American Outdoor Brands (NASDAQ: AOBC) may have wanted to distance itself from the volatile firearms industry when it changed its name from Smith & Wesson Holding to its current, bland moniker, but as gun sales continue to slow, shares of the recently rechristened company continue to fall.
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Since the start of 2017, American Outdoor's stock is down nearly 9%, and shares sit more than 15% below where they were a year ago. However, as the year progresses, investors should get a better understanding of how it plans to grow its business again and increase value for shareholders.
Image source: Smith & Wesson.
Gun sales normalizing
Investors got a taste of what was to come last month at the 2017 SHOT Show, the firearms industry's biggest event sponsored by the National Shooting Sports Foundation. American Outdoor put on a show of its own beyond the display of new firearms and accessories it introduced, like the M&P 2.0 handgun now available in .45 ACP, or the new laser sights and grips from Crimson Trace.
In a presentation for investors, the gun and accessories maker indicated background checks of gun buyers (adjusted to eliminate factors like checks of current concealed carry permit holders) showed December's numbers plunged more than 17% from the year-ago period, a more severe drop than the FBI's data implied. Even though it was still a record year, it points to the normalizing trend of gun buying going on since the election of Donald Trump -- and January's numbers weren't any better, with the official NICS numbers down another 20% year over year.
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Of course, even though these background checks are lower from the year-ago month, they do still represent historically high levels of interest in gun buying; they're just not all-time highs. December, for example, was the highest ever for the month except for 2015 and 2012, two periods notable for tragic shootings in Newtown, Connecticut, and San Bernardino, California.
Data source: FBI. Chart by author.
And with more than 2 million background checks conducted during the month, January was also the highest ever except for 2016 and 2013, the two months that followed those mass shooting incidents. So it's not that people aren't interested in buying guns anymore, it's just that it's no longer at the fever pitch it once was. Which is why American Outdoor wants to take a different path.
Buying into the industry
The investor presentation revealed it has a strategy for making acquisitions that will build long-term value for the company. Much like last year's acquisitions of Taylor Brands, Crimson Trace, and Ultimate Survival Technologies, American Outdoor seeks out brands in their respective niche that have developed a following among its customers and are led by capable managers, but which it can use to "build our business around the consumer we already know."
The rugged outdoor market is estimated to be a $45 billion to $50 billion opportunity, consisting of the $14 billion shooting and hunting segment American Outdoor is exceptionally familiar with, plus the much larger $30 billion to $35 billion outdoor recreation segment that it is entering into. Included in that broad sphere arepastimeslike camping, hiking, and fishing that its existing customers are probably already pursuing.
Image source: UST Brands.
A hunter is likely to also camp and fish, andbecauseAmerican Outdoor is familiar with the one individual, it now ought to be able to cross-sell him these other brands. Thus knife maker Taylor Brands, which was already a licensee for Smith & Wesson, is a natural extension into that market. Ultimate Survival, which opens American Outdoor further to the camping field, also gives it entry into the survivalist and prepper communities. Crimson Trace, of course,providesa further reach into firearms, but now gives it a new range of products for aiming, ranging, and magnifying, as well as scopes for a variety of applications. That will make American Outdoor more like Vista Outdoor (NYSE: VSTO), which targets much of the same demographic.
What American Outdoor wants to do, however, is take these new business opportunities and calve off into a centralized area those functions of running the business that would otherwise distract it, such as HR, accounting, and legal.
Guns and the Smith & Wesson brand aren't going away, as American Outdoor Brands' first product introduction of the new year was its M&P 2.0 handgun, and it will still represent the lion's share of revenue coming into the business. In 2016, that amounted to 83% of the total. Yet through targeted acquisitions, the rugged outdoors company is looking to grow that base so that over time, the outdoors will comprise an ever-larger percentage of revenues and become increasing important to its day-to-day operations.
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