Smith & Wesson Under the Gun: Loses $37.3m in Q2

Bloomberg reports that Springfield, MA-based gunmaker Smith & Wesson lost $37.2 million in the second financial quarter. The company racked-up $96.3 million in total net sales in Q2, down $13.4 million or 12.2% from Q2 2010. Drilling down to the trigger-related bits, Smith’s Firearm Division clocked in with net sales of $83.6 million, down $9.8 million or 10.5%, from last year’s Q2 net sales of $93.4 million. As you’d expect, CEO Michael F. Golden downplayed the news . . .

“As overall purchasing of firearms moderated during the quarter compared with the record levels a year ago, total sales came in slightly below our previously issued guidance.” What’s more (or less), “The environment has become increasingly challenging, leading us to the decision to lower our revenue outlook.”

Click here to read the official statement. Meanwhile or alternatively, I’d like to draw your attention to three items.

First, Smith & Wesson sells FAR too many products. ome of the members of Smith’s ever-increasing family of firearms are not that great. Some don’t jibe within the public’s brand expectations. Their existence lowers perceived quality (threatening margins), increases consumer confusion and weakens the brand. The BODYGUARD series, in particular, is generally recognized to be two of the worst pistols Smith has ever made, with terrible triggers and serious quality concerns.

The gunmaker’s corporate masters don’t see it. Like pre-C11 GM, like a rat tapping a bar for an endless line of coke, Smith & Wesson is hooked on the thrill of the new. “Overall, new firearm products remain central to our focus,” Golden’s statement states. “We look forward to unveiling some exciting new models and product line extensions next month at the SHOT Show.”

Smith doesn’t need new products. It needs less products. And it needs to sell a small selection of its world famous wheelguns to non-gun owners. To paraphrase Cambell’s soup ads, “It’s amazing what a revolver can do.” A revolver.

Second, like a pre-C11 GM, Smith & Wesson doesn’t underdstand that there’s no such thing as a core brand. There is a brand. And that brand, Smith & Wesson fans, is firearms. Period. The company’s decision to buy a perimeter security company will end in tears, either by tanking (as it shows signs of doing) or distracting the corporate big-wigs from the business of making guns.

We also remain confident in our business strategy to expand beyond firearms, and we are committed to tapping into the long-term potential of the large and expanding perimeter security market. After the close of the quarter, we successfully expanded our revolving line of credit from $60.0 million to $120.0 million.

See the problem? Which mouth gets fed? And what happens to the passion that informs the Smith brand as factions within the company fight for resources?

Speaking of which, Smith is spending $9m+ to “relocate” Thompson/Center Arms from Rochester, New Hampshire to Springfield, Massachusetts. This for “increased operational efficiencies through the optimization of the company’s manufacturing footprint and increased synergies generated in fixed, marketing, and administrative costs.”

Translation: Thompson/Center Arms will now be a Smith & Wesson sub-brand. Whether they know it or not, they’re euthanizing the blackpowder brand’s vibrant corporate culture. Check this from the Thompson website:

Our precision investment castings come from our own casting facility here in Rochester, Thompson Investment Castings. T/C’s dedication to giving shooters and hunters their best product value begins with the T/C employees. More often than not, T/C employees use T/C products when they head into the fields and woods… products they (and you) can rely on, year after year.

How many of those T/C employees are moving to Springfield? What are the odds that Smith corporate drones will let them take a little time off to go huntin’? Anyway, thing three:

Total company operating expenses, including the $39.5 million expense related to the non-cash USR asset impairment [re: the perimeter security company] and the $3.3 million of expenses related to DOJ and SEC matters, totaled $65.1 million, or 67.6% of sales, for the second quarter of fiscal 2011 versus operating expenses of $23.4 million, or 21.4% of sales, for the comparable quarter last year.

Never mind the write-off, we learn that the DOJ and SEC case against Smith & Wesson for violating the Foreign Corrupt Practices Act (FCPA) lingers. Click here for the gov’s investigation. To refresh your memory on the potential fallout in Springfield, here’s the key excerpt from S&W’s last annual report:

If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business, results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by investors, customers, and others.

Never mind outside perception. The damage to Smith & Wesson internally could be enormous. Remember: culture eats strategy for lunch. If a corporate culture fails, its strategies are doomed. Hey, whatever happened to that nice little revolver company?