Smith & Wesson owner American Outdoor Brands (SWBI 6.89%) wasn't shooting out any lights in its fiscal 2019 third quarter, as its laser sight business has been hurt by the protracted downturn in the firearms industry, leading to a writedown of the business and causing a GAAP loss to be reported.
Although actual gun revenues were higher for the period, helped along by a more promotional environment that saw American Outdoor use its popular bundling program to move more product, industry sales remain depressed, and there's no end to the downturn in sight.
An unsurprising surprise downturn
The rug was pulled out from under firearms sales in February, with adjusted National Instant Criminal Background Check System checks plunging 12.8% year over year. Although that's not completely surprising, as gun sales spiked last year in the wake of the Parkland school shooting in Florida, background checks conducted in the month of February are at their lowest levels since 2011.
The depth of the decline is surprising, though, because the numbers rose in January, giving the impression that the worst was over. That doesn't appear to be the case anymore, and American Outdoor Brands is now going up against similarly tough comparables for the next two months.
The gunmaker reported revenues of $162 million, a 2.9% increase over last year's $157.9 million, as gun sales grew 5%, but outdoor products and accessories segment revenues fell 6% from the year-ago period. Sales of actual outdoor gear and goods were 4% higher, but the laser-sight electro-optics business is included in the segment, and it suffered a significant drop-off in sales.
Check out the latest earnings call transcript for America Outdoor Brands.
Electro-optics out of focus
Because the electro-optics segment is closely tied to the firearms industry, it isn't unexpected that revenues tumbled. Adjusted NICS checks for handguns in American Outdoor's fiscal third quarter were down 8%, while long-gun checks were off 7%. The decline in laser sights, scopes, and related gear would be expected.
But the shortfall in sales that it believes will persist caused American Outdoor to restructure the business and fold it into the outdoor products segment as opposed to being a stand-alone business. The gunsmith also wrote off $10.4 million of the $54 million of total goodwill related to the business, or almost 20% of the total, which hit earnings by $0.19 per share.
When American Outdoor acquired Crimson Trace in 2015 and created the electro-optics division, the firearms industry was much different than it is today, with sales surging year after year as threats of greater restrictions on gun ownership seemed imminent. That, of course, changed with the election of President Trump, and the industry has been in a downward spiral since.
Smith & Wesson still locked and loaded
Without any fear-based buying occurring, the industry has been reverting to the mean. Gun sales are steady but at much lower levels.
American Outdoor's own firearms shipments to distributors and retailers rose 10% during the period, which suggests Smith & Wesson's bundling program continues to resonate with customers.
Among the more popular bundles during the third quarter was combining an M&P15 Sport II modern sporting rifle with a rifle case and a mag charger, which loads ammunition into a magazine. Another was its Thompson Center T/C R22 rifle with a rifle sling and a Crimson Trace optic. These proved to be so popular that American Outdoor believes they may have pulled some sales from the fourth quarter into the third. The gunmaker only ships firearms to federally licensed dealers, not end users.
While American Outdoor Brands reported a GAAP loss for the third quarter, which has sent its shares plunging, the gunmaker is still on solid footing operationally, and its diversified business ought to provide avenues of growth even if the firearms industry remains depressed.