Good day, everyone, and welcome to Smith and Wesson Brands Inc. 1st Quarter Fiscal 2022 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Chris Scott, Acting General Counsel, who will give us some information about today's call.
Thank you and good afternoon. Our comments today may contain predictions, estimates and other forward looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward looking statements. Forward looking statements also include statements regarding our product development, Focus, objectives, strategies, market share demand and consumer preference for our products as well as inventory conditions related to our products, growth opportunities and trends and conditions in our industry in general. Our forward looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties that could cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by our statements today.
These risks and uncertainties are described in detail in our securities filings, including our reports on Forms 8 ks, 10 ks and 10 Q, which you can find on our website at smith wesson.com, along with a replay of today's call. Our actual results, levels of activity, performance and achievements could differ materially from those expressed or implied by our statements today, and we expressly disclaim any obligation to update any forward looking statements. I have a few important items to note about our comments on the call today. First, we reference certain non GAAP financial results on this call. Our non GAAP financial results exclude acquisition related amortization, one time transition costs, COVID-nineteen expenses, spin related stock compensation and the tax effect related to each of these exclusions.
Reconciliations of GAAP Financial measures to non GAAP financial measures, whether or not they are discussed on today's call, can be found in our securities filings and also in today's earnings press release. Our securities filings and today's earnings press release can be found on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Finally, when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on the FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than the purchase of a firearm.
Please remember that adjusted NICS background checks are generally considered to be 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, Nick's 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. Before I hand the call over to our speakers today, I want to remind everyone that unless otherwise indicated, any reference to income statement items during this call refers to results from continuing operations. Joining us on today's call are Mark Smith, President and Chief Executive Officer and Dena McPherson, Chief Financial Officer. With that, I will turn the call over to Mark.
Thank you, Chris, and thanks everyone for joining us. First, as always, I would like to thank the entire Smith and Wesson team for a tremendous start to FY 2022. Continuing on the momentum from the record breaking FY 2021, The results for the 1st 3 months of the New Year were the highest ever for our Q1, both in terms of revenue and profitability and marks the 5th straight record breaking quarter. Even with the difficult comps versus the very strong results from last year, Increased manufacturing capacity due to our flexible model combined with increased market share and consumer preference for our products drove nearly a 20% increase in sales year over year. This is a great accomplishment, But more impressive is when we take a step back.
The 2 year compounded growth rate for the company at the end of our Q1 was nearly 170% and really puts into perspective the market share gains that the team has been able to achieve over the last 18 months. But simply out producing the competition during the surge periods that we experienced in our industry will only lead to short term share gains. In order to hold those gains long term, we need to ensure that during these times, we are working just as hard, if not harder, In sales and marketing, developing marketing plans and programs to connect with the consumer, launching new products, strengthening channel partnerships, etcetera, so that we are ready and waiting when the supply inevitably catches up with the demand. We have heard time and again from our customers that we have earned the title of We are a clear market leader throughout the past year and a half by outperforming the industry in delivery of our product, and we intend to hold that leadership position into the future regardless of market conditions. We continue to make significant investments in connecting with our consumers in new and unique ways for our industry, Ultimately, our brand always resonates with our loyal consumer and remains the number one firearm brand in the industry going forward.
Here are just a few of the recent highlights. We've begun shipping interactive kiosks to major retail locations across the country. These state of the art touchscreen displays are a very unique and effective point of sale tool to connect with that consumer who is ready to make a purchase at a retail store. They prominently carry Smith and Wesson branding and by using disabled inert product Allows the user to safely physically handle and interact with Smith and Wesson firearms without having to request assistance from a retail associate. As well as video content designed to inform and entertain.
Not only do these kiosks highlight the Smith and Wesson brand, They provide a very approachable and safe way for the first time or newer consumer to learn about and handle firearms. We launched the next phase of our GunSmarts program that we've highlighted on previous calls. The new content follows the natural evolution of the firearms Ownership and proficiency journey by starting to include advanced concepts in the training videos. In addition to helping the new consumer gain confidence and skills, These new instructional videos are now broadening the reach of the program to include seasoned members of the firearms community, while still keeping the millions of new firearm consumers engaged Our GunSmart's videos have been viewed nearly 4,000,000 times and are widely hailed amongst our consumers and our industry partners as the gold standard for training and outreach to new consumers. In August, we launched a full scale coordinated national advertising campaign across all media and advertising platforms from billboards to radio to television and digital with a goal to reach over 180,000,000 impressions with empowering messaging that will resonate with existing and potential firearms owners from all walks of life.
And finally, the highly successful launch of the M and P-twelve shotgun has opened up an entirely new category for the iconic Smith and Wesson brand, and we couldn't be more excited about the potential that this brings. This entry into the shotgun market generated nearly 3,000,000 impressions and 300,000 engagements on social media and email in the first 24 hours, making this one of our most talked about product launches ever. Within 48 hours of introduction, we had received orders reflecting 43% of our 1st year forecast. The success of the launch and the buzz generated by Smith and Wesson reentering the shotgun market after more than a decade reaffirms our brand's loyal following and our ability to continuously wow our consumers and the marketplace. With an extremely healthy new product pipeline, Stay tuned for a steady cadence of exciting new products over the next 12 months.
So of course, the tangible results from all this hard work is measured by our ability to continue outperforming the competition when the inventory becomes available at the retail level. And as the country started opening up at the beginning of the summer, although the demand for firearms remained very strong, we did start See a return to normal summer seasonality during our Q1, which allowed our channel partners to be able to begin stocking some inventory again for the first time in over a year. As a result, many of the consumers who had been limited to only the products in stock now have the ability to choose from a wider selection of Products and brands and new consumers that entered the firearms community over the past year started to come back for subsequent purchases. And Smith and Wesson continued to be the brand of choice. Comparison of our unit sales in the quarter versus the Knicks results in the same timeframe show that even after adjusting for the estimated channel inventory build, we held our market share gains in handguns, matching the NICS number for the period nearly exactly.
And we actually continue to gain market share in long guns, outperforming NICS in this category in spite of not participating in hunting with Thompson Center Arms during the period. Now before I hand the call over to Dino to cover financials, I wanted to highlight one last thing from our financial statements. Our team has delivered nearly 170 percent 2 year compounded growth, record revenues 5 straight quarters in a row, sustained market share growth, Several major product launches, including entrance into a brand new category, executed marketing campaigns, gun smarts, Rebranding initiatives, consumer research studies, etcetera, all while not just holding operating costs flat, but actually reducing them and not just in relative terms, in dollars spent. The restructuring of the business over the past year since the spin transaction Our subsequent commitment to driving efficiency in all of our business functions and processes has created a nimble, efficient and effective organization, which is flexible and profitable in any market condition. The results speak for themselves in our impressive operating and EBITDAS margins and combined with our capital allocation strategy of returning value to the shareholders positions us very well long term for consistent delivery of healthy returns.
With that, I'll turn the call over to Dina to cover financial results before we take questions.
Thanks, Mark. Revenue for our Q1 was $274,600,000 a $44,700,000 or 19.5% increase over the prior year Q1. This increase is exceptional considering that it is on top of last year's enormous increase and results in a 2 year compounded increase of nearly 170%. The increase in sales over the prior year was possible Due to an increase in capacity that was implemented in our Q2 last year and all the more remarkable given that the Q1 of last year had inventory on hand at the beginning of the year, while inventory at the beginning of this year was very low. As Mark noted, when summer started, demand began to seasonally soften as people began to get outside to enjoy summer sports and recreation for the first time in over a year.
Reports from our channel checks indicate that consumer foot traffic remains elevated above 2019 levels, but is lower than it was during 2020 at this When the pandemic was still fairly new and fear for personal safety was at a very high level. Because of our ability to deliver, Some of our very high volume products are now more available within the channel than they have been in 18 months. Gross margin in the Q1 of 47.3 percent was 7 10 basis points above the 40.2% realized in the prior year comparable quarter. This increase in margin was due to increased production and the impact of 2 price increases since the prior year Q1, 1 in November and 1 on June 14. Margins were slightly negatively impacted by increased volume related spending, some inflation impacts, Increased depreciation on machinery purchases and compensation related costs associated with increased headcount.
However, it is important to note The production output in the Q1 this year was 42.6% higher than in the prior year Q1, while fixed production costs were only 8.1% higher demonstrating our ability to control costs while flexibly growing manufacturing output. Operating expenses of $30,100,000 for our Q1 were $3,600,000 lower than the prior year comparable quarter due entirely to spin related costs in the prior year quarter. Excluding those costs, operating expenses were flat to the prior year in spite of increased volume related shipping costs and customer allowances due to the synergy savings realized from the spin, primarily in compensation related areas, again demonstrating our ability to control costs. The increase in revenue and gross margin combined with a strong expense containment led to net income of $76,900,000 a $33,600,000 increase over the prior year. This increased profitability, combined with an over $7,200,000 reduction in share count, resulted in an earnings per share of $1.57 compared with $0.77 in the prior year.
Finally, adjusted EBITDAS of $109,600,000 was $37,000,000 higher than the prior year and a record 39.9 percent of revenue. During the Q1, we generated $109,100,000 of cash from operations and spent $5,800,000 on capital equipment, resulting in over $100,000,000 in free cash in the quarter. We spent $40,000,000 to repurchase approximately 2,000,000 shares of our common stock and paid $3,800,000 in dividends, resulting in the company ending the quarter with over $170,000,000 of cash and no bank debt. As we announced on our call last June, our Board of Directors authorized an additional $50,000,000 share repurchase program for which we have not yet repurchased any shares. Because of the timing of our spin off of the outdoor products business last August and the Safe Harbor rules regarding tax free spins, This authorization represents the final value that we're able to execute until August 2022.
So we are biding our time and intending to be opportunistic for this program. Consistent with our dividend strategy, our Board has authorized a payment of our $0.08 per share quarterly dividend to shareholders of record on September 14 with payment to be made on September 28. Looking forward into our Q2 of fiscal 2022, for the past 4 quarters, we have shipped every firearm we can produce. We are now at a point where we're able to begin to rebuild inventory in the channel and replenish our own inventory so that our customers can order and receive product ahead of the consumer coming in their door. Our distributor inventory as of today is approximately 8 weeks of supply, which is our target level And this return to a more normalized level has been expected.
However, our internal inventory levels are still well below our target. And so we expect that our internal inventory levels will continue to be replenished throughout our Q2. Remember, Inventory in the channel and in our warehouse is a good thing. We expect there will continue to be periods where demand outstrips our ability to produce And having inventory on hand helps us continue delivering to our customers while we work with our supply chain to adjust capacity. This is part of our flexible manufacturing strategy, which works well in times of increasing demand and works equally well when demand decreases as we are able to reduce our capacity without reducing our ability to absorb overhead.
As always, Our production schedule is important in order to understand our cost and margin structure. Our Q1 had 58 operating days and our Q2 will have 59 operating days due to our 2 week shutdown that crosses over 2 quarters. We continue to monitor our supply chain for indications of stress related to our increase in demand or issues related to the pandemic. At this time, we've seen nothing to indicate a concern. But as always, supply chain risks are subject to change,
And our team
continues to develop contingencies to offset and avoid any interruptions. And finally, our effective tax rate is approximately 24%. With that, operator, can we please open the call to questions from our analysts?
Our first question comes from the line of Mark Smith of Lake Street Capital. Your line is open.
Hi, guys. First question, you addressed it a bit on the call, but just as As far as pure consumer demand and kind of foot traffic within retailer, what you guys are seeing today and You're seeing even some shift within that demand more towards hunting rifles or any shifts that you're seeing in consumer demand would be great.
Sure. Hey, Mark. Yes, the demand continues to be pretty strong. I think next results just came out today. And I mean, it's Obviously, we're lapping some pretty tough comps with the historic demand levels we saw at this time last year throughout the summer.
I think The difference between this year and last year is this year we saw our normal seasonality that we usually see in the summertime. But when you look at the stack chart of the Knicks results This year versus frankly the last 10 years, this is by far the 2nd biggest year ever on record versus All of those previous years except our obviously the last year. So the demand continues to be strong. In terms of what we're seeing recently, we're Anecdotally hearing that the fall is kicking off like it always does and traffic is picking up just even in the last few days weeks, even versus where it was in Beginning of August. So point there is, I think we're entering into our normal seasonal period.
And if you look at that stack chart of mix, usually the fall and The early winter is kind of the busiest periods that we get into in the firearms industry. I think the second part of your question was about the mix and Usually this time of year, we see a lot of the fall kind of kicks off with hunting as people start to kind of weather cools and they start to think about Getting out there and enjoying the outdoors and doing some hunting and that tends to kind of bring the rest of the firearms industry along with it this time of year. I think the difference this year is And I think you can see it if you look at the next detail from the results that just came out today, handguns is Definitely leading the way versus previous years. Okay.
And as we look at your new product mix, It looks solid during the quarter. As we look at kind of your launch calendar, should we expect more new product launches maybe over the next 12 months than we saw over the prior 12 months?
Yes. I think I kind of addressed it in the prepared comments, but yes, We have a very robust new product pipeline. And as I said, I think we talked during the surge in the last few quarters, we had kind of said, look, We're kind of building up a backlog, if you will, of new products because it doesn't make any sense for us to launch them now, just because we're sold out and everything we can make We're going to be strategic and smart about that. And you saw the shotgun launch here, that was we've been ready with that one for, Frankly, for a little while here, but it made sense for us to do that now as we had a little bit of capacity availability. And we've launched that out extremely successful and we have Plenty more, let's just say, waiting in the wings behind it.
Okay. And talking about the shotgun, just as we look at long guns, The business looked good for your numbers, especially on volume during the quarter and didn't include the shotgun launch. But How do you feel about how the shotgun launch has gone so far? And then your opportunity in long guns and this includes shotguns outside of that kind of A typical MSR platform.
Yes. We've talked about it on when we talked about divesting the Thompson Center Arms Brand that we were going to be coming back in with the into the shotgun and long gun, Martin, the more traditional, if you will, hunting Categories under the Smith and Wesson brand. And this is the first of that strategy. We're Immediately beginning to execute on that. I think the shotgun area is that shotgun market, that category is great for us.
I think it fits well with our brand. And I We're starting off with more of a self defense shotgun, but we very much intend to continue that Into that category on and we will as we said before, when we divested again the Thompson Center on the business, we will be getting back in on the bolt action side as well.
Okay. And last for me is just any updates on Thompson Center?
We're still going through the sale process.
Thank you. Our next question comes from Scott Stember of CL King. Your line is open. Good evening, guys.
Hey, Scott.
Yes. Yanna, you were talking about, it seems like you're back to your 8 weeks of threshold from a comfort level from an inventory standpoint. Are you saying that your customers are pretty much where they need to be as well? And then also Maybe just talk about the commentary about the internal inventory and how far below you are, Below what you really want it to be.
Yes. So, yes, the channel certainly started to rebound and fill up. There's still of areas where the customers are looking for more inventory. We're definitely still Sending out as many revolvers as we possibly can. So there are areas where we can do more.
But yes, they're in a, I think, a reasonably good place. And I think that's because We were able to ramp up our volume and get them the inventory that they wanted. With regard to our internal inventory, we Have over the many years had a lot more finished goods than we have right now. We'd like to have quite a bit more. So we'll take a little bit of time to be able to ramp back up to that certainly through the Q2 and probably further into the year to get us to where we want to be.
And that really does depend on how much the fall season starts to kick back in. Our ability to ramp will be based on how much more inventory goes out From our consumers. So, it will take us a little bit of time. And if you looked back in history, you'd see that we're very comfortable holding quite a bit of inventory. And what we have right now is still not a lot.
Scott, this is Mark. If you go back to 2018 or calendar 2018 calendar 2019 in the fall At the end of our Q2, I think you kind of take a look at our typical inventory levels, we're not going to be able to get there. The Current projections say that we're just not going to be able to rebuild those level of inventories, but we will be able to kind of start to put a little bit of inventory back into the So we're pretty we're still pretty tight, even as we sit here today.
Okay. And The promotional environment now that inventories across the channel are back to normal. I know you guys are doing some work with this GunSmart program, but Can you just talk about where it is now? Is it back to a more normalized environment or is it still very, very low, way below historical levels?
The promotional environment is definitely way below historical levels. There's no I mean, we're just at trade shows over the last few weeks And there is there are no promotions. Everybody is still selling. We do channel checks multiple times a week in different areas of the country. And I can tell you It's extremely rare to hear even a retailer who's offering anything but full MSRP.
So I mean, I think as we said earlier, think we went the difference between this year and last year is we went through a normal summer seasonality and I think everybody is very much Expecting and we are as well that we're going to be getting into a pretty as we go into our typically heavy or typically busy season, it's going to be a good busy season and there's no reason to be running promotions.
Got it. All right. That's all
I have right now. Thank you.
All right.
Thanks, Scott.
Thanks, Scott.
Thank you. Our next question comes from Kevan Brummer of Cowen. Your line is open.
Yes. Thanks so much. So Your G and A has been running under $18,000,000 for the Q3. How should I think Where that G and A is going to be in the next couple of quarters?
I think we've pushed pretty hard As we talked to you guys at the end of last quarter, that efficiency through driving efficiency into the business And everything we do in the back office and that restructuring we did right after the spin transaction, I think that will it Fluctuate a little bit here and there. Of course, it will, but I think that's in terms of order of magnitude, Cai, you can expect that that's going to continue going forward.
So basically, somewhere below near the current level, I mean, obviously, it could go up some, but it's not going to be it shouldn't jump Appreciably from where we are, is that essentially the way to think about it?
It is. Yes. I mean, I think it's pretty impressive what everybody's The projects and deliverables that everybody is going to achieve over the last year, dollars 1,100,000,000 last year. And with that G and A, there's no reason to increase it going forward.
And your gross margin was particularly Impressive. Maybe give us some color about how we should think about where that might be over the next couple
of quarters?
Yes, I think if you again going back to the model that we talked about on the analyst call the end of last quarter, look, we went through a normal summer seasonal demand period. But if you again, if you look at the next In StackChart, we're going to be this is the 2nd busiest year ever so far on record and no indication that it's not going to continue. So we're going to be at or above the top end of that model.
Okay. And then The shotgun, you mentioned that you had 43% of the expected orders right out of the box. How should we think about shipments? I mean, did you ship have you been shipping 43% In the 1st couple of weeks or how should we think about the shipping profile for the shotgun?
Yes, that's a great question, We're a little more successful with that project obviously than we thought we were going to be coming out of the gates. That was very, very well received by the marketplace. And so we're currently investigating increases in capacity there. That product, I mentioned earlier that we are strategic in the launch of that, because it is it does take a lot of capacity to produce that product. So we're investigating Increasing that production right now, our capacity on it is fairly limited at this point.
So we're seeing that.
And then Your June price hike, how big was that?
3%, Kai.
Okay, great. And last one, do you have any comment on the New Jersey legal challenge?
We don't really comment too much on ongoing legal matters, Cai. But I mean, suffice it to say, obviously, we didn't We fully respect that the Attorney General has the authority to investigate issues. Obviously, we didn't feel that, that subpoena was appropriate. And so we're going to respect the court's decision in that and move forward from there.
Great. Thank you very much.
All right. Thanks, guys.
At this time, I'd like to turn the call over to CEO, Mark Smith, for closing remarks. Sir?
All right. Thank you, and thanks, everyone, for joining us. Once again, I just want to say thanks to all my fellow Smith and Wesson team members For yet another record breaking quarter. And just as a reminder, remember that we will be holding our virtual annual stockholder meeting on September 27 at 12 noon Eastern Time. The details on the meeting, including the call information, is provided in our filings and the communication that was sent out to all of our stockholders.
With that, stay safe. Look forward to speaking with everybody next quarter.
This concludes today's conference call. Thank you for participating. You may now disconnect.