A warning about growing margin pressure from rising labor and input costs prompted investors to bid down stock in Amer Sports last week even after it reported a 21% increase in fourth quarter sales and predicted sales and EBIT growth for the year ahead.


Amer failed to meet two of the four goals set in a new long-term strategic plan unveiled in September. While meeting organic growth and debt related goals, the company failed to generate an EBIT/sale ratio of 10% or annual free cash flow equal to net profit.


The Finnish-based company reported net sales for the fourth quarter ended Dec. 31 rose 20.8% to €583.4 million ($794 mm) over the comp quarter a year earlier, but added that rising labor and input costs would challenge margins in 2011.


On a local currency basis, net sales for the quarter were up 14%, due largely to strong performance in the Winter & Outdoor segment, where currency-neutral footwear sales (Mavic, Salomon) grew 71%, Apparel currency-neutral sales (Arc’teryx, Mavic, Salomon, Wilson) grew 25% and Winter Sports Equipment (Atomic, Salomon, Bonfire) sales grew 19% on a currency-neutral basis.


Currency-neutral sales grew just 4% in the Wilson Ball Sports business, where a weak market for tennis racquets offset growth in team sports and golf, and the Precor Fitness business slid 6% on a currency-neutral basis for the quarter.


EMEA led regional sales growth with a 21% currency-neutral gain in sales compared to 8% growth in the Americas and a 3% increase in the Asia Pacific.


Group EBIT for the quarter, excluding non-recurring items was €56.0 million ($76 mm), with a third of that, or €18.7 million, coming from the Winter & Outdoor business. Increased sales volumes contributed €29.4 million to EBIT growth. Gross margin, however, remained at 40.8% of net sales as rising shipping, raw material, labor costs pushed up cost of goods sold. Including non-recurring items, EBIT was €48.4 million ($66 mm). Non-recurring items were mainly related to capital gains, restructuring and write-downs.


The company attributed an €18.3 million increase in operating expenses primarily to a €12.0 million increase in air freight costs incurred due to a lack of ocean containers.


EVP and CFO Jussi Siitonen said that while raw material and labor costs rose in the fourth quarter, their impact would not be felt until this year, when they could shave up to 150 basis points off gross margin. He called out rubber and aluminum prices as Amer Sports’ two most important raw materials, but noted those costs represented just over 1% of sales.


Company President and CEO Heikki Takala said the company will work with vendors and product designers to maintain gross margins in 2011 by eliminating complexity in its supply chain, leveraging raw material purchasing across brands and using less air freight. The company continues to eliminate low performing SKUs and mitigated some of its inflation risk by loading up on raw materials, which contributed to a 28.8% increase in inventory and work in progress at year’s end.

Flat gross margins also reflected the company’s decision to accelerate spending by €4 million during the quarter on its long-term strategic plan, which calls for boosting its footwear and apparel business by investing in marketing, distribution and owned retail. For example, the Group invested in customer service, recruited talent for its footwear and apparel brands and launched its first e-commerce during the quarter.  
The Wilson (Ball Sports) business posted a 4.4% increase in U.S. dollar terms to $146.0 million  (€107 mm) in Q4 , despite a dip in Racquet Sports sales. Growth in Team Sports (+11.1% to $16.7 million) and Golf (+7.7% to $69.4 million) was offset by slightly declining sales of low/mid price point rackets in Racquet Sports (-0.9% to $59.9 million). 

 

Currency-neutral sales increased in the Americas by 8%, were flat in EMEA and declined by 5% in Asia Pacific mainly due to the soft tennis market in Japan.


The Wilson Sports EBIT loss excluding non-recurring items was $3.7 million (-€2.7 mm) versus an EBIT profit of $3.2 million (€2.2 mm) in the prior-year period.


For the year, Racquet Sports net sales totaled €232.5 million ($309 mm), or flat with 2009 on a currency-neutral basis. The Americas and EMEA matched previous year's level, but Asia Pacific was down by 6% currency-neutral, due to the soft tennis market in Japan. The Americas accounted for 43% of net sales for the year, EMEA for 35% and Asia Pacific for 22%. Tennis rackets generated 41% of net sales and tennis balls 22%. Net sales of tennis rackets and tennis balls were flat in 2010, with sales of performance rackets ($100+) increasing and sales of low/mid price point rackets falling.


In euro terms, fourth quarter Racquet Sports net sales totaled €44.0 million up 7.6% versus the prior-year quarter.


Wilson Team Sports net sales grew 7.8% to $281.6 million (€212.1 mm). The majority of revenues (93%) came from the Americas, with 2% coming from EMEA and 5% from the Asia Pacific. Currency-neutral sales grew 21% in Asia, 7% in the Americas and were flat in EMEA. American footballs accounted for 21% of net sales in 2010, baseballs and gloves 19%, baseball and softball bats 19%, and basketballs with 15%. The strongest growth in 2010 was in baseball and softball bats (22%), basketballs (10%) and ball gloves (10%).


In full year 2010, Wilson Golf net sales increased 8.5% to $100.9 million (€76.0 mm) in U.S. dollar terms. For the year, 49% of Golf sales came from the Americas, 40% from EMEA and 11% from Asia Pacific.

 

Currency-neutral sales increased by 18% in the Americas, 3% in the EMEA, but fell 13% in Asia Pacific. Clubs (+26% c-n) generated 56% of net sales and balls (+2% c-n) comprised 30% of the total.
Wilson Golf fourth quarter net sales totaled grew 17.0% in euro terms to €51.0 million.


Full year Precor (Fitness) net sales inched up 0.5% in U.S. dollar terms to $272.0 million (€204.8 mm), or up 1% in currency-neutral sales. Geographically, growth in EMEA and Asia Pacific compensated for a decline in the Americas. Net sales were negatively impacted by the company’s decision to set aside an additional €4.5 million in its reserves for possible extended warranty claims.

 

Precor EBIT excluding non-recurring items was $3.6 million (€2.7 mm) for the year versus an EBIT loss of $3.5 million (€2.5 mm). Commercial business (clubs and institutions) represented 89% of Precor net sales while consumer (home use) was 11% of sales. Commercial business was up 2%, while the consumer business fell 10%. Commercial business started to show some early signs of recovery during 2010, while sales of premium consumer equipment remained sluggish.


During the fourth quarter, Precor’s net sales declined 6.8% in U.S. dollar sales to $81.1 million (€59.6 mm), but inched up 1.2% in euro sales. The decline reflected the company’s decision to set aside €4.5 million in income for possible claims on extended warranties. Underlying net sales were flat with the previous year.  Fourth quarter EBIT excluding non-recurring items decreased 12.0% in U.S. dollar terms to $5.8 million (€4.3 mm).


Editor’s note: For details on the Winter & Outdoor business, including Winter Sports Equipment, Footwear, Apparel, Cycling and Sports Instruments, please look for this week’s issue of The B.O.S.S. Report.