Cooling gun sales, dampened profit outlook sends owner of Smith & Wesson sharply lower

Key Points
  • American Outdoor Brands falls more than 12 percent after warning about "challenging market conditions."
  • The owner of the Smith & Wesson brand slashed its full fiscal-year guidance due to the weaker consumer outlook for firearms.
  • The company said its fiscal second quarter experienced lower shipments in firearms due to a significant reduction in wholesaler and retailer orders.
An attendee walks through the Smith & Wesson booth at the NRA's annual meeting.

Shares of American Outdoor Brands Corporation fell sharply Friday amid worries that falling firearms sales and weaker guidance are a sign of tougher times ahead for a business that once benefited from sales fed by fears of tighter gun control.

Prior to President Donald Trump's election, the gun industry enjoyed a surge in firearms sales — and AOBC, the owner of the Smith & Wesson brand, was one of the beneficiaries, enjoying several quarters of double-digit percentage growth in firearms sales. Demand was driven prior to the presidential election by concerns that the Republican Trump's Democratic challenger, Hillary Clinton, or then-President Barack Obama would make it tougher for Americans to buy guns.

However, with a pro-gun president now in the White House and Republicans controlling both chambers in Congress there appears to be more support than ever for guns at the federal level. It also follows the House this month passing a bill that allows licensed "concealed carry" gun owners to take their firearms across state lines.

Shares of AOBC hit a 52-week low of $12.46 and were recently down about 12 percent to $13.175 in active trading. More than 8.7 million shares have changed hands, compared with its average daily turnover of about 1.7 million shares. The stock is down 37 percent so far this year.

Wedbush analyst James Hardiman said in a note Friday he's still upbeat on the longer-term trends for the firearms business despite the near-term challenges.

"Longer term, strong underlying trends in concealed carry will help generate solid growth for the industry and in particular AOBC, who has a strong and increasing share of the growing handgun segment," the analyst said.

The Massachusetts-based company said after the close Thursday its total revenue in the fiscal second quarter ended Oct. 31 "faced a challenging comparison to last year, when we believe strong consumer demand was driven by personal safety concerns and pre-election fears of increased firearm legislation."

For the quarter, the company reported non-GAAP EPS of 11 cents per share, better than the 7 cents per share forecast by industry analysts.

Overall, revenue in the latest quarter was $148.4 million, down 36 percent from $233.5 million in the year-ago period.

"Our results for the second quarter were within our guidance range despite challenging market conditions," James Debney, the company's president and CEO said in a release. "Lower shipments in our Firearms business reflected a significant reduction in wholesaler and retailer orders versus the prior year, and were partially offset by higher revenue in our Outdoor Products & Accessories business."

Meantime, the firearms maker's full fiscal year outlook also was lowered, reflecting what it called "challenging market conditions."

"The Street has had a low degree of confidence in consensus numbers for some time, and probably still won't believe the updated (and significantly reduced) estimates until there is some evidence of a bottoming," Wedbush's Hardiman said.

Added the analyst: "We do believe that when this happens that AOBC shares will see significant and sustained improvement, and that the actions communicated by management on Thursday were a first and important step in that direction. While no assurances were understandably given, we believe the updated guidance is significantly more likely to position the company for success in fiscal year 2019 and beyond."

AOBC expects full-year GAAP earnings per share to be in the range of 33 cents to 43 cents, from a previous range between 77 cents and 97 cents per share. It also lowered the full-year, non-GAAP EPS guidance to a range of between 57 and 67 cents per share, and that is well below EPS of $1.10 forecast by analysts, according to Thomson Reuters.

For the remainder of the fiscal year, the CEO said, the company's "focus remains on ensuring that our internal manufacturing resources are aligned with demand. In addition, we intend to introduce several exciting new products, and execute on long-term organic growth initiatives that support our vision of being the leading provider of quality products for the shooting, hunting, and rugged outdoor enthusiast."