Wednesday, December 17, 2008

Implications of S&W's Losses

Yesterday's reported losses from industry leader Smith & Wesson, which has been struggling despite the current panic buying market, has sent shock waves through the industry. This from Reuters:
Smith & Wesson posts loss, sees weakness in hunting

Smith & Wesson Holdings Corp (SWHC.O: Quote, Profile, Research, Stock Buzz) posted a quarterly loss on a non-cash accounting charge and reported a plunge in hunting rifle sales that offset handgun growth, sending its shares down as much as 25 percent.

Sales of hunting rifles fell 41 percent in the quarter as cash-strapped consumers cut back on spending and distributors slowed purchases following a sales slump.

"The burden that the hunting business places on the otherwise healthy majority of our business is a significant consideration as we plan for our future," Chief Executive Michael Golden said.

The company has started cost-cutting measures such as extended holiday factory closures, support-function consolidation and job cuts.

Known for its 156-year-old handgun business, Smith & Wesson said in September it had shed about 80 hunting-related rifle production jobs at its facility in Rochester, New Hampshire.

The company's troubles reflect a broader trend as the percentage of Americans who hunt declines, though sales of other guns in the country remain strong. Smith & Wesson said quarterly U.S. revolver sales rose 13 percent on a year ago.

Pistol sales grew 40 percent, driven by demand from U.S. consumers, police forces as well as international sales.
[...]
Smith & Wesson, whose rivals include Ruger and Taurus for revolvers and Glock, Ruger and Springfield Armory for pistols, posted a net loss of $76.2 million, or $1.62 a share, for the second quarter ended Oct. 31. It earned $2.9 million, or 7 cents a share, a year earlier.
If you've been reading this blog, this isn't a big surprise. I have been saying for years that, essentially, the hunting side of our industry has feet of clay, propped up by discretionary spending on hunting accessories and a large segment of the industry with a vested interest in propping up hunting with large infusions of cash.

This from Jim Shepherd on today's SHOOTING WIRE:
For the past few weeks, it may be that we've given a false impression as to how well the firearms industry is really doing. The net of all the numbers is that if you're a company with a strong line of high-capacity pistols and AR-style rifles, you're doing land office business. If you're heavily dependent on hunting, you are hurting.

Some companies, unfortunately, are seeing those languishing hunting sales carve -deeply- into their bottom lines. Take, for instance, Smith & Wesson (NASDAQ:SWHC). The company's Military & Police (M&P) line of AR-style rifles and polymer pistols are facing significant back orders due to the incessant consumer demand for high-capacity pistols and military-style rifles that will likely face a resurrected "Assault Weapons Ban" in 2009.

Despite that solid performance, however, Smith simply couldn't overcome the impact that hunting-centric subsidiary Thompson/Center Arms has had on the overall corporate balance sheet. When Smith & Wesson purchased Thompson/Center Arms in 2007, it looked like a solid acquisition. As a category-leader in hunting that also had a barrel-making facility, it seemed a great fit into the S&W portfolio

Today, smart might better be applied to the stinging negative impact T/C is having on Smith & Wesson's stock price. On Monday, Smith announced the previous quarter turned from a profit to a loss after a write-down taken due to the hunting rifle business. That write-down resulted in a loss of $76.2 million- roughly $1.62 per share in the period ended October 31. Without that "impairment charge" S&W would have shown a profit of around a penny per share.
I'm going to be writing more on this post today — right now I have to walk into a meeting on Series 4, which you'll be seeing Q3 2009, fingers crossed! — but there are major implications for the industry built into this news.

12 comments:

Anonymous said...

I really didn't think at the time S&W did their homework when they bought TC. Yes TC controlled a large portion of the muzzleloader market, but for the most part this market is just people who are upgrading from old muzzleloaders. Especially seeing as how both companies were introducing similar new products at essentially the same time(iBolt and the Icon). TC's management was horrible in the Icon development case as it totally abandoned what essentially was its market niche in centerfires(switch barrels) for a product that is not separated from its competitors and is basically twice as expensive. Why would you not develop a bolt action switch barrel rifle? It would dramatically separate you from the competition and you would likely receive future income from each rifle as buyers bought other barrels for rifles they already owned. That and TC's marketing plan of sponsoring 1001 TV hunting shows is a joke. Off topic but every time I see the TC commercial with Shockey, at the end when he is giving his "serious face" it looks like he is "serious"ly constipated. -CCD

tombogan03884 said...

To answer CCD, you would need interchangeable bolt faces as well as barrels.
Also, T/C ALWAYS stunk at new product development, the semi auto .22 was in devolopment the entire 3 years I worked there the last time and it was a year behind schedule when I started. And you should have seen the fun we had with the Omega.

Anonymous said...

Why not just offer it in the 308 Win based cases then? Also the old SHR/STR 970 looked like a viable design and way around the problem. Why not just buy the rights to sell and manufacture the design in the US, which could have been done for a song? If they were having problems with designing/developing a 22LR that's not exactly a ringing endorsement of the company. Were their engineers the problem or was it management? It's really depressing to see the state of US industry (especially in defense)where the US seems incapable of making things that work for a reasonable cost.
CCD

nj_larry said...

I think you guys are fooling yourselves if you think the "hunting side" or "hunters" are to blame for this poor showing. I see the whole AR and high cap frenzy as as just that, a frenzy. No different than the real estate bubble, the dot.com bubble or tulips in Holland. By June of '09 it will all flatten out.

Guys please wake up. The culture in America has changed and it continues to. With over 300 million people sure guns will continue to be sold. BUT over time it is a downward slide.

I wouldn't invest a dime into this industry OTHER THAN FOR GOV'T CONTRACTS. The companies NEVER split out the M&P stuff from civilian because that is what is keeping them afloat. Good example is what happened to Colt. Let's see if Smith will break out the numbers on the handgun side for M&P. I betcha that it is a hugh chunk. What does that leave you with? Not much. These businesses are much smaller than you think. And in fragile condition.

Anonymous said...

I think a pretty fair amount of hunters decided to forgo the new hunting rifle/shotgun for an AR/AK/Semiauto Pistol this year.

I do not know how many firearms the "Average Joe or Jolene" buys a year. One maybe two at most.

I bet the Cowboy firearms are taking the beating as well.

As a hunter I'm a little sick of the caliber of the week club.

Ratcatcher 55

Dock said...

@NJ_larry, I'm not sure what you're implying, but I would hope that you see this "trend" as something you're willing to take action to reverse. Take a newbie friend shooting, if nothing else...

I wonder how this is going to affect the Outdoor Channel as a whole? 6 days out of the week it's hunt-tastic; only Wednesdays have shooter-related stuff. If HONDA is pulling out of most forms of racing due to slowdowns, I can only imagine that the OC's sponsors are having some serious discussions right now about their future as sponsors.

Michael- I've been listening to your archived podcasts. You were talking some serious smack about other (mercifully, un-named) shows in older episodes... and while I understand getting hopped up one's own efforts, and how rivalries work... I hope you don't intend to do the same in the future, since we really need to stick together for the times ahead, friend.

Anonymous said...

The hunting end of the business has been holding itself up by selling more guns to the hunters left. Hunters today are convinced you need a special turkey gun, an upland gun, a waterfowl gun, and a sporting clays or trap gun. No more buy one shotgun for all uses. The same has happened to a smaller extent with rifles as well.

I agree today's panic buying will eventually subside and if the economy is still in the crapper the AR makers and even Glock will see a big slowdown. They will see a slowdown even if the economy is reviving next year because of all the panic buying that is taking place there will be less demand.

Mike M. said...

I think Michael Bane pegged this one a while back.

The firearms industry is undergoing a shift. For decades, firearms = hunting in the minds of the industry. And they responded with lots of hunting-oriented products.

Over the last twenty years, this has shifted. Hunting has not grown with the population...but the number of people shooting for recreation and self-defense and NOT hunting has grown dramatically.

I think we are looking at a feeding frenzy that will run until whatever move Obama makes either gets signed or defeated. And I feat that he WILL try something...he needs a political distration from the current troubles.

But in the long run, I'd worry a LOT more about ammunition. There is a lot of generic hysteria about lead...and the hoplophobes have realized that they can get lead banned. Which will drive the price of ammunition into the ionosphere, as well as killing boht muzzle loading and air rifle/pistol competition dead as a doornail (there being no good substitutes). More $$ for ammo = fewer shooters. And less political clout.

Anonymous said...

First of all, I agree with the "migration" away from hunting. Without getting into the dynamics as to why that is happening, I think that we will all agree that this is a CULTURAL transition and as such, we will not turn it around soon. It can be slowed at first, then reversed. Recommendation? Take a kid hunting, shooting, and above all, represent our population responsibly! Encourage everyone to take a gun safety course, even if they don't plan to shoot. The education will be worth it and it's the right thing to do, for many reasons.
Now, to address S&W's losses due to sales of "hunting" rifles. What is lost here? "Premire Handgun Manufacturer" and rifles? They went down that rosy path a few times in this old geezers time, and got out each time, for the same reason. As another writer said very well, they had no "diferentiation" in this market. Further, the market was already "saturated"! Even T. C. going into the bolt-rifle market was a risk that proved near-fatal and may prove to be fatal in the end. Again why? Because of all of the reasons Smith' shouldn't have venture there AND they tried to be too many things to too many shooters (Switch-bolt handles, etc.). Was the T. C. .22 auto-loader a success? Around here it wasn't. In fact, there's a marked migration away from autoloaders in our local rimfire competion ( I "hang" with a lot of these guys!), favoring bolt-rifles and single-shotsfor many resons. That all started BEFORE their .22 even came out. Who missed that?
Last, the "black rifle' market is as another writer observed, a "frenzy". It too will die when the new administration bans the manufacture and sale of these guns. Not only will there be losses in sales, but also in the amortization of facilities and tooling.
This is a classic "Marketing 101" mistake.
What can we all do, dramatically accelerate our campaign tho "Shoot Straight and Speak the truth". We need to educate the MSM, our friends, families, our Representatives and Senators and anyone that we can get to listed. Write letters, teach, be "expert witnesses" if you have the credentials. We need to inculcate the public with facts, just as the MSM and politicians have inculcated them with mis-information. That's why "popularopinion" is against us, or at least being craftily used against us.
Life Member

Anonymous said...

Okay! That's it!

I have had enough of this defeatist attitude.

A lot of you guys are already giving up on AR's "because they will be banned."

And/or you are giving up on lead (Pb) because that will be banned too, in your opinion.

Give me a freakin' break people!

I'm sure the anti's browse this blog too and I'm sure they get all giddy when they read the likes of what some of you have written.

Dig your heels in!

Do NOT give up one inch.

NOT ONE INCH!

Take a stand.

If you think something is going to go by the wayside, fine, that's your opinion, but please keep it to yourself.

Methinks that only fans the anti's flames that much more.

Anonymous said...

That godforsaken internal handgun lock thing certainly doesn't push sales upward, does it? Personally, I don't buy internal-lock guns, because I don't want to encourage the manufacturers to release more internal-lock models. If a mfr doesn't offer a model-variant w/o an internal lock, don't buy it!

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