Smith and Wesson (SWHC) reported second quarter revenue of $108.1 million, a decrease of 22% year-over-year. EPS also saw a significant decline to $0.09 per diluted share, compared to $0.28 per diluted share in the second quarter of FY 2014. The decrease in revenue was due to lower consumer demand and competitors' excessive inventory at distribution and retail locations. Again, long gun sales had the largest negative impact on sales, declining 50% year-over-year. Handgun sales also declined 15%. Lower sales of higher margin products resulted in a gross profit margin dropping to 32% from 41.6% in the previous year.
Lower revenue was expected for the second quarter due to high inventories and a seasonal decline, but the lowered FY 2015 guidance hurt the stock, which saw a 1.5% drop after-hours. For the second time, management cut FY 2015 revenue guidance from $530-$540 million to $504-$508 million. FY 2015 EPS were also lowered from $0.89-$0.94 to $0.66-$0.70. On the bright side, the company partnered with General Dynamics (NYSE:GD) to pursue replacement of the U.S. Army's standard sidearm with their M&P polymer pistol and acquired Battenfield Technologies, a leading provider of hunting and shooting accessories, during the second quarter. Management believes the Battenfield acquisition could provide long-term double digit growth in their accessories market.
In my original article, "Smith & Wesson: Value Built In For Long-Term Investors", I expected the second quarter to be weak, but the large reduced full year 2015 guidance came as a bit of a surprise. While Smith & Wesson's inventories fell around 18%, large competitor inventories are expected to weigh on sales growth going into the important holiday season. At this point, the stock is nothing more than a speculation play, but I still remain confident in the company's long-term success. The recent acquisition should provide future organic growth and the company still has a decent balance sheet. All the bad news has been priced in and management has done a good job to keep expectations low. If this holiday season can reduce industry wide high inventories, the company could be set up to go against some incredibly easy comparisons in FY 2016.
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