Dorel’s Bike Q2 Operating Margins Plunged in Q2

 

The results for the Toronto-based company’s Recreational/Leisure segment illustrate just how critical the second quarter is to the bicycle industry. The segment, which owns the Cannondale and Schwinn bike brands, reported operating profits for the second quarter ended June 30 plunged nearly 83 percent from the year earlier quarter, on a 5.45 percent decline in revenues, which reached $238.2 million.

 

Gross profit fell by $8.64 million, or 13.7 percent to $54.6 million, resulting in a 220 basis point (bps) declined in gross margin, which hit 22.9 percent. SG&A rose 14.6 percent, causing operating profits to plunge 83.0 percent to $3.68 million. Operating margins fell to 1.54 percent compared to 8.58 percent in the year earlier quarter, when spring came early to most of North America. Revenue and operating profits for the first half of the year declined 6.59 and 69.2 percent, or $31.1 million and $29.8 million respectively.

 

“The resultant global slowdown in the bicycle category lowered sales in just about all markets, creating higher bicycle inventories and industry-wide discounting, particularly in the independent bicycle dealer (“IBD”) channel,” explained Dorel President and CEO Martin Schwartz. “This discounting combined with foreign exchange losses and one-time severance costs significantly affected the segment's second quarter profits.”

 

The Recreational/Leisure segment announced in June it would eliminate 50 positions worldwide to adjust to depressed sales. On Friday, Schwartz said that while discounting continues in the IBD channel, he expects earnings to approach 2012 levels in the third quarter and resume year-over-year growth in the fourth quarter.

 

The segment’s Cycling Sports Group sells Cannondale, Schwinn, Mongoose and GT bikes to IBDs, while its Apparel Footwear Group sells Cannondale and Sugoi branded products and its Pacific Cycle Group focuses on selling bicycles, parts and accessories to mass retailers, such as Walmart and Costco.

 

Schwartz said Dorel’s continued investment in the Cannondale's Pro Cycling Team is paying off thanks in part to team member Peter Sagan’s second consecutive Green Jersey win at Tour de France last month. He added that Cannondale sales are exceeding expectations in China, where the brand began selling in 2012.

 

More importantly to core enthusiasts, perhaps, is that Dorel has increased its spending on research and development on the bicycle business. The company invested $3.30 million in R&D during the first half of the year, up 42 percent from the same period in 2012.

 

What may be more troubling is that sales declined across all DII’s segments, indicating possible weakness in consumer spending. The company’s Juvenile Segment, which supplies cars seats, strollers and other products to mass retailers like Walmart, reported low double-digit revenue declines in the U.S and said operating margins declined in Europe due to exchange rates and a less profitable product mix.

 

Revenues declined 6.4 percent at the Home Furnishings segment, as e-commerce dealers continue to displace bricks-and-mortar dealers. The company reported consolidated revenue fell 5.2 percent to $600.5 million for the three months ended June 30, compared to the comparable quarter in 2012. Net income dropped 56.4 percent to 13.2 million or 41 cents per diluted share.