Smith & Wesson Brands Inc (SWBI) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to American Outdoor Brands Corporation Third Quarter Fiscal 2020 Financial Results Conference Call. This call is being recorded.

At this time, I would like to turn the call over to Liz Sharp, Vice President, Investor Relations, who will give us some information about today's call.

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, fully diluted share count and tax rate for future periods; our product development, focus, objectives, strategies and vision; our strategic evolution; our market share and market demand for our products; 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 important items to note about 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, recall-related expenses, compensation-related items related to the separation of our former President and CEO, onetime transition costs, fair value inventory step-up, changing contingent consideration, goodwill impairment 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. When we reference EPS, we are always referencing fully diluted EPS. For detailed information on our results, please refer to our annual report on Form 10-K for the year ended April 30, 2019, and our 10-Q for the quarter ended January 31, 2020.

Joining me today are Mark Smith and Brian Murphy, who serve as Co-Presidents and Co-CEOs of our company; as well as Jeff Buchanan, our Chief Financial Officer.

As you likely know, we will be spinning off our Outdoor Products & Accessories or OP&A business later this year. When that occurs, Mark Smith will become President and CEO of Smith & Wesson Brands, Inc., the Firearms business; and Brian Murphy will become President and CEO of American Outdoor Brands, Inc., the OP&A business.

On today's call, Mark will discuss third quarter results for our Firearms segment, then Brian will discuss results for our OP&A segment. Following that, Jeff will discuss our financial results and our outlook, after which we will open it up for questions from our analysts.

And with that, I will turn the call over to Mark Smith.

Thank you, Liz. Good afternoon, and thanks, everyone, for joining us. Our third quarter revenue for the Firearms segment was $127.4 million, which represented just over a 3% increase year-on-year. Revenue was favorably impacted by changes in the timing of our excise tax assessment as well as the positive impact of our new M&P9 Shield EZ pistol, which I will discuss in a moment. The positive impact of those items, however, was partially offset by lower-than-anticipated orders from certain strategic retailers across multiple product categories. We believe that consumer demand for firearms was positive during the quarter, as reflected by adjusted mix in the period, but we also believe that, that demand was partially fulfilled with existing retail channel inventory of our products.

Turning now to NICS. As a reminder, we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, not directly to end consumers. Therefore, since NICS is a measurement of consumer activity, it does not directly correlate to our shipments in any given time period. That said, adjusted NICS background checks are generally considered to be the best available proxy for consumer demand for firearms at retail.

In our fiscal Q3, background checks for handguns increased 13.9% year-on-year, while our handgun units shipped to distributors and retailers increased by 4.7%. We believe that our percentage increase in handgun sales did not match adjusted NICS for a few reasons: First, reporting changes occurred in certain states during the quarter that drove higher-than-normal NICS results. Most notably, Alabama moved from a state-issued license to a required federal background check. We also believe that our performance relative to NICS was impacted by the timing of our new product introductions as well as the fulfillment of consumer demand from existing channel inventory, again, particularly among certain key strategic retailers.

In long guns, for the same period, background checks grew 0.6% year-over-year, while our units shipped to distributors and retailers declined by 31.8%. This decline occurred for a few reasons: First, we believe that certain key strategic retailers addressed consumer demand with their existing levels of inventory. Second, we decreased our promotions compared to the prior year. And lastly, our prior year included closeout sales of certain discontinued hunting rifles in order to make room for new product introductions.

Turning now to channel inventories. Distributor inventory of our firearms increased slightly on a sequential basis from 153,000 units at the end of Q2 to 157,000 units at the end of Q3. Since the end of Q3, distributor inventories have increased and remain above our 8-week threshold.

We don't typically address retail inventories for our products since we believe it has been fairly consistent over time. More recently, however, the large retailer landscape has been changing. Those changes include some retailers completely exiting the firearms market, and others consolidating their businesses and evaluating their go-to-market strategies. We believe those shifts drove a small number of key retailers to focus on fulfilling consumer demand for our products with existing inventory in our Q3 and that they will continue to do so in Q4. That said, we believe that this is an isolated short-term situation that does not accurately reflect the underlying strength in the market, as evidenced by the steady order flow we have received from our distributors and buying groups.

Lastly, a quick update on our new products. Innovation to support our organic growth remains a top priority in the firearms business. We attended SHOT Show in January, where we displayed and launched several new products and line extensions. Among them was our new M&P9 Shield EZ pistol, chambered-in 9-millimeter and an expansion of our award-winning and very popular M&P Shield EZ series. Built for personal protection and everyday carry, the M&P9 Shield EZ is easy to rack, easy to load, easy to shoot and easy to clean, appealing to a wide range of consumers seeking out these popular features in 9-millimeter. With over 3 million M&P Shield pistols adopted by consumers, we believe the M&P Shield name has become synonymous with personal protection. Our new product development teams continue to work on some very exciting new product introductions that I look forward to sharing with you in the next couple of quarters.

With that, I will turn the call over to Brian.

Thank you, Mark. In our OP&A segment, third quarter revenue increased as a result of higher shooting, hunting and cutlery product sales. This increase was driven by demand from several of our large national retailers, and by the success of our strategy with certain retail customers to migrate them from lumpy, bulk buy ordering to a more balanced approach to their ongoing replenishment orders.

Point-of-sale data, which we collect from some of our larger customers, appears to indicate that our products in these categories remain popular with consumers as well. Revenue increases in the quarter were partially offset by reduced OEM sales of our laser sight products, bankruptcy and financial distress of certain customers and the unexpected acceleration of one brick-and-mortar retailer's private label strategy for camping accessories, negatively impacting our branded survival products. Despite those offsets, we believe there is underlying strength in our business, evidenced by growth in our shooting, hunting and cutlery categories, which were up collectively 13% year-over-year.

As we've discussed previously, the vast majority of our products in the OP&A segment are sourced from China or rely upon components coming from China. As a result, tariffs continue to negatively impact our gross margins and inflate our inventory values. Accordingly, gross margins declined in Q3 compared to the prior year quarter. With the announced rollbacks of tariff Lists 4a and 4b, we expect to see some benefit down the road, but only as newly ordered product works its way through our inventory, likely near the middle of fiscal '21.

Turning now to a discussion of developments in the business. Our OP&A business is organized into 4 brand lanes, each representing the core activities of our consumer base. We refer to them as: the marksman, the harvester, the defender and the adventurer. Each of our 21 brands falls within a particular brand lane. This focus has enabled our teams to establish clear positioning for each brand, which, in turn, defines where each has the consumer's permission to play in certain product categories. The result of this approach is evident in our recent new product announcements.

In January, at SHOT Show, 15 of our brands launched approximately 300 new products and extensions, some of which represent our entry into 6 completely new product categories. These include: ground blinds, game cameras, land management tools, DIY or do-it-yourself home security, binoculars and meat processing equipment. These new categories demonstrate meaningful progress towards our expansion into the $35 billion rugged outdoor market, while the remainder of our new product introductions aimed at strengthening our position and taking market share within existing product categories.

In a more recent development, earlier this week, we launched an entirely new brand that we teased out last quarter. With the public's growing interest in understanding of food's origin, such as the popular farm-to-table trend found at many leading restaurants and in the home, and the increasing popularity of harvesting one's own meat, as seen on shows such as the MeatEater series on Netflix, we saw an opportunity to leverage the insights of our harvester brand lane team, along with the capabilities of our new e-commerce platform, to create our own brand that addresses the post-hunt meat processing needs of our consumers. On Monday, we launched MEAT!, an entirely new brand focused on high-quality, commercial-grade meat processing equipment sold direct to consumers. We introduced the consumer to our new brand with clever marketing and a website called meatyourmaker.com, all while offering 28 products that give us entry into the estimated $10 billion meat processing market.

The launch of our MEAT! brand demonstrates our ability to expand our addressable market, and provides a tremendous example of our strategy in action and the power of our brand lane structure to support our future growth. First, it leverages our platform, fully digital and 100% direct-to-consumer. Second, it represents pure organic growth, conceived of and developed by our internal development teams who live the lifestyle. And third, the launch created no disruption to our current teams and their supported brands and products. I look forward to sharing future updates on how the new brand is progressing.

Before I hand it off to Jeff, I want to briefly address the topic of the recent coronavirus situation and the impact it could have on our business. As I've said, a vast majority of our products in the OP&A segment are sourced from China or rely upon components coming from China. As a result, we expect our business to be negatively impacted in Q4, possibly longer, and we have modified our outlook accordingly. Our thoughts are with those who have been affected, and we remain in close contact with our team in China as we monitor our suppliers and the evolving situation.

Jeff?

Thanks, Brian. Revenue for the quarter was $166.7 million, an increase of 2.9% from the prior year. Intercompany eliminations were $4 million. In our Firearms segment, revenue was $127.4 million, an increase of 3.1% over the prior comparable quarter. In our OP&A segment, revenue was $43.3 million, an increase of 3.2%. Mark and Brian have provided the details of the segment revenue, so I will move on to a discussion of margins.

In Q3, total company gross margin was 33.1% as compared to 33.4% in the prior year. In our Firearms segment, the gross margin was 27.9%, about the same as the prior year. Although the gross margin percentage was unfavorably impacted by the change in timing of our federal excise tax assessment, it was favorably impacted by moving certain firearm shipping costs down to OpEx, as we have previously discussed. Otherwise, the Firearms gross margin improved because of lower manufacturing spending and favorable absorption.

In the OP&A segment, gross margin declined to 42.8% as compared to 46.2% in the prior year. This decline was primarily the result of additional tariffs and a onetime increase in inventory reserves for our laser sight products. Excluding these 2 items, gross margins would have been 47.2%.

GAAP operating expenses in the quarter declined by 21% or approximately $11.8 million. Substantially all of that reduction was due to a $10.4 million goodwill impairment in the prior year quarter and a $3.8 million take back in the current quarter related to compensation and incentive expenses as a result of the separation of our prior CEO.

Related to this matter, it should be noted that $1.6 million of expense will be incurred in the fourth quarter due to the recently signed CEO separation agreement. Therefore, the total impact in fiscal '20 as a result of the CEO separation is expected to be a net reduction in G&A expenses of approximately $2.2 million.

On a non-GAAP basis, our operating expenses increased about 6.5% or approximately $2.6 million. That increase represents a variety of give and takes, including additional expenses at our new distribution center. GAAP EPS came in at $0.10 as compared with the $0.10 loss last year. Our non-GAAP EPS was $0.13 as compared with $0.16 in the year ago quarter, with the difference almost entirely related to the increases in operating expenses that I just discussed. Our non-GAAP EPS excludes the expense of amortization and spin-off costs as well as the financial pickup related to the CEO separation.

Adjusted EBITDAS in Q3 was $22.4 million for a 13.4% EBITDAS margin as compared with a 15% margin in Q3 of last year. Excluding the excise tax change, adjusted EBITDAS margin would have been 14.3%. Adjustments to EBITDAS included approximately $1 million of spin-off related costs.

So now I'm turning to the balance sheet. In Q3, operating cash flow was $9.6 million, and our CapEx was $2.9 million. Thus, our Q3 free cash flow was $6.6 million compared to free cash outflow of $5.2 million in Q3 of the prior year. We have substantially reduced our expectation for CapEx in the current fiscal year down to a range of $15 million to $20 million. The upcoming fourth quarter is typically our strongest cash flow period, and we expect that will be the case as well this year.

At the end of Q3, we had $46.1 million of cash on hand. We had borrowings of $200 million outstanding on our line of credit, although we have since paid down $10 million of that balance. As noted in the press release, all other term indebtedness has now been paid in full. As a result, total net bank borrowings at the end of Q3 were just under $154 million.

Our 1-year trailing EBITDAS is about $92 million. So our net banking leverage ratio is approximately 1.7:1. We expect that ratio to drop as we approach the spin-off date.

So now I'm turning to our guidance. For our full year fiscal '20, we are revising our total company revenue guidance downward to reflect our actual results in Q3 and a reduced outlook for Q4. In Firearms, revenue could be impacted by excess inventory at a few key strategic retailers. In OP&A, we believe that Q4 will be impacted by the same factors that impacted Q3, including continued weakness in laser sights and manufacturing delays related to the coronavirus. Thus, we now expect total company full year revenue to be in the range of $650 million to $660 million.

As a result of that revised revenue outlook, we now expect our full year GAAP EPS to be between $0.25 and $0.29 and our non-GAAP EPS to be between $0.58 and $0.62. It should be noted that expenses related to the spin-off and the separation agreement with our former CEO will not be included in our non-GAAP EPS.

In applying the adjustments that I just discussed, we expect Q4 total company revenue of between $205 million and $215 million, GAAP EPS of between $0.17 and $0.21 and non-GAAP EPS of between $0.33 and $0.37. All of these estimates are based on our current fully diluted share count of 56 million shares and a tax rate for Q4 of 31%.

And as a final matter, I want to provide an update on our spin-off. As Liz mentioned at the beginning of the call, we recently announced a plan to spin-off our OP&A business as a tax-free dividend to our stockholders. That process is underway and on-track to be completed later this year. We continue to work on the required SEC filings as well as the required independent audit of the OP&A business. And lastly, because we plan to become 2 independent public companies at the spin-off date, we will continue to include revenue guidance for each business in order to provide stockholders with enhanced visibility as we approach that spin-off date. Accordingly, we expect full year revenue for our Firearms business to be $502 million to $507 million and full year revenue for our OP&A business to be $170 million to $175 million.

Liz?

Thank you, Jeff. And with that, operator, please open up the call for questions from our analysts.

(Operator Instructions) Our first question comes from the line of Steve Dyer with Craig-Hallum.

So you under-shipped NICS -- adjusted NICS in the quarter fairly dramatically. I mean is it safe to sort of assume that, that's a few of these key retailers, a lot of them are exiting the -- not a lot, a number of them are exiting the business altogether, others are rationalizing, moving it out of certain stores. I mean is that primarily the shortfall in the quarter and the shortfall in the outlook?

Yes. The shortfall in the quarter definitely is mostly attributed to the couple of key strategic retailers dropping inventories. I think it's important to note, we look at market share data pretty closely internally in our own analysis, and that data shows that we are holding our own on our share and actually growing share in certain areas. So -- but when we look at the inventory on certain strategic retailers, which has been largely flat for the first half of the year, really dropped off dramatically in the last -- in our Q3. So -- and that really -- you can kind of point to the loss or the miss almost entirely to that.

And I guess, just going forward, how long would you expect that destocking to persist? I mean it sounds like, certainly, for your fiscal fourth quarter, but what's your sense as to beyond that?

The underlying market seems fairly steady right now. A lot of our -- the conversations we have with our industry partners are very cautiously optimistic. So I think through our fourth quarter, as long as they continue to -- consumers continue to buy, obviously, at some point there, then the strategic retailers are going to come back online with ordering from us. So it's the end of the fourth quarter. Could it weave into the very beginning of the first quarter? We don't think so. But is that a possibility? Maybe. But it should be corrected -- it is a short-term issue, which should be corrected within a few months.

Got it. That's helpful. And then last one for me. You noted an impact from corona here in your fiscal Q4, and then who knows potentially beyond that. I mean is that primarily supply chain issues? Or are you making some assumption on domestic demand on either side of the business? Or -- and if so, I guess, could you quantify sort of what you took out for that?

Sure. Steve, this is Brian. So as it relates to the coronavirus, I would say, in Q4, we did have -- it took some time for some of our factories, most of our factories to get back online. And so because we have so many new products that are coming out, that's a timing issue there. Thankfully, many of them have already come back online. So we should start to see that product here shortly. But other than that, we're also -- there's a lot of uncertainty around it. And we're hearing at least that there may be reduced foot traffic, and that could impact our business. So certainly, we'll keep an eye on it. But at this point, as you know, there's quite a bit that's unknown.

So it's mostly preemptive at this point as opposed to anything you're seeing in point-of-sale or anything so far?

In regards to point-of-sale, yes.

Our next question comes from the line of Cai von Rumohr with Cowen & Company.

So a couple of questions. First, you talked about the destocking, and yet, it looks like your distributor inventories were up kind of a normal pattern and your sales looked a little bit light. If can you -- maybe you can explain that divergence, if you could?

Cai, it's Mark Smith. So yes, the destocking was within our strategic retailers. As you know, we have 3 main channels on the consumer side that we go-to-market as our distributors, buying groups and strategic retailers. Our orders from our strategic retailers and from -- sorry, from our distributors and from our buying groups were very strong in the quarter, and their inventories largely remained flat. So they were -- while they sold out the front door, they were buying in the back door. The strategic retailers, not all of them, a couple of the key ones, we saw that they were selling out the front door and not buying in the back, and that they're adjusting their inventories. Why that is, I don't know. And we can't speculate.

So you gave us the distributor inventories. Could you give us some color in terms of if they're cutting back their inventories, are they at below average levels? Or do you expect them to be? How should we think about that?

Cai, it's Jeff. It's really more of a pacing issue in terms of the SRAs. So it might be that they have -- either have or overstocked or are just reducing their stock down to a lower level. It's hard to get into this specific reasoning. But clearly, what happened is that the order pattern changed drastically after the end of the calendar year. And it's really isolated right now with the SRAs.

Okay. I mean do you have any sense of their inventories at normal levels? Or are they -- were they at abnormally high levels?

The inventories were -- I don't think we've ever provided any color on the SRA inventory. So the ones that we do get their inventory levels from, they were pretty steady for the first half of the year. And then for whatever reason, as Jeff mentioned, I mean, obviously, there's a lot going on in that landscape right now, they really filled all of their consumer demand out of their warehouses. And why that is, I don't think we're probably not going to be able to speculate. And -- but at some point, again, I mean, the good news here is the underlying demand is there. And as soon as that -- as soon as they correct inventory levels to wherever they want them to be, then, obviously, they've got start buying from us again. So it's a short-term issue.

And then maybe a little more color on COVID. I mean if your plants were shut down, I haven't been hearing about that many plants in China starting up, and I assume it didn't really start to be an issue until toward the end of the quarter. So is that likely to be a bigger factor in the fourth quarter than the third?

Yes, we'll see. We'll see, yes, a decent impact in Q4.

Right. And Cai, it had virtually no impact in Q3. So it's a Q4 impact. And because it's about outdoor products, as we've talked about in the past, really carries as much as like 2 turns of inventory. So when we talk about, for example, the tariffs in the pack, you see sort of a delayed impact. And it's going to be the same with COVID that there's going to -- the delayed impact for us is in Q4. The good news is, as Brian says, is that the -- most of the factories that we deal with have reopened, not all of them. But it's just a little uncertain as to the supply chain shipments are beginning. I read an article today that the shipments of produce, for example, are beginning. So our guidance is based on what we know about the orders being placed with respect to the factories that we have. Our guidance does not take into account a widespread pandemic in the United States or any other impacts on shipping that we don't really understand yet.

And yes, I mean, excuse me for asking -- dominating this, but it looks like your guide for outdoor products doesn't assume much of a revenue hit in the fourth quarter. So how come is it that you're getting the inventory, but it's just when you're getting it? Or how come? I don't understand.

I'll let Brian talk about that. But I mean there's a lot of good things happening in OP&A. Brian, do you want to -- I mean, again, just, I guess, I reiterate.

Yes, I mean, so we're seeing, like we talked about in the prepared remarks, we're seeing strong growth. So in hunting, shooting and cutlery, for example, growing 13% year-over-year in Q3. We're seeing very strong POS data from some of our largest customers and demonstrating that pull-through. And we also -- we do have quite a few new products that are coming online that will flow into Q4, which is also going to support great growth.

I also want to mention, before -- Chinese New Year happens every year. And so in anticipation of that, we do bulk up on inline product. And so that's also helping us sort of mitigate some of those. Some of the factories come back online for that elongated time period. But overall, for Q4, we feel pretty good.

Our next question comes from James Hardiman with Wedbush Securities.

So a couple of questions from me. You had previously given us some sort of year-1 targets for both the Firearms business and the Outdoor business. Obviously, the guide for this year is coming down modestly, but it seems like those are largely temporary issues. Should we think about tweaking sort of the year-1 estimates for the 2 segments?

Well, I'm not going to actually comment on the -- like your year-1 estimate. If you remember, what we gave was we gave like sort of a rolling 12-month estimate of what we thought the revenue would be for each entity after the date of spin, for the 12 months following the date of spin. And we're not -- yes, we're not changing those. There is a -- the Firearms was $500 million to $550 million. It's a fairly large range because we're a little uncertain as to the impact of the presidential election. But the low end of that range is about the same or actually a little like lower than our midpoint of our guidance for this year.

With respect to outdoor products, it would be fairly up as compared to our guidance for this year 2020. But again, there's a lot of things that have happened that Brian talked about in this last quarter, Q3 and Q4, now to our own products that were onetime events, and there was a lot of good things happening. So we're also standing by those numbers, which I believe were 200 to 210.

Okay. That's helpful. And then I wanted to talk about end market demand for a minute. Obviously, the NICS numbers have been really strong. I guess, first, any reasons as to why you think it's been as strong as it's been? And do you think it's sustainable? And I think part of the answer is whether or not there's been some fear-based buying taking place here as of late. And then, Mark, I think you made a comment about maybe foot traffic slowing down a little bit. I don't know what that was in reference to, just given how strong the month of February was, but maybe flesh that out a little bit, if that's something you're seeing? Or just -- or maybe it was just distributors or retailers hearing that, that would happen?

Sure. Yes, James, this is Mark. So that was actually Brian who made the comment about the foot traffic, more related to the OP&A business. So yes, NICS is definitely strong. Very strong start to the year. We obviously are talking to our channel partners all the time, and everybody is very optimistic, but cautiously so. I think everybody remembers the -- getting caught in 2016, and nobody wants to do that again. So I think the good news is that the underlying demand is still there. As to what's driving that? There's all kinds of things in the marketplace that have happened in the last couple of months. We had the issues in Virginia. We've got the presidential election kicking off. And whether that's going to continue or fall off? I think, I mean, it's following the normal trends in terms of the seasonality right now. You can kind of look at January and February of this year and almost exactly on the same slope line, just slightly higher than it was this time last year. So we have no reason to think that the seasonality in the Firearms business will not repeat its normal trend, if that's helpful.

That's really helpful. And I apologize for mistaking the 2 of you, and that makes a lot more sense. Last question for me. Brian, there were a couple of comments in there about laser sights being weak. I guess, why are they weak? It seems like that's a product that would be highly correlated to end market demand? Is it some of the same reasons we're seeing sort of that delta between the Firearms business? Or how should we think about that?

Yes. Sure. And just for the avoidance of doubt on the foot traffic comment, it was related to just what may happen with coronavirus that folks choose not to go out as much. But as it relates to laser sights, we have -- I think laser sights were very much in vogue over the last few years. And while there has been, at times, a stronger correlation with the firearms sale, I don't know if we're seeing a change in consumer behavior. But certainly, we believe we're one of the largest players in that space. And we just aren't seeing as much traction, I would say, as it relates to the comment in the quarter. We do have other OEM customers. And we have -- we've seen a decline with them as well as it relates to laser sights.

For Crimson Trace, we've been preparing for maybe a shift in consumer preferences. And so while we continue to support that product line, we have proactively, and I think, some of you on the call have seen some of the new products that we had at SHOT Show, have been proactively coming out with other aiming solutions that harness the Crimson Trace brand. So getting into laser sights, getting into scopes, things like that, red dot sights.

And I would add that there still is a deal mentality with consumers looking for a lower price point firearm items, and a laser or a Crimson Trace laser is an expensive product. So it may be like in addition to the consumer preference perhaps waning a bit on laser. It might be a little bit of a price point also.

Our next question comes from Scott Stember with CL King.

Can you guys maybe talk about the promotional environment, particularly when looking at long guns. You guys -- you talked about some of the puts and takes of why you underperformed the NICS? It sounds like part of it was the fact that you backed off of some promotions. I don't know if this was bundling or whatnot? But just in general, just talk about the promotional environment. And how much of the NICS strength that we're seeing is reliant on people looking for deals and having to discount?

Sure. Scott, this is Mark. So yes, there was some very successful bundles that we had in the comparable quarter last year that we did not repeat this year. And so that's some of that drop. But again, the majority of the decline in the quarter was really, again, destocking on the SRAs. But in terms of the promotional environment, I think, it's still very much is what's driving the consumer into the retail stores, and they are still looking for that deal. There's a lot of capacity out there in the industry right now. And I think it's how can you differentiate yourselves. The bundles have been great for us. We don't really do a whole lot of them in the wintertime or this time frame right now just because we kind of use those to get an injection in the arm when we need it during our slower times. And this is kind of coming to the tail end of the traditional show season where every firearm retailers are offering -- or sorry, manufacturers are offering the deals associated with the shows. So I think it's -- we're going to continue to participate, as we see necessary, to continue getting those consumers, giving them a reason to come into the store and choose our products and hold and take market share.

Okay. And you talked about inventories on the Firearms side. Can you maybe just talk about where you stand on the OP&A side, particularly with some of the changes going on with your customer base?

Yes. This is Jeff. I mean inventories are, I would say, at a steady state on the OP&A side. Again, if you remember, we did buy extra couple of quarters ago to help with the tariff situation and to also deal with like the DC. But -- so at this point, right now, it's like steady state.

Okay. And just the last question, just following up on coronavirus. You talked about how your factories, I guess the ones that you're getting parts from, are coming back online. Maybe just give us an indication of how much they're back online, just try to -- from a percentage standpoint. Just trying to get a gauge of when we have to start worrying about whether you guys are getting the parts that you need?

Yes. This is Brian. So as far as I'm aware, they are all back to full strength.

(Operator Instructions) Our next question comes from the line of Mark Smith with Lake Street Capital.

First off, kind of a broad question. Why not -- as we look at the -- where you came in versus your guidance, why not pre-announce or update the guidance, especially when we met right here at the end of the quarter?

The answer to that is that we think at the time that we tell you what's happening in the quarter, we like to also like let you know what's happening in like the next quarter. We have no specific rule about -- I mean internally about whether we're going to pre-announce or not. So I don't think that anyone like should assume that a pre-announcement, it means something different, or if we don't, it means something different. We judge the situation every time based on the current facts. And personally, I believe that when we issue our results, it's better if we let The Street know what is going to happen in the future as well as to what just happened.

In addition, we do like to do a lot of analysis on the reasons like for the miss. It really is only a little over 5 weeks after we closed the quarter, so it takes time to get the numbers. And we want to be as open as possible, trying to explain everything and do the analysis, and it takes time. So we don't always like make that decision to not, but this time we did.

Okay. And then looking on the Firearms side, Mark, a question for you. Are there lessons to be learned here? Was the inventory in the first half of the year pushed too heavy out on retail or primarily distributors? And then to be able to get these repeat orders from some of your key strategic retailers here, are you going to need to reduce prices in a fairly competitive environment to get those reorders?

Okay. So 2 parts to that question. So the first part is, on the distributors, so again, just as a reminder, it wasn't distributors that went through the destocking. We think that the inventory levels at distribution are appropriate, as evidenced by the fact that they have remained steady, their order flow remains steady. It's really the SRAs. And in terms of whether they were too high, I mean, I guess, apparently, they felt they were. But again, they were pretty steady through the first half of the year. So we can't really point to exactly what happened there and why they decided to lower them. But we'll work with those customers and understand what their comfortable -- comfort levels on levels of inventory. And again, as soon as we kind of get through and meet their targets and their goals, they're going to start ordering from us again. I mean, I think, the story, again, here is the underlying market is very healthy and strong.

Okay. And then looking at modern sporting rifle, in particular, here pretty recently, we've seen 3 major manufacturers, it looks like, are exiting the space. Can you talk about your outlook for modern sporting rifle? Does this take away some competition or maybe give you opportunities in the space? Or is it really that difficult in that space right now to be profitable?

Definitely not difficult to be profitable, at least for us in that space, and it remains a key part of our product line. Those -- I think there were some exacerbating factors in at least some of those brands that got out. And I'm not going to comment any more on that. But -- and the other thing I'll tell you is that for as many who got out, we've gotten some new entrants into -- some new entrants into the market who are very formidable competitors and have great products. So I don't think we -- we're holding our market share. We're growing slightly. But I don't think that, that's going to have a huge impact on our -- them getting out is going to have a huge impact. They were already a pretty de minimis part of the marketplace by the time they went out.

Yes. And I just want to like point out that as far as a percentage of Firearms, MSRs are fairly low. It varies, but less than 15% right now.

Okay. And then last question, just looking at OP&A. Last quarter, you guys talked about some timing of shipments out into the channel that kind of hurt OP&A last quarter. Did -- maybe walk through the timing or sequential sales process through the quarter. Did it start out stronger and get weaker maybe as we went post-holiday? Or just any insight you can give us into kind of how the cadence of sales went in that business would be great.

Sure. Yes. This is Brian. So one of the things, and maybe you heard it in the prepared remarks, is we really want to get to a healthy level of replenishment with all of our customers. And that helps us better forecast demand, helps us better align with our supply base. And oftentimes, it does not come when you start having that sort of normalized demand over time and replenishment and fewer bulk buys or lumpy bulk buys, it also helps increase your profitability, and you're leaning towards more replenishment.

So for us, we have been trying to work with our customers, some of our largest customers to really focus on more normal cadence of replenishment orders, which is what you're seeing in Q3. I think it's a little masked just because of some of the onetime events. But excluding those, we said we were up 7.9%, excluding those onetime events. And that really, to me, is more normalized across all product categories, what that new replenishment looks like. I don't want to infer that, that is a growth rate you should use in the future, but in terms of picking up some of the -- what we had described and what you described, just due to the timing of some of those customer orders, it really is moving away from both lumpy bulk buys to that sustained replenishment demand.

And we have a follow-up question from the line of Cai von Rumohr with Cowen & Company.

I think in terms of discussing the sales, net of the federal excise tax, it looked like it was about a $14 million disappointment or a decline. You mentioned 3 factors. So the channel destock, the bolt action clearing and also the M&P. Could you basically give us some sense in terms of the relative size of those factors?

Actually, we haven't really like provided the detail, Cai, on the size of each of the factors. You can sort of look at the long -- our guidance -- we broke down our guidance between OP&A and Firearms for the year. You can look at that reduction this year. And as we said, with respect to Firearms, most of the unexpected drop relates to this SRA issue. So you can just -- you can look at the drop and say, okay, like most of that is SRA.

And then with respect to the OP&A business, without like characterizing it, I would say there was all equal contributors of the 3 things that we had talked about, which is the -- like the weakness in the laser market and as well as the other items that we discussed, the private labeling and -- so hopefully, that will like directionally give you some ideas.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Liz Sharp for closing remarks.

Thank you, operator. On behalf of Mark, Brian and Jeff, we want to thank everyone across American Outdoor Brands for their commitment and dedication to excellence. Thank you all for joining us today, and we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.