I don’t think that investors should panic over Ruger’s drop in EBITDA and distributor orders. Going forward, I see the company gaining market share as its continues to release new products (which it has done so in the past). Volumes and profitability should recover and grow.
That being said, a huge contraction in the gun market or intense competition can hurt Ruger shareholders. I have no special insight into what will happen to the overall gun market.
Drop in EBITDA
Due to the company changing its depreciation method, EBITDA is a slightly better metric of the company’s operating performance than earnings per share.
In the latest quarter, EBITDA dropped roughly a quarter year over year. A contributor to that drop is the decline in high-margin sale of accessories, mainly in gun magazines. Due to worries about legislation in 2013, consumers stocked up on high-capacity gun magazines over fears that they would be banned. Ruger was able to sell a lot of those magazines through its online store (shopruger.com), which generated significant profits for the company. I don’t think that the large drop in EBITDA is a cause for concern.
Drop in distributor orders
Fifer has stated on the latest conference call that he pays no attention to the backlog. He is trying to manage distributor inventory to keep them at around 6-8 inventory turns. Too little inventory at the distributor level causes Ruger to lose sales when retailers aren’t promptly restocked. Too much inventory and the distributor or Ruger has capital tied up in inventory needlessly. Too much inventory is also a problem for distributors if their inventory drops in value.
Historically, Ruger has continually hired more engineers and has constantly released new products. The company continues to hire new engineers. I expect that Ruger will come out with even more new products than in the past. Fifer has stated that new products offer the greatest returns for the company.
It just so happens that the company did not release many new products in Q1 and Q2 of 2014.
- New products represented $57.1 million or 18% of firearm sales in the first half of 2014.
- New products represented $41.3 million or 24% of firearm sales in the first three months of 2014.
- New products represented $195.8 million or 29% of firearm sales in 2013, compared to $182.0 million or 38% of firearms sales in 2012.
Going forward the company should be releasing more new products when they are ready. Fifer has stated that the company extensively tests its product to avoid costly product recalls. This can delay new products from being launched.
*Disclosure: Long RGR.