The lull in gun buying that began last summer seems to be evaporating as Smith & Wesson Holding Corp(NASDAQ:AOBC) updated its earnings outlook for the fourth quarter and full year, declaring that business was stronger than expected leading it to increase guidance.
Instead of quarterly net sales coming in somewhere between $162 million and $166 million and generating earnings per share between $0.24 and $0.26 from continuing operations, Smith & Wesson now anticipates revenues will be between $175 million and $179 million with earnings of $0.34 to $0.36 per share.
The nearly 9% increase in revenues and 40% jump in earnings is a pretty hefty revision, resulting in a 3% rise in expected revenues and a 12% boost to full-year earnings. The gun maker is now guiding to earnings of $0.84 to $0.86 per share on revenues of $546 million to $550 million for fiscal 2015.
Coming on target
That is a pretty surprising turn of events since it was only a month ago that Smith & Wesson had provided the original guidance when giving its fiscal third quarter results, but Sturm, Ruger (NYSE:RGR) had given a hint that things might be getting better when it provided its own full year financials a week prior and said it was beginning to see signs that business was picking up.
Ruger noted it saw a 28% increase in show bookings as compared to 2012, an appropriate baseline for what a normalized year would look like, and pointed to a 49% increase in retailer demand for its three largest independent dealers that do not have major distributor shows.
Cabela's also said it saw firearms sales returning to normalized levels after a "difficult" year, but Ruger cautioned against reading too much into the data and said it merely suggested the low point had been reached.
Tip of the iceberg
So what might have accounted for the dramatic rise in sales Smith & Wesson apparently experienced? Other than a more attractive product lineup, the only catalyst present during the intervening weeks was the Bureau of Alcohol, Tobacco, Firearms & Explosives trying to quietly ban the sale of so-called "green tip" ammunition.
It was discovered that the ATF had proposed banning the sale of 5.56mm M855 (.223 caliber) rounds over an overblown fear the rounds could be used in some pistols and pierce police body armor. That it just so happened the ammo was also the most popular round for the AR-15, the sporting rifle that is the target of many gun control campaigns, stoked the fears of gun owners and enthusiasts that this was a backdoor attempt at gun control. Take away the ammunition and you render the gun itself useless.
Even though the ATF backed down and withdrew the proposal, gun owners are still concerned the effort is not over as the Department of Homeland Security is now putting out a contract for a company to provide it with 12.6 million rounds of .223 Remington ammunition per year for a period of five years, or some 62.5 million rounds total. While the contract is ostensibly for "training ammunition," such full metal jacket rounds are a lower cost alternative for gun owners than duty ammo. The ATF proposal had gun owners racing to stock up on available supply causing prices to rise, and DHS similarly hoarding rounds would have the same effect.
Where did all the bullets go?
Two years ago, there was a similar rush on ammo creating a massive shortage, which Forbes noted occurred just as DHS put out contracts to purchase some 1.6 billion rounds. It was pointed out that during the most intense periods of the Iraq war, the military was using only 6 million rounds a month making DHS capable of fighting a war for 20 years or more, even though it is tasked with domestic security.
Such musings are a powerful influence for gun owners concerned about their rights and access to both guns and ammo, and could be the motivation behind improved guidance for companies like Smith & Wesson. It also bodes well for continued profitability as discounting had been a major reason sales jumped in the third quarter as retailers tried to move inventory.
With demand returning just as inventories are depleted, Smith & Wesson should benefit from both improved productivity and pricing.
Although FBI background checks for gun purchases in the first quarter were down more than 10% year-over-year, do not be surprised if we see a sudden spike in those numbers. Fear of executive action on gun control by the current administration could be the stimulus Smith & Wesson and Sturm, Ruger need to fire off another quarter of strong growth.
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