Sturm, Ruger & Company Inc. said distributors’ response to its first summer incentive program for dealers and happy workers at its new factory in North Carolina helped it beat Wall Street estimates in the second quarter.

The maker of more than 400 types of handguns, modern sporting rifles and other firearms announced net sales of $140.9 million in the quarter ended July 27, down 8.3 percent from the $153.7 million reported for the second quarter ended July 28 2014. Fully diluted earnings declined 18.8 percent to 91 cents, but easily beat analyst expectations of 78 cents thanks to rising production levels. RGR reported that a 32 percent increase in unit production from the first quarter of 2015 improved efficiency at its manufacturing plant that contributed to a 200 basis point improvement in gross margin, which reached 34.9 percent in the most recent quarter.

RGR CEO Michael Fifer said that worker productivity typically ebbs and flows with unit volume. When RGR cut production 40 percent in the back half of 2014, workers fretted about their jobs and took longer time to complete tasks. When production increases, as it did in the second quarter, they find a way to complete tasks more quickly. Right now, the four lines at RGR’s new Mayodan plant in North Carolina are running at capacity.

“Literally, the simplest way to put it is ‘a busy factory is a happy factory,’” said CEO Fifer. “When the guys have a lot of overtime, they are really happy. They may grumble and complain about the amount of overtime, but they're very happy. The Mayodan guys are running full out. They are working a lot of overtime and we're working hard to increase production there. It's a real success story.”

First summer incentives program hurts margins
Selling expenses rose 46.54 percent as the company accrued expenses for its first summer incentive program for dealers, which includes shipment of free products to dealers. The program seeks to encourage retailers to stock RGR products as fully in the second half of the year as they typically do in the first half. RGR has typically eschewed such programs, although its competitors typically offer them during buying shows in August and September. The higher expenses more than offset cuts in general and administrative spending to drive down operating margins 250 basis points to 19.1 percent compared with the same quarter in 2014.

New products, including the AR-556 modern sporting rifle and the LC9s pistol, represented $47.7 million or 17 percent of firearm sales in the first half of 2015. New product sales include only major new products that were introduced in the past two years and so do not reflect the Ruger Precision Rifle, which did not begin to ship until July.

RGR estimated sell-through of the company’s products from independent distributors to retailers decreased 22 percent from the first quarter of 2015 and is down 9 percent for the first half of the year. Inventory of the company’s products at independent distributors increased by 63,500 units during the second quarter of 2015 and the company’s finished goods inventory increased by 44,100 units during the same period.

Fifer attributed the inventory build up to preparation for fall deliveries targeted by its new summer incentive program, which requires dealers place orders in the third quarter for fourth quarter delivery. 

“I'm very comfortable with the levels where they are now,” Fifer said of inventory levels both at its own warehouses and distributors. “And I would expect the levels actually to peak sometime in mid-quarter. So you won't actually see them in the [third-quarter] numbers.”