Wal-Mart Paints Bull's-Eye on Itself

Let me preface this column with a disclaimer: "Warning -- Highly Speculative." I'm going to connect two dots, even though the line, in reality, may never be drawn.

That said, here are the dots. Yesterday evening, CBS Marketwatch reported that retailing giant Wal-Mart (NYSE: WMT) has settled a civil lawsuit brought by the California Attorney General's office. The lawsuit alleged that from 2000 through 2003, Wal-Mart violated California State firearms laws on thousands of occasions, by selling rifles and shotguns before the required background checks on the buyers had been completed. The suit further alleged that the retailer failed to perform its own background checks on certain employees involved in Wal-Mart firearms sales.

The story pretty much ends there. The lawsuit is settled, and Wal-Mart gets to walk away with just $4.5 million in penalties already paid, plus another $10 million promised as part of the settlement. That's not even a drop in the $9 billion bucket of profits that Wal-Mart carried home in 2003. Nor will the settlement's restrictions on Wal-Mart's future sale of firearms within the Golden State unduly crimp the retail powerhouse's profits.

So let's move on to dot No. 2. Think back to September, when Bushmaster Firearms settled a lawsuit brought by families of the victims of the Washington snipers. In that case, the plaintiffs based their case on Bushmaster's failure to ensure that retailer Bulls Eye Shooter Supply, which sold the gun used in the attacks, maintained adequate control over its inventory. This was the first case in which a gun manufacturer implicitly acknowledged liability for the criminal acts of one of the end users of its products. (Incidentally, Bulls Eye also settled.) At the time, I suggested the event should strike fear into the hearts of not only manufacturers such as Smith & Wesson (AMEX: SWB) and Sturm, Ruger (NYSE: RGR), but also of gun retailers such as Wal-Mart and Kmart (Nasdaq: KMRT) -- and soon, one supposes, Sears (NYSE: S) as well.

See the connection? In the Bushmaster case, the retailer permitted criminals to gain possession of its guns, and it paid for its mistake. Yesterday, Wal-Mart admitted that it allowed people to take possession of firearms without knowing whether the buyers were criminals.

The dots are plotted. All that's needed now is to find an instance in which a gun sold by Wal-Mart between 2000 and 2003 was, or eventually is, used in a crime. At that point, I'd expect the trial lawyers to start connecting the dots.

For further Foolish writing on the firearms industry, take aim at the following Foolish columns:

• Smith & Wesson Firing Blanks
• Gun Maker Misfires, Hurts Industry  
• Will Ban's Demise Boost Investors?
• Ruger Shoots Low

Fool contributor Rich Smith has no position in any of the companies mentioned in this article.