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Smith & Wesson Brands, Inc. (SWBI) Q2 2021 Earnings Call Transcript

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Smith & Wesson Brands, Inc. (NASDAQ: SWBI)
Q2 2021 Earnings Call
Dec 03, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. second-quarter fiscal 2021 financial results conference call. This call is being recorded. At this time, I would like to turn the call over to Rob Cicero, general counsel, who will give us some information about today's call.

Rob Cicero -- General Counsel

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, strategic evolution, market share, and demand for our products, as well as inventory conditions related to our products, growth opportunities and trends and conditions in our industry in general.

Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties that could cause our actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by our statements today. These risks and uncertainties are described in detail in our securities filings, including our periodic reports on Forms 8-K, 10-K, and 10-Q, which you can find on our website at smith-wesson.com, along with a replay of today's call. Our actual results, levels of activity, performance, and achievements could differ materially from those expressed or implied by our statements today, and we expressly disclaim any obligation to update any forward-looking statements. I have a few important items to note about our comments on the call today.

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First, we reference certain non-GAAP financial results on this call. Our non-GAAP financial results exclude acquisition-related amortization, one-time transition costs, COVID-19 expenses, and the tax effect related to each of these exclusions. Reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in our securities filings and also in today's earnings press release. Our securities filings and today's earnings press release can be found on our website.

Also, when we reference EPS, we are always referencing fully diluted EPS. Before I hand the call over to our speakers today, I want to remind everyone that we completed the spin-off of our Outdoor Products & Accessories business on August 24, 2020. As such, we are now reporting all historical financial information for that business as discontinued operations. Unless otherwise indicated, any reference to income statement items during this call refers to results from continuing operations.

Joining us on today's call are Mark Smith, president and chief executive officer; and Deana McPherson, chief financial officer. With that, I will turn the call over to Mark.

Mark Smith -- President and Chief Executive Officer

Thank you, Rob. Thanks, everyone, for joining us. Before I cover the results and highlights of our second quarter, just a quick update regarding our response to the ongoing COVID-19 pandemic. The aggressive and decisive actions that we took at the start of the year to ensure the health and safety of our employees and that I detailed on our last call are all still in effect.

Because of the hard work and dedication of our employees who have been extremely diligent in following our safety protocols, we have been able to continue safely operating our business in this challenging environment. Turning now to our financial performance during the second quarter. Our quarterly revenue of $249 million more than doubled the prior-year period and marks a second consecutive record-breaking quarter for our 168-year-old company. Q2 net income of over $49 million drove $0.87 of GAAP EPS and $0.93 of non-GAAP EPS, generated over $55 million in cash from operations, and has allowed us to end the quarter with zero net debt.

Our operations and logistics teams produced and shipped over 626,000 units during the three-month period, exceeding last quarter's record numbers by 43,000 units and demonstrating once again the power of our unique, flexible manufacturing model, and more importantly, our dedicated team's ability to deliver strong performance in the face of any challenge. We are also proud to say that during these extremely difficult times when so many of our fellow Americans are out of work, Smith & Wesson created and filled 287 new jobs just in our second quarter. And along with our existing employees, each of these new team members played a critical role in achieving our record-breaking numbers. Our success in the quarter is a direct representation of the trust that our loyal consumers have placed in the iconic Smith & Wesson brand and bodes very well for the long-term success of the company as we continue to gain significant market share as measured by our performance against NICS.

But before I go through those numbers, as always, two quick notes. First, please remember that adjusted NICS background checks are generally considered to be the best available proxy for consumer firearm demand at the retail counter. But since we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period, we believe, mostly due to inventory levels. That said, given the continued lack of inventory in the channel throughout our second quarter, we believe that NICS is currently more correlated to our shipments than it would be during periods when the inventories are not so depleted.

Secondly, as you may recall, we are providing more insight into our business and specifically market share trends by sharing with you the quarterly channel inventory levels at our strategic retailer accounts and distributors. Please remember that we have three main consumer channels, and the inventory levels I will discuss do not include buying groups. So with that, let's go into the market share numbers. In our fiscal Q2, overall NICS background checks for all firearm types increased 57.5% over the comparable time frame last year.

For Smith & Wesson, our total units shipped into the sporting goods channel during this time increased 93.4% to 586,000 units, while simultaneously, our SRA and distributor combined inventory levels declined by over 208,000 units. Breaking those numbers down a little further, NICS checks for handguns increased 75.6% during the quarter, while our handgun units shipped increased by 74.3% to 420,000 units. Simultaneously, our handgun channel inventory dropped by 178,000 units. And finally, NICS checks for long guns increased 48.8% in the quarter, while our long gun units shipped increased 167.7% to 166,000 units.

Simultaneously, our long gun channel inventory dropped by 30,000 units. So in addition to our terrific financial results, these numbers indicate very robust market share gains as well, which, as we've discussed previously, is the key metric and our focus on long-term growth. Our shipments into the channel significantly exceeded NICS overall, while inventory of our products in the channel actually decreased, reflecting our ability to deliver and a strong preference for our product at the retail level. Before I hand the call over to Deana, I just want to provide a longer-term perspective on the overall firearm market dynamics that we've all seen this past year.

Including the recent November NICS results released this week, in calendar 2020, through November 30, there have been approximately 19.2 million background checks for firearm purchases. This represents a year-to-date growth of 65% over the prior year and the largest 11-month period on record since FBI began tracking NICS in 1998. With NSSF predicting that 40% of the firearms purchases in 2020 are coming from first-time firearm owners, we can estimate that there were nearly 8 million Americans who made the decision in 2020, so far, to exercise their Second Amendment rights for the first time. Additionally, these new consumers are broadening and diversifying our consumer base with NSSF survey data indicating that women are making up 40% of new buyers.

And overall firearm purchases by African Americans are outpacing all other demographics with 58% growth in the first half of the year alone through June. So what does this mean for our company and our industry? In October, we conducted an attitude and usage study of over 1,200 law-abiding firearm owners with the goal of gaining a better understanding of today's firearm consumer. The research indicated that for those people who own firearms, the average number of firearms possessed was eight. And according to research conducted by NSSF in 2013, at that time, approximately one in four new firearm owners went on to purchase additional firearms, with the subsequent purchase at a higher sales price than their initial purchase.

Therefore, this expanded consumer base of new firearm owners represents a healthy long-term opportunity for the industry as a whole but specifically for Smith & Wesson. The A&U study also concluded that once again, the iconic Smith & Wesson brand was No. 1 in unaided awareness in the handgun and MSR categories and again No. 1 in aided awareness with 84% of respondents recognizing our brand.

Most encouraging, however, was that 85% of respondents would recommend Smith & Wesson to others, an endorsement that we do not take for granted and one that, combined with our results in the first half of our fiscal year, positions us very favorably within the marketplace long term. Finally, and as I mentioned on the last call, we have taken a leadership position in welcoming these new consumers to our community to our Smith & Wesson GUNSMARTS program. We continue to produce instructional videos and distribute free safety kits. And to date, we have donated over 47,000 GUNSMARTS kits, complete with hearing and eye protection, basic safety, and storage instructions, as well as links for the consumer to find our YouTube channel, where we share roughly 40 videos with content ranging from shooting fundamentals, responsible gun ownership, safety, storage and enjoyment of the shooting sports.

In just four months since its inception, we have received over 24 million impressions on this program. Please visit www.smith-wesson.com/gunsmarts to see the program tools for yourself. And with that, I'll turn the call over to Deana to deliver the financial results.

Deana McPherson -- Chief Financial Officer

Thanks, Mark. The ongoing heightened consumer demand, combined with our ability to increase our production capacity through use of our flexible manufacturing model, resulted in a second consecutive quarter of record revenue, totaling $248.7 million, a $135 million increase or more than double the prior-year results. Once again, these results are a testament to our operations team that increased firearms production output beyond our expectations, utilizing a combination of targeted headcount increases, additional machine capacity, and continued activation of our flexible manufacturing model, all while keeping our employees safe during the pandemic. Gross margin of 40.6%, well above the 28.2% realized in the prior year, was due to increased unit shipments, combined with a reduction in promotional activity, slightly offset by recall-related costs, increased depreciation on machinery purchases, and compensation-related costs associated with the increased headcount.

Operating expenses were $8 million higher than the prior year due to $4.8 million of spin-off costs, $3.1 million of increased profit-sharing expense, and a $500,000 donation to the National Shooting Sports Foundation's GUNVOTE campaign. Increased volume-related customer allowances were more than offset by reduced travel, lower advertising costs, and lower employee medical costs, likely due to the deferral of elective procedures resulting from the pandemic. The increase in revenue and gross margin led to a significant profit gain as compared to the prior-year comparable quarter, including net income of $49.1 million, GAAP earnings per share of $0.87, non-GAAP earnings per share of $0.93, and adjusted EBITDAS of $78.9 million. During the quarter, we generated $55.3 million in cash from operations and spent $8.7 million on capital equipment, leaving $46.6 million in free cash.

We also ceded the Outdoor Products & Accessories business with $25 million and repaid the final $25 million on our revolving line of credit, resulting in the company ending the quarter with $55.5 million of cash and no bank debt. As you may remember from our call last quarter, we indicated that our capital allocation priorities were to invest in our business, repay our debt, and return capital to our shareholders. I'm pleased to announce that our board has once again authorized our $0.05 per share dividend to shareholders of record on December 17 with payment to be made on January 5. Looking forward, although we do not intend to provide guidance, we will provide the following color for our third quarter.

We implemented a 3% price increase that went into effect on November 16. This increase applies to nearly all products shipped subsequent to November 15. In periods of high demand, our ability to recognize revenue is primarily a function of our production capacity. That production capacity is somewhat governed by the number of operating days we have available due to weekends, holidays, and other non-operating days such as shutdowns.

Our second quarter had 59 operating days with five shutdown days and one holiday. Our third quarter will have only 56 operating days due to the Thanksgiving and Christmas holiday shutdown periods. During our 12-week second quarter, we increased our capacity by over 50%, with nearly half of this increase occurring at the start of week 4 and two-thirds in place at the start of week 6. We are not currently planning to add any significant additional capacity beyond this.

In fact, we have been monitoring our supply chain due to recent indications that the pandemic is now starting to impact some suppliers' ability to supply us with the material we need to meet our very aggressive production plans. We continue to monitor the situation and are actively working to mitigate any disruption. Finally, due to the increase in our taxable income, our effective tax rate has dropped to just below 25%. With that, operator, can we please open the call to questions from our analysts?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Scott Stember from CL King. Your line is now open.

Scott Stember -- C.L. King and Associates -- Analyst

Good evening, and thanks for taking my questions. I know you guys aren't giving guidance of any sort, but just looking at where you see the industry going forward. I know we have a new foundational layer of growth, and it seems like things are a lot different this time around versus prior surges. But just give us your sense of could 2021, at least for the industry, be a year of growth? And how would supply issues play into preventing that from happening?

Mark Smith -- President and Chief Executive Officer

Yes. Scott, this is Mark. Yes, I mean, obviously, we're not giving guidance, so I'm not going to get too much into detail about whether it's a growth year or not. But what I will say is, as I said in the prepared remarks, I mean, there's obviously a lot of new firearms consumers in the industry now.

And all indications are that anywhere between a quarter to a third of those are going to become long-term enthusiasts. And as we mentioned, that tends to bode very well for us going forward as enthusiasts become collectors and move up in the ASP that their subsequent purchases are oftentimes a lot more than their initial purchase. Where the market is going, and why we're not giving guidance, I think you can kind of take from some of Deana's comments about the number of production days that the demand is very strong, remains very strong. Inventory in the channel is still very depleted.

We expect this to continue at least through our Q3 and into our Q4, and we'll see where it goes from there. But as I said, I mean, we're really taking a long-term view to this. And I think we've got -- as you said, we've kind of put a new layer on in terms of the consumer base.

Scott Stember -- C.L. King and Associates -- Analyst

All right. And could you, Deana, just go back and talk about or recap what you mentioned about supplier issues, how that could potentially -- well, how serious is it? And what kind of a headwind could that be in the next couple of quarters?

Deana McPherson -- Chief Financial Officer

Sure. Sure. We don't really expect any disruptions to our current plan. This is more a situation where we have to be flexible.

Things come up. COVID numbers are going up. There's a lot happening across the country right now. And at this point, we are flexible enough to change things around and that we can react to them.

But it is something that we're monitoring closely, and I want to make sure that everybody considers that in how we look at the future right now. And it's part of the reason that we don't want to be out there providing guidance. It's a situation where we manage, and our operations team and our procurement teams have done a great job, and our suppliers have been behind us. But it is something that we're actively managing.

Mark Smith -- President and Chief Executive Officer

Scott, this is Mark. I don't think it's going to -- I mean, I don't think it's going to have any impact in our quarter. But I think it's more a factor of -- I think we're going to take a little bit of -- we ramped -- obviously, as you can see from the numbers, we ramped really quickly. And we're going to take a little bit of a -- we're going to kind of pause here for a little bit and let the supply chain stabilize and then we'll see where the market goes from there.

Obviously, we've got upside, and we've proven we can manage through any kind of normalization that may come at some point in the future. So we're just kind of pausing here to let the supply chain stabilize a little bit, I think, is kind of what you should take away from that.

Scott Stember -- C.L. King and Associates -- Analyst

OK. And just lastly, we have the first two quarters of fiscal '20 regarding adjusted EPS. I don't know if you guys are prepared to give anything on a quarterly basis. But could you give us for the full year, at least, for fiscal '20, so we could have a framework to judge fiscal '21 off of? Obviously, '21 is a lot higher, but...

Deana McPherson -- Chief Financial Officer

Yes. We're not giving guidance. There's just too many variables, and we want to manage for the long term.

Scott Stember -- C.L. King and Associates -- Analyst

No, I'm not referring to guidance. But for 2020, we do not have what a -- fiscal '20, what the...

Deana McPherson -- Chief Financial Officer

You want to know what -- I'm sorry, you want to know what EPS is for continuing operations?

Scott Stember -- C.L. King and Associates -- Analyst

Yes. As far as so just we could have something to judge basically to base '21 off of. That's all. Yes.

Deana McPherson -- Chief Financial Officer

Sure. Hold on one moment. It's about $0.50 for the full-year fiscal '20.

Scott Stember -- C.L. King and Associates -- Analyst

You said $0.50, 5-0?

Deana McPherson -- Chief Financial Officer

5-0, yes.

Scott Stember -- C.L. King and Associates -- Analyst

OK. Thank you. Thanks a lot, guys.

Deana McPherson -- Chief Financial Officer

Scott, thank you.

Operator

Our next question comes from the line of Steve Dyer from Craig-Hallum. Your line is now open.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Thank you. Good afternoon and congratulations on the excellent results. A couple of questions. One, long gun performance was really exceptional in the quarter by almost any measure.

I think it's by far the biggest quarter I've ever seen. You clearly don't have really much, if any, shotgun exposure. So I'm wondering if you could elaborate a little bit on what may have driven that, whether it was ARs, whether it was -- I feel like it was more hunting rifles, etc.

Mark Smith -- President and Chief Executive Officer

Yeah. We don't provide that kind of breakdown, Steve, unfortunately. I think every category in the firearms industry right now is very, very strong. Our Thompson/Center Arms was above expectations.

But to be honest, our Thompson/Center Arms in terms of the brands out there is kind of one of the smaller brands in the industry. And so you can kind of draw your own conclusions from that. And on our MSR side, that is one of our most volatile -- it's just one of the most volatile categories in the portfolio, just in general in the industry. Obviously, it's very subject to political rhetoric and tends to have wild swings.

We're very, very used to that. Our supply chain is very, very used to that. And we've been through this before, and we're able to ramp up very quickly. We're also able to, you know, absorb any kind of normalization very well as well.

And we don't make a whole lot of those components. They're supplied from the outside. So from us, from an absorption perspective, it doesn't, you know, really affect us.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

But just in general, I think it's safe to say that was -- if you feel like it was more a personal protection sale as opposed to a hunting sale in the long gun category?

Mark Smith -- President and Chief Executive Officer

Yeah. I think the dynamics that happened, I think, as the year has gone on, it was very, very heavy, obviously, as we came into the pandemic in March and April, very heavily focused on personal protection and through the summer. And then as we kind of came into -- as the election kind of heated up through September and October, and obviously, the gun control became a topic of discussion, then the MSRs really kind of have heated up just in recent months.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Yes. You guys talked about expanded production capacity in the quarter. I'm wondering if you could tell us sort of how much of that added capacity was internal versus external.

Mark Smith -- President and Chief Executive Officer

We're not going to provide any kind of details on that. But as we've talked about many times before, our main mode of operation when it comes to managing through surges and ups and downs is we have a base level of capacity, which we feel is largely rightsized internally. And then we manage this kind of the heavier demand periods through outsourcing with the outside. So I can kind of give you that direction.

Deana McPherson -- Chief Financial Officer

And, Steve, you can take a look at our cash flow statement, and you can see our capital spending is not outsized. So that will kind of guide you in the direction.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Yes. Yes. Very helpful. And then I guess, lastly for me, and I'll hop back in line.

Your free cash flow is extraordinary and has turned the net debt situation around very, very quickly. You have a dividend, although it's probably fairly, I guess, nominal in the big picture. But when you look at whether it's share buybacks, whether it's a special dividend, I think any further sort of guidance as to, especially given another couple of quarters of this kind of cash flow, how you might think about that in the future?

Deana McPherson -- Chief Financial Officer

Yeah. You know, we've said before that and it is our intention to return our profits back to our shareholders. At this point, we do want to be a growth dividend company. And we know that we started out at a relatively small level.

What we don't want to do is grow the dividend so fast that it becomes unsustainable when there is a lot of volatility in the marketplace. So that is one piece of it. We are continuing to evaluate what to do. We recognize that the last two quarters of free cash have been very positive.

But our goal is to manage for the long term, and we don't want to make rash decisions. So stay tuned. When a decision gets made, we'll let everyone know.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

All right. Very good. Thanks, Deana.

Deana McPherson -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Smith from Lake Street Capital. Your line is now open.

Mark Smith -- President and Chief Executive Officer

I wanted to talk a little bit about ASP going forward and just confirm. You guys took a 3% price increase in the middle of November. Do you feel like that was as much as you could take, or are you being conservative in that? Maybe talk about what you're seeing in the environment as far as pricing.

Sure. So the ASP is up largely just due to the fact that the promotional activity is nonexistent right now. And obviously, there's some mix adjustments that we can make to maximize that ASP. Going forward, just speaking real quickly about the 3% price increase, we, again, take a pretty long-term view to our pricing.

Could we have gone higher in this environment? Yes, of course, we could have. But we're taking a long-term view to the marketplace and maintaining credibility with the consumer. And we want our products to be priced appropriately in the marketplace, not just in this environment but in any environment, versus our competition. So we took a hard look at that.

There were some categories that we took some targeted increases beyond the 3% just to kind of bring those back in line. It's an opportunity right now when the demand is so strong. And so I think going forward, at least through the rest of our fiscal year, I think it's pretty safe to say that these ASPs are going to hold up.

OK. Would the next opportunity be -- and kind of the next question, as we look at the calendar, without SHOT Show really happening in person this year, how does the calendar change? And as we look at new products, is there opportunity to maybe spread out the release of new products and take price strategically in new products?

Yeah. That's a great question. So we're continuing to push hard on new products. There are a couple that we've just strategically decided to kind of leave on waiting in the wings for now.

There's also a couple that we're going to be really excited to be talking about next time we speak. So we're continuing to remain very aggressive. And I guess we're kind of taking the view of let's take this opportunity now to be pushing hard so that, again, in any environment, we can continue to be successful in injecting life and excitement into our brands through new product launches. So I'm actually very excited about the new product pipeline that we have coming up here in the next 12 to 18 months.

And, yes, you're right. I mean, that's something we can definitely use to help to offset any kind of pricing pressure is new product, and it's something we spend a lot of time talking about and planning for.

OK. And then, Mark, you talked a fair amount about kind of brand loyalty and awareness. As we look at these new and first-time buyers, any insight into kind of how the brand helped you maybe take share with these new buyers? And then additionally, if we get a little more granular, do you think the EZ models within handguns really helped you drive sales to some of these first-time buyers?

The answer to both of those -- the answer to your last question is absolutely. All feedback in the marketplace right now from all of our retailers, distributors, etc., it is the No. 1 product hands down in the marketplace right now. And a lot of it is due to the fact that it just caters to exactly what somebody who's new coming into the marketplace is looking for.

In terms of the brand, yes, I think the brand really did help a lot. I think we in the industry are very familiar with all of the major players. I think people outside of the industry definitely know Smith & Wesson and then maybe know a few of the other larger players. So Smith & Wesson is just such an iconic brand in American heritage that when somebody is coming in new, it's a trusted, welcoming brand to see that under the -- to see that brand.

And I think we've done a great job of keeping our product in stock, maybe better than some others in the industry. And that's really helped us as well to make sure that we're there and that consumer is making that first purchase and that brand association with Smith & Wesson.

Great. And then just two more for me. As we look at gross profit margin, that certainly looks solid. Are there any pressures that you guys see that could impact this going forward primarily as we look at the labor market or commodities? Anything to call out?

Nothing on the commodity side. The labor market is -- frankly, it has been tough. And all credit to our operations and human resources teams They really haven't had any issues with that. I don't expect it to have any material impact going forward on our gross margins.

But it is a challenge for us right now, believe it or not, just because we're growing so quickly.

Deana McPherson -- Chief Financial Officer

Right. We did see our ability to hire improve after the additional unemployment benefits expired. Depending on whether there is a new agreement, that could have an impact on hiring or quite frankly, people who might want to just be out. But at this point, we have a good flow of really great workers.

And so we're doing the best we can to keep up with that. As Mark noted in his call, we hired 287 people during the quarter. That's a lot.

Mark Smith -- President and Chief Executive Officer

Absolutely. Last one for me is any insight you can give us as far as kind of backlog of orders and where you're sitting at today.

Yeah. We don't provide the backlog on a quarterly basis. But obviously, given the fact that our results we just posted and the fact we're kind of indicating that we're going to be pretty constrained through our third quarter, it's strong, It's very strong.

Excellent. Thank you, guys.

Deana McPherson -- Chief Financial Officer

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Rommel Dionisio from Aegis Capital. Your line is now open.

Rommel Dionisio -- Aegis Capital -- Analyst

Good afternoon. Thanks for taking my question. So a lot of moving parts in the supply chain, obviously, with the ramp in production, new employees, as you alluded to, and also, I imagine the COVID safety practices as well. I wonder if you could just address what you guys are doing to ensure quality control and product quality? And also just given that I'm sure some of these factors are impacting some of the companies you outsource, some of the production substitute, are you seeing any deterioration in terms of product quality from components that you guys are having brought in? Thank you.

Mark Smith -- President and Chief Executive Officer

Sure. Thanks, Rommel. No, we are not seeing any material changes. We run very similar to the automotive industry.

We've kind of copied a lot of their quality control processes and got those implemented. It's extremely important for us to make sure that, obviously, it's a firearm, and we want to make sure that it's safe as possible and quality and safety go hand-in-hand as far as that goes. We have a lot of pretty disciplined, rigorous processes internally in terms of testing and making sure that all of the product that's going out the door is up to our very, very high standards. So no, we have not seen any of those issues.

We actually have a -- every one of the sales folks does a biweekly report, where one of the main questions we ask is quality and any reports coming from the field because we watch trends and we watch a lot of our own internal metrics in terms of warranty returns and scrap rates out on the floor, etc., and we have not seen any kind of increase whatsoever.

Rommel Dionisio -- Aegis Capital -- Analyst

OK, very good. That's all I had. Thanks and congrats on the quarter.

Mark Smith -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Cai von Rumohr from Cowen. Your line is now open.

Scott McCrery -- Cowen and Company -- Analyst

Hi. This is Scott McCrery on for Cai. I have two questions. First, have you seen firearm purchasing behavior change at all during the elections, whether it be from a consumer standpoint? I know you all don't deal with consumers directly.

But have you heard of anything? Or have you seen anything with dealers and distributors?

Mark Smith -- President and Chief Executive Officer

Well, obviously, the election year is a driver for us. As the political landscape gets contentious and talk of gun control increases, and therefore, there's a fear of increased gun control regulation, which drives a lot of our consumers to go out and purchase firearms. So yes, I mean, there was a change in behavior as the election ramped up. And as everybody knows, this election was obviously a little more contentious than maybe they have been in the past.

And so I think as we've talked about before, though, this year was a little different in terms of the personal protection kind of fear drivers coming at the beginning of the year and as we kind of went into the spring with the COVID pandemic and then continuing through the social unrest through the summer. And that continues really still today. And then we layered on top of that, I think some of the more typical, if you want to call it that, election demand on top of that. So it did.

I think it just changed a little bit of the -- I don't think it changed the base level of demand that came out of the personal protection. It probably just layered on top of it with the gun control rhetoric.

Scott McCrery -- Cowen and Company -- Analyst

OK. And then for my second question. I know that someone asked this previously, but what are your -- I guess to put it differently, what are your relative priorities when you're thinking about returning cash or using cash? You have the dividend now. Is there anything else you're thinking about? I guess, just trying to understand the hierarchy there.

Deana McPherson -- Chief Financial Officer

Yeah. Our hierarchy is, as I said, investing in the business is one of our main priorities, and we continue to do that. With regard to returning profits back to shareholders, we do continue to evaluate it. We are having active discussions at this point regarding what to do.

We are not trying to rush into something that will have a long-term negative impact in a business that is, quite frankly, very cyclical. So we'll let you know. It is not our intention to just store a tremendous amount of cash that wouldn't do anybody any good. So give us a little bit more time, and we'll let everybody know.

Scott McCrery -- Cowen and Company -- Analyst

OK. Sounds good. Thank you.

Operator

Thank you. Our next question comes from the line of James Hardiman from Wedbush Securities. Your line is now open.

James Hardiman -- Wedbush Securities -- Analyst

Hey, good evening. Thanks for taking my questions. So a couple from me. I'm interested in the commentary about the new gun owners that are getting into the market, and you guys gave us some great stats.

Any idea how quickly somebody that is a first-time buyer typically takes to sort of get back into the market and get their second or third one? It seems like that could be a significant driver at some point in the future. Just trying to think about how long that cycle takes?

Mark Smith -- President and Chief Executive Officer

Yeah. James, I think I'd be giving you too much of a guess if I were to kind of answer that question. So directionally, is it two years? Is it one year? Is it six months? I think you're probably closer to the six-month time frame. Whether that's one month or six, I don't know, a little too much guessing to give you an answer there.

James Hardiman -- Wedbush Securities -- Analyst

That's fair. I figure your guess is better than mine. So I appreciate that. So my second question, Deana, you gave us a lot of numbers in terms of the capacity increase.

It seems like we can do the math, but I just want to make sure I'm thinking about this the right way. Your capacity was 50% higher at the end of the quarter than at the beginning, but it was sort of phased-in over the course of the quarter. Is that the way to think about it?

Deana McPherson -- Chief Financial Officer

Yeah, more toward the front half of the quarter than the back half. That's what I was trying to get across is that the ramping did come early. And you got to remember, too, that quarter is a 12-week quarter for us because the first week is shut down. So we did definitely ramp more toward the front end of the quarter so that you just can't take that and assume that the next several quarters is going to be that much more additive.

James Hardiman -- Wedbush Securities -- Analyst

Right. Yeah, I get that. OK. And then just lastly, and the answer may be, we don't really know.

But as I think about the substantial decrease in inventories, I think it was 208,000 units in aggregate between the two channels that you guys laid out. Any way to put that in context of what the restocking opportunity now is? I guess part of the answer to that question is, with the year-ago number sort of where you wanted to be too high, too low. But I think what a lot of people are now going to try to figure out is how long does it take you to get back to "normal". I doubt you're going to answer that, but any sort of breadcrumbs to help us figure out what that restocking looks like?

Mark Smith -- President and Chief Executive Officer

Yeah. I can help a little bit. I mean, I think we'll let you know that our inventory levels in the channel right now are right about one week worth of supply. And really, all that is, is the time it takes our partners to get the truck back in, unloaded, picked, and ship back out again.

As we've talked about many times before, our kind of our target level inventory in the channel, we want it to be about eight weeks. So, yes, there's a significant opportunity there. Eight weeks' worth of supply. So I think what's a little bit different even this time around in addition to the additional layer of new consumers, we got to refill the entire channel.

So you're right to be thinking about that, there's a significant work to do just to get the channel back up to where we want it to be.

James Hardiman -- Wedbush Securities -- Analyst

Got it. Much appreciated. Thanks, guys.

Deana McPherson -- Chief Financial Officer

James, just one other point. If you're thinking about the way that the marketplace reacted after the 2016 election, that was where inventory was in the channel and consumers stopped buying. In this case, there's no inventory in the channel and consumers are still buying. So as consumers potentially slow down in the future, at some point, we'll have the opportunity to see the inventory as it moves through the channel and work with the distributors and retailers.

So it should be a softer slowdown, not like it was in '16. This is a very different environment.

James Hardiman -- Wedbush Securities -- Analyst

Got it. Very helpful. Thanks.

Deana McPherson -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Smith from Lake Street Capital. Your line is now open.

Mark Smith -- President and Chief Executive Officer

Hi, guys. Just one quick follow-up on timing. This year, sure looked like we didn't really see any Smith & Wesson or Thompson/Center Firearms out on Black Friday Specials. Historically, with the timing of shipments, for those kind of specials, would that go in the October quarter and be shipped and typically booked that quarter? Or would that fall under the January quarter?

Well, just talking about Black Friday quickly. The feedback we've gotten unanimously from the retailers is there's very few of them who felt the need to run promotions. And as a matter of fact, a lot of the feedback has been that Black Friday was not as big as some previous years have been, just frankly, because they didn't have any inventory. And a lot of the feedback we got was Monday, Tuesday, and Wednesday of Thanksgiving week were very, very busy days and Thursday was actually -- sorry, and then Friday was actually a little bit of a down day and Saturday and Sunday picked up.

And I don't know if that's because of the COVID fear of being out Black Friday shopping or whether that's just the inventory was depleted, and people went shopping Monday through Wednesday or what the case was. So I think it's a bit of a different year. In terms of the promotional -- again, there really isn't any promotional activity in the channel right now and everything that we're making, we're shipping.

Deana McPherson -- Chief Financial Officer

Right. And generally, the way that you would think about like how do we promote our products and the timing of when we promote our products, we don't generally promote products for Black Friday. So the fact that we're not promoting, and it's increased the ASPs wouldn't have fallen into any quarter as it relates to Black Friday. Generally speaking, as you know, our fourth quarter is generally the higher promotional period because of the different shows and our distributor shows and buying group shows and whatnot, we generally would have promoted more in the summer time frames as our distributors and dealers were stocking up for their later periods.

But generally speaking, within our financial statements, the back half of the second quarter and the front half of our third quarter didn't generally have a significant number of promotions, generally speaking.

Mark Smith -- President and Chief Executive Officer

And outside of promotions as far as kind of inventory that's on hand in a historical year, it's not like you would build into and ship a bunch in the last week or so of October just to prepare for the holidays. There's nothing historically that's happened that way.

Deana McPherson -- Chief Financial Officer

No, no, that's not really how it operates. Generally speaking, two-step distribution would kind of take a little bit of time for it to get through to the retailers. So there's not a big push generally in October to get inventory onto the shelves for Black Friday.

Mark Smith -- President and Chief Executive Officer

OK, great. Thank you.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mark Smith for closing remarks.

Mark Smith -- President and Chief Executive Officer

Thank you, and thanks, everyone, for joining us today. I just want to close by recognizing our devoted employees for making this record-breaking quarter possible. Everybody, stay safe. Enjoy the holidays, and we look forward to speaking with you in 2021.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Rob Cicero -- General Counsel

Mark Smith -- President and Chief Executive Officer

Deana McPherson -- Chief Financial Officer

Scott Stember -- C.L. King and Associates -- Analyst

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Rommel Dionisio -- Aegis Capital -- Analyst

Scott McCrery -- Cowen and Company -- Analyst

James Hardiman -- Wedbush Securities -- Analyst

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