sturm ruger financial analysis

Sturm Ruger
Introduction
Sturm Ruger is one of the largest firearms manufacturers in the United States. The company is solid financially, despite some steep revenue declines. That said, the industry is still slated for growth, albeit slow growth. This calls into question the effectiveness of the company’s strategy, if it is suffering heavy revenue declines. The profits have also declined. While Sturm Ruger has made some moves financially to help get it through these times, while remaining profitable, such moves might not be sustainable, and the company will need to address the root causes of its revenue struggles, be those causes in its products, the competitive environment, pricing, distribution or otherwise.
Discussion of the Firearm Industry
The firearm industry in the United States is worth approximately $17 billion, spread over 690 businesses, with an annual growth rate of 2.8% (IBIS World, 2019). The National Shooting Sports Foundation estimates that the industry contributes around $6.8 billion in taxes to both state and federal government levels as well (NSSF.org, 2019). There is evidence to suggest that the industry is in a minor downturn in terms of demand (Hsu, 2018)
The industry is characterized by intense competition. In addition to domestic manufacturers, there are also many foreign companies involved in the sale of weapons in the United States. Regulations on firearm sales vary from state to state, such that the legal environment might be quite restrictive in one state, and quite loose the next state over. In general, firearms are a regulated industry. In addition to consumer uses, there are a lot of weapons that are produced for military applications, and that industry all told is substantially larger.
The firearm industry has as strengths strong lobby groups and a loyal fan base. Most gun owners will own multiple guns, and shoot recreationally or hunt. The industry also comes under intense scrutiny from the media and in some areas from regulators, leading to a sometimes restrictive legal environment. Such external groups pose one of the biggest threats, though economic downturn can also be a threat, especially for gun buyers who already own a lot of weapons – they might buy less when the economy starts to struggle.
The overall industry condition is moderately favorable. Companies in the industry are usually profitable, though the margins are not great due to high competition. Furthermore, growth is fairly slow as the industry is for the most part mature.
History of the Company
Sturm Ruger was founded in 1949 by William Ruger and Alexander Sturm in Connecticut. The company went public in 1969, and has been able to expand to multiple different manufacturing facilities in order to help fuel its growth. Ruger is one of the largest US firearms manufacturers and produces a wide range of different guns. It sells these through a variety of different retailers, mainly in the US, but there are some international sales as well.
Company Strategy
Ruger offers a range of weapons to help it compete in a number of different product categories. The 10/22 is a popular rifle because of its low cost but relatively high quality for that cost. Other products are more premium in nature. Ruger is one of the highest-volume firearms producers in the US, and therefore has a mainstream strategy in terms of offering a range of weapons that appeal to its target markets, and this choice helps it to sell multiple weapons to the same consumer, who will have different weapons and different uses for those weapons. 99% of sales were in firearms, and 1% in castings. 96% of sales are domestic, 4% international and all production is in the US, from US materials, according to the company’s 2018 Annual Report.
Most sales are done through independent wholesalers, leaving Ruger to focus primarily on manufacture and marketing of the guns. The company’s main end users are sportsmen, hunters, law enforcement, gun collectors and people buying for self defense purposes. The top three independent distributors of its products account for over 50% of the company’s sales.
Ruger typically aims for a differentiated strategy, with its guns having Ruger branding, and distinctive characteristics from other weapons in the same category. This is typical of the nature of competition in the industry, where there can be fairly high differentiation between products in the same category, due to differences in manufacturing processes and design. Ruger has been able to successfully execute this strategy since its inception.
Financial Analysis
Ruger has seen a decline in sales in each of the past two years. The company’s revenues in 2016 were $664 million, and were $495 million last year, a decline of 25.4%. As a result of this, operating income dropped by 50.1% over the same period. While the company was able to cut its selling expenses in line with the sales, it increased its general and administrative expenses over this time period, resulting in a sharper operating income decline compared with revenue decline. Net income declined from $87 million to $50.9 million during this two-year period, a decline of 41.7%
Ruger does not carry any long-term debt on its balance sheet. This means that, financially, the company is quite healthy. The current ratio was 3.2 in 2017 and 3.3 in 2018, both of which are very healthy numbers. Thus, Ruger’s liquidity is high.
Ruger’s lack of long-term debt also means that its capital structure is oriented towards the healthy side. Liabilities as a percentage of equity are 0.27 in 2018, and were 0.24 in 2017. Both of those numbers are quite healthy, and since all of the liabilities are current, and offset by a substantial block of current assets, there is no reason to worry about Ruger’s liquidity or solvency whatsoever. This is actually remarkable, since the company’s revenues and profits have declined so much in the past couple of years. For a company in that situation not to have to borrow, even in the short run, actually seems exceptional.
The decline in the revenues has been noted. Ruger has also seen a decline in its margins as a result. Gross margin was 33% in 2016, but that has declined to 27% in 2018. This might be because the company has had to discount its weapons in order to sell excess inventory. During a sales slump, there is always a risk that the company will be caught with excess inventory. Thankfully, Ruger’s product is not perishable. Net margins dropped from 13% in 2016 to 10.3% in 2018.
Given the sales slump, it only makes sense to investigate Ruger’s inventory statistics. In 2017, the company’s inventory turnover was 9.4x, and in 2018 it was 11.5x. What this means is that the company has not seen a slowdown in its inventory turnover during this period, and in fact it accelerated inventory turnover. There appears to be some flexibility built into Ruger’s manufacturing, as often a company cannot make such rapid adjustments to manufacturing costs and output, due to fixed costs, and inflexible labor. Inventory as a percentage of total assets declined from 13.8% to 9.3% from 2017 to 2018.
Cash provided by operating activities increased in 2018 to $119 million, up from $104 million in 2016, this despite the slump in both revenues and net income. It is worth noting that there were some financial adjustments that were made during this period to accommodate the sales slump. First, the company cut its dividends, from $32.8 million in 2016 to $19.2 million in 2018. In 2016 and 2017, the company was repurchasing stock, including $64.8 million in 2017. It did not repurchase stock in 2018, but instead diverted some capital to short-term investments, and ran down its cash on the balance sheet for the past couple of years. These adjustments have helped it to weather the storm, but obviously such steep revenue declines are not sustainable.
Conclusion
Sturm Ruger is a firearms manufacturer. The industry is relatively stable, with slow growth projected for the coming years. However, Sturm Ruger has seen steep revenue declines in the past couple of years. The company’s management has been able to weather the storm so far, largely by reducing dividends and cancelling stock buybacks, but increases in general and administrative expenses over this period are a bit concerning. That said, the company has a very healthy balance sheet both in terms of liquidity and solvency, given that it possesses no long term debt. All told, Sturm Ruger remains in a strong financial position, but will not want to sustain such sharp revenue declines going forward. If the company can stabilize the revenue side, it should be able to recover, given its general strength and overall strong financial condition, especially having the debt option to help it ride out any further downturn in business, should it be determined that the downturn relates to issues beyond the company’s control.
References
IBIS World (2019) Guns and ammunition manufacturing industry in the US. IBIS World. Retrieved March 27, 2019 from https://www.ibisworld.com/industry-trends/market-research-reports/manufacturing/fabricated-metal-product/guns-ammunition-manufacturing.html
NSSF. (2019) Firearms and ammunition industry economic impact. NSSF.org. Retrieved March 27, 2019 from https://www.nssf.org/government-relations/impact/
Sturm, Ruger and Company 2018 Annual Report. Retrieved March 27, 2019 from https://ruger.com/corporate/PDF/10K-2018.pdf