Smith & Wesson: Running Out Of Ammunition For 2017?

Earnings Summary

On December 1st, Smith and Wesson (SWHC) reported Fiscal 2Q17 earnings. We had forecast adjusted EPS of $0.58 on revenue of $230.5M. While Forward View was more accurate than the Wall Street consensus, our earnings and revenue estimates were still too low. Smith and Wesson’s sales rose over 62% y/y, with 106% growth in the company’s Outdoor Products & Accessories segment. Acquisitions fueled the massive Outdoor Products & Accessories expansion, but the almost 56% gain in Firearms segment revenue was driven by organic success. Gun enthusiasts were fearing a Clinton victory in November and went shopping before the election.

Gross margin for the quarter was 41.8%, up 260 bps y/y. Operating expenses fell 457 bps as a percentage of revenue, primarily due to the large sales increase. We can safely say that margins weren’t a problem in the quarter, enabling net income to climb 160% y/y to $32.5M.

Handgun sales continue to be the company’s strength, but long gun demand also rose almost 77% on a unit basis. Thus far in Fiscal 2017 long gun revenue is up 104.4% y/y. Handgun revenue has risen 44.7% y/y through the first half of the fiscal year. Smith and Wesson is obviously a top name in the sector, and the company’s guns have an outstanding reputation among shooters.

Guidance: Below expectations. The high end of sales guidance for 3Q17 and for FY17 touched our forecast and the Wall Street consensus, but EPS guidance was disappointing. The 3Q consensus revenue estimate was $238M, and the consensus adjusted EPS forecast was $0.59.1 On December 1st, however, Smith and Wesson offered the following guidance:

 

1Per Seeking Alpha data

 

Best & Worst News

Best News

Margins were especially strong in 2Q. We knew that sales would be absolutely incredible, but the question was exactly how many dollars would be spent to earn the revenue. The y/y improvement in gross margin shows that Smith and Wesson can efficiently run its businesses at near full production capacity. The boom in gun demand has been running along for months, so Smith and Wesson wasn’t simply clearing inventory in 2Q. In fact, the company’s inventory hit a record high in 2Q17, likely in anticipation of a fresh round of post-election panic buying. Fortunately or unfortunately, depending on your perspective, Trump instead sent Clinton into retirement. Moving $116.5M of inventory will be Smith and Wesson’s next objective, and they’ll need to do so without help from the man that firearms retailers call the best gun salesman ever: President Barack Obama. (Ironic, no?)

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Analyst Certification: I, Nathan Yates, certify that the views expressed in this publication accurately reflect my personal views about the subject companies and their securities. I ...

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