The Gun Business Is Bouncing Back From a Long Trump Slump

(Bloomberg) -- The American gun industry’s two-year “Trump slump” might finally be over.

Federal background-check data released Thursday indicated stronger-than-expected retail activity in August, a positive indicator that follows closely behind Smith & Wesson’s impressive earnings last week. American Outdoor Brands Corp, the parent company of Smith & Wesson, jumped by more than 3 percent in afternoon trading on Thursday before closing up one percent; Sturm, Ruger & Co. also closed up more than one percent.

The number of checks undertaken by National Instant Background Check System, which is overseen by the FBI, actually declined 5 percent in August compared with the same month last year. But that drop was smaller than analysts predicted and better than July’s 9 percent drop from a year earlier. The fact that falling background checks, which are used as a proxy for sales, could seem like good news is a sign of just how difficult things have been for gun makers since 2016.

Retailers stocked up on inventory ahead of the last presidential election, predicting Democrat Hillary Clinton would win and champion stronger gun-control measures and leading shoppers to stock up on firearms. That vision didn’t come to fruition thanks to President Donald Trump and a Republican-controlled Congress, leaving gun dealers with overstocked shelves and little need to order more.

Inventory levels have since started to normalize, and Smith & Wesson’s surprising results last week, with revenue up 7.6 percent compared to last year, provided one of the clearest indicators yet that gun buying is finally picking up. The earnings capped a 48 percent rise in American Outdoor’s share price in August.

“We believe the market is going to come back, it's going to return to growth, maybe slower growth than we’ve seen before,” American Outdoor Chief Executive Officer P. James Debney said on the earnings call.

Background checks for long guns—a category that includes popular AR-15-style weapons—fell by more than 11 percent over the last three months. But American Outdoor shipped nearly 38 percent more long guns during that span than the year prior. Modern sporting rifles like the AR-15 tend to have higher profit margins than handguns. Ruger, which announced earnings in early August and saw its shares rise by 20 percent last month, also outperformed the background checks. 

Gun makers aren’t completely free from the risk that backlash will affect sales.

Earlier this year, Ruger’s shareholders voted that the company must prepare a report on the risks of selling firearms. An investor who recently proposed a similar measure for American Outdoor purchased 200 shares, the minimum required for such an action. American Outdoor CEO P. James Debney said the investor was pushing “an anti-firearms agenda designed to harm our company, disrupt the local sale of our products and destroy stockholder value.”

On Thursday, American Outdoor said in a Securities and Exchange Commission filing that it was “extremely disappointed” that Glass Lewis, a proxy advisory firm, recommended the proposal be passed. The proposal, the company added, “will do nothing to make our communities safer.” 

American Outdoor also noted in the regulatory filing that it made a $1.5 million contribution to the National Rifle Association and National Shooting Sports Foundation, two major lobbying groups that support gun rights.

To contact the editor responsible for this story: Aaron Rutkoff at arutkoff@bloomberg.net, Mark Schoifet

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