FEATURE

Ruger Offers Industry Insight

Yesterday's 2014 earnings call with Ruger CEO Mike Fifer was another of those revealing glimpses into why some public company CEOs dread question and answer sessions with stock market analysts. As an observer to the process, the frequent accounting and Wall Street jargon will remind you why you didn't go for an MBA.

But the analysts' sometimes pointed questions make you appreciative of the broad knowledge base any CEO for a public company must have - and call up on demand. It's not enough to know the industry, their company and its products. They have to be able to tactfully deal with analysts whose recommendations can impact their company's access to investment capital.

And it will help you appreciate there's a lot of studying of the industry, consumer trends and other variables that go into the manufacturing process -before the manufacturing process goes into gear.

In a nutshell, Ruger's 2014 performance didn't match 2013.

That's not saying the company didn't make money, just that Ruger is the latest company to affirm what everyone in the industry has known for some time: 2013 was one of those boom years that skews all your projections and forward planning- if you don't put it into historical perspective.

Put into perspective, 2013 isn't a fair comparison to 2014, but 2012 is. And by those standards, Ruger -and the industry- appears to be doing fine.

But that "fine" assessment wasn't without its bumps for Ruger. Fifer candidly stated that some of the shortfalls in sales in Q3 and Q4 '14 were the result in delays in new product introductions.

"So," an analyst asked, "are you looking for more research engineers?" After thinking a few seconds, Fifer responded that while Ruger had "a couple of open slots" he might be looking for Project Managers before engineers.

Reasoning? "Brilliant engineers might not be up on what he needs in his planning," Fifer mused, "he may need springs and discover that the spring supplier needs four months lead time. A Project Manager considers those things throughout the process and prepares accordingly."

The conference call also reminded me that while distributor shows are critical to the manufacturing side of the industry, they're not exactly the direct indicator of what gun makers can expect to sell in 2015. That's because the orders written at distributor shows are from retailers. Those orders don't directly translate to orders to manufacturing because of the distributors' own inventory. A distributor sitting on excess inventory is going to deplete that inventory prior to reordering. For a company like Ruger with broad and deep product lines, that's not such a frightening proposition. For some single-line companies, like small ones that only make modern sporting rifles, that may trigger a lot of incentive programs in order to encourage distributors to keep their stocks higher.

It bears mentioning that Ruger took a big chance several years ago when it fundamentally changed the its products were brought to market. Rather than announce a product with an availability date somewhere in the future, Ruger produced thousands of new products before they announced them. When they were announced, the actual products were available, not only to look at, but to purchase.

As Fifer explained, "that process ties up some of your capital and you have some of it just laying around- that happened to us in Q4 as we were getting ready to announce our new products." That, in turn, impacts your balance sheets- although the forward looking process he's championed has worked well to this point.

Ammunition supplies were also discussed, with Fifer telling listeners that while a major ammo manufacturer (ATK) and powder maker (unnamed) had invested millions in meeting the added demand for rimfire ammunition, there was a wild card in the supply-and-demand equation: the BATFE.

The ATF's decision to go after heretofore legal ball ammunition was characterized as "a bigger issue than sales" -heading the industry toward a "slippery slope" where we didn't need to go.

Analysts also have a way of opening topics that seem pure business, but also have a broader implication. Yesterday, one question concerned Ruger's "mini foundries". With two "minis" up and running, the question was "are you at the point you're considering closing your main foundry in Newport?"

If you're in the Newport business development business, that's a red flag. If you're an analyst, it's just another business process hypothetical. If you're the CEO of the company, it's a question that has more than one answer. "Interesting question," Fifer responded, "we're at the point we're considering what to do- do we expand the load on the mini-foundries and idle the main one, or do we invest in a third mini foundry- it's a question we're still looking at."

One unexpected note in the call, however, concerned Ruger's Red Label shotgun line. Revived in 2013, Fifer told callers that while he wasn't certain if it had officially been announced or not, the company had removed the Red Label from the 2015 catalog and the company website. "We'd hoped we could get it to a favorable point," he said, "but we didn't and we have discontinued the Red Label."

Like I said, you can learn a lot on an analyst call. And as always, we'll keep you posted.

--Jim Shepherd