Is Gander Mountain's New Owner Taking Aim at Smith & Wesson and Ruger?

By Rich Duprey Markets Fool.com

On TV, the blunt-talking Marcus Lemonis uses his show "The Profit" to find struggling businesses, take a financial stake in them, and turn them into successful companies once more. He's doing that in the corporate world, too, where his recreational vehicle dealership Camping World (NYSE: CWH) recently won a bankruptcy auction for sporting goods chain Gander Mountain for $390 million, a company whose management practices he characterized as "stupid."

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Rebranding the chain as Gander Outdoors, and planning on running only a relative handful of the 160 or so it acquired, the turnaround of the sporting goods retailer by Lemonis is also taking potshots at the firearms industry that could wing both Smith & Wesson and Sturm, Ruger (NYSE: RGR).

Image source: Gander Mountain.

Not so wide open spaces

It's clear Lemonis wants a smaller Gander Outdoors, and he was critical of the company's previous attempt at becoming "America's Firearms Superstore." During Camping World's recent earnings conference call with analysts, the executive characterized the decision as misguided, saying store managers and customers felt "Gander got really away from its core customer and really bet $100 million on guns and was wrong."

It's hard to disagree with his assessment. Smith & Wesson's parent American Outdoor Brands (NASDAQ: AOBC) says the rugged outdoor recreation market is a $30 billion to $35 billion opportunity, more than twice the size of the $14 billion shooting sports and hunting market. That much bigger and growing pie is what led the firearms maker to change its corporate name and begin making acquisitions in the space.

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It also means Gander Mountain essentially went after a much more volatile and politically charged market that has increasingly operated on a boom and bust cycle, rather than tackle the more stable and opportunistic recreational market, where the Outdoor Industry Association says spending has doubled over the past decade.Bydoing so, it irrevocably hurt its chances for turning around.

Image source: Getty Images.

The gang thatcouldn't shoot straight

Lemonis was also critical of other management decisions, including the real estate it bought, its inventory purchase practices, and more, which is why he says he'd rather have 50 stores with a curated selection of products instead of 170 stores trying to be everything to everyone. The new Gander Outdoors will only have a handful of handguns and shotguns to sell, while fishing gear is going to be greatly expanded. Lemonis believes that's the sort of store customers really want to shop in, and with that decision comes the risk for the gunmakers.

In addition to the obvious reduction in inventory that would occur, Smith & Wesson and Ruger might find other retailers also recalculating their need for a large selection of firearms.

Cabela's (NYSE: CAB), which is in the process of being acquired by Bass Pro Shops, generates nearly half of its $4.1 billion in annual revenue from hunting, shooting sports, and accessories, and the firearms segment was one of those areas primarily responsible for its current financial difficulties.If Bass Pro is successful, it may decide a destination location retailer offering an "experience" isn't as necessary and opt to dramatically decrease its size (as well as its own experience-format stores).

Image source: Cabela's.

Similarly,Dick's Sporting Goods (NYSE: DKS) just reported a tough first quarter and said it would be cutting back on its store expansion plans, as too many bankruptcies have put too much real estate on the market. Earlier, it had said it was dropping a fifth of the labels it carried and would be promoting more in-house brands.No word has come on whether the gun department will be squeezed, but with Gander essentially liquidating its firearms selection at deep discounts, the sporting goods retailer is expecting it to have a negative affect on its own business for the next couple of quarters.

Still a targeted market

Despite the trend toward greater gun acceptance and more gun ownership, the potential for volatility, even in the current period, where the likelihood of gun control legislation is diminished, could cause other retailers to follow Lemonis' lead and reduce their reliance upon firearms in less turbulent markets. While American Outdoor Brands and Sturm, Ruger aren't selling to retailers directly, for the most part, but to federally licensed dealers and distributors, any reduction in the square footage available to sell firearms, or that wouldaffect the number of firearms offered for sale at retail, could end up crimping sales.

Gander Mountain's reversion back to an outdoors recreation retailer that is much smaller in size and has a narrower selection of firearms by itself won't hurt the gunmakers all that much, but they could be in the crosshairs if other retailers follow Lemonis' decision to lower their sights.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Camping World Holdings. The Motley Fool has a disclosure policy.