The market punished Sturm, Ruger (NYSE:RGR) last quarter after it reported a bigger-than-expected drop in gun sales and earnings took a big tumble lower, both of which were much worse than what industry gun sale data had suggested.

Could Ruger disappoint again when it reports its third-quarter results? Or is the company better positioned this time? Let's take a look at what investors might expect from the gunmaker as it prepares to report its quarterly update on Thursday, Nov. 7.

Man standing in front of firearms display case

Image source: Getty Images.

An improving firearms industry

The last time around, I said Ruger wouldn't offer many surprises because, as CEO Chris Killoy hinted in his comments to investors, industry trends indicated the firearms market had reached a bottom and was transitioning toward growth once more.

That has continued over the past few months as gun sales data (adjusted by the National Shooting Sports Foundation to remove duplicate checks of existing gun permit holders) shows National Criminal Instant Background Check System (NICS) checks rising for five consecutive months, and the last two months have risen by double-digit rates over the year-ago period.

While some of the gains were driven by state initiatives to restrict access to firearms, which had the effect of drawing sales forward, the overall trajectory of the industry still indicates an improving situation.

Yet just like last time, that might not matter to Ruger's performance in the quarter. Because of the industry's extended slump, competition is especially fierce, and discounting and the extension of payment terms is rampant. While Ruger has at times offered promotions on its firearms, it refuses to participate in the wholesale discount environment currently in effect, so its guns don't move as quickly as some others.

No inventory overload

Because Ruger doesn't sell directly to the public but only to federally licensed distributors and retailers, it can be affected by how they react to market conditions. When major distributor Ellett Brothers declared bankruptcy earlier this year, not only was its inventory liquidated at steep discounts, but it made other distributors leery of taking on too much inventory themselves lest they also get caught with too much in a new slump. 

Also, because the bankruptcy put so much inventory onto the market, other distributors anticipate there could be even more discounting coming and know that, should there be a spike in demand, they would be able to go to Ruger to get the guns they needed to meet it.

Ruger, however, has been carefully managing its inventory, and the combined inventories in its warehouses and at its distributors decreased by 18,000 units in the second quarter. It's probable there's not going to be any major spike in distributors taking on more inventory, but with the big increases in background checks seen over August and September, there may be some upward pressure to restock, though it may show up more in the fourth quarter than the third.

The gunmaker also said it was taking its production lines offline for three additional days in the quarter because of industry demand, beyond the typical week it shuts down each year. So investors probably shouldn't expect to see any large movements higher.

A watch-and-wait scenario

Neither management nor Wall Street provides guidance or makes estimates about how Sturm, Ruger may perform quarter to quarter, but the market may be expecting better results than it saw last time, as the gunmaker's stock has risen steadily (though slowly) off the lows it hit following the last earnings release, having risen 15% so far.

Regardless of how the quarter plays out, though, Sturm, Ruger remains financially sound, and the cash and investments it has are more than it needs to fund its day-to-day operations. That should continue to be the case following the earnings report.