Declining consumer demand for firearms caused sales growth at Smith & Wesson Brands (SWBI 3.23%) to swiftly decelerate in the fiscal first quarter.
The urge to buy a gun immediately for personal protection has seemingly ebbed, leading sales growth at the gunmaker to dramatically slow to just over 19%, a far cry from the 124% rate recorded a year ago -- and less than a third of the growth rate notched just last quarter.
However, there's still a lot of demand for firearms as Smith & Wesson's revenues are in their fifth consecutive quarter of record levels, reaching about $275 million for the quarter ended July 31.
A cooling-off period
Although violent crime continues to soar in major American cities, images of riots and civil unrest have disappeared from television screens, and some places that previously called for defunding the police now want to expand law enforcement budgets to deal with the crime surge.
While FBI data show background checks on potential gun buyers are still running 7% above last year's level, adjusted numbers from the National Shooting Sports Foundation -- which are generally considered a more accurate measure of buyer demand -- indicate they are actually down by about 10% year over year.
A more profitable gunmaker
Despite slipping sales growth rates, Smith & Wesson has seen profits surge. Gross margins jumped 710 basis points to 47.3% in the first quarter while net income soared 77% to $76.9 million, or $1.57 per share. On an adjusted basis, last year's earnings were $0.83 per share.
Adjusted EBITDAS (or earnings before interest, taxes, depreciation, amortization, and stock-based compensation) was almost 40% of net sales in the quarter, well ahead of the 32% the company recorded a year ago.
President and CEO Mark Smith said in the latest earnings statement that he believes Smith & Wesson is now positioned to be able to adjust to any condition the market throws at it while maintaining its position as the largest firearms manufacturer -- and doing so profitably. The firearms company has no long-term debt and over $171 million in cash.
Last year, the gunmaker introduced its first dividend and will pay shareholders $0.08 per share on Sept. 28. At Smith & Wesson's current price, the payout yields 1.51% annually -- better than the S&P 500's 1.28%.
A new opportunity for growth
Smith & Wesson's financial stability is allowing it to expand into a new vertical that could boost sales further. The gunmaker introduced its first shotgun, the 12-gauge M&P12 Bullpup, a more maneuverable and compact style of shotgun featuring dual grips. Designed with home defense in mind, it can fire various types of buckshot, slugs, and birdshot.
The firearms company has long made rifles, but has had a hole in its portfolio with no shotguns. So when Vista Outdoor (VSTO 1.04%) sold off its Savage Arms rifle and shotgun business in 2019, it could have been an opportunity for Smith & Wesson to shore up its absence in the market, but it chose instead to build a new segment from the ground up. With long gun sales also remaining elevated across the country, it's a timely addition to Smith & Wesson's portfolio.
The gunmaker's stock may still turn south because of the deflated headline growth numbers, but both the industry and Smith & Wesson remain healthy. There are also other risks, such as New Jersey's attempt to do an end run around the product liability protections afforded to gunmakers, but the business should continue growing for some time to come.