Will Smith & Wesson Holding Corp Keep Feeling the Pain?

As rifle customers evaporate, so too do sales -- and profits.

Aug 27, 2014 at 5:37PM

Call it a crisis. Call it an opportunity. Whatever you choose to call it, though, the fact is: Smith & Wesson (NASDAQ:SWHC) stock is a whole lot cheaper today than what it cost on Tuesday. It closed down nearly 14% at $11.31.

Every other story on Smith & Wesson on the Internet today will tell you that the company "misfired" on earnings. But us? We'll show you what a misfire looks like. Photo: Wikimedia Commons.

The reason, as you can probably guess was earnings. Early Wednesday morning, Smith & Wesson announced financial results for its fiscal first quarter 2015 (which wrapped up July 31). Here's how the numbers looked:

  • Sales dropped 23% year over year to $131.9 million, as rifle customers evaporated.
  • With worse economies of scale, gross profits took a dive as well -- down 540 basis points to just 37.2%.
  • Adding to the pain, operating costs spiked 320 basis points to 17.7%, leaving operating profit margins of just 19.5%.
  • And on the bottom line, profits at the company slid 35% to just $0.26 per share.

That sounds bad. Is it as bad as it sounds?
Oh, dear no. It's much worse than it sounds. Because according to Smith & Wesson management, next quarter is going to be even more of a disaster than this one was.

Peering into its crystal ball, S&W management predicted that Q2 (that's the quarter we're in right now) sales will come to no more than $110 million -- and maybe less than that. Per-share profits, meanwhile, will range somewhere from $0.04 to $0.08 per share.

Analysts, of course, had been expecting Smith & Wesson to report something closer to $137 million in sales, and $0.28 per diluted share for Q2. As such, S&W seems to think it will miss those marks very badly this quarter -- and with the quarter already nearly one-third completed, chances are management has a good picture by now how the remaining two months will play out.

Looking farther out
Speaking of predictions, Smith & Wesson now projects that full-year fiscal 2015 sales will not exceed $540 million, with per-share profits of $0.94 at best. If they're right about that, it will mean a sales decline of only 14% versus last year -- but about a 36% decline in profits. Even so, that level of profitability, relative to today's share price, would price Smith & Wesson stock at only about 12 times full-year earnings -- not an expensive price, if you think the stock will soon pull out of its slump.

But here's the thing: To hit its new target for the year, Smith & Wesson will need to book about $300 million in sales in the year's second half -- after generating only about $240 million in H1.

Is this doable? Sure it is. S&P Capital IQ data shows that fiscal Q4 is often a strong quarter  for Smith & Wesson, so a strong finish to the year could yet pull Smith & Wesson stock out of the fire. But then again, Q1 has usually been pretty good for the gunmaker as well -- except that this time, it wasn't.

At all.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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