Restructuring charges at Dorel Industries Inc.’s once, high-flying Cycling Sports Group (CSG) dragged down the Canadian company’s net income by nearly 43 percent in the fourth quarter.
Toronto-based Dorel said it took a $13.5 million pre-tax charge at its Recreational/Leisure segment in the fourth quarter to reflect the costs of closing Cannondale’s last US production and development facility and making other changes to reduce development and supply chain lead times. The mostly non-cash charges are expected to eliminate about $6 million in annualized costs starting late this year, but also reduced Dorel’s net income for the quarter by $8.2 million to $11.0 million. Last week, Dorel divulged it was also shifting from a direct to a distributor model in Australia effective May 1 to reduce risk and free up capital.
“2013's performance was disappointing,” stated Dorel's President and CEO Martin Schwartz, in a conference call where executives presented the company’s audited financial results for the quarter and fiscal 2013. “A number of the issues we faced were industry and economy related, while others were the result of less than perfect execution on our part.”
The Recreational/Leisure segment’s Cycling Sports Group (CSG) designs, imports and markets Cannondale, GT, Mongoose and higher end Schwinn bikes to independent bicycle dealers (IBDs), while its Pacific Cycle unit sells bikes to mass merchants such as Wal-Mart Stores Inc. and Costco Wholesale Corporation.
The audited financial statement confirmed guidance Dorel provided in early February when it warned the segment would report weak organic sales growth and a fourth-quarter loss. The statements show that while segment revenues increased 8.3 percent, or $18.8 million, during the quarter, almost all of that came for Caloi, a Brazilian company acquired in August, 2013. Currency-neutral organic sales, by contrast, grew just 1 percent. Gross margin dropped 380 basis points to 21.1 percent.
The results jibed with reports from other bike companies, which have attributed sluggish 2013 sales to unfavorable weather that cut the 2013 spring selling season short across much of North America, Europe and Japan. In a bid to move 2013 model bikes, IBDs continued to discount their bikes deep into the fourth quarter and delayed orders for 2014 model bikes. Additionally, Dorel disclosed last week that more than $10 million of CSG 2014 models did not arrive in time for fourth quarter delivery and were shipped during the current first quarter.
The $13.5 million in pre-tax, mostly non-cash restructuring charges together will lower sales growth and margins resulted in an operating loss of $5.4 million compared with an operating profit of $16.5 million in the fourth quarter of 2012. Excluding the restructuring charges, the segment posted $8.1 million in operating profit. All businesses, with the exception of Caloi, reported lower profits.
For fiscal 2013, c-n organic sales declined approximately 2 percent in both the IBD and the mass merchant distribution channels. In both cases, Dorel attributed the decline to the poor weather during the first half of 2013. Schwartz said Caloi was delivering profits as expected, even in the current quarter when its sales typically fall off as Brazil transitions toward fall.
Schwartz said Dorel has liquidated most of its 2013 bikes and that retailers have been buying 2014 full-price product. Mass retailers finished the year with lower than normal inventories and have been filling orders, while IDBs are only now beginning to focus on 2014 models.
“On a mass side I can say our backlog's not that great but we're still filling the stores and hoping for the season to break,” he said.” On the IBD side, we actually do have a bit of a backlog and again, it's related to both demand and the fact that we don't have everything in stock yet. Stuff's coming in.”
Assuming favorable spring weather, Schwartz expects segment margins to rebound.
“We are definitely well positioned to return to much higher levels of profitability,” Schwartz said. “Earnings for the first quarter should improve by at least 20 percent to 25 percent over last year.”
