Has Bubble Burst On Gun Sales Fueled By Fears Over Tougher Laws?

• Kevin Harlin
• On 5:45 pm EDT, Monday August 31, 2009

Bad times can be good times for people who make and sell guns.

Handgun and long-gun sales have skyrocketed this year as fears about the economy and worries about the anti-gun leanings of the new administration send buyers to gun stores.

That surge seems to be tapering off now. But gun maker Sturm Ruger (NYSE:RGR - News) says that surge alone doesn't account for the double-digit sales growth over the past two quarters.

"It's important to note we didn't just ride the surge. We actually developed and introduced new products that were embraced by the market, and we think in a few areas, we took a little market share," Chief Executive Michael Fifer told analysts in a conference call.

About half of the company's $72.4 million in second-quarter sales came from two recently introduced handguns and a military style, semiautomatic rifle.

Second-Largest Maker

The Southport, Conn.-based company was founded in 1949. It's the nation's second-largest gun manufacturer, after private firm Remington Arms. Smith & Wesson (NasdaqGS:SWHC - News) is No. 3, according to data from the Bureau of Alcohol, Tobacco and Firearms.

Company co-founder William B. Ruger Sr. stepped down in 2000. His son, William B. Ruger Jr., left in 2006. The current CEO is a U.S. Naval Academy graduate and former submarine officer. He earned an MBA from Harvard and has held executive positions at various industrial firms.

There was an accounting problem that caused an earnings restatement in 2005. And the company issued a recall on one of its popular pistols last year. But those problems appear behind it now.

Andrew Molchan, president of the Professional Gun Retailers Association, said Ruger's guns typically aren't top-end products. But they have a solid reputation among dealers and buyers.

"They're not a Maserati, but they would be ranked as a Ford," Molchan said. "Their guns are good quality. They work. And their prices are not bad."

The company couldn't churn out guns fast enough in the second quarter. Ruger concedes it probably lost some revolver and pistol market share to competitors who did a better job filling those orders.

"You know, everybody in this industry was capacity-constrained over the past few months and so whoever could fulfill better probably picked up some share," Fifer told analysts during the call. "And those who couldn't, for example, Ruger in those two areas I identified, we probably lost some share."

But Fifer thinks the company brought new customers and market share in with its new line of lightweight compact handguns and its SR-556 semiautomatic rifle.

The question is, now what?

Ruger steadfastly refuses to issue any forward guidance. The company doesn't talk to investors or the media outside of its occasional press releases and conference calls.

The second-quarter conference call was the company's first ever. The next one isn't scheduled until Oct. 28 after third-quarter numbers come out. But the company does concede that the surge in demand is abating.

FBI gun-sale background checks, one closely watched measure of overall sales, climbed 14% in 2008. That pace accelerated earlier this year. March checks were up 29% over the year before. April saw a 30% bump.

But since then, the growth rate has slowed. Checks were up 18% year over year in June and just 8% in July.

C.L. King analyst Jim Barrett thinks August will show just 7% growth. He thinks demand growth will continue to peter out.

"Regardless of when the current gun boom ends, our best guess is that once again revenues drop back to pre-boom levels," he wrote in a client note. That would bring gun sales back to 2007 levels of about $144 million, he notes.

Barrett points to a similar bubble effect before the assault weapons ban signed by President Bill Clinton went into effect in 1994. Ruger's gun sales surged 27% in 1993. But after the initial rush, sales soon tapered back down to pre-ban levels over the following few years.

Fifer doesn't think the industry sales will cool that much. He thinks firearms are popular with young people. And in addition to worries about the economy, he says people are worried about crime and safety.

"When you get a lot of free-floating fear or apprehension, the sales just keep going," he said.

Ruger posted earnings per share of 45 cents, up 800% from a year ago. The $72.4 million in revenue was up 87% from a year ago.

It shipped 246,200 units in the quarter, up from 136,700 a year ago. The average sales price was up about 6%, to $286. Revenue from firearms sales, factoring out a side metal-casting business, climbed 94% from a year ago, and 14% from the first quarter.

The number of new orders also climbed, year over year. It's up 70% from a year ago. But it's down 59% from the first quarter of 2009.

The company says the cooling industrywide demand is part of that. But the company also points to other factors.

Ammunition Shortage

There's a seasonality dip. An industrywide shortage of ammunition for some popular calibers might also crimp sales. And the company thinks its high backlog at the end of the first quarter discouraged some new Q2 orders.

It managed to increase its production in the second quarter, turning out 247,300 guns, up from 209,900 in the first quarter. But its back-order log remains high at 412,300 units.

Fifer told analysts the company is shipping guns as fast as it produces them. But it's made a conscious decision not to overinvest in new plants and equipment.

"We tried to take the long view on what would be sustainable rates, and to build a little more capacity than that, but not go crazy adding a ton of capacity that might then end up sitting idle," Fifer said.

Buzz up!