Dorel Industries Inc. warned investors that fourth quarter earnings will come in below 2012 levels because results at its bicycle business came in worse than expected.
The Canadian company said fourth quarter earnings at its Leisure/Recreational division will be substantially below prior year levels due to “top line weakness and a poorer product mix.”
Dorel attributed a decline in sales at the segment’s Pacific Cycle business to a decline in holiday traffic at Wal-Mart Stores Inc, Costco Wholesale Corp. and other mass merchants and big box sporting goods retailers that sell its bicycles. Sales fell more profoundly at Cycling Sports Group (CSG), which sells higher-priced Cannondale, Schwinn, GT and Mongoose bikes, to independent bicycle dealers (IBDs). Dorel said industry discounting continued deep into the year, resulting in a higher number of 2013 model year bicycles being sold at lower margins than anticipated. In addition, supply for firm customer orders for more than $10 million of CSG 2014 models did not arrive in time for fourth quarter delivery and are being shipped during the current first quarter.
Unfavorable foreign exchange rates further hampered margins during the fourth quarter.
“We had felt that things were improving at the end of the third quarter but the issues outlined above had more of an impact than originally expected,” said Martin Schwartz, Dorel President and CEO. “With January completed, normally the quietest month of the year and barring any disasters in weather, Recreational/Leisure earnings for the first quarter should improve by at least 20 percent to 25 percent over the corresponding quarter last year. There are now several positive trends working in our favor. Dealer orders are being driven by a firming consumer demand with new models selling at full margins, new SKUs at some of our largest customers, increased licensing revenue, strict cost controls and foreign exchange benefits. Management at the Recreational/Leisure segment is invigorated and is confident about the year ahead.”
The disclosure is the latest bit of bad news to come out of Leisure/Recreational since May, when Dorel an 8 percent decline in first quarter sales. Dorel attributed the decline to wet, cold weather and responded by discounting its 2013 model bikes, which drove down second quarter gross margins by 220-basis-points. In late June, Dorel announced it would lay off about 50 employees to cut costs and in December it dismissed its top bicycle executive. That was followed in January by news the company would shutter Cannondale’s only U.S. assembly and testing plant and lay off another 100 employees in a bid to become more competitive. Dorel will release its 2013 earnings results March 4.
