Smith & Wesson Brands Inc (SWBI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 American Outdoor Brands Corporation Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

And I would now like to introduce your host for today's conference, Ms. Liz Sharp, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue; earnings per share; non-GAAP earnings per share; net debt to adjusted EBITDA's ratio; fully diluted share count and tax rate for future periods; our product development, focus, objectives, strategies and vision; our strategic evolution and organizational development; our market share and market demand for our product; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms 8-K, 10-K and 10-Q. You can find those documents as well as a replay of this call on our website at aob.com.

Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today.

I have a few items to note with regard to our comments on today's call. First, we reference certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude acquisition-related costs, including amortization, onetime transition costs, a change in contingent consideration liability, fair value inventory step-up and backlog expenses, discontinued operations and the tax effect related to all of those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in today's Form 8-K filing as well as today's earnings press release, which are posted on our website or will be discussed on this call.

Also, when we reference EPS, we are always referencing diluted EPS. For detailed information on our results, please refer to our quarterly report on Form 10-Q for the quarter ended January 31, 2018.

And with that, I will turn the call over to James Debney, President and CEO of American Outdoor Brands.

Thank you, Liz. Good afternoon, and thanks, everyone, for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance as well as our guidance for the fourth quarter and fiscal year.

Our results for the third quarter reflected a continuation of challenging conditions in the consumer market for firearms. Lower shipments in our firearms business were driven by a reduction in wholesaler and retailer orders versus the prior year and were partially offset by double-digit revenue growth within our Outdoor Products & Accessories segment.

In firearms, we believe the orders were negatively impacted by weaker consumer demand, in general, as reflected by a decline in NICS background checks coupled with ongoing heightened channel inventory of firearms at retail. Despite these elements, our focus on reducing internal production outputs and outsourced capacity during the quarter helped to lower our firearm inventory both internally and at distributor locations. Overall, our long-term strategy remains focused on being the leading provider of quality products for the shooting, hunting and rugged outdoor enthusiast. Continued growth in our Outdoor Products & Accessories business will help us better balance our overall revenue by mitigating the volatility we have experienced with our firearms business.

With that introduction, let me provide some details. Many in the firearms industry follow the monthly adjusted NICS results, which measure the background checks conducted by licensed firearm dealers when a consumer purchases a firearm. The adjusted NICS number is generally considered the best available proxy for consumer demand. We follow this metric for the same reason, even though it's important to note that we do not sell directly to consumers. We sell only to law enforcement agencies and federally licensed firearms wholesalers and retailers.

With that being said, adjusted NICS results for our third quarter and particularly, for the month of January were lower than we had anticipated, far lower than can be attributed to seasonality. In fact, it was the lowest January adjusted NICS result in the last 6 years.

In our Q3, background checks for handguns declined 8.8%, while our units shipped into distributors and retailers declined 38.3%. Despite that decline, we believe we maintained our share leadership position in the consumer handgun market largely because retailers fulfill consumer demand for our firearms using their existing inventory of our products. For this reason, we also believe our unit sales relative to NICS results indicate that channel inventory reduction efforts by wholesalers and retailers were successful in the quarter.

Gross margins in our Firearms segment in Q3 were 23.4%, impacted by lower production volumes, which resulted in lower absorption of fixed overhead cost per unit. Those gross margins were also impacted by our participation in the promotional environment for consumer firearms that has persisted for the last several quarters. Successful promotions in our M&P and Thompson/Center product lines were designed to defend the market share during this period of market adjustment.

We are pleased that distributor inventory of our firearms actually decreased to a total of 175,000 units at the end of Q3 versus 213,000 units at the end of Q2. Since the end of Q3, this favorable trend has continued and our current weeks of sales at distribution are now at our 8-week threshold. Please note here that achieving this lower level of inventory of our firearms at distributors is important to us because it restores a healthy level of tension back into the ordering system. With that tension in place, distributor orders placed on us tend to be more accurately reflective of consumer purchasing activity at the retail level.

While we believe firearms retailers still have inventories higher than their required levels in the quarter, we also believe that firearm inventory conditions at the retail level have improved as well. This is based on information from 1 of our large distributors that surveyed the same 200 retail locations for the past several years. Recent data from that distributor reflects current retail firearm inventory levels that are comparable to 2 years ago.

As expected, our internal firearm inventories declined sequentially from their peak last quarter as we ramped down internal and outsourced production and benefited from the full hunting and holiday sales upswing offset by inventory builds to support multiple new product introductions.

During the period, we also significantly reduced our Outdoor Products & Accessories inventory, which typically runs between 20% and 30% of our total inventory. We recently launched an exciting new personal protection concealed carry pistol, the M&P380 Shield EZ. Several years ago, we recognized the existence of a large group of firearm owners that had difficulty racking the slide and loading the magazine on a semi-automatic pistol. When our engineers set out to design the M&P380 Shield EZ, our goal was to develop an easy-to-use personal protection pistol that these customers would be able to confidently operate, practice with at the range and carry concealed for personal protection. Throughout the development process, we focused on key areas that customers told us were important, and we incorporated these features into this revolutionary new pistol, allowing consumers of all statures and strength the opportunity to own, carry and effectively utilize this personal protection pistol. The M&P380 Shield EZ platform will be the basis for future models in several calibers and configurations that will be based on the ease-of-use concept.

Now turning to our Outdoor Products & Accessories segment, which includes our electro-optics business. Revenue grew 10.9% year-over-year, a combination of inorganic and organic growth. Gross margins in Outdoor Products & Accessories of 48.2% in Q3 validates our strategy to aggressively grow this segment and continue to diversify our business.

As within Firearms, our growth strategy in this segment is to innovate for the consumer with the objective of meeting their unmet needs, wants and desires. This is a clear focus for our creative product development and engineering teams who are enthusiasts themselves. Our ideation development process and execution in this segment was clearly on display at SHOT Show in January, where we launched nearly 150 new products across shooting, accessories, cutlery, tools and survival products. Some of these products provided our entry into completely new product categories. Let me provide a few examples.

Since acquiring Bubba Blade in August, which provided us entry into the very large fishing and hunting tool space, we've leveraged in-house product development and outsourcing capability to launch 10 new SKUs. These IP protected products include a tapered flex fillet knife, pistol grip pliers, split ring pliers and the ultimate fillet glove.

For the 32 million Americans that participate in target shooting at the range each year, our precision shooting accessories brand, Caldwell, released 3 new patent pending products geared for maximizing enjoyment at the range, including the market's lightest, most portable and stable shooting table at just 25 pounds in weight.

We also expanded our M&P-branded flashlight line with the introduction of 17 new LED-powered lights, positioning us against the competition with more value per lumen and arguably the most attractive and feature-rich tactical designs on the market. This includes the most compact 12,000-lumen handheld flashlight on the market that has 7 different light settings, a rechargeable battery, an integral battery light meter and is tripod mountable.

As part of our electro-optics division expansion, Crimson Trace, the leading laser sight manufacturer in the firearms market, also entered the large and diverse flashlight category. The company launched 4 new dual-purpose flashlights, which can be interchanged between handheld and rail-mounted configurations. In addition, Crimson Trace introduced several new laser and light products at SHOT Show, including red and green laser sights for Glock and HK pistols as well as a universal rail-mounted light.

And beyond all of these exciting new products, our development pipeline remains very robust. I look forward to sharing more details as they come to market.

Lastly, we made significant progress in the quarter toward developing our new distribution center in Missouri, a long-term objective that is well underway and will allow us to better serve our wholesale and retail customers. The precast walls have been installed. The steel roof installation is underway, and most of the underground utilities and mechanicals are complete. The original construction time line remains intact, and we're planning to start up in early December. The integration of various operations into the new facility will take place throughout calendar 2019. This important initiative will provide the framework for our future organic and inorganic growth and cost savings. I look forward to reporting on our progress in the coming quarters.

Now turning to the current environment. We have completed nearly all of our wholesaler and buying group selling shows, where retailers placed orders for the coming year. Those shows take place early in the calendar year, and they went well. While our new product development pipeline is robust and channel inventory levels appeared to be improving, we still believe that the new lower levels of consumer demand we saw reflected in the January NICS result may persist for some time.

During Q3, we effectively eliminated our component outsourcing and reduced our headcount by 200-plus individuals, which represents a 13% reduction in total manufacturing personnel. In fact, over the past 12 months, we have reduced our total manufacturing personnel by about 25%. Going forward, we will operate our business under the assumption that the next 12 to 18 months could deliver flattish revenues in firearms. Should market conditions change, our flexible manufacturing model allows us to quickly ramp production.

In the meantime, we'll focus on optimizing our manufacturing resources to align capacity with demand while preparing for a number of meaningful new product launches, reducing costs across the entire organization and generating cash; growing our business and particularly, our outdoor products business organically through the development of new products across our well-known and respected consumer brands. Developing new products, a large component of our organic growth strategy, is focused on continuous product innovation, and we are excited about the pipeline of new offerings in development with a wide range of additional products planned for rollout in fiscal 2019.

We believe the firearms market will eventually return to long-term growth, though, it's a slower pace than experienced in the last 10 years. As we navigate the current challenging market conditions in firearms, we anticipate that most of our organic growth will come from the Outdoor Products & Accessories segment, which now makes up approximately 25% of our net sales and 45% -- 40% of our gross profit. For this reason, we will continue to aggressively work to expand our product offering across this segment of our business. At the same time, we will continue to invest in our new distribution center, an important strategic initiative designed to lower overall cost, structure and harvest synergies from prior acquisitions.

With that, I'll ask Jeff to provide more detail on our financial results and our guidance. Jeff?

Thanks, James. Revenue for the quarter was $157.4 million, a decrease of 32.6% from the prior year. Revenue from our Firearms segment was $117.6 million, a decrease of 40.6%, and revenue from Outdoor Products & Accessories was $44.7 million, an increase of 13.4%. Within those total revenue numbers, intercompany sales eliminations were approximately $5 million.

Total company gross margin for the quarter was 29.8% as compared to 42.5% in the prior year. The Firearms gross margin was 23.4%, and the outdoor products gross margin was 48.2%. The total company gross margin decrease was mainly driven by the Firearms segment, which had lower production volumes, increased manufacturing spending percentages and heightened promotional costs.

GAAP operating expenses in the quarter were $41.1 million as compared to $49.1 million in the prior year. On a non-GAAP basis, which excludes acquisition-related amortization, operating expenses were $35.6 million as compared to $42.2 million in the prior year. Significant reductions include incentive, compensation and profit sharing as a result of our revised forecast contributed to lower operating expenses.

EPS for the third quarter came in at $0.21 as compared with $0.57 in the prior year, although it should be noted that $0.17 of that EPS was a onetime $9.4 million tax takeback resulting from tax reform. Our non-GAAP EPS, which excludes acquisition-related costs and the tax takeback was $0.09 as compared with $0.66 last year. As a result of cost-saving efforts, that $0.09 non-GAAP EPS was in line with our guidance despite lower-than-expected revenue.

You will note that our tax rate in Q3, excluding onetime adjustments and discrete items was 41.5%, which is higher than previous quarters. Although the tax reform act will eventually provide us with a lower tax rate, the change in our forecast combined with some of the vagaries of the new law as well as state tax impacts, drove our tax rate in Q3. Those items will have a similar effect in Q4. Adjusted EBITDAS in Q3 was $20 million or a 12.7% EBITDAS margin compared to $67.6 million, a 28.9% margin in the prior year.

So turning to the balance sheet. Operating cash flow was a positive $26.1 million, and capital spending was $4.1 million. Excluding our distribution center under construction, we have reduced our capital spending this fiscal year down to approximately $14 million, primarily related to IT and new product development. And as I have noted before, the distribution center will be financed primarily through capital lease construction, although we will have cash outlays for IT and equipment.

We also reduced inventory levels during the quarter, our finished goods inventory of firearm units decreased during the quarter by over 25%, helping to contribute to our positive cash flow, while distributor inventory units decreased by nearly 18%. As a reminder, in addition to selling to wholesalers, a significant portion of our firearms sales are direct to strategic retailers and retail buying groups. Thus, unlike companies that sell only to wholesalers, we must maintain inventory to support retailers.

Also, while we expect continued inventory reductions in Q4, I would note that as we transition to our new distribution center in 8 to 10 months, we will need to maintain extra inventory as safety and buffer stock during that time. Safety stock will mitigate the transition risk, and buffer stock will protect service levels that might be impacted by market volatility.

The end of Q3, our balance sheet remains strong with approximately $38.2 million of cash and $200 million of total net debt. I would note that we paid down $50 million on our line of credit in Q3. Since the end of the quarter, we have paid down an additional $25 million on that line of credit. In addition, we just announced that we have effectively extended the maturity on our $75 million senior notes by 2 years to August 2020 on substantially the same terms. That means, as of today, we currently have no short-term debt maturities and we have outstanding balances on our long-term debt as follows: $50 million on our line of credit, $75 million on our now extended senior notes and $80 million on our bank term loan A. We currently pay a blended interest rate of approximately 4% on our long-term debt. Q4, we expect another strong quarter of strong -- another quarter of strong positive cash flow, which will likely allow us to further reduce the outstanding balance on our line of credit.

So now turning to guidance. Based upon the market conditions in Q3, we are updating our full year fiscal '18 revenue estimate to a range of $597 million to $601 million. At that revenue range, we expect full year GAAP EPS of between $0.24 and $0.26, which includes the tax reform benefit. Excluding that tax benefit as well as amortization costs associated with acquisitions, our estimate for non-GAAP EPS is between $0.31 and $0.33. For the fourth quarter, we expect revenue of between $162 million and $166 million. We expect GAAP EPS of between $0.01 and $0.03 and non-GAAP EPS of between $0.09 and $0.11.

In both our fourth quarter and full fiscal year numbers, our non-GAAP EPS excludes amortization and cost related to our acquisitions. All these estimates are based on our current fully diluted share count of 55 million shares and a tax rate for -- in Q4 of approximately 40%. Due to the various gives and takes under the tax reform act, you won't see a benefit on our new tax rates until fiscal '19. For those of you modeling our '19 numbers, we currently estimate the tax rate in that fiscal year will be around 27% to 29%.

Back to James.

Thank you, Jeff. Before we open the call for questions, I want to conclude our remarks by commenting on the horrific tragedy in Parkland, Florida. We share the nation's grief over this incomprehensible and senseless loss of life, and we share the desire to make our community safer. Through our membership and work with the National Shooting Sports Foundation, we will continue to support the development of effective solutions that accomplish that objective while protecting the rights of the law-abiding firearm owner.

With that, operator, please open up the call for questions from our analysts.

(Operator Instructions) Our first question comes from the line of Cai Von Rumohr with Cowen and Company.

So first, a housekeeping issue. Your 10-Q normally is out before the call. Is that going to be out this evening?

Yes, it's coming out. There was like a glitch with filing with the SEC, and I believe it just dropped. Technical -- it was a technical difficulty, not a financial difficulty.

Okay. And can you give us some help in terms of what percent of your sales are to the large big box chains who have decided not to sell assault rifles? Was that factored into your guidance? And what kind of impact do you expect that decision that they've made would have on your business?

Yes. So far, and this is all we know, is the statement made by DICK'S that they will not be selling modern sporting rifles immediately. So we've looked at what percentage of our sales overall for the company were as a result of MSR sales to DICK'S, and it's extremely small. It's actually 1/10 of 1 percentage point of our total sales. So there isn't really any impact. And of course, anything like this is obviously built into our guidance going forward.

But I would assume, given what's happened, we may get more companies doing this, and presumably, there's going to be some kind of impact that if they're not selling MSRs, there may be lower sales of other items. What's your -- just your gut feel in terms of what that would do to the market?

Well, really, that would just be pure speculation right now. I'm not aware of any other statements made by the big boxes. We call them strategic retailers that we serve direct. And that is obviously the Bass Pro, who now owns Cabela's as we all know and Academy and Sportsman's Warehouse. So again, I don't want to speculate and at all, speak on their behalf.

Got it. And so inventories, where should we expect them to be at year-end roughly?

I think we're going to continue to see inventories drop over the course of the next quarter. So we had a 25% unit inventory drop in firearms. We think outdoor products will stay approximately like this, the same. So on a dollar basis, it could go down by another like $10 million to like $20 million.

Got it. And then lastly, your -- when you said you expect firearm sales to be flattish from here, but January tends to be seasonally a little bit better than July. Can you give us any rough color in terms of what that might imply if your assumption is correct for fiscal '19 sales of firearms?

What we don't want to get into now is we're not giving guidance. We were just really giving color on where we thought the next 12 to 18 months go. Obviously, we'll do a much better job on that when we have our call in June when we'll give guidance for fiscal '19. And Cai, I just looked up some information that was relevant to your last question where you were just asking about sales to the big boxes in general. If we just look at our modern sporting rifle sales in total, trailing -- really trailing 12 months, I can give you a percentage for both centerfire and this would actually include rimfire 22 ammo as well. They're slightly less, and this is the aggregate to what we call strategic retailers. You referred to them as big boxes, slightly less than 3% of our total sales.

And our next question comes from the line of Scott Stember with CL King & Associates.

Maybe just talking about the margins and the discounting environment. It seems, again, you're not giving guidance, but you've kind of pointed to foreseeable future or once we get through the next few months that NICS will be flattish and firearms sales will be flattish. But what does that do to your margin profile? How do you see -- with inventories coming back somewhat into line, what are you looking for with regards to the promotional environment? Are you looking for it to get better? Or are you just looking in this new normal that we're in right now that these heavy incentives are here to stay?

Scott, so I won't really talk about gross margins because, again, I don't want to get into giving guidance accidentally for the next fiscal year, but I can talk about the promotional environment and some of the thoughts that we have there. Right now as we said, we've been going through our wholesaler and buy group selling shows where the independent retailers come in and place orders for the coming year. There is always, every year, promotional activity associated with that, so that's perfectly normal. We will conclude that in -- by the end of this fiscal year. And then going forward, now I feel that we're in a much better position in terms of inventory in the channel. Our own inventory given all the transitions we have to do to the new DC for the firearms business as well, retailer inventory getting back to levels comparable with 2 years ago, for us, I see much less of a need to do consumer rebates, which were obviously very costly and compressed our margins. So I think you'll see a normal level for us from what I know now of that promotional activity going forward.

Is that inclusive of the quarter that we're in right now?

I would say so. If you were to go to the retail counter right now you would find pretty much only one consumer rebate that we have on offer right now and that's for our T/C hunting brand. And that's for a selection of rifles, bolt action and muzzleloaders with a variety of offers there. So that one for us is not very costly. It's a much smaller part of our business, strategically important to us because it's a part that we believe we can really grow in the future over the coming years. And you know we have a pretty weak presence in the hunting market. So a lot of runway for growth there, in particular, with bolt action rifles to start with.

Okay. And going back to the long gun side of the business. I know that -- can you just remind us MSRs as a percentage of your overall business and of your long gun business just so we can frame things out as the discussion about MSRs and any legalities or any changes in laws takes place?

Yes. MSRs as a percentage of our total revenue, if I look at the last 9 months, trailing 12 months, it's about -- it's anywhere between 10% to 12%.

Okay. And next question for now. Could you just -- what is your expectation for free cash flow for the full year operating cash flow and CapEx for the full year again?

$14 million on CapEx, not including what we're doing, but at the distribution center, we should probably have maybe like a $3 million to $5 million more in the quarter on the distribution center. We expect actually a pretty strong free cash flow in Q4. We're just about breakeven right now and we expect overall strong positive free cash flow for the whole year.

Got it. And just one last question, maybe just going back to the -- again, I haven't seen the Q come out yet, but just maybe give us some flavor on the sales rates in handguns versus long guns. And then maybe just talk about the NICS performance versus long guns. And that's all I have.

Okay. So handguns, here, hang on a second. We didn't have this in the Q, so I have to find it. Sorry. Yes, handguns was -- in Q3 was 55%. Long guns were 15%. Other was 5%, and outdoor products was 25.7%.

And our next question comes from the line of James Hardiman with Wedbush Securities.

So I guess, my first question, I just wanted to understand this flattish revenues comment for the next 12 to 18 months. Obviously, if we look at your revenues versus NICS and certainly, the inventory commentary, it would appear that you have significantly under shipped the channel over the last couple of quarters. So I guess, help me understand, when you say flat, do you think that demand is going to be flat and that, that would almost imply that you're going to continue to under ship demand or do you think that demand continues to decline from here and that you would ship more in line with demand. It just seems like there's sort of a disconnect given what's happened over the last couple of quarters.

James, I'll start and let James finish. But just -- first of all, the reason we used the term flattish versus flat is because it was intended to not be guidance for next year. It was intended to be sort of a directional indication, okay? As to what's going to happen in 12 months or 6 months is a little hard to speculate right now since the environment, overall, right now politically and otherwise is pretty volatile. So that was just intended to be sort of a directional indicator. I can say, however, that it was not intended to be some kind of indication that we think we're going to lose market share. We think that, as James mentioned a few minutes ago, that we do not have to do anything extraordinary going forward, and that is going to revert to a more typical promotional environment. And we think we have a lot of new products, including the Shield EZ that are going to be very much in demand. So our statement was more about the entire industry and not necessarily guidance for next year.

Okay, that's fair. Let me ask this question, which, I guess, is somewhat related but I think a little bit different of a question. So probably, the most positive thing that I took from the prepared remarks in addition to sort of the absolute number in terms of distributor inventory as well as sort of the commentary from their retailers, which I know was a point of focus for you guys on the last call, was just the 8 weeks that you had sort of achieved that 8-week number with respect to weeks of sales at that -- among your distributor channels. So I guess, first, since there's an inventory and a sales component to that week's metric, obviously, the inventory has come down. Has demand picked up in any way within those distributors? That's the first question. And then, I guess, again, as we look forward, are you comfortable enough with that number that we should think about shipping more in line with demand as we move forward?

So on distributors, yes, definitely, the sales have picked up as we've moved through the show season. So as I mentioned, wholesalers are being -- running their promotional events where they're incentivizing with our support retailers to place orders for the coming year. So certainly that, historically, has already -- always, sorry, I should say, driven Q4 to be our largest quarter in terms of revenue if you look back at history. And that's been -- those shows have been a primary driver of that revenue. Yes, velocity definitely picked up. And as we've always said, seasonality is in play. Before we know it, we'll be into May, June, and you'll be seeing a slowdown as we're into summer. That seasonally happens. And that 8 weeks will probably uptick to back into double digit. But then we're through summer into full hunting and the holiday season. It's that pattern you know well. Okay? We are happy though and very encouraged with that inventory result with our 2-step distribution partners. And we're seeing better stability in levels of inventory with retailers as well now, both our strategic retailers and independent retailers that we have surveyed via one of our distribution partners.

And then to the second question, how should we think about sell-in to the distribution channel or the distributor channel versus sell-through? Is it going to be more in line? Or are you going to continue to under ship here going forward?

No, it's going to be more in line. I mean, that's why we made the point in the prepared remarks about it's good to be getting the tension back in the system. And so we've always talked a lot about the consumer, and for us, consumer pull and to be connected to that pull -- and by pull I mean the consumer actually transacting at the counter and buying one of our products. To feel that pull as it translates into a retailer placing an order either directly on ours or in 1 of our 2-step distribution partners, if it's our 2-step distribution partner, then they're placing an order on ours as well. That consumer sale is not being fulfilled out of existing inventory in the channel. So I think we'll be much more in line with demand. And with our share intact, we're very confident about holding our share at a minimum as well. And I think as you -- just another thing to think about as we think about the next 12 to 18 months, as I'm sure we're not alone as people think about dialing down the consumer promotional activity, is that there is no doubt, as you look back in the last 12 months, NICS probably very likely, let's say, were somewhat elevated due to that intense promotional activity, and we know the -- as we look back at our -- the tail end of our fourth quarter in the last fiscal year and the very beginning, first couple of months of this fiscal year that we're currently in, that promotion that we had on the Shield, where we did a consumer rebate of $75, was particularly powerful. And that elevated NICS during that period significantly. And there will not be an anniversary of that big event because there is no need to do it. That was to really bring inventory down of the first-generation Shield as we made way for the introduction of the next-generation of Shield, the Shield 2.0, which, as you know, comes in a laser and a non-laser version.

Great. And then last question for me. I mean, you've talked about, obviously, the new distribution center, which had helped on costs and the significant personnel reductions. Any way to quantify any of that or order of magnitude how we think about just how much cost has been taken out of the business here?

Well, the -- I think taking the cost out is more of an ongoing issue versus like we haven't reached equilibrium. The -- our -- we're focusing on the budgeting like for next year and looking at the costs to try and match the manufacturing costs and the operating costs with our expected run rate. So I don't think I can really give anything more beyond that. James, did you have...

The only other color I'd add is that, obviously, as we're going through a transition, there's always some duplication of cost to start off with before you get to harvest the benefit. So there is an expectation that there will be a period of time where that happens. We're obviously -- have a great team in place that we're -- who's looking to minimize that as much as possible and move past to harvesting the synergies not only from our current Firearms business and the way that we run logistics and the supply chain to our customers but also to acquisitions that we've made in the past where we're yet to harvest that synergy.

And what's the timing...

I was going to say that the distribution center, first, basically, we have to move all the various sales operations and shipping operations into that distribution center. And that's going to take at least a year period starting in December. So the fully realized benefit of that is out there, like, 1.5 years to 2 years. And as James said, like there will be a little like duplication of costs as we roll that out. But we do think that it's a fairly big carrot at the end of the stick by the time we get out there in a couple years, savings in state tax costs, in logistics and the ability to acquire companies and receive immediate synergistic benefits. So we think it's a very important product -- project for the company.

Just one more comment on the DC, James, so everybody's clear, is that just ramping it up will take probably a year, but it's done in 4 distinct phases. And at each phase, the conclusion of each phase, which can last, let's say, last 3 months, then we'll be harvesting the benefit from that phase, and then we'll move onto the next phase. I just didn't want you to think it was massive duplication for an extended period of time.

And our next question comes from the line of Steve Dyer with Craig-Hallum.

We've touched on, I guess, the promotional environment, et cetera. The channel seems healthier than it has in some time. So I guess, going forward, given that there's still probably too much supply and capacity, if the promotional environment sort of stays elevated, it is the game plan and the strategy's still going to be to play along and defend share going forward. Or something different this time?

Our focus is going to be on the continued activation of the new products, meaningful new product launches that we've made in the last 4 or 5 months. And really, there, I'm talking about the M&P Shield 2.0, as I mentioned earlier, nonlaser and now a laser version under the Crimson Trace brand and our M&P Compact series 2.0, so both of those products designed for concealed carry, therefore, personal protection. So continued activation of those as there's good space in the market for those products, and obviously, we've been very successful over the last 5-or-so years with the Shield, and we intend to continue to do so. So -- and then moving past those, we have multiple meaningful new product launches coming across the whole of AOB, particularly in firearms as well, which are meaningful, and therefore, our expectation is that we'll be growing via those new product introductions that really do not require promotional activity. So there's a change just in the way we're looking forward. I understand what you're saying, "Hey, if competitors continue at a high level of promotions, what are you going to do?" I just don't see it as sustainable. I mean, a lot of the time, we're doing it strategically. We think we'll be doing it opportunistically to fill that excess capacity that they have. Their capacity is being dialed down, and we're the classic example of that. We've dialed down completely our outsourced capacity.

Yes. That's very helpful. Question on guidance, I guess, whether it's the specific guidance for this quarter or just generally directionally how you're thinking about next year even. Does that include sort of any changes in demand, et cetera, that you maybe have seen on a POS standpoint in the last week or 2?

Basically, we calculated our guidance this morning. So we just take all the information we have up until the time we issue like a press release. I try not to get influenced by short swing events and focus more on, like you say, the direction of how things are going.

Okay. Question as it relates to capital allocation. It seems kind of through your remarks and what you've been doing that it's preferable to pay down the revolver right now. But with the stocks sort of trading off pretty sharply here after hours, does that change the calculus in your mind as to capital allocation choices?

Obviously, we don't give any advance indication of what we're going to do. The -- I would say that we still like paying down the debt. We reduced our line of credit by $75 million here in the last couple of months because getting that back down to 0 gives us the necessary tools if a good inorganic opportunity comes along. Obviously, we're focused right now on the distribution center. So we basically -- as we said in the past, it's a continual analysis of what's best for the company, whether it's investing in the DC, paying down loans or investing in the stock.

Got it. Okay. And then, I guess, just a couple of quick modeling questions since the Q hasn't dropped yet. Free cash flow for the year, I think, through 3 quarters, you're running at sort of a negative $27 million. Would you anticipate you can swing that positive based on the free cash flow generation in Q4?

Yes, we do believe it's going to be positive for the whole year.

For the year, okay. And then, I guess, lastly for me and I'll hop back in. The organic growth from the outdoors segment, you talked about growth both organically and inorganically. Do you have the organic number on the -- on that side of the business?

About 7.5%.

And we do have a follow-up question from the line of Cai Von Rumohr with Cowen and Company.

So following prior tragedies, we've tended to get a surge in buying demand as gun users are concerned that legislation may be passed that would not allow them to buy guns in the future. Have you seen any signs since the tragedy that, that might occur? I know it's a politically confused environment. But have you seen any signs that you might see that or the reverse?

The only reports that we hear are of some increased foot traffic in firearms retailers, and that is translating into some level of increased sales but beyond that, no. You still there, Cai?

Yes...

I apologize, the line was dropped. We can move onto the next question, while I get that refigured out. Our next question comes from the line of Ronald Bookbinder with IFS Securities.

Not to harp on the inventory and the gross margin, but I'm just having problems reconciling that you talk about getting back to a normal gross margin and being in a less promotional environment. But yes, your inventory dropped a decent percent sequentially, but you're still up 27% year-over-year, while payables are done 37% showing that, that inventory's aged. So I know you're focused on the new products and not promoting them and having them get pulled through. But I guess, what has aged in the inventory? Is it firearms? Or do we have some excess outdoor segment? And why wouldn't you promote that to turn that into cash?

There's no doubt some of it is on the older side, and it will be in firearms for sure. But remember, it's not a perishable. It's a consumer durable. So we are not concerned about the inventory or the mix of inventory that we have. And as Jeff made a number of points throughout the call, one is we have a large transition coming up to the DC. That's moving our entire warehousing footprint for firearms to that DC in Missouri from Springfield, Massachusetts. And also, we serve a large number of retailers direct, whether they're members of the buy group, so they're independent retailers of -- which across the 3 buy groups that we have now, I cannot remember the exact total, but it will be anywhere between 700 and 800 independent retailers. And then, of course, the large strategic retailers, Bass Pro, who now owns Cabela's, and Academy and Sportsman's Warehouse and DICK'S, we serve direct. So obviously, to preserve service levels to those retailers, we hold the inventory, okay? Now if you look back and do your comparisons over years, yes, taken us a long time to get to this level of inventory. And I'm not saying the level of inventories exactly right, right now. We think there's room for improvement, but again, we've got the transition to go through. But it's taken us a long time to get to this level of inventory, we think, really helps us get -- achieve a much higher level of on-time deliveries going forward to those customers as well as our wholesaler partners.

And I just -- a couple things I would add is I don't think we ever like indicated that the lack of promotional activity would get us back to like what you -- a normal gross margin, which is the term you used. I mean, I think our goal is to move our gross margins back up into a range at where they have historically been. Outdoor products does a good job of pulling that up. But firearms margin is going to take some time, and we're going to work on that, the costing and the manufacturing expenses like next year to try and pull that back up. So I don't think we're commenting on it, but we didn't say it would -- that they would be like normal next year. And then also on the inventory, I would point out that the units like dropped as a percentage a lot on our own inventory, a lot higher of a percentage than the actual dollars did, indicating that a lot of lower product -- lower-priced products are what moved. And so it's likely that some of the older inventory is the higher-priced inventory. Often, the higher-priced inventory has better margins. And so when that moves, that could have a positive impact on the gross margin even if discounts are given.

Okay. And you've talked about the 8 weeks of supply threshold. What makes you think that retailers or the channel wouldn't be happier given a weakened environment of chasing inventory rather than the 8-week supply?

Sorry, Ron, you're saying why wouldn't they be...

Why couldn't it go down to a 6-week supply in the channel and retailers would chase inventory as pretty much every manufacturer out there would be able to get a delivery fairly quickly to them?

Sure. I mean, that could be something that we do observe going forward. Pretty standard for some years, when you think about wholesaler inventory, has been around the 60-day mark, where most people are comfortable. But in this -- in a different environment, Ron, you're right. Things may change, and we'll be ready to adapt to that.

Okay. And then you've talked about this a couple times in the past, but we haven't seen anything on it yet. The excess capacity in the factory, you had talked about sort of outsourcing it to the aerospace industry or other industries that you could cut metal for? Is there any update there? Any progress? Or anything that's going to come?

There's progress but nothing material, Ron, nothing to discuss.

Okay, but it's still a plan and part of the...

Yes, absolutely, and we don't have -- as you think about the different processes that -- our manufacturing services division performance, we don't have a ton of capacity to be perfectly honest. We have some capacity when it comes to plastic injection molding. We have some capacity when it comes to forging, but everything else is fairly well utilized.

Okay. And lastly, on the outdoor segment. You've made some acquisitions, and it grew, what, 7.5% organically this past quarter, but you took some contingent considerations in the beginning of the year. Are the acquisitions living up to your expectations or -- and would you take a breather on doing any more acquisitions until you get these totally folded in and moved into the new distribution center?

Yes. Actually, the acquisitions, like, for the most part, are living up to our expectations. Crimson Trace is -- has this more of a similar sales cycle as firearms. And so we -- I would say that as probably a bit of an unexpected like downdraft. On the other hand, we're focusing on Crimson Trace, which has a fabulous brand, on doing new kinds of products in different areas like James mentioned, like in lighting. So overall, I would just say, in general, we think our acquisitions are doing great. The -- as I mentioned earlier on going forward, we are taking a breather right now for a couple of reasons. One is the prices have been like really high in the last 6 months. We really can't find anything that is affordable. But more importantly, we're spending a lot of time and dollars on our distribution center. We -- once we get that finished, there's a lot of synergistic things we can do with the companies that we have already acquired. We think it's important to make sure the distribution center gets the full attention of everybody in the company, so that is ready to go, which will set us up better for acquisitions in the future and will also allow us to actually perhaps spend more on acquisitions because we'll have more synergies to take out faster.

Okay. And so the new DC will have plenty of extra capacity to take on (inaudible).

Absolutely, absolutely. It's -- like not only is it being built with enough storage to handle additional -- or big enough warehouse to handle additional companies, there's an ability to expand on the footprint that we have. And actually, like before we take any other calls, I just wanted to say that our 10-Q still hasn't filed. I guess, it just so happens that this is the 60-day deadline for year-end filers. And so there is a huge rush right now at the SEC, and they're overwhelmed. And so our 10-Q has been sent to them, but it just hasn't been published. With that, I'll turn it back to the operator.

And our final question is a follow-up from the line of James Hardiman with Wedbush Securities.

And it does look like the 10-Q has hit at this point. I guess, I just wanted to understand. I mean, you had really encouraging inventory stats, encouraging comments on promotions and pricing. The demand picture is obviously pretty foggy right now given what's going on in the last month. I guess, why now with respect to the longer-term comments? I don't think any of us were anticipating you give us a longer-term vision of what the next 1.5 years was going to look like. I guess, I'm curious why you chose to sort of, I don't want to say lower expectations, but sort of extrapolate the, I guess, January to the next 1.5 years just given some pieces that are getting better and a demand environment that seems pretty unpredictable.

Yes. I mean, it's a combination of 2 things really. One is, obviously, what happened in December and January was disappointing and largely was the reason that we missed our guidance in Q3. And the more we've learned as we've been adjusting in this challenging market environment and obviously, working really hard internally to get aligned with this market demand, what we didn't want to do was wait all the way through into June before we could really communicate, just our thinking about what we're basing our current forward thinking on in terms of where we see our Firearms business going. So that was really the basis of it, James, nothing more than that. I'll let Jeff comment.

Yes. Again, I -- as I said earlier, we just wanted to give sort of a directional impact and then let everybody know that, that view of that sort of direction is how we are operating the company. So we're working hard on reducing costs everywhere across the company and taking efforts to increase the profitability of the company going forward.

So all the flexibility that we've demonstrated in our manufacturing footprint over the last few years or more than a few years, 6, 7 years, remains in place. And outsource partners, we still have relationships with. And it takes time to dial some of them back up, but some could be dialed up fairly quickly as well. And so we remain nimble in that respect. So we wanted to really communicate that as well even as Jeff says as we think about firearms in that flattish way.

Great. And then, I guess, last question for me, are you seeing any more cracks in the supply chain? I guess, a, from a retailer perspective, we saw a retailer exit the market. That never helps. Or b, from a supplier perspective, I think you've been pretty outspoken that, that probably would help and that probably needs to happen. So just touch on quickly those 2 points.

Nothing as far as we're aware in terms of the supply base. And as you look at retail and wholesale, I mean, that's always going to be a pretty fluid environment for sure. I would say, as you think about wholesale, there are some weaker wholesalers and there are some very strong wholesalers with really strong balance sheets. So can they take market share over time? I don't know, okay? So -- but I think more will become apparent over the next 6 to 9 months when it comes to the health of retail and certain wholesalers.

And that does conclude today's Q&A session. And I'd like to return the call to Mr. James Debney, CEO, for any closing remarks.

Thank you, operator. I want to thank everyone across the American Outdoor Brands team for their commitment and dedication to excellence. Thank you for joining us, and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.