As if the turnaround Vista Outdoor (NYSE:VSTO) is engineering weren't difficult enough, Walmart's (NYSE:WMT) announcement that it's banning the sale of all handgun ammunition, along with the sale of certain long-gun rounds, will further complicate the recovery of the ammunition and outdoor-gear manufacturer.

Out of the fire, into the frying pan

Vista Outdoor just completed the sale of its Savage Arms and Stevens firearms brands, to focus more fully on ammunition and outdoor recreational products. Gun manufacturing had been only a recent addition to the company before it was spun off from defense contractor Alliant Techsystems (which then merged with Orbital Sciences to form Orbital ATK), so the brands were not seen as core to its operations. With the firearms industry in substantial decline, selling its gun brands was an easy decision -- though because it kept its ammunition business, Vista wasn't abandoning the hunting or shooting-sports markets.

A large pile of bullets

Image source: Getty Images.

But a fall in gun sales still translates to a weak market for ammunition. Vista reported that fiscal first-quarter sales were impacted by the bankruptcy of one of its big distributors, United Sporting (parent of Ellett Brothers), as the market was awash in liquidated merchandise that depressed prices.

Even so, while the industry fell by mid- to high single digits, Vista's own ammo business was down just 1.5% in the quarter. Most of the softness is in the consumer market; law enforcement and military sales keep the business going.

Ammo market weak too

That's not much different from the results achieved by specialty chemicals maker Olin Corp. (NYSE:OLN), which also owns the Winchester brand of ammunition. Sales were down 1% last quarter, but that was primarily due to the consumer market, where revenue fell by $2.3 million, compared to a $1.3 million increase in military and law enforcement sales.

However, unlike Vista Outdoor -- where ammunition accounts for about half of its total revenue, making it a much more strategic part of Vista's operations -- Olin only earns 10% of its revenue from its Winchester segment.

Vista told analysts on its earnings conference call that the ammo business is going to be choppy and would be "challenging" in the second quarter. It saw the back half of the year looking better, though, due to government contract wins at the city and federal levels, along with new product introductions.

While Vista hasn't said anything since Walmart's announcement, investors may find the full year challenging as well.

Walmart cuts off the supply

Walmart's announcement came after two mass shooting incidents at its stores, and then the shootings in Midland and Odessa, Texas. It said that after selling through its current inventory obligations, it would end the sale of all .223 caliber and 5.56 mm ammunition -- some of the most popular rifle rounds on the market -- as well as all handgun ammunition. It will also end sales of handguns themselves in Alaska, which would complete its exit from the handgun market.

The ban could impose a significant hardship on Vista Outdoor. While its outdoor gear undoubtedly makes up a good portion of Vista's sales to Walmart, ammunition likely does too, and the retailer represented 14% of Vista's total revenue in 2018. (It was up to 16% in the first quarter, though presumably that had nothing to do with ammo considering the market's weakness.)

Vista still has important retail outlets, including Bass Pro Shops and its subsidiary Cabela's, Sportsman's Warehouse, and others. But no retailer other than Walmart had accounted for 10% or more of Vista's revenue, and now a good portion of that channel has been walled off. Other retailers are also ending ammo sales: Supermarket giant Kroger ended such sales last year, and while Dick's Sporting Goods still sells some firearms and ammunition, it's thinking of exiting the hunting category at its stores altogether.

Making a tough situation worse

Walmart accounted for about 20% of the ammunition market, but now expects that will drop to between 6% and 9%. That will hurt not only Vista Outdoors and Olin, but also other leading ammunition makers like Remington Arms and Hornady Manufacturing.

The shrinking firearms and ammunition market is going to make Vista Outdoor's recovery more difficult. Its discounted valuation looks earned at this point, and reaching an inflection point could take much longer than investors originally expected.