K2s diversification seems to be paying off by balancing the seasonality of the different businesses and compensating for any unseasonable weather-related issues that have been plaguing many other manufacturers. Still, the balance didnt help the bottom line as net income plunged on higher SG&A expenses in some of the acquired brands that more than offset the decent improvement in gross margins.
Excluding about $45.1 million net sales attributed to the acquired Ex Officio, Marmot, Volkl, and Marker businesses since last years Q1, net sales actually dipped 0.8% to $275.2 million.
In the Action Sports segment, paintball sales are also seeing a very difficult retail environment after a glut of inventory flooded the market late last year. Participation is still at an all-time high, and K2 cannot make the stuff fast enough, but the sale of hardgoods is seeing a market-wide decline of 20% to 25%. Management is taking a Darwinian approach, waiting for the weaker vendors to shake-out.
K2 is also seeing continued weakness in in-line skates, but there are apparently some positive signs on the horizon. The precipitous rate of decline is slowing and there may be some growth out of this segment in the near future. The company pointed out that total KTO organic sales would have been up 2.2% when excluding an $8.4 million sales decline in in-line skates in Q1.
The sales increase in the division came entirely from the Volkl/Marker deal and the operating loss for the group expanded 170% to a loss of $12.4 million versus a loss of $4.6 million in Q1 last year.
In the operations side of K2s business, management has plans to consolidate their central offices for Volkl, Marker, and K2. Japan, Canada, and Europe have already been completed and the U.S. offices are just beginning. The full consolidation for the back office operations will be completed within 12 months. K2 has realized more savings on a faster pace than expected through this consolidation. KTO will also be moving production of all lower priced skis to its Chinese facility.
Operating profit for the Apparel/Footwear group, which got most of its revenue growth from the ExO and Marmot acquisitions, increased 80% to about $900k. Skate shoes were up 40% mainly due to Adios success in that market. K2s other new market apparel is showing similar success with both Marmot and Ex Officio posting “record quarters.”
Team Sports was another area that did not perform on-par with last years results, but K2s management feels this is more of a weather-related issue, causing the season to get a late start. Heckman said that January was “very tough” but at this stage in April, the market is continuing to get stronger. KTO also alluded to a shift in the market away from aluminum bats to newer composite technologies.
K2 also appears to be gaining considerable market share in baseball and softball gloves with several new products out of Rawlings and Worth.
Team Sports operating profit was down 19.1% to $8.9 million versus $11.0 million in the year-ago period.
On the positive side K2 is seeing some solid results out of its fishing and marine business, with Shakespeare, Pflueger, and Stearns all showing strong growth. K2s ATV accessory business is also seeing an up-tic in sales.
K2s Marine and Outdoor segment has been operating at a very high level of profitability, with EBIT margins approaching 15%, prompting the company to set an internal goal to bring the other divisions to this level as well. Operating profit for the group rose 4.6% to $16.0 million versus $15.3 million in Q1 last year.
Chairman and CEO Dick Heckman told analysts that the success of these three brands is complicating their acquisition strategy a bit.
“When you look at what a great job Adios doing, and Marmot and ExOfficio, you kind of feel like, gee, we ought to be able to do this ourselves internally. But thats the slow way of doing it to be sure,” said Heckman.
Heckman also stated that he expects to be closing on another acquisition within the next week or so. The opportunity for accretive deals seems to be opening up for K2, after a relatively long period where valuations were artificially inflated.
“Just at the very time you think were asleep, well surprise you,” said Heckman.
>>> Surprisingly, the sharp drop in profits didnt seem to phase the Street as KTO shares stayed positive for the week…
