Reebok International Ltd. reported net income for the second quarter ended June 30, 2005 of $37 million, or 60 cents per diluted share, an earnings per share increase of 71% when compared to net income of $22 million, or 35 cents per diluted share for the second quarter of 2004. The second quarter 2004 results contain a one-time after-tax earnings charge of approximately $7 million or 11 cents per diluted share, resulting from the early redemption of the Company's $250 million 4.25% convertible debentures.
Net sales for the 2005 second quarter were $876 million, an increase of 8% from 2004's second quarter net sales of $814 million. On a constant dollar basis, second quarter sales increased approximately 6% over the prior year's second quarter sales.
For the Reebok Brand, worldwide sales in the 2005 second quarter increased 9% to $740 million compared to 2004's second quarter sales of $681 million. The acquisition of The Hockey Company, effective on June 30, 2004, favorably impacted sales comparisons as did foreign currency exchange rate fluctuations. The Hockey Company sales, which were $48 million in the second quarter of 2005, are included in the reported sales of the Reebok Brand.
In the U.S., sales for the Reebok Brand (including The Hockey Company) increased 6% in the second quarter as compared with 2004's second quarter. Reebok's U.S. footwear sales in the second quarter were $281 million, an increase of 1% when compared with 2004's second quarter U.S. footwear sales of $279 million. Excluding THC, Reebok brand U.S. footwear sales declined 0.9%.
The Company's international sales of Reebok branded products amounted to $350 million in the quarter, an increase of 12% over 2004's second quarter sales. On a constant dollar basis, second quarter international sales, excluding THC, decreased approximately 3% from the prior year's second quarter sales, with a 13% increase in footwear sales more than offset by a 22% drop in apparel sales.
Sales for the Company's other brands; Rockport, The Greg Norman Collection and Ralph Lauren Footwear were $136 million in the second quarter of 2005 compared with 2004's second quarter sales of $133 million, an increase of 2%.
The Company reported that its total worldwide backlog of open customer orders scheduled for delivery from July 2005 through December 2005 for the Reebok Brand (including The Hockey Company) increased about 1% from the prior year's comparable amount.
Paul Fireman, the Company's Chairman and Chief Executive Officer said, “Our second quarter and six month financial results were in line with our overall financial targets. One of our key financial objectives, long-term, is to improve the operating margins of our Company. We accomplished this during the second quarter. During the quarter, we were able to increase our revenues and improve our operating margins despite some challenging retail conditions in certain of our key markets. In addition, we continued the rollout of our new Reebok advertising campaign under the umbrella of “I am what I am”. As I stated last quarter, this is our largest global integrated marketing and advertising campaign in nearly a decade. Our total advertising and marketing spend has increased during the first six months of 2005 in order to support this campaign. Our research indicates that our advertising is being received as both relevant and aspirational by our target consumers and it is raising our Brand awareness. The campaign is also assisting us in aligning with athletes and entertainers who identify with the campaign and want to be a part of it. We also believe that the campaign is beginning to positively impact our target consumers' intent to purchase. Under this one Brand umbrella we are effectively and efficiently marketing our Performance, Classic and Rbk platforms,” Fireman stated.
“On the product front, we generated strong sales increases on Reebok Performance footwear products on a worldwide basis. We are clearly seeing a shift to more technical performance products, particularly in the U.S. market. During the quarter, Reebok sales of Performance footwear products increased by 24% on a worldwide basis. Two Performance product categories that are critical to our long-term growth strategy are basketball and running and both of these categories reported double-digit sales increases in the quarter. Footwear technology also continues to play an important role in our performance positioning. This quarter we introduced our newest Pump technology that we refer to as Pump 2.0. Pump 2.0 which is our new self-inflating technology will be featured across multiple categories during the second half of the year, including running and basketball for both men and women,” Fireman said. “During the second half of 2005 and into 2006 and beyond we plan to introduce several new evolutions of our self-inflating, self-regulating Pump technology, and Pump products along with other new technology products will increase as a percentage of our overall footwear business.”
“Our Rbk platform continues to evolve into a broader initiative across multiple categories for both men and women. We will be launching a new line of Rbk fashion Classic product specifically for women during 2006. We also intend to market additional music products pertaining to new associations with selected music icons, thereby broadening the number of collections and marketing themes that we bring to retail. In addition, we plan to expand the distribution of this product into additional retail doors in order to place the product where this consumer shops. Our Rbk products and related marketing are reaching our target consumers in an effective way and we believe we can continue to grow this segment of our business on a worldwide basis,” Fireman added.
“During the quarter and for the six month period, worldwide sales of Reebok Classic footwear product grew. In Europe, Asia and Latin America, sales of Classic footwear products increased strong double-digits during the first six months of 2005, and the Classic silhouettes continue to perform well at retail. In the U.S., where the market has turned more towards technical performance products, sales of Classic footwear products did decline,” Fireman noted.
The Company's other brands; Rockport and The Greg Norman Collection continued to improve their operating performance in the quarter. The Rockport Brand has introduced several new collections to retail such as I.Travel, Walk-Dry and new women's dress and casual collections. Much of the product is trend right, contains the engineered comfort and fit that is Rockport's heritage and is being sold at higher average selling prices at retail. Also during the quarter, Rockport had lower closeout sales and this resulted in higher selling and operating margins for the Company. As a result of Rockport's new product offerings and their performance at retail, they are beginning to expand their men's collections in existing distribution and increasing the number of retail destinations for the new women's products, particularly in the better department store channel of distribution. And our Greg Norman Brand turned in another solid performance this quarter with double-digit growth in both the golf and department store divisions. This is the tenth consecutive quarter of double-digit sales growth for our Greg Norman Brand,” Fireman added.
The Company reported that its gross margin for the second quarter of 2005 was 40.6%, an improvement of 150 basis points when compared with the gross margin of 39.1% in the second quarter of 2004. “For the quarter, our margins improved in both the U.S. and internationally. Most of the improvement came from our international markets,” Fireman said.
Accounts receivable at June 30, 2005 was $670 million compared to $623 million a year ago. Worldwide inventories at June 30, 2005 totaled $541 million compared to $539 million a year ago. “Excluding the impact of currency, our accounts receivable increased about $40 million or 6%,” Fireman said.
The Company noted that it completed the sale of its Polo Ralph Lauren Footwear Company effective July 15th, 2005. “As we noted when we originally announced on May 23, 2005 our agreement to sell Ralph Lauren Footwear Co., we will be updating our earnings guidance during our regularly scheduled second quarter earnings teleconference call at 10:30 a.m. this morning,” Fireman added.
“In summary, from a strategic point of view, one of our key goals, long-term is to improve the operating margins of the Company. We believe that our operating margins will improve in 2005, while at the same time we are continuing to invest in advertising, marketing and product initiatives,” Fireman concluded.
Reebok International Ltd
THREE MONTHS ENDED JUNE 30,
(Amounts in millions except per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2005 2004
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Net sales $876.2 $813.6
Cost of sales 520.6 495.8
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Gross Margin 355.6 317.8
% of Net sales 40.6% 39.1%
Selling, general and administrative expenses 299.1 271.1
% of Net sales 34.1% 33.3%
Interest expense, net 2.6 1.6
Other expenses, net 1.5 3.0
Loss on extinguishment of debt (1) - 10.2
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Income before income taxes and minority interest 52.4 31.9
% of Net sales 6.0% 3.9%
Income taxes 15.0 9.7
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Income before minority interest 37.4 22.2
Minority interest 0.3 0.4
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Net income $37.1 $21.8
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Basic earnings per share $0.62 $0.36
Diluted earnings per share (2) $0.60 $0.35
