Smith & Wesson: Sales Growth Stalls Despite Strong Profit

Shares of Smith & Wesson Holding Corp. (NASDAQ:SWHC) jumped as much as 7 percent on Wednesday afternoon from Tuesday’s close after the gunmaker reported fiscal second-quarter 2014 financial results. Net sales increased 2 percent on the year to $139.3 million, above the mean analyst estimate of $137.44 million. Income from continuing operations increased 16.7 percent to 28 cents per diluted share, above the mean analyst estimate of 23 cents per share.

At a glance, the news is good and the market is rewarding Smith & Wesson for yet another solid quarter. Shares are up about 24 percent this year to date, fueled by strong sales growth and high gross profit margin of 41.6 percent of net sales, up from 35.5 percent in the year-ago period; gross margins averaged 42.1 percent over the fist six months. Operating income came in at 20.7 percent of net sales for the fiscal second quarter of 2014, up from 19.5 percent in the year-ago period.

There are a few downbeat notes from the report, though, and chief among them is that revenue growth has slowed to a snail’s pace compared compared to what it was at the beginning of the company’s fiscal 2013.

Smith & Wesson reported year-over-year sales growth of nearly 50 percent in the first and second quarters of its 2013 fiscal year. Growth slowed to below 40 percent in the third and fourth quarter, and to about 35 percent in the first quarter of fiscal 2014. Just 2 percent year-over-year growth in the second quarter doesn’t hammer any nails into any coffins, but it is a detail worth keeping in mind.

Smith & Wesson has lagged its publicly traded competitor Sturm, Ruger & Co. (NYSE:RGR) on the stock chart pretty much all year. Shares of Sturm, Ruger & Co. are up about 48.4 percent on the year and have had a particularly strong rally over the past three months, climbing 23.3 percent. The company won’t report earnings until February, but analysts have high expectations for the coming quarter. Revenue is expected to climb 24 percent on the year to $176.12 million, and earnings are expected to climb 24 percent to 82 cents per share.

Shares of Sturm, Ruger & Co. did decline about 2.5 percent in afternoon trading on Wednesday, though. The worry is that gun sales could be slowing down even absent any significant new federal-level regulations over sales or ownership.

For its part, Smith & Wesson is estimating third-quarter fiscal 2014 net sales in a range between $140 million and $145 million. Income from operations are expected in a range between 28 and 30 cents per share. For the year, revenue guidance was unchanged at between $610 million and $620 million, and earnings at between $1.30 and $1.35 per share.

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