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Vista Outdoors, Inc. (NYSE:VSTO) is trading 54.56% below its 52-week high of $52.69. It came out of second-quarter 2023 earnings with earnings per share of $1.71, beating estimates by $0.01 but down 29% (year over year). The company generated revenue of $781.68 million, up 0.41% (YoY). It expects annual sales to increase by over 50% in fiscal 2023 compared to pandemic-stricken fiscal 2020. Growth will be driven by brand portfolio expansion and new product innovations that will drive organic growth.
thesis
VSTO intends to spin off its outdoor product line from its athletic division to form two separate companies that will improve resource allocation and drive overall growth. The company has decided to put its mergers and acquisitions on hold and focus on paying down debt. Over the long term, it aims to focus capital on solid investments that have solid returns for shareholders.
VSTO’s total revenue declined 2.6% (QoQ) to $781.7 million as cost of sales increased 7.6% (YoY). The decline in revenue was due to lower volumes of finished goods in the quarter. However, the decline was offset by the company’s cheap pricing. Higher input costs also weighed on profits. Net profit also fell 25.79% (QoQ) to $93.5 million and gross profit fell 11% (YoY) to $265.9 million.
In the company’s first half of fiscal 2023, free cash flow grew 84% to $195 million after it completed its acquisitions of Premium Outdoor Lifestyle Brands and Simms Fishing. What caught my attention, however, was that of the $782 million in sales recorded in the quarter, $432 million was from athletic products sales, while $349 million was from outdoor product sales. VSTO has 7 sports product brands versus 34 outdoor product brands.
The split is a good idea
In fiscal 2022, VSTO’s sporting products, which primarily includes ammunition sales, recorded sales of $1.7 billion versus $1.3 billion of outdoor products. The Company’s outdoor segment spin-off is expected to enhance VSTO’s strategic focus and adjust its capital allocation priorities as needed. Sales in the last 12 months were US$1.9 billion for sports products, while outdoor products reached US$1.3 billion (TTM). Adjusted EBITDA (TTM) for Sporting Products more than tripled from Outdoor Products to $635 million versus $188 million.
VSTO said it will adjust its capital allocation strategy into Sporting Products to meet its debt repayment requirements and pay dividends to shareholders. In outdoor products, the company is looking to invest in organic growth and a return to mergers and acquisitions. These two companies have different growth trajectories, making it imperative to separate in calendar year 2023.
Sporting Products mainly includes brands such as Remington, Federal, Hevi-Shot and Alliant Powder dealing in guns and ammunition. Back in 2019, Vista Outdoor said it had sold its gun manufacturing business to Long Range Acquisition for $170 million. The sale was due to the rise in gun violence in the United States. Still, the company stayed in the bullet manufacturing business, which has grown as gun ownership has increased.
statesman
Research has shown that gun ownership in US households has remained stable since the late 1990s. By 2022, approximately 45% of American households will own a firearm. The increase in weapons means more ammo production.
Expansion of the ammunition business
Back in October 2020, VSTO added Remington Ammunition to its group, which also included Speer and CCI, who saved the company (then) from bankruptcy. VSTO revenue grew from $15 million in fiscal 2020 to $350 million annually. The company’s annual revenue is up 78.37% from $633.7 billion to $1.13 billion since the fiscal year ended in March 2021. This M&A strategy has shown that VSTO has invested in more profitable munitions companies. In addition, HEVI-Shot is one of the leading lead-free shotshell manufacturers in the USA, which also includes heavyweights such as Kent Bismuth, Winchester Blind Side Waterfowl and Herter’s Waterfowl.
VSTO has reiterated that its sporting goods business has toned down to more politically motivated categories and increased its share in areas where demand is driven by usage. The company expects an overall industry consolidation with up to 16 million new gun owners registered since 2019. Also, it’s likely that VSTO’s shooting sport will expand outside of shotgun shells as it looks to secure more multi-year supply deals with law enforcement and OEM customers.
Outdoor products appear as a more customer-oriented segment. As mentioned, it’s not as big as the shooting store in terms of sales. However, due to its direct-to-customer (D2C) capabilities, VSTO expects to leverage its scalability to improve pricing and improve service levels.
At the beginning of the first quarter of 2023, the company announced the acquisition of two new brands in its outdoor segment, Fox Racing and Simms Fishing. At the time, VSTO faced challenging macroeconomic headwinds caused by Covid19, but still managed to post revenue growth of 21% (YoY). Such acquisitions were affordable with $2.31 EPS and up to $100 million in free cash flow. This outdoor segment focuses on activities such as camping, barbecues, electric bikes and hunting, as well as other DIY projects.
From my point of view, the ammunition business has benefited from more affluent customers compared to the outdoor sector. The latter touches a broader socio-economic spectrum that allows the company to generate strong profits. Unfortunately, this ability has exposed the company to macroeconomic headwinds such as inflationary pressures.
Nonetheless, VSTO’s leading outdoor brands, referred to as 12 Power Brands (including Simms Fishing – Leisure and Fox Racing – Action Sports), can generate annual sales in excess of $100 million and can be described as the brands of the future. While Sporting Products posted higher sales of $432 million in the quarter, that represented a 4% YoY decline. Outdoor products sales of $349 million, up 6% (YoY) over fiscal 2022.
Also, I believe there is a direct correlation between home ownership and interest in outdoor activities. These activities will eventually become embedded in American culture, much like gun ownership.
Risks to consider
In Outdoor Products, growth relative to Sporting Products will be driven primarily by acquisitions driven by market prices. In addition, sales growth can be hampered by product seasonality. For example, the sale of fishing products or other recreational equipment may be restricted during the winter. In addition, consumer spending can be hampered by rising inflation and rising interest rates. However, this situation can be partially offset by the increase in input and freight costs. VSTO’s annual expenses increased 11% (YoY) to $107 million to cover increases in inflation and interest rates. Outdoor products EBITDA decreased 11% (yoy) to $46 million, while athletic products declined 23% (yoy) to $140 million. The decline should provide a hedge to maintain a lean SG&A (SG&A) expense structure.
VSTO’s Outdoor Products has a weaker capital structure compared to Sporting Products. In FY2022, Outdoor gross profit was $399 million versus Sporting’s $712 million. Other business segment trends show a relatively lower marginal growth rate. Since fiscal 2020, Sporting’s gross profit is up 439.39%, while Outdoor’s is up 79.73%. Additionally, out of 34 brands, only 12 power brands in the outdoor segment have annual sales over $100 million.
Finally, VSTO’s total outstanding debt is $1.32 billion. The company’s cash balance is $66 million, which means its net debt is $1.254 billion. However, VSTO’s current asset balance of $1.391 billion and total assets of nearly $4 billion are enough to provide long-term security. Net debt to Adjusted EBITDA also grows 1.7x from 0.7x in Q1 2023. Despite this growth (due to an increase in debt), VSTO is still able to reduce its debt repay in less than one year.
bottom line
VSTO has stable underlying business fundamentals as evidenced by its strong Net Debt to Adjusted EBITDA ratio of 1.7X. The company’s intention to spin off its outdoor business is a response to mitigate the challenges of inflation and high interest rates. VSTO’s sports sector remains the most dominant segment, despite having fewer brands under its umbrella. Robust free cash flow enabled the company to add key brands to its outdoor portfolio in the first quarter of 2023. It’s likely that after the split, the company will seek further value-added acquisitions to bolster its outdoor brands. It has only 12 out of 34 power brands with the capacity to generate more than $100 million in annual sales. For these reasons, we recommend buying the stock.
