Dorel Industries Inc. reported sales at its Pacific Cycle business outperformed its Cannondale Sports Group (CSG) in the fourth quarter of 2014 and would likely continue to do so through the second quarter of 2015 because the sharp rise in the value of dollar is hurting sales to independent bike dealers (IBDs) overseas.
Revenues at Dorel Sports reached $260.1 million in the fourth quarter ended Dec. 31, 2014, up 6.0 percent from the same quarter a year earlier. Organic sales – excluding the impact of foreign exchange and acquisitions – grew approximately 8 percent.
At Pacific Cycle growth came from the sale of Kid Trax battery-powered toy cars as well as bicycles, parts and accessories. The business sells primarily to U.S. mass merchants, including Kmart, Sam's Club, Sears, Target and Walmart as well as full-line sporting goods retailers such as Academy Sports+Outdoors and Toys R Us. As such, it is much less vulnerable to currency exchange rates than CSG, which designs and distributes higher priced Cannondale, GT, IronHorse, Mongoose and Schwinn bikes to independent bicycle dealers (IBDs) worldwide and owns Caloi – Brazil's largest bicycle manufacturer and distributor.
DII reported that operating profits at Caloi grew in the double-digit range in currency-neutral (c-n) terms in the fourth quarter as it began assembling and distributing Cannondale and GT bikes in Brazil for the first time. While the ramp up of Cannondale and GT operations went smoothly, DII executives said they have tempered their growth expectations for Caloi in the wake of currency and economic turmoil in Brazil.
Adjusted gross profit at Dorel Sports increased 1.7 percent to $56.9 million in the quarter, or 21.9 percent of sales, down 90 basis points (bps) from the fourth quarter of 2013. Adjusted operating profit surged 45.2 percent to $12.0 million, or 4.6 percent of sales, up 120 bps from a year earlier. The adjusted figures excluded $1.8 million in restructuring costs, $4 million in negative currency effect related primarily to the sharp appreciation of the dollar, and start-up costs of $400,000 in Chile.
For the full year ended Dec. 31, 2014, Dorel Sports organic sales grew approximately 8 percent. The increase came from both the IBD and the mass channels and were driven partly by improved weather conditions that propelled a global rebound in bike sales. Sales to the IBD channel in Europe and Asia contributed to the organic sales increase. At Pacific Cycle, strong shipments of Kid Trax toy cars and improved sales in Canada contributed to organic growth.
Adjusted gross profit grew 14.8 percent, but gross margin remained flat at 23.5 percent, while adjusted operating profit increased 73 percent to $67.5 million, or 6.4 percent of sales, compared with 4.2 percent of sales in 2013. Dorel said operating margins improved at all of Dorel Sports' major divisions, but was led by a strong turn around in the IBD sales channel. This along with strong sales growth at all other major distribution channels and improved operating efficiencies contributed to better earnings. For the year, the net negative impact of adverse foreign exchange rates was approximately $3 million.
Dorel expects the IBD business to be challenging through the first half of 2015 as the strong dollar reduces the purchasing power of consumers and distributors in Europe, Japan and Brazil. While sales may grow modestly, profits will not improve because of the difficulty of pushing through mid-model year price increases. Executives expect IBD profits to improve in the second half when CSG begins selling 2016 model year bikes at reset prices.
“We're not concerned about any fundamental long term issues here,” said an executive. “But it's going to be a little painful getting through this period like I'm sure it is for a lot of consumer product multinational consumer product companies we're all-in the same boat.”
Pacific Cycle, meanwhile, is expected to remain very profitable in the first half of the year.
