When Canadian bicycle maker Dorel Industries Inc. declined to provide earnings guidance for 2008 last week, it was not because of concerns over demand, but the rising costs of supplies and Chinese labor, the companys CFO told analysts. Earlier in the week, Dorels CEO and President Martin Schwartz said the company could not provide guidance because of economic uncertainties, but had “not witnessed any slowdown of consumer spending in Dorels products during the first two months of 2008.”
Much of that uncertainty, it turns out, is on the supply side, said CFO Jeffrey Schwartz. “Actually we are pleasantly surprised that demand is holding,” Schwartz told analysts in a conference call. “But there is the uncertainty of rising raw material costs and rising costs in China. Those are a certainty. Those costs are rising.”
Schwartz said the important question is how quickly Dorel will be able to pass on rising costs.
Dorel said bike sales are driving double-digit sales growth at its recreational/leisure segment, which makes Pacific, Mongoose, GT and Schwinn bicycles.
In the fourth quarter, the segments revenue rose 11.6% to $85.8 million from the previous years $76.9 million. Earnings from operations dipped slightly to $5.8 million as the company sold more bikes at lower margins. That lowered margins for the segment by 160 basis points during the quarter.
For the full year, segment sales increased by 10.0% to $374.8 million from $340.7 million the year before. Earnings from operations jumped 26.8% to $33.0 million from $26.0 million a year ago. Dorel said the majority of that growth came from several key mass customers as sales rebounded after declines in 2006.