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.