Fear drives earnings

February 24, 2016 09:00 AM

For a good part of 2012 and 2013, fear by some in the United States that tighter firearm laws were on the horizon helped drive sales for gun manufacturers and retailers. As those fears began to dissipate in 2014, sales of guns and ammunition suffered. In 2015, however, fresh political rhetoric regarding stricter gun laws, prompted by a string of mass shootings throughout the year, boosted the sector once again. 

The outlook for guns remains strong for 2016, partially due to newly proposed executive action. In January, President Barack Obama announced he would use his executive authority to bypass Congress in order to strengthen the enforcement of firearm laws. The president maintained his goal was to reduce gun violence, while still abiding by the Second Amendment. The four pillars of the new proposal are to keep guns out of the hands of the wrong people through an expansion of background checks, facilitate more stringent enforcement of the gun laws already in place, make a $500 million investment to increase access to mental health care and conduct research on new gun safety technologies. Under the latest proposal, anyone who sells guns for a living must register as a firearms dealer and conduct background checks on everyone.

Guns are a big business in the United States. According to the National Shooting Sports Foundation’s Firearms and Ammunition Industry Economic Impact Report 2014, the industry has an economic impact of $43 billion. The number of guns manufactured in the United States has more than doubled since 2008 and quadrupled since 2001. Exports of American made guns also have doubled since 2009. Civilian gun sales have surged since the financial crisis and since President Obama took office, and every time the president mentions tougher gun laws those stocks go up. 

Accelerated sales trends are indicative of the fact that consumer behavior around firearm purchases is driven by geopolitical fears. Mass shootings spur gun sales as people are convinced they need to protect themselves. The resulting gun control conversations following these events then cause consumers to want to buy guns before they are outlawed. Black Friday 2015 was the single biggest gun purchasing day ever. However, the number of households owning firearms is flat or downward trending, suggesting that growth in the industry is coming from existing owners stocking up on more guns rather than new buyers.

One such beneficiary of this trend toward firearms and ammo is Smith & Wesson (SWHC). After posting negative earnings and revenue growth for every quarter of 2014, the company returned to year-over-year growth in 2015, even putting up triple-digit EPS growth in the third quarter (see “Gun talk is good for business”). During that period, the company saw higher sales in both the firearm and accessories divisions, with firearms driven by robust orders for M&P 15 Sport rifles, Thompson/Center Venture bolt-action rifles and M&P Shield polymer pistols. That momentum should carry into 2016, with the FBI processing a record number of applications in 2015. Competitor Sturm, Ruger & Co. (RGR) is just catching up, reporting a decline on the top and bottom-line during the first half of 2015, but recovering in Q3 and Q4. Forward-looking estimates suggest a robust 2016 for the gun manufacturer. 

It’s not only the manufacturers that are having their day in the sun, but the retailers that sell guns. After seeing a slump in hunting rifle sales from 2012 – 2014, sales at Dicks Sporting Goods (DKS) and Cabela (CAB) began to strengthen in 2015. But who is the largest U.S. seller of firearms and ammunition? Well that would be the world’s largest retailer, of course, Wal-Mart. 

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize