Smith & Wesson faces a double-barreled threat: Weak weapon sales and leverage.
The gun manufacturer said Thursday night that sales fell 22 percent in the quarter through October because of weaker sales of a variety of firearms. In turn, the company cut its full-year sales target to a range of $504 million to $508 million, down from $530 million to $540 million.
Why the sales swing? After concerns that President Barack Obama or other politicians would impose strict gun controls, many firearms lovers stocked up. Now that those fears have subsided, demand is returning to normal. That has left inventories elevated, prompting gun companies to offer discounts to clear their stocks.
But Smith & Wesson’s worries don’t end there. The company announced in late November it was buying hunting and shooting accessories company Battenfeld Technologies for $130.5 million. As part of the deal, the company will take on an additional $100 million of debt and fund the rest with cash. Adding that to Smith & Wesson’s $175 million in existing debt, the company will have $275 million in debt.
That’s a potential concern because Smith & Wesson has a covenant on its existing bonds requiring that its debt be no more than 3.25 times earnings before interest, taxes, depreciation and amortization (EBITDA). For now, Smith & Wesson might appear comfortably below its leverage limit. Before Thursday’s statement, analysts expected the company to generate $114 million in EBITDA in the year through April. That would suggest a leverage ratio of about 2.4 times, or even lower, assuming some additional earnings from the acquisition.
But if sales and profits continue to fall, leverage could creep higher fast. Indeed, the company had EBITDA of just $68 million in fiscal 2012 before the big surge in gun demand. That would be low enough to violate the debt covenant. A spokesperson for Smith & Wesson told CNBC that the company took its “expected future financial situation and the covenants into account” when it borrowed more money.
There are signs that Smith & Wesson’s profits will remain under pressure. With demand soft, the company’s inventory has continued to rise. At the end of October, it held $99 million in inventory, up from $76 million at the same time a year earlier.
The company also said it plans to offer “aggressive promotions” in coming months to protect market share. It acknowledged that gross margins could take a hit as a result.
I haven’t seen any of those “aggressive promotions” in my area. The S&W revolvers, M&Ps and other guns are the same as they’ve always been. And anything from the performance shop at S&W will be very pricey. I have a E series 1911 and S&W .357 magnum R8 revolver, both from the performance shop, both very nice, but both very expensive.
For some reason S&W feels that they need to expand their product line to include whatever is produced by Battenfeld Technologies rather than either (a) become more competitive with the prices of those they already produce, or (b) move to another location where they don’t have the high cost of union labor.
Since Colt dropped out of eyesight and off of the consumer map by focusing all of their energies on military contracts for the M4 (which has now dried up) and letting their revolver program perish, the reputation is that if you want a good revolver, you buy S&W. My two S&W revolvers are very good. But Ruger has laid the smack down and taunted S&W with its Ruger GP100. I have held this weapon, although not shot it, and it balances nicely and its trigger action is smooth. It will prove to be a worthy competitor to any .357 magnum / .38 Smith wheel gun.
S&W is probably relying on becoming the supplier of choice for the new U.S. military pistol.
For gun manufacturers, no customer rivals the Pentagon for prestige and revenue potential. That’s why, after years of anticipation, firearm makers are mobilizing for the U.S. Army’s imminent competition to replace the Beretta M9 pistol, the American soldier’s standard sidearm since 1985.
The procurement process for several hundred thousand new pistols formally begins in January and is expected to last about two years. Based on more than 15 years of reporting on the gun business, I’d identify the early favorites as a much-improved Smith & Wesson (SWHC), which enjoys a made-in-the-USA marketing edge, and the formidable Glock of Austria.
For a second opinion, I asked longtime industry consultant and former National Rifle Association organizer Richard Feldman for some snap handicapping. “Beretta starts with a 30-year history of supplying the Army, and that counts for something,” said Feldman, now the president of the Independent Firearm Owners Association, an advocacy group based in Rindge, N.H. “S&W, which lost a lot of police and civilian business to Glock in the 1980s and 1990s, has transformed itself into a modern firearm manufacturing enterprise with much better quality than in the past. Glock, barely in existence the last time this contract was up, is undeniably a powerful contender.”
S&W is fielding a ported version of their M&P .45 (if I am not mistaken), and it would suit me just fine if they won the contract. My son Daniel (a SAW gunner) thought his Beretta was a piece of crap and the 9mm an underpowered cartridge. He never used it, and even in combat he avoided actually needing it. I have never liked the boxy design of the Glock or the slant of it’s frame. But oh, my friends at S&W, watch it.
As I have said before, “To S&W, I say again like I have to every gun manufacturer. Don’t even start down the path of relying on government contracts to keep your company solvent. It’s like shooting heroin once. Just say no. Just don’t do it.” It never works out quite like you intend. The Marines want a version of the Colt 1911, Cerakote flat dark earth with a tactical rail, if sold on the open market to the civilian population, worth less than what the Marines are paying for it (it has night sights, a tactical rail and Cerakote finish – my S&W E Series 1911 has Melonite coating, a tactical rail, and Trijicon night sights, and sells for less than what the Colt 1911 sells for to the public). The Army will prove to be finicky and fussy, and the orders won’t stack up to as many as you had bargained for. The phase-in will be slower than you wanted, and the demand that it does place on your production capabilities will change forever your attention, programs and dedication to QA for other customers.
I’ve had my run-ins with S&W before, but I’ve been kind and understanding to a company that – I admit – I really love. But S&W’s commitment to stay in labor union territory and a badly anti-gun state, flirt with law enforcement contracts to the exclusion of custumer rights, and now to chase after military contracts and buy out companies in strange moves that I cannot discern or understand, makes this all very troublesome for me.
It’s probably an exaggeration to say at the present that Smith & Wesson is going to go under. I say this thankfully because I would regret a world without S&W. But it doesn’t speak well of the current state of the company strategy to buy out other manufacturers to expand your line from your core business, to do so while sustaining higher debt, and to continue to ensconce themselves in an anti-gun, pro-union state.
The way to make money is to be a proud craftsman at your work for a competitive price, be loyal to your base, and respect their rights and their choices. Why is this so hard to understand, and why do some U.S. gun manufacturers have so much trouble stepping up to the plate to show themselves worthy of the title?