The magnitude of the drop in gun sales at Sturm, Ruger (NYSE: RGR) sent its stock careening lower after management reported second-quarter earnings. While no one was really expecting an increase considering the industry's slump, the 25% drop caught investors off guard, and they dropped the stock for a 20% loss on the day after the earnings report.
Not off to a roaring start
To a certain extent, Ruger's situation is not unlike that being experienced by Harley-Davidson (NYSE: HOG), which is caught in its industry's downward spiral. The bike maker's core customers are no longer buying its motorcycles at the same rate they had been, and Harley refuses to engage in discounting to simply generate more sales. That hurts sales, but it protects the company's profit margins and the prestige associated with its brand, even as prices are further pressured by low used-bike prices.
Sturm, Ruger's Wrangler revolver has proved a popular handgun for the gunmaker. Image source: Sturm, Ruger.
Ruger is also going through a protracted industry decline, one of the worst the firearms market has ever experienced, and customers who would traditionally buy its guns are either sitting out of the market or patronizing Ruger's rivals, who are embracing what Ruger believes is destructive discounting of their firearms.
American Outdoor Brands (NASDAQ: AOBC) showed a surprise 2.2% gain in its fiscal fourth quarter in June as buyers hurried to take advantage of expiring deals. It's quite possible the Smith & Wesson owner has pulled forward sales and will find demand slack in the current quarter.
But like Harley, Ruger prefers not to diminish its brand or its profit margins, and it was willing to forgo sales as a result even as used-gun prices put a damper on industry pricing.
External forces at play
But that's about where the parallels end, because big motorcycles like the ones Harley makes are in a secular decline, while the firearms downturn is more cyclical. These days, sales depend partially upon who is sitting in the White House and whether there is a threat to gun ownership. Otherwise, the industry is slowly returning to a more normalized state of demand that likely won't ever die out.
Sturm, Ruger also was hit by the bankruptcy of United Sporting, a major firearms distributor, which, after 85 years in business, lost its big bet on the 2016 election. While that was a big outlet for Ruger, it also resulted in other distributors becoming leery of taking on too much inventory and similarly getting caught without a way to unload it. Ruger does not sell its firearms to the general public but only to federally licensed firearms dealers.
The industry is in the middle of what is traditionally its slowest period, the summer months, so Ruger and other gunmakers will not see much of an uptick any time soon. However, hunting season is also fast approaching, and while the muted industry demand could impact sales, Ruger intends on going after sales aggressively, looking for its AR and bolt-action rifles, which have been designed around the Winchester .350 Legend cartridge, to be well received by the market.
Still on target for growth -- eventually
Although Ruger's earnings took a big hit this quarter (59% drop in EPS), it remains a financially sound company with a strong balance sheet that has no debt and prudently looks at how best to approach market conditions. It was such firm principles that allowed the gunmaker to ensure it had sufficient inventory of aluminum available for production ahead of tariffs being imposed, so it was not affected by rising prices.
Despite remaining weakness, the firearms industry does look like it's reached a floor at last, and because demand is only reverting to the mean, not evaporating as with Harley-Davidson, Ruger will be able to grow sales once more, albeit from a new, lower level.
This article was originally published on Fool.com