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.
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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.
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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.
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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.
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