By Charlie Lunan
Despite reduced discounting and improving inventory levels at Dorel Sport’s Cycling Sports Group (CSG), the parent of Cannondale, GT and Schwinn bicycles expects sales to continue to fall in the fourth quarter.
“We are expecting a significant change in IBD (independent bike dealers) retailers’ purchasing patterns with fourth quarter orders moving to the first quarter of 2017,” said Martin Schwartz, president and CEO of Dorel Industries Inc. (TSX:DII.B) during the company’s earnings call November 3. “Therefore it is expected that there will be a reduction in second-half CSG shipments, which should result in year-over-year growth in the first half of 2017.”
The company reported that Dorel Sports’ third-quarter revenue reached $250.7 million, ended September 30, down 5.9 percent compared with the third quarter of 2015, or -6.2 percent in currency-neutral terms. Organic revenue, which excludes the impact of changes in exchange rates and a shift in how the company recognizes overseas revenues, declined by 10.7 percent.
Traditionally, Dorel Sports and other bike vendors have offered incentives such as pre-season discounts and dating to persuade dealers to take up to 60 percent of their orders for the next model year in the third and fourth quarter. But when U.S. vendors’ bike inventories swelled to 140 percent of normal last January, they responded by offering deep discounts last March to make room for incoming model year 2017 bikes.
“With the discounting that occurred in the spring, they have kind of woken up this year and said, why would I want to take in such a big commitment so early, if I can wait and see if there is any discounting,” Dorel Industries’ CFO Jeffrey Schwartz said of IBDs. “So they are buying still, but they are not buying the bulk of their commitments before they need them. I don’t foresee this year as a time when the IBDs are going to load up and stock their warehouses. They would rather ask to keep the goods in our warehouse.”
Dorel Sports has responded by entering 2017 with less inventory than normal, and Schwartz said it appears the company’s competitors followed suit. Bicycle Products Supplier Association estimates U.S. bike vendors’ inventories were up just 20 percent on September 30 compared with a year earlier, versus 40 percent at the end of January, he said.
Despite these headwinds, Dorel Sports was able to boost adjusted operating profit, which excludes impairment losses, restructuring and other costs, by 0.9 percent to $10.9 million compared with the third quarter of 2015.
Pacific Cycle, a division of Dorel Sports that supplies Walmart and other mass merchandisers, contributed the most to those gains thanks to new products and logistics efficiencies. By year end, the division will relocate most of its distribution operations from Illinois to a facility operated by Dorel’s ready-to-assemble furniture segment in Savannah, GA. Dorel is expanding the center to ship a growing collection of products to retailers and consumers. Online sales accounted for 44 percent of the home furnishing segment’s revenue in the quarter, up from 37 percent in the third quarter of 2015.
“Pacific Cycle had a solid quarter,” Schwartz said. “Operating profits increased considerably with Schwinn’s new models and updated look. We are looking for an even better 2017.”
In Brazil, where the currency stabilized, bike manufacturer and distributor Caloi was able to pass through price increases. Improving inventory levels enabled CSG to reduce discounts on its model year 2017 bikes, including the Cannondale SuperX and CAADX cyclocross bikes featuring the brand’s proprietary carbon frame and disc brakes, an overhauled BMX freestyle line from GT, and Schwinn models that will launch at retail in the first quarter of next year. The segment, which also includes the Sugoi and Sombrio apparel and Fabric parts and accessories brands, reduced working capital and increased cash flow from a year earlier.
Through the first nine months of the year, Dorel Sports’ adjusted operating profit declined by 34.9 percent to $21.4 million, but executives expect adjusted earnings to continue improving.
“For the sports segment overall, we believe the positive trend on adjusted operating profit will continue in the fourth quarter, which will result in improved earnings compared to last year’s fourth quarter,” Schwartz said.
Photo courtesy Cannondale