Sturm, Ruger & Company (NYSE:RGR) may make accurate firearms, but its third-quarter results missed analysts' targets by a mile.

Shares of Ruger fell more than 8% in Wednesday's after-hours trading when it announced that quarterly revenue fell 42.5% year over year to $98.3 million. That translated to a 76.4% plunge in earnings per diluted share to $0.34. Analysts, on average, were looking for earnings of $0.99 per share on sales of $149.1 million. 

Consequently, Ruger also lowered its dividend -- which varies each quarter to remain at approximately 40% of net income -- to $0.14 per share.

Here's what happened
CEO Michael Fifer says this is a continuation of last quarter's painful results, and declining demand for Ruger's products only continued to accelerate in Q3. Meanwhile, sell-through from independent distributors to retail also declined 44% year over year.

Curiously, Fifer noted that the change in NICS background checks indicates that consumer demand declined only 3% year over year. In addition to that falling demand, however, high inventory levels at retail compounded Ruger's sales declines, which, in turn, caused those retailers to buy fewer firearms than they were selling in an effort to reduce that inventory and generate cash.

To make matters worse, this resulted in aggressive price discounting by many of Ruger's competitors. But Ruger chose not to match those discounts -- a move tht it admits "likely resulted in lost market share."

What's more, Ruger's results were further hurt by a lack of significant new product introductions, as well as continued limited availability of rimfire ammunition. Ruger specifically thinks the latter issue negatively affected sales of .22 rifles, pistols, and revolvers. And though Ruger did launch its new AR-556 modern sporting rifle last quarter, shipments of that rifle were limited, so it didn't have a meaningful impact on the company's financial results. As it stands, new products have represented only around 17% of all Ruger's firearm sales so far in 2014.

Perspective is in order
But that could change going forward. Ruger has already incurred capital expenditures of nearly $29 million so far this year, with the majority spent on modernizing manufacturing equipment and tooling fixtures and equipment for new product introductions. As Ruger continues to focus on new product development going forward, it expects total capex investments for the year to approach $40 million.

For what it's worth -- and with the exception of Ruger's troubling lost market share -- Fifer's comments largely echo the sentiment of Smith & Wesson (NASDAQ:SWBI) CEO James Debney in late August. Specifically keeping in mind Smith & Wesson's fiscal Q1 results, which ended on July 31 (and so overlapped Ruger's Q3 by a month), Debney blamed Smith & Wesson's own revenue misfire on "high inventories industrywide resulting from channel replenishment that occurred during an earlier surge in consumer buying." Still, Debney asserted that those high inventory levels would taper off in future quarters as the market returned to a more normalized environment.

How long that normalization will take remains to be seen, but you can bet investors will be prodding Ruger management for more color during Thursday's earnings conference call. For now, Ruger said inventories of finished goods during the quarter increased 24,000 units at independent wholesale distributors, and 39,000 units at the company itself.

Finally, there was no mention of whether Ruger utilized its existing share repurchase authorization, which the company expanded three months ago from $25 million to $100 million. As I noted earlier this year, however, Fifer has consistently made it clear that Ruger doesn't take such repurchases lightly. Rather, the company closely watches a number of historical price metrics and buys back stock only if it believes it's in the best interests of shareholders. Given their front-row seat to this weak quarter as it unfolded, I wouldn't be the least bit surprised if management says during Thursday's call that it chose to leave that repurchase authorization untouched.

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