Smith & Wesson Brands, Inc. Common Stock 2027 Q1 Earnings Call

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, 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.

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 EBITDA is to adjusted EBITDA. When we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS 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 shipments or market share 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 Deana L. McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin. Thanks everyone for joining us today. As we expected, we are off to an excellent start to fiscal 2027 with strong first quarter performance. Continued solid demand for our products in both the consumer and professional channels in Q1 were a direct result of our purposeful focus on innovation, the strength of our industry partnerships, operational execution, and the power of the iconic Smith & Wesson brand. We delivered significant year-over-year increases in all key financial metrics, including 32% in growth in net sales, 86% growth in adjusted EBITDAS, and an increase in EPS to $0.06 from a loss of $0.08 last year. The firearm market continues to be solid, with overall NICS up 7.7% over our first quarter last year.

With our shipments up nearly 20% in the same time period, we once again outperformed, demonstrating that strong consumer preference for our leading product portfolio is driving sustained share growth and continued positive momentum into FY27. From a product line perspective, we gained share in both handguns and long guns in the quarter. Our handgun unit shipments into the sporting goods channel increased nearly 17%, while NICS was up only about 5%. Importantly, and continuing the trend from FY26, channel inventories were flat during the same period, indicating strong pull-through and meaningful share gains at the retail counter. This was driven by strong demand for our semi-auto pistols across the board, including our market-leading concealed carry products and new products within our full-size M&P lines.

Long guns also performed well in the quarter, with our unit shipments into the sporting goods channel increasing almost 22%, well ahead of the 10% increase in NICS. Within the long gun category, channel inventories of our products were actually down 5,000 units during the period. Again, indicating solid share gains at retail. Growth in long guns was led by the MSR category and weighted to May and June ahead of state-level regulatory changes. We also saw strong growth in our 1854 lever-action rifles, with shipments doubling compared to last year. A great indicator of our increasing foothold in the hunting segment of the long gun market, where we have historically had limited exposure.

The breadth of our growth in Q1 was a further testament to our ability to react to market shifts through our flexible manufacturing model, consumer preference for our brand and innovative product line, and the strength of our relationship with industry partners. We had success not only across all of our product lines, but also across our customer segments. Within the consumer channel, we saw strong double-digit gains in wholesale, big box, and buying groups. In addition, we drove high double-digit growth in law enforcement and international shipments, a strong indication of professional endorsement of the product lines and our full capabilities to service these brave men and women, not only with our firearms, but with our world-class Smith & Wesson Training Academy, which continues to be a competitive differentiator. Moving now to ASPs. We continued the trend of outperforming in unit shipments versus the broader market while simultaneously demonstrating resiliency in our pricing.

Sustained demand for our core products throughout the period limited our need for promotions in the quarter. Combined with new products accounting for 35% of our shipments, our ASPs continued to move higher even in the typically slower summer months. Handgun ASPs held steady sequentially versus Q4 and were up nearly 9% year-over-year. While long gun ASPs increased nearly 11% sequentially and over 18% year-over-year. Finally, a quick few notes on inventory. As I mentioned earlier, channel inventories were flat and combined with our strong results indicate we continue to see healthy pull-through of our products at the retail counter. At the end of Q1, our internal inventory was $181 million, down from $203 million a year ago and up from $156 million at the end of Q4.

The sequential growth reflects our normal seasonal build as we prepare for the busy fall and winter seasons, as well as restocking of long gun inventories following a strong Q4. Our disciplined sales and operations planning process, which aims to align production to forward demand across every product line, gives us confidence in our inventory position as we look to the balance of fiscal 2027. Looking forward, we believe we are well-positioned to continue gaining momentum as we move into the traditionally stronger second half of the year. Our award-winning product line is in high demand with both our loyal consumers and law enforcement and professional customers, as indicated by our shipments consistently outpacing the market and our growth in professional sales.

We are making significant investments in our operational infrastructure to support our growth and drive further efficiencies, and we are well underway with installation of this new equipment in our machining center in Springfield, Massachusetts. Our balance sheet remains strong, and we continue to deploy capital efficiently to drive long-term growth and stockholder value. With this momentum, we expect our second quarter to significantly outperform last year on both the top and bottom lines, which Deana will cover in a few minutes. In closing, this continues to be a story about brand strength paired with a purposeful long-term strategy. Our focus on innovation, marketing, strong partnerships and operational excellence, and importantly, our team's relentless focus on execution across every function is what drives our outperformance.

As always, I just want to note that none of this is possible without each and every member of our team across all functions working together towards making Smith & Wesson the number one firearms brand. I'm incredibly proud of all of them for their exceptional talent and dedication, always striving to exceed the expectations of our passionate and loyal customers. With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Net sales for our first quarter of $112.6 million were $27.5 million or 32.3% above the prior year on strong polymer pistol, MSR, and lever-action shipments. During the quarter, inventory at distributors declined by 6.8% from the end of the prior quarter and 3.5% compared with the end of July 2025 in terms of actual units, indicating continued strong sell-through of our products at retail. Handgun ASPs remained sequentially flat versus Q4, but higher than Q1 2026 due to lower promotional spend during the current quarter and continued strong demand for our products. Long gun ASPs increased sequentially and year-over-year due to a favorable mix. Gross margin of 28.7% was 2.8% above the prior year, primarily driven by $2.9 million of tariff refunds, which accounted for 260 basis points of increased margin during the quarter.

Increased absorption on higher production was almost entirely offset by higher volume-related spending, supplier cost increases, and increased labor costs, both from increased headcount and increased wage rates. Operating expenses of $28.1 million for our first quarter were $3 million higher than the prior year comparable quarter, with legal expenses, profit-related compensation costs, volume-related increases in selling expenses and freight, and higher advertising costs driving the increase. The higher revenue and associated margin combined with a decrease in interest expense due to lower net debt resulted in $2.6 million of net income or $0.06 of EPS, compared with a $3.4 million net loss or an $0.08 loss per share last year. Cash used in operations for the first quarter was $8.8 million compared with $8.1 million in the prior year due to higher net income being offset by a bigger increase in inventory and the payment of profit-related compensation.