Sturm, Ruger's Inventory Storm

Inventory management has become the watchword at firearms maker Sturm, Ruger & Co. (NYSE: RGR  ) . That, and increasing sales.

While sales in 2006 exceeded those of 2005 by 8%, they are still barely above where they stood back in 2002. A strong third quarter ultimately saved the day for Ruger in 2006; in fact, firearms sales, which comprise more than 80% of Ruger's revenues, fell almost 4% in the fourth quarter. A 72% increase in its investment castings segment -- that's the "lost wax" process of mold making -- helped push net sales forward. Yet even here, Ruger is ending production of its titanium castings, so sales orders were pushed up before manufacturing ceased.

In the end, Ruger undertook an inventory count and found it had stockpiles of guns that far exceeded any demand it was realizing from customers. All those guns had to be liquidated and gross inventories were reduced by $24 million for the year, resulting in an obsolescence expense of $3.2 million, with an additional $5.5 million reserved for the future. It also had the effect of reducing Ruger's cost of sales.

In addition, it meant Ruger couldn't keep doing business the way it always has. It will be switching from an annual production cycle to a customer-demand driven "pull system" in the fourth quarter, meaning new guns will be made to refresh supply based on actual guns sold. The firearms maker is also trying to reduce its workforce by offering buyouts to employees, and is selling off factories to remake itself as a leaner manufacturer.

The challenges facing the industry are nothing new, but the competition remains tough. While Smith & Wesson (Nasdaq: SWHC  ) remains one of the only publicly traded competitors, Glock, Browning, Beretta, and Sig Sauer vie for sales to sportsmen, the military, and police segments. Ruger had a large sale to the Army in early 2005, but no large-scale orders since. Instead, it has seen slackening demand for its shotguns, pistols, and rifles. Slack industry demand has led to consolidation; Smith & Wesson, for example, just acquired hunting firearms manufacturer Thompson/Center Arms for $102 million.

Fools are often concerned when companies suddenly offer less information to investors, rather than more. An exception may be when a company stops offering guidance, since it would imply management is more properly focusing on running its business than in pleasing the analyst community. Yet Ruger has also gone a step beyond this in that it will not issue a press release discussing its quarterly and annual results. It will simply release its financial statements without any accompanying spin.

It's a curious action on Ruger's part, but not necessarily troublesome. Since the press releases do tend to highlight the best parts of the report, leaving the investor to sort through the footnotes to find the unpleasantness hidden within, Ruger's move seems to be one of those steps that indicates it is simply focusing on its business.

Which is a good thing. With the weakness shown in its core firearms segment,the company might just end up making itself a candidate for acquisition simply to keep its aim true.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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