Markets & Finance

Smith & Wesson Hits a Bullseye


Guns are a slow-growing market, but the company is finding ways to boost sales by double digits

Smith & Wesson Holding Corp. (SWHC) blew away Wall Street on June 15 with record sales and profits, signs the gun maker's two-year-old turnaround strategy is working.

Sales grew 59.7% in the fourth quarter from a year ago. That included a recent acquisition, Thompson/Center Arms, but even without adding in the rifle maker sales were up 22.3%. Profits were up 41% in fiscal 2007, despite a hit to fourth quarter earnings, which were 11 cents per share, due to charges related to the acquisition.

On June 15, the stock was trading up more than 6% on the news.

Smith & Wesson's strategy is simple but aggressive: Overall, the gun market grows only slightly from year to year. So, Smith & Wesson, armed with a well-known, 155-year-old brand name, is moving into new product lines and renewing old lines that had been neglected (see BusinessWeek, 6/4/07, "Smith & Wesson: A Gunmaker Loaded With Offshoots").

For example, the vast majority of U.S. police departments used to use Smith & Wesson revolvers. This is why "Dirty Harry" carried a Smith & Wesson .44 Magnum. But then new pistol technology came along and officers stopped carrying revolvers. A new pistol from Smith & Wesson is trying to win back cops. The firm says four out of five departments on the market have chosen its product. So far 216 police departments have committed to it, out of a total potential market of 17,000 departments.

New product lines include long guns, a new market for Smith & Wesson that is 80% larger than the handgun market. That's one reason for the acquisition of Thompson/Center Arms, a rifle maker. Smith & Wesson has also developed its own rifles.

"They're being very aggressive expanding their portfolio of offerings," says Rodman & Renshaw analyst Amit Dayal. The purchase of Thompson/Center Arms seems to be working out, he says, noting Smith & Wesson, once mostly confined to making revolvers, now sell all major categories of firearms. He says the fall hunting season will be key to seeing "how these market share gains play out."

Chief executive and president Michael Golden told analysts he's looking for other new product lines where the "Smith & Wesson" name might help win market share. Those include products in law enforcement, security, homeland security and defense, he said.

Dayal says he this move would probably come in the form of more acquisitions.

It's not just new products driving Smith & Wesson profits, execs and analysts say. The firm is also finding operational efficiencies in factories. Gross margins were 32.3% in fiscal 2007, up from 31% in 2006. Also, the firm changed its marketing strategies. It's trying to be more visible with NASCAR sponsorships. And it fired outside, independent sales representatives in favor of hiring its own sales force.

Finally, Smith & Wesson has boosted its presence in Washington, where it's pursuing government contracts. It has won four pistol contracts in the last two years, some for firearms for Afghanistan.

The big prize, however, is a contract to replace the U.S. Defense Department's 9 millimeter pistols with more powerful sidearms. Smith & Wesson says its new .45-caliber pistol is well-positioned to win this huge contract. But it's unclear exactly when the government, probably starting with the Air Force, might make a decision, Dayal says.

Steverman is a reporter for BusinessWeek's Investing channel.

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