Ammo Inc

NASDAQ:POWW

Earnings Call Analysis

Revenue Declines, Strategic Transformations Underway

In its first quarter of fiscal 2025, AMMO Inc. reported a revenue decline to $31 million from last year’s $34.3 million. The ammunition segment contributed $18.7 million while the marketplace segment added $12.3 million. The company is undergoing major transformations, focusing on high-margin rifle and pistol production and enhancing its e-commerce platform, GunBroker. Despite hardware and logistical challenges, AMMO identified up to $15 million in potential cost savings. Overall gross margins dropped from 40.9% to 31.6%. The company remains optimistic, expecting margins to improve with increased production efficiency and continued platform enhancements.

Navigating a Challenging Market Landscape

In the first quarter of fiscal 2025, AMMO Inc. encountered headwinds as revenues declined to approximately $31 million from $34.3 million in the same quarter last year. This decrease stemmed from subdued ammunition and firearm sales across the industry, largely influenced by seasonal fluctuations and macroeconomic dynamics. Despite these challenges, the company remains committed to repositioning itself for sustainable growth.

Transformational Strategy Taking Shape

The leadership of AMMO, under CEO Jared Smith, is emphasizing a transformative strategy focused on enhancing their ammunition production and evolving their GunBroker marketplace into a leading e-commerce platform. By shifting production from low-margin ammunition to high-margin rifle submissions, the company is targeting improved profitability despite an anticipated short-term revenue impact.

Focus on Operations and Efficiency

AMMO outlined a clear operational focus on streamlining manufacturing processes during the earnings call. Efforts to identify cost-saving initiatives are projected to yield up to $15 million over the next 18 to 24 months, alongside an extensive operations review expected to enhance profitability by addressing production inefficiencies in their ammunition division.

Adapting to Market Trends and Consumer Behavior

The company noted a slight uptick in demand for firearms, particularly influenced by the upcoming election. While the overall market remains challenging, AMMO is poised to capitalize on potential increased consumer interest by rolling out flexible financing options and improving cross-selling features within the GunBroker platform.

Financial Metrics Reflect a Work in Progress

For the quarter, adjusted EBITDA stood at approximately $2 million, down from $6.5 million a year prior. While the company reported a loss per share of $0.07, they achieved adjusted net income per share of $0.01, a slight improvement from a loss of $0.02 per share in the previous year. The gross margin for the quarter was reduced to 31.6%, down from 40.9% the previous year, indicating the pressure the company faces on its margins amidst ongoing operational challenges.

Future Outlook: Increased Production and Revenue Growth

AMMO expects steady production increases of rifle casings in the upcoming quarters, anticipating growth to resume in the second quarter. Continuous improvements in plant operations, particularly for high-margin products, are projected to result in positive changes in gross margins for the ammunition segment. The company is optimistic about enhancing functionality on GunBroker, which is expected to bolster sales growth.

Strategic Share Repurchases Reflect Confidence

The company made notable share repurchases in the quarter, acquiring approximately 580,000 shares under its buyback plan, signaling management's confidence in AMMO's long-term potential despite short-term challenges. Overall, the company’s strong position, supported by $134 million in current assets and $50.8 million in cash, positions it well for navigating through the transitional phase.

Key Performance Indicators and Market Position

With over 8 million registered users and 13 million unique monthly visitors to GunBroker, AMMO is building the groundwork for substantial future revenue. The recent increase in their take rate from 5.8% to 6.2% showcases the management’s efforts to monetize user engagement effectively and underscores potential for future growth in their e-commerce operations.

Anticipated Developments in Plant Operations

AMMO is addressing operational challenges in its manufacturing process. Recent investments in new equipment, such as a recently delivered annealing oven, are part of the strategy to ramp up production efficiencies significantly. As they navigate through these enhancements, management is optimistic about improved margins and consistent growth in the production of high-demand rifle ammunition.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMMO Inc. Fiscal First Quarter 2025 Earnings Call. [Operator Instructions].

I would now like to turn the call over to Matt Blazei of Core IR, the company's Investor Relations firm. Please go ahead, sir.

[Matt Blazei]

Good afternoon, and thank you for participating in today's conference call. Joining me from AMMO's leadership team are Jared Smith, Chief Executive Officer; Rob Wiley, Chief Financial Officer; and Paul Kasowski, Chief Compliance and Transformation Officer.

During this call, management will be making forward-looking statements, including statements that address AMMO's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from these statements. For more information about these risks, please refer to the risk factors described in AMMO's most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today and the company's press release that accompanies this call particularly the cautionary statements in it.

Today's conference call includes non-GAAP financial measures that AMMO believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company's earnings press release.

The content of this call contains time-sensitive information that is accurate only as of today, August 8, 2024, except as required by law, AMMO disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.

It is now my pleasure to turn the call over to AMMO's Chief Executive Officer, Jared Smith.

[Jared Smith, executive]

Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2025 earnings call. First, I want to take this opportunity to thank all of our employees for their commitment to this company, the mission and for their contributions to the massive transformation underway in our business. It takes true grit and perseverance to implement changes at this scale and at this level of quality. We have some extraordinary teams leading the way, and I'm proud to be a part of you, this ongoing effort.

In our first quarter of fiscal 2025, we continue to make progress on the primary core initiatives for each of our business units. Transforming our ammunition plan to high margin rifle and pistol production and transforming our marketplace to an innovative ecommerce leader. Despite the [ midst ] challenges of operating in this ever changing regulated market. We continue to make progress on these initiatives. We remained focused on building long-term shareholder value and strategically positioning this company for sustainable success. Despite the ongoing turbulence in our industry, we are confident that the company's recalibration is the shortest path to long-term stability and reliability.

As has been reported market-wide, ammunition and firearm sales have been down across all segments of the commercial markets throughout the summer months. While this is in-line with historic seasonality in the industry, we've been slowly pulling production back from non-attracting products segment due to low margins and propellant supply. We will continue to focus on strategic product categories that more heavily contribute to the bottom line.

We have been building ammunition inventories to accelerate sales this fall for the launch of our new premium rifle hunting segments, and we started delivering on our 12.7X108 cases under our contractual obligations to ZRODelta.

AMMO was at a pivotal point as we start the second quarter of our 2025 fiscal year. We've been delivering and releasing code over the last month on GunBroker that are starting to take noticeable effect. Changes that will positively affect both our 8 million plus registered users and our monthly 13 million unique visitors to the site.

We launched our cart just 4 months ago, and this last month began cross-selling accessories for the firearms purchased through the cart. We will continue to cultivate the algorithms and analytics over the coming months and fine-tune the recommended offerings across all categories as our environment accelerates its learnings.

This will be an ongoing development now that we pivot away from the historic single seller single-item framework to a platform with the capability for buyers to buy from multiple sellers in one transaction and includes suggested placement of products at checkout. We are building out a solution that will create strong revenues for our shareholders in an ecommerce industry with high barriers to entry and low market consolidation. This is an ecommerce industry, and a marketplace that is still in its infancy. While we've been around for 25 years, our transformation in fiscal year 2025 is game-changing and will result in an evolution to the face of GunBroker and for our shareholders.

As we communicated last quarter, GunBroker has been committed to growing its service offerings and increasing our take rate on the GMV we do through the site. In Q1, we increased our take rate by roughly 40 basis points. 6.2% versus 5.8% over last year. This was accomplished through category fee changes on non-firearm sales, increases in advertising revenue, enhanced listing option fees and the launch of Collectors Elite.

We see this take rate further increasing in the quarters ahead as we push ahead with our gear fire financing solution and an anticipated increase in non-firearm accessory cells as we monetize the algorithms and tune our cross-selling capabilities.

Turning to the ammunition division. We are now laser focused on increasing rifle production at the plant and are strategically pulling back on all range, training 9-millimeter and low to negative margin pistol production as rifle capacity increases.

We will continue to shift our production away from high volumes and top line revenue and we'll continue to focus on streamlining our operations and creating bottom line profitability. This will negatively affect the top line revenue, but will create higher margins and higher profitability.

The transition from pistol to rifle ammunition and their components is hard. The quantities, processes and teamwork required must be fine-tuned and it has required us to cultivate talent and the resources to handle the transformation to manufacture this much anticipated rifle capacity.

While we struggle with overhead absorption due to the lower capacity yields of the new factory, we continue to see opportunities for cost out initiatives. In conjunction with our manufacturing consulting partner, we will be working to eliminate inefficiencies in the coming months through continuous improvement initiatives to reduce our labor, scrap and quality issues. This extensive operations review will proceed for the next 20 weeks, focusing on improving financial results by removing critical constraints through continuous improvement initiatives and enhancing our engineering processes. We are excited to see the transformation underway and couldn't be more excited as we come into our second and third quarter.

Before I turn it over to our next speaker, I want to remind everyone of the progress we've made since our last earnings call. Just this last month, we delivered 211,000 pieces of 12.7 x 108 for ZRODelta. We were clear to start production on our 6.5 Creedmoor IVAC and [ BMM PR ] rounds, and we increased our take rate from 5.8% to 6.2% in less than a year. We've enabled cross-selling of accessories with firearms inside the marketplace cart in the last 30 days. And this last quarter, we signed a financing agreement for -- with Gearfire with an anticipated Q2 rollout.

And lastly, we executed share repurchases in excess of $1 million this last quarter. One of the biggest initiatives we are now undertaking is streamlining of all corporate and divisional processes.

In January, we brought on Paul Kasowski as our Chief Compliance and Transformation Officer to start identifying opportunities for savings throughout the company and making the changes necessary for improving returns. Paul has 21 years of experience in manufacturing in the consumer product goods space and has a firm handle on our opportunities for cost savings and process efficiencies.

I will now turn it over to Paul Kasowski. Our Chief Compliance and Transformation Officer.

[Paul Kasowski, executive]

Thanks, Jared. This is an exciting time at AMMO. We're executing on a strategy that will enable long-term profitable growth for the ammunition division by focusing on rifle brass production while positioning GunBroker as the most versatile online site for outdoor enthusiasts through increased functionality and diversified product offerings. .

Since joining the company, we've identified up to $15 million in cost cutting and working capital opportunities in an effort to simplify our business model, improve visibility to cost and enable us to actively manage operating margins. We believe these opportunities can be realized over the next 18 to 24 months.

Importantly, we now have the organizational alignment and the talent to execute these initiatives. This type of change takes time as we institutionalize a cultural mindset that emphasizes profitable growth.

I will now turn it over to Rob Wiley, our CFO, to discuss our Q1 financial performance in further detail.

[Robert Wiley, executive]

Thank you, Paul. Welcome, everyone. Let me now review the financials for the first quarter of fiscal year 2025 in more detail. We ended the first quarter of our 2025 fiscal year with total revenues of approximately $31 million in comparison to $34.3 million in the prior year quarter.

Our Ammunition segment made up $18.7 million of total revenues, and our Marketplace segment generated the remaining $12.3 million in revenues. The decrease in revenue was primarily related to a decrease in activity across both our reporting segments, which we believe decreased as a result of the current macroeconomic environment impacting our industry as well as others.

Cost of revenues was approximately $21.2 million for the quarter compared to $20.2 million in the comparable prior year quarter. Cost of revenues for our Marketplace segment was $1.8 million, and our ammunition segment cost of revenues were $19.4 million. This resulted in a total gross margin for the quarter of $9.8 million or 31.6% compared to $14 million or 40.9% in the prior year period. Our Marketplace segment gross margin was $10.5 million or 85.6%. The gross margin of our ammunition segment was negative $0.7 million or negative 4%.

The increase in cost of goods sold and decrease in gross profit margin was related to the shift in our sales mix and production inefficiencies in our ammunition segment in comparison to the prior year period.

Although our margins decreased from the prior year period, the robust margins on GunBroker continue to hold strong. And while the margins in our ammunition segment remained down as the plant ramp is still underway, we are beginning to see increased production throughput and expect that we will see increased product marginality in future periods if we are able to continue with this trend.

There was approximately $6.3 million of nonrecurring expenses in the quarter related to legal and professional fees, which we have included as an add-back to adjusted EBITDA. The $6.3 million nonrecurring expenses also included $3.2 million expenses related to a contingency stemming from litigation GunBroker was involved with prior to our acquisition.

We expect to recover 2.9 million shares of common stock as a result of the settlement, which will be canceled and returned to our authorized but unissued share pool.

For the quarter, we recorded adjusted EBITDA of approximately $2 million compared to the prior year quarter adjusted EBITDA of $6.5 million. This resulted in a loss per share of $0.07 for the quarter, our adjusted net income per share of $0.01, in comparison to a loss per share of $0.02 in the prior year quarter or adjusted net income per share of $0.04.

Looking forward, we are continuing to focus on streamlining our manufacturing processes, which should improve product throughput and marginality. For GunBroker, efforts to offer a flexible financing option to customers is well underway as well as our cross-selling solution, which provides our users with the ability to view and purchase compatible items when going through the checkout process.

We expect these enhancements will drive sales growth through better functionality and enhanced purchasing power of buyers. Our financial position remains strong, given our net working capital position as we have reported $134 million in current assets, including $50.8 million of cash and cash equivalents, along with $42.3 million of current liabilities. We believe the strong position will continue to stimulate our transformation efforts.

We repurchased approximately 580,000 shares of our common stock under our purchase plan in the reported quarter. Bringing us to just over 1.9 million total shares repurchased under the plan since December of 2022.

That concludes our opening remarks. I will now turn the call over to the operator for questions. Thank you.

[Operator]

[Operator Instructions]. At this time, we will take our first question, which will come from Matt Koranda with ROTH Capital Partners.

[Unknown Analyst]

This is Joseph on for Matt. We just wanted to know how should we expect casings revenues to ramp up from here? Can we assume to get back to growth in 2Q and beyond? And also, regarding your comments on gross margins for the ammo segment. Can we also expect a positive inflection for the second quarter and beyond?

[Jared Smith, executive]

Joseph, great question. So -- last quarter, we shipped an additional $1 million in our Centerfire Rifle Brass casings business. And yes, we expect steady progress with rifle case production in the quarters ahead.

[Unknown Analyst]

And if I could get just one more in there. Anything you have observed in the recent months about firearms in the shooting sports consumer? Do you see any uptick in demand in July? And -- what about the recent weeks with the President election becoming more competitive? Is there any trends in AOV or financing attach rates?

[Jared Smith, executive]

So what we saw in Nick's was a decline in Q1. Well, our Q4 and the Q1, but we've seen a slight uptick in Nick's for July. We anticipate that to hold through the election period. But once again, I'm not a fortunate teller when it comes to the election and to Nick's. But yes, what we're seeing today, the trend in July looks healthy compared to Q1 and Q4.

[Operator]

And our next question will come from Mark Smith with Lake Street.

[Mark Smith, analyst]

I want to start on GunBroker and kind of the sales decline there. Jared, and this is maybe a big picture question. Is -- how much of this is maybe a function of channel inventory and supply as mom-and-pops and other gun stores kind of have everything in stock that they need and want. And if so, how in the future do you compete more in kind of steady markets with brick-and-mortar? .

[Jared Smith, executive]

Excellent question, Mark. There's definitely a steady inventory that we saw through the summer months with Nick's checks being down. GunBroker really has to compete in that premium space. We will continue to control the ability to shop and price. We own the used market. We are seeing an increase in firearms in the used market. So there are bright spots within our market segments and our ability to go after and be able to really leverage cross-selling in the months ahead.

But you're right, there's a tendency as wallet share shrinks due to a reduction in consumer discretionary spending that impacts the business. But at the end of the day, we own the premium side. We own the used market. And with us now turning over and turning on the ability to cross-sell within the cart, we see a tremendous potential going forward.

[Mark Smith, analyst]

Okay. And that was kind of my next question. Just where are we at as far as cross-selling? Are we still just kind of first inning here as far as kind of being able to directly market and show customers, when they put a certain firearm in their carts and optic or new grips or whatever it may be for that. Where are we at in that process? And are you seeing any early signs of success? .

[Jared Smith, executive]

That functionality just came on in the last 25 days, Mark. And as our algorithms get better as we categorize and prioritize what we're positioning in front of the customer. it's part of the answer to the take rate, is that we're going to be able to promote products and be able to promote items where we have greater margins. And from an ability to grow the business, it's really about getting out in front of those consumers that are shopping these premium items and doing a better job of accessorizing those firearms before they check out.

[Mark Smith, analyst]

Okay. And then I think, last for me, just shifting over to the ammos of the business. Any additional updates on kind of plant operations. I know you -- with Paul coming on, it sounds like there's a lot of places to kind of come in and pick up nickels and dimes. But just curious, are there any big headaches that are out there that are kind of remaining from the last couple of quarters and the equipment that's not running, things that need replaced? Maybe talk about kind of the -- any big things that are remaining that are kind of hurting operations within the plant in Manitowoc?

[Paul Kasowski, executive]

Well, we just took delivery of an [ annealing oven ] that has been an issue for over a year, 1.5 years, and it will be starting up in late August, early September. So that's one hurdle that's been in the way. There are certainly issues as we bring on more capacity that we'll run into but we've had a massive uptick in 50 Cal production, a line item that we've not been able to lean into in the past. And we have firm deliveries scheduled out for the next year, 1.5 years.

Medium action too is growing its capability. We've had some mechanical issues with another press. But at the end of the day, more and more rifle production comes on. And we are making steady progress, and you will continue to see steady progress in Q2 and Q3.

[Operator]

And with no remaining questions, we will conclude our question-and-answer session. I'd like to turn the conference back over to Jared Smith for any closing remarks.

[Jared Smith, executive]

I want to thank you for participating on today's call and for your interest in AMMO, Inc. We look forward to sharing our ongoing progress when we report our fiscal second quarter 2025 results in November. Thanks, and have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.