Byrna: Marketing Masterclass Delivers Huge Investment Opportunity (NASDAQ:BYRN)

Byrna Technologies (NASDAQ:BYRN) manufactures and sells non-lethal CO2-powered guns. Its customers are almost exclusively US citizens who buy the device for personal safety. On March 22^nd 2023, BYRN was simultaneously banned from all social media sites. Advertising on these sites accounted for the vast majority of BYRN revenue and the CEO told me that META, GOOGLE, Twitter (as it was then) Instagram, SNAP and the rest would not even talk to him about reversing the ban.

It was a crisis moment; sales collapsed, and the company’s very survival was at risk. In this dark hour the CEO Bryan Ganz came up with an entirely new marketing strategy that led to a 76% revenue jump in Q2 2024, delivering record quarter for BYRN.

BYRN has the wind in its sales, and the new marketing strategy is being expanded and backed up by a brick-and-mortar retail sales plan. Manufacturing capacity has increased to 18,000 units per month, the management team has improved, and a new, smaller pocket-sized product will be released shortly.

BYRN now has a flawless balance sheet, growing sales, increasing margins and new products on the way. I have set a price target of $60, 500% above today’s price and have added BYRN to my Strong-Buy portfolio my main vehicle for wealth creation.

I interviewed the BYRN CEO on August 8^th as part of my due diligence for this article. When I use the information gathered in that interview, I will highlight it.

BYRN: The Product

Byrn calls their products launchers, but I will call them guns; as my father used to say, “if it walks like a duck and quacks like a duck, it is probably a duck”. They have two lines: handguns and rifles, the handguns account for the vast majority of sales

The gun is powered by CO2 cartridges and has a patent-protected mechanism for piercing the CO2 cartridge when the trigger is pulled meaning it can be left loaded for long periods. The gun is designed to deliver its plastic pellets accurately and effectively up to 60 ft. The BYRN fires a range of projectiles that contain either a mixture of OC and TS (tear gas) or OC and pava, which is an effective pepper round. The rounds look like small plastic balls and retail for around $30 for five, the handguns come in two variants, retailing from $380 to $450. The handguns are legal to carry concealed in all 50 US states without permits, background checks or waiting times.

The Competition

The CEO said there are two types of people when put in a threatening situation. Some will call law enforcement and wait, and others will try to deal with the problem. BYRN believes their market is the latter as a result, the competition for BYRNA is everything from a baseball bat to an assault rifle. The BYRN product has advantages against all its competition; it is effective at 60 ft, and it is non-lethal. If you fired a BYRN gun by mistake and hit an innocent person, then no one will die, and 30 minutes later, the unfortunate target will have fully recovered.

The CEO told me the effects are neurological, not physiological. People hit by a BYRN pellet feel an intense burning sensation (but they are not actually burning). Their eyes often close and most can’t see, people usually fall to their knees rubbing their eyes finding it difficult to breathe. However, there is no actual damage, the pellets have zero toxicity, but they are effective; the target is neutralized for a few minutes allowing people to escape a situation or get help.

Although no deaths have been recorded due to a BYRN device the CEO does expect one at some time. He used a Tazer as an example, Tazers have been responsible for over a thousand of deaths, 40% are primary fatalities when the electrical discharge causes a heart attack, but the rest are secondary when the incapacitated person falls into a road or off a building or hits their head on the way down. Inevitably, this will happen with a BYRN gun.

Other companies manufacture similar devices, my research turned up four direct competitors: GrimBurg sell a similar device for $499 and the opportunity to invest in the company for $5,000. Hero2020 a Nitrogen powered device with swappable cartridges rather than pellets and CO2 cartridges. Sabre who sell a similar spec device, without the automatic CO2 piercing of BYRN and finally Umarex a CO2 gun company who have diversified into this field selling a much lower cost but lower spec device.

These companies are all small relative to BYRN and do not have the same product engineering or reputation in the industry. BYRN stands alone with its reputation backed up by its 24,000 reviews giving it a score of 4.6 out of 5 and extremely positive industry reviews.

Byrna Marketing Plans

When BYRN first began making its products, they imagined they would be the antidote to US gun violence. The CEO told me they expected their market to be non-gun owners who wanted the added security a BYRN delivers but it turned out not to be the case. As they attended gun shows in the early days, they realized that their market was gun owners who did not want to pull the trigger when a human is the target. He quoted a figure of 90% for gun owners who are in fear of pulling the trigger. In the short term, that is the BYRN market, gun-owning families who do not want to kill anyone, and that market is enormous. Around 40% of US adults either own a gun or have one in the house, representing about 130 million people.

Prior to March 22^nd, 2023, BYRN was reaching these people by social media and internet ads. When they were banned, it must have looked like the end, but the CEO came up with a plan to use an influencer strategy, he sought out people who had influence with his target market settling on conservative political influencers. The first was Sean Hannity, the somewhat polarizing conservative broadcaster and writer. A strong supporter of President Trump and occasional conspiracy theory promoter. The BYRN CEO described how plummeting sales grew by $8 million in the week after being featured on Hannity’s talk radio show. The roster of celebrity influencers has been increased to ten, they are all conservative political commentators many have distinguished military and law enforcement careers behind them, but all have significant followings of gun-owning Americans.

The CEO says (Q2 earnings) he expects to increase marketing spend by 50% each year on the influencer strategy but he told me they are beginning to see the effect of word-of-mouth recommendations driving sales and believes that eventually that word of mouth in the gun-owning world will allow him to target new potential customers by employing influencers of the left of the political spectrum.

On the back of the influencer campaign, BYRN delivered record revenue of $20.3 million in Q2 2024 up from $11.5 million in Q2 2023. Following the social media ban revenue slumped to $7 million in Q3 2023 suggesting the new strategy has delivered a whopping 190% increase in underlying sales.

The resulting economies of scale have increased margins, Q2 2024 gross profit was 62% up from 53% in Q2 2023. It also pushed net income from negative $4 million to positive $2 million, which is why I call it a marketing masterclass.

Retail Sales Operations

In my interview, the CEO discussed his retail sales plan, before the social marketing ban the company was selling through large arms retail stores in the US. He said that, on average, they were selling one BYRN gun a month, an immaterial amount of revenue was being generated. He described how a small test range was put inside a gun dealer in New York and salespeople invited all customers to try the BYRN. Within one month, BYRN became that dealer’s third bestselling brand.

BYRN believes people looking for a personal defense weapon who try a BYRN will likely buy one and BYRN is testing the water with retail stores. The rollout is slow and managed, but the CEO said he hopes to reach 100 stores in the future, each delivering $1 million of revenue annually.

The first store was based in Las Vegas (now open nearly two years) and it reported an astonishing 80% conversion rate from people who walk into the store. The CEO puts this down to three things, the first is people travelling to the store with the intent of trying the BYRN gun and buying one if it works, secondly the store window advertising of no checks, no waiting, no license needed and thirdly the amount of interest the stores generate with local media. All local radios and newspapers cover the opening of a non-lethal gun store and BYRN targets them with information and invitations to try the gun themselves.

BYRN intends to open three or four more retail stores in the next year (Q2 earnings) and are targeting a 65% gross profit margin and 35% contribution to company margins. (these are the figures quoted for the Vegas store). The four planned stores are described as pilots and will be in California, Boston, Nashville and Scottsdale. The goal will be to prove the concept and replicability of the operating model. If the stores succeed, then BYRN will look to develop a 100-store roll, which will inevitably involve a franchise model.

At $1 million of sales, a store would need 3,000 units annually. Current capacity has just been increased but it took six months to boost production by 8,000 units per month.

Future sales and TAM

BYRN has shown incredible growth in five years its revenue has increased from $200K a year to $200K a day, a rate of growth we rarely see. The obvious question is how sustainable is this 160% CAGR?

Total sales to date represent 0.25% of US gun owners so the potential is enormous, likely, BYRN are only just getting going. In the Q2 earnings the CEO said

a modest 10% market penetration over the next 10 years would result in more than $10 billion in revenue based on the current estimated lifetime value of a BYRN customer.

The $10 billion is sales to gun owning families only, it ignores sales to non-gun owning families, law enforcement and international sales all of which offer further potential.

Management Changes and the Next BYRN gun.

I was impressed by the CEO of BYRN, and what impressed me most was he knew what he didn’t know. He did not claim to have all the answers but knew people who did and was prepared to pay to get them on board.

The bestselling handgun in the US is the SIG Sauer P365, described as a micro compact concealed carry pistol on the Sig Sauer website. The P365 (available for $540) transformed the fortunes of Sig Sauer and had a profound impact on concealed gun carry sales. It launched in 2018 and sold a million units in 18 months.

BYRN has just appointed a new Chief Operating Officer who previously worked at SIG Sauer where he led the launch of new handguns. John Brasseur joined BYRN last year as VP of product development after spending 12 years with Sig Sauer.

During my interview with the BYRN CEO he showed me a new model, it is much smaller than the current range in fact in the few seconds it was on view (before the CEO slipped into the inside pocket of his jacket) it looked like a P365. The new model will be easy to carry in a pocket or a purse, conceal in a drawer or the glove compartment of a car.

I think this new smaller BRYN gun will drive significant sales in the coming years through both the influencer and retail channels.

Finances and Price Targets

BYRN has a flawless balance sheet with $45 million in equity (assets-liabilities) and zero debt. With $25 million of cash on hand it has more than three years of cash runway. BYRN has begun using the balance sheet to buy back shares, announcing a $10 million scheme this month.

Despite the dip in sales caused by the 2023 social media ban revenue has come roaring back on a TTM basis, BYRN became cash flow positive in 2023 and looks set to go net income positive in 2024

Modelling the future

I have built a mathematical model for BYRN to calculate an estimate of the fair value of its shares. We all understand the inherent problems with this kind of work, the value is based on many assumptions that I will try to explain before presenting the model. Note 8 and 9 in the 2024 Q2 10Q provided the information for marketing spend and the breakdown of sales by channel on which the model is based.

Revenue

Influencer revenue: Inevitably this will be subject to diminishing returns, Return On Advertising Spend is currently running at x7, which is not sustainable, and I have it falling to x6 in 2026 and x5 in 2028 and then to x3 by 2030. At the same time, I have the advertising spend increasing by 50% each year (guidance Q2 2024). BYRN said 10% of advertising spending is likely to go on TV advertising in the future, and they expect a return of x3, which is equal to my long-term forecast. This direct-to-customer sales channel has a 69.5% margin (CEO Q2 earnings).

Retail

I have assumed BYRN will open three retail stores a year until 2027, that they develop $0.75 million in sales (well below target) delivering a contribution of 25% of sales to the firm.

From 2027 I have built in a franchise model growing to 100 stores in five years. I have assumed $0.75 million in annual sales per store at contribution to the firm of 10%.

International Sales, and Wholesale

Although I have not covered international sales in this article BYRN has made significant sales to South American law enforcement agencies – specifically, Argentina, Uruguay and Brazil. In Q2 a 2,500-unit order was announced, and guidance was given for a string of similarly sized orders over the next 12 months. I will assume 1,500 units per month sold at a 25% discount to retail prices.

The image below contains some key line items from my mathematical model up to 2030.

Net working capital is difficult to forecast, and it does have a big impact on the model. H2 2024 showed a significant deviation from the 3-year average. Days sales Outstanding has fallen from the three-year average of 28.2 to 8, inventory days from 217 to 62, and days payable is up from 56 to 160. For this first version of the model, I have gone with the three-year average assuming that the changes relate to the sudden surge in sales and that they will revert to the longer term average. I will review this when we have FY 2024 results.

Production

BYRN has been increasing production rates since the sale surge began and did have some problems scaling the production of the LE version of the handgun (Q2 earnings). The CEO did say in Q2 the facility could increase production beyond that in my forecast however in the Q2 10-Q note 11 it was mentioned that $2.7 million was on deposit for the supply of additional machinery. I have assumed this level of additional capex in both H1 and H2 of the next 4 years to build capacity.

Fair value calculation

The model uses the Godon-Graham Formula for calculating a terminal value and I have set it to run at zero perpetual growth rate. Discounting rates are always contentious, so I have run the model for various rates producing the following chart.

BYRN shares are currently priced at $10.15, so the model suggests a 100% upside at all discount rates.

To be consistent with my other research, I am setting a target of $60, using the 8% discounting value, suggesting a potential upside of 500%.

Risks

Apart from the usual risks associated with small companies, BYRN has several small risks and one large one.

Small risks revolve around the influencer marketing model and how sustainable it is. BYRNs plan to open retail stores goes against the current trend but does seem to be generating sales. Regulatory concerns will always be around this type of company as will its dependence on key personnel.

The significant and potentially existential risk surrounds the competition. At present, BYRN is the leader in its field with a significant competitive and reputational advantage over its smaller direct competitors. It is developing a brand name in the non-lethal gun market and given time could become the leading name in that field. The great risk is one of the major handgun manufacturers deciding to diversify into BYRNs market. What would be the effect of a CO2-powered non-lethal handgun being released by Smith & Wesson, Ruger, SIG Sauer or Glock. It represents a threat, an order of magnitude greater than anything else. Should this happen, I will re-assess my thesis immediately. Unfortunately, I believe the more successful BYRN is the more likely this will become BYRN needs the time to grow its market, its reputation and its brand.

Conclusion

This is a very bullish report for a fast-growing company selling a market leading product at high margins. The timing could be perfect, growing calls for gun control and an increasing concern over personal safety could power BYRN for years to come.

They have reached a scale where profits and positive cash flow are likely to arrive this year all thanks to a neat marketing plan devised in the face of adversity.

BYRN is developing new models that should increase the appeal of its products and is expanding its sales funnel into retail stores, TV advertising and new celebrity influencers.

The biggest identified threat, the arrival of a big-name competitor, is likely several years away by which time BYRN may have developed into a well known brand that can withstand the competition.

I am long BYRN, having added the stock to my Strong-Buy portfolio and will provide updates to the story in the comments section of this article and follow up with a new article when they release FY 2024 results.