Smith & Wesson Brands, Inc. (SWBI) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the American Outdoor Brands Corporation Fourth Quarter and Full Year Fiscal 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Liz Sharp, Vice President, Investor Relations. Ma'am, 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; our market share and market demand for our product; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, 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 aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we reference certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude goodwill impairment charges, the effects of tax reform as well as acquisition-related costs, including amortization, debt extinguishment costs, recall-related expenses, onetime transition costs, a change in contingent consideration liability, fair value inventory step-up and the tax effect related to all those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in today's Form 8-K filing as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. For a detailed information on our results, please refer to our annual report on Form 10-K for the year ended April 30, 2019. I will now turn the call over to James Debney, President and CEO of American Outdoor Brands.

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 updated guidance. Fiscal 2019 was a year that presented several challenges for the firearms industry, including changes in the political environment and reduced consumer demand for both firearms and the accessories attached to them such as lights, lasers and scopes. Despite that backdrop, we delivered year-over-year growth in revenue and gross margin, and we believe we gained in market share. And importantly, we made significant and exciting progress toward our long-term strategy of being the leading provider of quality products for the shooting, hunting and rugged outdoor enthusiasts. Today, I'll recap our accomplishments for the year in the context of our strategic plan, then Jeff will provide detail on our financial results and our outlook for the coming fiscal year. You will find our strategic plan outlined in the investor presentation currently posted on our website. That plan consists of 5 main themes. The first of these is to remain focused on organic growth. Our objective is to harvest the growth potential of our 20 distinct brands by leveraging our deep understanding of the consumers' needs, wants and desires and using that information as a leading light for our new product development pipeline. This approach allows us to further expand our overall addressable market and to establish ourselves in new product categories where we believe our brands have permission to play. We made significant progress on this objective across our entire company in fiscal 2019. In firearms, we introduced 106 new SKUs, including 32 meaningful new products in numerous line extensions. This included Performance Center versions of our SW22 Victory, a competition-ready target pistol; our Thompson/Center long-range rifle, a perfect match for the consumers' desire to participate in precision target shooting; a Ported M&P Shield M2.0 and a Smith & Wesson M 442 revolver, both designed for personal protection. Our M&P 380 Shield EZ was honored by the NRA when it was named American Rifleman Handgun of the Year and Women's Innovative Product of the Year. This new platform of pistols launched nearly 18 months ago is still winning with consumers and providing us with opportunities to further expand the Shield family of products in the future. We launched the Performance Center version of the M&P 380 Shield EZ at the NRA annual meeting late in our fiscal year, so its financial impact will be visible in fiscal 2020. Our entire Shield family has become a consumer favorite, and I am pleased to report that by the end of fiscal 2019, we had shipped over 3 million Shield pistols. We are now approaching the $1 billion milestone for cumulative sales of the Shield family of handguns. During the year, we produced several new bundle promotions, which combined our firearm with items from our Outdoor Products & Accessories business to provide consumers a great value with brand names they know and trust. The most impactful of these include our M&P 380 Shield EZ with a Crimson Trace laser sight combined with a handgun safe, an M&P knife and an M&P flashlight. This bundle generated revenue for both of our business segments while providing consumers a great value and an immediate safe storage solution for their new firearm. We believe the combined impact of these achievements in our Firearms business throughout the year helped us win market share. While consumer demand for firearms remained weak in fiscal 2019 as indicated by a year-over-year decline in adjusted NICS background checks of 8.8%, our units shipped into the sporting goods channel increased 4.2%. In Outdoor Products & Accessories, which we refer to as OP&A, we created an entrepreneurial-based brand lane structure. The lanes bring dedicated focus to each brand, establishing its positioning, its identity and where it has permission to play within specific product categories. With this foundation in place, we have found that our 20 OP&A brands fit within just 4 distinct lanes. They are marksman, harvester, defender and adventurer. Each lane consists of a highly agile team that provide dedicated brand management, creative design, content production, product management, new product development and engineering. This team approach supports organic growth by allowing each brand to respond quickly to changing consumer trends. The modular nature of the lanes also allows the division to leverage inorganic growth opportunity by rapidly integrating newly acquired brands without adding significant head count. Two examples from fiscal 2019 demonstrate this brand lane strategy in action. First, our brand lane team launched over 300 new products in OP&A. In their first year of introduction, these new products represented 6.2% of the segment's full year revenue. However, it's important to note, the vast majority of these products were launched at SHOT Show in January very late in our fiscal year. So that 6.2% number is not at all reflective of their annualized revenue potential. These new products included the Caldwell Hydrosled, the Frankford Arsenal M-Press, the BOG DeathGrip hunting tripod. We also introduced a new line of sights and scopes under the Crimson Trace brand, which significantly broadened our product offering and greatly expanded our addressable market for this brand. Second, we launched an exciting major rebranding initiative. When we acquired Bubba Blade in fiscal 2018, the brand name had recognition among fishing enthusiasts. But we've narrowly focused on a single product category, knife. Our vision, our acquisition, was always much bigger, and we believe the brand could flourish in the much broader fishing tool category. So we've rebranded Bubba Blade simply to BUBBA and then transferred its valuable product DNA such as its signature nonslip red grip into a variety of new products across fishing gear and accessories. We effectively took Bubba Blade from a single product brand to a broad and exciting new lifestyle brand that captures one of today's most popular trends. Much like farm to table, BUBBA addresses the water-to-table lifestyle that appeals to so many consumers. This is a great example of our ability to leverage our brands to greatly expand our addressable market. It's also an exciting story that is just beginning, and we believe we possess other brands that have the same type of potential. Lastly, it is important to note that our Crimson Trace brand is now part of this focused and creative brand lane structure, fitting perfectly into the defender lane. As a result, we will now be able to shutter and move the Oregon front office of Crimson Trace to Missouri by the end of this calendar year. Our second strategic theme is to simplify our go-to-market process. Our objective here is to streamline our approach to the market by simplifying and consolidating our logistics operations to a single location as our new Logistics & Customer Services facility, making it easier for our customers to do business with us. This new facility in Missouri lies at the core of achieving this objective, providing the infrastructure and capacity for our future growth. It will centralize the logistics, warehousing and distribution operations for our entire business, enabling growth, enhancing efficiencies and allowing us to better serve customers across the organization. And because the proxy will house multiple functions beyond just Logistics & Customer Service, we will now refer to this as our Missouri Campus. We have made significant progress on this objective. And today, I am pleased to report that all customer orders for our firearms business are now managed entirely by our Logistics & Customer Service team at the Missouri Campus. This includes the order management process in all areas of fulfillment such as picking, packing and shipping. To date, the simplification of our go-to-market process has allowed us to eliminate all physical locations as those operations move to the new campus. Over the last 2 years, these closures include our facility in Tennessee, 160,000 square feet; a third-party warehouse in Kentucky, 20,000 square feet; a third-party inventory location in Missouri, 100,000 square feet; and a temporary office location, also in Missouri, 7,500 square feet. We are on track to shut down 2 additional physical locations that include our 100,000 square foot UST warehouse and office in Florida by the end of this month and our 145,000 square foot original BTI office and warehouse in Missouri by this coming fall. We also have third-party warehouse and shipping locations in New York and Springfield, which are currently being consolidated and which, together, represent 35,000 square feet of space. When we are finished, we will have eliminated a total of 570,000 square feet of space across these locations and moved all of that functionality into our new 633,000 square foot Missouri Campus, which will be utilized at only 70% at that point. That campus will then be home to our OP&A division and all of its support personnel as well as the Logistics & Customer Service division and their support teams. Jack will walk through the financial impact of those actions later on the call. Our third strategic theme is to create a leverageable infrastructure. We have made significant investments in and progress toward developing each component of this important strategic initiative. The Logistics & Customer Service Division represents one such investment and is a cornerstone of this critical infrastructure. In addition, we recently formed our global e-commerce and technology division. This new division will be at the forefront of our digital innovation, providing best-in-class sales and marketing technologies that will allow us to further amplify our marketing efforts towards maximizing the consumer experience. We also established an office and team in China, an action designed to strengthen our relationships with our ever-growing supplier base while enhancing our flexibility and response time to new consumer trends. Our China team is comprised of engineers and designers that play a key role in our new product development process. Our investment in our infrastructure is significant and will continue throughout 2020. So it's important to underscore that these actions are a critical part of creating an adaptable and scalable framework that truly differentiates us from our competition and adds value for our customers. Most importantly, these investments will enable our future organic and inorganic growth, ultimately creating value for our shareholders. Our fourth strategic theme is to pursue complementary acquisitions. Our disciplined approach to acquisitions has yielded our current diverse portfolio of brands. When we first began, we focus solely on our core firearm consumer whose passion for the shooting sports we deeply understood. We studied that consumer's passion, identifying parallel opportunities based on their other outdoor activities and making acquisitions to enter those markets. This process yielded not only successful acquisitions, but it also provided a natural expansion of our consumer base beyond the core firearm owner. For example, we now have a fishing consumer and a camping consumer. And for each of those consumers, we have a set of passions that can be further explored for opportunities to expand our addressable market yet again. We now seek to expand those markets not just organically but also inorganically via tuck-in opportunities. We define tuck-ins as low risk, high return, relatively straightforward asset purchases of strong brands and their intellectual property that can be rapidly integrated by leveraging our existing framework. Our acquisition of LaserLyte in fiscal 2019 is a great example of rapid integration. LaserLyte's firearm training systems, laser sights and bore sites complement our existing offering, enabling us to further reach in the electro-optics market. Importantly, this is a business that we acquired and fully integrated within just 8 weeks. A clear demonstration of our ability to rapidly execute and integrate a tuck-in acquisition. Our fifth and final strategic theme is to fine-tune our capital structure. We continually focus on optimizing our balance sheet to achieve our top priority, which is to invest in our own company and maintain the financial flexibility to address future organic and inorganic opportunities. We believe this approach will provide our shareholders with the best possible long-term return. As Jeff will outline for you later in the call, we maintained a strong balance sheet throughout fiscal 2019 even as we continue to make significant investments in our company that will help us deliver on our long-term strategy. Now let me touch briefly on a few highlights from the fourth quarter. As you know, we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, not directly to end consumers. That said, adjusted NICS background checks are generally considered to be the best available proxy for consumer demand for firearms. In our fiscal Q4, background checks for handguns declined 7% year-over-year while our units shipped to distributors and retailers increased by 16.6%. For the same period, background checks for long guns declined by 16.7% year-over-year while our units shipped to distributors and retailers increased 9%. In a more recent update, May adjusted NICS were up only slightly year-over-year. And while NICS appears to be following typical seasonality, this was the second lowest May for adjusted NICS in the past 5 years, indicating that the consumer market for firearms remains soft. Distributor inventory for other firearms decreased sequentially from 141,000 units at the end of Q3 to 127,000 units at the end of Q4. We have heard from distributors and retailers that they remain comfortable with their overall inventory levels. That said, we also believe we are amidst a buyers' market. Distributors and retailers are accustomed to carrying lower levels of inventory than in the past as they await promotional deals. Since the end of Q4, distributor inventories have increased, and our current weeks of sales of distribution are above our 8-week threshold. Our vision for our company is one that truly sets us apart from our peers. Our focus remains on the consumer, and our investments reflect that focus. From innovation in new product development to the creation of leverageable infrastructure that allows us to rapidly integrate acquisitions and streamline our go-to-market process, all of our objectives are designed to expand our addressable markets and to take an increasing share of those markets by addressing the needs, wants and desires of our consumers. With that, I'll ask Jeff to provide more detail on our financial results and our updated guidance. Jeff?

Thanks, James. Revenue for the year was $638.3 million, an increase of 5.2% over the prior year. Revenue in our Firearms segment was $481.3 million, an increase of 6.3%. And revenue in our OP&A segment was $177.3 million, an increase of 3.3% and representing more than 1/4 of our total revenue. Without considering Crimson Trace products' revenue, which was down for the year, the OP&A segment was up 6.8%. Within those total revenue numbers, intercompany sales eliminations were approximately $20.3 million. Revenue for the fourth quarter was $175.7 million, an increase of 2.2% over the prior year. Revenue in Firearms was $140.7 million, an increase of 4.8%. And revenue in OP&A was $42.2 million, a decrease of 3.4% from the prior year. Without considering Crimson Trace products' revenue, which was down for the quarter, the OP&A segment was up 3.3%. Within those total revenue numbers, intercompany sales eliminations were approximately $7.1 million. As James mentioned, we are proceeding with the restructuring of Crimson Trace into the OP&A division, including moving the Crimson Trace front offices in Oregon to Missouri, an action we believe will significantly improve operating efficiencies over time. For the year, the total company gross margin was 35.4% compared to 32.3% in the prior year. The Firearms gross margin was 31.9%, an increase over the prior year. And the OP&A gross margin was 45.9%, the same as the prior year. The total company gross margin increase was driven mainly by the Firearms segment, which had lower promotional product discounts and rebates and lower manufacturing spending. For the year, GAAP operating expenses were $188.2 million compared to $168.7 million in the prior year. Current year expenses included $10.4 million for a partial impairment of goodwill in Q3 related to Crimson Trace. On a non-GAAP basis, which excludes that impairment and all acquisition-related amortization, operating expenses were $154.8 million as compared to $146.7 million in the prior year. In Q4, GAAP operating expenses were $48.1 million compared to $41 million in the prior year. On a non-GAAP basis, quarterly operating expenses were $42.2 million as compared to $35.4 million in the prior year. The year-over-year operating expense increase in both the yearly and the quarterly numbers mainly relates to higher variable compensation expenses and increased the depreciation relating to our new Missouri Campus. On a GAAP basis, EPS for the year came in at $0.33 as compared with $0.37 in the prior year. Although it should be noted that without the Q3 Crimson Trace impairment, the current year GAAP EPS would have been $0.52. Our non-GAAP EPS, which excludes that fiscal '19 impairment, onetime tax reform benefits in fiscal '18 and all acquisition-related and other costs in both years, was $0.83 in the current year as compared with $0.46 last year. For the fourth quarter, GAAP EPS came in at $0.18 as compared with $0.14 in the prior year. Our non-GAAP EPS was $0.26 as compared with $0.24 last year. In fiscal '19, adjusted EBITDAS was $111.3 million for a 17.4% EBITDA margin compared to last year's $89.5 million, which was a 14.7% margin. Adjusted EBITDA (sic) [ EBITDAS ] in Q4 was $31.9 million for an 18.1% EBITDA margin as compared with $33.4 million or a 19.4% margin in Q4 of last year. So now turning on to the balance sheet. For the year, operating cash flow was $57.5 million, and capital spending, including our investment in the equipment necessary for the new Missouri Campus, was $33.9 million, resulting in free cash flow of $24.3 million. In the quarter, operating cash flow was $36.7 million, and CapEx was $8 million, resulting in free cash flow of $28.7 million. Our free cash flow is typically stronger in the second half of our fiscal year and has also improved over the last few quarters as we have neared completion of the Missouri Campus. We reduced our internal inventory levels for a third consecutive quarter. We are moving into the slower summer sales period, so we do expect inventory levels to rise until autumn, as usual. In fiscal '19, our capital spending was approximately $33.9 million, an increase of about $15 million over the prior year. The increase was primarily related to the Missouri Campus and included IT spending and equipment but excluded the capitalized lease construction costs of $46.2 million. In fiscal 2020, we expect to spend about $30 million in CapEx, which will include continued costs relating to the consolidation of our facilities into the Missouri Campus. As of the end of Q4, our balance sheet remained strong with approximately $41 million of cash and $115.4 million of total net borrowings. I would note that we paid down $25 million on our line of credit in Q4, resulting in a 0 balance on that line of credit at the end of the year. This means we have reduced our net borrowings by nearly $100 million in a little under 2 years while still investing heavily in our business, including small acquisitions and the construction and furnishing of the Missouri Campus. Thus, as of today, we have outstanding balances on our borrowings as follows: $75 million on our senior notes due in 2020 and $81 million on our bank term loan A also due in 2020. We currently pay a blended interest rate of approximately 4.73% on this debt. So now turning to our guidance. For the full fiscal year 2020, we expect our Firearms business to reflect continued softness in a buyers' market and the consumer market for firearms, while we expect our OP&A business to deliver solid growth. As a result, we anticipate our overall financial performance to be roughly flat to last year with a revenue range of $630 million to $650 million. At that level, we would expect full year GAAP EPS of between $0.50 and $0.58 and non-GAAP EPS of between $0.76 and $0.84. We believe revenue will be back-end loaded due mainly to new firearm products planned in the second half of the year. Taking into account the loading during the year as well as our typical summer slowdown in sales, we estimate revenue in Q1 to be between $120 million and $130 million. At those levels, we would expect GAAP EPS to be at about breakeven and non-GAAP EPS of between $0.03 and $0.07. As James has noted, we are continuing our consolidation efforts into Missouri, including the moves of UST, BTI and Crimson Trace. These actions will result in approximately $0.07 per share of duplicate expenses in fiscal '20 that will not reoccur in fiscal '21, most of which are in OpEx. I would note that because the logistics and warehouse operations for firearms are now being handled in Missouri, most of our freight and warehouse costs relating to firearms will now be in OpEx instead of cost of goods sold. We estimate that amount to be approximately $8 million to $9 million. Finally, I would also point out that our fiscal 2020 forecast does not include any additional future tariffs on products that we manufacture in China for our OP&A business. Although we believe we could eventually mitigate a portion of any new tariff increase, a full 25% tariff on all such goods supplied throughout the quarter could initially result in a full quarterly impact of as much as $3 million. In both our first quarter and full fiscal year numbers, our non-GAAP EPS excludes amortization and costs relating to any acquisitions. All these estimates are based on our current fully diluted share count of 55.5 million shares and a tax rate for the year of approximately 27%. James?

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

[Operator Instructions] Our first question comes from the line of James Hardiman with Wedbush.

So a really good fourth quarter, certainly, versus your guidance. You beat it by $0.13, basically doubling that up. I don't think you really spoke to what was so much better than you initially anticipated 3 months ago.

Basically, what helped was the top line. Like the top line drove an extra about $0.05 in sales, and then that extra top line helped with absorption by about another $0.03. We did release some reserves at the end of the year because you true things up. That was another $0.04. That accounted for most of it. The -- we had a lot of promotional activity in Q4 that I think helped with the -- like the sales and the revenue, the top line. A lot of that came in at the very end as people were trying to get on -- get it in under the wire as the promotions were ending at the end of the -- our fiscal year.

That's helpful. And then the commentary on the Firearms business, continued softness moving forward. Maybe compare that outlook to how you've anticipated it looking 3 months ago. If I recall correctly, you would sort of look to June as a month that maybe things could bottom out and turn around. Your commentary on May didn't sound very constructive, although it was the first increase we've seen in a while and was better than, I think, a lot of people were looking for. So maybe walk us through the machinations there. Was May better or worse than you thought it would be? And I guess, has your outlook for the next 12 months gotten better or worse versus how you were thinking about it a few months back?

James, I think -- I don't think our outlook's particularly changed. I mean at the moment, it's fairly flattish, and we stick by that. Yes, May was up. But as you stack it up against prior years, it still ranks pretty low. That's what leads us to the conclusion that we believe the market is soft. And we are in that summer period as well, which we all know is the seasonal slow period. And it's always difficult to predict how things will go once we enter the cooler months, going to the fall and hunting kicks in and so on, back into the holidays and gift-giving season, which is always where we see the most sales at retail. So I think we'd just maintain that flattish outlook. Yes, you could take some encouragement away from the May result. Yes, it was certainly a positive year-on-year. But I don't think we know enough yet. We just don't have enough data points.

Perfectly fair. And then last question for me. Maybe just speak to inventory. It was down versus 3Q but up versus last year. Sounds like the distributors are pretty comfortable. What's the right amount of inventory? You talked about it being a buyers' market and them taking less inventory, so I'm just trying to put that inventory number in the proper context.

I think -- what's the right inventory? I think that's a million-dollar question. I don't think anybody knows. And distributors have obviously experienced competitors file for bankruptcy, as we know, one just happened recently. So I would say they're cautious, and I think that's a good thing. And they also know that the inventory that they need is readily available from manufacturers. So I think they're doing the smart thing by keeping their inventory as lean as possible but obviously not too lean so that they jeopardize their service levels to independent retailers. As you would expect, if business picks up, that inventory level is probably going to have to increase to support those service levels. That's the way it works. As we move through the summer period, there's no doubt that their inventory levels will start to creep back up again because they need to get ready for the busy period that's coming. And they need to take advantage also of just the regular normal cadence of promotions that, for example, we engage in. As you know, we'll have a late summer promotion. We'll do our spring promotions and so on. And they need to get ready for those. It is a buyers' market. That's our belief right now because the inventory is readily available, and we still have a soft market when it comes to the consumer.

And James, I just want to add that on our inventory, the Firearms finished goods inventory is actually down both over Q3 and Q4 of last year. The Outdoor Products, OP&A, inventory is significantly up over last year. And that's mainly because we did buy forward because of the tariffs that were going to be imposed and probably buying some now with respect to the possibility of additional tariffs. And as we said, we're moving a lot of inventory around now with the closing of UST and the upcoming move of BTI, so we do have excess inventory with regard to those moves. So most of the differences right now are really related to Outdoor Products. The finished goods inventory at the Firearms level is basically been -- it's been sort of on a downward -- a descent for the last 8 quarters, up and down a little bit but mostly down.

And just to add another point, where Jeff says we have excess inventory, that's inventory of very good product. This is not a product that is so...

Yes. It should be easily ordered.

I'll text you later. It's product that doesn't have a shelf life. It's fast-moving product as well, so we don't have any concerns there.

But just to clarify, the 127,000 number in terms of distributor inventory at the end of the quarter, I think it was 98,000 in the fourth quarter of last year. Was that number unnaturally low coming out of 4Q last year? Or what's driving that increase?

I would say that's a pretty low number when you think about it. If you take our average sell price and multiply it by the number of units, you can see how much revenue that would represent for us. And that's, call it, roughly 10% for the firearms business. That's pretty low when you still think about 60% of our revenue is generated by 2-step, the firearms business.

Yes. Historically, that was, I think, one of the lowest quarters we've had in many, many quarters.

Our next question comes from the line of Steve Dyer with Craig-Hallum.

Ryan Sigdahl on for Steve. Congratulations on a solid quarter given the challenging environment.

Thank you.

First question is drilling into Firearms. But with backlog down pretty meaningfully and a more cautious buyer the way it sounds, what gives you confidence in those new products driving growth in the back half of the year?

I think it's really our prior experience, to be honest. We have a very strong new product pipeline. We have a lot of experience with the revenue that's generated by new product introductions. And there are obviously different tiers. The lowest being just a simple line extension to -- all the way to the one that's going to generate the most revenue, which is our new platform. And I think that's a success we saw with the new EZ platform, the M&P 380 EZ being the first caliber that we introduced there. So there are several meaningful new product introductions across the whole of AOB that are staged for the balance of the year, and we're particularly excited about those. Those will, I have no doubt, generate a good amount of revenue. And that's what gives us confidence.

And just to clarify, you have both new product line extensions as well as new platforms coming?

What I would say is that January, we had the full spectrum going on, and that's just typical. As you heard in the prepared remarks, we launched 100-plus new products in firearms, 32 of those were meaningful. I'm not saying that's the mix you'll see this year, but I'm just indicating to you that you will see the full spectrum from what could be, could be, a new platform to a simple line extension. That's typically what we do.

Got it. Then James, you briefly mentioned that a large distributor recently filed Chapter 11. What impact has that had on your business? And then how would you assess the financial health of your other customers?

The one that just most recently filed for bankruptcy had lost relevance over the last 12 to 18 months. So as an impact on our business going forward right now, minimal. So no real concerns there. As for the balance of our customers when it comes to our 2-step distribution partners, I just see strong partners, so I have no concerns.

Great. Last one for me, and then I'll turn it over. Handgun average selling price was down last several quarters here, and it's the lowest in quite a while this quarter. What's the primary driver of that? Is it bundling, mix, incentives, et cetera? And then should we expect that to continue?

Right. It's mainly due to promotional activity, the -- from January to April, the types of promotions that are typically done in the industry are buy x, get y free, buy 8, get 9 free, so -- or get 1 free. The more that -- successful the promotional activity is or the lower that ratio is, then the lower the ASP is. So I think the change in ASP primarily relates to that. It also relates partially to success in, for example, the 380 EZ, which is a less expensive product versus a revolver, Performance Center revolver, which goes for $800 or $900. So product mix -- a successful product mix is probably impacting that also.

Our next question comes from the line Cai von Rumohr with Cowen and Company.

A good quarter, guys.

Thanks, Cai.

Jeff, could you -- I think I may have -- how much is the duplicative expense likely to be this year in OpEx? And sort of how does that pattern across the year?

Yes. Well, it's around $0.08, okay, $0.07 to $0.08. And it's relatively equal throughout the year. So pro rata each quarter, a couple cents a quarter roughly.

Then it's just 0, is it 0 in the next year? I would have thought it would have been [ spared ] early on.

Right. So there's a lot -- kind of there's a lot going on. So let me -- I'll try to explain this. So, for example, there's increased depreciation and costs associated with the new Missouri Campus, yet offsetting that is the reduced costs on the things like closing UST and now the front office of Crimson Trace moving, the other Columbia location, et cetera. So what I tried to do is by saying that the costs that are duplicate with next year, I'm trying to identify the costs that are, in essence, going away. And that's this $0.07 that I mentioned in the script, which is approximately $0.02 a quarter. And that is relatively a pro rata because we can't do this all at once. We're staging this in. And we just announced Crimson Trace, and all of those cost savings in Crimson Trace are really going to occur in 2021 and account for a large portion of that $0.07 that I'm talking about. So right now, we're going to be running -- we're still running a lot of, like I say, duplicate things that are going away. And I mean maybe it's $0.03 in 1 -- in quarter 1, and maybe it's down to $0.01 by quarter 4. But in general, there's not a big swing. It's just a very -- a slight downward glide path. But all of those are definitely gone by next year or 2021.

Got it. And then -- so you mentioned $8 million to $9 million of freight expense moves from COGS to OpEx. How should I think about how much of that is -- I would assume most of that's related to Firearms, but maybe not. Roughly how should I think about the allocation of that, the Firearms and OP&A?

It's about 75% on Firearms.

Got it. Okay. And then so $3 million per quarter if the tariff goes to 25%. But I assume that assumes no actions on your part in terms of raising prices to offset that?

Yes, exactly. So yes, let me explain the -- the $3 million. That's -- I think that's the worst possible amount in a quarter. So it's like assuming that the full quarter is impacted and that we don't have previously bought inventory, we haven't taken any mitigating steps, it's just the worst case. Obviously, if the full 25% on tariff is imposed on all Chinese goods, we will take mitigating actions. And those actions are -- you work with suppliers to get additional price concessions. You raise prices. You find other areas to offshore. And we think we can do all those things. I'm not sure whether we can mitigate a full impact of additional tariffs, but we're thinking about it right now. And as to when those are going to be imposed, it seems the story changes every day, so...

Just roughly, what percent of the OP&A sales are produced in China?

A very large percentage. I would say...

Mid-80s probably.

Yes, mid-80s. I mean we do a lot of assembly on Crimson Trace, for example, in Portland, although they buy product in Asia, but it is not -- the cost is lower, the assembly cost there. So yes, I think James is right, like 70s, 80s, something like that. And we buy -- I know we buy knife products in Taiwan. So that's probably a good estimate.

So DSOs were a little bit higher. How come they were where they were?

Like I said, a lot of sales at the end of a quarter as people were trying to get the deals that were ending at the end of April.

Got it. Okay. Okay. And then last one. Free cash flow, what's that look like for the year? I mean you're entering with a little extra inventory for buffer for China. What's the free cash flow look like now that the CapEx is down?

I would say the free cash flow next year looks better than this year. We typically don't give a forecast for free cash flow, but it definitely looks better. Just for the exact reason that you mentioned, you got -- right now, we have high DSOs and some inventory buildup on...

High inventory?

Yes, high inventory for the tariffs, so -- and less outgoing on cash, so...

And last one. M&A, you're still looking for tuck-ins. What's the pipeline look like in terms of are we looking at big things, small things? Give us some color on that if you could.

The company's focus is on smaller transactions. It's tough out there because the price is high, the interest rates are low. And so the result, the PE firms can pay a lot because they're willing to leverage a lot more than we are. So where we have had success the last 2, like BUBBA and LaserLyte, were ones that we were not in a process that we found on our own. Right now, we're finding -- I mean there's -- things are coming up, and we look at them. We're finding that in the process, it's hard at this point to be competitive because we're just more conservative. Our weighted average cost of capital has dropped. It's around 8% now. So our bogey for an acquisition has dropped maybe 10% or higher. But it's hard to find them, but we're still -- we're working on things that we find on our own. And it is the focus of the company on acquisitions. It's the biggest bang for the buck. You buy it on EBITDA. You don't hire any people. You don't take any buildings. You basically take some inventory and the supply chain and the IP. And you -- and we've already -- as we -- as James mentioned, we bought LaserLyte. We did the whole thing in just...

8 weeks.

Eight weeks. So we have the infrastructure now. As James mentioned, we're closing all these extra facilities. We have everything now in the Missouri Campus. But despite the fact that the square footage is about equal on trade, the cost is about unequal on trade, the Missouri Campus is only 60% to 70% utilized. So for basically even dollars and even square footage, we have the excess capacity. So we definitely would like to find these, what we call tuck-ins. And typically, they would be smaller.

Our next question comes from the line of Scott Stember with CL King.

You alluded to the fact that in the fourth quarter, there were, I guess, some consumers that were rushing to get in, I guess working to try to get their product with certain promotions. And I'm just trying to tie that into the first quarter where, I guess, even on the high end, you're looking for about 10% decline in sales year-over-year. Can you maybe just talk about the cadence of how some of those promotions are falling off? Or are you just stopping some of these bundling programs? Just give us an idea of how much of an impact that's having on your expectations for the first quarter.

Yes, just to clarify that. Promotional activity in Q4 is just the typical spring show specials, we refer to them as, where you may buy 6 of something and receive 1 is pretty good. And that was coming to end at April. That targets retailers, not consumers. So for those retailers who are waiting as long as possible, looking at their -- I suspect looking at their inventory, trying to optimize their inventory and then trying to capitalize on that promotion before it ended at the end of April, obviously, which was the end of our fiscal year. So when you look at our units shipped, we believe that we significantly overperformed. We definitely overperformed the market. You can see that in the numbers for sure when you compare to adjusted NICS. And so as we come into Q1, there's obviously going to be some correction. And we think that's what we're going to see in Q1, and that's built into our guidance. So as you just quite rightly said and compare versus last year, we are down. But we go back to what we said, it's a buyers' market. They're capitalizing on the opportunity without a doubt. I don't blame them. The products are readily available. They can afford to take some into inventory at a lower average cost and bleed it down until they believe that the next promotion will come along. We're not doing anything special, it's our normal cadence of promotional activity when it comes to working with our major retailers and our 2-step partners who serve all the independents that we don't serve direct and obviously the buy -- important 3 buy groups that we do work with. So it's our normal cadence there. We are doing the bundling promotions, and we'll continue. We do believe that we'll continue to do those this fiscal year as well. They've been very effective. So we've worked up a number of different bundle promotions that will activate throughout the year.

Got it. And maybe, James, just taking a step back, just looking at the market. I know that the last 1.5 years, I guess, a lot of the declines could be pinned on some of the pullback in the politically motivated buying that was taking place. But clearly, there are some underlying trends of organic growth, although we can't see them right now in the NICS numbers. But when do you think -- assuming that there's no change of political stance in the country here and we don't get any political-based buying, when do you think we could start to see what it will take for some of the underlying traits? Whether it's more people wanting personal security, whether it's women or just shooting sports, when do we see some signs that the industry could start to at least show some of the modest growth that we would expect it to see?

I think some of the trends that you referred to, obviously, are still there. People's primary reason to buy a handgun, for example, is for personal protection. Women are still very interested in owning firearms. So those trends are there. And as you quite rightly said, there's an absence of fear-based buying in that. To be absolutely clear to everybody, that's fear-based buying based on fear of regulation, okay? So we don't see any of that right now. The question you asked is a question that we try to answer internally all the time as we try and figure out our forecast going forward that obviously forms guidance that we give. And it's a difficult one, for sure. Certainly, the market appears to have somewhat reached its low point. Is it going to start growing from here? I just don't know. And that's why we hold on to what we call our flattish outlook. But what will drive excitement, what will drive revenue, all those new product introductions, that's absolutely key. And we have some -- a significant one for the balance of the year. Our promotions will always be strong. Our bundle promotions will be strong. That was -- those worked very well last year as you can see in our results. So the market, I don't know, we have what we have in control. Certainly, as you look outside of firearms, for us, we have our Outdoor Products & Accessories segment. We have a lot of excitement going on there. A tremendous number of new products were launched last year that we didn't get the full benefit in the year. We'll certainly see that benefit this year. Multiple rebranding initiatives; we have a very strong family of brands as we have discussed before. So we see plenty of growth opportunities there. There's some navigation to do. Some of the retailers aren't as strong as we'd like, but -- and it's a bit choppy out there. But I think that's starting to settle down. We certainly formed extremely strong and high-level strategic relationships with several key large retailers, which we're excited about, and we'll leverage that going forward as well. So there's a lot of good things. We are working hard to mitigate the softness in the market, and I hope you recognized that in the results. And that's all we can do, and we'll continue to do that. And if the market picks up, well, that will be a tailwind for us.

Got it. And just last question, Jeff, you talked about the $0.07 to $0.08 of duplicative costs for everything that's going on throughout the year and evenly distributed. But once we get past that into 2021, just trying to look back at my notes and to see if you guys will come out and say, all right, this is what the benefits will be starting in 2021 on an annualized basis from consolidating, from a -- just from a cost-saving standpoint or a synergy standpoint.

Yes. That's what that $0.07 to $0.08 is. That's just cost savings. Now obviously, a lot of what we're doing, especially with respect to the distribution and sales -- or the logistics and sales division is to try to enhance sales. Also, James talked about the new initiative in e-commerce. So a lot of those expenses in addition to are going away. We hope there will be more top line benefit in 2021 to everything we're doing.

Our next question comes from the line of Mark Smith with Lake Street.

Just real quick. I just wanted to look at the promotional activity a little bit more here in the quarter. Was this really led by you guys or more so by your peers? And was there anything that really surprised you in the promotional activity? Do you feel like it was at healthy levels throughout the quarter?

I guess the only real surprise is what we go back to, is that it got somewhat back-end loaded in the quarter. As I said, people were waiting. Retailers were waiting till the last minute looking at their inventory and then capitalizing on the last couple of weeks of that promotional period before it ended. Our math, no real surprises. I mean that's just a typical promotion for -- as I mentioned, it's the promotion for the show season when distributors invite independent retailers in to shows that they hold or they just do e-shows. And they're using those packages. They're not bundles, packages. And that's the typical buy 5, get 1 free; buy 6, get 1 free and so on with our 2-step distribution partners that were offering those to those independent retailers. So nothing unusual in that respect.

Okay. And pretty similar impact in handguns and long guns?

We're a handgun company. I mean that's where we're strongest. That's where our -- if you just look at the Firearms segment, that's where, by far, most of our revenue comes from.

Our next question comes from the line of Ronald Bookbinder with IFS Securities.

Yes, congratulations on a nice finish to the year.

Thanks, Ron.

You guys have done an excellent job of taking market share in a competitive market through product innovation and bundling. Is there an opportunity -- given, as you just expressed, the strong relationships that you have with key retailers, is there an opportunity for you guys to start producing private-label firearms for retailers and going after sort of a lower value end of the market?

I have private label in my background when I look back into the roots of my career, and I do my best to avoid it. I mean all it does is start to commoditize your product, compress your margins. You have less pricing power. There's lots of negatives to private label. The most valuable thing that we have are our 20 brands, and that's what sets us apart. We own those brands. There's nothing else out there really like them. We have the full spectrum as well from an iconic brand right the way down to brands that we're just nurturing and getting going now. And we can see a future that we'll just start new brands from scratch, and we'll get behind those and raise their awareness with the consumer by matching them with quality products. So I definitely don't see private label in our future. There are some very, very small parts of our business that are private label, but again, I mentioned what I think about private label.

Yes. Yes, it tends to be low margin, low revenue and -- but it would increase your throughput through your facilities. On the $0.07 to $0.08 that Jeff was just talking about that, that would be the cost savings going forward in fiscal '21 and beyond, is that $0.07 and $0.08 -- $0.07 to $0.08 already being backed out in the adjusted numbers?

No. No, because the only adjustments we're taking in the adjusted numbers are really amortization. We're not taking any -- at this point, we're not taking any onetime numbers associated with all these various moves. There might be a few dollars here and there if it's a true onetime. But really, what's going on right now is we're operating several things at once that are going to become just one thing. So it's kind of hard to identify what is "onetime". So instead of doing that, I thought it would be best to just say that we have $0.07 to $0.08 of costs in this year that will not be around next year.

And we have time for one more question. This question comes from the line of [ Max Mathoff ] with Two Way Media.

Hey, guys, congrats on a positive quarter. Just have a small bundle of questions, pun intended. So based on the success of the bundled promos that you guys had, can we expect to see this applied across more product SKUs, both firearms and accessories? So I mean like cleaning kits, optics, operated cases or even something like bundling your firearms with the Gemtech suppressors, especially since it's such a low-hanging fruit?

Yes. I think all of those are certainly on the table and make perfect sense. So we'll definitely see more of that. Some of them may even become standard SKUs. We just continue to see the value that we can create for the consumer. And if we see that demand can be sustained, then I do believe that we've made some of those just standard SKUs. And you can certainly see that with our M&P15 Sport II rifle as well where we could -- and the M&P15-22 as well where we just continue to bundle those with the Crimson Trace optic, make that a standard SKU.

Awesome. So one of the questions you kind of already answered, which was have you seen any evidence of any fear-based buying. But as we're approaching the next upcoming election cycle and obviously the upcoming rhetoric, speaking with the distribution channel, the retail channel, have you seen any signs of willingness for them to leverage up again much like they did in 2016? Or are they still hanging in with the lessons in the back of their minds from that?

Yes. I think lessons learned definitely are resonating strongly in people's minds right now. So there's certainly been nobody who's talking about building inventory and making it that they will see some fear-based buying manifest itself at some point. And again, it's fear-based buying just on fear of regulation. So nothing yet, but who knows?

Yes. And [ Max ], I'd like -- if you go back to '16, the build, in anticipation of the Clinton/Trump election, really occurred in '16. That is in the year of the election, probably 4 or 5 months before the election. We're still a year before that buildup period started in the equivalent time in the last election. So we got a long ways to go, and we'll see.

And I guess the final question. So in light of a few of your product competitors seemingly having success with ammunition, have you guys considered tucking in a small ammo manufacturer or perhaps having your own branded line of ammunition?

We've considered it. Obviously, we talk about the full spectrum of potential acquisitions, and that's still one that we do talk about. But nothing really appeals to us right now, I would say.

Yes, [ Max ], I would add to that. Two problems with -- one is the gross margins tend to be lower than firearms. And also, if we're going to be in -- with respect to the firearms business, we like to be in a leading position in terms of market share. So a tuck-in acquisition in ammo might -- you could do -- I suppose you could have some specialty ammo or something, but it's not -- I don't think it would be our focus right now.

And that concludes today's question-and-answer session. I'd like to turn the call back to Mr. Debney for closing remarks.

Thank you, operator. I want to thank everyone across the American Outdoor Brands team for their commitment and dedication to excellence. Thank you for joining us today, and we look forward to speaking with you next quarter. Take care, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.