American Outdoor Brands ($AOUT)

Rating: Buy

Prepared by Robert Ota (April 21, 2021)

Investment Thesis:

American Outdoor Brands ($AOUT) is currently undervalued compared to their growth rates. Their favourable financial stack and positive industry outlook supports the value via growth thesis.

Simple Valuation:

14,018,879 shares outstanding, cash $45,510,000= cash/share $3.24. Current price of $AOUT is $25.91. ($25.91–3.24= $22.67). The company is currently 10–14 PE based on EPS $2.28-$1.66. Revenue grew 90% when comparing 2020 Q1 results to 2021 Q1 results.

“When revenues are growing at a faster rate than the PE, it’s always a good sign” — Peter Lynch (Rough Quote)

Quick Background on Company:

AOUT spun-off from Smith and Wesson ($SWBI) in August 2020. SWBI still wholly owns AOUT, showing that the insiders… A) Want they brand to succeed and B) Believe they can create more value developing AOUT than selling the individual brands. At the spin-off, SWBI capitalized AOUT with $25 Million. So, within three quarters, the company was able to increase their cash by $20 Million, to $45.5 Million from its operations. “Cash generated by operating activities was $17.0 million for the nine months ended January 31, 2021”- 10Q

Company Growth Strategy:

Dock and Lock Strategy:

The company has over 20 consumer brands categorized within 4 brand verticals consisting of ‘Adventurer’, ‘Harvester’, ‘Marksman’ and ‘Defender’. The company plans on bringing these brands from “Niche-to-Known,” by widening product lines within brands and to capture more of the consumers wallet.

Case Studies:

BUBBA KNIVES ⇒ BUBBA :

The most obvious success of the “Dock and Lock” strategy is BUBBA KNIVES. BUBBA KNIVE’S original product is a red fisherman’s fillet knife (a knife I actually bought for my Dad one Christmas).

After acquiring the company in 2017 for 12 Million, AOUT rebranded BUBBA KNIVES to brand BUBBA, and sold more products relating to the companies fishing tackle niche (fisherman gafs and nets, apparel, tackle management and fillet sets).

The revenue from this brand line by 100% in 2020.

BOG-POD ⇒ BOG
The re-branding and expansion of brand product lines seen above, is also a huge success with BOG. The original company BOG-POD had a specific well known product- hunting camera pods (tripods, bipods, monopods).

After AOUT acquired and rebranded the company they developed more product lines across the niche. The new product lines consist of (cameras, hunting blinds and camera-pod connection accessories).

BOG’s sales increased 200% in FY20.

So far the “Niche-to-Known” business development strategy has proven extremely successful in capturing a higher % of their target markets wallet. Continued growth in these product lines as well as success bringing their other brands from “Niche-to-Known” will create an extremely valuable company. “New products, defined as any new SKU not shipped in the comparable quarter last year, represented 12.8% of net sales for the three months ended January 31, 2021.” — 10Q FY 21

Industry Macro Trends:

The amount of “outdoor goers” increased dramatically in 2020 driven by COVID-19. Below are some industry trends.

• 46% of campers started camping for the first time or started to camp again after a long time.
• 8M new firearm holders entered the market, 40% of which are first time owners
• 3M more fishing licenses were sold in 2020 than the year before~ a 14% increase

Financial Results for Q3 2021

• Quarterly sales increased 90.7% y/y. Quarterly E-commerce channels increased 129% y/y and brick and mortar quarterly channels increased 70% y/y. Next quarter, E-commerce will likely continue to make its way to a higher % of total revenue or even make up the lionshare. This is good. It means that the company will become less reliant on debt-ridden brick and mortar shops as brands and product lines become stronger.

Clear improvements in profitability post spinoff

• Post spinoff the company became evidently more profitable. Gross Margin improved +110 Bps net, but on the 10Q it says:

“Gross margins increased by 810 basis points primarily because of favorable product mix and lower promotional expenses driven by increased product demand. These increases were partially offset by 590 basis points as a result of higher tariff costs, our sales of slower moving inventory to certain strategic retailers at a discount that generated lower gross margins, and increased labor and overhead.” Meaning the company’s new products carry a higher GM, but there is a large threat of inventory build. AOUT says that the company is intentionally building inventory for an expected boom in sales- this could be good if they are right, but, if they are wrong this will eat away at gross margin by selling off products at extremely low margins with the worst case scenario being an asset write down.

Operating income increased from -7.94% to 22.45% or 30.39% (showing that the business is scalable).

Financial Stack:

Cash:

As of the most recent 10Q, the company has $45.5M in cash. SWBI bolstered the company with $25M upon the spinoff in August and since then the company was able to produce an additional $20M.

Debt:

The company doesn’t have any debt outstanding. AOUT has a line of credit for $50M which, if the debt is utilized will carry an interest rate of 1.95%.

Dividends:

None.

Industry Comparison:

Leading ROIC, EBITDA Margin, Net Income Margin and Strong Free Cash Flow

• What’s important to notice here is the ROIC % as well as the growth rates in sales. Because AOUT is able to post a strong ROIC, they are well poised to be chasing growth. Their efficient business model creates the highest EBITDA Margin (15.47% almost double that of peers), when compared to brick and mortar counterparts such as Dicks and Academy of Sports + Outdoors. Overall, the company has the best growth lines, the highest ROIC and is valued at the lowest EBITDA multiple.