American Outdoor Brands (NASDAQ: AOBC) faces in 2017 what could be its worst year yet if its business matches its recent stock performance. Last year was pretty good operationally for the guns and outdoors gear maker, but its stock essentially did nothing, ending 2016 slightly lower than where it started.
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That could get worse this time around, as its primary firearms market is expected to slow dramatically and it pushes off into uncharted territory with a bold move into a new market.
Image source: Getty Images.
Shooting itself in the foot
Last year was a record-breaking year for the firearms industry. The FBI conducted more than 27 million background checks on individuals wanting to buy a gun, 19% more than in 2015, the previous record high year, and it ran a streak of 19 straight months where the number of investigations conducted was higher than in the year-ago period.
Yet that record run was snapped in December when the number of background checks conducted fell below what it had been in the prior year. At the recent industrySHOT Showtrade show, Smith & Wesson pointed out that when it looked at the adjusted numbers put out by the National Shooting Sports Foundation, which eliminates checks on permits and active concealed carry permit holders to provide a better indication of industry conditions, it found demand for handguns was down nearly 30% and long guns were off almost 9%.
Data source: FBI. Chart by author.
That's troubling for American Outdoor because it generates most of its revenues from sales of handguns. In its fiscal second-quarter earnings report, handguns accounted for 72% of all firearms sales and 60% of total revenues. Firearms, whether handguns or long guns, accounted for 83% of total revenues. Over the first six months, firearms represented 88% of total sales, so if the industry is slowing, American Outdoor is going to feel it.
Wandering into the wilderness
But the gunslinger is trying to minimize the outsized role firearms plays in its business by entering the $35 billion outdoor recreation market. First dipping its toe into the stream with its 2014 purchase of gear and equipment maker Battenfeld Technologies, American Outdoor waded in waist-high last year with a series of acquisitions to really jump-start its effort to change its focus. It first bought knife manufacturer Taylor Brands that it had a long relationship with and then purchased Ultimate Survival Technologies, a maker of camping and survivalist equipment.
The biggest change was its decision to rename itself from Smith & Wesson to American Outdoor Brands. Although accessories and such only accounts for a relatively small percentage of its sales, being identified solely with its firearms no longer represented the vision it had for the full range of products it carries or will produce in the future. Opting for a bland, if somewhat patriotic, new corporate identity, American Outdoor hopes to encompass a grander vision for where it's heading while downplaying the importance and volatility of its gun business.
Image source: Thomson/Center.
Growth by acquisition
The risk is that it is entering a market where it has little experience, and it will largely be growing by making acquisitions. While purchases like Taylor Brands and laser sight maker Crimson Trace are very complementary to it because they were both longtime suppliers and were a good fit with its firearms customers, expanding into the rugged outdoors market puts it in competition with rivals like Vista Outdoor (NYSE: VSTO), REI, and others that have greater experience serving in the niche. The industry's size, fragmentation, and growth may allow for yet another player, but there's no guarantee of success.
Moreover, the growth by acquisition strategy is often not a successful one because rollups rarely see the synergies often touted when the deal is made. While American Outdoor is currently happy to make numerous smaller deals, it has not ruled out what it calls a "transformative" one, and that is often where the mergers and acquisitions route to growth falls apart.
So far, the acquisitions it has made are seemingly smart and let American Outdoor acclimate itself to the new conditions. But that could derail quickly, particularly if the gun market implodes as some suggest could happen and its performance appreciably declines. In such a scenario, investors will find 2017 to be American Outdoor Brands' worst year yet.
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