- Net Sales Decline: Q2 net sales fell to $124.7 million, down 3.9% YoY.
- EBITDA and Cash Flow: EBITDA was $15 million, with operating cash flow at $27.3 million.
- Inventory Reduction: Inventory dropped $20 million to $183 million, maintaining 8 weeks of supply.
- New Product Contribution: New products accounted for nearly 40% of Q2 sales.
- Q3 Guidance: Sales expected 8–10% higher than Q3 2025, with gross margins improving sequentially and YoY.
Inventory Management and Product Mix
The company ended the quarter with $183 million in inventory, down from $203 million at the end of Q1, indicating a reduction in inventory levels. New products accounted for nearly 40% of sales in the quarter, driving growth in a competitive environment. Handgun unit shipments into the sporting goods channel were down 1.9% versus the market, but after adjusting for channel inventory fluctuations, handgun sell-through at the retail counter was up 7.7%. The company is very positive about Smith & Wesson's performance, citing market share gains and a strong brand, with the CEO stating that the portfolio is doing extremely well, with inventory levels at a healthy eight weeks of supply.
Outlook and Valuation
For the third quarter, the company expects sales to be 8% to 10% over Q3 fiscal 2025 sales, with gross margins expected to increase by a few percentage points both sequentially and year over year. With a current P/E Ratio of 49.13 and an EV/EBITDA of 10.5, the stock appears to be priced for growth. The Dividend Yield is 4.74%, providing some support to the stock price. Analysts estimate next year's revenue growth at -4.0%, which may put pressure on the stock. However, the company's strong brand and market share gains could help it weather a decline in the market.
Balance Sheet and Cash Flow
The company's balance sheet remains strong, with $27.3 million in cash and investments and $90 million in borrowings on its line of credit, which has been reduced by $15 million since the end of Q2. The company expects continued healthy cash generation through the second half of the fiscal year, with an effective tax rate of approximately 28%. The board has authorized a quarterly dividend to be paid to stockholders of record on December 18, with payment to be made on January 2, maintaining the company's commitment to returning capital to shareholders.