June 12, 2022 - 6:47pm EST by
2022 2023
Price: 35.00 EPS 0 0
Shares Out. (in M): 57 P/E 0 0
Market Cap (in $M): 2,000 P/FCF 0 0
Net Debt (in $M): 750 EBIT 0 0
TEV (in $M): 2,750 TEV/EBIT 0 0
Borrow Cost: General Collateral

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VSTO has two divisions, Sporting Products which deals in ammunition and Outdoor Products which deal with sporting goods accessories. They have benefited substantially from pandemic-era nervousness, boredom and stimulus payments. I expect their results will begin to mean-revert later harder than management projects in 2022 or in early 2023, and also do not expect the planned separation of the two businesses to reveal substantial undiscovered value.


Sporting Products


The proliferation of consumer firearms during the pandemic era is a well known phenomenon. It is estimated that we have gained 5 - 7 million new gun owners in the United States since COVID, with a substantial jump in female and minority gun ownership.


How many households own guns? Nobody knows for sure, but it seems about 40% of the U.S. according to various studies. This would imply ~50 million households pre-pandemic, and therefore that we got something on the order of a 10% increase in overall household gun ownership during the pandemic.


In early COVID, production stoppages came about just as global anxiety about a lawless, violent plague apocalypse spiked. As people formed long lines around gun stores, ammo became scarce. This shortage persisted even as all of the domestic ammo makers ramped production beyond historical levels and anxieties about social disorder had calmed. This has led to manufacturers claiming that demand is now permanently elevated due to the influx of new gun owners.


While more guns ensure more ammo demand, I believe there is a good chance ammo demand is not as as persistent as the manufacturers hope. One of the recurring patterns in the industry is that gun owners stockpile weapons and ammo anytime they perceive the supply to be threatened, whether due to an elevated risk of tightening federal gun controls or a lack of inventory on the shelves. Putting the politics aside, nobody wants to be the person who doesn’t have ammo when everyone else does.

This has led to many boom-bust cycles as the industry ramps during good times and then gets rugpulled once the hoarders accept there is no more shortage. Nobody knows how much ammo is floating out there, since it is a nonperishable product. But in pretty much every cycle to date, the fear that ammo will not be available has eventually abated and people have sharply curtailed purchases. This cycle appears to represent a suped-up bullwhip effect, except instead of hitting only retailers, the inventory tends to stack in consumer basements. Remember the toilet paper craze? Except this toilet paper costs $50 per roll.

The issue of gun ownership here isn’t the key issue for VSTO, but it is relevant to the bigger question of how much ammo gun-owners will demand in the steady state? NICS background checks already show a precipitous decline in gun purchases, yet the influx of 5 million+ new gun-owners will clearly have an impact on ammo demand. The question is how much?

Plenty of data suggests that the incremental gun buyer during the pandemic was disproportionately younger, female, single, and minority. All of these factors are (sadly) correlated with a weaker income profile.


The ownership intent of gun owners matters when it comes to ammo requirements. If you own a gun for self defense, you will mostly need just a few clips worth of bullets and only fill up after you’ve drained some practice rounds. If you own a gun for sport or recreation, you are far more likely to be a consistent and heavy consumer of rounds. Based on the buyer demographic and the mix of gun types purchased (next paragraph), I believe more new gun owners are in the former category.


Very rough math suggests the majority (~65%) of guns acquired by new pandemic-era gun owners were handguns instead of long guns. This compares to pre-existing gun owners who favored long guns over handguns by approximately a 65% to 45% split. I believe that most handguns reflect a bias toward self defense, whereas long guns reflect a bias toward sport/recreation. This relationship is not at all perfect, but I believe it is directionally helpful. The demographic skew of new buyers also suggests we are not seeing an influx of new enthusiasts into a white male dominated sport, but I am speculating here and could be wrong.



There is another piece of data from the same study that is helpful: