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.

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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Fool contributor Rich Smith owns no shares of any company named above. Try any of our Foolish newsletter services free for 30 days. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.