On Thursday, May 9, Vista Outdoor (VSTO) reported their fiscal Q4 2019 and full fiscal year 2019 earnings results.
While the stock initially popped on the mixed results, it has since settled as investors and analysts start focusing and asking the hard question: What is the company going to look like after the triage is over?
Let's take a look at the earnings results and work through where the company is today.
For Q4 FY2019, the company reported net sales of $515 million. This is down from $571.227 million a year earlier, a decline of 9.8%.
For the quarter, the company reported a net loss of $48.635 million or $.84 per share. This is an increase in the loss from $15.922 million or $.28 per share a year earlier.
For the full year, the company lost $648.44 million or $11.27 per share. This is a tenfold increase from a $60.23 million and $1.05 per share loss a year earlier.
In it important to note however that the bulk of the losses are from write-downs to the values of the various business units, both assets that were sold, held for sale or held today.
You can find the earnings release here.
Thinking About the Earnings
Almost universally I recommend that anyone interested in investing in a company look at the actual 10-K and 10Q statements and NOT merely look at the selected data presented on earnings calls or investor presentations.
By looking at the reports with numbers in black and white rather than on a power-point slide, you are far more likely to take the time to understand the data rather than focus on the numbers management wants you to focus on.
I suppose it is always easier to state income and losses in EPS rather than the actual numbers, especially when the full year loss is more than company's market cap.
On this earnings call, management was fairly adamant that they have turned the ship around and are now on the right path.
While back in 2017 I brought up major concerns regarding the debt and the ability to service it, many investors and other analysts dismissed those concerns. As we know now, debt is an issue and forced the company to sell off assets to pay down the debt.
Over the previous 12 months, the company was able to pay down $211 million coming predominantly from the sale of their eye-ware brands.
As such, the company's balance sheet showed Long-Term Debt of $684.67 million with total liabilities of $1.128 billion.
The company is further poised to pay down debt with the sale of Savage Firearms.
This, of course, has been something investors and analysts have been wondering about for at least 6 months as many in the industry expected an announcement in January for Shot Show and then were told by management on a previous earnings call to expect an announcement before quarter end, which was March 31st.
What we did have however is continued write-downs for the brand over the previous few quarters with another $36 million impairment on "held-for-sale assets" with a total of $84.55 million over the previous fiscal year. The current valuation range for the brand is $170 million.
Interestingly, the balance sheet shows "assets held for sale" at $208 million. Is $38 representing the Bell/Giro business? Or something else?
In any case, yes, selling off assets WILL reduce debt... but it creates another issue that is already starting to come up.
Selling off assets is also killing off revenue.
While the company does not provide a detailed breakdown by brand, they do break down revenue by segments, outdoor products and shooting sports.
In the outdoor products, the company reported sales of $220 million for the quarter and $990 million for the year. This is down from $273 million and $1.149 billion a year earlier.
Yes, there is a decrease due to the loss in eye-wear, however, excluding eye-wear, the company still showed an organic loss of 8% for the quarter and 7% for the year. Including eye-wear, that is a 19% loss in revenue for the quarter and a 14% loss for the year.
Source: Vista Q4 FY2019 Earnings Slides
The shooting sports segment showed similar numbers with an 8% decline in revenue for the full year and a 22% drop in adjusted gross profits. For the quarter, however, there was a small improvement.
Source: Vista Q4 FY2019 Earnings Slides
The shooting sports numbers continue to fall in line with the broader firearms market and the adjusted NICS data which we follow.
So what we have so far is year over year drops in organic sales. On top of it, the company is selling off business units which will further depress revenues going forward.
One place we are likely to see it show up is in the net receivables. As we can see from the company's 10-K, the net receivables are now at $344 million, down from $421 million a year earlier. Furthermore, inventories have also declined to $344 million from $382 a year prior.
Source: Vista Q4 FY2019 10-K
One of the questions which I have today which will impact the future is "how much revenue is Savage generating?"
What we do know from company statements is that ATK, the parent company from which Vista was spun off from, paid $315 million for Savage in 2013 which represented a 5.5 EBITDA multiple. ATK has since been acquired by Northrop Grumman (NOC).
As per an older article on MassLive.com, Savage produced 645,000 rifles in 2012. Assuming the same level of sales and an average selling price of $350 (right around where Ruger is at). This implies sales of around $225 million or a bit more than 10% of the current sales of Vista as a whole.
In either case, the brand is currently being valued at around $170 million. Does that mean the volumes declined over the previous 6 years? The margins? Or willing to accept a lower multiple to pay down the debt?
There is no data which I have found which suggests one way or another however while Ruger has certainly taken market share with their Ruger American and Ruger Precision Rifles, Savage is still one of the go-to brands in the precision rifle market and as we discussed, one of the few areas of firearms which has been experiencing major growth. If there is a loser in this area, it is likely Remington. So net/net, my own belief is that Savage is still producing right around 600,000 rifles per year being hurt by Ruger however helped by the overall growing precision rifle market along with stealing share from Remington.
The Value Question
In a recent article, we discussed that I thought of Vista as a company going through a triage.
Without a doubt, there are many AMAZING brands under the umbrella and I have been a customer of 14 out of the 32 outdoor brands and 6 out of the 11 shooting sports brands. The brands, however, are not the issue but what is, is the debt and valuation.
My longtime readers know I am not a fan of "adjusted" or "non-GAAP" numbers as companies will frequently find many "one-time" expenses on an ongoing basis. Staples was my best example with 2 years of "one-time" expenses that lead the company into being sold at discount prices to private equity leaving shareholders holding the bag.
With Vista, I have ZERO doubts about whether or not we are going to see the brands in 5 to 10 years, my only question is based around who the owners may be.
To get some stock valuations, let's go ahead and look at the few common valuation methods.
For the previous fiscal year, the company generated an operating profit of $60.7 million. Almost all of this went towards interest expenses ($51 million) leaving the company with an adjusted net income of $8.1 million or $.14 per share.
Source: Vista Q4 FY2019 10-K
At the current stock price of $9.46, this implies an adjusted PE of over 67!
Even if we used prior year's adjusted EPS of $.50, this is a PE of over 19!
Of course, we do have to keep in mind that Vista's numbers are not yet accounting for the drop in revenue from future business unit sales.
Source: Vista Q4 FY2019 Earnings Slides
The company did provide some FY2020 guidance and called for Adjusted EPS of $.28 to $.38. Once again, we have the "adjusted" keyword but assuming that is the actual earnings, taking the midpoint of $.33 per share and applying a "reasonable" 20x multiple, that is still $6.60 per share, without taking into account the sale of Savage and the loss of those revenues.
Personally, I would far prefer to invest at 10x multiples in which case the price per share target is far lower.
Looking at the price to sales, we do see some "value" signs as the company is valued at just .26x sales... far below the .80 for AOBC or the 2x sales for Ruger. The thing to keep in mind here, however, is that the price to sales is also going to be impacted by how clean the balance sheet is and the margins on those sales.
On one hand, Vista is in the high profit margin business of firearms accessories and outdoor products. On the other hand, they are in the ammunition business which is in large part a commodity.
I love the brands and I LOVE the idea of Vista... BUT... as a conservative investor who in my opinion, has a good sense on the firearms industry, I have real challenges with the company and perhaps with some of the things being said.
Sales Declines In "Good" Economy
My first issue is as to why the outdoor segment, including brands like Bell, Giro, Camelbak, JimmyStyks, Camp Chef and Blackburn Design are having a tough time with meaningful year over year declines?
Isn't the economy doing okay? And last I checked sales of Camelbak hydration packs had very little to do with NICS background checks?
What is peculiar to me is that the year over year numbers were seemingly little to unhelped by the VERY GOOD snow sports season.
So, the combined company has declining sales with both a good economy and many brands that have little to do with firearms?
The next logical question for me would be... "how will those brands fare when we do have a recession and the firearms market continues to slump?"
Aggressive Cost Cuts
When a patient goes into the hospital for an emergency surgery, getting through the surgery is just the first step. The second big area of concern is the recovery.
Vista has certainly done a great job of trimming off the fat, although this really begs the question as to why those expenses were allowed in the first place.
My main question around cutting costs actually deals with what type of an impact this will have going forward?
Will we see this when it comes to new product innovations down the road? Or is it going to be seen in the marketing and brand recognition in the future?
As we discussed, many shooters have left Vista's Federal Gold Medal Match ammo and have moved onto the arguably better offerings from Hornady, such as the Hornady Match ammo with their ELD bullets. I believe it is also a matter of time until Hornady eats up even more of Federal's premium offerings when they start offering loaded ammunition with their A-Tip bullets which offer ultra-low drag ballistics. Currently, Hornady only offers A-Tip bullets by themselves to reloaders.
For anyone who needs proof, take a look at one of the sources I commonly use, Google's Trends, a tool that looks at the interest in various search terms over time.
Source: Google Trends
As we can clearly see, starting around 2015, search interest in "Hornady Match" has been growing meaningfully while "Federal Gold Medal Match" has been declining.
We can also find signs of this on YouTube when you look at what match ammunition the bigger gun YouTubers are using. Hornady rifle ammunition has been featured more and more frequently while we also see a general decline in YouTubers being sponsored by Federal/Vista.
Perhaps what I am most unsure of is whether there are enough people in the company who have both... a say in the direction of the company AND understand the business segments they are in.
As a "gun guy," I really had issues with the following, stated on the earnings call:
While I'm optimistic about fiscal year 20, I'm also realistic that we're not out of the woods yet. We continue to face headwinds that are pressuring our business. While the ammo market seems to be bottoming out, we still aren't seeing that upward J-curve that we'd like to see. All of the best minds predicted that the recovery would take 18 to 24 months. And here we are at well over two years without the market rebounding.
Source: Seeking Alpha VSTO Transcripts
I must give CEO Chris Metz a LOT of credit for being much more realistic and less "everything is great" than his predecessor. At the same time, and perhaps industry wide we have been hearing that a "recovery is coming in the next quarter or so" for over two years. So "all of the best minds predicted that the recovery would take 18 to 24 months" are probably NOW saying that, as for the past few years we have been hearing "3 to 6, 12 max." Where these "great minds" simply business school grads who are brilliant with business but clueless on the gun industry?
The thing is though, your average gun owner who has owned guns for more than 1 presidency would tell you up front... this market is NOT going to recover UNTIL one of two things happen... 1. There is a very real possibility that an anti-gun Democrat gets elected to the oval office, or 2. There are external factors that will impact supply which will in turn drive demand, the last example of which was the 22lr ammo crunch when an $18 brick of 22lr would sell for $80 to $100.
In my opinion, the primary reason we are seeing any signs of stabilization is due to manufacturers continuing to push rebates. Worse yet... today, Vista is now offering rebates on not just factory loaded ammunition but also reloading components such as gun powder and primers! While I already have PLENTY of powder and primers, I am likely to pick up some more because of the rebates.
Would I pick up more if it was not for the rebates? No, not at all. I follow what most sensible reloaders do and have at least 3 or 4 years' worth of ammo in components ready to go (bullets, powder, primers). This is on top of the ammunition that is already loaded and ready to be shot. This has generally been the "rule", especially since the last ammo crunch. Gun guys go out and buy when prices are low to dirt cheap. This means primers at $30 per box or less or when Grafs, Natchez, Powder Valley or one of the others runs a "Free Hazmat" promo. Once again, this is all fairly common knowledge with any gun owner who has owned a gun for more than a few years.
As such, I don't know what to think when the comment stated "all of the best minds" as almost any gun owner that I spoke with after President Trump was elected, would have clearly stated that they are far less likely to buy any more guns or ammo as the fear is gone. All of this goes back to reaffirm that either they are not the "best minds" or the people who actually understand the firearms business do not have much say or control. Nothing in the firearms business should have been a surprise as soon as we learned that Donald Trump was President Elect.
For all of these reasons, while I love the individual brands, I do not feel comfortable investing in the stock at the current time.
The only situation under which I would see myself considering VSTO in the near future is closer to the elections and if the Democratic nominee has a tough stance on firearms.
Author's note: Once again, I hope you found this helpful and I look forward to your questions and comments! If you enjoyed the article, please hit the "like" button below. For my next articles, now that we have covered the background check data and both Ruger's and Vista's earnings, we will be returning back to fixed-income ETFs and closed-end funds.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.