Crimson Trace

November 2, 2018

Investor Calls Can Go One of Two Ways

Yesterday, Ruger CEO Chris Killoy held their regularly quarterly call with analysts to talk about the company’s Q3 results. Without getting into a bunch of numerology (which was detailed in Ruger’s release yesterday), there’s precious little to complain about if you’re a shareholder. The company’s selling products, making a profit and has no debt and more than $100 million in cash. That’s solid, if unspectacular, performance in any industry. The problem with spectacular- as digital companies should have taught investors by now- is that spectacular is a word that can be equally applied to success or failure.

In a year where the adjust NICS checks indicate a slowdown (NICS checks are down 8 percent over 2017- and approaching 2011/12 levels- pre “panic” levels), Ruger’s NICS numbers are actually up five percent this year.

Granted, the Q3 2018 sales and income numbers were lower than ’17, but Killoy explained to analysts that the company had planned for that eventuality and had adjusted operating expenses and output accordingly.

Consequently, there’s no glut of Ruger products overall -and that helps dealers hold their margins without fear of being undercut by the company trying to move excess product. Since thirty percent of Ruger’s Q3 sales came from new products, there’s a reduced chance of excess product in the pipeline. Again, that’s good news for everyone involved in selling Ruger into the marketplace.

When quizzed on the overall industry’s health, Killoy (without proffering any sort of investment guidance) indicated his personal impressions say the modern sporting rifle manufacturing sector might still be in for some constrictions. More specifically, Killoy was addressing the small manufacturers who turned out 1,000 or fewer guns per year.

“There are fewer of those companies around this year,” Killoy said, some are still battling to stay, but there’s probably still be some shakeout ahead there.”

The challenge these smaller companies face is an inability to wheel to other projects. If you’re a small manufacturer only equipped to crank out AR-style lowers, there’s not much demand, even as a supplemental supplier to larger companies. Larger OEMs (Original Equipment Manufacturers), Killoy said, have already adjusted to pivot to making parts for others.

Another challenge everyone in virtually any manufacturing industry’s facing today is the cost of raw materials. Although Killoy seemed to dismiss most concerns about petroleum-based items, he did say that manufacturers across virtually all industry groups were keeping a watch on steel prices.

And what about the elections next week, analysts asked, are there concerns? While it’s a concern to everyone in the industry, Killoy granted, he was quick to say that Ruger continued to take all variables into account, from the potential for the Democrats possibly taking one or more houses of Congress, to a softening of demand for product accompanied by a rise in the cost of raw goods.

In other words, Ruger’s going to continue to be the company that relies on its own expertise, although it wouldn’t hesitate to look at acquisitions or opportunities in the future. After all, the company’s sitting on significant amounts of ready capital - and carries no debt. “But,” Killoy cautioned the investment types listening, “while we wouldn’t hesitate with the right opportunity, it would have to be at the right price. We aren’t going to go buy something just because we have the money.” In other words, Ruger’s not going to overpay for anything.

Ruger’s call was markedly less contentious than an investor call that Camping World Holdings (NYSE: CWH) CEO Marcus Lemonis held recently.

As background, Lemonis and Camping World acquired Gander Mountain’s assets from bankruptcy in May of last year for $37 million. With the acquisition, Lemonis announced plans to reopen 70 of the big box stores rebranded as Gander Outdoors.

But less than a month later, plans changed. Instead of 70, there were only going to be 57 Gander Outdoors.

Now investors who bought more than $530 million worth of Class A stocks in the combined enterprise are beyond unhappy. So unhappy they’re suing Lemonis and Crestview Partners, the primary equity firm, for what they claim was really a “massive insider selling scheme” rather than a business opportunity.

This suit, we’re told, was precipitated by a remark Lemonis made on his quarterly conference call.

That’s where Lemonis described the results of the integration of Gander/Camping world as a “giant sh** show”.

Shortly after, Camping World Holdings stock dropped from $47 to less than $20/share (yesterday it was trading in the $18.50-$18.75 range- up slightly, but nowhere near the $47 price).

Unfortunately, from what we’ve seen first hand and and been told by others around the country, Lemonis’ comment wasn’t just colorful, it was accurate. Former Gander Mountain and Camping World customers visiting the “new” locations regularly complain to almost anyone who will listen that the new stores are poorly integrated, featuring bad product mixes and even worse customer service.

Not the recipe for success Lemonis had in mind. But he probably never expected shareholders to accuse him of “massive insider trading fraud” by selling them shares in a company he’s subsequently described as “misunderstood”.

In fact, Lemons says the intent was never to get into the big box retail business. The goal, he says, it was a “backdoor entry into Minnesota, Wisconsin, Indiana, Illinois, Pennsylvania, and Texas” locations where RVs will be put into most of the locations. At the end of 2019, Lemonis says CWH will have grown twenty percent, from 130 to as many as 165 dealerships -primarily from the Gander additions.

We’ll see about that, because the investors aren’t happy. And unhappy investors and customers don’t help grow businesses in what is already a hyper-competitive marketplace.

We’ll keep you posted.

—Jim Shepherd