Since Colt’s near-default last month, a lot of gun enthusiasts have been suggesting that Colt has an easy way back from the brink — it could just bring back the Python.
We do love us some lustrous blue, silky-smooth double-actions, we firearms enthusiasts.
First, let’s have some high points from one of the good posts making this argument.
I think the way Colt should solve their money woes is by bringing back the Python.
Today the Python’s fetch ridiculous amounts when you can find one for sale. On one forum recently the asking price was over $4k and it sold within a day.
… they could easily ask $700-800+ with an MSRP of $900-1000+. A blued Smith Model 586 6″ has a MSRP of $839 and would retail for around $750. A blued Ruger GP100 6″ has an MSRP $699 and you might be able to get one for $550. It would take several years for Colt to saturate the market with new Pythons to the point people would say I’ll just go get a 586 or a GP100. Both the Smith and the Ruger are terrific firearms, but you cannot find a Colt and I know plenty of wheel gun enthusiasts who would line up to grab a new off-the-line Python for $800+ and that cycle would repeat until all of us left wanting finally had one in our hot little hand.
Please do Read The Whole Thing™ because we edited it heavily, although we think we represented the argument fairly.
Now, we’ll put on our Master’s Hood (it’s totally a thing) and apply some MBA-fu to the situation. First, the facts:
- Colt was in debt $380 million when they defaulted briefly last month. That’s $380,000,000 or… at least 380,000 Pythons if they (a) could sell 380,000 Pythons and (b) could produce them for free and give nothing up to the retail and wholesale trade.
- Uh, that was before their latest loan which kicked the default can down the road, at the cost of more debt, $70 million from Morgan Stanley, some of which is going to pay interest on previous debt, some of which will retire some of the oldest and most urgent debt, and some of which, judging from past experience, will be pocketed by the owners.
- While Colt has not released the numbers for 1985-2004, the entire 50-year production of Pythons, most of which took place when revolvers were the preferred police guns and were far more popular than today, has probably produced under 650,000 Pythons. That’s still quite a lot of guns, and a new Python will compete on the market with those as well as with all the other baubles demanding your Gun of the Month Club money.
- How unlikely is a $900-1000 street price? The MSRP of the Python when it went out of the catalog was $1,150 (presumably 1999). That is $1,639 in today’s dollars. And Colt was losing money on every one. Colt needs products that are profitable, not loss-producing.
- Colt needs not only for each gun to be profitable, but it needs a high profit margin for the company to have any hope at paying down its crushing debt. A lot of precision manufacturing operations have a 10-20% markup. A lot of less ordinary businesses have a 50% gross margin. So when we figure out what it costs to make a Python (we know it would be more than $1,639 without major process changes) we need to plus that up at least another $170 for some profit. We’re now closing in on $2k. Ask yourself — how many $2k handguns do I own? We can answer that question, maybe 2. Collector’s items.
- As price goes up, for a gun as for anything else, the size of the market and therefore the sales volume declines. If cars were free, more people would want Bentleys than a Corollas. But in the real world, C > B in sales volume. This relationship isn’t perfectly linear, but it’s broadly so.
- The principal reason for the high price (and therefore, low sales) of the Python at its end was the great many labor hours that went into one. Colt’s UAW member workers are generally much more expensive per hour than most other gunmakers’ workers, but the Python workers were in a different class entirely.
- The cost driver for the labor hours was the beautiful and unequalled mirror polish that was put on most Pythons. The reason the Python Blue is so beautiful is not the bluing so much as the incredible metal finish underneath it. This required many hours by specially skilled workers on special (and expensive) buffing wheels. Colt actually ran a sort of polishing academy for select workers, back in the day. You’re not going to get that for $900 in 2014. While CNC can cut metal well, and CNC polishing machines do exist, there’s no substiute for the old Polishing School-trained experts who did the old Pythons, and the big, sometimes exotic-material, wheels they used.
- It’s been 10 years since the last Custom Shop Python and 15 since the last production gun. The human expertise that would finish and assemble them is heavily attritted. How many people in your workplace were there in 2004 and 1999?
Finally, there’s an overarching reason that Colt is not going to look to product to save them. Its leaders are not product guys; they’re not gun guys like you are. They are finance guys, hedge fund guys, and they have a very risky and highly leveraged investment (one that has already made them fabulously rich, and about which they do not care, apart from its ability to make them fabulously richer). So their focus has been on a Hail Mary, longshot very-high-payoff end game for Colt, and it continues to be. The possibilities are:
- Going public with an Initial Public Offering (IPO). They lost the window for this which would have been possible in 2012-2013. Now, they would be making the IPO with the burden of all this debt, into a market rocked by media stories (however inaccurate) that the gun industry is dying. An IPO was probably their initial imagined goal when they took the business over in the first place, but now it would fail.
- Finding a private buyer, probably another hedge fund. This is a problem given the financials of the company at the moment. While an IPO is sometimes an instantiation of the Bigger Fool Theory, hedge guys think that they’re never fools.
- Merging. A variety of the above. Hey, maybe Kahr wants a prestige nameplate?
- Continuing to borrow. We were a bit shocked by the terms of the last credit extension because we don’t see how Colt can pay it off. Sooner or later, the music stops. (This is also Bigger Fool Theory in action). And right now, more debt adds more people to the game of musical chairs, without adding chairs. Could this happen for a few more cycles? Possibly.
- Landing a Fat Government Contract. This is clearly something Colt managers have invested most of their time and effort in, but they haven’t even been able to successfully defend the contracts they’ve had. This is one of the principal reasons they’re in the hole; they blew the money that could have been invested in keeping them competitive for these contracts and in improving production efficiency, sluicing it out to the hedge fund guys’ pockets instead. They’re learning what HK, FN, Lockheed Martin, etc. have learned, you need to be close to DC and to your K Street lobbyists to make sure the baksheesh you’re paying to Congress gets you cash back. The headquarters of a lot of defense companies founded in the Midwest, Northeast, and Southern California now cluster around the nation’s wealthiest, and most corrupt, urban area. Finally, on this, being good at government contracts makes a company less and less suited for anything else. Over time, government work drives out your ability to compete in a free market and you become a captive of these contracts (look at Lockheed’s failed attempts to build airliners, or the whole history of Booz Allen). Working for the government is also the Bigger Fool Theory in action, because no one of us is as dumb as all of us, channeled through our grifting and gluttonous elected representatives.
- Banging out bankrupt. Unless some example of the Bigger Fool Theory is executed, this is in Colt’s future. One iron law of finance is that, in the end, creditors that can’t be paid, won’t be paid.
The fact is, the industry brontosaurs of today are sunning themselves on the edge of a tar pit that’s full of the fossils of the terrible lizards of yesterday. While our focus is usually on the guns, not the business, the guns have to make the manufacturer money for him to stay in business. The guns have to sell for enough for there to be something left over after the lights are kept on, the machinery is paid for, the overhead’s handled, and the skilled workers are compensated for their time. Or the lights go off, the machinery is repo’d or auctioned, the overhead goes unpaid, and the workers drive by a dark plant to go to the unemployment office.
Exercise for the reader: imagine you are CEO/CFO of Colt. Design a plan to retire more than a third of a billion in debt. Colt sales are about $50 million a quarter right now, with earnings before interest, taxes, depreciation and
allowances amortization1 of $6M. Not so easy, is it?
1. Thanks to Alan H in the comments for the correction. (Makes all the “MBA-fu” noise look pretty dumb now). Just FYI, the reason EBITDA is important is it represents earnings from your actual business, uninfluenced by accounting write-offs that can make your balance sheet look better but don’t actually represent more dollars earned by your business’s activities.