Smith & Wesson Brands, Inc. (SWBI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Smith & Wesson Holdings Corp Q2 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I will now like to turn the call over to Liz Sharp, Vice President of Investor Relations. Please go ahead.

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 and organizational development, our market share and market demand for our product, market and inventory conditions related to our products, and 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 smith-wesson.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 contained herein. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we referenced certain non-GAAP financial measures on this call. 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 8-K filing, as well as today's earnings press release, which are posted to our website or will be discussed on this call. Also, when we reference EPS, we are always referencing diluted EPS. For detailed information on our results, please refer to our 10-Q for the quarter ended October 31, 2016. I will now turn the call over to James Debney, President and CEO.

Thank you Liz, good afternoon and thanks everyone for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call Jeff will provide a recap of our financial performance, as well as our guidance for the third quarter and full fiscal 2017. Today we are very pleased to share another consecutive quarter of strong financial results combined with strategic accomplishment that move us closer to our expanded vision which is to be a leading provider of high quality product for the shooting, hunting, and rugged outdoor enthusiasts. In addition to delivering financial performance that exceeded our guidance, we also completed two important acquisitions that fit perfectly into our strategy. These acquisitions position us well to explore new opportunities, both organic and inorganic and our large and growing market for shooting, hunting, and rugged outdoor enthusiasts. And after the close of the quarter, we announced an additional acquisition that enters us into two new segments of the rugged outdoor market; accessories for camping and survival situations. With that said, let me provide some highlights from the quarter. Total company revenues exceeded the high end of our guidance range. Higher revenue on our Firearm segment was driven by strong orders for our concealed carry hand guns, and modern sporting rifles. Our manufacturing services division continues to leverage our flexible manufacturing model, enabling the firearms division to capture incremental sales and market share. Distributor inventory of our firearms increased as anticipated by about 33,000 units to a total of 189,000 units at the end of Q2. Over time, as our production output and revenue has increased we are focused on increasing our inventory to optimize distribution of our product with independent retailers in support of our take market share strategy. This is especially important at this time of the year when we move towards the holiday season and distributor shows. At the close of Q2 our weeks of sales on the distributor channel was slightly above our eight week threshold. But again, this is not unexpected as we approach Q3 and Q4, which are typically our strongest shipping quarters of the year. Our shipments relative to adjusted NICS results lead us to believe that we continue to take market share in the quarter, even when taking into account the increase in distributor inventory. In hand guns, which made up 83% our firearms unit shipped in Q2, NICS checks increased 12.2% while our units shipped into the consumer channel grew by 68.2%. In long guns, which make up about 17% of our firearms unit shipped in Q2, NICS check also increased 12.2% while our units shipped into the consumer channel grew by 76.5%. Note here, that while that is a large increase it's based on a much smaller unit number than handguns. In our Outdoor Products & Accessories Segment, we completed the acquisitions of Taylor Brands and Crimson Trace, both of which were accretive to our non-GAAP earnings. As a result, revenue in this segment approximately doubled compared with last year. Crimson Trace is the leader in the laser sight market. So its new products are always highly anticipated by customers. In the quarter, Crimson Trace began shipping LiNQ, an innovative, new two piece light and laser sight module that utilizes state-of-the-art wireless operating technology and takes the ease of activation to new levels. This is our first LiNQ product and what we anticipate will grow into robust product platform over time. New product development is a key part of our organic growth strategy across the entire multi-division structure. Across all of our divisions, preparations continued throughout the quarter for SHOT Show in Las Vegas next month. Company-wide, we put the finishing touches on over 100 new products that will be launched at SHOT 2017. I'm excited to share that in Q2 firearms finalized a major new addition to our M&P polymer pistol family, and prepared for its upcoming launch. Our M&P family has grown significantly and today includes many notable and extremely popular products such as the M&P SHIELD, the M&P Bodyguard, and the M&P 15 sport. M&P is a brand that has developed a substantial following over the last 10 years based on its ability to deliver the key attributes that consumers demand: product performance, reliability and durability. Our team is looking forward to January on the official launch of this exciting new handgun. Among these 100 new products are multiple SKUs from our accessory brands called Tipton and Wheeler, and a number of new line extensions from Crimson Trace. SHOT Show will be an exciting time for our company with new products that position us well for our next fiscal year. After the close of Q2, we announced our acquisition of Ultimate Survival Technology or UST, a provider of high-quality survival and camping products. UST delivered compound annual revenue growth of 49% from 2012 through 2015, maintained healthy gross margins, and developed hundreds of high quality products. We believe the areas of strength we have identified in the UST distribution network will create multiple incremental opportunities for our existing accessory product lines in the coming years. Before I hand over to Jeff for our financial discussion, I want to share a few thoughts about our strategy. As one of the most respected and iconic brands in America, Smith & Wesson holds number one leadership position in the U.S. consumer market for hand guns. Our family of brands participates in almost every firearm category and our teams focus intently on maintaining a robust new product pipeline that has continued to fuel our organic growth and profitability year-after-year. We’ve demonstrated our ability to create new product for our firearms brand such as M&P which today generates the majority of our revenue. And operationally, our unique approach to increasing production, allows us to efficiently respond to changes in our marketplace. As a result, we believe we continue to achieve market share gains and what we estimate to be a $4 billion domestic firearms market. A market that we estimate grows at a rate in the mid to high single-digits over the long-term and a normalized environment. That said, our strength in firearm has not only delivered growth but has served as a strong core business and a solid foundation from which we are pursuing a broader and exciting strategy, and that is all focused on the growing market for shooting, hunting and the rugged outdoor enthusiast. Taken together, they provide us with a much larger addressable market, one that we believe exceeds $60 billion plus in size and one with a user base that has much in common with our core firearm consumer, a rugged outdoor lifestyle and an affinity for strong and trusted brands. With this concept in mind, we have completed a number of successful acquisitions over the past 24 months that have helped establish our newly created outdoor product and accessory segment. We began with Battenfeld Technologies, a provider of shooting and hunting accessories under well-known brands like Caldwell and Tipton. We then expanded the Battenfeld offering through the acquisition of Taylor Brands, owner of several well-known knife and tool brands, including our very own Smith & Wesson and M&P brands, and more recently, UST, which I mentioned earlier. Today Battenfeld serves as the platform for our growing accessories division. We added another platform to outdoor products and accessories with the establishment of our electro-optics divisions by the acquisition of Crimson Trace. Given the talent and deep experience about the team at Crimson Trace, we now have the ability to view the electro-optics market and its entirety. This broadening of their horizons gives them a sizeable market to explore and pursue. That market includes products such as various sites aiming and ranging devices, magnifiers our scope for a variety of applications. Therefore, we believe that this division will have handful organic and inorganic expansion opportunity. By executing on our strategy, we have successfully grown from a single operating division to full operating division that serve us a large addressable market and represent more than 18 highly respected consumer brands. So on January 1, 2017, our holding company will -- pending stockholder approval on December 13 of this year become American Outdoor Brands Corporation. We believe this name better represents our strategic direction, our broad range of product offerings and our plan to continue building our portfolio of strong American brands. American Outdoor Brands Corporation will serve as the holding company for the historic Smith & Wesson Corp., Battenfeld Technologies, Inc., and Crimson Trace Corporation, which represent our firearms, manufacturing services, accessories, and electro-optics divisions. We have only just begun our journey towards achieving our vision of being a leading provider of high quality product for the shooting, hunting and rugged outdoor enthusiast. This large and growing market is populated by active lifestyle consumers who pursue their activities with passion and who exercise brand loyalty, seeking out brands they can trust. With a track record of creating, preserving and acquiring strong brands, we remain committed to our future growth, focusing on brands and products that best meet the needs and lifestyles of our target consumers. With that, I'll ask Jeff to provide more detail on our second quarter financial results, and provide our updated guidance.

Thanks, James. Revenue for the quarter was $233.5 million, up 63% from the prior year. And looking at our two segments; revenue from our firearms was $194.5 million, an increase of 57.5% and revenue from Outdoor Products and Accessories was $39.1 million, a 97.9% increase that was driven primarily by the acquisitions of Taylor Brands and Crimson Trace. The gross margin for the quarter was 41.8% as compared with 39.2% in the prior year. On a segment basis, the firearms gross margins was 42%, and the outdoor products and accessories gross margins was 40.6%. On a non-GAAP basis, which excludes the one-time inventory step-up in backlog and cost of goods that occurred as a result of the recent acquisitions, the outdoor products gross margin would be nearly 50% and the total company gross margin would be 43.4%. The increase in gross margin was driven by higher fixed cost absorption that are purchased price variances and favorable inventory adjustments in firearms and higher standard product margins in outdoor products and accessories. These positive factors more than offset increased manufacturing spending and promotional costs. Operating expenses in the quarter were $45.4 million or 19.5% of revenue compared to $34.4 million or 24% of revenue in the prior year. Increase in the second quarter operating expenses included $3.8 million in acquisition cost including new intangible amortization and a $1 million contribution to the NRA-ILA [ph]. On a non-GAAP basis which excludes the acquisition related costs, operating expenses were $39 million or 16.7% of revenue, compared to $31.7 million or 22.1% of revenue in the prior year. The operating margin was 22.3% for the second quarter compared to 15.2% in the prior year. On a non-GAAP basis, the operating margin was 26.7% in Q2 as compared to 17.1% in the prior year. Our EPS for Q2 came in at $0.57 as compared with $0.22 in the prior year. Our non-GAAP EPS which excludes acquisition related cost was $0.68 as compared with $0.25 last year. Adjusted EBITDA in Q2 was a record $72.4 million for a 31% EBITDA margin, compared to $33.4 million, a 23.3% margin in the prior year. Turning to the balance sheet, operating cash flow was a positive $20.8 million during the quarter and excluding inventory relating to acquisitions, we build up our internal inventories with the fall hunting and retail seasons. CapEx spending during the quarter was $7.5 million. We expect to spend approximately $50 million this fiscal year on CapEx, primarily related to a capacity increases; further enhancements to manufacturing and flexibility, tooling for several important new product offerings in various IT projects. At the end of Q2, our cash balance was $73.9 million. We had $25 million of borrowings on our banking line of credit which we have since repaid. And our outstanding long-term debt was $172.1 million leaving a net debt position of $123.2 million. During the quarter, we secured a commitment to increase our banking line of credit to $500 million from $225 million. This expansion of that unsecured line provides us with greater opportunities to invest in our future growth, both organically and through strategic acquisitions. This increased access to our capital is a clear reflection of the confidence our bankers have in our company, as well as the overall strength of our business. After the end of the second quarter, we closed on our UST acquisition which utilized approximately $33 million in cash-on-hand. And as noted, we repaid the $25 million balance on our line of credit. Turning now back to our guidance; and for the full year we increased our guidance and now expect net sales of between $920 million and $930 million; GAAP EPS of between $2.11 and $2.16 and non-GAAP EPS of between $2.42 and $2.47. For the third quarter, we expect net sales between $230 million and $240 million; GAAP EPS of between $0.44 and $0.49 and non-GAAP EPS between $0.52 and $0.57. In both our third quarter and full year numbers, our non-GAAP EPS excludes acquisition costs such as amortization and deal related costs. Also note that our guidance takes into account our acquisition of UST but does not take into account, any other acquisitions that we may close during the remainder of the year. All these estimates are based on our current fully diluted share count of 57.1 million shares. It should also be noted that we recently adopted a county standards update, 2016-9, which resulted in a one-time reduction to our first quarter taxes resulting in a pickup for $0.04 to our first quarter EPS and you will see that new adjustment reflected in the six months to gears [ph] that are in the 10-Q we filed today with our second quarter results. I want to make sure that our analysts take that into account as you prepare to model. And to be clear, this was a one-time adjustment and going forward, we estimate our tax rate at 36%. Back to James.

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

Thank you. [Operator Instructions] Our first question comes from Steven Dyer with Craig-Hallum. Your line is now open.

Thanks, good afternoon. Thanks for taking my questions. A question I guess on margin for the January quarter; guidance would appear to imply a slightly lower I think gross margin. And I'm wondering how much of that is from the firearms division? It looks like maybe there are still some residual from the fair value step-up on the accessory side but maybe a little bit more color on how you see that shaking out?

Yes, actually it's – probably if you did the math, it would be a bit reduced. The fair value on step up is mostly gone in Q3. The difference is that a lot of our promotional activity occurs mostly in Q3 and Q4, so I think that probably would account for most of the difference.

Okay. And then I guess, just as you look at inventory, you guys have a higher level of inventory year-over-year, the channel has its highest level for a while in terms of the wholesale channel at a time when certainly I guess there are some expectation by some people that maybe gun sales cool off a little bit. Can you kind of tell us how you feel about the inventory situation and maybe what you're hearing back from the channel including retail -- your large retailers since the election?

We are very comfortable with a level of inventory that we see our wholesalers carrying. Obviously, we've performed a lot of analysis on that inventory and we look at it in terms of weeks of cover as well. And as I said in the prepared remarks, we ended with just over eight weeks, which is our threshold in terms of sales cover. We've worked hard to increase that inventory in preparation for what we always see as a busy holiday season and then as you go into January and February and somewhat into March as well, we're very busy in terms of the promotional activity that Jeff was referencing earlier, and that’s a lot around by group shows and wholesaler shows as well, whether inviting independent retailers and to place orders with promotions to incent them to do so. So again, have inventory already in the channel to me – consumer demand during the holiday period and getting ready as well for those show, we're very, very comfortable. And then what we saw in NICS for Black Friday was very encouraging, I'm very pleased to see that result, so comparing well against prior year, just slightly beating it. So I'm pleased to see the consumer for firearms is still out there strongly on Black Friday looking for a deal as we step a few years now. It's obvious that firearms have become mainstream in terms of entering the basket of goods the consumers expect to see a deal on when they are shopping at retail on Black Friday, so very pleased with that result. And then overall for NICS, for the month of November which came out today we're very pleased against the -- a good increase over prior year of 16%, and that's adjusted NICS, and I should also say that when we are comparing Black Friday, just a single day versus the same day last year, that's an unadjusted NICS number but it's always apples with apples when the comparisons are done just important to bear in mind. So again, we see you know, what's shaping up to be a good environment at retail, definitely, more promotional activity. I would say on Black Friday versus last year, some slightly more aggressive pricing on certain product categories, in particular, perhaps modern sporting rifle. So that caused me great concern now because we've already -- always been ready to compete, promotionally we've said that time and time again, a lot of planning goes into the level that we are going to promote that in the future. We do a lot of analytics around the pricing that we see out in the market and I'm talking about promotional pricing in particular. So a lot of analysis on the pricing that we saw on Black Friday; we do that analysis that we'll even do bell curve, so we can understand the distribution and how many retailers were promoting a certain product to a certain price versus the competition. And again, that helps us design our promotion going forward so that we are appropriately aggressive and that we can continue to take market share. This is the time that the company does really, really well in a normalized environment and it gives us the opportunity to take share from our competitors when the consumer really has choice. Going back to those level of promotions that we do, once we understand the level that we are going to promote at in terms of price, we do a lot of financial modelling because we have to go back, close the loop and check that we are still going to have gross margin within the range that we talk about as our long-term goals of 37% to 41%, very important to us. And of course, our P&L is exceptionally strong, and again, it allows us to sometimes be more aggressive, let's say than the competition in terms of promotions.

And Steve, I just wanted to add that on the inventory that is on the balance sheet, of course, we bought two companies; so the organic growth of inventory was just about $10 million.

Got it. Very helpful color guys, thanks. I'll pass it along.

Our next question comes from Scott Stember with C.L. King. Your line is now open.

Good afternoon, or good evening, I should say. I just have a question on the guidance again, if you just look at the back half for the year and you assume the high end of your guidance, you're looking at about mid-teens sales growth in total, but if you look at earnings, you're clearly looking at a modest decline. Can you just maybe walk us through some of the puts and takes there, so we can figure out what's going on just to have a clear picture? Thanks.

Sure. You know, there is a couple of things, first, the promotional activity, that James just discussed is going to have an impact on gross margins but we still intend to -- like maintain gross margins in our targeted range which is 37% to 41%. Second thing is, OpEx is going up, we actually were fairly frugal with OpEx in Q2 but we do have several important new product launches in Q3 and Q4, of course, we also have SHOT Show and the NRA Show, SHOT Show in Q3 and NRA in Q4. Our OpEx loss will be increased because of UST. So -- I mean basically, it's all of those items that are factoring into the guidance.

And again, if you just maybe point to the promotional environment again, if you had to characterize it versus the year ago, I think you had said, James, slightly more elevated than the year ago?

Yes, I would say so. It's a little early to tell. Certainly Black Friday is a good indicator as I said earlier. And I would say there were certain product categories where promotional activity was more aggressive but I would just go back and remind everybody it's an environment we like, this is the normalized environment and it's really the environment where we can take market share and continue to grow.

Okay. And then just one last question, maybe just talk about the acquisitions, whether it's Crimson Trace or any of the other guys or Battenfeld which you acquired a couple of years ago; just maybe -- just talk about how the internal sales growth at these companies have been trending because we've heard stories of -- with retail consolidation and weak retail environment, the impact that's having on some of these add-on items if you would for firearms. Can you just talk about what you've seen?

Organically, at Battenfeld, if you don't count any of these acquisitions, it has occurred in the last year as up 1% or 2%, although they are up strongly overall, and sequentially over the last quarter. So overall, we don't really comment on the existing -- on companies that we've bought other than to say what their growth was at the time that we bought them and just is an example, we had said UST had organic growth since - in the last three years of almost [15%] [ph], Crimson Trace up in the -- like the 20s I think it was, yes, and Taylor knives growth in the teens. So we -- you know, we bought those companies, like based on those growth rates.

Okay. And just one last question if I could, just looking at -- at the back half for the year, at that mid-teen number that we talked about -- we've assumed the high end of the range. What that assumes for your gun business versus your outdoor business? Just, you know, at high level.

Well, and again, you know, we don't give a guidance on segment. So I will say that the accessories and outdoor product segment is -- its cycle is a bit different than the firearms cycle. Firearms is strong and our kind of -- at the end of Q3 moving into on Q4, and Q3 for the accessories business is not as strong because it's post-holiday season. I mean all the buying is done in -- like mostly by the end of the second term -- on quarter. So I mean you can sort of take our results and calculate that out. Our results were on Q2 but other than that we don't really give segment guidance.

Got it. That's very helpful, thanks for taking my questions guys.

Our next question comes from Cai von Rumohr with Cowen & Company. Your line is now open.

Yes, thank you very much and good quarter, again. We have a new President-Elect, and if we look back over the last four years, gun sales were quite volatile under Obama and yet if you go back farther and look at the pattern of a NICS checks under Bush, there was -- they were relatively stable with an upward trend. But do you have any impressions about -- you know, what are you guys looking for from a Bush – from a Trump Presidency in terms of the impact in your business?

In terms of the market, Cai, we're still thinking about it growing in single digit, say mid-single digit to high single-digit in a normalized environment. So an environment free of events that may spur consumer buying. So that's really where we are. We see the demographics of the firearm consumer, very different now to what they were under the Bush administration and that's exciting, and we've spoken about it many times before; you know, younger people from more urban areas versus suburban areas, and many more women than never before taking an interest in the shooting sports, first-time buyers significantly up, very strong trend that can still carry, continues. So all of those are very exciting, and as you know, we're always analyzing and researching what the needs, wants and desires are of those firearms users so that we can build that into our new product development process and meet their expectations and hopefully, beat their expectations and excitement. So that's again a key part of our take share strategy. So we're excited about the future. As you've heard, we've got a lot of new products coming in all parts of the business. Firearms business remains strong and we're excited to be executing in organic strategy.

Thank you. And could you give us a little more color on outdoor products in the second -- in the first quarter, I mean you had mentioned that kind of, there was left -- lower sales because of the transition to higher prices, Thompson products, and also there was some destocking. Just in terms of color, what did you see in that sector in the second quarter?

Well, in the second quarter it was a large sequential increase and so we did not see the destocking that we saw -- I don't think that the retailers could have destocked anymore and still have sales. So I think -- I think that impact was mainly felt in Q2. But we're still – we're still working on the TC strategy, which is rationalizing SKUs and getting the right price. Like, the -- and the -- you know, as the gross margin rose again, so that on a non-GAAP basis the accessories and outdoor products that gross margin was almost on 50% which is where we wanted that.

Okay. And I was going to mention, you had mentioned -- I assume your gross margin target when we mentioned 37% to 41%, that's for firearms, correct?

That's for the whole company. Obviously, we – it's been a while in terms we've been like below -- like 39% for the whole company; it looks like it has an occurred sense of couple of years ago. But – we haven't updated that, after – we'll probably – in January, we'll probably have an analyst meeting and roll out our new targets for everything.

Got it. But you mentioned you know, that the gross margin has been trending up pretty consistently for outdoor products, is that a trend that we should consider that they were close to 50% as we mentioned?

Well, yes, we've said that – we've said in the – like in the past that we like that segment to have gross margins in upper 40s approaching like 50%. This time they were pretty strong, they were almost like 50%. But it depends on other acquisitions that we do, so as we – as we do other acquisitions, not all accessory like businesses have that gross margin approaching 50% but – yes, certainly not day one of the acquisition necessarily but as we go forward, we have an integration plan that we bombed before we closed on that acquisition. That integration plan, a key part of that is had we had the synergies that we've identified, and that gives us a roadmap to expanding gross margins.

Terrific, thank you very much. And – so M&A, you've obviously been consistently more active here. What does the M&A pipeline look like and maybe give us a sense of rough size range of deals that you're looking at?

Well, I would -- I would say the pipeline is volatile, in a sense that deals come and go. And -- I mean sometimes you have to woo an acquisition on target because maybe they haven't planned on selling so you have developed relationship. Other times, the target is already decided to upsell [ph] and then you're in a auction process. And so I guess I'll talk about the three kinds of acquisitions that we do. First there is the -- like the tuck-in acquisition in which we can buy basically a product portfolio from a company, it works like -- the founder wants like to retire, we just take over the product portfolio, the IP, the -- like the supply chain. Those are very accretive transaction but they tend to be smaller. Then there is new platform acquisitions that – let's say we move into an area that we're not necessarily are currently in and it doesn't fit into one of our divisions, then it might be a new division in which it's going to be a larger transaction in which that is now a platform for those -- that product, whatever it is, that segment of the market. And then there is transformational acquisitions that are very large, that could make a significant change to the company and the percentage of firearms, for example. We have consistently try to organize our balance sheet to be ready for any one of these kinds of transaction because often the target won't wait -- like for you to go out and get the financing and whatever is needed to do a transaction. That's why we raised our credit line commitment to $500 million and have looked at other types of things to ensure that we could basically handle any of these three types of acquisitions.

Got it. I mean may I ask in terms of transformational, is there anything that's relatively lukewarm and by transformational, are you talking $500 million or $200 million or can you give any rough ballpark?

Yes, I can't say whether the thing is lukewarm or not. You know, I can't say the transformational acquisition in order to be transformational as for our company which has almost a $1 billion in revenue right now, what has to have a significant amount of revenue, $400 million, $500 million revenue, and if it does -- have that much revenue, then that would have a significant price tag with it depending on the EBITDA, and the multiples, and the growth rate, and all that kind of stuff.

Thank you very much.

[Operator Instructions] Our next question comes from Ronald Bookbinder with Coker Palmer. Your line is now open.

Good afternoon, and yes, congratulations on a great quarter. Going back to the acquisitions, given the name change and the M&A activity, what percent of the company would you like accessories or the outdoor division quote [ph]?

Well, I think what is a good thing to do is just take a look at the relative side of the firearms market versus what we would time the rugged -- more rugged outdoor market or just for simplicity, the outdoor market. And you can see that one versus the other. So I would anticipate overtime, a long time for sure, that we should be able to significantly grow inorganically in that rugged outdoor space versus firearms where the market is much smaller and we already have significant market share when it comes to hand guns and mountain sporting rifles, in particular. So I'd say there is a no ideal, there is no – there is no real target, I mean given that -- the magnitude of difference in the size of the markets.

Okay. And one the gross margin, it appears that you're forecasting for the back half of the year to be in your old traditional range of 37% to 41% as is mentioned, it's been a while since you've been there and given that accessories carrying that higher margin, upwards of 50%, are you defending market share over margins? And how much of that has to do with maintaining leverage of your fixed cost?

Yes, well, one really important thing I have to do point out in your statement. We are not defending market share, we are taking market share with the promotional activities. All right, we think that this is – we've been consistently expanding our market share. And as I -- I think I said last year this time we're at some point; we do a lot of analysis on the promotional activity and generally find -- not always but generally I'm going to find, the cost of the promotional activity is roughly offset by the increase in gross margin as the result of the full factory. But our factory is already full, and so the promotional activity that we're doing right now could have a slight impact but it's very – it's not a lot and we certainly have higher gross margins by a large percentage than anybody else in the firearm business or the outdoor space.

Okay. And lastly, you talked about that you're satisfied with the inventory in the channel. Were you talking about the industry inventory or specifically with either Smith & Wesson inventory in the channel?

I was referring to the Smith & Wesson inventory in the channel.

Well, how do you feel about the industry income in the channel? And do you think that could lead to excessive promotional pricing, greater than pushing today?

Yes, Ron, higher levels of inventory, our competitors inventory to be clear. It's always a concern; it's always something we're watching for as well. We've discussed before that if we do get an inventory bubble, out there, whether that's with wholesale or retail, and it needs to be bleed off. And it's competitors inventory, that can be difficult for us to navigate but as we've demonstrated in the past, we can successfully do that and so maintain some of the highest gross margins in the industry. And again, that comes back to our promotional planning. Having navigated some of those tougher times before in the market sites, we've become pretty good at it. And as Jeff said, our analysis only gets better and better.

Okay, thank you for taking my questions. And good luck in the new quarter.

All right, thanks Ron. Take care.

And I am showing no further questions. I would now like to turn the call back over to Mr. James Debney, CEO for any further remarks.

Thank you, operator. I want to thank everyone on the Smith & Wesson team for delivering another excellent quarter. Please note, that next week we will be attending the ROTH Capital Conference in Park City, Utah. In January, we're looking forward to SHOT Show 2017. We hope to see some of you at these events. Until then, all of us at Smith & Wesson wish you a happy and healthy holiday season. Thank you for joining us and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.