American Outdoor Brands Corp. (NASDAQ: AOUT) Q4 2022 earnings call dated Jul. 14, 2022
Corporate Participants:
Liz Sharp — Vice President, Investor Relations
Brian D. Murphy — President and Chief Executive Officer
Andrew Fulmer — Chief Financial Officer
Analysts:
Mark Smith — Lake Street Capital Partners — Analyst
Presentation:
Operator
Welcome to the Fourth Quarter and Full Fiscal Year 2022 American Outdoor Brands Earnings Conference Call. My name is Vanessa and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]
I will now turn the call over to Liz Sharp, Vice President of Investor Relations.
Liz Sharp — Vice President, Investor Relations
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, should, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding 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. 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. Our non-GAAP results exclude fair value inventory step-up, amortization of acquired intangible assets, goodwill impairment, stock compensation, transition costs, COVID-19 expenses, technology implementation, acquisition costs, related party interest income, other costs 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 our filings as well as today’s earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS.
Joining us on today’s call is Brian Murphy, President and CEO; and Andy Fulmer, CFO.
And with that, I will turn the call over to Brian.
Brian D. Murphy — President and Chief Executive Officer
Thanks, Liz, and thanks everyone for joining us. The completion of fiscal 2022 marks our first full year as a standalone company dedicated to building authentic lifestyle brands to help consumers make the most out of the moments that matter. It also signals the approaching two-year anniversary of our spin-off in August 2020. Since that time, we have remained firmly focused on our long-term strategic priorities, which include, introducing new differentiated products, expanding our addressable markets, cultivating our direct-to-consumer relationships, diversifying and enhancing our supply chain, and pursuing complementary acquisitions. I believe we’ve made significant progress across these objectives and today I look forward to sharing details of that progress and my thoughts on our outlook.
First, let me highlight for you, what we’ve achieved in our first two years as an independent public company. In that time, we’ve taken our revenue from $167 million in fiscal 2020 to over $247 million in fiscal 2022, representing net sales growth of nearly 48% over our pre-pandemic levels, and a two year CAGR of over 21%. Underpinning that growth are a number of important developments. We leveraged our Dock & Unlock strategy to deliver a steady flow of exciting new products that generated nearly 26% of our fiscal 2022 revenue. That Dock & Unlock strategy also enabled us to enter new markets in large categories, including land management, at home meat processing, optics, and reloading equipment by creating a number of disruptive products that open-up our potential for sizable future net sales growth.
We created an entirely new brand, Meet Your Maker, which we conceived and developed internally, providing us with access to new markets and new customers, and helping fuel year-over-year growth of 73% in our direct-to-consumer business in fiscal 2022. MEAT is an outstanding example of the organic growth opportunities made possible by Dock & Unlock, a process we expect will be a key driver for our future growth. We expanded our Outdoor Lifestyle category and entered the large outdoor cooking market with the acquisition of Grilla Grills. A tuck-in that met our strict criteria for strategic M&A targets and helped grow our direct-to-consumer business to more than 10% of our net sales in fiscal 2022 on a pro forma basis.
We expanded internationally, delivering international net sales growth of more than 96% over fiscal 2020 and nearly 40% over fiscal 2021. While it’s just over 5% of our total net sales today, we are still in the early innings of this exciting opportunity for our long-term growth. We successfully positioned our brands and products wherever the consumer soft them out, delivering two year organic net sales growth of nearly 33% in our traditional brick-and-mortar channels and over 79% in our e-commerce channels.
In summary, we successfully captured the growth opportunities that arose from an energized and expanded consumer base propelled by the pandemic. We capitalized on that growth by strengthening our balance sheet, investing in organic growth opportunities through innovation while identifying and pursuing accretive acquisitions. And we opportunistically returned cash to shareholders, demonstrating our Board’s confidence in the business and its commitment to a well-balanced capital allocation program that considers the perspectives of our shareholders.
While these achievements are exciting in their own right, it’s equally exciting to consider how the underlying market for our products has changed over the past two years. In that time, amidst an unprecedented pandemic, many consumers discovered for the first time or rediscovered a passion for the outdoors, shooting sports and personal protection. This phenomenon delivered nearly 14 million new firearm entrance, over 9 million new first time camper households, 3 million new fishing license issued and up to 1 million new hunters. There is little doubt that some of the gains experienced by American Outdoor Brands and the broader industry over the past two years were propelled by the pandemic, resulting an outsized growth last year and making year-over-year comparisons particularly challenging. That said, we are pleased with our performance in fiscal 2022, including our improved gross margins, and we are optimistic about our future growth opportunities, particularly in light of this larger installed base of new and returning outdoor and personal protection consumers.
Investing capital in organic growth remains the top priority in our strategic plan and our Dock & Unlock process continues to fuel the innovation pipeline that will support our long-term growth plans. Our new product pipeline is robust. Many of the products we launched in fiscal 2022 and plan to launch in fiscal 2023 reflect our intent to continue growing our outdoor lifestyle category, while focusing on areas and shooting sports that represent large and more stable markets such as shotgun sports, target shooting and rifle scopes. New products in 2022 included the first electric filet knife for our old timer knife brand, double wide sleeping mats and eco-friendly camp blankets from UST, meat processing accessories for Meet Your Maker, innovative designs and new hay bale blinds from BOG, rifle scopes and rapid aiming red dots from Crimson Trace, and innovative clay target launcher from Caldwell, and a host of new products and category entries from Bubba, including culinary knives, expanded apparel, bags and packs, premium storage, award winning cordless electric fillet knives, and our first fishing rods. In fact, it’s hard to believe that just three years ago, we launched the first Bubba Electric fillet knife at ICAST, the world’s largest sport fishing trade show. ICAST is an important annual event and that successful launch helped propel our entry into the very large market for freshwater fishing. I’m excited to announce that we’ll be returning to ICAST in Orlando, Florida, next week, where the team is excited to unveil our newest products for the fishing market. So stay tuned.
Turning now to growth through acquisitions. We have long stated our desire to supplement organic growth with acquisitions that fit our strict criteria, which require a target to number one, be Dock & Unlock friendly; two, offer a runway for future growth; three, serve large addressable markets; four, have low complexity; and five, further diversify our supply chain. In fiscal 2022, we found that fit with Grilla Grills, a direct-to-consumer provider of high quality grills, smokers, modular outdoor kitchens and accessories that provided us with immediate access to the estimated $7 billion US barbecue grill market. We are very pleased with Grilla which is performing ahead of its model and continues to resonate with our outdoor cooking customers. We have plugged Grilla into our Dock & Unlock process and identified some exciting opportunities to leverage existing technology from other AOB products, demonstrating the power of our brand line structure.
The team has been busy preparing for a number of new product launches this fall, as well as our first major product launch scheduled for the springtime. We look forward to sharing more when that time comes. We believe there are additional opportunities on the horizon to identify and acquire other brands that fit our criteria. Andy and I have developed incredibly strong relationships in our industry over the past several years and we believe those relationships will yield an increasing number of M&A opportunities in fiscal 2023, especially given the challenging consumer environment that has just begun to emerge. In fact, we have recently been approached by a number of companies with brands that are uniquely positioned to benefit from our Dock & Unlock process. And importantly, we have worked over the past two years to build a strong balance sheet that provides us with the flexibility to capture those opportunities when they arise.
We intend to maintain our disciplined approach to capital allocation, applying our strict framework to any potential acquisition targets and opportunistically pursuing those that fit well within our portfolio and will drive future growth. Our achievements in fiscal 2022 have helped strengthen and diversify our company, while building stronger, long lasting relationships with our consumers. These will be important elements as we, our retail partners and our consumers navigate fiscal 2023 amidst a number of macroeconomic factors that have recently developed, including rapidly rising inflation and interest rates, which have served to drive-up inventory levels at retail.
It remains to be seen how consumers may shift their buying patterns in response to these developments. At the backdrop of this uncertainty, we are not providing full year financial guidance for fiscal 2023 on today’s call, although, we look forward to doing so when our visibility into consumer buying patterns and their impact on our retail partners has improved. In the meantime and despite the uncertainty in the near-term environment, we could not be more excited about our future. We set out last year with a goal to grow our business by 8% to 10% over the ensuing four to five years, implying a business capable of generating $400 million in net sales annually with EBITDAs margins in the mid to high-teens. And while macroeconomic factors may slightly impact the timeline, we are confident that we will achieve this growth objective. We believe our achievements over the past two years demonstrate that our strategy produces results and we are on an exciting path to the future.
With that, I’ll turn it over to Andy to discuss our financial results.
Andrew Fulmer — Chief Financial Officer
Thanks, Brian. Net sales for the year were $247.5 million, a decrease of 10.5% compared to our record prior year and an increase of roughly 48% over fiscal 2020. The year-over-year decrease was driven by a decline in shooting sports of 22.5%, partially offset by an increase in outdoor lifestyle of 7.2%. In fiscal ’22, our net sales were almost evenly split between our two primary product categories, with shooting sports representing about 52% of our net sales and outdoor lifestyle representing 48% of our net sales. This result reflects significant progress and growing our outdoor lifestyle category, which represented only 40% of our net sales in fiscal ’21.
Turning now to our traditional brick-and-mortar sales versus e-commerce. Net sales in our traditional channel decreased 10.6% compared to the year ago period, but increased roughly 33% over fiscal ’20. Net sales in our e-commerce channel were down 10.4% compared to our record fiscal 2021, but up nearly 80% over fiscal 2020. Our e-commerce net sales number includes our direct-to-consumer net sales of $16.6 million. This represents an increase of 73% in D2C net sales over fiscal ’21 and an increase of nearly 273% over fiscal ’20. These results demonstrate that the investments we made in our e-commerce platform in fiscal 2020 continue to yield meaningful returns and we believe they will continue to do so as we grow. On a quarterly basis, net sales in Q4 were $45.9 million, a decrease of approximately 29% from the prior year quarter, driven mostly by the decline in our shooting sports category. On a two-year basis, we grew our net sales in Q4 by 6.5% over Q4 of fiscal 2020. Fiscal ’22 gross margins were 46.2%, a 40 basis point increase over the prior year. The increase in gross margin percentage was driven by increased pricing and tariff drawbacks, offset by higher freight and promotional costs.
Turning to operating expenses. For the full year GAAP operating expenses were $170.8 million compared to $103.3 million last year. Our fiscal ’22 OpEx includes a non-cash goodwill impairment charge of $67.8 million. Excluding this charge, our OpEx was relatively flat compared to fiscal ’21, reflecting increases in setting up our own IT function and resuming participation in industry trade shows, both of which were expected, as well as higher insurance and outbound freight costs. Those increases were offset by lower intangible amortization, compensation related expenses, and variable selling and distribution costs resulting from lower sales. The non-cash impairment charge was driven entirely by our lower market capitalization, which was a result of our stock price at April 30. Our yearly measurement date is February 1, and at that time, we noted no indication of impairment. For accounting purposes, our market value declined as of the end of Q4 was considered a triggering event. The difference between our book value and market capitalization at that time resulted in the impairment of our goodwill balance. Non-GAAP operating expenses for fiscal ’22 were $83.8 million compared to $83.6 million last year. Non-GAAP operating expenses exclude goodwill impairment, intangible amortization, stock compensation and certain non-recurring expenses as they occur.
GAAP EPS for fiscal ’22 was a loss of $4.66, as compared with earnings of $1.29 last year. Excluding the impacts of the impairment and the related tax charges, GAAP EPS would have been a positive $0.71 per share. Our fiscal ’22 non-GAAP EPS was $1.77, as compared to $2.32 last year. These figures are based on our fully diluted share count of approximately 14 million shares. Full year adjusted EBITDAS was $35 million compared to $47.3 million in fiscal ’21 and $12.3 million in fiscal ’20.
Turning to the balance sheet and cash flow. We ended April with $19.5 million in cash and roughly $25 million outstanding on our line of credit. As a reminder, we accessed the line of credit for our acquisition of Grilla in March. Afterward, on March 25, we amended our credit agreement to add an additional $25 million of availability, bringing our borrowing capacity on the line to $90 million, which includes a $15 million accordion feature. The amendment allowed us to effectively maintain the same amount of dry powder we had available prior to the Grilla acquisition and we believe it reflects the strong relationship we have with our lender.
During fiscal ’22, we successfully leveraged the strength of our balance sheet to achieve three strategic investments, which include, one, inventory of high-volume SKUs; two, our IT infrastructure and ERP; and three, the acquisition of Grilla. I’ll address each of these separately.
First, our investment in inventory. We started the year with inventory slightly above $74 million, but our high backlog at the time clearly indicated that inventory was too low to maintain our target service levels. So we established a strategy to build inventory over the course of the year in key areas, in an effort to mitigate the risk we faced with our supply chain and shipping delays. Specifically, we focused on building inventory to support new products and our highest volume SKUs. We successfully executed this strategy over the course of the year, helping us maintain high fill rates with our customers and putting us in a solid position to keep satisfying demand in the future. Our inventory balance at the end of fiscal 2022 increased roughly $2 million sequentially from Q3, which is largely the result of the Grilla acquisition, partially offset by planned reductions in our legacy business.
Second, our investment in IT infrastructure and ERP. Our IT strategy establishes a roadmap that calls for our transition from a fully outsourced IT function which exists under an agreement we have with our former parent company to our own post spin-off standalone IT platform. Our transition plan contains two phases; infrastructure and ERP. We successfully executed the first phase in November 2021 by going live on our own IT infrastructure. Our team then turned its focus to implementing our new ERP system, Microsoft D365, which is the phase we’re in now. We plan to complete this phase in two steps. The first step will involve going live with a small portion of our business in September, allowing us to minimize risk as we work through any issues on a small scale and as we complete testing. The second step will occur in early December, when we will go live with the balance of our business. While this approach adds a few months to our timeline as well as some added expense, we believe it will give us the most seamless transition possible. We’re excited to launch D365. It is a platform that is very well suited to our growing business with the ability to generate enhanced analytics and efficiently integrate future tuck-in acquisitions.
Lastly, our investment in acquisitions. We utilized the combination of cash and borrowings on our revolver in March to acquire the assets of Grilla Grills. And as Brian mentioned, we are very happy with how the brand is performing and the new products we have on the way. As we consider additional acquisitions that are likely to come our way, I am confident that we have both the resources and the strategy to opportunistically add new and exciting brands to our portfolio.
The strength of our balance sheet also allowed us to deliver on an important capital allocation priority, returning capital to shareholders. In Q4, we completed the $15 million share repurchase program that our Board authorized in December 2021. We purchased nearly 6% of our outstanding stock and the full repurchase will be reflected in our share count of approximately 13.7 million shares in fiscal 2023 starting in May. The repurchase reflects our Board’s confidence in the business and its commitment to a balanced capital allocation program.
Turning now to capex. In fiscal ’23, we expect to spend roughly $5.7 million for product tooling and maintenance capex and another $2.3 million to complete the ERP system, for a total capex spend of approximately $8 million. Our total cost estimate for the IT infrastructure and ERP project has increased from $8 million to approximately $9 million, reflecting additional data migration costs and our shift to a multi-phase go live approach. Here’s a quick breakout of the total project costs. In fiscal ’22, we spent $3.9 million in capex and $1.2 million in one-time operating expenses. In fiscal ’23, we expect to spend $2.3 million in capex and $1.6 million in one-time OpEx. In addition, we expect duplicate OpEx costs in fiscal 2023 to be $500,000. This includes the cost of operating two systems in parallel during the changeover period. We will treat both the $1.6 million and the $500,000 as non-recurring transition costs when calculating non-GAAP operating expense and adjusted EBITDAS.
Turning now to our outlook. As Brian explained, certain macroeconomic factors have impacted our near-term visibility with regard to consumer behavior in the coming months and the impact they will have on our retail partners. We have provided financial guidance in the past and it is certainly our goal to provide a more detailed financial outlook as soon as our visibility improves. In the meantime, we can share some high level expectations for fiscal 2023.
With regard to revenue flow over the course of the year, historically, our quarterly net sales reflect seasonal trends and are highest in Q2 and Q3, driven by demand for the fall hunting and holiday shopping seasons. Q1 net sales are typically lower than Q4, although, it is worth noting that Q1 of last year was an outlier that included a pull-forward of demand that we’ve discussed in previous calls. We’re expecting typical seasonality to occur in fiscal 2023, with our highest net sales in Q2 and Q3, and with Q1 being lower than Q4.
With respect to gross margins, we are planning for a more promotional environment in fiscal 2023, as our retail partners respond to potential shifts in consumer buying patterns and adapt to inflation and economic uncertainty. We intend to remain competitive with pricing in order to protect our market share and as such, we expect gross margin percentage to decline for the year compared to fiscal 2022.
Lastly, on operating expenses, we plan to continue investing in our business for the long term, primarily in the form of new product development and sales and marketing initiatives that build our brands and enhance our connection with consumers. At the same time, we will remain focused on efforts to contain our fixed costs wherever possible with the goal of maximizing our operating profit in the short-term while we navigate the environment in fiscal 2023.
With that, operator, we’re ready to open the call for questions from our analysts.
Questions and Answers:
Operator
Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Mark Smith with Lake Street Capital Partners.
Mark Smith — Lake Street Capital Partners — Analyst
Hey guys, thanks for the update here at the end on kind of your outlook. I’m curious, if you can talk at all, last quarter you did a little bit about kind of point of sale trends and data kind of what you’re seeing out there today as far as at retail?
Brian D. Murphy — President and Chief Executive Officer
Sure. Hey Mark, this is Brian. So we continue to see, I would say, strong demand for our products at retail. So POS remains strong. However, we are seeing that retailers are taking a step back right now and closely managing their inventory levels as they anticipate or try to anticipate what the consumer is going to do, kind of funny, before this call we were talking about the dynamic right now between the consumer and the retailer. It feels like they’re in a little bit of a staring contest. But for our products, we are seeing products move through nicely. We’re just seeing that inventory levels are coming down with retailers.
Mark Smith — Lake Street Capital Partners — Analyst
And that brings up my next point, you guys talked about your inventory and kind of the puts and takes there. What’s your comfort level with retail inventory right now?
Brian D. Murphy — President and Chief Executive Officer
Our comfort with retail inventory of our products, whether it’s — you’re saying overall, you’re saying with our products specifically?
Mark Smith — Lake Street Capital Partners — Analyst
I guess, your products specifically, but also if there’s competitive products, if we’re seeing any bloat in inventory that maybe would cause more competitive pricing or promotions down the road that would be insightful if there’s any of that happening?
Brian D. Murphy — President and Chief Executive Officer
Yeah. So what we’re seeing is generally the open to buy has been reduced from where it was in our Q3 and into Q4. So the open to buy from retailers has shrunk, as they’re trying to lower their own inventory levels. With that said, there are pockets that they are focused on that tend to be higher moving or higher volume of which we do benefit from some of them. But overall, there are other areas like shooting accessories, which we began to know back in — it started in January, just a slowdown in shooting accessories and that’s moving along, but overall, we’re not seeing retailers begin to double down on that space. But they’re just being more cautious. So that’s probably the best insight I can give you.
Mark Smith — Lake Street Capital Partners — Analyst
No, that’s helpful. My next question was really around kind of brand lanes, if there’s any that are holding up better than others. And when you just talk about shooting sports, anything we’ve seen mix seemed to hold up pretty well and would you say that accessory business in shooting sports is following trends with mix or with inflationary pressure on consumers or they may be pulling back a little bit from some of their accessory spend within shooting sports?
Brian D. Murphy — President and Chief Executive Officer
Yeah. Good question. So I’ll kind of reframe it into the two different worlds. You’ve got direct-to-consumer for us, which we noted with the combination of Grilla. Just those two brands alone represents about 10% of our total net sales. And where we have that conversation directly with the consumer through direct-to-consumer sales, we still are seeing some very, very good traction and very much positive trends. So that’s moving along very nicely and obviously, Grilla and MEAT fall into our harvester in our adventurer lanes.
And then, what I also want to mention is looking kind of where we’re at today, looking forward to be seen if we are in the early stages of a recession or what that might look like, but the saying goes history never repeats itself, but it sometimes rhymes. And historically, during times of lower consumer spend, fishing, hunting, camping and I would say outdoor cooking, any off-premise, cooking and consumption of drinks, meaning away from restaurants tends to see a benefit as people are more cautious about getting in their cars and driving to restaurants and when there’s inflation and things like that. So I think that bodes well for companies like ours, specifically the brand lanes that we have and where we play. So I do think that that will — if that were to be the case, I think that bodes well for all of our brand lanes.
You asked specifically about shooting sports. We continue to see good attachment rates with our accessories. We are not seeing the same height obviously that we saw last year when there was civil unrest and some other dynamics that play that drove up demand, but certainly we are seeing consumers come back around with additional purchases, so we are seeing a stickiness there.
Mark Smith — Lake Street Capital Partners — Analyst
Excellent. The last one from me. Remind me and I apologize if I missed this. You guys completed your buyback, but you’ve not seen re-up by the board yet for new buybacks. Is that correct?
Brian D. Murphy — President and Chief Executive Officer
That’s correct.
Mark Smith — Lake Street Capital Partners — Analyst
And are you guys limited in any way from doing a re-up until the two year anniversary from spin-off or is it available if the Board wanted to do a buyback now and authorize one?
Andrew Fulmer — Chief Financial Officer
Yeah. Mark, this is Andy. It’s a great question. So there are some limitations. I think the dollar amount would be pretty big. So we work with our Board to make sure we’re maximizing shareholder value and capital allocation. So yeah, nothing of note.
Mark Smith — Lake Street Capital Partners — Analyst
Okay, perfect. Thank you guys.
Operator
Thank you. [Operator Instructions] I see no further questions in queue at this time.
Brian D. Murphy — President and Chief Executive Officer
All right. Well, operator and everyone listening, in closing, I want to acknowledge the loyalty, hard work and dedication of our employees, our suppliers and our customers who continue to move American Outdoor Brands forward on a path to an exciting long-term future. Thank you everyone for joining us today. We look forward to speaking with you again next quarter.
Operator
[Operator Closing Remarks]