Smith & Wesson (SWBI)

American firearms manufacturer Smith & Wesson (NASDAQ:SWBI) announced better-than-expected revenue in Q2 CY2025, but sales fell by 3.7% year on year to $85.08 million. Its non-GAAP loss of $0.08 per share was 33.3% above analysts’ consensus estimates.

Company Overview

With a history dating back to 1852, Smith & Wesson (NASDAQ:SWBI) is a firearms manufacturer known for its handguns and rifles.

Leisure products cover a wide range of goods in the consumer discretionary sector. Maintaining a strong brand is key to success, and those who differentiate themselves will enjoy customer loyalty and pricing power while those who don’t may find themselves in precarious positions due to the non-essential nature of their offerings.

Competitors in the firearms market include Sturm, Ruger & Company (NYSE:RGR), Vista Outdoor (NYSE:VSTO), and American Outdoor Brands (NASDAQ:AOUT).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Smith & Wesson struggled to consistently generate demand over the last five years as its sales dropped at a 6.6% annual rate. This wasn’t a great result and suggests it’s a low quality business.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Smith & Wesson’s annualized revenue declines of 3.8% over the last two years suggest its demand continued shrinking.

This quarter, Smith & Wesson’s revenue fell by 3.7% year on year to $85.08 million but beat Wall Street’s estimates by 7.4%.

Looking ahead, sell-side analysts expect revenue to decline by 2% over the next 12 months. While this projection is better than its two-year trend, it’s tough to feel optimistic about a company facing demand difficulties.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Smith & Wesson’s operating margin has been trending down over the last 12 months and averaged 7% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

In Q2, Smith & Wesson generated an operating margin profit margin of negative 3.5%, down 4.7 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Smith & Wesson, its EPS declined by 32.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

In Q2, Smith & Wesson reported adjusted EPS of negative $0.08, down from negative $0.02 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, Smith & Wesson’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.5%, meaning it lit $3.45 of cash on fire for every $100 in revenue.

Smith & Wesson burned through $12.4 million of cash in Q2, equivalent to a negative 14.6% margin. The company’s cash burn slowed from $35.52 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Smith & Wesson hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 20.9%, impressive for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Smith & Wesson’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Smith & Wesson reported $21.18 million of cash and $127.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $63.95 million of EBITDA over the last 12 months, we view Smith & Wesson’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $5.09 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Smith & Wesson beat analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 2.3% to $8.40 immediately following the results.

Updated: November 12, 2025 at 10:08 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Smith & Wesson falls short of our quality standards. To kick things off, its revenue has declined over the last five years. And while its market-beating ROIC suggests it has been a well-managed company historically, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its projected EPS for the next year is lacking.

Smith & Wesson’s P/E ratio based on the next 12 months is 46.8x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $12 on the company (compared to the current share price of $8.67).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.