What Investors Should Focus on in American Outdoor Brands' Q3 Earnings

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There's good reason for investors to hope that American Outdoor Brands' (NASDAQ: AOBC) fiscal third-quarter earnings report will beat analyst expectations. Although it's doubtful the gunmaker will be shooting out the lights as it was a few years ago, the report that will come out on Thursday, Feb. 28, has a decent chance of showing that the Smith & Wesson owner is on target for growth.

A recovering gun market

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Naturally, all eyes will turn first to the company's firearms division to see how gun sales fared. Handgun sales, which comprise the bulk of American Outdoor's firearms sales, fell 1.8% last quarter, and shipments to the consumer channel were also down in the first quarter. But they were appreciably better than adjusted National Instant Criminal Background Check System data indicated.

While background checks don't translate one for one into gun sales, they're a good barometer of buyer demand, and the checks were depressed for most of last year. Yet for the three months that will comprise American Outdoor's fiscal quarter -- November, December, and January -- the year-over-year decline in background checks performed has greatly diminished, and January's numbers were actually up 3.4%.

That's the first monthly increase since May 2017, if you ignore the 10% gain last March following the Parkland school shooting in Florida the month before. The gun industry may have finally reached its nadir and may be ready to start growing once more.

American Outdoor has also been enjoying considerable strength in its long-gun division, having recorded double-digit growth rates over the first two quarters of the fiscal year. Now, while much of the gain the firearms segment has seen was the result of a revenue-recognition policy change, there has still been increased demand, and that may carry over now that the industry itself seems to be picking up.

As the biggest firearms manufacturer in the country, American Outdoor should necessarily rise and fall with the ebb and flow of the market in general. Further, the fall season tends to pick up as hunting becomes dominant, and then there are the holidays.

The great outdoors are getting greater

Better results might be obtained in the outdoor products and accessories segment, which is increasing in importance to the gunmaker. Last quarter, division sales accounted for a third of total sales. Part of that, of course, is because gun sales have fallen sharply from their highs a few years ago, so other products will account for more of the total. But through acquisitions, American Outdoor has cobbled together a growing collection of goods that are enjoying sales growth.

Outdoor product sales are up 8% year to date, and much of that expansion has come from shooting-sports accessories, which likely coincides with the improving firearms market. But growth also came last quarter from cutlery items, which American Outdoor attributes to new products it has introduced over the past few years. It has acquired several well-known knifemakers in that time frame. Also, the company just completed the purchase of consumer laser products and training company LaserLyte, which makes firearm training systems, laser sights, and bore sights.

Focusing on the numbers

American Outdoor surprised Wall Street last quarter by raising its guidance for the third quarter, forecasting profits of between $0.09 and $0.13 per share on revenue of between $155 million and $165 million. The midpoint of analyst estimates at the time pegged revenue at $158 million, and earnings at $0.10 per share.

The gunsmith topped not only what the market was expecting in the second quarter but its own forecasts as well, and by upping its guidance now, it is anticipating stronger results from the better environment the industry is finding itself in. That belief in better times seems to be justified, so although American Outdoor Brands may not be approaching the performance of a few years ago, investors ought to see a bigger, better, and healthier gunmaker than they've come to expect these past two years.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.