Overview
The following discussion and analysis of our financial condition and results of operations for the three and nine months endedJanuary 31, 2022 and 2021 should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year endedApril 30, 2021 . This discussion and analysis should also be read in conjunction with our unaudited consolidated and combined financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, those discussed above in "Statement Regarding Forward-Looking Information" in this Form 10-Q. In addition, this section sets forth key objectives and performance indicators used by us as well as key industry data tracked by us. The following discussion and analysis includes references to net sales of our products in shooting sports and outdoor lifestyle categories. Our shooting sports category includes net sales of shooting accessories and our products used for personal protection. Our outdoor lifestyle category includes net sales of our products used in hunting, fishing, camping, and rugged outdoor activities.
Background and Basis of Presentation
On
Prior to the Separation, the unaudited combined financial statements reflected the financial position, results of operations, and cash flows for the periods presented as historically managed by our former parent and were derived from the consolidated financial statements and accounting records of our former parent in accordance with accounting principles generally accepted inthe United States , or GAAP. The combined financial statements for the period prior to the Separation do not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent, publicly traded company during the historical periods presented. For those periods prior to the Separation, the unaudited combined financial statements were prepared on a "carve-out" basis. In addition, for purposes of preparing the combined financial statements, prior to the Separation, on a "carve-out" basis, a portion of our former parent's total corporate expenses were allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenue, employee headcount, delivery units, or square footage, as applicable. These expense allocations included the cost of corporate functions and resources provided by our former parent, including executive management, finance, accounting, legal, human resources, internal audit, and the related benefit costs associated with such functions, such as stock-based compensation and the cost of our former parent'sSpringfield, Massachusetts corporate headquarters. For the period prior to the Separation in fiscal 2021, we were allocated$2.7 million for such corporate expenses, which were included within general and administrative expenses in the consolidated and combined statements of operations and comprehensive income. For the period prior to the Separation in fiscal 2021, we were also allocated$1.9 million of such distribution expenses, which were included within cost of sales; selling, marketing, and distribution expenses; and general and administrative expenses in the consolidated and combined statements of operations and comprehensive income. Our unaudited financial statements for the three and nine months endedJanuary 31, 2022 are consolidated financial statements based on the reported results of our company as a standalone company.
Third Quarter Fiscal 2022 Highlights
Our operating results for the three months ended
• Net sales were
the comparable quarter last year.
• Gross margin was 45.8%, an increase of 60 basis points over the comparable
quarter last year.
• Net income was
income of
quarter last year.
• Non-GAAP Adjusted EBITDAS was
reconciliation of non-GAAP Adjusted EBITDAS.
22 --------------------------------------------------------------------------------
Our operating results for the nine months ended
• Net sales were
the prior year comparable period.
• Gross margin was 46.7%, an increase of 40 basis points over the prior year
comparable period.
• Net income was
net income of$17.2 million , or$1.20 per diluted share, for the prior year comparable period.
• Non-GAAP Adjusted EBITDAS was
reconciliation of non-GAAP Adjusted EBITDAS.
Results of OperationsNet Sales and Gross Profit The following table sets forth certain information regarding consolidated net sales and gross profit for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Net sales$ 70,105 $ 82,649 $ (12,544 ) -15.2 % Cost of sales 38,010 45,276 (7,266 ) -16.0 % Gross profit$ 32,095 $ 37,373 $ (5,278 ) -14.1 % % of net sales (gross margin) 45.8 % 45.2 % The following table sets forth certain information regarding trade channel net sales for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change e-commerce channels$ 35,397 $ 36,450 $ (1,053 ) -2.9 % Traditional channels 34,708 46,199 (11,491 ) -24.9 % Total net sales$ 70,105 $ 82,649 $ (12,544 ) -15.2 % Our e-commerce channels include net sales from customers that do not traditionally operate a physical brick-and-mortar store, but generate the majority of their revenue from consumer purchases at their retail websites. Our e-commerce channels also include our direct-to-consumer sales. Our traditional channels include customers that primarily operate out of physical brick-and-mortar stores and generate the large majority of their revenue from consumer purchases at their brick-and-mortar locations. We sell our products worldwide. The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Domestic net sales$ 67,610 $ 80,128 $ (12,518 ) -15.6 % International net sales 2,495 2,521 (26 ) -1.0 % Total net sales$ 70,105 $ 82,649 $ (12,544 ) -15.2 %
For the three months ended
Net sales in our e-commerce channel decreased$1.1 million , or 2.9%, from the comparable quarter last year, primarily because of lower net sales to a certain strategic retailer that purchased certain discontinued shooting sports product inventory in the comparable quarter last year at discounted prices. The lower net sales in our shooting sports products was almost entirely offset by increased net sales of our outdoor lifestyle products, specifically in our fishing and rugged outdoor products; increased net sales from our own direct-to-consumer websites; and increased orders from the world's largest e-commerce retailer. Net sales in our traditional channels decreased$11.5 million , or 24.9%, from the comparable quarter last year primarily because of lower net sales of our shooting sports products. We believe our shooting sports product demand is more directly associated with firearm demand, which declined 23.4% as indicated by adjusted background checks reported in the National Instant Criminal Background Check System, or NICS, compared with the comparable quarter last year, a period which we believe had heightened demand as a result of certain news and pandemic related events. 23 -------------------------------------------------------------------------------- New products, which we define as any SKU introduced over the prior two fiscal years, represented 28.8% of net sales for the three months endedJanuary 31, 2022 .
Gross margin for the three months ended
The following table sets forth certain information regarding consolidated net sales and gross profit for the nine months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Net sales$ 201,633 $ 212,214 $ (10,581 ) -5.0 % Cost of sales 107,518 114,038 (6,520 ) -5.7 % Gross profit$ 94,115 $ 98,176 $ (4,061 ) -4.1 % % of net sales (gross margin) 46.7 % 46.3 % The following table sets forth certain information regarding trade channel net sales for the nine months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change e-commerce channels$ 79,540 $ 87,241 $ (7,701 ) -8.8 % Traditional channels 122,093 124,973 (2,880 ) -2.3 % Total net sales$ 201,633 $ 212,214 $ (10,581 ) -5.0 % The following table sets forth certain information regarding geographic makeup of net sales included in the above table for the nine months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Domestic net sales$ 191,599 $ 205,124 $ (13,525 ) -6.6 % International net sales 10,034 7,090 2,944 41.5 % Total net sales$ 201,633 $ 212,214 $ (10,581 ) -5.0 %
For the nine months ended
Net sales in our e-commerce channel decreased$7.7 million , or 8.8%, from the prior year comparable period, a period that, we believe reflected heightened e-commerce net sales because of COVID-19 related restrictions. In addition, our prior year comparable period included replenishment of retailer inventory after non-essential product orders were halted in our fourth quarter of fiscal 2020, which had a positive impact on our net sales for the nine months endedJanuary 31, 2021 . During that period, we noted numerous retail store closures and stay at home orders that we believe resulted in a shift in consumer preferences to online retailers. Although our net sales in our e-commerce channel decreased from the prior year comparable period, direct-to-consumer sales from our own websites increased. Net sales in our traditional channels decreased$2.9 million , or 2.3%, from the prior year comparable period, because of lower net sales of our shooting sports products. We believe our shooting sports products demand is more directly associated with firearm demand, which declined 24.6% as indicated by adjusted background checks reported in NICS, compared to the prior year comparable period. The lower net sales in shooting sports was almost entirely offset by increased net sales of our outdoor lifestyle products, specifically for our fishing, hunting, and rugged outdoor products. Net sales in our international channel increased as a result of increased demand for products in our hunting and shooting sports categories, primarily due to customers inCanada as well as incremental new international customers.
New products, which we define as any SKU introduced over the prior two fiscal
years, represented 26.0% of net sales for the nine months ended
Gross margin for the nine months ended
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Operating Expenses
The following table sets forth certain information regarding operating expenses for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Research and development$ 1,377 $ 1,478 $ (101 ) -6.8 % Selling, marketing, and distribution 15,627 15,121 506 3.3 % General and administrative 10,366 10,591 (225 ) -2.1 % Total operating expenses$ 27,370 $ 27,190 $ 180 0.7 % % of net sales 39.0 % 32.9 % Research and development expenses decreased$101,000 from the comparable quarter last year, primarily as a result of lower professional fees and outside services. Selling, marketing, and distribution expenses increased$506,000 over the comparable quarter last year because of higher trade show expenses and advertising, partially offset by lower freight and temporary labor costs from reduced sales volumes. General and administrative expenses decreased$225,000 from the comparable quarter last year, primarily as a result of$1.6 million lower employee compensation-related expenses and$639,000 of lower acquired intangible asset amortization, partially offset by$1.0 million of increased standalone expenses, such as our information technology infrastructure costs, subscription and software costs, and insurance premium costs.
The following table sets forth certain information regarding operating expenses
for the nine months ended
2022 2021 $ Change % Change Research and development$ 4,354 $ 4,641 $ (287 ) -6.2 % Selling, marketing, and distribution 44,490 41,426 3,064 7.4 % General and administrative 31,020 29,899 1,121 3.7 % Total operating expenses$ 79,864 $ 75,966 $ 3,898 5.1 % % of net sales 39.6 % 35.8 % Research and development expenses decreased$287,000 from the prior year comparable period, primarily as a result of lower professional fees and outside services. Selling, marketing, and distribution expenses increased$3.1 million over the prior year comparable period, primarily as a result of$1.4 million of increased freight costs;$1.3 million of higher digital, print, and commercial advertising expenses; and$931,000 of higher expenses related to trade shows, partially offset by lower sales volume related expenses. General and administrative expenses increased$1.1 million over the prior year comparable period, primarily as a result of$3.8 million of increased standalone expenses, such as our information technology infrastructure costs, subscription and software costs, and insurance premium costs, partially offset by$2.0 million of lower acquired intangible asset amortization and$1.1 million of lower employee compensation-related expenses.
Operating Income
The following table sets forth certain information regarding operating income for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Operating income$ 4,725 $ 10,183 $ (5,458 ) -53.6 % % of net sales (operating margin) 6.7 % 12.3 % Operating income for the three months endedJanuary 31, 2022 was$4.7 million , a decrease of$5.5 million from$10.2 million operating income for the three months endedJanuary 31, 2021 , primarily because of lower sales and gross profit and higher operating expenses as described above.
The following table sets forth certain information regarding operating income
for the nine months ended
2022 2021 $ Change % Change Operating income$ 14,251 $ 22,210 $ (7,959 ) -35.8 % % of net sales (operating margin) 7.1 % 10.5 % 25 -------------------------------------------------------------------------------- Operating income for the nine months endedJanuary 31, 2022 was$14.3 million , a decrease of$8.0 million from$22.2 million operating income for the nine months endedJanuary 31, 2021 , primarily because of lower sales and gross profit and higher operating expenses as described above.
Total Other Income, Net
The following table sets forth certain information regarding total other income,
net for the three months ended
2022 2021 $ Change % Change
Total other income, net
For the three months ended
The following table sets forth certain information regarding total other income,
net for the nine months ended
2022 2021 $ Change % Change Total other income, net$ 837 $ 693 $ 144 20.8 %
For the nine months ended
Income Taxes
The following table sets forth certain information regarding income tax expense for the three months endedJanuary 31, 2022 and 2021 (dollars in thousands): 2022 2021 $ Change % Change Income tax expense$ 1,149 $ 2,244 $ (1,095 ) -48.8 % % of income from operations (effective tax rate) 23.4 % 21.8 % 1.6 %
We recorded income tax expense of
The following table sets forth certain information regarding income tax expense
for the nine months ended
2022 2021 $ Change % Change Income tax expense$ 3,282 $ 5,746 $ (2,464 ) -42.9 % % of income from operations (effective tax rate) 21.8 % 25.1 % -3.3 % We recorded income tax expense of$3.3 million for the nine months endedJanuary 31, 2022 compared with income tax expense of$5.7 million for the prior year comparable period. The effective tax rate forJanuary 31, 2022 included discrete items related to stock-based compensation. The effective tax rate forJanuary 31, 2021 included discrete items related to the corporate and distribution expense allocations presented in the combined financial statements on a "carve out" basis. Net Income
The following table sets forth certain information regarding net income and the
related per share data for the three months ended
2022 2021 $ Change % Change Net income$ 3,766 $ 8,029 $ (4,263 ) -53.1 % Net income per share Basic$ 0.27 $ 0.57 $ (0.30 ) -52.6 % Diluted$ 0.27 $ 0.56 $ (0.29 ) -51.8 % 26
-------------------------------------------------------------------------------- Net income of$3.8 million , or$0.27 per diluted share, for the three months endedJanuary 31, 2022 was$4.3 million lower than net income of$8.0 million , or$0.56 per share, for the comparable quarter last year, primarily because of lower sales volume and gross profit as well as increased operating expenses.
The following table sets forth certain information regarding net income and the
related per share data for the nine months ended
2022 2021 $ Change % Change Net income$ 11,806 $ 17,157 $ (5,351 ) -31.2 % Net income per share Basic$ 0.84 $ 1.23 $ (0.39 ) -31.7 % Diluted$ 0.82 $ 1.20 $ (0.38 ) -31.7 % Net income of$11.8 million , or$0.82 per diluted share, for the nine months endedJanuary 31, 2022 was$5.4 million lower than net income of$17.2 million , or$1.20 per share, for the prior year comparable period, primarily because of lower sales volumes and gross profit as well as increased operating expenses. Non-GAAP Financial Measure We use GAAP net income as our primary financial measure. We use Adjusted EBITDAS, which is a non-GAAP financial metric, as a supplemental measure of our performance in order to provide investors with an improved understanding of underlying performance trends, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Adjusted EBITDAS is defined as GAAP net income/(loss) before interest, taxes, depreciation, amortization, and stock compensation expense. Our Adjusted EBITDAS calculation also excludes certain items we consider non-routine. We believe that Adjusted EBITDAS is useful to understanding our operating results and the ongoing performance of our underlying business, as Adjusted EBITDAS provides information on our ability to meet our capital expenditure and working capital requirements, and is also an indicator of profitability. We believe this reporting provides additional transparency and comparability to our operating results. We believe that the presentation of Adjusted EBITDAS is useful to investors because it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. We use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to neutralize our capitalization structure to compare our performance against that of other peer companies using similar measures, especially companies that are private. We also use Adjusted EBITDAS to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe it is useful to investors and analysts to evaluate this non-GAAP measure on the same basis as we use to evaluate our operating results. Adjusted EBITDAS is a non-GAAP measure and may not be comparable to similar measures reported by other companies. In addition, non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of non-GAAP measures through the use of various GAAP measures. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDAS. Our presentation of Adjusted EBITDAS should not be construed as an inference that our future results will be unaffected by these items. The following table sets forth our calculation of non-GAAP Adjusted EBITDAS for the three and nine months endedJanuary 31, 2022 and 2021, respectively (dollars in thousands): For the Three Months Ended January 31, For the Nine Months Ended January 31, 2022 2021 2022 2021 GAAP net income $ 3,766 $ 8,029 $ 11,806 $ 17,157 Interest expense 68 - 167 - Income tax expense 1,149 2,244 3,282 5,746 Depreciation and amortization 4,164 4,642 12,550 15,112 Related party interest income - - - (424 ) Stock compensation 920 904 2,336 2,100 Transition costs - - - 264 Technology implementation 460 - 1,619 - COVID-19 costs - - - 223 Other 22 - 40 125 Non-GAAP Adjusted EBITDAS $ 10,549 $ 15,819 $ 31,800 $ 40,303 27 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We expect to continue to utilize our cash flows to invest in our business, including research and development for new product initiatives; hire additional employees; fund growth strategies, including any potential acquisitions; repurchase our common stock under our authorized stock repurchase program; repay any indebtedness we may incur over time; and develop our independent information technology infrastructure, including the implementation of our enterprise resource planning systems. We estimate that our information technology infrastructure will cost a total of approximately$8.0 million over a period that spans fiscal 2022 and fiscal 2023. In fiscal 2022, we expect capital expenditures of approximately$3.5 million and one-time operating expenses of approximately$1.6 million . In addition, we expect to record approximately$1.2 million of duplicative expenses, in fiscal 2022, as we operate both our existing and our new information technology and enterprise resource planning platforms in parallel during the system changeover period. In fiscal 2023, we expect capital expenditures of approximately$2.0 million and one-time operating expenses of approximately$1.0 million . The one-time operating expenses and duplicative expenses will be recorded in general and administrative expenses on our consolidated and combined statement of operations and comprehensive income.
The following table sets forth certain cash flow information for the nine months
ended
2022 2021 $ Change % Change Operating activities$ (26,186 ) $ 17,057 $ (43,243 ) -253.5 % Investing activities (4,711 ) (3,063 ) (1,648 ) 53.8 % Financing activities (7,126 ) 31,282 (38,408 ) -122.8 % Total cash flow$ (38,023 ) $ 45,276 $ (83,299 ) -184.0 % Operating Activities
On an annual basis, operating activities generally represent the principal source of our cash flow.
Cash used in operating activities was$26.2 million for the nine months endedJanuary 31, 2022 compared with cash provided by operating activities of$17.1 million for the nine months endedJanuary 31, 2021 . Cash used in operating activities for the nine months endedJanuary 31, 2022 was primarily impacted by$45.3 million of increased inventory as a result of a planned inventory build on high moving items due to the acceleration of planned purchases to help mitigate price increases on materials and future supply chain disruptions and additional new product introductions later in the year. In addition, our anticipated new products that have a higher average cost; increases in pricing from our suppliers; and increased freight costs increased our average finished goods per unit cost value during the nine months endedJanuary 31, 2022 . Accounts receivable increased$7.9 million because of timing of customer shipments, prepaid expenses and other current assets increased$2.6 million primarily from timing of insurance premium payments and deposits on inventory, and accrued payroll and incentives reduced by$3.0 million because of timing and the payout of management incentives during the nine months endedJanuary 31, 2022 . The cash used in operations for the nine months endedJanuary 31, 2022 was offset by$3.8 million of increased accounts payable from timing of inventory shipments, and$4.0 million of higher accrued expenses primarily related to freight and duty accruals as a result of higher inventory purchases as well as the timing of sales volume related accrual payments. Our inventory has increased during the three months endedJanuary 31, 2022 for the same reasons described above and we expect our inventory balance to be relatively flat in our fourth quarter of fiscal 2022. It is possible that worsening of conditions or increased fears of the COVID-19 pandemic could have a renewed and prolonged effect on manufacturing or employment inAsia , travel to and fromAsia , or other restrictions on imports, all of which could have a longer-term effect on our sales and profitability in future periods. In addition, increased demand for sourced products in various industries could cause further delays at variousU.S. ports and as products move throughout the country, which could affect the timing of receipts of our products.
Investing Activities
Cash used in investing activities was$1.6 million higher during the nine months endedJanuary 31, 2022 as compared with the prior year comparable period. We expect to spend approximately$7.0 million to$7.5 million of capital expenditures in fiscal 2022, an increase of$3.5 million to$3.9 million over fiscal 2021, which includes the capital expenditures for the development and implementation of our independent information technology infrastructure noted above. We recorded spending of$2.4 million of capital expenditures during the nine months endedJanuary 31, 2022 related to our development and implementation of our independent information technology infrastructure. 28 --------------------------------------------------------------------------------
Financing Activities
Cash used in financing activities was$7.1 million for the nine months endedJanuary 31, 2022 , primarily from$7.0 million of purchases of our common stock under our authorized stock repurchase program compared with cash provided by financing activities of$31.3 million in the prior year comparable period because of changes in net transfers from our former parent company.
Acquisition
OnMarch 8, 2022 , we entered into a definitive agreement to acquire substantially all of the net assets fromFahrenheit Technologies, Inc. , aMichigan corporation, or Fahrenheit, for an aggregate price of$27.0 million , subject to certain adjustments. We intend to utilize a combination of cash on hand and availability from our revolving line to complete the acquisition. Fahrenheit, based inHolland, Michigan , is a provider of high-quality, barbecue grills; Wi-Fi-enabled wood pellet grills; smokers; accessories; and modular outdoor kitchens sold under the brand Grilla Grills. Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the capital needed to operate as an independent publicly traded company, including the establishment of our independent information technology infrastructure and enterprise resource planning systems, any acquisitions or strategic investments that we may determine to make, the completion of our$15.0 million authorized stock repurchase program utilizing cash on hand, and our ability to navigate through the many negative business impacts from the COVID-19 pandemic. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.
We had
Other Matters
Critical Accounting Policies
The preparation of our consolidated and combined financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant accounting policies are summarized in Note 2 of the Notes to the consolidated and combined financial statements in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 . The most significant areas involving our judgments and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , to which there have been no material changes. Actual results could differ from our estimates.
Recent Accounting Pronouncements
The nature and impact of recent accounting pronouncements, if any, is discussed in Note 2-Recently Adopted and Issued Accounting Standards to our consolidated and combined financial statements included elsewhere in this Quarterly Report on Form 10-Q, which is incorporated herein by reference. 29
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