Remington’s Bankruptcy May Be the Tip of the Iceberg

(Bloomberg) -- Firearms companies face declining sales, falling stock prices and tremendous debt. Gunmaker American Outdoor Brands Corp., formerly known as Smith & Wesson, has seen its stock plummet by almost half from 2017. On Monday, Remington Outdoor Co., an iconic, 200-year-old American firearms manufacturer, announced it’s planning to file for bankruptcy.  

With Republicans in control of Washington, there’s little chance of firearm regulation—even in the face of Wednesday’s massacre in Florida. When Barack Obama was president or Democrats controlled Congress, gun sales would generally rise after a mass shooting for fear of more restrictive laws. The gun lobby pushed these worries despite a lack of significant legislative effort by the Obama administration. Now that Donald Trump is in the Oval Office, fear of new gun laws has receded, industry executives have said. And so have sales, hurting both retailers and manufacturers such as Remington.

In December, James Debney, chief executive officer of American Outdoor, said “fear-based” buying of firearms had stopped. According to data collected by the FBI’s National Instant Criminal Background Check System, a barometer for firearms sales, January 2018 was the slowest in gun purchases since 2012. Even on Thursday, after gunmaker stocks rose in premarket trading, shares headed back down by afternoon. (The assault rifle used in the Parkland high school attack was a Smith & Wesson AR-15, police said.)

Following gun stores and manufacturers, the next victim of the industry’s political success could be distributors. Because most are privately owned, earnings data are hard to come by. Still, company debt can offer a glimpse into their financial health. The declining performance of a $140 million loan to distributor United Sporting Cos., for example, suggests there may be a problem. 

United is a private equity-owned holding company whose subsidiaries include Ellett Brothers and Jerry’s Sport Center, two gun distributors that work with more than 30,000 independent retailers across all 50 states (Sturm, Ruger & Co. says 15 percent of its sales are to the two subsidiaries). They distribute hunting and shooting-sports products, including handguns, ammunition, silencers and holsters. In 2016, Jerry’s was named “distributor of the year” by Marlin Firearms, a company owned by Remington.

A $140 million loan extended to United fell to less than half of its face value last year, according to U.S. Securities and Exchange Commission filings by the loan’s holder, the business development company Prospect Capital Corp. 

Since Prospect makes loans to private companies but has issued shares to the public, it’s required to disclose its financials, even when the companies on the hook for the loan are not. In Prospect’s annual report for 2017, the company said a fair value of its loan to United was almost $47 million—about 33 percent of its face value. That was down from 94 percent in its report for the quarter ended March 31, 2017.

Michael Grier Eliasek, a director of Prospect, said in the securities filing that United had been hit by a cyclical slowdown in gun sales, as well as by the bankruptcy of a major customer, sporting goods retailer Gander Mountain. 

United and Prospect didn’t immediately respond to requests for comment.

“When there are elections that go a certain way, there tends to be a slowdown in sales to the firearms sector for the first six or nine months or so, and then there’s a more of a normalization thereafter,” Eliasek said in an August conference call when he was asked about the writedown, which at that time was 59 percent of face value. 

To contact the authors of this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net, Polly Mosendz in New York at pmosendz@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net.

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