After market close on Tuesday, May 7th, Ruger (RGR) reported their Q1 FY2019 earnings results. The earnings call was part of the company's 2019 Shareholders' Meeting which was held in NH and available via telephone and webcast. This article will cover both. So, let's dive in.
For the 1st quarter of 2019, the company reported net sales of $114 million. This is down from $131.2 million a year earlier.
The company earned $13.03 million or $.74 per share. This is down from $14.26 million and $.81 per share a year earlier.
Despite the weaker firearms industry and a general lack of new product introductions in January's NSSF Shot Show, the company remained profitable.
The company ended the quarter with cash and short-term investments totaling $134.9 million.
Thinking on the Earnings
Generally, the company's performance was completely within my expectations. I was therefore a little bit surprised when the stock was down for the day with a few questions brought up. You can find the complete form 10Q filing on SEC Edgar or by clicking here.
Investors have to keep in mind that there were two large drivers, at least in my opinion, for the Q1 2019 revenue drop.
First, as I commented in the NICS article, Ruger had a fairly light schedule of new introduction at the NSSF Shot Show 2019 in January. The new product introductions were predominantly for the NRA 2019 Annual Meeting and Show which we discussed in my most recent article.
Therefore all things being equal, with new products being a driver of revenue, sales were going to be lower versus the prior year.
Secondly, the firearms market continued to get weaker over the previous 12 months as suggested by the adjusted NICS methodology and confirmed throughout the year by the publicly traded companies and numerous private companies facing difficulties.
We can see that Ruger's trailing twelve month revenues are at around $478 million after having hit peaks in 2014 and 2017.
And as we discussed before, the peaks are consistent with the background check data we have seen and been discussing in my NICS series of articles.
Source: NICS Data from FBI, compiled by author (combined annual adjusted data from 1999 through 2018).
So without a doubt, Ruger has in the past been impacted by the broader market trends as to be expected with a large, experienced manufacturer. Where the expertise and "good stewards of capital" comes in is that despite the drops in revenue that sent more leveraged companies into a death spiral, Ruger's clean balance sheet and focus on lean manufacturing principles has continued to provide more consistent gross profits and net income.
One interesting metric to follow is the Gross Profit Margin. Interestingly, the peaks we have seen over the last 10 years are also in line with politically driven gun peaks.
As we can see, the current 12 month gross profit margin is 27.4% over the prior twelve months. I do see this continuing to expand from this point as newer products optimized for the current environment continue to become the larger driver of sales. This would be products such as the Security 9 pistol, the Ruger Wrangler revolver and Ruger American rifles.
One thing that we must also note is that Gross Profit Margins will now be impacted by how the promotional products are accounted for. Here I am talking about the "Buy X, get Y Free" deals.
Comparing Ruger's Gross Profit Margins to their peers we find that they come in in the middle of the pack behind American Outdoor Brands (AOBC), maker of the Smith & Wesson firearms, and ahead of ammo and outdoors products conglomerate Vista Outdoor (VSTO).
As we can see, while Ruger's gross profit margins remained in line or ahead of AOBC at the beginning of the decade, they have lagged behind starting in 2014. The reason for this is fairly simple, American Outdoor Brands became a diversified firearms company that produces both firearms, firearms accessories and outdoor products that generally have far higher margins. Those higher margins however come at the expense of generally being more severely impacted by slowdowns.
Vista Outdoor, while being a diversified company is in large part in the commodity business of range/target ammunition and has been severely impacted by declining ammunition prices and sales volumes. As such, their combined profit margins are in the low 20% range.
Turning back to the 10Q there were a few things that stood out that I believe I have the answers for, or at least answer the sales drop.
The first is the unit data.
As we can see, there was a meaningful decline in the number of units ordered in Q1 2019 vs Q1 2018. While Q1 2019 unit orders were in line or above Q2, 3 and 4 of 2018, they were significantly below Q1 2019. I believe this is tied to the schedule of introducing new products along with the reduction in the "Buy X, get Y" deals that the industry engaged in last year.
Source: Ruger 10Q - Q1 FY 2019
I also believe the new product introductions and the shift in normal sales calendar is foreshadowed in the inventory data.
As we can see below there is a meaningful increase in inventories from Q1 2018 to Q1 2019. Furthermore, the company's inventory increased by 52,000 units from 80,300 to 132,300. I hope many of those were Ruger Wranglers!
Source: Ruger 10Q - Q1 FY 2019
One disclosure that I find quite exciting is relating to investing and capital expenditures,
Investing and Financing
Capital expenditures for the three months ended March 30, 2019 totaled $2.7 million, an increase from $1.4 million in the comparable prior year period. In 2019, the Company expects to spend approximately $25 million on capital expenditures, much of which will relate to tooling and fixtures for new product introductions and to upgrade and modernize manufacturing equipment.
Source: Ruger 10Q - Q1 FY 2019
One thing that I believe is very telling as to priorities is the amount of money the company is spending on reinvesting and improving. As per the company, Ruger plans on spending approximately $25 million on cap ex, much of which is related to new product introductions and improving tooling.
On the other hand, from Vista's forward guidance just issued this morning, the company plans on sending $45 million to $50 million on cap ex.
The difference is, Vista is a MUCH more diversified brand with an expected $2 billion in revenue versus Ruger, which is predominantly a firearms manufacturer with trailing twelve month revenues of $478 million. This implies an investment of about 5.2% of sales for Ruger vs 2.49% for Vista.
As mentioned, the earnings release coincided with the company's annual shareholder meeting. Generally there were no surprises in the agenda as the board was set to discuss two anti-gun activist shareholders representing numerous anti-gun groups who have recently pushed numerous proposals including the latest to vote against a number of board members.
Despite their small stakes, they pushed the company to, consider a number of proposals backed by anti-gun groups that have been proven to be counter to common industry thinking and have previously lead firearms companies to the brink of financial collapse.
Anti-Gun Activist Investors
When it comes to the activist shareholders at both Ruger and American Outdoor Brands, the issue is, despite both companies spending meaningful time discussing minority shareholder concerns and publishing lengthy responses to proposals with numerous third-party sources, research reports and experiences, the activist shareholders still seem to ignore history and studies that show following those proposals would lead to business failure.
The issues are focused on two primary topics: pursuing smart-gun technologies (the primary focus) and responsibility for gun violence. If you have not done so already, I urge you to read the company responses for Ruger and American Outdoor Brands here and here. For a detailed discussion on these proposals and the problems with the technology, I urge to read my blog post here.
An Arms Maker For Responsible Gun Owners
This was of course a great opportunity for management to discuss their vision and goals and they did.
Ruger's CEO spent a considerable amount of time discussing the company's goal of being the provider of firearms for RESPONSIBLE gun owners and discussed the company's guiding principles. If you have not done so already, I do recommend you watch the company's webcast.
Lastly, the company provided some helpful commentary on both the state of the industry and their own recent product introductions.
First, we had further confirmation that the industry is seeing excess capacity at all levels of the distribution chain. Furthermore, while Ruger is still committed to their typical 2%/30 or net/40 terms, there are still many other there offering extended terms.
Second, we also had the first management comments on the reception of new products announced for the NRA Show. When discussing the Ruger Wrangler, I believe the term used was "fantastic."
Overall, the Q1 results are as expected. Without many introductions for Shot Show, the company's sales were largely subject to the broader industry trends. As we know, those background checks were down high single digits year over year.
The good news for the next few quarters is that the company introduced many new products and much more models that should continue to drive sales in a challenging market.
What is good to know is that the company can produce custom runs of firearms for certain retailers and distributors with as little as 300 to 1,000 units.
And of course, the company continues to be a great steward of investor capital and has been committed to returning capital through dividends and buybacks.
Once again, I know my readers here are in two areas of investment focus, firearms and income, with a bit of overlap however the major firearms companies are reporting earnings and we just had latest NICS data. As such, needed to cover them. Vista Outdoor (VSTO) just reported earnings so my next article will be on those earnings and we will then return to income focused ETFs and CEFs. Ruger however is a nice income paying equity with opportunities for covered calls.
Thank you again and I hope this was helpful. If you liked it, please hit the "Like" button and I look forward to your questions and comments!
Author's note: I just wanted to take a moment and say thank you to everyone who has been reading my work as a follower, and especially Income Idea subscribers. I want to thank everyone who read my last article, "Ruger Is Certainly Not Boring Anymore," liked it, shared it, commented on it, or even disagreed. Thank you to Seeking Alpha for providing me the platform and opportunity to share my knowledge, thoughts, and research. You have all made that article my most widely read investment article yet, in all the years I have been publishing on Seeking Alpha. More than that, it accomplished #1 Trending for the day on the platform, and hit Google's "Top Stories" for the company name. And it accomplished that in less than 36 hours, for a small cap stock. Thank you.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.