Dorel Industries reported organic sales at its bike business are up 15 percent year-to-date thanks to strong European demand for its Cannondale and other premium bikes and strong sales to mass merchants in North America. Company executives are looking to Brazil to accelerate growth in the fourth quarter.
The Canadian company said total revenues at its Recreational/Leisure segment increased 20.2 percent to $286.3 million in the second quarter ended June 30. Total sales reached $526.6 million for the six months ended June 30, up 19.2 percent from the same period in 2013.
Growth was aided by improved weather conditions as well as a continuing rebound in most global bike markets following a swoon in late 2012 that caused independent bike dealers (IBD) to freeze orders for Model 2013 bikes. Both the Cannondale Sports Group (CSG) and Pacific Cycle made solid headway. CSG benefitted from global sales growth in most IBD markets, particularly in Europe and Japan, while better weather drove growth at Pacific Cycle, which sells to mass merchants.
Sales growth in Europe outpaced that seen in the United States, where a glut of last year’s bikes continues to stifle growth in the IBD channel, said Dorel President and CEO Martin Schwartz.
While the glut did not have a significant impact on CSG, which was able to sell through its Model 2014 bikes at fall margin, Schwartz said he had heard that 3 of the year’s top 10 selling bikes were 2013 models.
Sales of current model-year bicycles and the weakening of the U.S. dollar against the euro helped boost gross margins in the IBD channel in both the quarter and year-to-date. Gross profit in the mass market channel was tempered marginally due mainly to sales mix and was below the prior year's level in both the quarter and year-to-date.
The one laggard in the segment was Caloi, a Brazilian bicycle manufacturer Dorel acquired in August, 2013. Caloi nearly met plan during the first half of the year, but has been hurt by Brazil’s slowing economy and the month-long World Cup, which shifted consumer’s attention away from cycling. However, the overwhelming bulk of Caloi’ earnings come in the fourth quarter, which marks the start of Brazil’s summer and Christmas shopping season.
“We expect Caloi to grow versus last year and we are confident regarding its future contributions to the segment,” said Schwartz.
The impact from Caloi decreased Dorel's earnings by $10.3 million net of tax for the six months ended June 30, which is mainly comprised of the $800,000 loss from operations, cash interest costs and $6.0 million of non-cash charges related to interest rates and financial instruments. DII recorded restructuring costs of approximately $1.7 million for the quarter and $2.2 million year-to-date, up from $2.0 million for both the quarter and year-to-date periods of 2013. Remaining costs of approximately $900,000 are expected to be recorded in the second half of this year.
Segment gross profits increased 23.3 percent to $67.4 million compared and operating profit more than quadrupled to $15.2 million.
The segment faces tough top line comps in the third quarter, but DII’s outlook calls for slight growth in operating profit. Sales and operating profit will improve significantly over 2013 levels in the fourth quarter, when shipments by Caloi and CSG are expected to peak.
“Just having Brazil putting all of that income into the fourth quarter is going to have a major positive impact for us,” said EVP and CFO Jeffrey Schwartz, adding that IBD orders for Model 2015 Cannondale bikes were coming in strong.
Beyond that, Martin Schwartz predicted 2015 would be a break out year for Cannondale’s parts and accessories business, which is undergoing a major overhaul.
