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Smith & Wesson Near-Term Outlook Sinks Shares

The Exchange

Smith & Wesson's (SWHC) shares were slumping Friday, despite a higher sales forecast for the full year, after the gun maker's second-quarter outlook fell short of analysts' estimates.

Smith & Wesson image

In recent trading, the stock was losing 8.5% to $10.51 on heavy volume. The drop came after the Springfield, Mass., company said sales for the second quarter likely will be between $135 million and $140 million, short of the $143 million Wall Street projection. Smith & Wesson is looking for earnings from continuing operations of 20 cents to 22 cents, whereas analysts are looking for 29 cents.

Factors hurting the results, the company said, are the implementation of a new software system that will cut its days of production beyond a planned two-week factory shutdown and a probable 20% increase in operating expenses from the $24.8 million recorded in the first quarter.

Smith & Wesson management didn't indicate in its earnings press release or on a conference call discussing the results that waning demand for its firearms was contributing to the second-quarter shortfall. Asked by one analyst whether sales expectations specifically would be $15 million to $20 million higher if not for the lost production days, Chief Financial Officer Jeffrey Buchanan said that was "fair to say." Additionally, the company won't have Walther sales, since its distribution deal has ended. Those sales came to $9.7 million in the previous second quarter.

In terms of background checks to gauge gun-buying interest, the FBI's latest data show 1.42 million were run in August, down 7% from the same month in 2012 but up nearly 11% from July. An adjusted figure from the National Shooting Sports Foundation puts the number of August checks at slightly under 1.02 million, a 2.5% decline year over year. NSSF data exclude certain state-level checks, such as those for concealed-carry licenses.

That said, the number of checks is one industry data point, and it doesn't translate directly to gun sales because, for instance, more than one firearm can be purchased on a single check. It also doesn't capture every sale in the nation. The decrease may reflect, as well, less urgency among the public to hurriedly buy firearms, as gun-control pushes largely have stalled or fallen off the radar lately.

Big mover

For the entire year, Smith & Wesson raised its view. After having previously projected revenue of $605 million to $615 million, the company lifted the range to $610 million to $620 million. Profits should be $1.30 to $1.35 a share, compared with the current $1.32 seen by analysts, who were calling for $1.30 a week ago.

The outlook came after Smith & Wesson posted first-quarter sales of $171 million, up more than 25% from the same period a year ago, and better than expected by $6 million. Earnings from continuing operations were 40 cents, 4 cents ahead of the consensus.

While the stock was sinking on the day, big gains or declines following earnings aren't unusual for Smith & Wesson. Going back 20 quarters, the stock has only had three instances in which it moved less than 5% in either direction. Ten of those times have seen double-digit changes in the shares, according to FactSet data. Coming into the trading session, the stock was up 36% this year, but it had lost 7.9% in the last month.

Competitor Sturm Ruger (RGR) said a few weeks ago that it's seen demand stay high, partly because gun owners are worried more-restrictive firearms laws may be coming. However, though a handful of states — namely New York and Colorado — have enacted new legislation in the aftermath of last December's school shooting in Newtown, Conn., a White House bid to change existing regulations failed in the Senate. Ruger shares were off 1.1%.