Description

AOUT

 American Outdoor Brands is a collection of outdoor and hunting and shooting-related brands that was spun off from Smith and Wesson in the summer of 2020 (AOUT doesn’t make or sell any firearms). The stock traded in the mid-teens (market cap: $200mm) post-spin, then rallied to as high as the mid-$30s (market cap: $500mm), before plummeting to $7-9/sh (as low as $100mm market cap; now closer to $120m) over the last 12 months.

AOUT’s brands are in the camping, fishing, hunting, and shooting categories. The business is approximately 50% “outdoor lifestyle” and 50% “shooting sports.”

AOUT have generally been good operators; the company has excellent e-commerce penetration (40%+ of its sales), for example.

AOUT was put together via a series of acquisitions over the past decade.  The chart below shows some high-level information about the deals. 

The total purchase price for the acquired businesses was ~$400mm (again, compare to the recent EV of ~$120mm).

In addition to purchasing these brands, the company has started a number of brands from scratch, including Meat Your Maker, and has expanded a number of purhcased brands, such as Bubba kitchen knives and fishing rods.

The last few years (mid-2020 through early-2022) were good years for the hunting and shooting accessory business. The company generated $35mm of TTM EBITDA through April 2022 (putting trailing valuation at 3.3x EBITDA), which we should consider to be a peak year. Earnings will certainly be lower this year and EBITDA may not recover to $30mm+ for several years (if ever), although the company does have ambitious long-term growth targets that include growing sales to $400mm at a mid-high teens EBITDA margin (implies EBITDA of $65mm several years out).  Even if they badly miss this target, the stock is cheap.

Net Net

AOUT is very close to a net-net.  Current assets of $174mm less total liabilities of $73mm gets you $100mm, or almost 85% of the market cap. This gives very little value to any of the brands and close to no going-concern value to the business. Statistically, net nets tend to work, and they usually aren’t found in brands and businesses as healthy as AOUT.  Sure, AOUT is past peak and numbers will be lower for quite awhile going forward, but I think mid-cycle EBITDA is in the $20mm range (11% margins on $180mm of sales) and that EBITDA shouldn’t fall negative for long during the cyclical trough. Hunting isn’t as cyclical as some parts of the shooting sports market.  (There may even be another peak year at some point in the next 5-10 years.)

AOUT had inventory of $74mm at Fiscal YE 2021 (April 30).  Fast forward a year, and inventory is now $121mm.  While $74mm was perhaps a little light to support the level of sales AOUT was generating a year ago, it should be sufficient to support a business during a weaker economy. Over the next year, AOUT should work down about $50mm of inventory, which would bring the effective enterprise value to ~$70mm. Inventory is generally hardgoods and not subject to fashion risk. Even with expected discounting, I still think it can generate positive/breakeven EBITDA while freeing up this cash.

The company addressed its inventory on its recent fiscal 1Q conference call:

“With respect to inventory, historically, our inventory levels increased during Q1 each year due to timing of new product introductions and to support the increased seasonal demand starts in Q2. We implemented targeted inventory reduction initiatives, which helped us reduce inventory by roughly $1 million in Q1 as we more than offset inventory that we built to support new product launches.

 “Our team is executing against a plan to reduce our inventory balance in the coming quarters to drive cash conversion from inventory in the second half of the fiscal year [ending April]. In addition, because the majority of retailers are focused on driving down their overall inventories at the moment, we have intentionally delayed certain new product launches to better align with current retail demand patterns. We believe this strategy will help us launch those products at a time when retailers open to buy dollars have normalized. In addition, it will allow us to better manage our inventories over time.”

Activism

We think this stock should work out as long as management doesn’t do anything too stupid. Activism is a mitigant to this risk.  On this front, several investors have filed 13Ds over the past year or so, including Hallador Investment Advisors, which as of September 9 owns 7.5% of the company.  Additionally, Engine Capital, an activist firm, has board representation (as of August 8, 2022).

Recently (September 30th), the company announced a new $10mm share repurchase authorization.  It had previously repurchased over 800k shares at an average price of $17.90.

Conclusion

·         Effective EV at $8.84/sh with normalized inventory levels: $70mm

·         Normalized EBITDA: $20mm

·         Mid-cycle EV/EBITDA: 3.5x

$20mm of EBITDA maps to something close to $13-15mm of FCF, as the business is capital-light.  This is a dollar a share.

So again, a year or two from now, assuming the stock price doesn’t move, we could have a sub-$9 stock with $3.50/sh of net cash and mid-cycle earnings power of $1/sh.

Risks

The biggest risk is bad capital allocation.  The company recently purchased Grilla Grills for $27mm, and this seems like it was probably a bad acquisition (just look at WEBR and COOK since then). If AOUT had that $27mm back, its EV would be <$100mm and it could buy back almost a quarter of its shares with its net cash. (The company thinks it can grow Grilla to be a $100mm sales brand, perhaps worth $100mm+, which could be possible—WEBR does well over that level of sales every month—but I am skeptical).

AOUT could make further bad acquisitions (adding leverage) or fail to reduce inventory as I discussed above.

Catalyst

 - Cash generation via inventory reduction

 - Return to mid-cycle profitability

 - Share buyback