American Outdoor Brands, Inc. (NASDAQ:AOUT) posted disappointing 1Q25 results. The company had guided for growth in FY25 but posted revenues 4% slower than last year in Q1 and guided for revenues down 8/9% in Q2. The shooting category is particularly challenged despite 2024 being an election year, which should generally involve the sale of more firearms. Despite this challenging start, the company maintained its yearly guidance.

AOUT’s markets remain challenging, but the company is improving in some areas. New products are doing better than legacy ones, and the company is expanding in Canada (from a small base).

The company’s stock remains at similar prices compared to my coverage initiation article. I do not believe the company’s fundamentals have improved. AOUT still trades at more than 40x earnings. Even considering significant operational leverage, the company would need to grow significantly to post fair returns. For this reason, I maintain my Hold rating.

1Q25

Challenging start: AOUT had done well in calendar 2023 (FY24), with revenues growing 5%, after a very challenging FY23. The company guided for more moderate results in FY25 (topline growth of 2.5%). However, the year’s start seems to be more challenging than anticipated.

AOUT’s 1Q25 revenues were 4% lower than last year. The shooting category was particularly hit. Management commented that this market is very challenged by high demand in the early post-pandemic. Even with 2024 being an election year (an event that generally drives up anxiety and the desire for people to purchase firearms), the outlook is negative for the shooting segment (to clarify, AOUT does not sell firearms but benefits from those trends).

In the outdoor segment, the situation was better, down 1.7%. The outdoors segment is where AOUT has been generating a lot of innovation, with new products in brands like Grilla, Buba Fishing, Hooyman, and MEAT! I covered some of these products in my first article on the company.

2Q25 is not looking better: The company’s management guided for revenues to be down 8/9% in 2Q25. This is a very negative figure because it implies a sequential deterioration, but most importantly because 2Q is the highest-selling quarter for the company (in the chart below, it is the last point of each calendar year).

Guidance maintained: It seems strange that with revenues down 8/9% in the most important quarter, the company has maintained guidance of revenues up 2.5% for the fiscal year. Management is confident that product introduction in the second half will drive better sales. Given the current situation, this seems really challenging. In addition, it is strange for the company to introduce new articles after and not before its highest-selling season.

Valuation remains very unattractive

In my coverage initiation article, I expected AOUT to generate pre-tax earnings of about $3 million (or barely $2 million in net profits). This is based on a sales outlook of about $205 million, adjusted EBITDA margins of 6% ($12 million adjusted EBITDA), CAPEX of $5 million and SBC of $4 million.

Compared to this, the company trades at an EV of $93 million, or 46x earnings. This seems extremely high.

Considering flat margins (the company has not been able to leverage OpEx so far, as seen in the chart below), in order to generate $9 million in NOPAT (or about a 10% yield), the company should generate about $21 million in adjusted EBITDA or $350 million in revenues at 6% margins. Management commented again in the 1Q25 call that the company can obtain a contribution margin of 30% EBITDA on sales above $200 million. This would imply that to generate $21 million in adjusted EBITDA, sales should be generated of $235 million, or 15% above current levels.

I believe AOUT is an interesting company that is innovative in certain categories. However, it is not a fantastic company with guaranteed growth. AOUT is a young company that has not shown a capacity to grow over cycles, has very low margins (indicative of pricing pressures or a bloated cost structure), and is facing decreasing revenues. I do not believe it deserves a 40x+ multiple on earnings, even assuming the high contribution margins modeled by management.

For that reason, I maintain my Hold rating on AOUT.

Upside risks

I am not recommending shorting AOUT, only not buying it. However, we could consider the risks to the negative thesis here. The main one, in my opinion, is that the company has operational leverage above a certain revenue threshold. Its designers, salespeople, and overhead structure are probably relatively fixed for a higher level of sales. In fact, management guides for an adjusted EBITDA contribution of 30% for sales above $200 million (compared to 6% aggregate below $200 million). This means that if AOUT was able to grow faster than expected, that would translate to explosive growth on its bottom line and potentially the stock price increasing even more.