Gun Sales Go Soft As Economy Improves, Fears Subside

In the past few years, as the U.S. economy faltered, demand for firearms skyrocketed: People worried that high unemployment would lead to an increase in crime. Then, when President Obama was elected, gun rights supporters feared that the new administration would clamp down on their right to bear arms, which lead to another gun sales spike. But both of those fears have eased, and demand for guns and ammunition is weakening.

The FBI's National Instant Criminal Background Check System was used for 1.30 million background checks in March 2010, down from 1.34 million a year earlier, according to the National Shooting Sports Foundation. In 2008, there was an 18% increase, and in the month after Obama's election, background checks skyrocketed by 42%. Obama was even named "Gun Salesman of the Year" by one pundit.

"You had an abnormal spike," says Cai von Ruhmor, an analyst with SG Cowen, adding that demand is returning to normal levels.

Background checks are a statistical proxy for gun sales, though not everyone who goes through the process buys a weapon. People can also buy multiple weapons through one check. The figures were better than some analysts had expected. Nonetheless, gunmakers are also reporting drop-offs in sales, and investors who had enthusiastically bid up the shares of these companies have largely soured on the sector.

Venerable weapons maker Smith & Wesson Holding Corp. (SWHC) saw its firearm products revenue decline by 10.2% in the quarter that ended Jan. 31, when compared to a year earlier. Sales of pistols decreased by 33%. Wall Street remains concerned about the prospects of the Springfield, Mass., company. CEO Mike Golden mentioned during the recent conference call that "cooling consumer demand" remains a challenge. Its shares are down more than 32% this year as analysts expect Smith & Wesson's sales growth to drop to 7% in the April 2011 fiscal year versus 19% in the current one.

Guns Are Still Popular, But Explosive Growth Is Gone For Now

Rival gunmaker Sturm, Ruger and Co. (RGR) has been a Wall Street darling, with its shares rising more than 39% this year, but that gain is not expected to be sustainable. Wall Street analysts are forecasting a 27% drop-off in sales in 2010. Shares in munitions maker Alliant Tech Systems (ATK) have dropped 10% this year, and analysts expect its revenue in the current quarter to be little changed from a year earlier. Revenue also is expected to decline at Freedom Group, the closely held maker of Remington and Bushmaster weapons owned by Cerberus Capital Management, according to IBISWorld.

"Despite the aggressive growth the industry has experienced between 2005 and 2010, growth is expected to moderate over the next five years," writes Nima Samadi, an analyst with IBISWorld, in a recent note to clients. "Over the five years to 2015, revenue is expected to grow at a rate of 3.7% per year as fears surrounding the economy and changes in gun laws subside."

Guns are still plenty popular with some Americans. Indeed, the March gun check figures show a 3.3% decline from 2009, but that's still 24.9% higher than March 2008. Interest in target shooting and hunting is on the rise, indicating that the people who have recently acquired guns are making use of them, according to the National Shooting Sports Foundation. Gun rights advocates recently convinced Starbucks (SBUX) to permit customers to carry their weapons openly, provided that it's legal under local statutes, though gun-control advocates cried foul. Second Amendment issues are going to play a role in the upcoming midterm congressional elections.

Meanwhile, the firearms and munitions industry must adjust, but though its growth will no longer be explosive, it is hardly on the decline.

"We really don't know what the new normal will be, but will be higher than it was in 2008," says Bill Brassard, an NSSF spokesman, in an interview.