Byrna: Strong Q4 FY22 Results, Underwhelming FY23 Sales Guidance

Introduction

I’ve written two articles on SA about non-lethal weapon maker Byrna Technologies (NASDAQ:BYRN). The latest of them was in November when I turned bearish and said that inventories were at concerning levels and there don’t seem to be further economies of scale.

Well, Byrna recently released its FY22 financial results, and it barely hit the low end of its revised revenue guidance. Yet, revenue growth rates for Q4 were decent and the margins expanded significantly thanks to improved logistics costs. Unfortunately, the company expects to book revenues of just $55 million to $60 million in FY23 which I view as underwhelming considering it recently announced the formation of a LATAM arm with a new production facility in Argentina. Let’s review.

Overview of the Q4 2022 financial results

In case you haven’t read any of my previous articles about Byrna, here’s a quick description of the business. The company focuses on the production of CO2 handheld personal security devices and shoulder-fired launchers that can fire chemical irritant, kinetic, and inert rounds. These non-lethal guns don’t require a background check, or a firearms license and the rounds are designed to disable a threat from a standoff distance of up to 60 feet.

Byrna also produces pepper spray, body armor, personal safety alarms as well as apparel products like t-shirts, beanies, and hats. Its main clients include private security professionals, law enforcement offices as well as ordinary citizens. All orders get shipped from the factory in 3-5 business days and products are sold through the company’s online store, an Amazon (NASDAQ: AMZN) storefront and through a network of more than 1,300 local, regional and national outdoor and sporting goods stores. Byrna has sold over 275,000 handheld launchers since its inception in 2019 and it gained nationwide attention on June 9, 2020, as its products were shown on FOX News. The company received online orders for more than $2 million on that day. Byrna received another unsolicited endorsement from Sean Hannity on live television in April 2021 which led to a $9 million spike in sales in the first half of FY21.

Turning our attention to the Q4 FY22 financial results, we can see that revenues increased by 43.5% year on year, which is much lower than the compound annual growth rate of 272% recorded over the past four years. In addition, we aren’t comparing apples to apples here as Byrna bought pepper spray maker Fox Labs for $2.2 million in May 2022. The latter booked revenues of about $0.4 million in Q4 FY22. While Byrna barely met the lower end of its revised FY22 revenue guidance of $48 million to $52 million, I find it encouraging that sales growth in the second part of the year has increased and the company almost managed to get into the black in Q4 following growing losses during the first nine months of the fiscal year.

The gross profit margin increased to 54.1% in Q4 FY22 from 51.1% a year earlier thanks to reduced dependence on air freight as well as an improved product mix as the high-margin ammo sales represented a larger part of the net revenue. Operating expenses were flat compared to Q3 FY22, which helped improve the result from operations. Earlier in FY22, the company moved its US manufacturing operations in Indiana from a 14,000 square foot facility to a new 30,000 square foot facility nearby in order to expand capacity. However, operating expenses are likely to increase significantly in FY23 as Byrna recently announced the creation of a 51%-owned subsidiary in Uruguay with a manufacturing facility in Argentina. The plant was expected to start production in February and considering Byrna is expecting revenues of just $55 million to $60 million in FY23 due to a challenging macroeconomic environment, I doubt that the company will have a positive net income this fiscal year. With cash running out rapidly, this is a major issue.

Turning our attention to the balance sheet, we can see that Byrna closed FY22 with $20.1 million in cash and cash equivalents compared to $56.4 million a year earlier. So, how did the company get here? Well, accounts receivable grew as the business expanded while inventories increased due to the switch from air freight for raw materials to ocean freight as this mode of transportation is slower. In addition, Byrna spent $17.5 million to repurchase 2.2 million shares at an average price of $8.08 during FY22.

I expect Byrna’s cash balance to decline further in Q1 FY23 as the company revealed in its FY22 financial report that it contributed $0.5 million in cash and loaned approximately $1.6 million to its new LATAM arm (see page 70 here).

Overall, I think that Byrna finished FY22 on a high note as it almost achieved a net income, but it seems that FY23 is going to be challenging. So, how do you play this? Well, short selling seems like a viable idea as data from Fintel shows the short borrow fee rate is 0.83% as of the time of writing. The short interest is just 3.66% of the float, but it takes over 5 days to cover due to the low trading volume. Looking at hedging, call options look relatively cheap at the moment.

However, the share price could receive a boost over the coming months if Byrna keeps buying back shares at the current pace and I think it could be best for risk-averse investors to stay away from BYRN stock.

Investor takeaway

In my view, FY22 started out bad for Byrna as it was struggling with growing sales due to macroeconomic headwinds. Sales growth rates picked up over the past few months and cost discipline helped the company almost get into the black. However, I think that the FY23 sales guidance is underwhelming and that losses in the first half of the fiscal year are likely to expand as the new factory in Argentina opens its doors. However, short selling seems dangerous as Byrna still had over $20 million in cash as of November and I think the company could continue to buy back shares on the open market aggressively. It could be best for risk-averse investors to avoid Byrna.