Smith & Wesson Brands Inc Stock

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. First Quarter Fiscal 2027 Financial Results Conference Call. This call is being recorded.

At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us information about today's call. Thank you. You may begin.

Thank you and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general.

Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filing, which are available on our website, along with a replay of today's call. We have no obligation to update forward-looking statements.

We reference certain non-GAAP financial results. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filing and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS, and any reference to EBITDA is to adjusted EBITDA.

When we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipment or market share in any given time period, we believe mostly due to inventory levels in the channel.

Joining us on today's call are Mark Smith, our President and CEO, and Deana McPherson, our CFO.

With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. As we expected, we are off to an excellent start to fiscal 2027 with strong first quarter performance. Continued solid demand for our products in both the consumer and professional channels in Q1 were a direct result of our purposeful focus on innovation, the strength of our industry partnerships, operational execution, and the power of the iconic Smith & Wesson brand.

We delivered significant year-over-year increases in all key financial metrics, including 32% in growth in net sales, 86% growth in adjusted EBITDA, and an increase in EPS to $0.06 from a loss of $0.08 last year. The firearm market continues to be solid, with overall NICS up 7.7% over our first quarter last year. And with our shipments up nearly 20% in the same time period, we once again outperformed, demonstrating that strong consumer preference for our leading product portfolio is driving sustained share growth and continued positive momentum into FY '27.

From a product line perspective, we gained share in both handguns and long guns in the quarter. Handgun unit shipments into the sporting goods channel increased nearly 17%, while NICS was up only about 5%. Importantly, and continuing the trend from FY '26, channel inventories were flat during the same period, indicating strong pull-through and meaningful share gains at the retail counter. This was driven by strong demand for our semi-auto pistols across the board, including our market-leading concealed carry products and new products within our full-size M&P lines.

Long guns also performed well in the quarter, with our unit shipments into the sporting goods channel increasing almost 22% well ahead of the 10% increase in NICS. And within the long-gun category, channel inventories of our products were actually down 5,000 units during the period, again indicating solid share gain at retail. Growth in long guns was led by the MSR category and weighted to May and June ahead of state level regulatory changes. But we also saw strong growth in our 1854 lever action rifles, with shipments doubling compared to last year. A great indicator of our increasing foothold in the hunting segment of the long gun market, where we have historically had limited exposure.

The breadth of our growth in Q1 was a further testament to our ability to react to market shifts through our flexible manufacturing model, consumer preference for our brand and innovative product line, and the strength of our relationship with industry partners. We had success not only across all of our product lines, but also across our customer segments. Within the consumer channel, we saw strong double-digit gains in wholesale, big box, and buying groups. In addition, we drove high double-digit growth in law enforcement and international shipments, a strong indication of professional endorsement of the product lines, and our full capabilities to service these brave men and women not only with our firearms, but with our world-class Smith & Wesson Training Academy, which continues to be a competitive differentiator.

Moving now to ASPs, we continued the trend of outperforming in unit shipments versus the broader market while simultaneously demonstrating resiliency in our pricing. Sustained demand for our core products throughout the period limited our need for promotions in the quarter, and combined with new products accounting for 35% of our shipments, our ASPs continued to move higher even in the typically slower summer months. Handgun ASPs held steady sequentially versus Q4, and were up nearly 9% year over year, while long-gun ASPs increased nearly 11% sequentially and over 18% year over year.

Finally, a quick few notes on inventory. As I mentioned earlier, channel inventories were flat and combined with our strong results indicate we continue to see healthy pull-through of our products at the retail counter. At the end of Q1, our internal inventory was $181 million, down from $203 million a year ago and up from $156 million at the end of Q4. The sequential growth reflects our normal seasonal build as we prepare for the busy fall and winter seasons, as well as restocking of long gun inventories following a strong Q4. Our disciplined sales and operations planning process, which aims to align production to forward demand across every product line, gives us confidence in our inventory position as we look to the balance of fiscal 2027.

Looking forward, we believe we are well positioned to continue gaining momentum as we move into the traditionally stronger second half of the year. Our award-winning product line is in high demand with both our loyal consumers and law enforcement and professional customers, as indicated by our shipments consistently outpacing the market and our growth in professional sales. We are making significant investments in our operational infrastructure to support our growth and drive further efficiencies. And we are well underway with installation of this new equipment in our machining center in Springfield, Massachusetts.

Our balance sheet remains strong, and we continue to deploy capital efficiently to drive long-term growth and stockholder value. And with this momentum, we expect our second quarter to significantly outperform last year on both the top and bottom lines, which Deana will cover in a few minutes.

In closing, this continues to be a story about brand strength paired with a purposeful long-term strategy. Our focus on innovation, marketing, strong partnerships, and operational excellence, and importantly, our team's relentless focus on execution across every function is what drives our outperformance. As always, I just want to note that none of this is possible without each and every member of our team across all functions working together towards making Smith & Wesson the number 1 firearms brand. I'm incredibly proud of all of them for their exceptional talent and dedication, always striving to exceed the expectations of our passionate and loyal customers.

With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Net sales for our first quarter of $112.6 million or $27.5 million are for 32.3% above the prior year on strong polymer pistol, MSR, and lever action shipments. During the quarter, inventory at distributors declined by 6.8% from the end of the prior quarter and 3.5% compared with the end of July 2025 in terms of actual units, indicating continued strong sell-through of our products at retail. Handgun ASPs remained sequentially flat versus Q4, but higher than Q1 2026 due to lower promotional spend during the current quarter and continued strong demand for our products. Long-gun ASPs increased sequentially and year-over-year due to a favorable mix.

Gross margin of 28.7% was 2.8% above the prior year, primarily driven by $2.9 million of tariff refunds, which accounted for 260 basis points of increased margin during the quarter. Increased absorption on higher production was almost entirely offset by higher volume-related spending, supplier cost increases, and increased labor costs, both from increased headcount and increased wage rates. Operating expenses of $28.1 million for our first quarter were $3 million higher than the prior year comparable quarter with legal expenses, profit-related compensation costs, volume-related increases in selling expenses and freight, and higher advertising costs driving the increase.

The higher revenue and associated margin, combined with a decrease in interest expense due to lower net debt, resulted in $2.6 million of net income, or $0.06 of EPS, compared with a $3.4 million net loss, or an $0.08 loss per share last year. Cash used in operations for the first quarter was $8.8 million compared with $8.1 million in the prior year due to higher net income being offset by a bigger increase in inventory and the payment of profit-related compensation. Because of increased demand during last quarter, internal inventory in certain product lines was depleted.

In addition, we generally build inventory during the first half of the fiscal year in order to level load our operations in preparation for the busy fall and winter season. We spent $11.9 million in capital projects this quarter, compared with $4.3 million last year, and continue to expect our capital spending for the year to be between $45 and $50 million. As a reminder, our capital spending this year is approximately $25 million higher than our historical run rate due to investments we are making in our Springfield facility, combined with advanced manufacturing initiatives at multiple locations. we paid $6 million in dividends and ended the quarter with $25.2 million in cash and investments and $40 million in borrowings on our line of credit.

Finally, our Board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on September 17th with payment to be made on October 1st. Looking forward to our second quarter, we continue to expect a normal seasonal environment and strong demand for our products, resulting in anticipated sales for Q2 of roughly 10% above last year. With channel inventory continuing to remain at healthy levels, we don't expect inventory to have an impact, positively or negatively on our second quarter. For the full year, we continue to expect that our fiscal 2027 revenue will grow approximately 5% to 7% over FY '26.

We expect Q2 gross margin to be 200 to 300 basis points higher than last year's Q2 on increased absorption, partially offset by increased volume-related spending and inflationary cost increases. Operating expenses in Q2 will likely be 10% to 15% higher than in Q1 due to volume-related customer and freight costs combined with continued investment in R&D and increased profit-related costs such as profit sharing. Our effective tax rate is expected to be approximately 30%.

With that, operator, can we please open the call for questions from our analysts?

[Operator Instructions] Our first question is from Mark Smith with Lake Street Capital Markets.

This is Alex Ewig asking questions for Mark Smith. Q1 net sales grew 32% versus the 15% to 20% you guys guided in June. But the full year guidance, you guys kind of left unchanged at 5% to 7%. And Q2 is only 10% above last year. What drove this upside, and was it timing or pull forward from Q2? And what does the implied back half deceleration look like? Kind of projecting flat to down in the back half. And what does this kind of assume about demand?

Thanks, Alex. So the growth this year, I'll just point you back to the full year. Yes, I mean, it's going to be a little bit more steady this year. I mean, I think last year, as you can see, it was a big Q4, and some of that was some of the state regulatory changes driving a pretty big Q4 for us, specifically on the MSRs. So this year, great, great start to the year with outperformance in Q1. And we just think this year it's going to be just a little steadier than it was last year, but at the end of the day, we kind of think of that as that's good news. It's steady growth. It's sustained market share gains and something that we, we can kind of really build on that momentum as we go into the back half of the year.

So it's still up significantly versus last year to 7% growth, pretty happy with that, and it's going to be smoother this year than it was last.

And then ASP on both handguns and long guns outpaced our expectations. How much of this is mix versus price increases this year? And do you guys expect ASPs to kind of remain at these levels moving forward?

Yes, we've been pretty happy with the ASPs. I think kind of in Q1, as Deana covered on the long gun side, definitely mix. We're really happy with the performance of the 1854, which, as you know, is kind of the top end of the pricing hierarchy for us. So that was really good and continued proof that we're really gaining a nice foothold there in that hunting segment of the market, whereas according to prepared remarks, we historically kind of had a smaller presence. So a little bit of mix, but a lot of it also is really limited promotions. We've had pretty solid demand for our core line as well. And so Q1, I think, was a story. A little bit of mix, but a lot of, no need to participate to a meaningful degree in promotions and we do anticipate that that's those ASP levels will continue going forward.

And then professional channel units jump pretty sharp off of a relatively small base. What type of long-term opportunity do you guys see in that professional channel?

Yes, we're really pleased with the performance on the LE side. The investments in the academy are really starting to pay dividends and a lot of the efforts we've been putting in over the last 12, 18 months really come into fruition. That's a longer sales cycle there with the professional channel. And so I think you're starting to see some of the results and some of those efforts come to fruition. So really starting to gain momentum there. We're pretty pleased there. We're continuing to invest in the academy, a lot of traction there with the law enforcement professional user community, and we expect that to continue. We have a lot in the pipeline, a nice pipeline, as we look to the back half of the year.

There are no further questions at this time. I would like to turn the conference back over to Mark Smith for closing remarks.

All right. Thank you, Operator, and thanks, everyone, for joining us today and your interest in the company and Smith & Wesson. We look forward to speaking with everybody again next quarter.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Good day, everyone. and welcome to the Smith & Wesson Brands fourth quarter and full fiscal 2026 financial results conference call. This call is being recorded. And at this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call.

Thank you and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results.

Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. and any reference to EBITDA is to adjusted EBITDA. I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. adjusted NICS is generally considered the best available proxy for consumer firearms demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipment or market share in any given time period. We believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our president and CEO, and Dina McPherson, our CFO.

With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks everyone for joining us today. Our excellent fourth quarter and full year fiscal 2026 results showcase our team's remarkable execution on our strategic priorities and the steering power of our iconic brand. Fueled by strong consumer demand for our products and our ability to leverage our flexible manufacturing operations, We are sustaining our market share growth momentum, and our Q4 performance surpassed our expectations on every key metric. Net sales increased nearly 27% year over year. Adjusted EBITDAs increased 31.7%. And adjusted EPS was up nearly 77%. We also delivered another strong quarter of cash generation, cash from operations increasing by nearly $34 million compared to last year. These numbers are a direct result of the team's focus on our clearly defined strategy of growing market share through innovation and operational execution.

For the full fiscal year, our top line revenue was up over 10% year-over-year, adjusted EPS increased more than 25%, and adjusted EBITDA was up 7%. We also continue to fortify our balance sheet, generating over $114 million in cash from operations, retiring $60 million in debt on our credit facility, and closing the year with just $20 million in debt versus $80 million at the end of fiscal 2025. Throughout the past year, we have been highlighting the tremendous results that we've been achieving in market share growth, and this momentum certainly continued in our fourth quarter. On the handgun side, our unit shipments into the sporting goods channel surged 23% versus a NICS increase of only 1.1%, while channel inventory remained flat, indicating strong consumer demand for our products is driving excellent sell-through and substantial market share capture at the retail counter. We continue to lead the concealed carry market with our Bodyguard 2.0 and Shield Pistol lines. With the introduction of our newest M&P pistols from the HD Steel to Competitor to the Carry Comp Series, we are now rounding out the innovation across the categories within the semi-auto pistol market, which is only accelerating our market share growth. Revolverside, we are the market leader and have been for years.

But true to our discipline focus on the long term, the team has been hard at work on renewing and revitalizing the line to maintain our leadership position. And we are seeing tremendous success with our new product launches, particularly our no-lock series, mountain guns, and UCJ frames. In long guns, our unit shipments into the sporting goods channel increased 28.7% versus Nick's rising 3.5%. In particular, we saw strong growth in the MSR category in Q4. As a reminder, long guns represent a relatively small portion of our overall sales, only approximately 17% at fiscal 2026. That said, we continue to build momentum in the hunting segment and will continue to look for opportunities to fill in this white space. For the net result for the year, Smith & Wesson far outpaced the broader market, with our total shipments into the channel up by 14.7% for the full fiscal year, while Nick's decreased by 2.3%.

And I'll just highlight that in that same time period, channel inventory remained flat. Again, these impressive numbers are a direct result of our purposeful focus and execution on innovation, marketing, operational excellence, and, of course, power of the iconic Smith & Wesson brand. Just to underscore that point, new products accounted for nearly 38% of our shipments during Q4 and 38% for the full fiscal year. I'm exceptionally proud of our talented product management, engineering, design, and production teams who consistently create and reliably manufacture products that resonate with our customers while upholding the world-class quality and dependability that they expect from us. And meeting those expectations for innovation and quality allows us to not only take a unit share but maintain strong average selling prices. Sequentially in Q4, handgun ASPs were up 4.3%, and long gun ASPs increased 4.5%. Turning now to inventory, we closed Q4 with $156 million in internal inventory. from $190 million a year ago.

Our strong balance sheet and robust sales and operations planning process, which aligns production to forward forecasts across each of our product lines, has positioned us exceptionally well as we enter fiscal 2027. As I spoke about earlier, channel inventory remains flat in rig units relative to both Q3 and last year. Again, signaling healthy sell-through at retail in a very clean position as we enter FY27. Looking forward, we expect a positive momentum to carry into FY27. While we anticipate and are experiencing a typical summer season from a demand perspective, we're continuing to see relatively strong demand for our products, and therefore expect our Q1 to significantly outperform last year, as Dina will cover in a few minutes. I want to emphasize that we believe the market share gains we've secured are the product of years of methodical execution of our innovation strategy, marketing, sales relationships, and focus on operational excellence, as well as the success of our innovation strategy. as our commitment to creating products that meet and surpass consumer expectations. We remain focused on preserving this momentum and maintaining our leadership position in the market.

Given what we see on the horizon, we are planning to make investments in our Springfield facility during fiscal 2027, which will increase our capital spend this year as compared to our historical averages. This represents a strategic investment concentrated on expanding our capacity and increasing operational efficiency. We've consistently delivered high returns on our investments in business and are confident this latest initiative will do so as well. along with further strengthening our foundation for sustained long-term growth. In closing, fiscal 2026 was an outstanding year for Smith & Wesson. We delivered strong results across every dimension of our business, from revenue to profitability, from cash flow to debt reduction. We outperformed our competitors in our core categories and achieved meaningful progress in segments that we hadn't historically competed in. We launched our state-of-the-art Smith & Wesson Academy, further strengthening our commitment to our professional customers and providing world-class training to our consumers.

We introduced dozens of new products, which were enthusiastically received by our customers. We're making significant investments back into the business to optimize operations. And as I said earlier, this momentum continues into FY27. The combined strength of our brand, our team, our disciplined strategic focus, and strong balance sheet puts us in an excellent position to continue creating long-term value for our stockholders. Finally, I cannot stress enough that all of this is only possible through the amazing team of employees that work tirelessly every day of the year across every function of our business. always, I want to thank them, each and every one, for their unwavering dedication and for applying their skills every single day to drive our success. With that, I'll turn the call over to Dina to review the financials. Thanks, Mark.

Please note that all comparisons are between the fourth quarter of fiscal 2026 and the fourth quarter of fiscal 2025, unless otherwise stated. Net sales of $178.4 million were $37.6 million, or 26.7% above the prior year, with new products making up 37.5% of total revenue for the quarter. As Mark noted, our outperformance was mostly driven by handgun shipments, which represented over 80% of our units shipped. Our handgun unit sales into the sporting goods channel increased 23.2% over the prior year, while Nick's increased only 1.1%, with nearly no change in channel inventory, demonstrating strong consumer preference for our products. We also benefited in Q4 from a short-term increase in long gun demand, although the volumes there are much lower than in our handgun line. Gross margin of 29.8% was one percentage point above last year, reflecting a 23% increase in production volume, lower promotions, and a 2% to 3% price increase from January, partially offset by increased volume-related spending tariffs and inventory reserves. Operating expenses of $31.7 million for our fourth quarter were $4.3 million higher than the prior year due to increased profit-related compensation costs, including profit-sharing and incentives, increased freight-related costs, and higher R&D costs.

The income of $16.2 million in the fourth quarter was $7.6 million more than the prior year due to a combination of higher net sales and gross margin, partially offset by increased profit-related compensation costs. Earnings per share of 36 cents was above the prior year of 19 cents. Turning to cash flows, during the quarter we generated $74.6 million in cash from operations and spent $4.8 million on capital projects, resulting in net free cash of $69.7 million. We paid $5.8 million in dividends, and we paid $55 million on a revolving line of credit. We ended the quarter with $28.2 million in cash and $20 million in borrowings on our line, representing a net cash position of $8.2 million. During our full fiscal year, we generated $114 million in cash from operations and spent $23.7 million in capital projects, resulting in net heat-free cash generated of $90.4 million. Our board has authorized our quarterly dividends of 13 cents to be paid to stockholders of record on July 1st, with payment to be made on July 15th.

Looking forward to fiscal 2027, we expect firearm industry demand in fiscal 2027 to continue to be healthy and slightly higher than in fiscal 2026. Combined with our market share growth, we expect our full fiscal 2027 revenue to grow in mid-single digits compared to full fiscal 2026. We believe our first quarter revenues will be approximately 15 to 20% higher than last year, with margins a point or two higher on increased volume. As a reminder, our prior results were negatively impacted by a reduction in channel inventory, which we are not anticipating this year. With regard to average selling prices, we expect our first quarter to be sequentially lower in the 5% range. With the decline in handguns being partially offset by an increase in long guns, both due to mix of products sold. Operating expenses for the first quarter are expected to be approximately 20% higher than last year's first quarter due to volume and profit-related costs such as freight, customer marketing allowances, and profit sharing.

Finally, our effective tax rate is expected to be approximately 30%, which is higher than in fiscal 2026 due to prior year favorable adjustments that impacted 2026. For that, operator, can we please open the call to questions from our analysts? Thank you.

And with that, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. And confirmation tone indicate that your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hi guys. I want to ask first off, you guys had mentioned meaningful progress in segments you haven't historically competed in. Can you elaborate a little bit more on where all you saw incremental growth? Sure. Hey, Mark. Yes, so obviously the biggest one is in the 1854 with the entry into that hunting category that we traditionally had not participated in. So continuing to see a really nice market share there for a product that we just introduced within the last 18 months. So continues to do really well for us, really pleased with the progress there. And then also on the long gun side, on the carbine side, continue to do really well really well with that FPC. So just some new entrance into some of the categories that we do play in, but I guess a subcategory within the carbines and then just brand new category for us in the hunting side.

Perfect. And then looking at gross profit margin, I know you discussed it a little bit on the call, but I wanted to dig in more on that, just on kind of what helped drive the gross profit margin improvement in fourth quarter, maybe how much of that was just volume versus the 2% to 3% price increase or impact. any, any other moving parts that help drive some of that outperformance? Yes. I mean, there's going to be some tailwinds and headwinds there, obviously. Um, you know, headwinds continue to be the, uh, the, you know, the terrorists, um, But tailwinds there, obviously margin. I think you well know that as a major manufacturing operation, more of volume drives more absorption. And then obviously that 2% to 3% price increase that went through very smoothly back in December.

obviously helped there as well. So a little bit of combination of all of those. I think you'll remember, Mark, that in fiscal 25, we were pulling down inventory. So production levels were quite a bit lower. And we sort of got to a place in fiscal 26 where we were comfortable with inventory, and then we were increasing inventory to match. I think we talked about that maybe in the last couple of quarters. So that really increase in introduction volume really gave us a lift on the margin side.

Okay. And then just looking at the price increases that were taken in January, any thoughts on kind of how those were received by distributors? Yes, the price increases were great. Sorry, go ahead. Oh, go ahead. I can greet you in January, Mark, without any... fanfare whatsoever. So I think that just kind of speaks to, again, we talk about a lot the power of the brand, that innovation strategy of introducing new products that are going to resonate with that consumer, and that just those two things together really hold those ASPs up nicely. Okay, perfect. And yes, new products was kind of my other part of that question, just how much of that was kind of driven by new products versus kind of across the board price increases. Yes, I think it's important to note that the new products also help the core line because it just elevates the overall perception with the consumer of the brand itself. So, you know, a lot of those new products, I think you've seen them out there, the HD, the, you know, competitor.

I mentioned some of them on the prepared remarks. But, you know, it's just – and, of course, the, you know, the marketing, you know, know, power that we have with our team here and really being the number one voice in the firearms industry really helps the overall brand. So it's not just new products. It helps with the core line as well. Okay. I think the last one for me, just you guys did a good job cleaning up the balance sheet here, paying down debt. Curious your thoughts around capital allocation. It sounds like some investments back into Springfield, but then maybe how you weigh the dividend buybacks, or any other investments as we look forward here to fiscal 27? Sure, yes, I'll take that in a couple of sections.

The investments back into Springfield know I think it's just a reflection of the you know the business and our comfort level with how sustainable that growth is I think you know you know I Our flexible manufacturing model, we've always got a mix of internal and external machining capacity. So, you know, as we look at, you know, the performance of the core line and the products that we have out there in the marketplace today, market share growth, how sustainable that is, and then we're looking down the line at that new product pipeline, we're always looking at what is the optimal balance. of internal versus external there. So, you know, to the extent we see that being sustainable, we're going to make the investments internally to be able to increase our capacity. And then also some of the new products coming down the line, we need some additional capabilities as well. Let's give you a little color there. You know, we're right now, you know, the initial phase is about 20 new CNC machines. You know, you can expect, you know, About half of those will be online this summer.

They're remaining throughout the rest of this calendar year. So by the end of the calendar year, they should all be operational. And then the impact to the capex spend for this year, I think, Mark, you can expect another, probably an additional about $20 million above our usual usual 25 to 30. So with that said, back to the capital allocation that you just mentioned, we've always talked about capital allocation priorities is first and foremost invest back in the business where we see the best return. And obviously, this is going to have a pretty healthy return for us. So that's going to be the focus this year. But we still do have authorization on the buyback. from the board, so we'll continue to be opportunistic there.

If there's an opportunity, it's still on the table. And then the dividend, as Dean had discovered, we still remain committed to the dividend. Great. Thank you, guys. Thanks, Mark. Thank you. And we'll see you next time. Bye-bye. Bye-bye. Bye-bye. Bye-bye. Bye-bye.

And our next question comes from the line of Romel Dionisio with Aegis Capital Corporation. Please.

to see with your question. Good morning and good afternoon. Thanks for taking my question. Did I hear you say correctly much of the capital expansion or capital expenditure this year would be in Springfield and not in Tennessee? I wonder if you could just clarify that and just maybe the thought behind, you know,.

facility? Thanks. Sure, thanks Ramon. So as I think you're probably aware, our Springfield facility is really our machining center of excellence. where we've got all of our skilled labor there, a great team there that they make all of the, they do all the machining work there in Springfield. And then this facility here in Tennessee is It's kind of our state-of-the-art facility where we're doing distribution, we're doing assembly, we're doing some finishing operations, plastic injection, molding, and obviously the headquarters. So, you know, and that is going to be the plan going forward is that, you know, Springfield is going to be the machining center and, you know, and then Tennessee is going to be the, you know, the headquarters and all the operations I just mentioned. The investment in capacity is happening in Springfield because that's the machining center where that capacity is going to be planted. to be for the machining is going to be planned to be forever. So, you know, that facility is going to continue to be part of our plans, you know, for the future. Thank you.

Okay, great. That's helpful. And maybe just to follow up on the new products that you already talked about a little bit, I don't mean to beat it to death, but just on the handgun side, could you just comment on some of the most recent introductions which maybe didn't necessarily impact the quarter you just reported, like Bodyguard 38 2.0, and I guess you've had the shield next for several months now but yes I wonder if you could just comment on the most recent introductions and handguns and obviously the impact that that's having and helping to drive these significant share gains you've seen thanks sure.

Yes, I mean, I think, you know, if we're going to point to one thing that's kind of driving the share gains, I think it is new product and, you know, it's handgun new products. So, you know, it's just been, frankly, you know, one home run after another. The Bodyguard 38 that you just mentioned, as you know, was just introduced very recently within the last few weeks. That's doing very well for us. The Bodyguard 380 pistol continues to be a very successful product for us. You know, one of the leading, if not the leading, concealed carry pistol on the market. The Shield X. doing very well for us as well.

And also, as I mentioned in the prepared remarks, it's not just that all of those are kind of concealed carry guns. We're really rounding out the line to the entire semi-auto pistol line with the competitor, the HD series. So really, all of those new products are doing very well for us, and as I mentioned earlier, really just helping to elevate the brand in general. The consumer's perception of the brand is already good and only getting better with all these new products introductions, so they're really doing what we expected. Great. Thanks very much. Thanks, Ramo. Thank you.

And with that, there are no questions at this time. I would like to turn the floor back to Mark Smith for any closing remarks.

Well, I just want to thank you, Operator, and thank you, everybody, for joining us today and your interest in our company and Smith & Wesson. Look forward to speaking with you all again next quarter.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.

[Call has ended.]

Good day, everybody, and welcome to Smith & Wesson Brands, Inc. Third Quarter Fiscal 2026 Financial Release and Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call. Thank you. You may begin.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities in trade and industry conditions in general. Forward-looking statements represent our current judgment of the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today.

These risks and uncertainties are described in our SEC filings, which are available on our website, along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS and any reference to EBITDA to adjusted EBITDA.

Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted mix removed those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer fire only the law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe, mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our President and CEO; and Deana McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. We are very pleased with our third quarter results, which demonstrated continued market share growth while simultaneously maintaining resiliency in our pricing power and profitability. This is a direct function of the entire team's discipline in staying focused and executing against our long-term strategy. The strength of the iconic Smith & Wesson brand, along with our laser focus on innovating to keep ahead of market trends. Once again drove impressive average selling prices in the quarter, which, together with increased unit shipments delivered not only solid top line performance, but also translated into both strong profit margins and balance sheet performance.

Our Q3 performance exceeded our expectations across the board. Net sales increased over 17% year-over-year to nearly $136 million. $16.8 million was up nearly 21% and adjusted EPS of $0.08 compared with $0.03 in the prior year period. Importantly, we also delivered another quarter of significant growth in operating cash flow, which is up more than $30 million year-over-year. We believe our purposeful deployment of capital will allow us to continue consistently delivering long-term value for our stockholders.

Looking at our performance by category. Our handgun results were exceptional. Our unit shipments of handgun into the sporting goods channel were up 28%, while mix was down 2.2%. With distributor inventory weeks of supply remained flat during the period, this indicates significant market share growth. This outstanding performance was driven by several factors, including strong demand for our new products, a favorable shift in product mix towards higher price models, robust consumer demand and the benefit of a modest 2% to 3% price increase that we implemented late in the quarter on January 1.

Notably, we saw this growth across our entire semi-auto pistol line, indicating that the hard work that the team has been putting in on marketing messaging, targeted promotions and new product development execution across the line is paying dividends. Performance in long guns was consistent with our strategic positioning in the market, and we are pleased with our performance in the categories where we actively compete. For the quarter, our long gun shipments into the sporting good channel were down 25%, while overall mix was down 5.6%.

However, we believe this was largely due to channel fill in the prior year period of several new caliber introductions on our higher-end 1854 lever-action rifle products, combined with the relative outperformance in the industry, of the hunting segment versus the self-defense segment, where our product line is more heavily weighted.

Diving a little deeper into innovation. New products represented 44% of handgun shipments and 28% of long gun shipments during the quarter. In handguns, while we continue to have success with the Bodyguard platform, as I just mentioned, the growth we experienced in Q3 was across the entire line of our semi-auto pistols, where we introduced several new models outside the subcompact space, most of which are positioned at higher prices.

Once again, I'm incredibly proud of our award-winning product management, engineering, design and production teams who consistently deliver products that resonate with consumers while meeting their expectations of world-class quality and reliability associated with our legendary brand. Driven by this mix shift, and as I mentioned earlier, we were again pleased to continue seeing strong overall average selling prices in the hanging category. with ASPs up 5.2% versus a year ago to over $419 and also above Q2 levels. On the long gun side, ASPs were also strong at $535 although down about 11% versus a year ago. Similarly, mix was the primary driver here, as I just mentioned, with the year-ago period, including the channel fill of higher-priced new product deduction from the 1854 rifles.

For both categories, the strength of the Smith & Wesson brand and our ability to ensure our product assortment is aligned to market trends continues to allow us to maintain healthy pricing and profitability while only participating selectively in promotions.

Turning now to our balance sheet. We continue to make significant progress reducing our debt and further strengthening our financial position. We ended Q3 with $75 million in debt versus $90 million at the end of Q2, and we paid down an additional $20 million subsequent to the end of Q3.

We were pleased with our internal inventory position of $175 million which was down $23 million versus last Q3, resulting in excellent cash generation in the period of over $20 million. I'd like to once again commend the team for their hard work on our disciplined process for aligning production to sales expectations across the product portfolio, which drove these results. And we're also very pleased with our distributor inventory levels, which remained flat in terms of weeks of supply, maintaining at approximately 9 weeks throughout the quarter, right in line with our target. With our strong sales in the period, this indicates solid sell-through of our products at the retail counter.

Before I turn the call over to Deana, I want to touch on a couple of additional points. First, we attended the annual industry SHOT Show in Las Vegas at the end of the quarter, where we were very pleased with customer feedback on our performance, product portfolio and forward strategy. This feedback, combined with our recent results and strong outlook for the remainder of the fiscal year, which Gina will cover in a moment, indicates we are winning in the marketplace. And looking forward, we will continue to be laser-focused on execution across the business and sustaining these gains. Next, the Smith & Western Academy, which launched just 6 months ago, along with our focus on the professional channel is already exceeding our expectations. Thanks to the hard work of our Academy staff and law enforcement sales team and the ongoing success of our purpose-built, rugged and reliability weapons, we are not only growing in the consumer channel, but also gaining significant momentum on the law enforcement side.

You may have seen that we were awarded a number of large agency [ orders ]recently. And as a matter of fact, tips to nearly 1,000 separate federal, state and local law enforcement agencies just within the past 18 months. With a strong sales pipeline and growing momentum, we're very pleased with the results to date and beyond proud and home hold to be trusted by these men and women with the tools they need to come home safe to their families every day as they put themselves in harm's way to protect and serve our country and our communities.

In summary, momentum is strong and building, and our brand and product assortment are driving continued healthy profitability, and we remain confident in the direction and trajectory of our business against the backdrop of a healthy and stable market. We continue to lead with a proven innovation strategy that consistently resonates with consumers backed by the powerful Smith & Wesson brand, along with our commitment to operational excellence and maintaining a strong balance sheet we are well positioned to continue winning in the marketplace and delivering long-term value to our stockholders.

As always, I want to thank our entire team of talented Smith & West employees for their tireless dedication and putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Please note that all comparisons are between the third quarter of fiscal 2026 and the third quarter of fiscal 2025, unless stated otherwise. Net sales for our third quarter of $135.7 million were $19.8 million or 17.1% above the prior year on the strength of our new handgun products. During the quarter, distributor inventory in terms of actual units increased by approximately 20% over the end of the prior quarter, but only by about 4% compared with the end of January 2025 with weeks of supply remaining steady at approximately 9 weeks.

We believe, based on feedback from our customers, that strong demand for our products will continue in the coming months. Hengan ASPs were up slightly versus Q2 levels due to continued strong demand for certain premium products, but offset by the strength of certain of our lower-priced products.

Long gun ASPs decreased by about 11% due to lower overall volume of certain of our higher-priced products, driven by channel fill for new products in the prior year, as Mark covered earlier. Gross margin of 26.2% was up 210 basis points over the prior year on increased production volume combined with lower promotion costs and lower federal excise taxes partially offset by a 160 basis point negative impact from tariffs. Having focused on driving inventory levels down over the last 12 months, we are now turning our focus to increasing production to meet market demand which should continue to have a positive impact on margins.

Operating expenses of $28.9 million were $5.7 million higher than the prior year due primarily to a $2.3 million gain on the sale of real estate that was reported last year. Increased profit related and stock-based compensation expense contributed to the remaining increase. Higher revenue and related margin resulted in net income of $3.8 million compared with $2.1 million in the prior year period. GAAP earnings per share in the third quarter was $0.08 compared with $0.05 a year ago. On a non-GAAP basis, earnings per share was $0.08 compared with $0.03 a year ago.

Cash generated from operations during the third quarter was $20.5 million compared with cash used from operations of $9.8 million in the prior year quarter. This was due primarily to lower inventory, which decreased $7.9 million during this quarter versus an increase of $2.9 million in the prior year quarter. We spent $3.6 million in capital projects in the third quarter compared with $6.3 million a year ago. We expect our capital spending for the year to be between $25 million and $30 million. We paid $5.8 million in dividends and ended the quarter with $23.5 million in cash and investments and $75 million in borrowings on our line of credit. Subsequent to the end of the quarter, we repaid $20 million on our mind, bringing our outstanding borrowings down to $55 million.

Finally, our Board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on March 19, with payments to be made on April 2. Looking forward to the fourth quarter, we believe the strength of our brand, product assortment and new product offerings are helping us drive growth and take share in an otherwise stable market. Therefore, we expect our fourth quarter sales will be up 10% to 12% over Q4 2025 sales, with a small reduction in channel inventory as distributors begin to plan for the slower summer months. With 8 additional operating days compared with Q3 and an increase in production to meet demand, we expect Q4 gross margin to increase by several percentage points over Q3 and a point or 2 over last year's fourth quarter.

Operating expenses in Q4 will likely be about 10% higher than last year's fourth quarter due to increases in research and development costs, stock compensation, profit sharing and other profit related costs. Additionally, we expect continued healthy cash generation during the fourth quarter. Our effective tax rate is expected to be approximately 29%. With that, operator, can we please open the call to questions from our analysts.

[Operator Instructions] Our first question is from Mark Smith with Lake Street Capital.

I want to ask first about kind of recent pricing changes. Can you talk about any price that's been taken, whether that's been across the board? And anything that you can quantify?.

Sure, Mark. The price increase we put in was effective January 1, as I covered in the remarks. And it was largely across the board. It was -- there were some categories that took a little bit steeper increase and some categories took a little bit little bit less so just really driven on market demand and our position within each category. But overall, across the board, it was pretty close to 3%.

Okay. Any feedback for you look at distributors? Or as you think about kind of consumers on that, does it seem like that's gone through well? Or has there been any pushback on the pricing?

No, it's no pushback whatsoever. As you may recall, it's been a little bit since we've taken a price increase and really has gone through smoothly, no impact whatsoever. And I think as you saw from the results, an uptick in demand throughout the quarter. So...

Perfect. And I want to look at just handgun sales, really strong results there, especially as we think about new products. I'm curious, without giving out too much competitive details here, anything that you can expand on, on what's kind of helped drive some of that strength. I'm curious like colorways, some of your ported options? Or are these things that have helped or is just having the right product for consumers right now?

Yes. You know we've had great success with BODYGUARD over the last -- really the last couple of years that category, we kind of own it on the -- we've done a lot of work and that strategy, I talked about a lot, long-range strategy is let's make sure we're refreshing the entire product line. And I think we're starting to see the results of that. And it's really just it's across the board. It's all of what you just talked about markets. And obviously, we're not going to give too much detail for the reason you just covered. It's looking at the market trends and having a team that really understands the industry and what is trending out there, where do we need to make some updates and changes.

And making those changes, and we've been really happy with the results that are coming out with that. And now that polymer pistol line across the board is really starting to gain a lot of profitable share. And obviously, as we start to move now into one of the -- out of the subcompact into the compact and full-size markets, that's obviously at the higher end of the pricing hierarchy and that really helping ASPs and the momentum continues.

Perfect. And then just similar question shifting over to long guns. I'm curious, anything that you guys can do today to kind of drive more strength in that long end market. And I realize there's some things in the comparable that make it this quarter tough. But as we think about the hunting category. Is there interest in entering there? Is there more maybe on SBRs or anything that you can do to drive more long gun business?.

Yes, the SBRs, as you're well aware, the tax am changes that occurred on January 1 are helping a little bit there in that category. But at the end of the day, as I covered in the prepared remarks, it really is. One is the difficult comp versus last year as we were introducing kind of the last couple of calibers and the lever action rifle, which obviously are at the very high end of our pricing higher and long guns, but also that our product portfolio is kind of more weighted towards that self-defense market and the hunting market, obviously, we're in it with the 1854 and very pleased with the performance there. But there's -- I'll just leave it at this, is there's a lot of white space there for us and we're always looking at long-term opportunities..

Perfect. And I think the last one for me. You called it out a bit in your commentary, just the law enforcement opportunity and improving sales there. I'm curious, just where you're at in that process? It seems like that's a big market and maybe just scratching the surface. Is that something that is a big focus and where you think you can really move the needle on revenue as there's more drive in law enforcement. And then similarly, I'm curious as we think about maybe international within military, if there are similar opportunities.

Yes, it's definitely a focus area as I think you've been around long enough now you know that's a much longer sales cycle than on the consumer side. So what I'm pleased about is the pipeline that we have with results this quarter, we've got a pretty healthy pipeline coming up behind it. And that is a direct result of all of the intangibles of the academy and being able to service that law enforcement customer in a more meaningful way, purpose-built products, changes to the product, there's innovation happening there as well. And that expands beyond just domestic law enforcement, it moves into federal agencies. state, local and federal and then outside into foreign militaries as well. So a lot of good things happening in that space. Still does remain kind of a smaller section of our business right now, but a lot of momentum there and a pretty healthy pipeline coming up behind it.

Our next question is from Ramel Dionisio with Aegis Capital. Please check for line is muted. I believe he was having some technical difficulties. We do not have any further questions at this time. I would like to turn the conference back over to Mark for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today and your interest in Smith & Wesson. We look forward to speaking with you all again next quarter.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I would now like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us information about today's call. Thank you. Please proceed.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products growth opportunities and trends and industry conditions in general.

Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website, along with a replay of today's call. We have no obligation to update forward-looking statements.

We reference certain non-GAAP financial results. Our non-GAAP financial results exclude relocation expense and onetime costs related to the grand opening event for the Smith & Wesson Academy. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS and any reference to EBITDAS is to adjusted EBITDAS.

Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe, mostly due to inventory levels in the channel.

Joining us on today's call are Mark Smith, our President and CEO; and Deana McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. We were pleased with our second quarter results. which continue to demonstrate the strength of the Smith & Wesson brand, the ongoing success of our innovation strategy and our disciplined focus on managing operations and allocating capital. As we anticipated, excellent efficiency in our business operations allowed us to deliver solid profitability of $15 million of EBITDAS on net sales of nearly $125 million.

We also saw great results on our balance sheet with a significant reduction in inventory, thanks to our disciplined sales and operations planning process, which ensures our factories are rightsized to demand levels. This generated healthy operating cash flow of over $27 million in the quarter. Further, our new products continue to be a significant catalyst, accounting for nearly 40% of sales in the quarter. I'm proud to see our award-winning engineering and design teams continuing to deliver products that resonate with consumers.

Looking at market dynamics, we believe that the market continues to be healthy and stable, following normal seasonal trends and that our brand strength, award-winning product portfolio, experienced team and disciplined management allowed us to continue gaining share during the quarter. In handguns, our unit shipments into the sporting goods channel were down 1.9% versus NICS being up 2.9%. However, when we adjust for channel inventory fluctuations in the period to understand true consumer demand, we had a 12,000-unit decrease in distributor inventory during Q2. This indicates that our handgun sell-through at the retail counter was actually up 7.7%, we believe reflecting market share growth. As I just mentioned, this was driven by the continued success of our entire line of new products as well as solid performance from the core line.

In long guns, our shipments into the sporting goods channel declined 5.1%, while mix was down 8.3%. When we adjust for inventory fluctuations in the channel, we did underperform the overall long gun category during the period. However, this represents typical category seasonality for us as demand for long guns in the fall season is heavily weighted towards the traditional hunting segment, where we currently have a relatively limited presence.

In summary, on the overall market, our handgun outperformance far outweighed the impact of long gun seasonality. And after inventory fluctuation adjustments, our total firearm unit shipment into the sporting goods category were up 3.3% versus the market being down 2.7%. This represents solid results for the fall period, which again is heavily weighted to the hunting category. Importantly, the strength of our brand allowed us to outperform the market in unit sales without sacrificing our average selling prices, which actually increased in Q2.

Overall, ASPs were up 3.5% versus a year ago, including a 2.1% increase in handguns to $418 and a 10.2% increase in long guns to $602. We also saw growth sequentially with overall ASPs up 6.5%, comprised of a 3.7% increase in handguns and a 15.1% increase in long guns. While our focus on innovation is a key factor in supporting ASPs, the growth we delivered in Q2 also illustrates the strength of the Smith & Wesson Brand, which allows us to largely avoid having to be reactive in our promotional participation.

On that note, our balance sheet remains strong, and I'm particularly pleased with our inventory position as we move into the seasonally stronger second half of the fiscal year. We ended the quarter with $183 million of inventory, which was down from $196 million a year ago and from $203 million at the end of Q1. The team has done an incredible job managing production and inventory ensuring we are aligned with consumer demand across our portfolio as well as retail and distributor inventory levels.

Channel inventory at distributors continues to be very clean declining over 5% sequentially and over 15% year-on-year, positioning us to quickly convert incremental demand into shipments as we move into our typically busy second half of the fiscal year. In addition to putting us in a strong competitive position, as I mentioned earlier, our focus on inventory management drove significant operating cash flow of over $27 million.

Finally, just a quick update on our new Smith & Wesson Academy that I mentioned on our last call. Our grand opening ceremony was held on September 12, and we'd like to thank all of the federal and state senators, congressmen and women, industry personalities customers and influencers who made the trip to help us celebrate this latest milestone in Smith & Wesson's long legacy. Our goal with this state-of-the-art purpose-built facility is to offer tailored situational training to our current and prospective law enforcement federal agency and military customers as well as offer training classes to consumers of all skill sets, looking to learn from the best of the best to enhance their firearms proficiency.

As I mentioned on our last call, we are proud to have Mark Cochiolo leading the operations and training at the Academy. Mark is a retired U.S. Navy Seal, who proudly served our country as a member of the Elite SEAL Team 6 and after retirement returned to San Diego where he spent the next 16 years as a firearms instructor, training over 4,000 Navy Seal candidates in that time. I'm happy to report that just over 2 months in, we have already had the pleasure of hosting dozens of current and prospective law enforcement customers and held our first consumer training classes. The feedback has been overwhelmingly positive. And we look forward to continuing to exceed the expectations of our professional and consumer customers with this new addition to the Smith & Wesson brand experience. I encourage anyone interested to visit our website for more details or to sign up for training class.

As we look forward to the future, we remain focused on our proven strategy of innovation-driven growth, disciplined cost management and maintaining our strong balance sheet. Our capital allocation strategy remains unchanged, invest in our business, maintain financial flexibility and return value to stockholders. With our industry-leading innovation pipeline and continued strong market position, we believe we are well positioned for continued success. Before I hand the call over to Deana, and as always, I just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication and putting their skills to work each and every day to make us successful.

With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Please note that all comparisons are between the second quarter of fiscal 2026 and the second quarter of fiscal 2025, unless stated otherwise. Net sales for our second quarter of $124.7 million were $5 million or 3.9% below the prior year. During the quarter, distributor inventory in terms of actual units declined by over 5% from the end of the prior quarter and by 15% compared with the end of October 2024. This indicates continued positive sell-through of our products at retail and a good position for us as we look forward to the coming months.

Hand gun ASPs increased slightly from Q1 levels due to strong demand for certain premium products, partially offset by promotions and continued demand for lower-priced products. Long gun ASPs increased due to the mix of higher-priced products and slightly increased overall volume. Gross margin of 24.3% was down 2.3% versus a year ago, due primarily to decreased absorption on temporarily lower production as we focus on inventory optimization and an 80 basis point negative impact from tariffs partially offset by lower promotion costs and lower federal excise taxes as a result of the favorable outcome of a recent audit.

Operating expenses of $26.2 million were $733,000 lower than a year ago, with increases in selling and marketing costs related to the grand opening of the Smith & Wesson Academy being more than offset by lower G&A primarily due to lower legal costs. The lower revenue and associated margin resulted in net income of $1.9 million compared with $4.5 million in the prior year period. Earnings per share during the second quarter was $0.04 compared with $0.10 a year ago. Cash generated from operations during the second quarter was $27.3 million compared with cash used from operations of $7.4 million in the prior year quarter due primarily to lower inventory and income taxes paid.

Inventory decreased $20 million versus an increase of $6.2 million in the prior year quarter. We spent $11 million on capital projects in the second quarter compared with $3.3 million a year ago, with the increase primarily related to the Smith & Wesson Academy. We expect our capital spending for the year to be between $25 million and $30 million. We paid $5.8 million in dividends and ended the quarter with $27.3 million in cash and investments and $90 million in borrowings on our line of credit. Since the end of Q2, we have so far repaid $15 million on the line, bringing our current total borrowings on our line of credit to $75 million.

Finally, our Board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on December 18, with payments to be made on January 2. Looking forward to our third quarter, although we continue to see uncertainty regarding macroeconomic conditions, including tariffs, we believe that the strength of our brands, product assortment and new product offerings should allow us to continue performing well. Therefore, we expect our third quarter sales will be 8% to 10% over our Q3 fiscal 2025 sales with no significant impact either positively or negatively from channel inventory. With 2 additional operating days and an increase in production to meet demand during our busiest quarter in Q4, we expect Q3 gross margins to increase by a few percentage points, both sequentially and year-over-year.

Operating expenses in Q3 will likely be about 15% higher than in Q2 with increases due to the SHOT Show in January, new product development costs, increased promotions and increased profit sharing. Additionally, we expect continued healthy cash generation through the second half of the fiscal year. Our effective tax rate is expected to be approximately 28%.

With that, operator, can we please open the call to questions from our analysts. Thank you.

[Operator Instructions] And our first question comes from the line of Mark Smith with Lake Street Capital.

You have Alex Sturnieks on the line for Mark Smith today. First one for me. You noted an 80-point or 80 basis point headwind in the quarter. But could you just walk us through what you're seeing in input costs right now, steel components, tariffs and how you're thinking about gross margins over the next couple of quarters?

Sure. Alex, this is Mark. Yes, the -- as you know, we're mostly a U.S.-based manufacturer, although in the global economy, we do have some source components from overseas. I think our impact from tariffs, you can probably expect it to pick up a little bit as we go through the back half of the year just as we work through some of the inventory that we had already in stock from kind of the pre-tariff days. But it shouldn't have a material impact on our profitability as we go through the back half.

Okay. That's great. Sorry, go ahead.

I would just say one other point. The back half of the year, we have more operating days. And as I said on the prepared remarks, given that inventory has declined and we're now ramping back up, the absorption will probably be a little bit favorable. So you'll see a little bit of a positive impact that should be able to offset that impact of tariff costs.

Okay. That's great. Second one for me. OpEx looked really clean this quarter, specifically G&A. Is this a level you feel you can hold on to? Or should we expect G&A to tick up as we move through the rest of the year?

Yes. I mean, our operating expenses are usually fairly consistent year-to-year. So we always have an increase for SHOT Show in January. So I think you can kind of look at how we performed on operating expenses in past years in Q3 and Q4. And I think you can kind of expect that to be held in line. We're pretty disciplined in managing the OpEx line in general. So that performance in Q3, Q4 kind of last year, I think you can kind of expect the same cadence this year.

Okay. That's great. And then last one for me. It sounds like you're seeing some nice tailwinds given the Q3 outlook. Any early thoughts on how Q4 is shaping up from where you sit today?

Yes. We've been really pleased with the performance in Q2 and the first half of the year. The strength of the brand is really kind of showing through and resonating. New products are doing very, very well across the board. We expect that. We'll continue to focus on innovation. It's one of the core strategies. The marketing and design teams are continuing to kind of hit it out of the park with blockbuster launches. And so I think as you can see in kind of the color and guidance for Q3, we expect that to continue into Q3.

And for Q4, as I said in the prepared remarks, the market is stable, normal kind of back to how it always performs, which puts our Q4 always is our strongest quarter. And this year, I don't think it's going to be any different. I think you can expect somewhere high single-digit, low double-digit growth in Q4 over Q3 this year.

And our next question comes from the line of Rommel Dionisio with Aegis Capital.

I know SHOT Show is still about a month away. But I wonder -- you mentioned you've already had some conversations with retailers, some distributors. I wonder if you could just give us a little heads up in terms of the feedback you're receiving with regards to reset for new products, outlook for calendar 2026 in the industry overall?

Yes. Great. Thanks, Rommel. Yes, I mean the conversations we've been on with our -- whether it's distributors, retailers or all of our channel partners have been very positive around Smith & Wesson. I mean, and really kind of underscores the comments we made in the prepared remarks about the market share gains. So the portfolio is performing extremely well. The strength of the brand is really starting to show through. So I think they're very pleased. Their inventory is in a really great spot as we kind of covered earlier. We always say we try and target about 8 weeks of supply, and we're right there, right at 8 weeks right now. So their inventory is very clean across the line and performing efficiently for them. So they're very pleased with the Smith & Wesson brand.

As far as SHOT Show and what we got coming up there. I encourage you to keep your eye out. Obviously, as you know, we don't give any forward guidance into the new products. But all I'll say is we expect for the back half of this year, absolutely to continue that momentum on new products. They continue to do really well for us in a competitive environment. That's really what drives the needle for us and really frankly, any consumer goods company. So we're going to keep the foot on the gas there.

And with that, there are no further questions at this time. I'd like to pass it back to Mark Smith for any closing remarks.

All right. Thank you, operator. And thank you, everybody, for joining us today and your interest in Smith & Wesson and we look forward to speaking with everybody again next quarter.

Thank you. And with that, this does conclude today's teleconference. Thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. First Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify forward-looking statements.

Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website, along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results.

Our non-GAAP financial results exclude relocation expense. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. And any reference to EBITDAS is to adjusted EBITDAS.

Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearm purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe, mostly due to inventory levels in the channel.

Joining us on today's call are Mark Smith, our President and CEO; and Deana McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. First quarter results came in better than expected, with sales of $85.1 million and EBITDAS of $8 million, reflecting robust demand for our new products and continued strong market share for our broader portfolio in every firearms category in which we compete. Our performance during the seasonal slow period for firearms demonstrates the strength of our brand and the ongoing success of our innovation strategy.

During the first quarter, our performance in handguns was exceptional. With our shipments into the sporting goods channel increasing just over 35% year-on-year versus NICS being down 2.4%. These results were driven by strength across several product lines, including Bodyguard, Shield and M&P, showing the power of the Smith & Wesson Brands supported by our incredibly passionate and loyal customers.

In long gun, our shipments into the sporting goods channel were down 28.1% year-over-year versus NICS being down 7.8%. However, this reflects the divergent conditions between the shotgun and bolt-action rifle market, where we do not play meaningfully and the MSR and lever action markets, where we continue to maintain very strong market positions. As expected, average selling prices trended lower in the first quarter, declining 6.1% sequentially.

Handgun ASPs were down 4%, while long guns declined 13% due to mix. While the market remains highly promotional, our focus on new products, strong marketing campaigns, such as the Red, White and Big Blue campaign we ran throughout July and continued consumer preference for our brand have allowed us to participate in promotions more selective. As a result, we maintained relatively healthy ASPs throughout the summer. With the typically busy fall and winter season is now upon us, we continue to expect to maintain strong ASPs throughout fiscal 2026.

Moving now to market conditions. We continue to view the market as relatively "normal". It remains cyclical and reflects traditional seasonality throughout the year. While the current environment is more challenging than a few years ago, as we have seen many times before during these market cycles, underlying consumer demand is above what we saw before the last surge as we now have more consumers who are participating in the category. Through all the ups and downs of the market over time, our leadership position in key categories has endured. And feedback from our distributor and retail partners supports the view that our disciplined execution of our strategy continues to position Smith & Wesson at or near the top in the categories in which we compete.

Innovation remains a cornerstone of that strategy with new products accounting for 37.3% of sales in the first quarter. Underscoring this, we've seen a very positive initial reception to our Shield Act, which we introduced in late July. And as I've said many times before, our award-winning engineering and design teams consistently deliver products that resonate with consumers. With a strong pipeline of new products upcoming, we will continue to invest in innovation to keep the line fresh and ensure that we maintain our leadership position.

Looking at inventory levels in the channel. Distributor inventory is very healthy with strong sell-through of our products. Distributor inventory was down more than 13,000 units at the end of July compared with the end of fiscal 2025 and down more than 17,000 units year-over-year, which indicates strong demand for our products at the retail counter. Due to this clean inventory position, we are well placed to quickly convert incremental demand into shipments as we enter the typically busy firearm season.

As we now prepare for the traditionally stronger second half of the year, we remain disciplined in managing our business and our capital allocation strategy is unchanged, invest in our business, maintain our strong balance sheet and return value to stockholders. In fiscal 2026, our internal investments continue to prioritize, leveraging our state-of-the-art facility in Tennessee, optimizing and modernizing several value-add elements of our facility in Massachusetts and investing in special initiatives to further enhance our brand and support our customers.

On that note and before I hand the call over to Deana, I want to provide an update on a very special project that the team has been hard at work on at our Tennessee facility. For decades prior to its closure several years ago, the Smith & Wesson Academy in Springfield, Massachusetts wasn't industry stable, providing training for countless law enforcement officers, consumers and agencies around the world. Today, I'm thrilled to announce that the Smith & Wesson Academy is back and better than ever.

The state-of-the-art facility encompasses nearly 30 acres of purpose-built ranges, training facilities, fitness equipment to allow training under physical duress, classrooms and even a two-story modular building rated for sumunition live fire to allow situational training for law enforcement and military customers. The Academy will be run by Mark Cochiolo, a true American Hero. Mark is a retired U.S. Navy SEAL veteran and firearms training expert. After proudly serving our country for 25 years, including with the prestigious CLP6, he spent the next 13 years of his career as one of the top firearms instructors at Basic Underwater Demolition/SEAL training or BUD/S in San Diego, where he helped revamp the firearm training curriculum and trained nearly 4,000 Navy SEAL candidates.

The goal with this new facility will be to provide yet another advantage to our current and prospective law enforcement, federal agency and military customers, who will all have access to Mark and his team's knowledge and our facilities free of charge. In addition, and in keeping with our goal to promote responsible firearms ownership, we aim to enhance the firearms proficiency of our loyal consumers, who will be able to sign up for a variety of courses, custom design for any skill set from beginners to experts and come to Smith & Wesson to learn from the best of the best, all of course, while showcasing our world-class firearms.

We'll be hosting a grand opening celebration next Friday on September 12 and are excited to share more details as we begin leveraging this amazing asset. Finally, and as always, I just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication to our brand and in putting their skills to work each and every day to make us successful.

With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Net sales for our first quarter of $85.1 million were $3.3 million or 3.7% below the prior year comparable quarter. During the quarter, inventory at distributors declined by over 10% from the end of the prior quarter and over 13% compared with the end of July 2024 in terms of actual units, indicating positive sell-through of our products at retail and a good position for us as we look forward to the coming months.

As expected, handgun ASPs declined slightly from Q4 levels due to promotions and continued strong demand for our lower-priced products. Long gun ASPs decreased due to the mix of lower-priced products and lower overall volumes. Gross margin of 25.9% was 1.5% below the comparable quarter last year, due primarily to decreased absorption on lower production and a 120 basis point negative impact from tariffs, stemming primarily from steel, partially offset by lower promotion costs and lower federal excise taxes as a result of the favorable outcome of the recent audits.

Operating expenses of $25 million for our first quarter were $680,000 lower than the prior year comparable quarter with increases in R&D being more than offset by lower selling and marketing costs due to lower promotional costs and the absence of costs related to the NRA show which was held in Q4 of last fiscal year. The lower revenue and associated margin, combined with an increase in interest expense due to higher outstanding borrowings resulted in a $3.4 million net loss or $0.08 loss per share.

Cash used in operations for the first quarter was $8.1 million compared with $30.8 million in the prior year comparable quarter, due to a net working capital decrease of $24 million. Inventory increased $13.3 million during the current quarter versus $29.3 million in the prior year comparable quarter. As a reminder, we typically level load our factories and build inventory in our first quarter. We spent $4.3 million in capital projects this quarter compared with $4.7 million in the prior year comparable quarter and expect our capital spending for the year to be between $25 million and $30 million. We paid $5.9 million in dividends and ended the quarter with $21 million in cash and investments and $95 million in borrowings on our line of credit.

Finally, our Board has authorized our $0.13 quarterly dividend to be paid to stockholders of record on September 18, with payment to be made on October 2. Looking forward to our second quarter, we expect a normal seasonal environment causing our second fiscal quarter sales to grow significantly over the first quarter and to land roughly at 3% to 5% below our Q2 fiscal 2025. The channel inventory at a healthy level, we don't expect inventory to have an impact positively or negatively on our second quarter.

Although we remain cautious regarding the full fiscal year due to macroeconomic conditions, we believe that our current product lineup and planned new product introductions will allow us to maintain or expand our market share in the foreseeable future. With the extended shutdown in August that we discussed last quarter, resulting in lower absorption, combined with the impact of steel tariffs, we expect Q2 gross margin to be in line with Q1 gross margin. Operating expenses in Q2 will likely be about 20% higher than Q1, with half of that increase driven by profit sharing.

In addition, costs associated with the grand opening of the Smith & Wesson Academy combined with promotions, sales activity and distribution costs associated with the increased volume will make up the remainder of the increase. Our effective tax rate is expected to be approximately 33%.

With that, operator, can we please open the call to questions for our analysts.

[Operator Instructions] Our first question comes from the line of Mark Smith with Lake Street Capital.

I want to ask first about ASPs kind of both in handgun and long gun. Just given kind of the competitive dynamics, but more so kind of where the consumer is, how do you feel about your pricing today on products? And do you feel there's any shifting that potentially could happen as we look through the rest of the year?

Mark, yes, we are pretty pleased with the ASPs throughout the summer. As you know, that's our typically slow season throughout the year in firearms. And we were -- we were able to kind of maintain that. The promotional environment still remains fairly robust out there. But for us, as I said in the prepared remarks, with the innovation, making up a significant portion of our pipeline of products and the strength of the -- even the core portfolio, we were able to be pretty selective. We did participate. But we're able to maintain those ASPs. And as we now go into the busy season, I think that bodes pretty well for us to be able to hold those up throughout the rest of the year.

Okay. And then I wanted to ask about the long gun business. You talked about some markets where you don't really participate or have products. What opportunities do you have in expanding your product offerings maybe to hit some of these segments?

Yes. I mean I think we've been -- well, we have definitely been very successful with the 1854 entering into that lever action market. And I think that's kind of pave the way for us to continue expanding into more of the white space for us in the -- in the industry that we don't play in. So we continue -- we're still expanding that lever action platform. There's 2 more calibers that we're still kind of working on filling out, and those will be coming here very shortly. But -- and then after that, it's on to the next thing.

Perfect. And the last one for me is just as we look out to changes in regulations with the recent tax law, is there opportunities for some NFA items potentially suppressors and SBRs offer some higher demand as we move into January?

Yes. Good question. For sure, I think there's a lot of pent-up demand there in the suppressor market as folks are kind of waiting for that law to go into effect in January. So I think from a long-term perspective, bodes very well for us with the Gemtech brand. So we're already seeing some movement there with some promotions on early discounts on the tax stamp problems that we're running with some of our -- our suppressor retailers, and I think that's an early indication that, that should be a pretty healthy market come January.

Our next question comes from the line of Steve Dyer with Craig-Hallum.

This is Matthew Raab on for Steve. I just want to hone in on the legacy products. On my math, legacy products were actually up very slightly year-over-year in the quarter. I guess, two sort of questions there. One, what do you credit the better performance to in the quarter? And then two, how do you feel about getting through the rest of that inventory as we look towards the back half of the year?

Thanks, Matthew. Yes, the legacy products did very well for us. We continue to gain share there. I think that's a combination of the strength of the brand. We are definitely taking share in that category of the more in-line products, [ including the new stuff ]. And we continue to see that we have more runway there to go as we go through the rest of the year.

And then from an inventory perspective, we're hyper focused on that this year and kind of bringing our internal inventories kind of back down again. Just be completely honest, we ended last year with maybe a little bit more than we wanted. And -- but I'll just remind you that for us in the firearms industry, that's not necessarily a concern.

We obviously have a strong balance sheet, and we're able to kind of navigate the ups and downs of the marketplace pretty well. I think we've proven over time. And for us now, that just means, again, these products -- there's no expiration date on our inventory, and we'll just make some adjustments to the production run rate and bring that down throughout the rest of the year.

Sure. That's great. And then just on promos, really thinking about the back half of the year, should we expect promo -- promo activity to accelerate to aid the inventory reductions? Or should we expect promos to remain pretty rational? And then maybe comparing that cadence to last year would be helpful. I mean it sounds like you're being pretty thoughtful about promos in the near term, but any other thoughts there would be great.

Yes. On the promotional side, I don't foresee any need for us to be leaning in there any more than we already have throughout this summer. As I mentioned, we are participating. We're just doing a very thoughtful manner. We're -- had a lot of conversations internally about maybe a couple of pockets here and there where we want to promote. But I think you can kind of expect that our ASPs will kind of hold up throughout the rest of the year. We'll participate, but I think we're probably in a little bit better position just given the strength of the brand. And again, a strong balance sheet where we can kind of be a little bit more measured in our participation. So we'll participate, but I don't think -- you shouldn't expect that we're going to have a significant increase as we go through the back half.

And we have reached the end of the question-and-answer session. And I would like to turn the floor back to Mark Smith for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today and your interest in our company. We look forward to speaking with everybody again next quarter.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.