Editor's Note: Yesterday, Outdoor Wire Digital Network Publisher Jim Shepherd sat in on the analysts conference call that followed Sturm Ruger's Wednesday announcement of disappointing third quarter results. In the course of that call, Shepherd listened as analysts probed for answers to short-term questions and Ruger CEO Michael O. Fifer responded with answers that echoed the long-term outlook of most industry leaders.
Today, his take on a call that once again points out a critical difference in thinking between Wall Street speculators and business leaders.
Ruger's Fifer on Q3 2014 Drops: "It's only one quarter. Nothing is broken."
Ruger CEO Michael O. Fifer had one response in this morning's conference call with Wall Street analysts that nailed a key difference between his job and the thinking on Wall Street. After nearly a half-hour of being quizzed on the company's latest -and admittedly disappointing- third quarter earnings, he responded -for the umpteenth time- to the question "when will the downturn end?"
Ruger CEO Michael O. Fifer to analysts: "It's just a quarter. Nothing is broken." Photo from Ruger website.
"It's just a quarter," he responded, "Nothing is broken."
"We are in this for the long haul," he said, "and we're positioned for that. We will be just fine."
At that point, he defended that assertion by (again) pointing out the company, despite that disappointing 43% drop in Q3 sales and profits, was healthy.
"Ninety-eight percent of our accounts receivable are current," he said, "we have twenty-eight million dollars in cash with zero debt. Ruger is a healthy company and we're positioned for the future."
That having been stated, he did tell the analysts that in his estimation, it might take as long as a year before retailers get their inventories down to what he called a "30-turn" - inventories at levels that would get them into the position to need to reorder products every 30 days.
Today, he admitted, they're holding enough Ruger product that they're not being compelled to reorder by customers.
That situation, he said, wasn't something Ruger could control.
In fact, a key portion of the company's overall strategy helped accelerate the precipitous declines in second -and third -quarter sales.
"Our business model sets very clear minimum selling prices for Ruger products," he explained, "over the long haul, that model guarantees retailers a healthy profit on Ruger products."
But, he explained, it also makes Ruger's sales vulnerable when other manufacturers were deeply discounting product. "A forty percent discount," he said, "is essentially trading inventory for cash."
"When you're shopping for a gun and we're at our normal price while you can't see through the glass top of the retailer's counter because of all the other companies' rebate cards or discounts," he explained, "it's a tough deal to pass up a competitor's product that's discounted that much. They buy the other product and we lose that sale-and short-term, some market share."
"I'm certain that's hurt our sales some," he said, "and I admit I'm surprised they can keep such brutal discounting going. They did it in the second quarter, through the third quarter and some are still discounting."
"Eventually," he said, "that's going to impact their business."
"You can't service debt, invest in new projects or even set cash aside. Like I said, I'm surprised they've kept the discounting up so long. Even I can do the math on that one."
Fifer also defended the company's decisions to treat the quarter as exactly that- a correction quarter- and not a reason to panic.
Unlike some "unnamed competitors" Ruger intentionally kept personnel despite a thirty-six percent reduction in production. Neither, he said, has the company reduced research and new product development. Both, Fifer says, are critical to keep the company and its products in the minds of consumers.
"We're in a good position," he said, "we have more engineers than they (competitors) do, we have more money for research and development, no debt and our long-term strategy isn't designed to overreact to short-term challenges."
New product development is a critical part of that strategy, and Fifer told listeners there were "lots of new products coming over the next 18 months". He amplified on that position by explaining that many of the company's new products were, in fact, "a year or more behind in their introductions" due to the exploding demand for exiting products in 2013.
Ruger's new product introduction strategy, he explained, didn't help slow the third quarter drop in sales -despite the introductions of two new products- a revision in their popular SR-9 pistol and an all-new 556 Modern Sporting Rifle.
"Those products are popular," he said, "but they were only available for so little of the third quarter that they really didn't help our sales numbers."
One analyst pressed Fifer as to whether the company would "punish" distributors for selling out the deeply-discounted products from competitors, leaving Ruger inventory sitting on shelves.
Seeming to see that question as both a criticism of distributors and Ruger's two-step selling process, Fifer was quick to defend distributors and the distributor-based sales model.
"First, he said," I don't think distributors are doing that. A lot of the discounting is coming directly from the other companies. That's not doing anything to help distributors."
"And we're working with distributors that aren't selling our products as effectively as others. We don't think they're doing anything wrong."
Distributors, he explained, are critical participants in the overall business model of the gun industry.
Distributors, he explained, mean retailers need only place "one or two calls" to replenish inventories sold over a weekend.
Without distributors, "retailers might have to make dozens of calls after a busy selling period- it might be a week or two before they get around to calling everyone. They just don't have the time to reorder everything all at once. And our product would sit until they ordered it from us."
Secondly, Fifer says distributors offer something critical to the overall health of the industry: credit.
"Distributors offer terms to retailers that, frankly, we couldn't afford," he explained, "Retailers work with distributors to get the most favorable terms they can for themselves; distributors also have trained sales forces to reach out to all the retailers."
"Because of them," he explained, "Ruger doesn't need an elaborate credit department and I don't have to manage a huge field sales force that's trying to reach more than 12,000 retailers nationwide. We deal with distributors. The two-step sales process works - for all of us."
One comment seemingly missed by the analysts with their constant focus on short-term sales (and ultimate goal of making markets) concerned two "new normals" Fifer said indicated were good signs - in today's current sluggish marketplace, and the future.
First, gun buyers are no longer "old white guys" (Fifer's laughing term). Today's marketplace, he says, "is made up of young people from rural, suburban and urban areas. And they're buying their first guns."
"Some," he acknowledged, "may never buy another gun. Some may never shoot the gun they buy. But plenty of them according to all the industry research are practicing, getting training and learning to shoot."
That, he says, is the key to a new generation of gun owners. "They're going to discover the same thing we did," he said, "Shooting is fun - a lot of fun. And at that point, they're hooked."
Instead of one-time buyers, Fifer says "they become customers for life. And buying the newest-guns with the latest features is just what gun lovers do."
"Ruger," he said with certainty, "can -and will- respond with innovation and products they're going to want. That's why our long-term outlook is very positive-despite the fact that being a public company, I have to come on these calls every few weeks and answer the same questions over and over."
After the hour-long discussion between the CEO of a major industry player and the ever-skeptical market makers and analysts, some things seemed very apparent:
First, companies looking at historical trends and not short-term results tend to come through the bumps in the marketplace in good shape.
Ruger, for instance, acknowledgesCalifornia as a dying marketplace for semi-automatic pistols. According to Fifer, they've essentially written off $10 million in sales there. Microstamping requirements, he said, "make it impossible to do business there. It just doesn't work."
Rather than waste time and energy there, Ruger's plan is drive-and meet- demand where guns -and gun owners- are welcomed, not demonized.
And it seems business analysts, despite their focus on the gun industry, don't seem to have much of a handle on the demographic makeup of today's gun buyers.
Of course, with most of the financial world huddled in and around anti-gun hotspots (Los Angeles, Chicago and New York City), it's tough for them to get even-handed reporting or information on the gun industry. And from personal experience I know many covering the industry aren't pro-gun; they're only pro-profit.
As always, we'll keep you posted -which reminds me - this is "Spring forward- fall back" weekend- yep Daylight Savings Time as of 2a.m. Sunday morning.
Halloween night..a time for fun, and caution. Be careful out there.
When you show up an hour early Sunday morning instead of sleeping in, don't say we didn't remind you.
And finally, as we go get ready for ghosts, goblins and ghouls to descend on our front porches this evening, a word of caution: not every zombie at your door tonight has evil intent. Be safe, be careful and have a great weekend.