A bad dream for U.S. firearms producers has become reality: The fear-based motivation for gun purchases has evaporated and is being replaced by bargain hunting.
A price war has broken out across the gun industry with no end in sight. Sales and profits are dropping. American Outdoor Brands Corp., the maker of Smith & Wesson weapons, slashed its annual profit target by 45 percent.
"There was some fear-based buying that would take place from time to time. There is no fear-based buying right now," James Debney, chief executive officer of American Outdoor, said in a conference call. Heavy discounting is "the primary driver for a consumer who wants to acquire a firearm."
Blame the new business environment on the White House. President Donald Trump is a self-avowed champion of gun owners and the right to bear arms. Weapons sales often jumped after mass shootings during President Barack Obama's administration, as some customers anticipated that lawmakers would respond with tougher gun-control measures.
Gunmakers aren't reducing production enough to meet lower demand, and inventories at independent dealers is high, Debney said. He cited competitors offering rebates of $150 on sport rifles, a level of discounting he called unsustainable.
"We have to defend our position and weather the storm -- ultimately until there's a better balance between those production rates and the consumer demand," he said after the close of regular trading Thursday. It's unclear how long the discounting will continue, he said.
American Outdoor's stock plunged 9.5 percent to $13.51 per share on Friday in New York. The stock dropped 29 percent this year through Thursday, while the S&P 500 index climbed 18 percent. Rival Sturm Ruger & Co. declined 7.9 percent to $51.45.
American Outdoor slashed its earnings target for the fiscal year through April to a range of 57 cents to 67 cents a share from $1.04 to $1.24, citing the need for price cuts to maintain market share. The Springfield, Mass.-based maker of the M&P Shield 9 mm handgun cut its sales goal to $670 million to $675 million. It previously forecast $700 million to $740 million.
"We believe the industry environment will remain difficult for several more months, if not longer," Chris Krueger, an analyst with Lake Street Capital Markets, said.
A record number of background checks, a proxy for gun purchases, during Black Friday had sparked investor hopes that gun demand had hit bottom. But that holiday buying was merely a sign that consumers were waiting for steep bargains, Debney said. Activity in the National Instant Criminal Background Check system dropped 12 percent in November from a year earlier.
The industry eventually will match production with gun demand, and the large discounts will diminish, Debney said. Consumers are still driven to buy weapons on concerns over their personal safety, he said. The big unknown: What is the long-term level of demand under an administration that doesn't spark concern over possible firearm regulation.
"Where do we settle out in terms of the size of the market?" Debney said. "We just don't know."
Business on 12/09/2017