There wasn't much about the earnings report Sturm, Ruger (RGR 0.66%) released for the third quarter that investors shouldn't have expected, and in fact the situation has even improved slightly from the second quarter.
Although no one will be cheering a 17% decline in firearm sales for the period, it's better than the 25% drop last quarter, and Ruger is preserving its profits and its brands while competitors scramble for market share by heavily discounting their firearms.
Gun sales are actually stabilizing
The leading gunmaker reported revenue of $95 million, all but $1 million of which was related to firearms sales (the other figure was castings sales, or the internal parts of a firearm sold to third parties). Although down year over year, that was almost the same level recorded in the second quarter, which is a pretty decent achievement, since Ruger sales typically decline from the second to the third quarter.
This also occurred despite a 24% decline in the sell-through rate of its products from its independent distributors to retailers, even though adjusted National Instant Criminal Background Check System (NICS) background checks were down only 1% for the same period.
Ruger only sells its firearms to federally licensed firearms dealers, not to the public, so there is a layer of disconnect from demand, since the gunmaker relies upon its distributors to maintain a certain level of inventory.
The National Shooting Sports Foundation parses the NICS data the FBI issues to remove checks performed on existing gun permit holders, which gives a more accurate picture of consumer demand for firearms. The NICS figures have improved for five straight months now, indicating the firearms industry has reached a bottom and might start rising once again, albeit slowly.
An industry desperately seeking sales
CEO Chris Ruger Killoy noted the big drop in sell-through to distributors was due to a number of factors, including competitors still deeply discounting their firearms; shipping fewer new products, which tend to draw in more buyers; the bankruptcy of a major distributor; and more sales of used firearms.
He noted retailers are also keeping their own inventories relatively low because of the promotional environment the industry is still in. Figuring there will be more discounts coming, they're not stocking up on inventory.
Because Sturm, Ruger doesn't engage in such discounting very often, its firearms will be at a competitive disadvantage at retail, but Killoy said in a statement, "We once again elected to forego opportunities to generate better short term results with overly aggressive discounting and promotions and the extension of payment terms, which would hinder our long term performance, value, and brand."
Instead, the gunmaker chose to reduce production of firearms to minimize the amount of inventory that was on hand at distributors, the third straight quarter Ruger has done this. It noted total inventories decreased by 8,600 units in the quarter, following a reduction by 18,400 units last quarter and 25,000 units in the first.
Financial stability for the long term
While net income was cut nearly in half for the current period, falling to $4.8 million, or $0.27 per share, from $9.2 million, or $0.52 per share, the gunmaker employs rigorous financial discipline, meaning it remains financially strong. It also continues to pay a dividend to investors, which is based on a percentage of net income (40%) versus a fixed amount. In the third quarter, Ruger paid a dividend of $0.11 per share, which currently yields 1.2% annually.
No doubt investors won't like the results Sturm, Ruger posted in the third quarter, but considering industry conditions and its refusal to participate in a campaign of discounting that it says undermines the financial integrity of the industry as a whole, the gunmaker's performance wasn't as bad as it could have been.