Shares of firearms manufacturers fell earlier this month after the FBI reported data for the final month of 2017. The number of criminal background checks performed on potential gun buyers in December dropped 13% year over year. It was the fourth consecutive month of declines and the ninth month out of the last 11 that they were down.

To put last year's decline in perspective, the drop-off in background checks, which are considered a rough proxy for gun sales, was the worst year-over-year decrease since the FBI began keeping records nearly two decades ago. Yet as gloomy as that all sounds, there remain more than a few silver linings.

Image source: Getty Images.

The gathering storm

American Outdoor Brands (NASDAQ: AOBC), the owner of Smith & Wesson, admits the industry weakness is going to last longer than it anticipated. The company noted that while inventories were lower both internally and at retail for its products due to extensive discounting, inventory across the industry is still high. American Outdoor Brands was cutting its production, but other manufacturers were not. The current promotional environment will remain as companies jockey for market share.

And Sturm, Ruger (NYSE: RGR) shares American Outdoor's concern over inventory levels and discounting. It pointed out in November that over the first three quarters of 2017, it had reduced production by 17% and continued to manage its inventory as the year closed out.

Yet where American Outdoor was ready to jump into the price war and take additional near-term hits to its profitability -- Sturm, Ruger chose not to play that game. That mirrors how the company has operated in the past. Despite elevated promotional activity, Sturm, Ruger was not willing to engage in the wholesale discounting employed by its rivals, a strategy management feels is too short-sighted and detrimental to the business as a whole.

And if you look at others in the industry, the situation is no different. Vista Outdoor (NYSE: VSTO), the owner of Savage Arms and Federal Premium ammunition, reported adjusted earnings before interest, taxes, depreciation, and amortization fell 8% last year, and it forecast net sales in 2018 to decline 12%. Meanwhile, ammo maker Olin (NYSE: OLN) said sales of its Winchester brand were down 20%.

Data source: FBI. Chart by author.

A different take

There is a lot of doom and gloom for the industry right now, but when you look at the background check data, December was still the fourth highest-volume month ever, and 2017 overall was second only to 2016, which increasingly must be seen as an outlier. Pre-election buying and other factors drove the gun market to dizzying heights in 2016. As I've noted before, on a two-year basis, the industry is running fairly even with the long-term trend.