Smith & Wesson Holding Corp. (SWHC - Snapshot Report) reported non-GAAP third-quarter fiscal 2015 (ending Jan 31, 2015) earnings from continuing operations of 20 cents per share, beating the Zacks Consensus Estimate of 11 cents by 81.8%. Earnings were however down from 35 cents per share a year ago on weak sales.

Shares of Smith & Wesson rallied 10.11% in after-hours trading on the earnings beat and a positive outlook.

Operating Highlights

Total revenues in the quarter were $130.6 million, beating the Zacks Consensus Estimate of $128 million by 2%. However, revenues decreased 10.5% year over year. Lower long gun sales, primarily modern sporting rifles, were the main reason for the top-line decline. Long gun sales declined 39.8% year over year in the reported quarter. Handgun sales were soft as well and consumer demand remained weak. Excess inventory of competing products at distributor and retailer locations added to the negatives. Yet, consumer demand for handguns increased from the year-ago period as reflected in the FBI's National Instant Criminal Background Check System. The demand was likely met by surplus channel inventory.

In the quarter under review, gross profit decreased 25.4% year over year to $43.8 million. This corresponds to a gross margin of 33.6%, down 660 basis points year over year, due to higher promotional product discounts and a related fall in fixed-cost absorption.

On the cost front, operating expenses were $28.1 million, or 21.5% of revenues, compared with $27.5 million, or 18.9% of revenues in the third quarter of fiscal 2014.

Operating income in the quarter was $15.7 million, down 49.5% year over year.

Segments Detail

Smith & Wesson acquired Missouri-based Battenfeld Technologies, Inc., a leading provider of hunting and shooting accessories, on Dec 11, 2014. Smith & Wesson currently has two reportable segments: a Firearm division and an Accessories division. The latter is comprised entirely of Battenfeld. Hence, revenues at its Accessories division reflect only a partial quarter of sales.

Smith & Wesson’s Firearm division reported net sales of $124.5 million (95.3% of total revenues), down 14.7% year over year. The Accessories division reported net sales of $6.1 million (4.6% of total revenues).

Financials

As of Jan 31, 2015, the company had cash and cash equivalents of $59 million compared with $68.9 million as of Apr 30, 2014. Operating cash was $29.9 million in the first three quarters of fiscal 2015, down from $54.2 million in the comparable year-ago period. Capital expenditure was $24.2 million in the first nine months of fiscal 2015, down by $12 million year over year.

Guidance

For fiscal fourth-quarter 2015, Smith & Wesson expects net sales in the $162–$166 million range. Non-GAAP earnings from continuing operations are expected in the range of 29–31 cents per share for the upcoming quarter.

For fiscal 2015, sales are now expected in the $532–$536 million range, higher than the $526–$530 million expected earlier. The company reaffirmed its earnings guidance at 87–89 cents per share for fiscal 2015.

Our Take

Smith & Wesson is expected to gain considerable traction from the Battenfeld acquisition, particularly in the firearm accessories market and the hunting vertical as well. Battenfeld boasts of a solid distribution network and is renowned for producing high-quality products. Smith & Wesson will likely witness a boost in its sales as it leverages Battenfeld’s potential going forward.

We however note that Smith & Wesson has been posting declining sales for the past few quarters. The blame largely goes to falling sales of long guns, including modern sporting rifles.

Peer Comparisons

The leading publicly traded U.S. firearms maker, Sturm, Ruger & Company’s (RGR - Snapshot Report) fourth-quarter 2014 earnings of 53 cents per share comfortably surpassed the Zacks Consensus Estimate of 42 cents by 26.2%. The reported figure was however down 60.2% on lower sales from $1.33 per share earned in the year-ago quarter.

TASER International Inc.’s (TASR - Snapshot Report) fourth-quarter earnings declined year over year due to rising cost. This Scottsdale, AZ-based company reported earnings of 9 cents per share in the fourth quarter, short of the Zacks Consensus Estimate and the prior-year earnings of 10 cents by 10%.

Zacks Rank

Smith & Wesson currently has a Zacks Rank #2 (Buy). Pool Corp. (POOL - Analyst Report) with the same Zacks rank as Smith & Wesson is another well-placed stock in this space.

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