A woman holds a Smith and Wesson handgun at the National Rifle Association's (NRA) annual meeting, in Indianapolis, Indiana, U.S., April 28, 2019. REUTERS/Bryan Woolston - RC11E0B9D8B0
American Outdoor’s shares are trading 70 per cent below their 2016 peak. © Reuters

As momentum for gun control stalls in Washington, the companies that dominate the US firearms industry are beginning to feel pressure from a different direction: their bottom line.

Earlier this month the second-largest US gunmaker, American Outdoor Brands, announced plans to split itself in two, separating the Smith & Wesson gun unit from its outdoor products business, which sells gear such as knives, rifle scopes, and fishing equipment.

Jeffrey Buchanan, the company’s chief financial officer, conceded on a call with Wall Street analysts that the hazards of doing business as a gunmaker played a role in the move.

“There are many banks that don’t want to work with firearms companies,” he said, adding: “The insurance market has tightened up with regard to firearms.”

Nor is American Outdoor alone; erstwhile rival Vista Outdoors sold its gun business in July, leaving just two listed US gun manufacturers.

But the decision to carve up American Outdoors may be the most striking sign yet of the business pressures facing the industry. American Outdoor’s shares are trading 70 per cent below their 2016 peak.

Line chart of Share price ($) showing American Outdoor Brands

Weeks after 17 high school students were murdered in a 2018 shooting in Parkland, Florida, Citibank announced plans to stop financing companies that sell guns without background checks, sell guns to individuals under 21, or sell high-capacity magazines. Opinion polls show a supermajority of Americans support all three rules, but they are not law.

Similarly, Bank of America does not do business with gunmakers that produce military-style rifles such as the notorious AR-15.

Retailers, too, are cautiously taking action. Walmart announced plans to roll back some gun sales in September, a month after a mass shooting at one of its stores in El Paso, Texas.

Dick’s Sporting Goods has ended sales of assault-style weapons and phased out guns altogether in almost a fifth of its stores. Chief executive Ed Stack told Bloomberg that the decision cost $150m in lost sales last year.

Gun control campaigners hope these business moves will have resonance in Washington. “You begin to reach a more conservative audience if you bring a corporate audience on board,” said Igor Volsky, executive director of Guns Down America.

American Outdoor and Sturm Ruger — America’s other listed gunmaker — are also contending with shareholders pushing for changes on the inside.

Eli Kasargod-Staub, co-founder of shareholder activist group Majority Action, said gunmakers’ “boom-and-bust” exposure to the US electoral cycle — gun sales tend to rise and fall in line with the political fortunes of Democrats — runs against long-term shareholder interest.

They would increase their appeal, he said, with moves “in the broad social interest and long-term investor interest like gun safety technology.”

Line chart of Rolling 12-months, units (mn) showing Firearm background checks in the US

Shareholder resolutions have passed at Ruger and American Outdoor mandating corporate gun safety reports. More forceful resolutions pressing American Outdoor to adopt a human rights policy and opposing three Ruger directors were endorsed by Institutional Shareholder Services, the world’s largest proxy adviser, but failed to pass.

For that, Mr Kasargod-Staub blames BlackRock and Vanguard. Both hold substantial stakes in gunmakers via passive index funds. He said their votes constitute “systematic abdication of responsibility,” adding: “They say ‘we take an engagement first approach’, but engagement has to have a purpose.”

Both companies stressed the value of positive engagement. Vanguard said: “Vanguard anchors engagements and voting outcomes to our focus on creating lasting, long-term value, and we expect to see companies make progress in these areas over time.”

BlackRock agreed: “We have engaged with more companies than any other asset manager over the past 18 months, including the publicly traded civilian firearms companies. Attempting to measure the effectiveness of BlackRock’s investment stewardship efforts based solely on proxy voting, ignores the meaningful outcomes driven by engagement.”

BlackRock offers gun-free ESG index funds, but they have relatively low take-up. BlackRock’s Russell 2000 ETF has $45.6bn in assets, but the gun-free ESG equivalent has only $74.5m.

Mass shootings in the US have become more frequent. Chart showing the days between mass shootings is increasing

History gives reason to question how much gunmakers will reform in response to business headwinds.

Smith & Wesson, American Outdoor’s predecessor, was forced to row back tentative reforms — child safe triggers; fingerprint-unlocked ‘smart guns’; stricter background checks — after a devastating NRA-led backlash and boycott in 2000.

Adam Winkler, a UCLA law professor, said the same threat holds today: “Gunmakers are very vulnerable to customer boycotts. Guns are being purchased by a smaller and smaller percentage of the population — the people who are buying are the most diehard gun collectors and enthusiasts.”

But business as usual is getting more fraught for gunmakers. This month’s Supreme Court decision to allow a lawsuit against rifle-maker Remington has raised the stakes further. The case alleges that Remington’s marketing — full of images of the heroic lone gunman — bears responsibility for the 2012 Sandy Hook shooting in which killed 26 people, including 20 school children.

Remington argued that a 2005 law protects gunmakers from liability for crimes committed with their products.

Though Mr Winkler said the case was “unlikely” to succeed, he emphasised that even exposing business documents could potentially damage Remington and its peers.

When American Outdoor is split, chief executive James Debney will lead the smaller outdoor products business, which has half the revenues of the gunmaking unit.

Mr Kasargod-Staub claims the choice was telling: “If that isn’t . . . a proper analysis of the risk and return profile for the industry, I don’t really know what is.”

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