Taking Vista Outdoors Is A Good Call (NYSE: VSTO)

Vista Outdoor Inc. (New York Stock Exchange: VSTO) is in the process of dividing itself into two publicly listed companies. In doing so, management hopes the market will place a higher valuation (in terms of multiple adjusted EBITDA) on non-Vista Outdoor ammo. existing business (while maintaining more or less the same valuation on an EBITDA-adjusted multiple basis for its ammunition business), where decoupling could encourage the market to re-evaluate the value of Vista Outdoor’s equity. There could be significant capital appreciation here as the subsidiary nears completion, although the equity of the two new companies may not be revalued until after the chapter is complete.

The company’s business reporting division, Sporting Goods, focuses primarily on the manufacture and sale of ammunition under brands such as Federal and Remington. in the fresh air The Product Business Reporting division is primarily focused on designing and selling a variety of products under several brands including rangefinder and rangefinder systems under the Bushnell Golf brand, hunting and shooting accessories under the Bushnell and Blackhawk brands, and stoves and related accessories under the Camp Chef brand. brand, motorcycle and winter sports helmets under the Bell, Fox, and Giro brands, hydration packs under the CamelBak brand, and much more.

By separating the Sporting Goods unit from the Outdoor Products unit, Vista Outdoor aims to improve the operating focus and capital allocation options of both units. The goal is to spin off the company’s outdoor products unit to investors in a tax-free manner by the end of the 2023 calendar year. Once the spin-off is completed, there will be two independent publicly traded companies with one focused on the manufacture and sale of ammunition and the other focused on the design and sale of outdoor products.

Enhance evaluation

One of the most important reasons behind the planned split is that it potentially enhances the valuation investors want to place on the company’s external products unit as a separate entity. In other words, Vista Outdoor’s management team doesn’t believe the market is properly evaluating the company’s future financial performance for qualitative reasons, which I’ll turn to in a moment. During a recent Vista Outdoor earnings call held in May 2023, management noted the following:

Our company currently trades at about 5 times enterprise value compared to fiscal year 2024 EBITDA, in line with the ammo and sporting goods companies. While peers that focus solely on external products tend to trade with a double-digit enterprise value to EBITDA, we believe that value is not reflected in our current trading price. And after the turnover, we expect our outdoor products division to trend toward trading at similar multiples to its outdoor peers.

Given the rise of ESG investing and similar investment strategies that can overshadow companies with ammunition operations, the management logic behind the split makes sense, in my view. The upside that could result from improved operational focus is also likely to be significant. These operations, as stand-alone units, are likely to be more desirable from an M&A perspective, meaning that a potential buyer will be more likely to acquire assets operating in the same field than a company with somewhat disparate operations, although Vista Outdoor does not show No interest in selling itself at this time.

Financial performance

In fiscal year 2023 (period ended March 31, 2023), Vista Outdoor generated $3.1 billion in GAAP net sales, up 1% year-over-year due to modest revenue growth in each of its sporting goods products (sales were up 1% to $1.8 billion )) and overseas products (sales increased by 1%, to $1.3 billion). The company’s GAAP gross margin decreased more than 295 basis points from fiscal year 2022 to fiscal year 2023 to 33.5% as higher commodity prices, higher freight and product costs, and lower volumes impacted Vista Outdoor’s profitability levels.

A combination of lower gross margins and meaningful operating expense growth (R&D and G&A expenses combined were up 19% year-over-year), and an impairment charge of $0.4 billion saw Vista Outdoor’s operating income reach $0.1 billion in fiscal 2023 versus $0.6 billion. $ billion in fiscal 2022. The company reported $0.17 (negative $0.17) GAAP diluted earnings per share in fiscal 2023 as net interest expense and corporate income tax expense pushed the company’s net profit into the red.

I define free cash flow as net operating cash flow minus capital expenditures. This is money companies can use to pay dividends, buy back their shares, and build up the strength of their balance sheet in an organic way. Vista Outdoor generated approximately $0.45 billion in free cash flow in fiscal year 2023 and hasn’t repurchased a significant amount of its inventory. Historically, the company has been a strong free cash flow generator (Vista Outdoor also had comfortably free cash flow in fiscal 2022). The company does not pay a joint dividend at this time, although it can if it wants to.

guidance

Looking ahead, Vista Outdoor anticipates that its financial performance on a consolidated basis will face significant headwinds. The company is on track for $2.85-2.95 billion in revenue in fiscal 2024, down 6% year-over-year at the halfway point. Sales in the Sporting Goods segment are expected to reach $1.475-$1.575 billion this fiscal year (down 13% yoy in the middle of guidance) and sales in the Outdoor Products segment are expected to reach $1.375-$1.475 billion in fiscal 2024. (6% year-over-year increase in the middle of guidance).

What makes its sales outlook (slightly) subdued is that the expected non-GAAP EBITDA margin for the Sporting Goods unit for fiscal 2024 is 26.75%-27.75% versus 12%-13% in the Outdoors unit.

Of note, Vista Outdoor expects to see a significant improvement in the profitability of its outdoor products segment in fiscal 2024, which reported an adjusted EBITDA margin of 9.5% in fiscal 2023. Growing economies of scale through organic sales growth is Partly why management is optimistic about Vista Outdoor’s performance here. However, profitability in the company’s sporting goods segment is expected to decline in FY2024 after posting adjusted earnings of 32.8% in FY23 (the expected drop in economies of scale in FY24 is a headwind that is difficult to circumvent).

The company’s sporting goods segment is the primary generator of profit and cash flow for Vista Outdoor. Its operations here are supported by four domestic ammunition manufacturing facilities.

Vista Outdoor expects to generate $4.50 – $5.00 in EPS and $290 – $340 million in free cash flow (as defined by the company) this fiscal year. The company’s consolidated growth trajectory hits some snags even though its core business remains comfortably profitable. Capital expenditures are directed to be 1.5% of Vista Outdoor sales in fiscal 2024, which is about $44 million in the middle of sales guidance, which if achieved would be moderately higher than the $39 million I spent in fiscal 2023. As opposed to $65 to $75 million US in interest expense in fiscal year 2023, up from $59 million net interest expense in fiscal year 2023.

At the end of March 2023, Vista Outdoor had $0.1 billion in cash and cash equivalents against $0.1 billion in short-term debt and $1.0 billion in long-term debt. Once the spin-off is complete, the sporting goods segment is expected to hold the bulk of Vista Outdoor’s total debt load and management expects to use the standalone company’s free cash flows to steadily reduce leverage in the new unit. In the Outdoor Products segment, this standalone post-single supply operation is expected to take up only a modest portion of Vista Outdoor’s total debt load and may use capital markets to fund growth endeavors by investing in the business (organic growth) and pursuing mergers and acquisitions (inorganic growth). ).

Closing thoughts

Vista Outdoor is making the right call by separating its ammo-focused business from its outdoor product-focused business. There’s a very good chance that the market will re-evaluate the value of the outdoor products segment once the offering is complete, as funds with ESG investment criteria that were previously screening names related to ammunition will be able to invest in the new publicly traded company.

Shares of VSTO have fallen significantly since the last quarter of 2021, due in part to a moderation in ammunition sales in the United States, though the pending chapter should be a major catalyst for its inventory. Vista Outdoor is a great opportunity to increase your capital.