Is Smith & Wesson's Sporting-Goods Strategy Already a Big Mistake?

By Markets

Smith & Wesson's purchase of accessories manufacturers like laser-sight maker Crimson Trace have been part of its push into shooting sports add-ons, but the transition to diversification hasn't been smooth. Image source: Crimson Trace.

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Firearms demand shows no sign of letting up for Smith & Wesson Holding (NASDAQ: SWHC)-- the FBI reported background checks for gun buyers hit record levels for the 17th straight month -- but that doesn't mean there haven't been a few holes shot in the gunmaker's growth plans. One just might be its goal of becoming a diversified outdoor sporting goods manufacturer.

A sporting chance

Since buying Battenfeld Technologies for $130 million in 2014, Smith & Wesson has sought to develop a presence in sporting goods that wouldn't replace its firearms business but would actually supplement those sales with accessories related to its main business. That was expressed most clearly this summer when it purchased laser-sight makerCrimson Trace for $85 million. A gun buyer could not only purchase a Smith & Wesson handgun, but could trick it out with laser sights, too.

Other acquisitions included knife maker Taylor Brands, which already manufactured knives under Smith & Wesson's important M&P brand. Bringing it in-house ensured the gunslinger would be getting all the benefits of a consumer's purchase and give it a bigger presence in the $60 billion sporting goods industry.

Unfortunately, the transition hasn't been smooth or easy. Although the Battenfeld acquisition has pushed accessories from accounting for just 9% of total revenue to 20%, sales in the division plunged 17% last quarter, which it blamed in large part on a messy transition of its Thompson/Center Accessories business to the new segment. A combination of price hikes and eliminating discounts and promotions hurt sales just as consumers seemed to be saying they just wanted to buy guns and not all the accoutrements that go with them.

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Stocking up on guns

During the fiscal first-quarter earnings conference call with analysts, CEO James Debney said, "There's probably been some impact due to the shift in consumer spending, perhaps over to more firearms, more expensive firearms. Difficult to understand, really hard to quantify, but there is no doubt it seems to be apparent."

Gun buyers are willing to pay up for their firearms, but apparently not on accessories for them. While the price increases hurt sales, it did improve profitability, which was the overall goal of the move. Plus there were destocking initiatives at three key retailers for Smith & Wesson that weighed on the division's results, although first-quarter sales were still above the total seen at those retailers last year.

Yet it's not alone in seeing a drop in related product sales. Privately held Remington Arms, the oldest gunmaker in the U.S., also saw consumer-related product sales tumble last quarter, falling 20% to $16.5 million even as firearms sales rose almost 8%. And of course, there's the precipitous decline that's occurred at outdoor sports retailer Cabela's (NYSE: CAB), a favorite of hunters and firearms enthusiasts, that led to a $5.5 billiontakeover offer by Bass Pro Shops.

Even so, Smith & Wesson near-peer Vista Outdoors (NYSE: VSTO) enjoyed a 3% increase in shooting sports accessories that include products like holsters, reloading equipment, clay targets, and premium gun care products. But it saw better performance in its more general outdoor sports segment, where sales surged 57% year over year.

Still on target for growth

Ultimately, that bodes well for Smith & Wesson. Its Battenfeld subsidiary is a leading manufacturer of just those types of products that Vista sells, so working out the problems with Thompson should open the way for an improved picture overall going forward. Smith & Wesson has restructured itself into two segments -- firearms and outdoor products and accessories -- that will be further split into accessories and electro-optical divisions, the latter of which will house Crimson Trace.

It's not always easy entering new markets, and this quarter was definitely a stumble for Smith & Wesson as it makes the transition. Yet it still appears to be the right move to help smooth out the ebb and flow of gun sales, even if they're white-hot right now. That won't always be the case, and Smith & Wesson, having done the hard work during this boom period, should be on target if and when gun sales start to slow.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.