Bye-Bye American Pie.

              When I was a kid, my father’s favorite gadget was a hand-held electric drill which he used to make holes in the walls whenever we needed an additional shelf to hold clothing, books, toys, or any other household crap. The drill was made by Remington; that’s right, the same company which made all those rifles and shotguns over the years.

              I don’t know at what point Remington gave up making drills, but I never imagined that the company would ever give up making guns. Guess what? To all intents and purposes, the gun maker founded in 1816 has given up the ghost. Which it looks like may happen now to another iconic gun brand which first started making guns back in 1852.

              Earlier this week, Smith & Wesson announced they were going to dissolve a company formed in 2016 known as American Outdoor Brands (AOBC). This was Smith & Wesson plus a few small companies making gun accessories and other consumer ‘outdoor’ products, but basically it was the Springfield gun maker operating under a different name.  When the bait-and-switch took place in 2016, the company’s stock was selling for $22 a share. Yesterday it closed at $8.36. So much for how Wall Street has reacted to what Jim Dabney, the company President, refers to as the “potential for organic and inorganic growth.”

              Going forward, Smith & Wesson will be a separate company making guns. American Outdoor Brands will focus on building its unique collection of outdoor consumer products with such iconic names as Hooyman and Lockdown.  In case you haven’t heard of these great products, Hooyman makes hand saws used by hunters to build a tree-stand in the woods, Lockdown makes shelving for the interior of gun safes. If you take a look at the brands which comprise the AOBC family, you’ll notice that virtually every product appeals to the same consumers who happen to own guns. Incidentally, when AOBC made its announcement about splitting the two companies, the stock price jumped sky high from $7.90 to $8.46. Now it’s drifting back down to where it belongs.

              What’s really going on here is that the folks who run Smith & Wesson see the handwriting on the wall and the handwriting ain’t good. A big chunk of the company’s revenues come from sales of their AR-15 assault rifles, and following the Supreme Court’s announcement which lets the Sandy Hook lawsuit go forward, at some point this product line may well disappear. The kid who shot himself and five other students yesterday at Saugus High School used a 45-caliber pistol which is the type of weapon on which the entire financial livelihood of S&W and therefore AOBC depends. Think there won’t be a new gun law if Trump and his Senate GOP allies go bye-bye next year? Think again.

              For all the talk about armed, self-defense and how the 2nd-Amendment gives Americans the ‘right’ to own guns, I always thought the gun business was something much more suited to the life I experienced as a kid than the lives that most of us lead now. And while it’s true that as many as 40 percent of American homes contain guns, it’s not as if the number of guns being carried around are even a fraction of the number of people walking around with droids. Last night we were eating dinner in a local restaurant where the dining room contained about 15 tables, and at every table there was at least one person playing around with their phone. How many diners do you figure had guns on their persons? One – me.

              The joke used to be that if you wanted to make a million in the gun business, you had to start with two million.  I’m beginning to think that maybe the joke should go like this: Want to make a million in the gun business? Go into another business. Guns may be as American as apple pie, but many of us are now eating fresh fruit for dessert.

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Smith&Wesson vs. Walmart. Guess Who Wins?

I Last week I promised to cut down on writing columns and already did a column this week, but a story out of Delaware caught my eye today and I just need to respond. The story, in a Delaware news website, is based on an interview with some Delaware residents who represent the gun ‘rights’ gang, and of course are extremely disappointed that Walmart has decided to stop selling handgun and assault-rifle ammunition because, after all, keeping a good supply of self-defense ammo around is just as important as making sure that your house gets clean water from the tap.

The problem for these pro-gun guys, of course, is that maybe they don’t need to get a latte at Starbucks or Panera, but there really isn’t anyone who can afford to boycott Walmart when it comes to buying the things we really need. And this creates something of a dilemma for Gun-nut Nation because the only way they can really express their anger or disappointment when a retailer says ‘no’ to guns, is to say ‘no’ right back and take their business somewhere else.

But the comment that really caught my attention was from Jeff Hague, who is identified as President of the Delaware Sportsman’s Association who said this: “It’s a shame (Walmart) made such a bad business decision based on a political issue.” And then he added this line: “I’m just glad I’m not a stockholder.”

That statement about not wanting to own Walmart stock may not be the statement which is furthest from reality in the gun debate this year, but it’s close. And to show you how desperate Gun-nut Nation has become in their efforts to craft a narrative that will bring them back to even with the other side, what Jeff Hague should do is pretend he owns Walmart stock and has decided to sell it so that he can buy stock in Smith&Wesson, just to show that he will put his money where his mouth is when it comes to guns.

Ready? Three years ago, Walmart stock was selling for roughly $70 bucks a share. Yesterday it closed at $115. Three years ago S&W shares were going for $26 a share, yesterday they closed under $6. And Jeff Hague says he’s ‘glad’ he doesn’t own Walmart stock? Does this guy live on the same planet that I live on?

See you next week.

Want To Make A Million In The Gun Business? Start With Two Million.

              Everyone in Gun-control Nation is exulting over the latest news about how the NRA is in a state of free-fall collapse. But there was another piece of gun news which is far more important in terms of what it says about the future of America’s love affair with guns that gun-control advocates and noisemakers completely missed.

              I am referring to news out of South Carolina that a company named Ellett Bros., has filed for bankruptcy, an event hardly making a ripple in Gun-control Nation, but I can guarantee you was of great importance to the gun industry itself. This is because Ellett’s happens to be, or happens to have been, one of the largest gun wholesalers in the United States, and if you are or were a retail gun dealer, sooner or later you bought something from the sweet ‘thangs’ salesgirls who used to answer the Ellett phones.

              I visited Ellett’s back in 1976. As a certified gun nut, going to Ellett’s was the equivalent of a Muslim making the pilgrimage to Mecca during Holy Week. You could stand at the end of a big room and watch all the women busily taking orders and whispering sweet nothings into their customer’s ears, or you could glimpse inside the warehouse and see thousands of guns stacked up just waiting to be shipped. You might even get an opportunity to shake hands with one of the Ellett family members himself!

              What made the Ellett operation so successful back in the day was that it was the only gun wholesaler whose inventory basically contained not only every, single gun that was being made, but you might also be able to buy parts for old guns that needed to be repaired. For those of my readers who don’t know anything about the gun business, which happens to be most of my readers, always bear in mind that guns don’t wear out. So just about every guy who comes into a gun shop sooner or later needs a new part for an old gun. And who carried all those parts?  Ellett’s, that’s who.

              In addition to an enormous inventory, Ellett’s also pioneered telephone marketing at a time when most of the other gun wholesalers were still relying on catalog sales. This direct-sales approach, along with an annual dealer’s show which drew just about every retailer in the Southeast, made Ellett’s the powerhouse wholesale operation for much of the country east of the Mississippi River, particularly when they acquired another wholesale house, Jerry’s Outdoor Sports, which catered primarily to retailers in the Northeast.

              So what happened to bring about the collapse of Ellett’s at a time when, thanks to Obama, the gun business had enjoyed its best sales years of all time? To begin with, nobody in the gun business believed that Sleazy Don was going to move into the White House in 2017, which meant that Ellett’s, along with everyone else in the distribution chain, loaded up inventory anticipating that Hillary’s election would prolong and even increase the demand for guns which occurred during the Obama ‘regime.’

              The other problem in the gun business is that the distribution system is regulated end-to-end because of licensing requirements, which means you just can’t dump unsold inventory into a job-lot retailer or maybe ship the stuff overseas. The moment that gun owners stop coming into retail stores to buy more guns, and it’s always the same people who keep buying guns again and again, the retail inventory backs up, the wholesale inventory doesn’t ship out and someone gets stuck with the unsold load.

              Not only did Ellett’s bet the wrong way in 2016, but so did everyone else. Another major wholesaler, Accu-Sport, filed Chapter 11 last year, which means that the unsold inventory of two major distributors is available at rock-bottom prices. Which means that if you want to make a million in the gun business, now you have to start not with two million but with three.

When It Comes To Guns, The New York Times Gets It Wrong.

              Now that gun control has become an accepted issue for mainstream concern, as well as a required part of ‘this is what I will do’ spiel for every Democratic Presidential candidate, it figures that our friends at the (failing) New York Times would start ramping up their coverage about guns. This past weekend, the paper ran a major article in the Sunday Magazine section explaining how Remington, one of the iconic names in the gun business, went bust due to the financial machinations of its ownership group, a ‘secretive’ private-equity firm, Cerberus Capital Management.

              I met the owner of Cerberus, Steve Feinberg, at the SHOT show (or maybe it was NRA) back in 2006 (I think) when he was first floating around looking to become a player in guns.  He said that his plan was to purchase multiple gun companies, then consolidate manufacturing in one or two factory sites. When I told him that the problem with thinking of gun companies as investment opportunities was that industry were always very thin, he said this problem could be solved by achieving ‘economies of scale.’

              As it turned out, Feinberg didn’t know much about the gun business, but according to the NYT article, he certainly knew how to make a quick buck. To acquire Remington he formed a holding company with money from the private sector, then getting Remington to borrow money which was used to pay back those investors (a.k.a. Cerberus and other hedge funds) leaving the gun company saddled with debt. The debt obligation couldn’t be sustained when gun sales went south following the end of the Obama regime.

              All well and good except for one little thing. What spelled the end of Remington was not just  the confluence of bad timing between taking on debt and declining sales. What was much more of a problem was how the gun company was already in deep trouble even though, according to the author of this article, Jesse Barron, “sales were strong and the future bright.”  If Barron had taken the trouble to walk into any gun shop and ask the proprietor how Remington products were selling back in 2008, he would have learned that the company’s future was already going down the drain.

              I got into the gun business in the 1960’s when companies like Remington, Winchester and Iver Johnson were name brands. Winchester and IJ were long gone by the time Feinberg came floating around. Remington was still holding on simply because everyone who wanted to go hunting with a bolt-action rifle or a semi-automatic or slide-action shotgun had at least one Remington in their home.

              Notice the phrase ‘go hunting.’ Guess what started happening to all those hunters beginning in the 1980’s? They all began to die off. Which is why gun companies like Ruger, Smith & Wesson and Springfield Armory saw the handwriting on the wall, along with the appearance of the European handgun imports (Beretta, Glock, Sig) and remade themselves as companies whose products were primarily designed for armed, self-defense.

              How did Remington meet the demand for small, concealable self-defense handguns? It came out with a whole line of large, full-metal pistols based on the Colt 1911 design which was never (read: never) considered to be a personal defense gun. When the Remington engineers realized that it was small, lightweight polymer guns that were pushing sales, the product they brought to the market, the R51, didn’t work.  And in the gun business, where everything is word of mouth, if a gun doesn’t work, you might as well close down your shop.

              If The New York Times wants to become an important voice in the burgeoning noise being made by Gun-control Nation, the editors might consider checking the content of their articles with someone who knows something about guns.  On the other hand, since the average NYT reader is probably not a member of Gun-nut Nation, does it really matter whether an op-ed piece aligns with the facts?

The Gun Business Ain’t Gettin’ Any Better. In Fact, It’s Gettin’ Worse.

Once again I have the honor and pleasure of presenting to my reading audience the monthly portrait of the gun business as rendered by the background check data published by the FBI.  Believe it or not, the gun industry is the only consumer product industry whose health and welfare can be understood with reference to government-issued data which doesn’t lie. Because no matter how many guns are floating around, no matter how many gun transfers do or do not require  background checks, unless the gun makers can make and sell more guns, sooner or later it’s bye-bye guns. And since most gun shops try to keep the new-gun inventory as light as possible if only because the damn things cost so much, the overall number of new-gun transfers recorded on the background-check form (ATF4473) really gives a very accurate picture of what’s happening on the factory floors.

             And what’s happening is that the gun industry is in the dumps.  For October, the total number of completed 4473 forms covering gun transfers was 928,474.  A year ago, the October number was 1,056,548, a month-to-month drop of 12 percent.  Since the beginning of the year, handgun transfers have totalled 5,281,038.  Over the same period in the last year of the Obama regime, handgun transfers were 6,492,102. That’s a drop of nearly 20 percent.

The only problem with these numbers is that the 4473 form doesn’t distinguish between the transfer of new and used guns. But we can assume that the breakdown between new and used guns in most gun shops is somewhere around half and half. So if the entire retail gun segment has sold around 2,600,000 new guns this year, there’s a reason why the price of Smith & Wesson stock has dropped from $28 to $14 since 2016.

In 2013, the year following Sandy Hook when Obama tried (but failed) to pass a new gun law, the gun industry produced around 5 million handguns, which was the biggest single production year the industry ever had.  That same year, in rough numbers, the FBI processed 5,750,000 handgun background checks.  In other words, dealers cleaned their shelves.  Now here’s the real number to consider.  The population of the U.S. in 2013 was 316 million (give or take a couple of hundred thousand) the population at mid-2018 is estimated to be 327 million and change.

So here’s the bottom line. So far this year the number of new hand guns that entered the civilian arsenal was somewhere around 795 guns per 100,000 population; in 2013 that same number was 1,012.  In other words, the per-capita purchase of new hand guns since 2013 is down by more than 20 percent.

If you can find another consumer industry that can sustain itself over any period of time when its market drops by 20 percent, give me the name and I’ll short the stock.  What we have here folks, is a consumer industry whose market share is not only slowing down, but isn’t even keeping pace with the size of the potential market itself.  Because if the population of the U.S. goes up roughly 1 percent a year, no consumer industry will survive over the long term if the size of its market doesn’t at least increase by the same 1 percent. This isn’t rocket science, by the way, it’s simple business math.

All these numbers would be slightly less dismal had I looked not just at data on handguns but data covering all guns manufactured and sold. The reason I didn’t bother to break down sales of rifles and shotguns is that the gun industry has all put its product eggs into the handgun basket.  Now you can always pretend that an AR-15 is a personal defense weapon even if it happens to be a long gun. But walking around with a concealed weapon doesn’t mean that you can strap on an AR-15.

The joke in the gun business is that if you want to make a million, start with two million. It may not be a joke.

Want To Make A Million In The Gun Business? Start With Two Million.

Although it’s less than a month before the replacement of that notorious gun-grabbing President with a guy who really understands the need to carry a gun for self-defense, the real question is whether the next four years will be a milestone or a millstone for the gun industry, since gun sales have traditionally been a function of whether or not you can buy a gun. And if there’s a chance you won’t be able to buy a gun, you run out and grab as many as you can. But if there’s no gun ban on the horizon, oh well, need a new set of tires for the car.

trump5            The problem in trying to figure out whether the gun industry will continue strong under (ugh) Trump or begin to slow down is difficult to figure out because it’s next to impossible to get a real fix on exactly how many guns are actually sold.  Or to put it more exactly, how many new guns are sold.  Because remember, a NICS background check is conducted every time a gun goes across a dealer’s counter, and since most gun shops carry a healthy assortment of used guns, many NICS phone calls just mean that a gun already in the civilian arsenal is changing hands. Ditto for many of the guns which go from an auction website to a dealer’s shop, particularly for interstate sales.  Obviously, the civilian gun arsenal increased enormously under Obama – Smith & Wesson stock didn’t jump from $5 to $30 between 2009 and 2016 just because the company makes some nice-looking guns. On the other hand, that same stock has lost 30% in value since November 8th, which says something about the industry’s future prospects under a President named (ugh) Trump.

But if I had a nickel for every time a stock went up or down because market predictions turned out to be incorrect, I also could buy a new set of tires for my Subaru without selling one of my guns.  Remember when gasoline prices went over $2 a gallon back in 2005 and the experts were all predicting a $10 price by the end of the decade?  We’ll have some rough idea about the health of the gun market when Smith & Wesson releases its 10-Q for the quarter ending September, 2017.  But the number of new guns produced and sold each year is not necessarily an accurate measure of whether a pro-gun President like (ugh) Trump will help or hurt gun sales.

The real problem is trying to figure out the size of the potential market; i.e., how many people out there might be interested in buying a gun. Because when all is said and done, the success of any consumer product is based not so much on its replacement rate (consumers who already own the product buying a new one) but on the number of new consumers who decide that a particular product is something they just must have.

What apparently has happened under Obama is that the replacement rate for guns has soared – the same people who started out as gun owners in 2008 just kept buying more and more guns. These folks didn’t need to be educated on why Obama was a threat; as long-time gun owners they always knew that a gun ban might be in the works. And most gun owners had lived through the terrible Clinton gun and magazine bans enacted in 1994.

As for new consumers entering the gun market, I’m not so sure that the slow but steady decline in the percentage of American households with a legal gun will continue under (ugh) Trump, and I’m going to tell you why. Because what this election showed, if nothing else, is that a lot of people bought Trump’s message that government doesn’t work.  Which is exactly the long-time message used by the gun industry to sell self-defense guns. On the other hand, if Trump (ugh) makes government more efficient, do you really need to protect yourself with a gun?

              Wishing Everyone a Healthy and Happy 2017.

 

Want To Make A Million In The Gun Business? Start With Two Million.

If you think I’m kidding about losing your rear end in the gun business, I can tell you that if I had been holding one million shares of S&W stock three weeks ago I would have been worth roughly $30 million bucks and the same pile of shares today would fetch about $8 million less.  Meanwhile, the financial media is abuzz with the idea that the great run-up of gun sales thanks to you-know-who in the White House has finally come to an end. On the other hand, according to FBI-NICS, the number of background checks is at an all-time high. So what’s really going on?

First of all, we need to remember that most of the guns manufactured in the United States come from companies that are still in private hands.  The only publicly-owned companies that provide detailed numbers are Smith & Wesson and Ruger, which together account for roughly 20% of all guns made each year in the US, but because of imports to the US market, their overall share of the gun business is somewhat less.

As for FBI-NICS background checks, these numbers are also not quite what they seem.  The gun industry would like you to believe that NICS checks are continuing to zoom upward, but the report issued by the FBI each month counts every time the telephone rings at the NICS call center in West Virginia, whether it’s for a gun transfer or not.  And in fact, roughly half the background checks each month are for reasons that have nothing to do with gun transfers at all, namely, to check the validity of gun licenses, pawn redemptions, etc.

The reason why several stock analysts downgraded S&W stock was because handgun transfers dropped 13% from February to March, with the decline in long gun transfers also noticeable but not quite as severe. And while the sell-through numbers posted in Ruger’s latest 10K report indicates that products aren’t piling up on anyone’s shelves, the bottom line is that gun sales simply haven’t been all that strong since the post-Sandy Hook gun-control furor died down.

Before I get into the NICS numbers in more detail, first, NICS doesn’t distinguish between new and used guns, which means, to begin with, that using NICS to judge the health of gun-making companies isn’t such a bright idea. Second, since NICS covers transfers, not the number of guns transferred, the monthly numbers for handguns and long guns are certainly undercounted, but nobody knows by how much.  On the other hand, NICS data is a good measure of gun transfer trends, which obviously reflects the health of the industry as a whole.

With that in mind, let’s look at monthly NICS transfers for March and start back in 2005.  Total gun transfers that March were 580,000, which climbed to 675,000 in March, 2008.  The number went to 900,000 in Obama’s first March (2009) and remained right around that figure each March through 2012.  Then we had Sandy Hook and a noisy argument about expanding background checks – the 2013 number was 1.4 million, but in 2014 it slipped down 17% to 1.1 million and remained at that same level the following year.

Here’s the bottom line.  Despite all the hue and cry from Gun Nation about how ‘everyone’ is getting into guns, the NICS numbers have been basically unchanged since the Democrats stopped trying to regulate guns.  And nobody is going to tell me that the 40% increase in NICS directly after Sandy Hook reflected a sudden upswell of interest by new buyers who wanted to purchase guns. So the gun market will continue to drift downward until the Clintons reclaim their love nest at 1600 Pennsylvania Avenue.  Unless the unthinkable happens in November and we elect someone who just ‘loves’ the 2nd Amendment.  In which case you can start off with however much money you want and you’ll still wind up with bupkis when all is said and done.

Who Wins When Harvard University Goes Up Against Ruger? Neither One.

You know the gun business is a serious business when someone writes about it in the Harvard Business Review.  And thanks to my friend Shaun Dakin, I just finished reading an article about the gun business published in the latest issue of HBR whose author, Robert Dolan, is a member of the Harvard Business School faculty.

Actually, the article is basically an update of a business school case study that Dolan published in 2013 which, although Dolan claims makes him someone who has studied the gun industry “in depth from a management perspective,” is actually an analysis of one company, Ruger, whose CEO, Michael Fifer, happens to hold a Harvard MBA degree.

Dolan’s article argues that gun companies should redefine their business practices to go beyond concerns for the bottom line and move from ‘management’ to ‘leadership’ by taking a more active role in making sure that company products are only used in safe and lawful ways.  Rather than just complying with gun laws, Ruger and other companies should take some of their profits and bring ’smart guns’ to market, expand programs that curtail straw sales and more closely monitor gun dealers who let their guns get into the ‘wrong hands.’

Even though Dolan attempts to validate his approach by invoking the legendary Peter Drucker (as if you can publish a Harvard case study without mentioning Drucker) there’s little here that can’t be found in many other calls for more gun industry responsibility, beginning with President Obama and moving on down. The Clinton Administration tried to get the gun industry to adopt all those ideas in 1998, and what they got for their efforts was a boycott of Smith & Wesson and then a law protecting the industry from class-action torts that was signed by George W. Bush in 2005.

To understand how the gun industry views Dolan’s argument for transitioning from management to leadership, you can find a response just below his comment from none other than Larry Keane, who happens to be the Senior Vice President of the NSSF. Keane begins his response by noting that “there is so much wrong in [Dolan’s] piece that it is hard to know where to begin.”  Actually, Dolan’s case study on Ruger contains more errors than his op-ed (including the extraordinary claims that the value of Ruger stock increased by more than ten times between 2008 and 2013), but Keane wants to make sure that everyone understands the basic idea that either you know the truth about the gun business or you don’t; and if you say anything negative about the gun business, you don’t.

Keane argues that policing the gun industry should be done by the police; i.e., law enforcement agencies like the ATF.  It’s a disingenuous argument at best, a wholesale fabrication at worst.  The Tiahart Amendment that severely curtails the ability of law enforcement to track illegal guns was not, as he claims, based on misrepresentation of gun-trace data by GVP advocates; it was nothing more than a successful effort to hamper government’s effort to regulate the gun industry through stricter enforcement of the distribution chain.

On the other hand, Professor Dolan is engaging in his own brand of wishful thinking by assuming that the gun industry is ready, willing or able to regulate itself.  Detroit didn’t begin installing seatbelts until the Federal Government mandated their use; the money spent by the gun industry to lobby against government regulations is a trifle compared to what the tobacco industry spends to stave off more government rules on cigarette sales.  If Dolan wants to write an interesting case study on the gun business, perhaps he should examine how and why the gun business has kept the regulators under control.

The GVP community rightfully takes umbrage at the degree to which the gun business has insulated itself from government mandates or controls, but the industry is just doing what comes naturally – no business owner wants the government to tell him what to do.