Shares of American Outdoor Brands (AOBC) fell sharply in late morning trading after the parent of Smith & Wesson slashed its guidance for fiscal 2018, citing "challenging market conditions."

EARNINGS AND GUIDANCE:

After the market close on Thursday, American Outdoor Brands reported second quarter adjusted earnings per share of 11c, beating analysts' estimates of 7c, but well below the 68c the company reported in the year-ago quarter. Sales of $148.4M beat the $142.18M consensus, but dropped 36.4% from a year ago. American Outdoor previously forecast Q2 EPS of 7c-12c and revenue of $140M-$150M.

Looking ahead, American Outdoor slashed its FY18 adjusted EPS view to 57c-67c from $1.04-$1.24 and its revenue view to $650M-$675M from $700M-$740M, significantly missing analysts' estimates of $1.10 and $712.64M, respectively. Third quarter adjusted EPS is currently forecast at 7c-10c on revenue of $170M-$180M, also well below the consensus of 41c and $209.38M, respectively.

In a statement, president and CEO James Debney said that the company faced "difficult market conditions" in the quarter, adding that "Total revenue for the quarter faced a challenging comparison to last year, when we believe strong consumer demand was driven by personal safety concerns and pre-election fears of increased firearm legislation."

Debney also noted that "Lower shipments in our firearms business reflected a significant reduction in wholesaler and retailer orders versus the prior year, and were partially offset by higher revenue in our Outdoor Products & Accessories business." For the second half of 2018, Debney said the company's focus remains on "ensuring that our internal manufacturing resources are aligned with demand."

WHAT'S NOTABLE:

For its most recent quarter, American Outdoor competitor Sturm Ruger (RGR) reported EPS and sales that fell well below the consensus, with the company commenting that "net sales decreased 35% and EPS decreased 50% from the third quarter of 2016. The decrease in earnings is attributable to the sales decline and the unfavorable de-leveraging of fixed manufacturing costs due to the decline in production volumes."

ANALYST COMMENTARY:

In a post-earnings note to clients, Wedbush analyst James Hardiman said the company's guidance reduction was a "first and important step." While the Street probably still won't believe the updated estimates until there is some evidence of bottoming, Hardiman, who maintained an Outperform rating and $19.50 price target, said he still views the stock as significantly undervalued compared to his lowered estimates. Craig-Hallum analyst Steven Dyer kept a Hold rating on the stock, but lowered his price target to $15 from $17, saying that it remains to be seen if normal buying will pick up when promotions ease.

PRICE ACTION:

In late morning trading, American Outdoor Brands has rebounded a bit, now down only 6.7% to $13.87, while Sturm Ruger is down 5% to $53.10.