By Thomas J. Ryan

<span style="color: #999999;">Sturm, Ruger & Co., sees little improvement in demand for firearms and reported net earnings declined 47.8 percent in the third quarter as sales slumped 17.3 percent.

“Demand has remained soft throughout this year,” said Christopher Killoy, president and CEO, on a conference call with analysts. “Once again, we elected to forgo opportunities to generate better short-term results with overly aggressive discounting and promotions and the extension of payment terms, which would hinder our long-term performance, value and brand. Instead, we took the fiscally prudent measure of reducing production for the third consecutive quarter to moderate inventory levels in our warehouses and in the distribution channel.”

Earnings reached $4.8 million, or 14 cents a share, down from $9.2 million, or 34 cents, a year ago. Sales were $94.1 million versus $113.8 million.

Killoy attributed the decrease in sales to the following:

  • More aggressive promotions, discounts, rebates, and the extension of payment terms offered by competitors;
  • Relatively fewer new product shipments compared to 2018, which benefited from the launch of four major products in December 2017;
  • The loss of a formally significant distributor, Ellett Brothers, that ultimately filed for bankruptcy protection in June 2019, and the market disruption caused by the liquidation of its inventory of Ruger products; and
  • Decreased retailer short-term demand as the anticipation of further discounting continues to encourage cautious buying from the retailers.

He noted that while the company uses adjusted NICS background checks as a proxy for consumer firearms demand, the metric could 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. This resulted in increases in third-quarter adjusted NICS background checks for Alabama and Minnesota of 124 percent and 60 percent, respectively. Excluding Alabama and Minnesota, adjusted NICS increased only 7 percent in the third quarter, compared to 10 percent as reported and decreased 2 percent for the nine months ended September 28, compared to 1 percent as reported. Also, adjusted NICS includes used gun sales, which can unduly impact its results for a particular period or comparison.

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

Sales of new products, including the Wrangler, which was introduced in April 2019, the Pistol Caliber Carbine, the EC9s pistol, the Security-9 pistol, and the Precision Rimfire Rifle, represented $70.6 million or 23 percent of firearm sales in the first nine months of 2019. New product sales include only major new products that were introduced in the past two years.

During the first nine months of 2019, a total of 120 product line extensions and distributor exclusives were launched.

<span style="color: #999999;">As a result of a disciplined approach to production, the combined inventories in its warehouses and at its distributors decreased 8,600 units during the third quarter despite the reduced demand. Killoy said this allows further flexibility in production and inventory management as management plans for 2020. In response to the reduced production in the third quarter, the company kept its hiring freeze in place and allowed attrition to reduce its workforce. The company also reduced overtime and took two additional shutdown days in the third quarter on top of a normally scheduled shutdown week in July. Said Killoy, “We believe that this disciplined approach, which adversely impacted our quarterly financial results, will pay dividends in the long run.”

Total unit production for the quarter was 4 percent below the second quarter of 2019. And due to the production mix, the sales value of production was down 16 percent.

Asked about the impact of the Ellett Brothers bankruptcy and liquidation, Killoy said Ruger product from the liquidation is gone from the marketplace but some price-driven mentality remains. He said, “The challenge is that the liquidation price points remain longer than the product does, and so customers who saw those liquidating actions taking place by the bankruptcy trustees and then remember those prices, that negatively impacted us in the short term. I think we’re largely through that.”

The bigger remaining challenge, when a distributor exits, is the extension of capital to the independent retailers. Killoy said, “They’re extending credit terms. It might be as small as a $10,000 credit line to a small independent or it might be much more, but when that capital leaves the channel, that has an impact, especially on a company like Ruger, where we have 100-percent of our sales going through two-step distribution.”

Asked about the impact of the ongoing changes at firearms retail, including Bass Pro buying Cabela’s and Gander Mountain rebranding to Gander Outdoors by Camping World, Killoy said the company is making adjustments. He elaborated, “Well, I think it’s been a while since one of the big retailers filed for bankruptcy, which is a good thing. They’re impacted to some degree when a distributor like United Sporting, which has included both Ellett Brothers and Jerry’s, goes out because they have to find a new source of supply, and so, we work very closely, even though we don’t sell to those big-box accounts direct. We have a very solid team that works hard to make sure we help them in that transition, to make sure we’re up to speed on getting the products they need for their circulars and flyers and to try to manage that transition as best we can.”

Killoy concluded in his formal comments, “We are in this for the long haul. Our strategy is predicated on remaining financially strong, fiscally disciplined and focused on delivering long-term value to our shareholders. This strategy has resulted in the return of over $230 million to our shareholders in the past five years alone, during which time we achieved an average annual return on net operating assets of 46 percent. Our engineering teams are actively engaged every day working on exciting new products, and I remain optimistic about our future.”

Photo courtesy Sturm, Ruger