Smith & Wesson Brands achieves $15 million EBITDA and strong cash flow despite lower net sales, while new products drive market share growth.

Good day everyone and welcome to Smith & Wesson Brands Second Quarter Fiscal 2026 Financial Results Conference Call this call is being recorded at this time. I would now like to turn the call over to Kevin Maxwell, Smith and Wesson's General Counsel who will give us information about today's call. Thank you. Please proceed.

Thank you and good afternoon. Our comments today may contain forward looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify forward looking statements. Forward looking statements may also include statements on topics such as our product development objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings which are available on our website along with a replay of today's call. We have no obligation to update forward looking statements. We reference certain non GAAP financial results. Our non GAAP financial results exclude relocation expense and one time costs related to the grand opening event for the Smith and Wesson Academy. Reconciliations of GAAP financial measures to non GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS and any reference to EBITDAs is to adjusted EBITDAs. Before I hand the call over to our speakers, I would like to remind you that when we discuss NICs results, we are referring to adjusted NICs, a metric published by the National Shooting Sports foundation based on SBI NICS data data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers. NICS generally does not directly correlate to our shipment or market share in in any given time period, we believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our president and CEO, and Dean McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you Kevin and thanks everyone for joining us today. We were pleased with our second quarter results which continue to demonstrate the strength of the Smith and Wesson brand, the ongoing success of our innovation strategy and our disciplined focus on managing operations and allocating capital. As we anticipated, excellent efficiency in our business operations allowed us to deliver solid profitability of $15 million of EBITDA on net sales of nearly $125 million. We also saw great results on our balance sheet with a significant reduction in inventory thanks to our disciplined sales and operations planning process which ensures our factories are right sized to demand levels. This generated healthy operating cash flow of over $27 million in the quarter. Further, our new products continue to be a significant catalyst accounting for nearly 40% of sales in the quarter. I'm proud to see our award winning engineering and design teams continuing to deliver products that resonate with consumers. Looking at market dynamics, we believe that the market continues to be healthy and stable following normal seasonal trends and that our brand strength, award winning product portfolio, experienced team and disciplined management allowed us to continue gaining share during the quarter. In handguns, our unit shipments into the sporting goods channel were down 1.9% versus NICs being up 2.9%. However, when we adjust for channel inventory fluctuations in the period to understand true consumer demand, we had a 12,000 unit decrease in distributor inventory during Q2. This indicates that our handgun sell-through at the retail counter was actually up 7.7% we believe reflecting market share growth. As I just mentioned, this was driven by the continued success of our entire line of new products as well as solid performance from the core line. In long guns, our shipments into the sporting Goods channel declined 5.1% while NICS was down 8.3. When we adjust for inventory fluctuations in the channel, we did underperform the overall long gun category during the period. However, this represents typical category seasonality for us as demand for long guns in the fall season is heavily weighted towards the traditional hunting segment where we currently have a relatively limited presence. In summary, on the overall market, our handgun outperformance far outweighed the impact of long gun seasonality and after inventory fluctuation adjustments, our total firearm unit shipment into the sporting goods category were up 3.3% versus the market being down 2.7%. This represents solid results for the fall period which again is heavily weighted to the hunting category. Importantly, the strength of our brand allowed us to outperform the market in unit sales without sacrificing our average selling prices which actually increased in Q2. Overall Average Selling Prices (ASPs) were up 3.5% versus a year ago including a 2.1% increase in handguns to $418 and a 10.2% increase in long guns to $602. We also saw growth sequentially, with overall Average Selling Prices (ASPs) up 6.5%, comprised of a 3.7% increase in handguns and a 15.1% increase in long guns. While our focus on innovation is a key factor in supporting Average Selling Prices (ASPs), the growth we delivered in Q2 also illustrates the strength of the Smith and Wesson brand, which allows us to largely avoid having to be reactive in our promotional participation. On that note, our balance sheet remains strong and I'm particularly pleased with our inventory position as we move into the seasonally stronger second half of the fiscal year. We ended the quarter with $183 million of inventory, which was down from $196 million a year ago and from $203 million at the end of Q1. The team has done an incredible job managing production and inventory, ensuring we are aligned with consumer demand across our portfolio as well as retail and distributor inventory levels. Channel inventory at distributors continues to be very clean, declining over 5% sequentially and over 15% year on year, positioning us to quickly convert incremental demand into shipments as we move into our typically busy. Second half of the fiscal year. In addition to putting us in a strong competitive position, as I mentioned earlier, our focus on inventory management drove significant operating cash flow of over $27 million. Finally, just a quick update on our new Smith and Wesson Academy that I mentioned on our last call. Our grand opening ceremony was held on September 12th and we'd like to thank all of the federal and State Senators, Congressmen and women, industry personalities, customers and influencers who made the trip to help us celebrate this latest milestone in Smith. And Wesson's long legacy. Our goal with this state of the art, purpose built facility is to offer tailored situational training to our current and prospective law enforcement, federal, agency and military customers as well as offer training classes to consumers of all skill sets looking to learn from the best of the best to enhance their firearms proficiency. As I mentioned on our last call, we are proud to have Mark Cocciolo leading the operations and training at the Academy. Mark is a retired US Navy SEAL who proudly served our country as a member of the elite SEAL Team 6 and after retirement returned to San Diego where he spent the next 16 years as a firearms instructor training over 4,000 Navy SEAL candidates in that time. I'm happy to report that just over two months in we have already had the pleasure of hosting dozens of current and prospective law enforcement customers and held our first consumer training classes. The feedback has been overwhelmingly positive and we look forward to continuing to exceed the expectations of our professional and consumer customers. With this new addition to the Smith. And Wesson brand experience. I encourage anyone interested to visit our website for more details or to sign up for a training class. As we look forward to the future, we remain focused on our proven strategy of innovation driven growth, disciplined cost management and maintaining our strong balance sheet. Our capital allocation strategy remains unchanged. Invest in our business, maintain financial flexibility and return value to stockholders. With our industry leading innovation pipeline and continued strong market positions, we believe we are well positioned for continued success. Before I hand the call over to Dena and as always, I just want to thank our entire team of talented Smith and Wesson employees for their tireless dedication in putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Dina to cover the financials.

Thanks Mark Please note that all comparisons are between the second quarter of fiscal 2026 and the second quarter of fiscal 2025 unless stated otherwise. Net sales for our second quarter of $124.7 million were $5 million or 3.9% below the prior year. During the quarter, distributor inventory in terms of actual units declined by over 5% from the end of the prior quarter and by 15% compared with the end of October 2024. This indicates continued positive sell through of our products at retail and a good position for us as we look forward to the coming months. Handgun ASPs increased slightly from Q1 levels due to strong demand for certain premium products partially offset by promotions and continued demand for lower priced products. Long gun ASPs increased due to the mix of higher priced products and slightly increased overall volume. Gross margin of 24.3% was down 2.3% versus a year ago due primarily to decreased absorption on temporarily lower production as we focused on inventory optimization and an 80 basis point negative impact from tariffs, partially offset by lower promotion costs and lower federal excise taxes as a result of the favorable outcome of a recent audit. Operating expenses of $26.2 million were $733,000 lower than a year ago with increases in selling and marketing costs related to the grand opening of the Smith and Wesson Academy being more than offset by lower G and A, primarily due to lower legal costs. The lower revenue and associated margin resulted in net income of $1.9 million compared with $4.5 million in the prior year period. Earnings per share during the second quarter was $0.04 compared with $0.10 a year ago. Cash generated from operations during the second quarter was $27.3 million compared with cash used from operations of $7.4 million in the prior year quarter, due primarily to lower inventory and income taxes paid, inventory decreased $20 million versus an increase of $6.2 million in the prior year quarter. We spent $11 million on capital projects in the second quarter compared with $3.3 million a year ago. With the increase primarily related to the Smith and Wesson Academy, we expect our capital spending for the year to be between 25 and $30 million. We paid $5.8 million in dividends and ended the quarter with $27.3 million in cash and investments and $90 million in borrowings on our line of credit. Since the end of Q2, we have so far repaid $15 million on the line, bringing our current total borrowings on our line of credit to $75 million. Finally, our board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on December 18th, with payment to be made on January 2nd. Looking forward to our third quarter. Although we continue to see uncertainty regarding macroeconomic conditions, including tariffs, we believe that the strength of our brand, product assortment and new product offerings should allow us to continue performing well. Therefore, we expect our third quarter sales will be 8 to 10% over our Q3 fiscal 2025 sales, with no significant impact either positively or negatively from channel inventory. With two additional operating days and an increase in production to meet demand during our busiest quarter in Q4, we expect Q3 gross margins to increase by a few percentage points both sequentially and year over year. Operating expenses in Q3 will likely be about 15% higher than in Q2, with increases due to the shot show in January, new product development costs, increased promotions, and increased profit sharing. Additionally, we expect continued healthy cash generation through the second half of the fiscal year. Our effective tax rate is expected to be approximately 28%. With that operator, can we please open the call to questions from our analysts?

Thank you. With that, we will now be conducting a question and answer session. If you would like to ask a question, please press * one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press * two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the * keys. One moment while we poll for questions. And our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Yeah, hey, guys, you got Alex Sternicks on the line from Mark Smith today. Thanks for taking my questions. First one for me. You know you noted an 80 point or 80 basis point headwind in the quarter. But could you just walk us through, you know, what you're seeing in input costs right now, steel components tariffs and how you're thinking about gross margins over the next couple of quarters.

Sure. Hey Alex, this is Mark. Yeah, the. As you know, we're mostly a US. Based manufacturer, although in the global economy today we do have some. Source components from overseas. I think our impact from tariffs, you can probably expect it to pick up. A little bit as we go through the back half of the year, just. As we work through some of the inventory that we had already in stock from the pre tariff days. But it shouldn't have a material impact on our profitability as we go through the back half.

Okay, that's great. Oh, sorry, go ahead.

I would just say one other point. The back half of the year we have more operating days and as I said on the prepared remarks, given that inventory has declined and we're now ramping back up, absorption will probably be a little bit favorable. So you'll see a little bit of a positive impact that should be able to offset that impact of tariff costs.

Okay, that's great. Second one for me. You know, operating expenses looked really clean this quarter, specifically G and A. You know, is this a level you feel you can hold on to or should we expect G and A to tick up as we move through the rest of the year?

Yeah, I mean our operating expenses are usually fairly consistent year to year. So you know, we always have an increase for shot show in January. So I think, you know, you can kind of look at, you know, how we've performed on operating expenses in past years in Q3 and Q4 and you know, I think you can kind of expect that to be held in line. You know, we're pretty disciplined in managing. The, you know, the OPEX line in general. And so that performance in Q3, Q4 kind of last year, I think you can kind of expect the same cadence this year.

Okay, that's great. And then last one for me, you know, it sounds like you're seeing some nice tailwinds given the Q3 outlook, you know. Any early thoughts on how Q4 is shaping up from where you sit today?

Yeah, we've been really pleased with, you. Know, performance, you know, in Q2 and first half of the year. You know, the strength of the brand. Is really kind of showing through and resonating. New products are doing very, very well across the board. You know, we expect that, you know, we'll continue to focus on Innovation, it's one of the core strategies. The marketing and design teams are, you know, continue to kind of hit it out of the park with blockbuster launches and you know, so I think, you know, as you can see in the, you know, the kind of the color and guidance for Q3, we expect that to continue into Q3 and for Q4, you know, as I said in the prepared remarks, the market is, you know, stable, normal, you know, kind of back to how it always performs, which puts our Q4 always as our strongest quarter. And this year I don't think is going to be any different. I think you can expect, you know, somewhere high, single digit, low double digit growth in Q4 over Q3 this year.

All right, that's great. Thanks for answering my questions. Thank you.

You got it. Thanks, Alex. Thanks, Alex.

Thank you. And our next question comes from the line of Romel Denisio with Aegis Capital. Please proceed with your question.

Thank you very much. I know shot show is still about a month away, but I wonder if I mentioned you've already had some conversations with retailers and distributors. I wonder if you could just give us a little heads up in terms of the feedback you're receiving with regards to, you know, recent trajectory for new products, outlook for calendar 2026 in the industry overall. Thank you.

Yeah, great. Thanks, Rommel. Yeah, I mean the conversations we've been. Having with our, with our, you know, whether it's distributors, retailers or, you know, all of our channel partners have been very positive around Smith and Wesson, I mean, and really kind of underscores the comments we made in the prepared remarks about the market share gains, you know, so, you know, the portfolio is performing extremely well. The strength of the brand is really starting to show through. So I think they're very pleased. Their inventory is in a really great spot. As we kind of covered earlier, you know, we always say we try and target about eight weeks of supply and we're right there right at eight weeks right now. So, you know, their inventory is very clean across the line, you know, and performing efficiently for them. So, you know, they're very pleased with the Smith and Wesson brand as far as shot show and you know, what we got coming up there encourage you to keep your eye out. Obviously, as you know, we don't give any forward guidance into the new products, but. All I'll say is we expect for the back half of this year, absolutely. To continue that momentum on new products. They continue to do really well for us in a competitive environment. That's really what drives the needle for us and really, frankly, any consumer good company. So we're going to keep the foot on the gas there.

Great. Look forward to hearing about it. Thank you.

Thanks, Rahmo. Thanks, Romel.

Thank you. And with that, there are no further questions at this time. I'd like to pass it back to Mark Smith for any closing remarks.

All right. Thank you, operator. And thank you, everybody, for joining us today and your interest in Smith and Wesson. And we look forward to speaking with everybody again next quarter.

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time. And have a wonderful day.