While several companies have bombed their earnings results this year partly due to tariff pressures, Vista Outdoor (VSTO) takes the cake in the leisure/products category. The company reported earnings in mid-August and revised their FY-2020 sales guidance down from a midpoint of $1.98~ billion to a midpoint of $1.84 billion, a drop of over 6%. On earnings per share, the revision was even more dramatic, with a revision from a midpoint of $0.33 in annual EPS, to a mid-point of $0.18~. These significant reductions in FY-2020 guidance were due to several different headwinds the company faced, including the Chapter 11 Bankruptcy of South Carolina based Ellett Brothers in June, which flooded the market which cheap inventory. Fiscal Q1 2020 results marked the eighth consecutive quarter in a row of negative year-over-year sales growth, and there’s no real light at the end of the tunnel in terms of this improving. Based on Q2 2020 guidance, we are expecting to see yet another quarter of mid-double-digit contraction in revenues year-over-year. Based on weakness in sales, the recent decision by Walmart (WMT) to halt some rifle and ammo sales, and the bleak technical picture, I see the stock as an Avoid. Bounces in the stock are possible as nothing goes down in a straight line, but I see 30% plus rallies as opportunities for investors to trim their positions.
It’s been a terrible start to the year for Vista Outdoor with downward revisions in their FY-2020 guidance across nearly all metrics. Unfortunately, for investors, there doesn’t seem to be any end to the headwinds experienced by the company. The most recent negative headwind is the decision by Walmart to halt sales of some ammunition, including discontinuing the sale of handgun ammunition. In addition, Walmart is ending the sale of handguns in Alaska, which was the last state where they were still being sold. This move by a mega-retailer to take action in an attempt to fight back against the trend in mass shootings is of no help to Vista Outdoor, where ammunition makes up a significant part of their product mix. If year-over-year sales growth was slipping and could not gain any traction before this decision, it is unlikely that this is going to change any time soon.
The tough pill to swallow for investors here is that the company’s guidance was likely sandbagged slightly due to all the headwinds, but is now closer to reality after the recent Walmart news. As we can see from the below table from the company’s earnings call slides, this was one of the most material downward revisions of any company reporting this earnings season. Not only did the company slash annual EPS guidance by nearly 50% from $0.33 to $0.18 at the mid-point, but sales guidance which has remained soft for two years was also slashed by a further 6%. The prior guidance was already projecting slightly negative year-over-year sales growth from FY-2019’s $2.04 billion, but this new revision has dropped year-over-year growth to a near double-digit contraction. Let’s parse out some of the issues below:
To begin with, South-Carolina based Ellett Brothers Chapter 11 filing in June flooded the market with discounted product. This affected Vista’s ammo and hunt/shoot accessories segment significantly in fiscal Q1. Adding insult to injury, the prolonged tariff tit for tat between the U.S. and China continues to make things difficult for Vista, with many orders from retailers being either delayed or canceled. The recently added tariffs may affect sporting products which will hit costs at the company’s Bell, Giro and Bushnell brands. Additionally, Vista may see a hit to their CamelBak business costs with the potential for tariffs on water bottle components. Finally, the ammunition market was down mid to high single digits year-over-year, and this certainly hasn’t helped Vista, even if their contraction was in the low single-digits and tracked below this. The final seeming nail in the coffin is the Walmart news out last week, which has driven a stake into any hopes for growth this year in FY-2020.
Fortunately, for investors, it’s not all bad news, and there are some minor positives to point out. The company realizes the issues they’re facing, and the company is attempting to put the final touches on a planned reduction in G&A spend going forward. This will likely be detailed further in the company’s fiscal Q2 call in November. Also, the company’s e-commerce and direct to consumer businesses are gaining some traction, with CamelBak sales on Prime Day reaching 47,000 units, which represents 57% growth year-over-year. Finally, the LAPD chose Vista’s Speer G2 round in a recent contract win. This now gives Vista the two largest police organizations in the US, the NYPD, and LAPD after their NYPD contract win in July 2018.
Unfortunately, while there are some positives, and it’s a good sign the company has recognized the need to act, the negatives far outweigh the positives. Most of these issues are not at the fault of the company like tariffs and softness in the ammunition and hunt/shoot end-markets, but this doesn’t mean we can discount them. So let’s take a look at the company’s growth metrics below, and how they’ve been affected by these developments:
Looking first at annual earnings per share [EPS], we can see that it has contracted significantly from its FY-2016 high at $2.50, and has fallen over 90% to where current FY-2020 estimates sit at $0.14. This is significant, and any bounce backs in earnings per share are not material at all after a drop of this magnitude. While FY-2021 earnings per share are expected to double year-over-year based on current estimates, a double in earnings per share after a 90% contraction from peak to trough is nothing to fawn over. The most attractive annual earnings per share growth comes from a solid uptrend that sees steady gains, not a violent downtrend that sees a bounce back after seemingly being left for dead. Based on the added pressures from the recent Walmart decision, I believe the FY-2021 estimates for $0.36 may be ambitious, and would not be surprised if they’re revised down.
If we move over to revenue growth, sales have been tepid to be polite. Vista Outdoor has seen eight consecutive quarters in a row of negative year-over-year growth in quarterly sales, and the two-quarter average, which aims to smooth out lumpiness continues to trend near its lows. As of Q2 2018, the Q2 average for year-over-year sales growth was (-) 10%, and this figure currently sits at (-) 11.5% as of the end of Q1 2020. Worse, this trend is not expected to change any time soon. As of right now, Q3 2020 estimates are for $476 million in revenue, and this will represent negative 13% growth year-over-year assuming they only meet these estimates. Even if Vista Outdoor managed to beat these estimates, which is unlikely, it still wouldn’t be anything to get excited about as an investor. The reason for this is that anything less than positive growth makes a company un-investable in my view. I wouldn’t consider investing a minority stake in a business with declining year-over-year sales, and I view stocks the same.
Moving to the financials and margins, we’re seeing margins continue to contract from over 32% in 2016 to below 20% currently. This is occurring at the same time that the company’s debt to equity ratio is trending higher at a reasonable pace. This is a dangerous cocktail for a company when we’re potentially later stage and a year or two out from a recession, and this makes the company even less attractive as an investment. While the recent yield-curve inversion does not guarantee a recession is coming by 2021, it does increase the odds.
Based on the fact that Vista Outdoor is seeing increased headwinds, could not sustain positive sales growth before this, and is seeing continued margin contraction, there is very little to like about the company. Even if annual EPS is expected to jump over 100% in FY-2021 based on estimates, this spike in earnings is unlikely to be sustainable on the back of declining year-over-year sales. The only thing that would change my mind on Vista Outdoor would be if we saw three consecutive quarters of double-digit sales growth. Given the current headwinds, I don’t see this happening any time soon.
If we move over to the technical picture, things are just as bleak, unfortunately. Vista Outdoor continues to trade in a sharp weekly downtrend and is one of the few stocks on the US markets making new all-time lows while the market is busy banging on the door of new all-time highs. The stock has spent more than 80% of its trading life below its 40-week moving average, and this suggests that there’s very little institutional demand for the stock. The 200-day moving average comes in near the $8.65 level, and a weekly close above $8.65 would be the bare minimum requirement to suggest a possible turnaround in the technicals.
Looking at a daily chart, Vista Outdoor has no real support below given its new all-time low just over a month ago, and three crucial resistance levels overhead. The first resistance sits at $7.75, and the second is strong resistance at $10.50. As long as the stock remains below $7.75 on a weekly close, I would consider any bounces as bear market rallies and opportunities for investors to lighten up positions. Violent 50% – 60% rallies like we’ve seen are possible to shake out some of the weaker shorts, but they would do nothing to improve the technical picture here. Only a monthly close above $10.50 would confirm a complete turnaround for the technical picture.
Not only does Vista Outdoor have some of the weakest growth metrics of any stock on the US Market; but it’s also facing what seems to be a never-ending barrage of headwinds. The stock continues to trade in a bear market with no support below, and I see 50% plus rallies like the current one as opportunities for investors to lighten up their positions. Barring a significant turnaround in year-over-year sales growth, I don’t see any sustainable growth in earnings per share possible for the company. The reduced costs based on their reduction in G&A spend they will roll out later this year are positive, but cost-cutting does not build a foundation for sustainable growth. I see Vista Outdoor as an Avoid for those looking to bottom-fish, and a sell into rallies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.