With margins remaining under pressure, Brunswick Corp. tempered the outlook for the company’s Fitness segment for the rest of the year.
As reported, Brunswick announced plans in early March to separate the Fitness business into a separate, publicly-traded entity. The segment includes strength and cardiovascular equipment and game tables and accessories under the Life Fitness, Hammer Strength, Cybex, Indoor Cycling Group, SCIFIT and Brunswick Billiards brand names.
In the first quarter, revenue in the Fitness segment increased 4 percent with 1 percent growth on a constant-currency basis.
Sales of commercial cardio decreased slightly in the quarter as strong sales to health clubs were more than offset by declines in sales of Cybex product in advance of new product introductions and sales to certain vertical markets.
On a conference call with analysts, Mark Schwabero, Brunswick’s chairman and CEO, said global growth in cardio offering has been influenced by certain delays in new product launches have already been referenced by company officials over the past several quarters. Said Schwabero, “Moving forward, the new Life Fitness Integrity and Cybex cardio products are now fully available, with two remaining updated console options to be released in the second quarter. We expect that these products, along with the Halo suite of digital solutions that were launched in March, will continue to accelerate global demand.”
Introduced at IHRSA, the Halo Fitness Cloud is a software platform for club operators that enhances the exerciser experience and simplifies facility management.
Commercial strength sales continue to grow globally as demand for these products increases due to the company’s well-positioned product offering and changing exerciser preferences.
Fitness segment sales in the U.S. were down 5 percent in the quarter, primarily the result of lower Cybex sales in advance of the company’s new product launches, along with weakness in several vertical markets. That was partially offset by gains in sales to the domestic health clubs, which Schwabero said showed a “strong increase” in the quarter. Domestic sales would have increased slightly for the quarter had Cybex revenue remained consistent from Q117.
International sales, which represented 50 percent of total segment sales in the quarter, increased 14 percent as compared to the first quarter of 2017. European sales experienced strong growth in the quarter, with higher sales to both direct markets and distributors. Asia Pacific also continued to see strong growth, with China and Japan leading the way. Said Schwabero, “We anticipate that these positive trends will continue in 2018, resulting in sustained growth in these regions.”
Operating earnings for the Fitness segment declined 39.9 percent in the quarter to $11.0 million from $18.3 million. Restructuring, exit, integration and impairment charges totaled $1.2 million in the latest quarter versus $2.4 million in the year-ago period.
Bill Metzger, Brunswick’s CFO, said the operating earnings decline in the Fitness segment was caused by margin declines, reflecting several factors, including higher freight costs, challenging pricing dynamics in certain international markets, unfavorable changes in product and customer mix and cost inflation. These factors were partially offset by benefits from higher sales.
On freight cost, he said, the Fitness business continues to experience a number of challenges, including higher national transportation rates, along with additional complexities around the shipment and installation of new products. Metzger said the company “is focused on resolving the issues under its control and adjusting price where appropriate.”
Looking ahead, Brunswick expects revenues in the Fitness segment to grow in the low single-digit percent range over 2017 levels, “and we expect operating margins to remain under pressure, while stabilizing toward the end of 2018,” said Schwabero.
The company expects the Fitness segment to benefit from the positive effects of recent new product launches and cost management actions.
“Our plan assumes the inflationary factors are mostly offset by price. However, the impact of trade policy changes could possibly create some additional pressures moving forward, which our business would address accordingly,” claimed Schwabero.
He said the Fitness segment’s results contain “an element of uncertainty” as they relates to the relationship with Planet Fitness, since the chain is shifting away from an exclusive agreement with the company.
“We’ve provided an aggressive response to the Planet Fitness RFP, and we believe we are the leading partner to support Planet Fitness’ goals for growth, technology and development, and improve club operator and user experience,” said Schwabero. “However, we’ve incorporated a more conservative view of the second half into our plan based upon an expectation that Planet Fitness will offer a broader equipment choice to its franchisees. We continue to have a very strong relationship with Planet Fitness and feel we’re best positioned to satisfy their equipment needs on a go-forward basis.”
Schwabero added that he expects the launch of new products, including the updated Life Fitness and Cybex cardio products, will benefit sales and margins in the back half of 2018.
“We remain encouraged by the overall trend in the global fitness marketplace and the progress we’re making to take advantage of the growth opportunities in newer segments such as boutiques and group fitness,” said Schwabero. “Evidencing this progress is a recently completed three-year agreement with Orangetheory to equip their international, locations with specialized equipment and a unique user interface to motivate and connect members. We believe that we are well positioned to leverage these trends and will position our equipment and digital solutions to help fuel this growth. Overall, the Fitness business continues to position itself to succeed in the changing commercial fitness market.”
Schwabero also said the Brunswick is still early in the process of the company’s move to separate the fitness segment. The company expects to file the initial Form 10 registration statement in the third quarter of this year and remain on track for completion by the end of the first quarter of 2019.
On March 1, Brunswick announced that the company’s board of directors has authorized proceeding with a spin-off of the Fitness business. The move comes after Jeff Altman’s Owl Creek Asset Management has acquired an activist stake in Brunswick Corp. in late January and encouraged the company to spin out the fitness business.
Companywide, Brunswick’s sales grew 6.8 percent to $1.16 billion. Net earnings rose 8.5 percent to $80.5 million, or 91 cents a share. The latest quarter included an 8-cents-a-share charge from special tax items, 1 cent a share of costs related to the planned Fitness business separation and 1 cent per share of restructuring, exit, integration and impairment charges. The year-ago quarter reflected 7 cents a share in restructuring, exit, integration and impairment charges.
For the full year, Brunswick now expects revenue growth of 6 to 7 percent. Previously, the company expected growth in the range of 5 to 7 percent. Adjusted earnings are expected in the range of $4.50 to $4.65 compared to $4.45 to $4.65 previously. The change takes into account benefits from a lower federal tax rate, continued successful marine business performance, potential inflationary pressures and additional revenue and margin risk in the Fitness business for the remainder of the year.
Photo courtesy Cybex