Tariffs are about to become a big problem for American Outdoor Brands, the maker of iconic Smith & Wesson firearms.
The company reported weaker than expected earnings Thursday because of a drop in gun sales. It also warned investors that it will take a $5 million hit to earnings in the second half of the fiscal year due to the impact of tariffs from the escalating US-China trade war.
The tariffs will mostly affect its outdoor products -- hunting and fishing accessories that account for more than a quarter of its sales. Many of those products are made in China, and the company warned it has few alternatives other than to pay the cost of the tariffs when they take effect this year.
"As the tariff situation continues to escalate, opportunities to offset that impact have begun to rapidly diminish," said CEO James Debney in a call with investors Thursday. "Our supply chain in China is relatively sophisticated compared to those available in other low-cost countries, so a rapid change is difficult. In addition, bringing an entirely new manufacturer online takes time, and the duration of the tariff is still very unclear."
The company cut its earnings guidance for the full fiscal year because of the cost of tariffs, even though it maintained its revenue target.
"Without that impact, we believe our earnings per share would have been within our most recent guidance, but tariffs now make that result unlikely," said CFO Jeffrey Buchanan.
The company didn't disclose how much of its firearms are manufactured in China, although it said that business faces the separate problem of softer gun sales across the industry. The company's shipments of handguns fell by 7% in the quarter, and shipments of long guns such as rifles were down 8%. Much of the decline was due to promotions it made at the end of the previous quarter which increased shipments in that period but ate into sales in the most recent period.
Gun sales have been down consistently in the nearly three years since President Donald Trump was elected. The fears of gun enthusiasts that there would be gun control measures enacted have abated since the 2016 election, reducing the demand for guns that were very strong under President Barack Obama.
The lower gun sales and earnings in the quarter, coupled with the reduced earnings guidance for the rest of the year sent shares of American Outdoor Brands down 12% in morning trading on Friday following the report.