Is This the Good News the Firearms Industry Was Waiting For?

Smith & Wesson owner American Outdoor Brands (SWBI 0.71%) reported earnings recently, and considering the state of the firearms industry, and Sturm, Ruger's (RGR 1.37%) report at the end of October, no one was expecting a great report.

CEO James Debney noted "challenging market conditions" in a press release and a decline from the previous year, "when we believe strong consumer demand was driven by personal safety concerns and pre-election fears of increased firearm legislation."

Yet as glum as things might seem, the FBI's report on background checks on Black Friday could be just the thing that heralds the shot in the arm the gun industry needs.

Image source: Getty Images.

Cheek by jowl at the gun counter

While most of the news for Black Friday sales centered on Amazon.com breaking all kinds of sales records and capturing an estimated half of all online sales, the FBI reported a different kind of record-breaking number: It processed more criminal background check applications of potential gun buyers on that one day than it has on any other single day ever.

To purchase a firearm, a buyer completes a Form 4473 from the Bureau of Alcohol, Tobacco, Firearms and Explosives that contains personal information like name, address, and date of birth, and a series of 14 questions to ascertain whether they are eligible to purchase a firearm, such as whether they've been convicted of a felony, if they are a fugitive from justice, or whether they have been convicted of domestic violence.

The firearms dealer, who must be federally licensed, then contacts the FBI's computerized NICS system (or a state point of contact) and typically within a few minutes a check to match the applicant with persons in the database will be completed. A match will lead to a denial of the purchase.

The FBI said it fielded 203,086 applications on Black Friday, some 9% more than the 185,713 it processed last year, the previous record year. In fact, this is the third year in a row that Black Friday has been the busiest day of the year for background applications, and, according to the agency, the six busiest days on record since it began tracking the data in the late 1990's fall on the traditional start to the Christmas shopping season. Remarkably, all but one fall between Thanksgiving and Christmas.

NICS = National Instant Background Check System.

This year's record was a significant milestone because gun sales have severely lagged behind those of last year, and it's been weighing on the shares of the gun manufacturers. While Ruger stock is actually 2% higher than where it was at the start of the year, American Outdoor Brands is down 35% and Vista Outdoor (VSTO 0.59%) is down 62%. Privately held Remington Outdoor is said to be on the brink of filing for bankruptcy protection.

So the FBI's Black Friday numbers could signal a turning point for the industry. Demand that has lain low all year long suddenly reared its head again and the potential for sales moving on a more or less historical trajectory could be in the industry's future.

Deals too good to pass up

The industry's so-called "Trump slump" following the election of President Donald Trump has produced a firearms inventory glut. Anticipating a different electoral outcome, manufacturers produced and dealers stockpiled a massive arsenal of guns in expectation of the demand they'd see. The upset victory not only for the White House but in Congress as well, caused a tumult in the industry.

So the surge in buying witnessed on Black Friday is certainly going to be helpful in clearing out storerooms and making way for new product, but the oversupply of firearms means there was likely heavy discounting going on to move the product.  If prior experience is any guide, it was done with the assistance of the manufacturers, and that indicates the gunmakers' profits will be taking a hit.

It didn't show up in American Outdoor Brands fiscal second quarter earnings report it just issued because the quarter ended Oct. 31, but it will eventually filter through. And Sturm, Ruger might not be affected since last time it largely avoided doing any discounting, but American Outdoor Brands saw it as an opportunity to take market share, and with its sales down sharply this year, it will probably feel the need to do so again.

Another weak year on the horizon?

The jump in background checks could also indicate sales being pulled forward from 2018.  People who might have been thinking about buying a gun next year could have been moved to make a purchase now since the deals being offered may have been too good to pass up.

But the outcome of this big jump in potential sales is ultimately a good thing for the firearms industry and its return to normalcy. While individual gunmakers are going to see bumps and pitfalls in the quarters ahead, and 2018 isn't likely to start off with a clean slate, as the year progresses, expect the sales situation to level out and return to its steady and inexorable climb higher.