K2 Inc. Sees Strong Q1 on Balanced Segments…

K2, Inc. saw strong single-digit sales increases during the first quarter of 2007 due to growth in sales within the Marine & Outdoor and Apparel & Footwear segments. Earnings were boosted during the quarter by stronger margins, particularly in team sports, and slightly lower G&A expenses. Winter Sports equipment sales were in line with expectations in spite of the weather problems in the U.S. and Europe.

Action Sports net sales, which include winter products and in-line skates, were relatively flat with an increase of 0.3%. Sales increased for K2 in-line skates and skis, but this was offset by decreased sales of Volkl alpine skis and Marker bindings. The operating loss for the first quarter of 2007 was $10.6 million, slightly better than the $10.7 million operating loss in the first quarter of 2006. The decrease in operating loss for the first quarter was primarily due to higher gross profit as a percentage of net sales.

Marine & Outdoor, which includes Shakespeare and Penn fishing tackle, Stearns and Sevylor, saw sales increase 15.5% during the first quarter. The increase was due to increased sales of fishing kits and combos, Ugly Stik rods, Sevylor inflatables and Penn fishing tackle, offset by declines in personal flotation devices, immersion suits, Hodgman waders and drywear. The decrease in operating income for the first quarter from $15.9 million in 2006 to $15.3 million in 2007 was due principally to $1.3 million in non-cash amortization expense associated with the acquisition of Sevylor and Penn, consisting of $0.8 million of inventory step-up and $0.5 million of acquired intangible amortization. K2 sees the retail environment for fishing as very good with the overall market up in the high-single-digits.

Team Sports, which includes Rawlings, Worth, K2 Licensed Products and JT Sports, had a net sales increase of 1.4% from the 2006 period primarily due to increased sales of paintball products. Operating income was $15.4 million in the 2007 first quarter, an improvement from $12.9 million in the 2006 period, primarily due to higher gross profit as a percentage of net sales. K2 saw the largest incremental margin increases in the team sports division due to the shift of its U.S. bat production to China. Team Sports operating margin increased 180 basis points to 11.5% of sales.

Apparel & Footwear saw net sales increase 9.6% due to increased sales of Marmot winter outerwear and Ex Officio spring apparel products, offset by declines in sales of skateboard shoes and apparel. The operating loss for the seasonally slow first quarter of 2007 was $1.3 million compared to an operating loss of $1.8 million in the first quarter of 2006 due to the increase in sales and lower SG&A expenses as a percentage of net sales. However, margins did suffer somewhat. Management said that spring shipments and late winter shipments were both strong due to the cold that occurred in February and March. The division also saw the effect of the new Reno, Nev. distribution center that started up last year and is now operating better than planned.

For fiscal year 2007, KTO is forecasting net sales in the range of $1.46 billion to $1.51 billion, with GAAP diluted earnings per share in the range of 73 cents to 77 cents.

>>> There is no doubt a lot of private equity salivating over a solid Team Sports business… And will skate really fit under the new umbrella???

Editor’s Note: For a full report on Jarden’s Q1 financials, see this week’s issue of The B.O.S.S. Report