Smith & Wesson Misses the Bear

"You can't miss the bear, or he's gonna turn around and rip you open like a present from your momma on Christmas morning."
  -- "Silas Botwin," Weeds (Pilot episode)

Wise words, my friends. And words Smith & Wesson (Nasdaq: SWHC  ) management should have taken to heart. Monday, S&W reported fiscal second-quarter earnings and ... well, they missed the bear. I'll leave it to your imagination what their stock price looks like right now.

Their Q2 sales came in about 3% higher than for this quarter, last year, but profits were another matter. They would have been down a mere 86%, but that just wasn't bad enough for S&W. They had to go and make it worse.

You can't miss the bear
Remember how management ballyhooed its January 2007 purchase of Thompson/Center Arms, saying how TCA would secure S&W's place in the $1.1 billion longarms market? As it turns out, that market may not have been worth entering -- or at least, not at the price S&W paid.

As you may recall, S&W paid $102 million to acquire TCA. Monday, S&W wrote down $76.5 million of that investment. In other words, S&W overpaid for TCA by a factor of four. (Way to make Time Warner feel better about its AOL purchase, guys.) And as a result, S&W wound up not earning $0.01 for the quarter, but losing $1.62.

What went wrong
Basically, S&W miscalculated the market. Sales of pistols performed admirably in Q2 with 40% growth, in addition M&P (military & police) tactical rifle sales grew at 308%. Problem was, hunting rifles -- TCA's stock in trade -- dropped 41%. That accounts for the anemic sales, but what about the decline in profits?

According to management, this issue also originates at TCA. Manufacturing lower volumes of hunting rifles hurt efficiency to begin with. Meanwhile, the gun market endures price markdowns, a continuing inventory glut, and consumer preference for lower-priced hardware. These trends may be good news for Wal-Mart (NYSE: WMT  ) , which retails S&W's wares. But for S&W itself, it translated into a five percentage point reduction in gross margin. On the plus side, though, S&W's still grossing more than rival Sturm, Ruger & Co. (NYSE: RGR  ) .

Foolish takeaway
All of which seems to cut against various ideas on how the current environment could help gun sales:

  • A recession helps hunting rifle sales, as more Americans hunt for food in the forest rather than the supermarket.
  • Gun sales accelerated after Barack Obama won the election.

But be patient, Fool. Such wisdom may yet prove prescient. After all, the election was held four days after the close of S&W's second quarter. There's still hope that in Q3, we'll see more of these gun sales we've been promised, for either reason -- or both.

More Foolishness about Smith & Wesson:

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.


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