Gun Sales Drive Smith & Wesson Holding Corp (SWHC) Q2 Earnings

Gun Sales Drive Smith & Wesson Holding Corp (SWHC) Q2 Earnings

Leading firearm manufacturer, Smith & Wesson Holding Corp. (SWHC) reported second quarter of fiscal 2014 results after the market closed yesterday. Earnings from continuing operations were 28 cents per share in the second quarter of fiscal 2014, beating the Zacks Consensus Estimate of 21 cents by 33.3%. The reported figure also increased 16.7% from the year-ago profit level of 24 cents. The bottom-line gain came on the back of higher demand for handguns. Shares of Smith & Wesson shot up more than 5% in after-hours trading on Dec 10, 2013.

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Total Revenue

The company reported net sales of $139.3 million in the quarter, up 2.0% from $136.6 million in the year-earlier period. The year-over-year growth was driven by strong customer demand for handgun sales, which surged 27.4%.

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Since the reelection of President Obama last year gun sales have surged, on fears of tighter regulation for weapons in the wake of a series of unfortunate shooting incidents in the recent past. The Boston Marathon terror attack on Apr 15, 2013 and the tragic shootout at the Sandy Hook Elementary School Newtown, Connecticut on Dec 14, 2012 had sparked off fierce controversy about the proliferation of firearms.

Net sales in the reported quarter were higher than the Zacks Consensus Estimate of $137.0 million.

It is worth noting that the company had fewer manufacturing days in the fiscal second quarter 2014. This was due to a two-week annual factory shut down and a previously announced downtime for the company’s enterprise resource planning (ERP) implementation initiated early in the quarter.

Quarterly Highlights

Smith & Wesson expanded its gross margin by a significant 610 basis points year over year to 41.6%. The increase was attributable to a favorable product mix, absorption, and manufacturing efficiencies, along with the absence of Walther product sales. The company ended its Walther distribution agreement at the end of fiscal 2013.

However, operating expenses increased 490 basis points year over year to 20.9% of sales in the second fiscal quarter 2014. Hence, operating income clocked $28.8 million or 20.7% of sales versus $26.6 million or 19.5% in the year-earlier period. Higher operating cost mostly consumed the significant jump in gross margin resulting in just a gain of 120 basis points of operating margin from last year.

Financial Update

Cash and cash equivalents as of Oct 31, 2013, were $52.9 million versus $100.5 million as of Apr 30, 2013.

Cash from operating activities was $24.0 million in the second quarter of fiscal 2014 versus $13.8 million in the second quarter of fiscal 2013.


The company expects total revenue in the third quarter of fiscal 2014 in the range of $140.0 million to $145.0 million. GAAP earnings per share from continuing operations in the third quarter of fiscal 2014 are expected between 28 cents and 30 cents. The Zacks Consensus Estimate for the quarter ending Jan 31, 2014, is 27 cents per share.

The total revenue guidance for fiscal 2014 is maintained in the range of $610 million to $620 million. This reflects an estimated 4.7% year-over-year growth at the midpoint. GAAP earnings per share for fiscal 2014 are expected between $1.30 and $1.35. The Zacks Consensus Estimate for the quarter ending Jan 31, 2014, is $1.33 per share.

The guidance takes into account the expected impact of the implementation of the company’s new ERP system through fiscal 2014.

Our Take

Smith & Wesson continues to post strong results. The firearm maker has surpassed our expectation for the last ten quarters. The company gained from a $100 million stock buyback completed earlier this year and recently authorized an additional buyback of $15 million.

In fact, Springfield, Mass.-based Smith & Wesson benefited from the demand leap during the reported quarter. However, as a caveat, the possibility of a new gun law might have an adverse impact on gun sales in the future.

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

Zacks Rank

Smith & Wesson currently has a Zacks Rank #3 (Hold). Other better-ranked stocks worth buying now include Alliant Techsystems Inc. (ATK), Sturm, Ruger & Company Inc. (RGR) and Callaway Golf Co. (ELY). While Alliant Techsystems and Sturm, Ruger sport a Zacks Rank #1 (Strong Buy), Callaway holds a Zacks Rank #2 (Buy).

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CALLAWAY GOLF (ELY): Free Stock Analysis Report

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SMITH & WESSON (SWHC): Free Stock Analysis Report

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