Vista Outdoor: Drifting Around (NYSE:VSTO)

Via SeekingAlpha.com

Vista Outdoor (VSTO) is a name which has seen real ups and downs in recent years, or better said an up and down, as we are still in down phase here. To judge where we are standing, let’s look back at the history of the firm, strategic moves made, and expectations.

Most certain is that an acquisition strategy backfired, and that with a shrink-to-grow strategy, investors are still balancing between leverage concerns and continued disappointments on an operational basis, making it still an uncertain investment case.

The Investment Thesis

My last take on Vista was during the summer of last year where I concluded that the company was selling assets in order to shrink the business. Vista announced a sale at the time after a debt-fuelled M&A strategy in recent years went wrong.

Vista sold its Savage Arms and Stevens firearms business at the time in a $170 million deal, with activities being sold six years after which they were acquired by the company. Vista’s predecessor, ATK, acquired the company for $315 million back in 2013, making it at the very least a very expensive round-trip transaction.

In May 2019, the company reported its annual results with sales down 11% to $2.06 billion driven by volume declines, pressure on pricing, declining ammunition sales and some modest divestments executed. The company ended the year with $682 million in net debt for a 5 times leverage ratio based on adjusted EBITDA of $137 million, as the results are quite adjusted by all means.

The company guided for further declines in 2020 with sales seen at $1.94-$2.03 billion and roughly flattish EBITDA margins around 7%. While the sale would allow for some significant deleveraging, with net debt expected to fall to roughly half a billion, the EBITDA contribution and earnings contribution would take a beating as well, as Vista simply lacks many profitable businesses, with one of its better-performing units being sold.

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The leverage in this cyclical industry resulted in the shares reverting from a high of $50 following the spin-off from ATK to $8 at the time, as I concluded that the sales of one of its more promising businesses took place at a non-impressive multiple. This left me to conclude that while I would like to be constructive on the shares, I failed to see many reasons to become upbeat last summer.

What Happened?

Still trading at $8 and change in July of last year, shares fell to levels half that just a month later with no real news flow, as investors were fearful about the impact of declining sales, lack of earnings, and still sizable debt load. This was driven by the first-quarter results as a 7% organic sales decline and 13% reported sales decline were no reasons to be cheerful, causing doubts on the outlook already, as the company guided for a much more modest sales decline for the year despite pending asset sales.

Following that sale, the company cut the sales guidance to a midpoint of $1.84 billion with EBITDA margins seen at just 6%, indicating how much profitability has really left the door. It furthermore reveals that the sale might have either occurred at a low multiple or the remaining business performed worse than originally believed.

Shares rebounded to $9 in November upon the release of the second-quarter results. Organic sales declines were “stable” at minus 7%, as reported sales fell 19%. While the EBITDA guidance for the year was maintained, the midpoint of the sales outlook was cut by another $40 million to $1.80 billion.

Shares continued to trade around the $9 mark in February as this was still ahead of Covid-19 as third-quarter results were somewhat resilient. Reported sales fell 9% with organic sales up 0.2%, yet the full-year sales outlook was cut again to $1.75-$1.80 billion. With EBITDA seen around 6%, the EBITDA contribution just surpasses the $100 million mark, hardly needed with net debt just a few millions under the half a billion mark.

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Besides leverage, earnings power is a real issue as the company hardly has any adjusted earnings power with GAAP losses reported in the meantime as well, but realistically economic losses come in around zero.

With the fourth quarter ending on the final day of March, no real hoarding effect was seen yet in the wake of the Covid-19 outbreak with reported sales down 17%, or minus 8% on an organic basis. On sales of $1.76 billion the company reported a net loss of $155 million and adjusted profits of $14 million. The vast majority of the discrepancy, about $140 million, is explained by impairment charges. Not adjusting for restructuring costs, transaction costs, debt issuance costs and some other items, realistic earnings were close to zero.

No Hoarding, Ho Holding

While higher guns sales were reported amidst the Covid-19 outbreak, with stores even being labelled as essential, the first-quarter outlook for 2021 is anything but convincing. Sales are seen at a midpoint of $385 million, which is down $75 million on an annual basis, with about a third explained by the impact of divestitures. Despite continued deleveraging on the top line, the company believes that continued cost reductions should allow for break-even results. This might be comforting given the sales declines, yet it means that no profits are reported.

Claims that the company has cut net debt in half or more than that following an ill-advised acquisition tour are factually correct, yet there is a comment to be made. Leverage ratios are still high above 4 times, as relative leverage ratios never touched upon the 6 mark in recent years when absolute debt was far higher. In that sense, on a relative basis, deleveraging has been fairly limited.

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While the company is still hanging in there and is essentially “swimming” with realistic earnings around zero, we have to still factor in the real potential of adverse scenario bankrupting the company or causing an equivalent outcome for equity holders. On the other hand is the potential. If margins could improve a point or 5, resorting to historical standards aided by some demand and operating leverage, that could easily add over a dollar in earnings per share. Such earnings power and rapidly falling leverage ratios would make shares look like a steal.

Given the situation as it is today, I more or less see the same as I did last summer, as shares have been holding up quite well in this environment, with the first-quarter guidance not being very strong. Amidst all of this, I do not see imminent appeal as I reiterate a largely cautious neutral tone here, with investors bracing for continued adjustments and disappointments on the organic trajectory.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.