By Eric Smith

In his opening remarks on this week’s earnings call with analysts, Sturm, Ruger & Co. President and CEO Chris Killoy called 2019 a “challenging” year for Ruger and the entire firearms industry, both of which were rankled by a host of headwinds.

“Manufacturing overcapacity, excess inventories at all levels of the channel and a continued softness of demand led to a marketplace settled with undisciplined discounting, reckless extension of payment terms and excessive promotions,” Killoy said.

Those winds could be shifting as the presidential campaign heats up—more on that below—but first a look at the effects of a tough firearms market on Ruger throughout last year and into the fourth quarter.

The pressures that Killoy cited led to the company’s fourth-quarter earnings plummeting 33.3 percent to 46 cents per share and Q4 revenues declining 13.2 percent to $105.1 million. For the corresponding period in 2018, diluted earnings were 69 cents per share and net sales were $121.1 million.

Despite the soft quarter, Killoy did find some signs of encouragement in Ruger’s ability to improve as the quarter wore on.

“We typically don’t comment on month-to-month specifics, but … throughout the fourth quarter, we saw a steady improvement,” he said. “By the time we hit December, certainly, it looked like things were selling through, both from our distributors and at retail.”

The company saw steeper declines over the full-year. For 2019, earnings were down 36.6 percent to $32.3 million, or $1.82 a share, from $50.9 million, or $2.88, the previous year. Revenues reached $410.5 million against $495.6 million in 2018, representing a decline of 17.2 percent.

In 2019, the company’s finished goods inventory decreased 12,900 units and distributor inventories of the company’s products decreased 29,300. In the aggregate, total company and distributor inventories decreased by 11 percent in 2019.

During the year, the estimated sell-through of the company’s products from the independent distributors to retailers decreased 18 percent from 2018

Killoy said of the decline: “The reduction in the sell-through of the company’s products may be attributable to the following: more aggressive promotions, discounts, rebates and the extension of payment terms offered by many of our competitors; the loss of a formerly significant distributor that ultimately filed for bankruptcy protection in June 2019, and the market disruption caused by the subsequent liquidation of its inventory of Ruger products; the loss of three additional smaller distributors in the second half of 2019; and decreased retailer inventories as the anticipation of further discounting continued to encourage cautious buying behavior by those retailers.”

Some good news could be brewing for Ruger and other gun manufacturers, however. The FBI reported last month that it completed 2.9 million gun background checks in December, up 15 percent from the year-ago period and marking the second-highest month ever for NICS background checks.

That strong finish helped 2019 set the record for the most since the National Instant Criminal Background Check System (NICS) began in 1998. The FBI said it completed 28.4 million background checks last year, up 8.4 percent from 2018 and up 3 percent from the previous record set in 2016.

That trend continued in January. 2020 got off to an impressive start with 2.7 million checks in January, a 23.3 percent bump from the same month in 2019. The adjusted data of 1.2 million still marked an 18.6 percent increase against the previous year’s adjusted total.

Killoy said he is cautiously optimistic with the latest figures.

“We use adjusted NICS background checks as a proxy for consumer firearms demand,” Killoy said. “However, adjusted NICS is not a perfect metric, as it can be impacted by changes in state laws and regulations and many directives and interpretations issued by government agencies. For example, the use of state-issued permits to carry firearms in lieu of NICS background checks for certain transactions was significantly curtailed in 2019.

“Despite its limitations and anomalies, we believe adjusted NICS provides insight into the underlying demand for firearms at the consumer level.”

The recent NICS increases could speak to the end, or at least the slowing, of the so-called “Trump Slump.” That’s the term used to describe how the presence of a firearms-friendly president in Donald Trump has quelled concerns over gun rights and stunted sales—which was certainly the case with Ruger in 2019.

The slump, now in its fourth year, resulted in a host of financial woes for gun manufacturers and especially distributors that had stocked up on inventory in 2016 while planning for a Hillary Clinton presidency. Once Trump won and sales slowed to a crawl, a rash of bankruptcies followed.

As the 2020 campaign heats up, look for a similar reaction up and down the firearms channel, but perhaps most noticeably at the consumer level. The possibility of a president who favors gun control is sure to fuel demand.

Killoy didn’t address the situation on this week’s earnings call, but the next three quarters will reveal a lot about the health of the firearms industry. It’s possible that manufacturers, distributors and retailers will be, er, gun shy when it comes to boosting inventories, making a repeat of 2016 less likely. But if polls point to a Democratic victory, look for another rush on production and sales.

Whoever ultimately wins will determine what happens next—another slump or a surge in firearm sales.

Photo courtesy Sturm, Ruger & Co.