Smith & Wesson Holding Corp. (Nasdaq:SWHC) aggressively hiked its guidance for the year after reporting that its fiscal first-quarter earnings more than doubled on a 40.1 percent revenue gain.
But are firearms sales reaching their peak? Despite the stellar results, investors sent the stock down more than 6 percent September 2, with one analyst group, Craig-Hallum, saying firearm sales were “as good as it gets,” reducing its rating from buy to hold.
Smith & Wesson now projects sales for the fiscal year, ending April 2017, to be between $900 million and $920 million, well above its previous guidance calling for sales in the range of $704 million and $760 million. Wall Street’s consensus target had been $777 million. Sales reached $722.9 million in the prior year.
EPS is now expected to range between $2.38 and $2.48, up from previous guidance of $1.83 to $1.93. Analysts expected annual adjusted earnings of $1.92 a share. Earnings on an adjusted basis were $1.83 in the prior year.
The raised guidance also incorporates two acquisitions: Taylor Brands and Crimson Trace.
In its first quarter ended July 31, sales reached $207 million, exceeding the company’s guidance calling for sales in the range of $190 million to $200 million.
Firearms segment sales grew 47.7 percent to $192.4 million, driven by strong mix results and market share gains.
On a conference call with analysts, James Debney, president and CEO, said the gains were boosted by strong orders for both handguns and long guns. The manufacturing service division also saw incremental sales and market share within the Firearms division.
Revenue from its Outdoor Products & Accessories segment was $14.6 million, down 16.9 percent from the prior year. The decline reflected an increase in pricing on many Thompson/Center Accessories as part of an internal initiative to improve the profitability of those items. While the change reduced sales of TCA Accessories, overall gross margins in the segment improved 500 basis points to 47.3 percent.
Company-wide gross margins improved 250 basis points to 42.3 percent due to increased production volumes and inventory adjustments in the Firearms segment, as well as the higher margins in the Outdoor Products and Accessories segment. These positive factors more than offset increased manufacturing spending and promotional costs.
Operating expenses were reduced to 16.9 percent of revenue from 19.7 percent due to the sales leverage. The latest quarter’s operating expenses included cost related to the acquisition of Taylor Brands and Crimson Trace. On a non-GAAP adjusted basis, which excludes the amortization of the one-time acquisition-related costs, operating expenses would have been 15.1 percent of sales against 19.4 percent.
Net income improved 126.4 percent to $32.6 million, or 57 cents a share. Non-GAAP earnings jumped 98.3 percent to $35.1 million, or 62 cents a share. Adjusted earnings came in well above the company’s guidance calling for earnings of 49 cents a share.
The strong fiscal-first-quarter results come after the company saw a bounce-back campaign in its fiscal year-ended April 1 as sales gained 31 percent. The rebound was helped by a number of mass shootings, including ones in San Bernardino, CA; Paris and most recently, Orlando, FL. High-profile incidents tend to boost firearm sales due to concerns over consequent tighter gun-ownership restrictions.
Distributor inventory of the company’s firearms increased as planned by 64,000 units to a total of about 155,000 units at the end of the fiscal first quarter. Officials said the sequential rise from the fourth quarter reflected a typical seasonal increase with the upcoming arrival of fall hunting and the busy holiday shopping season.
Debney noted that even with that increase, its distributor inventory is lower than last year’s level of 177,000 units. Moreover, at the close of the fiscal first quarter, Smith & Wesson’s weeks of sales in the channel remained below its eight-week threshold.
“So it appears there was no concerning build-up of firearms inventory in the channel as we approach the busiest retail period of the year,” Debney said.
Adjusted net background checks during its fiscal quarter grew 19.2 percent year over year, while the company’s units shipped into the consumer channel for the same period were up 52.8 percent, which Debney said indicates the company is gaining market share.
In handguns, which make up about 80 percent of its total annual firearms units shipped, NICS checks increased 15.2 percent, while its units shipped into the consumer channel grew 42 percent. In long guns, which make the remaining 20 percent, NICS checks advanced 24.1 percent, while units shipped jumped 118.8 percent, albeit off a lower base than handguns.
Touching on the acquisitions, Debney said Taylor Brands has long produced the Smith & Wesson and M&P branded knives under a license with the company and is the owner of many other “highly regarded” knife brands, including Schrade, Uncle Henry, Old Timer and Imperial. Taylor Brand’s trailing 12-month revenue was approximately $41 million.
“This business will tuck into our Accessories Division and will provide us with the opportunity to deliver future organic growth,” Debney said.
The CEO described Crimson Trace as the “undisputed leader” in laser sighting and tactical lighting systems. Crimson Trace has also long been a key supplier to the company. Crimson Trace’s trailing 12-month revenue are $44.7 million, including $10.8 million in sales to its Firearms division.
Debby said Crimson Trace will serve as a platform for its new Electro-Optics Division. Although Crimson Trace has been narrowly focused on the laser sighting market, its management team sees a much bigger opportunity targeting the electro-optics market in its entirety. Said Debney, “This is a broad and sizable category that includes products such as various sights, aiming and ranging devices, magnifiers and scope for a variety of applications. Therefore, we believe that this division will have ample expansion opportunities, both organically and inorganically.”
Beyond growth, the acquisitions and related-growth opportunities will support diversification efforts for Smith & Wesson.
“These are busy and exciting times for our company,” concluded Debney. “We now stand at four divisions, operating in two high-growth segments with multiple opportunities for organic growth, ample resources and a robust pipeline of potential acquisition targets.”
For its upcoming fiscal second quarter, ending October 31, Smith & Wesson expects sales to come in the range of $220 million to $230 million, which compares to $147.7 million in the prior year. Earnings are projected to land in the range of 53 cents and 57 cents a share, which compares to 32 cents a year ago.
Photo courtesy Thompson/Center Arms