K2 continued its trend of double digit sales increases fueled by acquisitions and, with one exception, strong organic growth among its core brands.
The Action Sports division of K2 showed the strongest revenue gains on a dollar basis, with the core brands showing sales increases in the “mid teens.” No results from Volkl or Marker sales are included in these numbers since the acquisition closed after the end of the second quarter. The addition of Atlas and Tubbs snowshoes did contribute to the 47.7% increase in Action Sports sales.
Pre-season ski and snowboard orders, which make up over 90% of ski & snowboard sales for the year, are up 20%, while sales in the “core brands” showed a “high-single-digit increase.”
Paintball revenues, the other major aspect of the Action Sports Division, were buoyed by a 13.9% increase in sales at the newly acquired Brass Eagle during what was described as a “seasonally slow quarter.” It has been estimated that K2 owns about 30% of the paintball equipment market through Brass Eagle and Worr Game Products.
K2s In-line skate business, which has been declining since 2002, was the major cause for a slowdown in organic growth. Excluding the decline from the In-line skate business, organic growth would have been 9% for the second quarter versus the reported 0.8% gain. The company says that the skate business has declined from approximately 600,000 pairs shipped at its peak to 100 to 150,000 pairs today. This caused a $15.8 million hit to revenue in Q2.
“Skates are a crappy place to be right now,” said K2 CEO Richard Heckman said in a conference call with analysts, “We have not lost money on the business. Weve lost revenue, but weve been smart about it.”
In the Marine and Outdoor division, Shakespeare and Stearns sales were up 9.3%, driven by strong growth in Pflueger reels, Ugly Stik combos, marine antennas, and children's flotation devices. This division was said to be the major sales driver for the quarter, however the product mix from these brands lowered GM when compared to Q1.
The Team Sports division growth was driven by the acquisition of Worth and the former Fotoball – now K2 Licensing & Promotions. Additionally, K2 reported “mid single digit” unit growth in balls, bats and gloves.
Newly appointed K2 CFO Dudley Mendenhall told analysts that he “couldnt be happier” with the outcome of the team sports integration, and K2 has been receiving very positive feedback from retailers on customer service and product.
Mendenhall takes over for John Rangel, who will move to Europe as president of K2 Inc.'s European operations. Rangel is responsible for integration of all current and future operations in the region.
Christoph Bronder, president of the Volkl Group since 1996 and the managing partner of Marker International, has been named president of Volkl and Marker's worldwide operations. Mike Noonan has been named president of Volkl Sport America. Dudley Mendenhall, Senior Vice President – Finance, will assume the vacated role of CFO.
Heckman said he feels if K2 integrates these operations “carefully and thoughtfully, maintaining the European history, I think we can have years of potential brand extension and margin improvement.”
“Both Marker and Volkl have strong bookings for the year, that is 04, for their products. Their weaknesses, however womens skis, snowboards, and snowboard bindings, and the lower price point skis play right into our strengths,” he said. Heckman feels K2 is “several years ahead” of Volkl and Marker in these markets.
“I think we can be a great help to them,” he said. “Conversely, their distribution system at the mid to high price points is exactly what we need for our apparel division.”
Heckman, who has been in Europe for the last two weeks visiting Volkl manufacturing and corporate sites, said that retailer response to K2s acquisition of Volkl and Marker has been surprisingly positive. “I would have expected a more muted response, particularly in reaction to an American acquisition of a venerable German business,” he said.
Part of the reason for the positive response is the current landscape in the ski hard goods market. Before the acquisitions, according to Heckman, there were “two venerable German brands out there without a parent and without global distribution.” Now, with K2 as their parent, Four major companies adidas-Salomon, Rossignol, K2, and Amer with its Atomic brand make up an estimated 85-90% of all ski hard goods sales.
