Voss Capital: “American Outdoor (AOUT) is a Consumer Stock We Could Sink Our Teeth Into”

Voss Capital, an investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. A return of 20.81% was recorded by its Voss Value Fund LP, and 20.67% by its Voss Value Offshore Fund in the fourth quarter of 2020, both below its Russell 2000 Value Benchmark that delivered a 32.72% return and its Russel 2000 TR Index that was up by 31.37% in the same period, but above the S&P 500 TR Index that gained 12.15% in the fourth quarter. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Voss Capital, in their Q4 2020 investor letter, mentioned American Outdoor Brands, Inc. (NASDAQ: AOUT) and emphasized their views on the company. American Outdoor Brands, Inc. is a Columbia, Missouri-based firearms and outdoor sports manufacturing company that currently has a $364.9 million market capitalization. Since the beginning of the year, AOUT delivered a decent 52.85% return, and as of March 22, 2021, the stock closed at $26.03 per share.

Here is what Voss Capital has to say about American Outdoor Brands, Inc. in their Q4 2020 investor letter:

“While we are clearly optimistic on the prospects for robust US consumer spending going forward, the retail and consumer goods stocks in general have had valuations too rich for our taste, so we have been underexposed to these sectors. We finally found a special situation consumer stock we could sink our teeth into in American Outdoor Brands (AOUT).

AOUT owns a portfolio of 20 mostly outdoor-related consumer brands. The company was spun out of Smith & Wesson (SWBI) in August 2020 with no debt and $25 million in cash. The current EV of $250 million values the company significantly below the $360+ million in acquisitions SWBI spent to build the portfolio since 2014. Most of AOUT’s brands have strong end market tailwinds, as evidenced by half of the brands growing sales >100% last quarter. The number of hunting licenses, fishing licenses and first-time campers is exploding higher as consumers pursued new hobbies and socially distant entertainment options during the COVID-19 related lockdowns.

Over the past 18 months, AOUT wisely invested in building out its e-commerce capabilities and revamping its brands’ websites which is now paying dividends. The e-commerce part of the business grew 213% last quarter and now makes up 40% of total company revenue, which is growing by 60% overall. This growth isn’t just coming from the e-commerce side cannibalizing the company’s traditional retail channel customers though, as revenue from brick & mortar retail still grew 27% over the last six months and accelerated to +34% last quarter. With the relatively fixed cost platform and low capex requirements, the company is seeing expanding margins and high FCF generation. Despite these attractive characteristics and growth potential, the stock is trading at just 7x EBITDA and 8x FCF.

Some of AOUT’s promising brands like Bubba and BOG are going from “niche to known” as the company likes to say by expanding into new product categories. BOG recently released the patent-pending Blood Moon game camera, the company’s first foray into game cameras which received an 88/100 rating from TrailCamPro.com who described it as “excellent photos and videos. 20-plus months of battery life and insanely fast detection capability.” With the launch of new products like this, the brands are both expanding their customer bases and moving into higher priced goods which will only help continue to drive revenue growth.

While the portfolio was built through acquisitions, the team has also shown the ability to successfully launch brands organically like MEAT! Your Maker which was developed entirely in-house and debuted in March 2020. MEAT! sells an array of meat processing equipment and was originally targeted at hunters to process and preserve their meat. However, the commercial-grade quality meat grinders, slicers and dehydrators are also finding their way into home kitchens, restaurants and butcher shops given their rave reviews. The company says that in just nine months the brand went from “non-existent to self-sufficient” and has “quickly becoming a multimillion-dollar brand in our portfolio”. We expect more low-risk, internally developed brand launches in the future.

At the time of the spin in August, the company was guiding for $200 million in revenue and $20 million in EBITDA for the fiscal year ended April 2021. In December, the company raised revenue guidance to $240 million (+20%) and EBITDA to $35 million (+75%) implying 38% incremental margins and showing the leverage of the brand platform. We believe there is a good chance the company raises guidance again in a couple weeks when they report Q3 numbers. Despite all this we think the company is being overlooked with the stock up just 8% since its spinoff in August compared to the S&P Retail ETF up 50% over the same time frame with its constituents having vastly inferior fundamental performance over the same timeframe. With 20 unique brands, or “shots on goal”, we believe there is a good chance just a couple of them could ultimately be worth more than AOUT’s current EV.”

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Our calculations show that American Outdoor Brands, Inc. (NASDAQ: AOUT) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, American Outdoor Brands, Inc. was in 13 hedge fund portfolios, compared to 10 funds in the third quarter. AOUT delivered an impressive 48.15% return in the past 3 months.