Smith & Wesson Jams (In a Bad Way)

I hate to say I told you so … so I won't. But if you found yourself surprised and held up at gunpoint by Smith & Wesson's (Nasdaq: SWHC  ) underwhelming earnings report this week, you really have only yourself to blame. The warning signs were all there as far back as three months ago.

Ready, aim … misfire!
S&W announced fiscal Q2 2011 earnings Wednesday, and the news was predictably bad:

• Sales slipped by 12% from last year's total to $96 million in Q2.
• Following last year's vaunted acquisition of Universal Safety Response, S&W took a $40 million charge to write down the "goodwill" value of its new perimeter security division.
• Oh, and as a result, the company lost $0.62 per share last quarter, compared with the $0.22 it earned the year before.

Lovely
Yeah, I know. Things are not going well in the personal-weapons business lately, with analysts predicting sales declines at not just S&W, but also at TASER (Nasdaq: TASR  ) and Sturm, Ruger (NYSE: RGR  ) . Even the munitions-makers are starting to struggle; analysts predict only low double-digit sales growth at Olin (NYSE: OLN  ) next year, and no growth at Alliant TechSystems (NYSE: ATK  ) !

But how surprising is this, really? Last quarter, S&W warned us that its "firearm order backlog" had dropped by 58% between fiscal Q1 2010 and fiscal Q1 2011; the new perimeter security division, too, saw a significant decline in orders. And although I'd love to be able to tell you that things are getting better, the picture still looks bleak, even though the perimeter-security division showed a slight sequential increase in backlog.          

Pull my finger
Yet like a tunnel-visioned shooter, S&W just keeps pulling the trigger on its gun-making machines. Despite warning that "purchasing of firearms moderated," that "end-market demand" is "diminished," and that "the environment has become increasingly challenging," S&W went ahead and increased its inventories of unsold guns by a good 28% over last year.

So to sum up, gross margins are down, net profits are nonexistent, and sales slipping and bound to get worse. Smith & Wesson's solution: Make more guns that no one wants to buy, and hit up the bank for a doubling of your line of credit to finance this money-losing business.

Yeah. Good luck with that.

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