These are tough times to be a gun manufacturer. Just ask the people who lead American Outdoor Brands.
Maybe you still know it as Smith & Wesson. The Springfield company had changed its name nearly three years ago to reflect its diversified approach beyond selling pistols and rifles, after an acquisition-fueled expansion into camping, fishing, and other outdoor activities.
So much for that idea.
With the company’s stock down some 40 percent for the year amid slumping sales, chief executive James Debney inevitably faced pressure to make a move. On Wednesday afternoon, he pulled the trigger. The company will split in two. Firearms will go one way, outdoors gear will go the other. Investors seemed to endorse the divorce, sending the stock up 6 percent on Thursday, to close at $8.36 a share.
Smith & Wesson, the nearly $500-million-a-year gun business, will stay in Springfield and be overseen by Mark Smith, currently the head of manufacturing. Debney isn’t sticking around, though. He will decamp for Missouri to oversee the outdoor recreation conglomerate he built under the American Outdoor Brands umbrella, with its $200 million-plus in estimated annual revenue.
So what happened to that earlier diversification strategy? In a word: Parkland. Fatal school shootings seem all-too frequent these days; indeed, the kids in Santa Clarita, Calif., on Thursday became the latest teens to face such a tragedy, one day after the American Outdoors announcement. But the massacre in Parkland, Fla., in early 2018 — where a rifle from Smith & Wesson was used — galvanized a new generation of activists. They set their sights on political leaders, and the gunmakers themselves.
This new reality was only hinted at in American Outdoor Brands’ announcement and subsequent conference call on Thursday. Chairman Barry Monheit referenced changes to the “political climate” as well as “economic, investing and insurance markets” to explain the corporate divorce.
The timing was interesting, to say the least. On Tuesday, the US Supreme Court allowed a gun lawsuit to proceed in Connecticut, a victory for families of Sandy Hook victims who sued rifle maker Remington. A 2005 federal law shields gunmakers in court from these kinds of lawsuits. But there are exceptions; in the Sandy Hook case, the plaintiffs argue Remington used deceptive marketing practices.
Debney’s chief financial officer, Jeff Buchanan, downplayed any connection to the Remington decision after a Wedbush Securities analyst inquired during the conference call on Thursday. Buchanan said the split had been in the works for many months, and the Remington case had nothing to do with it.
Was it a coincidence? Gun control activist John Rosenthal says American Outdoors is simply trying to manage its legal risk. Rosenthal, a Boston-area developer known for his billboard decrying gun violence over the Mass. Pike, said gunmakers once thought they were completely immune from litigation over the deaths caused by their weapons. Not anymore.
Hans Despain, a Nichols College economist who lives near Springfield, is also skeptical that there is no link between the Supreme Court decision and the corporate breakup. Yes, American Outdoors stock is worth less than a third of its peak value in 2016. Despain figures the company had to have been contemplating a dramatic move as a result. Maybe the split was a backup plan: Had the Supremes gone the other way with Remington, Despain says he thinks American Outdoor Brands would be staying together.
That’s not the only advantage to splitting up. George Milne, a marketing professor at UMass Amherst, notes there are consumers who won’t shop at stores that carry guns, or buy from companies that make them, particularly in this school-shooting era. Vista Outdoor, for example, won back REI as a retailer in July after spinning off its gun business in a management buyout.
The Wedbush analyst also asked Debney and Buchanan if they thought the firearms business was holding back the outdoors business. Debney’s response: certainly not.
Instead, Debney said the split is driven in part by “capital allocation,” a fancy phrase for how a company invests its money. Smith & Wesson profits would be returned to shareholders via dividends or used to pay down debt; some of American Outdoor Brands’ capital would go to acquisitions.
Buchanan did briefly acknowledge challenges inherent in running a gun company. Many banks won’t work with firearms companies now, Buchanan said, and the insurance market for that side of the business has “tightened up.”
Perhaps the most telling detail highlighting the differences: Debney’s career choice. The chief executive may have picked the smaller division for his own future, but it’s the one with more potential for growth.