American Outdoors was our largest detractor in 2022 being down 50% YTD. To recap some of the factors when we took a position in January 2021:
- CEO had about 1.4mm in shares (a significant amount purchased on the open market), came from being co-CEO of SWBI.
- Disciplined acquisition strategy- didn’t pursue the buying frenzy in 2021 when competitors were acquiring everything for nosebleed multiples. Heavy focus on organic growth
- AOUT was a spinoff from SWBI and underfollowed with forced selling after it became public.
- Repurchased 7% of shares
- AOUT was trading at around 7x normalized FCF
Although revenues were predicted accurately coming out of COVID, operating expenses were not. AOUT has seen an uplift in expenses driven by increased freight costs, standalone expenses, and an expanded distribution footprint. This amount added up to roughly an extra $10mm/ year in costs; an estimated $25mm in earnings became $15mm. The lesson learned here is to be especially cautious about forecasting expenses on spinoffs and small caps.
Although operating expenses increased, there was still downside protection with AOUT’s rock-solid balance sheet. AOUT had about 60mm in cash, 70mm in inventory, 40mm in AR, and 40mm in liabilities, with a market cap of 200mm (normal working capital necessitated inventory levels of about $50mm). Management exhibited disciplined capital allocation with share buybacks and not pursuing expensive acquisitions during 2021. Our view changed after AOUT completed a 30mm dollar acquisition in March 2022 (for about 2x peak revenues) with no hurdle rate mentioned or expected ROI. Inventory had also increased almost 100% to 120mm, partly due to retailers and distributors cutting back on inventory, and partly due to AOUT’s intentional decision. Although this was not a mistake in itself, the change in the environment necessitated a change in their previous inventory strategy. Management showed no alacrity to this. To add to this, guidance was not given for FY23, no comment on share buybacks when share prices were at much lower levels than AOUT’s previous repurchases, and AOUT was still looking at pursuing more M&A- all while inventory levels were at a record high. All of these factors pointed to a management team that was unlikely to grow AOUT’s brands in a judicious manner.
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