Will Smith & Wesson Holding Corp Keep Feeling the Pain?

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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