Smith & Wesson Holding Corp. (SWHC - Snapshot Report) reported second-quarter fiscal 2015 (ending Oct 31, 2014) earnings from continuing operations of 9 cents per share, beating the Zacks Consensus Estimate by 2 cents. The number was, however, lower than the year-ago earnings of 28 cents per share as sales remained weak.

Smith & Wesson Holding Corporation - Earnings Surprise | FindTheBest

Operating Highlights

Total revenue in the quarter was $108.4 million, beating the Zacks Consensus Estimate of $105 million by 3.2%. However, it decreased 22.1% year over year. Lower long gun sales, primarily modern sporting rifles, were the main reason for the top-line decline. Lower handgun sales as well as lower consumer demand along with competitors' excess inventory at distributor and retailer locations added to the negatives.

In the quarter under review, gross profit decreased 39.9% year over year to $34.8 million. This corresponds to a gross margin of 32.1%, down 950 basis points year over year, due to lower sales volumes of higher margin products and related fall in fixed-cost absorption.

On the cost front, operating expenses were $24.0 million, or 22.1% of revenue, compared with $29.2 million, or 20.9% of revenue recorded in the second quarter of fiscal 2014.

Operating income in the quarter was $10.8 million, down 62.3% year over year.

Financials

As of Oct 31, 2014, the company had cash and cash equivalents of $64.4 million versus $68.9 million as of Apr 30, 2014. Operating cash outflow stood at $14.2 million in second-quarter fiscal 2015 while capital expenditure was $6.6 million.

Guidance

For fiscal third-quarter 2015, Smith & Wesson expects net sales, excluding the Battenfeld Technologies Inc. (:BTI) acquisition, in the $113–$118 million range. Earnings from continuing operations are expected in the range of 9–11 cents per share for the upcoming quarter. The company intends to close BTI transaction in mid-December.  Upon successful execution of the plan, the company’s fiscal third quarter earnings will likely decrease by approximately 5 cents per share.

For fiscal 2015, sales are now expected in the $504–$$508 million range, sharply lower than the $530–$540 million expectation the company had laid out earlier. Earnings will likely be 66–70 cents per share in fiscal 2015, compared with 89–94 cents expected earlier.

Our Take

The company has benefited from higher sales earlier on fears of tighter regulation for weapons.

A series of unfortunate shooting incidents in the past – the Boston Marathon terror attack on Apr 15, 2013 and the tragic shootout at the Sandy Hook Elementary School Newtown, CT on Dec 14, 2012 – have sparked off fierce controversy about the proliferation of firearms.

In the recent quarters, U.S. gun sales have deteriorated substantially, mainly the demand for sporting rifles. In the third quarter itself, Smith & Wesson reported that handgun sales declined 15% year over year, while sales of long guns, mostly sporting rifles, dropped 50%.

However, the company remains focused on growth, both inorganic and organic, within its core firearm business. Recently, Smith & Wesson agreed to acquire Columbia, MO-based Battenfeld Technologies, Inc., a leading provider of hunting and shooting accessories. Battenfeld will not only provide the company opportunities to enhance its accessories portfolio but also enable it to expand aggressively into the hunting vertical. It will thus provide the company with the right platform for expanding its footprint in the firearm accessories market (read more: Smith & Wesson to Buy Firearm Accessories Firm Battenfeld).

Again, Smith & Wesson has partnered with defense major General Dynamics Corp. (GD - Analyst Report) to compete for the U.S. Army's Modular Handgun System (:MHS) solicitation to replace the M9 standard Army sidearm. Per this strategic partnership, the companies intend to submit an MHS based on the Smith & Wesson M&P Polymer Pistol platform.

Smith & Wesson Holding Corp. manufactures, designs and supplies a large variety of firearms and related items to its worldwide customers.

Peer Comparisons

TASER International Inc. (TASR - Snapshot Report) reported earnings of 14 cents per share in third-quarter 2014, beating the Zacks Consensus Estimate by 55.6%. The beat was driven by higher law enforcement weapon handle sales. The quarterly figure was also higher than the year-ago profit of 10 cents per share by 40%.

The leading publicly-traded U.S. firearms maker, Sturm, Ruger & Company, Inc.’s (RGR - Snapshot Report) third-quarter results were hit by weak demand for its firearms and firearm accessories. Its third-quarter 2014 earnings were 34 cents per share, widely missing the Zacks Consensus Estimate of $1.13 by 69.9%. The reported figure also plunged 76.4% from $1.44 per share earned in the year-earlier quarter.  The downslide was due to lower sales.

Zacks Rank

Smith & Wesson currently has a Zacks Rank #5 (Strong Sell).