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American Outdoor Brands: An Undervalued Spinoff?

American Outdoor Brands spun off from Smith and Wesson in July of 2020. AOUT is composed of both outdoor and gun accessory brands. Due to COVID and the subsequently accelerated affinity for outdoor activities, about half of AOUT’s brands have experienced triple-digit growth yoy. Given AOUT’s strong brands and their success in e-commerce and DTC, we believe AOUT is in a terrific position to take advantage of the record number of hunters and campers that have recently entered the market.


Background

AOUT is composed of an assortment of brands that is a result of Smith and Wesson’s acquisition spree over the past five years. The total purchase price of these brands was about 360 mm (SWBI paid about 2x revenue or about 10x EBITDA per brand) or about forty percent higher than where AOUT currently trades-even with a significantly more beneficial environment for hunting and camping. About seventy percent of AOUT’s revenue comes from gun-related accessories such as gun vaults, lasers, and gun range PPE. The other thirty percent comes from products such as camping gear, fishing, and gardening. Before COVID, AOUT’s main customers were land based mom-and-pop shops and retail stores (Cabela’s and Sportsman’s). Sportsman estimates that about 65% of the gun and outdoor specialty market are comprised of mom-and-pop shops in their 2020 annual report. AOUT’s brands (shown below) are divided into four categories: Hunter, Harvester, Defender, Adventurer. AOUT’s strategy is to cover the entire gamut from hunting/outdoors to the dinner table.


Due to COVID and the subsequently accelerated affinity for outdoor activities, about half of AOUT’s brands experience triple digit growth. Currently, there are now 42mm campers in the USA, 8 mm new customers have entered the gun market, hunting licenses are up 12%, and fishing licenses have gone up 14%. Per specialty retailer Sportsman Warehouse, their results across the various categories are shown below. AOUT has significantly outperformed the growth seen in Sportsman and in competitors such as Vista.

Sportsman Dec 2 Conf call


Under SWBI and pre-Covid, these brands languished and remained stagnant with little to no revenue growth. Prior to being acquired, most of these brands were organically growing for years between ten to eighteen percent CAGR. This is to say that SWBI mismanagement was likely a cause of the stagnation of these brands as guns were the bulk of their revenue and likely their focus as well. The gun market also did not fare too well over the past four years with Republicans dominating the government branches. Now that it has separated from SWBI, AOUT’s strategy to leverage the potential of their brands is called “dock and unlock”. When AOUT comes up with a new product -they shoot for about three hundred per year- they “dock” it underneath one of their four brand categories. These categories were recently created to segment their brands and reduce overlap and confusion. The idea is to have each brand category entrepreneurially run with its own marketing, customer service reps, and incentives. This allows AOUT to quickly unlock the potential and take new products from “niche to known”. AOUT has also transitioned from producing products to enabling lifestyles which considerably expands their TAM. This shift in framework is subtle but important as it breathes life into a brand and achieves better customer engagement and loyalty- critical for DTC and e-commerce. An example of this at play is AOUT’s Bubba brand. SWBI purchased Bubba Blade for 12mm in 2017. When it was acquired, it was solely a fly-fishing knife. AOUT was able to leverage the strong brand to expand Bubba’s brand presence to cover more of the “water to plate” lifestyle. It now spans dozens of tools needed for fishing. AOUT is now using this playbook for their other brands such as UST and BOG whose websites have recently gotten facelifts. Bubba currently makes up almost half the top ten best-selling fish knives sold on Amazon.



E-commerce & DTC

Prior to COVID, AOUT had been making a push towards e-commerce and DTC with brands such as Bubba growing 100% yoy and BOG growing 200% yoy. COVID has only accelerated their ecommerce revenue even more by an additional 200% in Q2 of 2021! By the end of 2021, e-commerce should make up more than 40% of AOUT’s revenue (about 100mm). Although AOUT does not break out revenue from DTC, this has been a major recent initiative for them seeing as retailers and marketplaces have been competing against AOUT with their own private labels. We believe that about 25 mm or so of AOUT revenue is DTC. Given the success they have had with DTC brands such as meatyourmaker, we believe that AOUT has a long runway ahead with DTC.


With more of their sales migrating towards ecommerce and DTC vs retail mom and pop shops, AOUT stands to benefit significantly from a faster feedback loop. The fascinating aspect with DTC is the compression in distance between the customer and the company. This feedback loop enables companies to bring ideas to market quicker and trim off unsuccessful products. Compared to the state AOUT is in now with large inventories and accounts receivables (due to the nature of working with mom-and-pop shops) cycles, a growing e-commerce presence should make it a much more profitable company. Aside from better working capital -AOUT has about a 50% net working capital to sales ratio, roughly double that of their competitors- AOUT can run iterative A/B testing to focus on its best-selling products. This benefits AOUT due to their innovative nature. AOUT spends roughly 8mm a year on R&D or about 3% of revenue to come up with 300 new products per year. A comparable larger competitor, Vista Outdoors, spends only double what AOUT does on R&D even though it has 7x the sales!


Examining AOUT’s brand websites, most of their products are sold out. This ranges from Crimson Trace (gun laser) to Lockdown (vault and monitoring systems) to their newly introduced meatyourmaker (already a multi-million-dollar revenue meat grinder brand at only 9 months). This serves as corroboration that AOUT’s brands are still relevant and in high demand in these times. A snapshot from AOUT’s crimson trace website is shown below.



On management

With AOUT being a spinoff, management and incentives are important indicators for its future performance. The previous co-CEO of SWBI, Brian Murphy (36 yo), is now the CEO of AOUT. Listening to him explain AOUT’s strategy going forward, we came away confident in AOUT’s ability to execute. Both his and the CFO’s stock award incentives are roughly double their cash salary which aligns their interests with shareholders. He also owns about 1.4mm dollars in AOUT stock and recently bought 10k shares directly in the open market at around 14 dollars per share. The company has also declared the option to issue ten percent of outstanding shares for incentive compensation.


Risks

A perpetual risk is the rise of private label. Retail brands and marketplaces are leveraging their brands to sell their own private label and this will only increase. From Sportsman's 10k 2019- “During fiscal year 2019, private label offerings accounted for approximately 3.4% of our total sales.…. this compares to more than 20% for many of our sporting goods retail peers. We believe our private label and special make-up products are an important opportunity to drive sales and increase margins alongside our branded merchandise.”


Another risk is that with the rollout of the Covid vaccine, people quickly regress back to pre-Covid habits which would put a damper on the growth of AOUT. We ascribe a low probability to this given the social aspect and high costs of these activities. We believe this makes these activities stickier and more habit forming.


Catalysts

“Democrats are good for gun sales” A democratic president and house will be a good tailwind for guns and accessories, as it slightly increases the risk of gun control etc


AOUT’s shift towards e-commerce and DTC increases margins, working capital cycles, and facilitates better inventory management.


AOUT’s continued leveraging their brands to go after larger TAMs (meatyourmaker, Bubba, Bog) will help increase their runway and growth.


A longer delay of vaccine rollouts or new strains prolong quarantine and causes more people to enter the outdoor space.


Valuation

AOUT is a high margin business that has significant and relevant brands. It’s gross profit margin is > 40%. Competitors such as Vista Outdoor – whose outdoor brands range from Bushnell and Camelbak- have margins around 25%. Conservatively assuming a slight decline in revenue to a more modest 20% growth from 2019 to account for a normalized environment, AOUT will throw off about 25-30 mm in cash per year.


A modest 12x 2021 earnings would put AOUT at around 330mm and adding back discounted inventory, accounts receivable, and cash would put the final valuation around 450 mm or about a 70% upside from today’s price. Using the prices SWBI paid for these brands as a ballpark would put AOUT around 360mm. We believe that AOUT is worth significantly more than this given the new environment we are in. AOUT’s current price does not factor the growth potential of their brands given the current pandemic and political climate we are in. There is also significantly more upside if AOUT can execute on the DTC front and expand the TAMs and margins of their brand.

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