Participants

Kevin Maxwell; Senior Vice President, Chief Compliance Officer, General Counsel, Secretary; Smith & Wesson Brands Inc

Mark Smith; President, Chief Executive Officer, Director; Smith & Wesson Brands Inc

Deana McPherson; Chief Financial Officer, Executive Vice President, Treasurer, Assistant Secretary; Smith & Wesson Brands Inc

Mark Eric Smith; Analyst; Lake Street Capital Markets

Steven Dyer; Analyst; Craig Hallum

Rommel Dionisio; Analyst; Aegis Capital

Presentation

Operator

Good day, everyone, and welcome to the Smith & Wesson Brands, Inc. third-quarter fiscal 2025 financial results conference call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson General Counsel, who will give us some information about today's call. Please go ahead.

Kevin Maxwell

Thank you and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipates, 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 proceeds from sale of land, relocation expense, and other costs. 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 to adjusted EBITDA.
Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we were referring to adjusted NICS in 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 of 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 McPherson, our CFO. With that, I will turn the call over to Mark.

Mark Smith

Thank you, Kevin, and thanks, everyone, for joining us today. Our top-line revenue for the third quarter came in slightly below our target range. However, lower operating expenses and leveraging of our flexible manufacturing model, which is designed to ensure solid profitability regardless of demand conditions, allowed us to deliver on EPS and EBITDA expectations.
Our new products continued to perform very well. And we believe we gained share in those categories with products introduced within the past year, accounting for over 41% of our sales in the quarter. Innovation continues to be a core focus, with several exciting new products expected to be introduced during the final quarter of FY25 and throughout next year. And we expect to continue this strong momentum going forward.
Looking at market share for the third quarter, adjusted NICS was down 4.5% as two months of year-over-year declines were followed by a small increase in January, while our shipments into the channel declined by 7.7% in the period. Breaking those numbers down, we believe we gained share in handguns, with overall handgun NICS down 4.1% in Q3, while our shipments into the sporting goods channel were only down 3%, driven by strong demand for the new Bodyguard 2.0.
In long guns, NICS was down 3.9% in Q3, while our shipments declined to 26.7% due largely to outperformance in the prior-year period of newly introduced products, specifically our FPC rifles. Additionally, the overall market for long guns in recent months has been driven by the seasonal hunting category, which currently only accounts for a small portion of our overall sales.
While the introduction of our lever-action rifle has been extremely positive and is helping with this dynamic, our product offerings in the category are still narrow, and we expect this momentum to grow as we build out the line. It is also important to note that on a two-year basis, our Q3 long gun unit sales grew at a compounded average annual rate of nearly 20%, well ahead of NICS. In our view, this provides a much better illustration of the momentum we have achieved and highlights the true long-term market share successes of our innovation strategy.
Average selling prices, as expected, trended lower in Q3 with overall ASPs moderating to a 3.1% decline versus the prior-year period. NICS was the primary factor in driving our overall ASPs. In handguns, our ASPs declined 7.8%, again, reflecting strong demand for the new Bodyguard 2.0, which is priced at retail at around $400, combined with lower revolver sales. In long guns, our ASPs increased 17.2% in Q3, driven by strong demand for our higher priced lever-action rifles.
Turning now to the overall firearms environment. Macroeconomic conditions continue to bifurcate the market with pressure on consumers' discretionary spend narrowing demand and heavily skewing to new products or lower price points. Our new product pipeline positions us very well in these conditions, with the success of our Bodyguard 2.0 is a great example, a unique innovative product at a compelling price point.
And as I mentioned earlier, we expect that our slate of introduction schedule over the coming months will continue this momentum. Additionally and also as mentioned earlier, our flexible manufacturing model allows us to participate in targeted promotions for our core products with two very successful promotions conducted during the holiday season on tactical rifles and revolvers and a current promotion active on our core line of pistols.
Our balance sheet remains strong, and we continue to be disciplined in managing our business and allocating capital to drive value for stockholders. Internal inventory levels are slightly elevated due to lower than anticipated Q3 sales, combined with normal seasonality as we prepared for the typically busy fourth quarter.
Through our robust monthly sales and operations planning process, which aligns production levels to sales forecasts, we expect to continue adjusting manufacturing to drive lower internal inventories throughout Q4. Channel inventory at distributors is very clean, currently at under nine weeks.
Given these factors, we expect strong cash flows during Q4. And consistent with our capital allocation strategy, we expect to continue paying down our line of debt, pay our quarterly dividend of $0.13 per share which Deana will cover in more detail in a moment, and continue to reinvest in innovation and manufacturing efficiencies.
I'll also note that during the third quarter, we repurchased another 220,000 shares of our stock. With these purchases, through the first nine months of fiscal 2025, we lowered our share count by more than 1.5 million shares net of dilution. And during the past 12 months, we have returned more than $49 million of capital to our stockholders through our stock repurchase program and strong dividend.
Looking further forward, we anticipate that the firearms market will remain steady at current demand levels. And with our industry-leading innovation pipeline, continued disciplined cost control, state-of-the-art facilities, flexible manufacturing model, strong balance sheet and our capital allocation model of returning value to stockholders, we believe we are well-positioned for continued success.
Before I hand the call over and as always, I just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication and putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Deana to cover the financials.

Deana McPherson

Thanks, Mark. Net sales for our third quarter of $115.9 million or $21.6 million or 15.7% below the prior year comparable quarter. As we noted on last quarter's call, we expected post-election consumer demand to be relatively soft for our third quarter, given the election results and the impact of persistent inflation.
Following new products continued to perform very well, we are seeing lower demand for our core product portfolio, which has negatively impacting our top line and margins. During the quarter, inventory and the distribution channel dropped by over 15,000 units while holding steady in terms of weeks outstanding.
Handgun ASPs declined for the second consecutive quarter, reflecting the impact of lower priced products and promotions. ASPs for long gun increase due to the NICS of higher priced products, including the introduction of additional lever-action calibers.
Gross margin of 24.1% was 4.6% below the comparable quarter last year due to unfavorable fixed cost absorption from lower production volumes and higher promotional costs, partially offset by lower labor costs. Operating expenses of $23.8 million for our third quarter were $4.3 million lower than the prior year comparable quarter, due primarily to a $2.3 million gain on the sale of property in Missouri. Excluding this onetime sale, operating expenses were $2.1 million lower than the prior year quarter due to lower costs associated with relocation and lower profit related compensation expenses, which were slightly offset by higher R&D costs associated with new product development and selling and marketing costs associated with promotional activities.
We ended the quarter with net income of $1.7 million or $0.04 per share. Our non-GAAP basis income per share was $0.02. Cash used in operations for the third quarter was $9.8 million compared to $25.4 million of cash highlighted in the prior year comparable quarter due to a larger increase in net working capital in the current quarter, combined with lower net income.
We spent $6.3 million on capital projects for the third quarter compared with $18.2 million in the prior year comparable quarter, primarily due to lower investment in the current year related to relocation. We expect our capital spending for the year to be between $20 million and $25 million.
During the quarter, we repurchased approximately 220,000 shares at an average price of $12.94 for a total of $2.8 million. We paid $5.7 million in dividends and ended the quarter with $26.7 million in cash and $110 million in borrowings on our line of credit. Subsequent to quarter end, we repaid $10 million from the line of credit and expect to repay additional amounts during the remainder of the fourth quarter. Finally, our Board has authorized a $0.13 quarterly dividend to be paid to stockholders of record on March 20, the payment to be made on April 3.
Looking forward, we continue to expect full-year revenue to be down 5% to 10% from fiscal 2024, which is consistent with what we said last quarter. However, based on the softer demand trends we've seen across the industry in recent months, we now anticipate revenue at the lower end of this range closer to a 10% decline.
Our fourth quarter down from the prior quarter in the 2% to 5% range. With lower production levels during Q4, given our desire to reduce inventory, we expect manufacturing absorption to be a factor resulting in lower margins than we historically have seen in our busiest quarter. As a result, fourth quarter margins will likely be 7 percentage points lower than our prior year fourth quarter, leaving a full year margins and a few percentage points lower as well. Channel inventory is expected to remain stable, and we believe the distribution channel remains cautious and will continue to manage their inventory carefully.
We expect operating expenses for our fourth quarter to be in line with the prior year comparable quarter, with investments in research and development promotions and marketing programs offsetting lower profit related compensation costs. Our effective tax rate is expected to be approximately 28%.
Turning to the balance sheet. We expect to reduce inventory slightly during our fourth quarter while generating enough profit to repay additional amounts on our line of credit over and above the $10 million that will be repaid in February. We believe that our ending liquidity well under 2 times, which puts us in a good position to continue to invest in our business. Other reminder, our capital allocation plan continues to be investing in our business, remain debt-free, and return cash to our stockholders.
With that, operator, can we please open the call for questions from our analysts.

Question and Answer Session

Operator

(Operator Instructions) Mark Smith, Lake Street Capital Markets.

Mark Eric Smith

Hi, guys. I apologize. I missed a little bit of call, but I wanted to just check on a few things. First, new product sales looked really good, but as we look at sales of kind of non-new products or legacy products, if you will, can you just walk through -- do you feel like it’s consumer weakness that’s kind of hurting there? Or is there competitive pressures? Walk us through kind of what you’re seeing there.

Mark Smith

Hey, Mark. Yes, sure. I think a large part of that is, frankly, the outperformance a little bit in the near term of some of those new products. I think that Bodyguard 2.0, specifically on the pistol side is probably cannibalizing a little bit of our own line.
So I think overall, as we covered in the remarks, the pistol category, we're gaining share there. But you’re probably seeing a little bit outsized obviously impact from the Bodyguard versus the core line, and there’s probably a little bit of internal cannibalization as well as obviously cannibalizing the competitive products.
So I think -- and that said, as we cover, and I think you can see from the NICS results in February and the inflation continues to pressure that consumer discretionary spend. And so it is a pretty competitive market out there. So I mean, the new products whereas it kind of used to be just gravy on the top, now it’s maybe a little bit of cannibalization of our own, and obviously, cannibalization of the competitors as well. So I think that’s really what you’re seeing.

Mark Eric Smith

Okay. And you talk about competitive environment. Maybe just talk, if you will, about kind of the industry as you look at distributors, as you look at everybody kind of through the channel, how you feel like everybody’s behaving and kind of the health of the industry today?

Mark Smith

Yes. I think on that front, Mark, it’s pretty good. I mean, I think the distributors, our distributor of inventory is right about 8.5 weeks right now. So we’re very comfortable. It’s right on target. Everybody’s doing a good job of making sure they hold the whole line but not getting out over their skis, and I think the dealers are in the same boat.
So I think as that market moves, we’re seeing that right away. We’re not having that kind of that hangover effect of excess inventory in the channel. So I think we’re pretty comfortable that the market is going to remain steady at where it’s at right now. There’s -- we don’t see any major demand catalysts coming up here.
Obviously, some can be unforeseen, but the biggest thing for us right now again is just that if we can see that economy start to turn around, that discretionary spend availability start to go up, which we’re optimistic on over the long term, then that’s going to be a nice tailwind for us. And we’ll see -- we should see that demand increase translate to demand on Smith & Wesson pretty quick because, again, the channel inventory is really good right now.

Mark Eric Smith

Okay. And the last one for me, just topic of the day and the last few days certainly seems to be tariffs. Can you talk about any exposure that you guys see? And obviously, it’s an evolving situation, but we would love to hear your thoughts on tariffs on any exposure there.
And then also just regulatory environment, any changes that you’re seeing whether in states or at the federal level? And if you wanted to comment at all any thoughts around the Supreme Court case that was just heard the other day.

Mark Smith

Sure. I’ll start off with tariffs. So I think you’re well aware that we’re an American made product. A lot of our supply chain is domestic. And so we do have some supply that comes in from overseas and from foreign countries that would be impacted by the tariffs. All of that has been kind of dialed into our numbers into the guidance and the direction that Deana gave. So it’s not in any way, shape, or form going to be a material impact to our numbers for the rest of this year and next year, Mark.
So on the regulatory environment, we’re pleased to see some good movement there from the current administration on really more stability on what the regulatory environment is going to look like going forward, which is really, obviously, as any business is what we need, is we just need stability. We operate obviously. We’re proud to operate within the bounds of the regulations and laws that govern our industry. We just need stability, and we’re happy to see that that looks like at least for the -- in the foreseeable future here that we’re going to get that. So we're pleased.
And then on Supreme Court case, I think we really don’t discuss ongoing litigation. I’ll just suffice it to say, I know we got a lot of news coverage. We were happy to have our day in court, and we’re really looking forward to the decision that should be coming out in early summer.

Mark Eric Smith

Excellent. Thank you, guys.

Operator

Steve Dyer, Craig-Hallum.

Steven Dyer

Hi guys. This is Matthew Rob on for Steve. Just starting on ASPs, nice performance there on the long guns. Sounds like it was the 1854 mix, which is good to see. How do you think about the Q4 ASPs? It sounds like handguns are maybe flattish. And any outlook for the long gun category?

Mark Smith

Yes. I think on the handgun side, I think I covered a little bit of that in the prepared remarks. But I think you’re going to kind of see more of the same in Q4 as you saw in Q3. Our mix right now on the long gun side that the proportionate amount of lever actions that we’re selling versus the core that the MP15 and the shotgun line should really kind of remain the same throughout Q4. And then on the handgun side, again, we have a couple of new products coming out, but it shouldn’t materially change that number.

Steven Dyer

Okay, got it. And then if you’re willing to comment, not looking for sort of specific guidance, but can you frame kind of 2026 for us? What are you looking to accomplish within the company? Is it new product intros? Are you focused on market share, taking margins? Any color there would be great.

Mark Smith

Sure. Yes. I mean, I think as we look forward into 2026, we’re still early days. We still got this year to close out. But obviously, we’re starting to look out into the next 12, 18 months. I think as I talked about earlier, we expect the market to remain steady.
And remember, this is the environment. I think if you look at NICS chart, it’s kind of put a stacked, 20-year chart. And you’re going to see that the NICS results that you’re seeing right now are kind of trending with right along with where they historically have been if you kind of go back 15, 20 years and look at 2019, 2020 even. So for us, that’s -- we talk a lot about our flexible manufacturing model, but that’s exactly what the flexible manufacturing model is designed to do, is to react to those upswings but also be remain very profitable when the market returns to normal as it has.
So for us, how do we continue to grow? I mean, I think we’re expecting obviously always planning for growth. I think this year that growth is going to be fairly modest, lacking any demand, major demand catalyst. And then how do you do that? Well, that’s new product, right? I mean I think we’ve proven multiple, multiple awards for innovation. I think we’re kind of view it as a front runner there in the innovation category within the firearms industry. We’re going to continue that and not just on our core line, but also how do we expand into other white spaces within the firearms market.

Steven Dyer

Okay. That’s great. Thanks, guys.

Deana McPherson

Thank you, Matt.

Operator

Rommel Dionisio, Aegis Capital Corp.

Rommel Dionisio

Good afternoon. Could we just talk about the handgun category for a second? For years now, there’s been a shift right to a smaller frame concealed carry. And we’ve heard that there’s been a little more of acceleration here in the last few quarters. Would you say that that's the consumer trading down to a lower price point is helping to accelerate that? Or would you say that's just more continued move to kind of a smaller frame concealed carry, that category? Obviously, you're well represented there with products like the Bodyguard 2.0. I wonder if you could just chat about that.

Mark Smith

Sure. I think it’s a little bit of both. You’re right that there has been a big trend towards concealed carry, those concealed carry firearms. And then obviously, that's been -- the success of the Bodyguard, as I talked about, was a little bit of a combination of the fact that it was a great concealed carry product, but it's also at an entry-level price point for a premier brand like Smith & Wesson. So it kind of hits both of those. And I think really, that's the sweet spot that we -- that's driving the success of that product.
So directionally, for the handgun market, I think as I talked about, it's kind of bifurcating a little bit. We've got that definitely that entry level. But even within every one of those categories, it's kind of going towards the lower end, the entry-level price point products. And then there's also -- we're also seeing some success with things like our metal M&Ps, which are at the higher end, but it's something unique and something different. You've got to give that consumer a reason to get excited about the product, about the brand, right?
So that innovation is still successful on the high end. It's just -- you've got to have something compelling for them to -- for that consumer to get excited about. So it really kind of is bifurcating to the entry level into new product. And we can get up on the higher up on the ASP chain, we just got to have something that's exciting. And we've obviously found some success there with the metal M&P, and we're going to continue to look for things like that.

Rommel Dionisio

Okay. And maybe my follow-up question on switching to the long gun side. Mark, I think you talked about, in your prepared comments, potential future product launches in that kind of traditional hunting category. Could you just remind us again what the potential margin impact of that would be if you have a shift in long guns, perhaps slightly away from MSRs to those more traditional categories? Thanks.

Mark Smith

Sure. Yes. I mean the 1854 has been very successful. And as I said in the remarks, we definitely expect and plan to continue to build that line out for -- across the entire category, multiple calibers that we're not into yet, some of the most popular ones were -- are still in the works. So as far as margin, we don't really give too much color and guidance on margin by product line, Rommel. But what I can tell you is that the margins of the 1854 is not materially different from our core line of rifles.

Rommel Dionisio

Okay. Thanks very much. That’s very helpful.

Operator

Ladies and gentlemen, there are no further questions at this time. I'll hand the call back to Mark Smith for closing remarks.

Mark Smith

Thank you, operator, and thank you, everybody, for your -- joining us today and your interest in Smith & Wesson. We look forward to speaking with you all again next quarter.

Operator

This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.