Head N.V. echoed the reports coming from other snow sports hardgoods manufacturers during their fourth quarter as winter snow did not materialize until late in the season for Europe, and much of the Northeast and Midwest in the U.S. Fourth quarter net revenues were down 4.2% to 123.3 million ($159 mm) from 128.7 million ($153.0 mm) in the year-ago period. The declines were primarily in the Racquet Sports and Winter Sports divisions while Diving sales rebounded nicely from a long, industry-wide down-turn.
Gross margin increased to 37.3% of sales in 2006 from 36.5% in the comparable 2005 period. Selling and marketing expenses for quarter decreased 9.1% to 25.5 million ($32.9 mm) from 28.1 million ($33.4 mm) in the comparable 2005 period. General and administrative expenses increased 7.4% to 9.8 million ($12.6 mm) from 9.1 million ($10.8 mm). As a percentage of sales, SG&A expenses decreased 30 basis points to 28.6% compared to 28.9% last year.
Winter Sports sales decreased 4.9% during the quarter to 87.9 million ($113 mm) compared to 92.4 million ($110 mm) last year. In spite of the revenue declines in the quarter, sales for the full year were up in all categories due to strong pre-season orders realized in Q3. Winter Sports gross margins increased 150 basis points in Q4 to 37.4% due to better product mix and more efficient production.
Head NV Chairman and CEO Johan Eliasch said that snow conditions for the '06-07 season have been extremely poor, and consequently, re-orders have been much slower than prior year. This was the primary reason for lower Q4 sales than last year. Management said that their research estimates the worldwide snow sports market was down between 15% to 20% for the season.
“We are quite well-prepared to face these difficult market conditions. We have great products and we have also great success with our ski race team,” Mr. Eliasch told analysts during a conference call. “We know that inventory levels (at retail) are undoubtedly going to be high. We know that there is going to be a lot of closeout activity. And we know that dealers will be very cautious ordering all we can do is to work hard to continue our investment in new athletes, invest in new technology product development and branding, and work hard, and hope for the best for '07. But at this point in time, market conditions are going to be very difficult.”
For the full year, Head ski sales increased from 572,000 pairs to 601,000 pairs. Bindings increased from 1.52 million pairs in '05 to 1.57 million pairs in '06. Ski boots increased from 583,000 pairs in '05 to 650,000 pairs in '06. Snowboard units increased from 261,000 units to 285,000 units. Winter sports protection equipment nearly doubled, increasing from 30,000 units in '05 to 55,000 units in '06.
The Racquet Sports division was also faced with some tough market conditions. Sales decreased 7.4% during the quarter to 26.4 million ($34 mm) compared to sales of 28.5 million ($34 mm) last year. Racquet sports is the only segment of Heads business with the majority of its sales in the U.S. market. Margins for the brand declined 740 basis points during Q4 to 27.6% due to climbing raw material prices and the investment to launch the new Head branded tennis ball.
Management said that the overall market was not as strong in the back half as it was in the first two quarters and the U.S. is showing more upward momentum than other regions. Management estimated that the global racquet sports market “declined slightly” in 2006.
Diving revenues increased 20.7% during the quarter to 10.6 million ($13.7 mm) compared to 8.8 million ($10.5 mm) last year. Margins also improved considerably, climbing nearly 11 full percentage points to 31.7% of sales. The diving markets in the U.S. and Asia maintained sales growth throughout the year, while Europe showed some positive signs as well. The first quarter of 2007 is expected to be even stronger than Q4 of 2006.
Head is still in the development phase of its new Golf hardgoods category extension. Management said that it is difficult to say when it will be ready, but they are confident that they will come to market with “groundbreaking technology.” No time line was provided for the future launch date.
Licensing revenues inched up 1.6% to 2.2 million ($2.8 mm).
Head management spent the majority of their quarterly conference call battling questions from irate stock-holders; one even complained about the lack of athlete pictures in Heads annual report. However, some stockholders did raise some legitimate concerns regarding the recent low performance of Heads stock and urged the company to participate in more road show conferences.
In spite of stronger operating margins, Head reported a net profit of 3.3 million ($4.3 mm), down 5.7% compared to the profit of 3.5 million ($4.2 mm) in the comparable 2005 period. Much of this decline was due to debt repayment and higher tax allowances than last year.
| Head N.V. | |||
| Full Year Results | |||
| (in $ millions) | 2006 | 2005 | Chg |
| Total Sales | $460.8 | $447.8 | 2.0% |
| Europe | $276.5 | $264.2 | 3.7% |
| N. America | $124.4 | $120.9 | 2.0% |
| Rest of World | $59.9 | $62.7 | -5.3% |
| Winter Sports | $236.3 | $220.8 | 6.1% |
| Europe | $177.2 | $167.8 | 4.7% |
| N. America | $33.1 | $28.7 | 14.3% |
| Rest of World | $26.0 | $24.3 | 6.1% |
| Racquet Sports | $166.7 | $165.5 | -0.2% |
| Europe | $66.7 | $67.9 | -2.6% |
| N. America | $83.4 | $76.1 | 8.5% |
| Rest of World | $16.7 | $21.5 | -23.2% |
| Diving | $61.1 | $60.9 | -0.6% |
| Licensing | $10.2 | $11.6 | -12.9% |
| Gross Margin | 39.3% | 38.4% | |
