Smith & Wesson parent company sees falling sales
American Outdoor Brands to limit ad spending, production, but expects sales growth
Smith & Wesson parent company American Outdoor Brands Corp. plans to lower advertising spending and firearms production to address what’s expected to be at least another year of falling gun sales.
Sales, which peaked just above $900 million in the business year ended in April 2017 fuelled by concerns about tougher gunownership laws, are expected to fall for the third consecutive year.
Absent of “fear-based buying,” Chief Executive James Debney said in a conference call with analysts referring to consumer concerns about tighter gun control policies or personal safety, American Outdoor should return to sales growth next fiscal year.
“It can take up to two years for that correction to take place,” Mr. Debney said during the call. “So certainly still some market contraction we see on the horizon.”
In response, Mr. Debney and Chief Financial Officer Jeffrey D. Buchanan said the company would limit advertising to sustain market share, rather than gain market share, and seek to expand market share through new products alone.
American Outdoor, the largest U.S. gun maker by sales, has been trying to expand beyond the volatile gun and ammunition market. Previously known as Smith & Wesson Holding Corp., the company changed its name in 2017 to reflect its push into the broader outdoorsports market.
Still, firearm product sales ac- counted for about 68.6% of sales in the year ended April 30.
Mr. Debney said he expects continued uncertainty in the sporting-goods channel, which includes firearm sales and accounts for the bulk of the company’s revenue, driven by several factors, including what Mr. Debney called political posturing.
Gun makers and sellers have faced increased investors’ pressure and public scrutiny following a series of high-profile shootings this year, including a school shooting in Parkland, Fla. In March, Sturm, Ruger & Co.’s shareholders voted for the company to detail publicly what it is doing to prevent gun violence. “We are fundamentally looking to understand whether the company has the appropriate policies and controls in place and is sufficiently managing the risks associated with these issues,” BlackRock Inc., American Outdoor’s largest shareholder and one of several major asset managers that have increased pressure on the firearms industry, wrote in a notice posted on its website in March detailing questions that it was asking those companies.
In a letter responding to BlackRock’s questions, Mr. Debney and Barry M. Monheit, the board chairman, said the company supported “comprehensive discussion regarding preventing violence in our communities and we are committed to reviewing all reasonable proposals with an open mind.”
“The solution is not to take a politically motivated action,” Messrs. Debney and Monheit wrote. “We must collectively have the courage to ensure any actions are guided by data, by facts, and by what will actually make us safer — not by what is easy, expedient, or reads well in a headline.”
American Outdoor has since added “actions of social activists” to its list of risk factors as part of its annual 10-K report with the Securities and Exchange Commission.
In the most recent quarter, ended April 30, the Springfield, Mass., company reported a 72% drop in profit to $7.7 million, or 14 cents a share. On an adjusted basis, profit fell to 24 cents a share from 57 cents a share a year earlier.
The results easily beat analysts’ projections.
Meanwhile, net sales fell 25% to $172 million, above the consensus forecast of $165.6 million.
Gross profit margin narrowed to 33.4% from 39.6% a year earlier, which the company largely blamed on the firearms segment and higher promotional costs.
Mr. Buchanan, the company’s finance chief, said this quarter’s gross margin would be “somewhat comparable,” it would drop two to 4 percentage points in the second and third quarters in part tied to seasonal advertising and pick up again in the fourth quarter.
That will weigh on its annual profit, which company executives project at 12 cents to 22 cents a share, or 40 cents to 50 cents a share on an adjusted basis, compared with analysts’ forecast of 34 cents a share, or 59 cents a share as adjusted.
Asked about the discrepancy in gross margins from the time when the company reported similar sales figures, Mr. Buchanan cited lower production of revolvers and similar products that generally carry higher fixed costs.
“We’re looking hard at the manufacturing configuration,” Mr. Debney said.
“So over time, revolvers don’t need to make (a) comeback in terms of consumer demand,” the chief executive said, adding, “we will have mitigated it by just reconfiguring our manufacturing to produce those components that we currently procure in-house.”