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Demand slows for firearms, sending shares of major gunmaker down 5%

A man checks out a model S&W500 handgun at the Smith & Wesson booth during the 2016 National Shooting Sports Foundation's Shooting, Hunting, Outdoor Trade (SHOT) Show at the Sands Expo and Convention Center in Las Vegas, Nevada.
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A man checks out a model S&W500 handgun at the Smith & Wesson booth during the 2016 National Shooting Sports Foundation's Shooting, Hunting, Outdoor Trade (SHOT) Show at the Sands Expo and Convention Center in Las Vegas, Nevada.

Firearms giant American Outdoor Brands, formerly Smith & Wesson Holding, late Thursday reported fiscal third-quarter sales that were slightly weaker than expected and also conceded the gun business has slowed after unusual demand.

"Toward the end of the quarter, consumer firearm purchasing began to cool — a trend that underscores the importance of remaining focused on our strategy to continue growing and balancing our business across the shooting, hunting, and rugged outdoor enthusiast markets," James Debney, American Outdoor Brands' president and CEO, said in a press release.

On the news, American Outdoor's stock fell as much as 5 percent in after-hours trading. The stock is down 23 percent in the past year.

Analysts have been cautioning that there was a possibility of gun sales slowing after the election of President Donald Trump. They indicate that some of the buying prior to the November election was linked in part to fears of gun regulation as well as consumer demand for home protection following several mass shootings.

Indeed, the FBI's National Instant Criminal Background Check System (NICS) data showed big declines after the election. December 2016 NICS checks were down by 17 percent and January 2017 checks slid by 24 percent, which followed double-digit percentage increases in October and November of 2016.

Adjusted NICS background checks during the company's fiscal third quarter ended Jan. 31, 2017, declined by almost 10 percent when compared with the year-ago period. The adjusted NICS data supplied by the National Shooting Sports Foundation is sometimes used by analysts as a proxy for retail gun sales, since it excludes concealed carry weapon permit background checks.

The year-ago quarter's NICS data was boosted by consumer demand for firearms after the December of 2015 terrorist attack in San Bernardino, California.

"This year-over-year NICS decline in the quarter was not entirely unexpected, given the tragic news in the prior year," Debney said on the earnings call late Thursday.

However, the CEO said the company didn't expect to see the 19 percent NICS decline in handguns as compared to long guns, which declined only about 3 percent. He said the decline in handgun-related background checks took place in "mid to late quarter" — with 30 percent in December alone followed by 29 percent in January.

"These declines demonstrated a reversal of the recent trend of handgun NICS outperforming long-gun NICS," he said. "Given that handguns comprise approximately 80 percent of our firearms shipped in Q3, that change consumer purchasing is impactful for us."

Smith & Wesson formally changed its holding company name in January to reflect its diversification beyond firearms and new brands acquired in the outdoor rugged segment. Even with the change, American Outdoor still generated about 85 percent of its sales from firearms in the latest quarter.

Here's how American Outdoor performed in the quarter:

• EPS: 57 cents per diluted share, compared with 55 cents expected by Thomson Reuters analysts' consensus.
• Revenue: $233.5 million, versus $235.8 million expected by Thomson Reuters.

Sales in the quarter were up about 11 percent from the year-ago period. The EPS was up about 2 percent from the year-ago period.

The company also provided guidance for the current fiscal fourth quarter but it was lower than expected, reflecting the slower trends in the consumer firearms business.

Taking into account the softer retail environment, management said it expects net sales in the fiscal fourth quarter of between $200 million and $220 million; that is below the $245.2 million forecast by analysts, according to Thomson Reuters estimates.