Organic sales at Cannondale Sports Unlimited (CSU) declined 6 percent in the third quarter as mass merchants delayed deliveries of holiday inventory until October and independent bicycle dealers (IBDs) continued to work through inventory left over from spring. While the IBD business rebounded somewhat during the quarter, CSU expects dealers to postpone orders for Spring 2014 into next year.
“What we're seeing going forward in Q4, is a lot of dealers are just nervous, given the weather situation that happened last year, to fully commit to as large opening orders as they have in the past,” said Jeffrey Schwartz, EVP, CFO and secretary for Dorel Industries, which reports CSU financial results under its Recreational/Leisure segment. “If the weather is fine, we're going to see those replacement orders coming in Q1 and Q2. They're just not building up as much inventory as they had prior to last year.”
CSU reported total revenues increased 1.2 percent to $231.6 million during the quarter ended Sept. 30, but only because $16 million in sales at Brazilian bike maker Caloi offset declines at Cycling Sports Group (CSG) other Pacific Cycle. CSU acquired a 70 percent stake in Caloi in late August and said the company will begin assembling some Cannondale and GT models for Brazil, where demand for premium bikes is rising.
CSG designs, markets and distributes Cannondale and some high-end Schwinn, GT and Mongoose models as well as parts and accessories and Sugoi apparel for the IBD channel. Pacific Cycle owns the Iron Horse brand and provides OEM services as well as aftermarket parts and accessories to mass retailers such as Wal-Mart Stores Inc. and Costco Wholesale Co.
CSU reported gross margin declined 80 basis points to 23.4 percent of total revenue during the quarter, which is typically its weakest. SG&A expenses fell 130 basis points to 16.7 percent, thanks to a cost cutting program launched in the second quarter, when CSU warned that sales and profits would suffer following a cold and wet spring in both North America and Europe. Operating profit grew by $1.5 million, or 12.7 percent, including $1.3 million from the higher margin Caloi business. Operating margins increased 60 basis points to 6.1 percent. Quarter-over-quarter, operating profit grew 283.2 percent to $14.1 million from $3.7 million thanks in part to the Aug. 22 acquisition of a 70 percent interest in Caloi, Brazil's largest bicycle company.
While IBD sales rebounded slightly in the third quarter with the introduction of some new models, it is unlikely CSG excluding Caloi – will beat last year’s strong fourth quarter numbers, Dorel President and CEO Martin Schwartz said. Sales at Pacific Cycle and Caloi are expected to be strong as mass merchants finally take delivery of holiday inventory and Caloi shipments peak during the Brazilian summer.
Schwartz said CSU could begin phasing out annual model updates on its lower end bikes as soon as next year so that mass merchants can carry over more unsold product without it becoming dated.
