Somebody should hire me as a brand consultant. I wouldn’t charge much; I don’t have much to say. Keep the brand as narrow as possible. Focus the entire company’s efforts on realizing and promoting the brand premise, from designing the product to pushing sales to providing customer service. If a new product doesn’t fit you must acquit. If you’re Smith & Wesson, you make revolvers. And . . . that’s it. Smith just about got it right with their semi-automatic pistols. The M&P brand is far enough removed from the S&W brand to establish its own identity. But can it stretch to AR’s? Nope. As good as the rifles are – and they are very good – the branding isn’t strong enough to sustain AR sales, or margins. Don’t take my word for it . . .
Smith & Wesson misfire: Rifle sales drop 50% the headline at fortune.com reveals. That, friends, is a significant drop. Which had a significant impact on S&W’s overall sales, which also dropped. The company’s second-quarter earnings report tells the tale.
Net sales for the second quarter were $108.4 million, a decrease of 22.1% from net sales of $139.3 million for the second quarter last year. The expected decrease was a result of lower consumer demand and competitors’ excess inventory at distributor and retailer locations, which followed an earlier surge period when consumers purchased firearms in anticipation of possible additional restrictive regulations.
Sales of long guns, primarily modern sporting rifles, were most heavily impacted, declining 50.3% compared with the comparable quarter last year, while handgun sales declined 15.0% — a smaller decline because of continued strong sales of small concealed carry polymer pistols and revolvers.
So “continued strong sales of pistols and revolvers” are the only bright spot in this dismal picture, eh? Tight branding wins. Also note: Smith’s report blames the precipitous sales drop on falling demand and competitors‘ excess inventory. That completely glosses over the fact that Smith & Wesson ramped up production — at considerable long-term expense — to capitalize on the post-Newtown sales surge. Which has left Smith with plenty o’ inventory of its own.
The company’s prez boasts that his minions have reduced inventory in Smith’s distribution channel by 18 percent. “We have the lowest inventory in the channel of any major firearm manufacturer.” Yes, well, Fortune reports that “The company’s inventory has continued to rise. At the end of October, it held $99 million in inventory, up from $76 million at the same time a year earlier.” Warehouse much?
“The company also said it plans to offer ‘aggressive promotions’ in coming months to protect market share. It acknowledged that gross margins could take a hit as a result.
Unfortunately, margins are already looking depressed. Gross margin for the quarter was 32.1 percent, the lowest level since the quarter ended in January 2012.
Sadly, I’m hearing echoes of GM’s fall into bankruptcy here. Profits suck so . . . discount the product! Which cheapens the brand (and reduces profit). Which reduces sales. Which causes further inventory build-up. Which leads to discounting and warehousing. Which leads to more discounts. Can you say death spiral? Again, don’t take my word for it. Here’s cnbc.com doing the Cassandra thing.
Smith & Wesson’s worries don’t end [with falling sales]. The company announced in late November it was buying hunting and shooting accessories company Battenfeld Technologies for $130.5 million. As part of the deal, the company will take on an additional $100 million of debt and fund the rest with cash. Adding that to Smith & Wesson’s $175 million in existing debt, the company will have $275 million in debt.
That’s a potential concern because Smith & Wesson has a covenant on its existing bonds requiring that its debt be no more than 3.25 times earnings before interest, taxes, depreciation and amortization (EBITDA). For now, Smith & Wesson might appear comfortably below its leverage limit. Before Thursday’s statement, analysts expected the company to generate $114 million in EBITDA in the year through April. That would suggest a leverage ratio of about 2.4 times, or even lower, assuming some additional earnings from the acquisition.
But if sales and profits continue to fall, leverage could creep higher fast. Indeed, the company had EBITDA of just $68 million in fiscal 2012 before the big surge in gun demand. That would be low enough to violate the debt covenant. A spokesperson for Smith & Wesson told CNBC that the company took its “expected future financial situation and the covenants into account” when it borrowed more money.
All of us in business are all slaves to the brand. If we fail the brand, the brand dies. Sometimes it’s a slow, agonizing death. Sometimes it’s quick and painful. But no amount of fancy financial footwork can save an ailing brand. That requires re-dedication to — and refocusing on — the values that made the brand great in the first place. It’s a long, expensive process. There are no short-cuts.
Note to Smith: if you want more seemingly profound piercing glimpses into the obvious, call my agent.