The firearms market has not reached bottom yet, as firearms manufacturer American Outdoor Brands (NASDAQ:AOBC) recently closed out another "challenging" year by dampening expectations of a rebound.

The Smith & Wesson brand owner reported that total sales tumbled 33% in fiscal 2018 while firearms revenue fell sharply, down 42% from the year-ago period. Firearms segment sales had been up 18.5% in the prior fiscal year.

Male shooting handgun at paper target

American Outdoor Brands doesn't see sales of its Smith & Wesson brand improving anytime soon. Image source: Getty Images.

Buyer preferences shift

The primary reason for the decline, aside from the continued market softness that began after the presidential election in 2016, is that buyer preferences have switched to long guns from handguns. Adjusted data from the National Instant Criminal Background Check System (NICS) show that while background checks for long guns were up 7.3% in the fourth quarter, checks on handgun purchasers declined 4.1%. Handguns comprise 73% of American Outdoor Brands' firearms sales.

CEO James Debney told analysts on the earnings conference call: "... [I]t can take up to two years for that correction to take place so certainly still some market contraction we see on the horizon."

The National Shooting Sports Foundation provides the adjusted NICS data, using the raw FBI figures on the total of background checks performed each month to weed out anomalous numbers, like states that run checks on existing concealed-carry permit holders to see if they're still eligible to carry. The adjusted numbers give a more accurate depiction of consumer demand for firearms, and gunmakers like American Outdoor Brands use them as a yardstick for their own planning.

Adjusted NICS background checks by month

Data source: National Shooting Sports Foundation. Chart by author.

Weaker days ahead

Although March saw a surge in checks (up 11% year over year), that was likely in response to the Parkland school shooting in Florida and a return to the sort of "fear-based buying" -- as Debney mentioned in his conference call -- that has been largely absent from the gun market recently.

Overall, checks through May were down 1.6% compared to last year and have been falling more sharply as of late. Checks were off 4% in April, followed by an 8.5% drop in May. And now we're heading into the summer, which tends to be a slow period for the industry. So it's not surprising that American Outdoor Brands expects the current fiscal year to be another weak one.

Additionally, many gunmakers are financially weak. Remington Outdoor only recently emerged from bankruptcy, and industry peer Vista Outdoor has decided that it wants to exit the firearms business (though it will continue making ammunition).

Discounted performance

As the industry slump took shape, gunmakers engaged in unusually heavy discounting to reduce their own excess inventory. Though that has continued into 2018, American Outdoor Brands says it is going to be tackling the market differently this time around. Instead of discounting its firearms to maintain and increase market share, it is going to be more strategic and only offer promotions that will help it maintain its leadership position.

The gunmaker says it is still planning to take share from other gunmakers, but through innovation with new products, not discounts. New product revenue accounted for 29% of American Outdoor Brands' total firearms sales in fiscal 2018, and the company promises a whole new lineup of innovation for fiscal 2019.

The other key component of the company's business these days is its outdoor products segment, which also includes its electro-optics division that was created following the acquisition of laser sight manufacturer Crimson Trace. Although sales in the division were down in the fourth quarter, if you exclude the optics segment (which typically follows the rise and fall of the firearms unit), sales for the period were actually up about 4%.

Outdoor products now account for over a quarter of American Outdoor Brands' revenue, and the company plans to keep growing this segment, both organically and from acquisitions. Yet firearms still account for the vast majority of sales, so until the market finally bottoms out, growth will be hard to come by. It's going to be at least another year before that happens.