Good day, and welcome to the Vista Outdoor Third Quarter Fiscal Year 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kelly Reisdorf. Please go ahead..

Thank you, and good morning, and thank you for joining us for our third quarter fiscal year 2020 earnings call. With me this morning are Chris Metz, Vista Outdoor Chief Executive Officer; and Mick Lopez, Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act.

These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor and the industries in which we operate.

We encourage you to review today's press release and Vista Outdoor's SEC filings for more information on these risk factors and uncertainties. Please also note that we have posted presentation materials on our website at vistaoutdoor.com, which supplements our comments this morning and include a reconciliation of non-GAAP financial measures.

With that said, I'll turn the call over to you, Chris..

Good morning, and thank you, Kelly. I will begin the call by telling you what I told our leadership team. This was a good quarter for us, and I'm proud of our team for delivering excellent results in a continuing challenging environment. Vista Outdoor has been in turnaround mode since I began more than 2 years ago.

The first 1.5 year was spent meticulously leaning out our overhead structure and reconstituting our brands while laying out new repeatable processes for future success. In the past 6 months, we've accelerated our pace. And the results of our third quarter provided glimpse into what our future holds.

While I'm pleased with our Q3 results, and we still have much more to do to accomplish the goals we set for Vista Outdoor as part of our accelerated transformation plan. So while we continue to make steady progress, we are not satisfied and will continue to relentlessly push for better results sooner.

Today, we will cover our financial performance, provide a progress report on our accelerated transformation plan and give color on some external factors that impact our business. I will start with an overview of our financial performance for the third quarter of fiscal year 2020.

Our CFO, Mick Lopez, will go deeper into the numbers during his presentation later this morning. For the third quarter, we delivered on several key financial metrics. Our team has worked hard, and it is encouraging to see some of the hard work had started to pay off, specifically in the third quarter.

For the first time since our turnaround began, Vista Outdoor recorded positive organic revenue growth. Within Shooting Sports, while sales and gross profit were up on an organic basis compared to the prior year quarter. These are encouraging results, and this is the first time in 11 quarters that our Ammunition business has seen year-over-year growth.

Our Outdoor Products segment delivered on profitability improvement with continued expansion on the gross profit line. We saw positive year-over-year sales growth in both our outdoor Recreation and Bell + Giro business units.

And as we have done in each of the past quarters, our relentless focus on cost controls, enabled us to continue to invest in new products and our centers of excellence, while taking our total SG&A spend down year-over-year. As many of you know, one of our two annual bonus measurements for myself and my team is free cash flow generation.

This past quarter, we continued to see improvements in inventory, which was down 20%, while our service levels increased. The combination of inventory management, tight cost controls and strong collections enabled us to generate $70 million in free cash flow.

This free cash flow allowed us to pay down $55 million towards our long-term debt balance, bringing it from a height of approximately $1.2 billion to current levels of just under $500 million and further reducing our leverage. As we move into the fourth quarter and beyond, our focus remains on our accelerated transformation plan.

This plan is our road map and our report card. It drives what we do, but also gives us a platform and what we can report progress on. Below, I'll go through each pillar of the plan and the latest updates from each. The first area is optimizing our organizational structure.

This is about putting the right talent in the right places and organizing our brands and business units most effectively, while organizing corporate into a lean but effective team to drive accountability and brand support.

As we have shared in the past, we have reconstituted our brands to be more autonomous, have more of a founder's mentality and enabling them to promote and go-to-market in the most authentic way possible.

As we begin to place more of an emphasis on organic growth, you will see our brands continue to place increased emphasis on product innovation and digital marketing and E-Commerce.

At the corporate level, we've completed a significant G&A restructuring, which has resulted in not only a leaner, more efficient team, but also better position corporate for internal and external needs. We continue to look at ways to be more efficient with our corporate overhead structure, and we'll continue to do so.

Our second key area of focus is our centers of excellence. For those of you that have followed our company and accelerated transformation plan, you understand how these centers bring deep knowledge and expertise into our organization.

In practice, these centers advance our goals to drive growth and profitability, become more consumer minded in all that we do, and leverage our scale and diversity for the benefit of the brands and the business units. Thus far, we have established 2 major disciplines, operational excellence and digital E-Commerce.

Our operations center of excellence has been resourced to bring best practices and proven tools to our business units in areas that enable them to reduce complexity within their business and improve their profitability and/or facilitate more profitable growth.

At our Investor Day last fall, we gave a few examples illustrating the types of efforts we have undertaken. Programs such as our vendor procurement initiative, SKU rationalization and manufacturing efficiency initiatives are delivering real results.

It is a key reason why our gross profit rates are improving as we're absorbing increased costs and tariffs and other headwinds. Tariffs have continually -- certainly, been a drag on profitability for many of our businesses, and we continue to work tirelessly to find ways to mitigate the impact of tariffs.

To date, we've been largely successful deploying our scale. We continue to explore non-Chinese manufacturing alternatives where feasible, sharing cost with vendors and working closely with our customers. In our digital e-commerce discipline, I mentioned on our last call that we brought 16 new websites online in calendar year 2019.

In calendar year 2020, we will continue to migrate the rest of the brands to our leading-edge sales force platform and position ourselves to begin to leverage the benefits of a single shared digital E-Commerce platform. In the third quarter, we began to see real progress from our E-Commerce investments.

For example, in CamelBak, we had a strong holiday season, delivering significant year-over-year increases in traffic, conversions and net sales within E-Commerce. This was a leading contributor to CamelBak, delivering a strong overall quarter three, with both sales and profits up nicely year-over-year.

Another example of the momentum, the E-Commerce program brings is within Hunt and Shoot. Bushnell, Primos and tactical direct-to-consumer websites, all experienced record-setting year over year revenue growth during the holiday season as well as site and conversion increases well over 1,000 basis points for each.

We are pleased with the initial success of our E-Commerce initiatives and look forward to continuing to transform the way we engage with our customers and consumers. Our third key area of focus is reducing our leverage. We remain intensely focused on reducing our leverage by improving profitability and free cash flow and taking our debt down.

In the third quarter, we paid down over $55 million of debt and have meaningfully reduced our leverage. Mick will provide more details on this in his update on business performance. Our four key area of focus is returning our brands to organic growth.

This has become one of the top themes across the entire company as we begin calendar year 2020 and head into fiscal year 2021. We realized that with an improved foundation, the next phase of our transformation must include meaningful organic growth. You've heard me say many times that our new products is the lifeblood of this company.

Our ability to innovate and connect with our end consumer is central to driving a culture of organic growth. I recently attended the SHOT Show and in meeting with our customers, the positive sentiment and confidence expressed in the industry is, frankly, the best I've seen since I've been with the company.

Our new product innovation pipeline is excellent and has received a significant number of accolades with the media. We are well positioned in many categories to profitably grow share and capitalize on trends with our end consumers. Within Ammunition, Federal is leading the field with its new products this year.

In fact, we will be introducing more new products in calendar year 2020 than any previous year. Our premium terminal -- hunting bullet lens match accuracy with outstanding performance. It's simply the best time but where available, and is getting great attention in the outdoor media.

Another great example of game-changing innovation coming out of our Ammunition business is fire stick. The fire stick muzzle loading system is the most innovative product in its category in decades, providing muzzle loaders with a safer, more convenient experience.

Its launch has created great buzz in the market and ensure to change the way people hunt with muzzle loaders. Lever guns are a classic and very popular firearm for hunters and shooters. Federal's new HammerDown line of ammunition makes them run better than ever before.

The first full line of Ammo made specifically for lever guns was launched in partnership with Henry firearms. The product features a bonded hunting bullet for use on targets and game.

This spring, our CamelBak brand will be introducing the new Horizon collection, which is a brand-new line of vacuum stainless steel drinkware, a result of thoughtful and strategic consumer research. This new line of drinkware is uniquely positioned to serve demand with our core active outdoor lifestyle consumer in a growing category.

For the rangefinder lineup within Bushnell, our new Nitro 1800 with its built-in ballistic solving engine with Bluetooth connectivity from Applied Ballistics is integrated to our Bushnell ballistic app. This new product with connected capabilities gives long-range shooters, a simple digital solution for more accurate shop placements.

In the same theme around connected products, our new wing man, GPS speaker from Bushnell Golf, created a significant amount of buzz with customers and media at the PGA show. The innovation behind the wing man is a story that starts with sound.

Our product teams have truly come up with a first-to-market product that combines practical on-the-course features whose GPS course map distances with a high-quality sound system that rivals the top names in the speaker market. Also introduced at PGA show, we received positive customer feedback and strong demand around the new V5 laser rangefinder.

The reception of the V5 affirmed that Bushnell Golf is still the choice, drives a premium and is well positioned to outsell every laser rangefinder combined in the market. The V5 and Wingman, along with all the other industry-leading products in the Bushnell Golf portfolio, resulted in orders written at the PGA show hitting historic highs.

In the Outdoor cooking space, we've released a Wifi-enabled Pellet Grill from Camp Chef. This speed allows our consumers to take control of their grill directly from their phone, whether they are at home or on the go. Low and slow cooking has never been easier with Wifi-enabled monitoring and control.

You can not only see the exact temperature of the meat and grill you're at, but you can adjust temperature and smoke levels accordingly, like from mobile device.

For the snow enthusiasts, Giro helmet and goggles continue to be a favorite choice, from entry-level options to best-in-class technology, Giro provides snow helmets and goggles for every level of rider.

Giro has found a clear formula for success with the right team of dedicated employees, creating market-leading products paired with thoughtful innovation as we remain the first choice for consumers. We look forward to a strong and industry-leading innovation pipeline within our Bell + Giro family of brands.

And lastly, many of you are aware that we have faced some challenges with our Bushnell line of optics. And in response to these challenges, we've undertaken consumer research. In response to insights we have gleaned, we have developed a repositioning strategy with purposely targets innovation around our core consumer.

Lastly, although our top capital allocation priority continues to be reducing our debt, we hope to increase our efforts to explore tuck-in acquisition as conditions improve and we progress into the latter phases of our transformation.

While our internal efforts are bearing fruit, we faced external uncertainties and market conditions that are less predictable.

We believe our organization is stronger and better equipped to manage and address these uncertainties, but in the face of the ongoing trade war, ships in retail and other outside factors, there are elements on the horizon we're sharing in greater detail.

On the tariff front, the United States government finalized a Phase 1 trade agreement with China on January 15. We are pleased to see the 2 countries progressing towards a conclusion. For Vista Outdoor, the Phase 1 agreement mitigated against future potential tariffs, but did not remove tariffs currently in place on many of our products.

Safety helmets, outdoor cooking and other products continue to be subjected to import tariffs. These tariffs have posed a hardship to our business and will continue to challenge our brands in an environment where mitigation options are decreasing. The Phase 1 agreement also created a false expectation that tariffs will soon be completely eliminated.

That expectation has created a new obstacle for our businesses to overcome. Many suppliers are pushing back against efforts to reduce our cost to finished goods and many customers have resisted price increases as the perception from both groups is that the trade war is over or nearing completion.

Some of the largest customers have reduced or delayed post-holiday ordering in anticipation of further tariff relief.

Our team is working directly with the United States government to have our products removed from the various tariff lists for safety helmets, which is our most impacted category, we have testified before the government, submitted editions, organized industry coalition to support our efforts and lobbied Congress for support.

Despite these efforts, helmets continue to be subjected to List 4a tariffs. And remember, helmets were successfully adjudicated and removed from the List 3 tariffs. We've deployed successful lobbying campaigns only to have them undone for reasons that we still do not fully understand.

However, we will continue to push for government relief and take other measures to ensure we can mitigate impact of our financial results. Shifting gears to the Ammunition market. The Ammunition industry is still settling in after a major retailer announced their exit from certain ammunition employees.

While this decision was made just last September and their exit is complete as of the end of December, the full impact is just beginning to be felt. As we've been impacted by disruption in the channel over the last several years, we acknowledge that it can take up to a year or more, in some cases, to establish a new equilibrium.

Our Ammunition team has been laser-focused on mitigating this headwind, predominantly by working with our other customers to pick up these products in volume. We view this as a near-term headwind and does not change our long-term growth strategy as the market share and innovation leader. While we certainly see stabilization in the Ammunition market.

There are still some headwinds we are facing. The rimfire market remains very soft, the small rifle Lake city business remains very challenging. In the last quarter, despite the retailer exit activity, overall, we saw less discounting and continue to see stabilization in pricing.

We also are seeing continued increased consumer demand in the Pistol and Ammunition category, which is reflective of the trend with our end consumer towards a personal protection.

In summary, while we see kind of stabilization in Ammunition market, we're cognizant of these headwinds and are working diligently to continue to adjust and react to the changing market dynamics. The Coronavirus has spread throughout many regions of China and across the globe.

First and foremost, we're tracking the virus and taking precautions to protect our employees and their families. The state department has issued travel advisories and many global health organizations have restricted travel and other activities in the region.

Second, we're working with regional partners to understand working conditions and impacts to production and overall commerce. China is a hub for many products in our Outdoor Products segment, and we are diligently tracking the situation to assess the impact on our operations.

At this point, it is too early to fully understand the ongoing impacts to our businesses. Overall, I'm excited for the future of Vista Outdoor. While outside uncertainties exists and may present short-term challenges, our team has worked diligently to build a platform for success.

We have the right people, the right processes, and our products and brands are meaningful and resonate with end consumers in the marketplace. Combined with our leadership team, improved profitability, strong cash generation and reduced debt, we're certainly poised for future success.

I'll now turn it over to Mick to share more detail on our financial performance and outlook..

sales in the range of $1.75 billion to $1.80 billion; adjusted interest expense of approximately $35 million; adjusted earnings per share in the range of $0.15 to $0.20; capital expenditures of approximately $35 million; free cash flow in the range of $40 million to $50 million; also, we anticipate slightly reduced full year research and development spending to be approximately $25 million.

We expect full year EBITDA margins of roughly 6%. As a reference, to provide additional transparency as requested by many of you, we have included an additional slide, as referenced on our adjusted EBITDA in the appendix.

For the fourth quarter, we expect shooting sports gross margins to be in the mid- to high teens and outdoor products gross margins in the midpoints. The implied fourth quarter free cash flow is basically plus or minus $5 million.

Please note that this is affected by the large international shipment that has been delayed since we purchased the inventory in the fourth quarter, but anticipate cash-paying in the summer months. In conclusion, we had the best quarter during our transformation with positive revenue growth and over $0.20 of earnings per share.

While we have made much progress, there's still much more to do. External headwinds and market softness remains but we are better positioned than ever. We will remain diligent in controlling our costs, focusing on profitability improvement, generating free cash flow and reducing our leverage.

We are intensely focused on delivering sustained returns thresholds. Thank you, everyone. And now we will open the line and take your questions..

[Operator Instructions]. And our first question will come from Gautam Khanna with Cowen & Company. .

Yes, thanks.

Was wondering if you could frame how -- I was wondering if you could give us more framework around the Walmart transition? How do you expect this to -- when is it fully kind of out of the numbers? And when do you think the other channels will be at run rate, if you will, absorbing the lack of the Walmart demand?.

Yes. So Gautam, I'd say it's a very good question that, as you can imagine, we are discussing all the time. And so we've done a lot of research on the outside to understand historical precedents in other industries and what has happened in similar circumstances.

And it's hard to draw a beat on what's happened precisely in other industries because there's different stories, if you will. But here's what we're seeing is it's transitioned as we expected. Walmart honored all of their agreements with all of their suppliers. They were terrific upon exit. They completely exited by the end of December.

But as soon as they announced, our sales team went out in full force to try to replace all the listings, all the products in all the neighborhoods and ZIP codes, if you will, that we're exiting those products. We feel like we've been largely successful in getting those placements.

And frankly, our Q3 results reflect some of that where we had some load-ins to customers or what-have-you to support that. So if you walk some of our key customers, you should see a strong presence from all of our Federal -- Federal Premium Ammunition brands.

We expect, as I've said previously, that there is to be some turbulence over the next 12 months if that demand finds other retail -- other dealer homes. We expect though, this to be a short-term issue over the next handful of quarters. And then demand will be what it is. And it will have found a home.

And we think the mid to long term, there should be no issue..

Okay. That's helpful. And then just a quick follow-up.

Do you anticipate any change in the competitive landscape? And so kind of what -- given the ABC break up, potentially more focus at their respective units? How does that change the environment or what you're thinking about?.

Honestly, I don't anticipate it to -- that particular factor, LBC to change anything. I mean, I think they've run their businesses with focus regardless of the breakup. And so you take the gun side of the business, that's not a category we're in. Obviously, we support their efforts there and in the Hunt and Shoot accessory.

There's some categories where we overlap. There's, frankly, some that we don't. We're, honestly, a large presence -- probably the biggest presence in total with our Hunt and Shoot brands.

And we're going to continue to run the place that we've been running as it relates to developing innovative new products, supporting it with our centers of excellence and really driving E-Commerce, starting with B2B and drop ship and moving into B2C. So we feel very, very good about where we're at.

We also think as the industry consolidates and recovers, we think the strong are going to get stronger. And I think you kind of see that, particularly in the Ammunition category, where the vector, I believe, are going to get better.

We know that we continue to invest over the past couple of years, realizing that there was going to be a turn at some point. It wasn't a matter of if, but it's only a matter of when. So we didn't pull off the throttle at all.

And that's why you see so much new product coming out from us in the Ammo category, frankly, in our outdoor products as we're gaining traction with new management teams and what-have-you. So we feel good about it..

And next will be Eric Wold with B. Riley..

A couple of questions.

I guess, one, when do you think you'll have something to share around Lake City and kind of how you look around that? And then, two, and on the Outdoor Product segment, where are you on the SKU count reduction goals? Any way to measure kind of the impact on sales to date as well as on margin?.

Sure. So let me handle firstly the Lake City. And so we'll be sharing more color on our next earnings call as it relates to our 2021 guidance. And just to remind everybody, the contract with Lake City runs up to the end of our fiscal second quarter, which is the end of September. So we've got a full 6 months of business as usual.

And what we're doing now, and frankly, since the announcement, what we've been doing is trying to find ways to replace that volume. And we've got multiple avenues in which we can replace that volume.

One of those being partnering with the winner of that Lake City contract and determining how we can leverage our strengths across the globe with their production capacity. But there's other options as well that we can go to.

So we feel like we're in a good position to take the volume in Lake City and make sure that we replace the profitable elements of Lake City because that Lake City volume has been a real deterioration, not only for us but for the industry as the categories have softened, as the demand has come down.

It's been a bit of a price war and a race to the bottom. So we'll be happy to anniversary the minimum quantities that we had to buy and be in a position to more closely support the volume that we think we can drive profitably. So we'll share more color as we look into 2021 and on our next earnings call.

Now on the actual products question, you mentioned SKU rationalization. It's really starting to bear fruit.

So we've gone systematically with our toolbox coming out of our operational excellence center of excellence, and we've gone into the Bell + Giro business unit, we've gone into the CamelBak business unit, into our Hunt and Shoot accessories business unit. And we're pulling SKUs back.

We -- the first area that we see this really benefiting us, frankly, is in our Capex. And you've seen us take our CapEx down while introducing more new products than we've ever done in our history. We're able to do this by, frankly, discontinuing low-margin, no-margin money-losing SKUs and product families.

So we no longer have to feed those with CapEx and iteration 2, iteration 3, if you will, and really focusing our expenditures on high volume, high opportunity products. So we're going to see it first in Capex. We're going to see it secondly in our gross margin, which you start to see expanding.

And then you'll start to see it move through into sales as we go into the next few quarters..

Our next question will come from Scott Stember with CL King..

I'm not sure who made the comment, Mick or Chris, but you talked about since Walmart, I guess, it was going to be a shift in that product to other means, the potential for pricing pressure on gross margins.

Did I read that correctly? And if I did, can you just explain that a little bit more?.

No, we certainly didn't mention any pricing pressure because of the Walmart shift. So what's happened here with the Walmart shift, there's been strong reaction from our other customers looking to pick up that volume, which we've certainly supported, and we feel like we're gaining share with our key retailers, but no.

No mention of any price pressure because of that..

Okay, got you..

You will see that our margins for the Ammo business are up substantially and versus our prior quarter or even prior year. And that reflects some of the discounting that was seasonal, which came in, in the second quarter, but I think some of it is also that the market has had less discounting overall..

Got it. My bad. And the next question on, I guess, the Ammo, and we've seen the mix checks for firearms have been quite positive as of late, and you talked about a 60 to 120-day difference for when the Ammo market catches up.

Are you starting to see any of that right now? And also, last question, just given the political backdrop, are you seeing any cases of any consumer stockpiling starting to happen again?.

So Scott, the way we see the next checks date that is it is generally following that lag. We're starting to see a pickup in demand without question. But the devil's always in the detail. And so you really need to start to pull back.

Where is that strength coming from? And so we -- where we see the strength coming from is, first and foremost, we had a strong hunting season. Secondly, we see the pistol calibers, led by 9 millimeters, certainly picking up. But what has not picked up yet -- and Shotshell's have picked up a bit as well.

But what we've not seen pickup, which is critically important to our business, given our large market share is rimfire. And so rimfire continues to be soft. As most of you know, we are the #1 share leader in rimfire. We own probably about 50% plus of the market. And our business is off considerably this year.

So that -- but we're taking share in all of the categories, haven't lost any share in rimfire. That certainly hurts us more than it may other competitors. We have not seen any stockpiling. We haven't seen any evidence of stockpiling. We just see a healthy demand, if you will, and really don't know how to call the general election at this point..

And moving on to William Reuter with Bank of America..

The commentary around E-Commerce and the success you guys are having there? It sounds like it's certainly very positive.

Are there any metrics or any data you can give us? I know it's early, but in terms of, I don't know, growth rates or what percentage of sales maybe you are now or where you could be in a year or 2?.

Yes. So Bill, this is an area, it's interesting to ask the question because we've been talking internally how we can start to give more color on the traction we're getting in E-Commerce. So we've said in the last call that we brought online 16 new sites in calendar year 2019, and we'll finish up all that work here in calendar year 2020.

And it will be about the same, again, it will be about 15 to 16 sites that we're going to bring on, largely in the first half of the calendar year.

What we've seen in the fourth quarter here with our -- some of our big outdoor brands like CamelBak and the Camp Chef and Bell + Giro is -- and Bushnell is a pickup in conversions, a pickup in the order -- average order value, better return on ad spends, e-mail subscriptions list, what-have-you picking up. And these are the KPIs we look at.

But what we've been talking about internally is how we can start to give more color. So more to come on that, but we're still, as we've said before, at the beginning stages of getting traction. And as you can imagine, coming off of a low base.

Our growth in -- you need to see in some of the E-Commerce initiatives is kind of hyper growth, but still pretty small, but we expect that to continue to ramp up, and we'll figure out the best way to give you guys color so you can see how we're projecting..

Okay. And then this year, you've had a couple of high-profile contract wins of police departments and the U.S. Army. There's another one we talked about in this update this quarter.

I guess, how do you view the pipeline for new opportunities there? Have you been able to secure? Or I guess, do you have potential other new contracts you guys will be getting over the next couple of quarters?.

So Bill, it's a good question because when you look at our Ammunition business, we've had really healthy year so far in our commercial side. In our noncommercial side, which is really law enforcement, military, international, what-have-you, we continue to win contracts. And we feel like we've got the largest share.

We know we do with law enforcement, and we'd certainly get our share of the military and international. But what's happened is that business is more lumpy. And so we haven't anniversaried some of those year-to-date. Some of those contracts we won last year. And we've got a couple of contracts that we're looking to fill this quarter that may slip.

And so we've tried our best to build all that into our guidance, which we believe we have. So although we continue to win contracts, and it bodes well for the next year, 2 or 3. It's lumpy. And so we're not seeing quite the gains this year that we had in the past. But we think that, that will anniversary as we move forward into the subsequent years.

But we feel good about that side of the business. And although some of that is affected by Lake City and what-have-you, we feel good about our ability to continue to get sources of supply to win those contracts..

Okay. And then just lastly for me. You affirmed this guidance for 6% EBITDA margins this year. I didn't see any commentary about the longer-term 10% EBITDA margins over 2 or 3 years.

Do you still feel like those are reasonable? Or that is a reasonable goal to try and get there? And I guess, what might be the 1 or 2 drivers that you think will be key to achieving that?.

Yes. So Bill, the -- certainly, the 10% EBITDA margin target is front and center for my entire organization. And we haven't seen any changes to that. In fact -- and what's going to be key to driving that are the things that we've communicated at Investor Day and all the key initiatives that we're driving.

So it starts with driving organic growth for the new products and our E-Commerce efforts, continuing to drive margin expansion like we're talking about with our centers of excellence, contributing in the areas that they are. So full speed ahead on that goal, and everybody's got it in the crosshairs..

And our next question will come from Jim Chartier with Monness, Crespi, Hardt..

The Sportsman's Warehouse preannounced the fourth quarter negatively. And they highlighted very significant promotional activity in the Ammunition category.

And I just wanted to kind of reconcile that with your comments that you saw less discounting on your sales into the channel in the third quarter? And then if you could just talk about what you're seeing from a promotional activity in retail today versus what you saw during the holiday season?.

Sure. So Jim, on Sportsman's Warehouse, in particular, it's hard for us to comment on any one particular customer or competitor or what-have-you. I'll give you a little bit of color, though, on what happens in general, once Walmart made the announcement that they did.

As I mentioned previously, all of our other customers scurried and worked hard and we work with them to pick up that volume. But Walmart stated that they wanted to be out of the business by December 31. And so in doing so, they ran some pretty strong promotions, which I think Sportsman's Warehouse and the others had to react to.

And so I don't look at that as a harbinger for things to come. I look at that as just a short-term reaction to channel shift. And I think that's what we'll see bear out here..

Great.

And then are you seeing any knock-on impact from Walmart's exit of Ammo on accessories or other categories, some add-on sales that might be impacted by that?.

Jim, we're watching that really, really closely. So we get daily POS, and we're watching the movement of that. We -- there's concerns because the 2 are related. And we feel like there will be a decline in our Shooting accessories business at Walmart. We're planning for it.

We hope it doesn't happen, but we're planning for it, and we're reacting in the same way we're doing with our Ammunition category, which is making sure that all of our key customers can find the product in areas that they will shop. So we've reached out.

We understand where that foot traffic may go, and we're making sure that we're locking arms with other customers to support the volume movement if it does happen..

And we have a question from Brett Andress with KeyBanc..

Chris, maybe just elaborate on the improved sentiment that you said you're seeing across the firearms industry. I think you said it was the best you've seen since you've been there. I guess, what's really driving that? Is it inventory levels? Is it expectations for demand? Just any color there..

Yes, Brett. So what I was referring to specifically was meetings that we had at the SHOT Show with our key customers. And to a customer, every customer was very, very optimistic. I mean, the most optimism I've seen in the -- and this is my third show.

Some of that optimism, I think, was driven by Walmart's movement, which our other customers should be seeing a lift in their business. And there's been some consolidation with Ellett Brothers and some others. So they should naturally be seeing a lift, but we took that into account and the optimism was beyond that.

And it was because they're starting to see more foot traffic, pickup in demand, our buy groups and distributors are starting to see bigger orders from dealers. So it's just a general improvement. And you can see in the next data, you can see it in the federal excise tax data that supports demand has started to pick up.

Now I don't want us to get out in front of ourselves. It's not like this is back to the yesteryear, but it is certainly an improvement from what we've seen. And it's a gradual improvement. So we're calling it -- we plan on calling it a stabilization and a gradual pickup here in demand, which is, I think, healthy for the industry..

Helpful. And then the last one, Mick, maybe if you could help us bridge the updated guidance a little bit more, particularly the sales guidance.

I guess, what's the driver of that lower sales guide? I mean, does it assume that this international order simply does not occur? Are you baking in some kind of probability? Or is the bulk of that simply the tariff impacts? Just any help in terms of kind of what's driving that..

Sure, Brett. I think we now -- the sales guidance, much like where we have our earnings guidance, what we think it's the more likely than not. So we have taken a weighted average probability for the large international order. It's -- that's merely the reflection of what we believe is going to happen in the next quarter..

And we have a question from Mark Smith with Lake Street Capital Markets..

First, can you just walk us through a little bit more on the Outdoor Products, primarily the hunting and shooting accessories business? In what drove that lower? Did you see some people maybe trade out of purchasing some of those products as they may be purchased more Ammunition that was discounted at Walmart and other places during the quarter? Or any insight you can give us into kind of what drove the sales decline in that business?.

So Mark, what's happened in Hunt and Shoot is largely correlated with our Ammunition business. They're highly correlated in terms of consumer demand and what have you. But there's another underlying reason why our Hunt and Shoot business, we think, has been struggling over the course of the last year or so.

And that's really our position in the marketplace in optics. And probably won't come as a surprise to you, but we just feel like we didn't have the right strategy in optics. We had products that were priced higher than I think what our traditional consumer would give us credit for.

And so a credit to our general manager, Vishak and his team, they went out and did thorough research. They talk to consumers, they talk to customers, they talk to a lot of people.

And the feedback back was, you guys have got to redesign your optics line, your binoculars, your laser rangefinder, your scopes, all that, to hit a price point that is more conducive to where the Bushnell Hunter and Shooter like to shop. And so you saw that introduction at the SHOT Show.

We'll be introducing it to the marketplace in late spring, early summer. And we're pretty excited about it. So what it is, is it's fully featured product at price points that we think are more consistent with what a Bushnell shopper is looking for. And we also think that it comes at a good time because Micon has vacated some of those price points.

And we're going to be moving in at the right time, I guess, if you will..

Okay, perfect.

And then looking at the Ammunition business, can you just talk about inventory levels that you guys have currently as well as kind of what's out in the channel today and your comfort levels?.

Yes. So if you'll -- on the Ammo side, I mean, frankly, we're running pretty lean on inventory. You've seen our inventory in total, down 20% year-over-year.

Our Ammo inventory, the team has done a super job of keeping service levels high and managing inventory, and that's a really, really increased emphasis of our entire team to really drive service levels of inventory and improve working capital. So the result of that is we're building more to demand. So we're carrying healthier levels of inventory.

And the channels -- channels are good. Their -- they cleaned up over the last couple of years, and we don't see the concerns that we may have had in the past..

And that does conclude the question-and-answer session. I'll now turn the conference back over to Chris Metz for any additional or closing remarks..

Thank you, Justin. And thank you, everyone, for joining us this morning. I'd like to start off with complementing and thanking our team of employees around the globe. We've done a lot over the last 24 months to evolve and reshape our organization and none of this could have happened without the talent and commitment of all of our people.

I can confidently say that we are a leaner, more focused version of ourselves. So thank you for everything you do. And as you've heard today, we are pleased with our third quarter performance and are intently focused on executing on fourth quarter. Our strategic plan will continue to deliver performance-driven and value-creating operating model.

So looking forward to talking with you all again in May, and thank you for joining us this morning..

Well, thank you. That does conclude today's conference. We do thank you for your participation, and have a wonderful day..