Smith & Wesson Brands reported its second consecutive record-breaking quarter for the 168-year-old company. Mark Smith, president and CEO, also expressed confidence that the new hunt customers gained during the pandemic would drive growth for the company in the years ahead.
Smith noted that with the November NICS results released this week, 19.2 million background checks for firearm purchases have been made this year, representing year-to-date growth of 65 percent over the prior year and the largest 11-month period on record since the FBI began tracking NICS in 1998.
With NSSF predicting that 40 percent of the firearms purchases in 2020 are coming from first-time firearm owners, nearly 8 million Americans are estimated to be first-time firearms owners in 2020. Furthermore, NSSF survey data has shown that new gun owners are diverse. Women were found to make up 40 percent of new buyers. Firearms purchased by African Americans were found to be outpacing all other demographics with 58 percent growth in the first half of the year through June.
Smith noted that in October, Smith & Wesson conducted an attitude and usage (A&U) study of over 1,200 firearm owners and found that for individuals who own firearms, the average number of firearms possessed was eight. According to similar findings from research conducted by NSSF in 2013, approximately one-in -our new firearm owners at that time went on to purchase additional firearms, with subsequent purchases at a higher sales price than their initial purchase.
“Therefore, this expanded consumer base of new firearm owners represents a healthy long-term opportunity for the industry as a whole but specifically for Smith & Wesson,” said Smith.
He added that the Smith & Wesson study showed that the Smith & Wesson brand was again number one in unaided awareness in the handgun and MSR categories and again number one in aided awareness with 84 percent of respondents recognizing the brand. Smith added, “Most encouraging, however, was that 85 percent of respondents would recommend Smith & Wesson to others, an endorsement that we do not take for granted and one that, combined with our results in the first half of our fiscal year, positions us very favorably within the marketplace long term.”
Quarterly Revenues Surge 119 Percent
In the fiscal second quarter ended October 31, reported sales vaulted 118.79 percent to $248.7 million, topping Wall Street’s consensus estimate of $226.30 million.
Smith said the company continued to gain “significant” market share as measured by its performance against NICS.
In Smith & Wesson’s fiscal Q2 period, overall NICS background checks for all firearm types increased 57.5 percent over the comparable time frame last year. For Smith & Wesson, total units shipped into the sporting goods channel during this time increased 93.4 percent to 586,000 units, while, simultaneously, SRA and distributor combined inventory levels declined by over 208,000 units.
NICS checks for handguns increased 75.6 percent during the quarter while Smith & Wesson’s handgun units shipped increased 74.3 percent to 420,000 units. Simultaneously, Smith & Wesson’s handgun channel inventory dropped by 178,000 units.
Finally, NICS checks for long guns increased 48.8 percent in the quarter, while Smith & Wesson’s long gun units shipped catapulted 167.7 percent to 166,000 units. Simultaneously, long gun channel inventory dropped by 30,000 units.
Smith said, “Our shipments into the channel significantly exceeded NICS overall, while the inventory of our products in the channel actually decreased reflecting our ability to deliver and a strong preference for our product at the retail level.”
The company shipped over 626,000 units during the three-month period, exceeding last quarter’s record numbers by 43,000 units. During the 12-week second quarter, Smith & Wesson increased capacity by over 50 percent to meet demand, with nearly half of this increase occurring at the start of week four and two-thirds in place at the start of week six. A total of 287 new jobs were added.
Quarterly GAAP income was $49.1 million, or 87 cents per share, up from $343,000, or 1 cent, for the comparable quarter last year. On an adjusted basis, earnings reached $52.8 million, or 93 cents, compared with $472,000, or 1 cent, and ahead of Wall Street’s consensus estimate of 56 cents.
Adjusted earnings exclude costs related to the spin-off of the outdoor products and accessories business, COVID-19 related expenses, and other costs.
Merchandise Margins Boosted By Reduced Promotional Activity
Gross margin significantly improved to 40.6 percent from 28.2 percent a year ago due to increased unit shipments, combined with a reduction in promotional activity, slightly offset by recall-related costs, increased depreciation on machinery purchases, and compensation-related costs associated with the increased headcount.
Operating expenses were $8 million higher than the prior-year due to $4.8 million of costs related to the spin-off, $3.1 million of increased profit-sharing expense, and a $500,000 donation to the National Shooting Sports Foundation’s GUNVOTE campaign. Increased volume-related customer allowances were more than offset by reduced travel, lower advertising costs, and lower employee medical costs likely due to the deferral of elective procedures resulting from the pandemic.
Looking ahead, Smith & Wesson is not providing guidance, but Deana McPherson, CFO, indicated the company implemented a 3 percent price increase effective November 16 on nearly all products. Smith & Wesson also has no current plans to add any significant additional capacity beyond the capacity added during the second quarter.
She added, “In fact, we have been monitoring our supply chain due to recent indications that the pandemic is now starting to impact some suppliers’ ability to supply us with the material we need to meet our very aggressive production plans. We continue to monitor the situation and are actively working to mitigate any disruption.”
Asked in the Q&A session about the impact from the presidential election, Smith said firearms likely got some boost from discussions over gun control regulation tied to the election although he underscored the strength in demand has multiple drivers.
“This year was a little different in terms of the personal protection fear drivers that came at the beginning of the year and as we went into spring with COVID-19 and then continuing through the social unrest through the summer,” said Smith. “And that continues still today, and then we layered on top of that more typical election demand. I don’t think it changed the base level of demand that came out of personal protection. It layered on top of it with gun control rhetoric.”
Photo courtesy Smith & Wesson