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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Smith & Wesson Brands, Inc.    SWBI

SMITH & WESSON BRANDS, INC.

(SWBI)
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SMITH & WESSON BRANDS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

09/03/2020 | 04:19pm EST

Overview

Please refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020 and our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. This section sets forth key objectives and performance indicators used by us as well as key industry data tracked by us.

We report our results of operations in two segments: (1) Firearm and (2) Outdoor Products & Accessories. Subsequent to the spin-off of our outdoor products and accessories business on August 24, 2020, or the Separation, we will no longer report our operations in two segments.

First Quarter Fiscal 2021 Highlights

Our operating results for the three months ended July 31, 2020 included the following:

    •  Consolidated net sales were $278.0 million, an increase of $154.3 million,
       or 124.8%, over the comparable quarter last year.


    •  Firearm segment gross sales were $229.9 million, which included $1.0
       million of inter-segment revenue, an increase of $134.4 million, or 140.9%,
       over the comparable quarter last year, primarily because of increased
       consumer demand for the majority of our products driven by market share
       gains and increased consumer interest in firearms, which may be a result of
       recent events that have raised fears about personal protection and the
       upcoming political election.


    •  Outdoor Products & Accessories segment gross sales were $50.6 million,
       which included $1.5 million of inter-segment revenue, an increase of $17.4
       million, or 52.3%, over the comparable quarter last year, primarily because
       of several factors related to the COVID-19 pandemic, discussed below.


    •  Consolidated gross margin was 42.0%, an increase of 330 basis points over
       the comparable quarter last year.


    •  Consolidated net income was $48.4 million, or $0.86 per diluted share,
       compared with a net loss of $2.1 million, or ($0.04) per diluted share for
       the comparable quarter last year.




Results of Operations

Consolidated Net Sales and Gross Profit - For the Three Months Ended July 31, 2020


The following table sets forth certain information regarding consolidated net
sales and gross profit for the three months ended July 31, 2020 and 2019
(dollars in thousands):



                                2020          2019        $ Change       % Change
Net sales                     $ 277,965$ 123,665$ 154,300          124.8 %
Cost of sales                   161,199        75,811        85,388          112.6 %
Gross profit                  $ 116,766$  47,854$  68,912          144.0 %

% of net sales (gross margin) 42.0 % 38.7 %

Consolidated net sales increased $154.3 million, or 124.8%, primarily because of increased consumer demand for the majority of our products in our Firearm segment and increased revenue from our e-commerce channel in our Outdoor Products & Accessories segment.

Consolidated gross margin increased 330 basis points over the comparable quarter last year primarily because of lower promotional product spending in our Firearm segment because of the increased demand in the consumer market that eliminated the need for promotional programs in the quarter, and favorable manufacturing fixed cost absorption. Consolidated gross margin was also favorably impacted by customer mix, product mix, and favorable manufacturing fixed-cost absorption in our Outdoor Products & Accessories segment.


                                       21

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Firearm Segment Revenue and Gross Profit - For the Three Months Ended July 31, 2020


The following tables set forth certain information regarding Firearm revenue and
gross profit for the three months ended July 31, 2020 and 2019 (dollars in
thousands):



                                2020          2019       $ Change       % Change
Handguns                      $ 165,169$ 69,710$  95,459          136.9 %
Long Guns                        53,847       16,600        37,247          224.4 %
Other Products & Services        10,868        9,127         1,741           19.1 %
Total Firearm Revenue         $ 229,884$ 95,437$ 134,447          140.9 %
Cost of sales                   137,461       60,039        77,422          129.0 %
Gross profit                  $  92,423$ 35,398$  57,025          161.1 %

% of net sales (gross margin) 40.2 % 37.1 %





The following table sets forth certain information regarding firearm units
shipped by trade channel for the three months ended July 31, 2020 and 2019
(units in thousands):



Total Units Shipped                    2020      2019      # Change      % Change
Handguns                                 472       225         247        109.8%
Long Guns                                112       60           52         86.7%

Sporting Goods Channel Units Shipped 2020 2019 # Change % Change Handguns

                                 441       199         242        121.6%
Long Guns                                108       57           51         89.5%

Professional Channel Units Shipped     2020      2019      # Change      % Change
Handguns                                 31        26           5          19.2%
Long Guns                                 4         3           1          33.3%



Revenue for our handguns increased $95.5 million, or 136.9%, over the comparable quarter last year. The increase in revenue was due to increased demand for all major product lines driven by an increased consumer interest in firearms, likely resulting from continued concerns regarding the COVID-19 pandemic, recent events that have raised fears about personal protection, and uncertainty regarding the possibility of increased firearm regulation in relation to the upcoming political election. Unit shipments into the sporting goods consumer channel increased 121.6% over the comparable quarter last year primarily due to increased consumer firearm demand, as indicated by a 141.3% increase over the comparable quarter last year in total adjusted handgun background checks as reported to the National Instant Criminal Background Check Systems, or NICS, which we believe is a proxy for overall consumer demand. We believe that our percentage increase in sales in handguns likely did not match the increase in NICS because of a significant decline of channel inventory during the quarter and capacity constraints related to the significant increase in consumer demand.

Revenue for our long guns increased $37.2 million, or 224.4%, over the comparable quarter last year. The increase in revenue was primarily because of increased consumer demand for our M&P modern sporting rifles. This was partially offset by a decrease in hunting rifle sales as a result of a bulk sale to clear discontinued products from the channel in the prior year.

Other products and services revenue increased $1.7 million, or 19.1%, over the comparable quarter last year, primarily because of increased sales of component parts and handcuffs, partially offset by lower sales in specialty services.

New products in our Firearm segment, defined as any new SKU not shipped in the comparable quarter last year, represented 11.8% of firearm revenue for the three months ended July 31, 2020 and included a new concealed carry M&P branded polymer pistol, many new product line extensions, and promotional product bundle kits for our M&P, Performance Center, and Thompson/Center Arms branded products.

Gross margin for the three months ended July 31, 2020 for our Firearm segment increased 310 basis points over the comparable quarter last year, primarily because of lower promotional product spending, favorable manufacturing fixed cost absorption, and favorable price increases. These increases were partially offset by unfavorable inventory valuation adjustments and increased manufacturing spending.


                                       22

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Firearm inventory balances decreased $23.8 million during the three months ended July 31, 2020 as a result of our ability to meet increased consumer demand.

Outdoor Products & Accessories Segment Revenue and Gross Profit - For the Three Months Ended July 31, 2020


The following table sets forth certain information regarding Outdoor Products &
Accessories segment revenue for the three months ended July 31, 2020 and 2019
(dollars in thousands):



                                2020         2019       $ Change       % Change
Revenue                       $ 50,580$ 33,217$  17,363           52.3 %
Cost of sales                   27,498       19,144         8,354           43.6 %
Gross profit                  $ 23,082$ 14,073$   9,009           64.0 %

% of net sales (gross margin) 45.6 % 42.4 %

For the three months ended July 31, 2020, revenue for our Outdoor Products & Accessories segment increased $17.4 million, or 52.3%, over the comparable quarter last year, primarily because of higher demand for the majority of our products, which we believe was driven by increased consumer interest in self-protection and outdoor activities. In addition, there were several factors we believe are related to the COVID-19 pandemic, such as increased participation in outdoor recreation activities that we believe was heightened due to state-mandated travel restrictions, increased foot traffic after the reopening of retail locations that were previously ordered to be closed, and our ability to replenish retailer inventory after non-essential product orders were halted in our fourth fiscal quarter that had a positive impact on our revenue for the three months ended July 31, 2020. Revenue in our e-commerce channel increased over the comparable quarter last year, that we believe resulted from a shift in consumer preference during the current period to online retailers and increases in our own direct-to-consumer business. Sales in our traditional channels, which include retailers with physical brick and mortar stores, increased over the comparable quarter last year primarily because of the reasons described above. In addition, feedback from certain of our large customers seems to indicate significant growth over the comparable quarter last year, reflecting strong consumer demand for our products in the channel. The increase in revenue was partially offset by $2.6 million lower inter-segment revenue and a previously communicated decline in sales of our branded camping accessory products due to one large retailer accelerating a strategy towards its own private label brand.

New products in our Outdoor Products & Accessories segment, defined as any new SKU not shipped in the comparable quarter last year, represented 10.2% of revenue for the three months ended July 31, 2020. Our Outdoor Products & Accessories segment has a history of introducing approximately 250 to 350 new SKUs each year, the majority of which are introduced late in our third fiscal quarter.

Gross margin for the three months ended July 31, 2020 for our Outdoor Products & Accessories segment increased 320 basis points over the comparable quarter last year, primarily because of channel mix, product mix, and lower promotion expenses from increased demand, partially offset by higher tariff costs.

Inventory in our Outdoor Products & Accessories segment increased $9.1 million during the three months ended July 31, 2020. Items impacting our inventory included a planned inventory build to support increased demand leading up to the fall hunting and holiday shopping seasons, the resolution of COVID-19 related supply chain issues that resulted in increased order fulfillment of our inventory, additional planned purchases to help mitigate potential future supply chain disruptions, and an inventory build in anticipation of new product introductions later in the fiscal year. These increases were partially offset by increased sales and improved order cadence, which improved inventory turns. With regard to concerns surrounding COVID-19, and based on our understanding of the current situation, it is possible that worsening of conditions or increased fears relating to the pandemic could have a renewed and prolonged effect on manufacturing or employment in China, travel to and from China, or other restrictions on imports - all of which could have a longer-term effect on our sales and profitability in future periods.


                                       23

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Consolidated Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended July 31, 2020 and 2019 (dollars in thousands):




                                       2020         2019        $ Change       % Change
Research and development             $  2,965$  3,229$     (264 )         -8.2 %
Selling, marketing, and distribution   19,269       16,773          2,496           14.9 %
General and administrative             29,080       26,709          2,371            8.9 %
Total operating expenses             $ 51,314$ 46,711$    4,603            9.9 %
% of net sales                           18.5 %       37.8 %



Selling, marketing, and distribution expenses increased $2.5 million over the prior year comparable quarter, primarily because of increased co-op advertising expenses for strategic customers, increased compensation-related expenses, and increased freight-related expenses. This increased spending was partially offset by lower travel and entertainment expenses due to COVID-19 and decreased advertising expenses. General and administrative expenses increased $2.4 million because of $3.6 million of expenses related to the spin-off of our outdoor products and accessories business, $2.8 million of increased profit sharing expense, and increased other compensation-related expenses, partially offset by a reduction in our allowance for doubtful accounts and lower travel and entertainment expenses due to COVID-19. The increases in total operating expenses were also partially offset by lower employee medical costs, likely due to the deferral of elective procedures resulting from the COVID-19 pandemic.

© Edgar Online, source Glimpses

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