enjoy the rest of your day. [indiscernible]