First Quarter Results Mostly Weak for Vendors

 

Fast forward a year and the double-digit increase in revenues, the high-single digit gain in profits and the improvement on gross margins in the first quarter last year are but a distant memory for most.  The market this year is dealing with the effects of a stronger U.S. dollar, the obvious impact of the global recession and retailers’ moves to narrow inventories to a level that is now starting to stress the supply chain.

From the 30,000 foot view, the sporting goods market was not a happy place in the first quarter ended March 31, with the exception of the firearms business, according to quarterly sales and profit information compiled by The SportsOneSource Group and Sports Executive Weekly.  The public companies (and others that report quarterly data to the SEC) on the vendor side of the business in the sports and outdoor markets saw an aggregate decline of just over 10% in the first quarter while the bottom line shrunk by more than a third for the consolidated business. 

 

Sharp declines in gross margins across the board and cuts in the expense line that couldn’t come fast enough combined to cut into return on sales.  Consolidated gross margins were down an average of 240 basis points in the first quarter to 40.5% of sales for the industry vendors.   Much of the margin decline can be traced to moves by vendors to right-size inventories, which were essentially flat at quarter-end for the aggregate group of companies reporting results.
One result of the economic downturn is the almost total lack of M&A deal flow, which makes year-on-year comparisons easier than in quarters past.

First quarter results shown in the charts on pages 4 and 5 are posted for those companies that have reported for the period ended closest to the end of March.  However, because the report is not a clear picture of the entire industry, SEW feels the total numbers are less significant than the trending information provided in the percentage increases and decreases.

Only 13 of the 50 companies tracked on the charts posted a revenue increase for the first quarter.  Less than 65% of the companies reporting results saw a profit for the period and only ten reported a profit increase or swing to profitability for the quarter.  Six companies fell to a loss versus a year-ago profit, while only three swung to a profit versus the prior-year period.

The vendors with most of their business in the softgoods end of the market fared far better than their hardgoods brethren-again with the exception of the firearms manufacturers.  Still, of the 27 softgoods companies reporting results, only six posted a revenue increase for the period.  Only nineteen of the softgoods companies posted a profit for the first quarter and of those, only five reported an increase in, or swing to, profits.  

The revenue declines in the softgoods segment were fairly balanced across the various sub-segments of apparel companies, athletic footwear companies and outdoor companies. Overall revenues were down nearly 8% for the softgoods companies in the aggregate, with apparel companies and outdoor softgoods companies both sliding 8.7% on the top line, while athletic footwear companies posted a 7.5% revenue decrease as a group. 

Margins were the most challenged in the apparel sub-segment, slipping nearly 400 basis points to 38.2% of sales versus the prior year quarter.  There is a broad range of margins in this sub-segment as companies like Broder Bros., Gildan and Delta Apparel see margins in the teens, while others like Columbia, Quiksilver and Under Armour were in the low- to mid-40’s and Volcom posted gross margins just north of 50% of sales, which was a decline in margin for that company.  Margins were also tough in the athletic footwear sub-segment, but one company in that group, Puma AG, posted the highest margin of the 50 non-licensing companies (Iconix margins were 100%) at 51.1% of sales.  Overall gross margin for the athletic footwear sub-segment were down 220 basis points to 44.8% of sales for the period. 

Heelys was the only company in softgoods to post an improvement in gross margin, up 930 basis points to 30.8% of sales in the first quarter.  Deckers posted the highest increase in revenues in softgoods for the first quarter and Asics Corp. posted the largest increase in profits.  Deckers also had the highest growth in inventories at quarter-end, which was said to be precipitated by support for the spring needs for the UGG brand.

In hardgoods, seven of the 23 reporting companies posted a revenue increase for the first quarter.  Thirteen of the 23 companies posted a profit for the period, but results for Smith & Wesson — due early this week — are expected to push that number to 14 companies.  Five of those companies posted a profit gain or a swing from a loss.

Overall consolidated hardgoods revenues were down in the high-teens for the quarter, with the three firearms companies reporting the highest revenue gains for the period, led by Sturm Ruger with an increase of nearly 50% for the period.  On average, firearms manufacturers saw revenues jump nearly 25% for the quarter.  Fitness companies led the decliners, down more than 35% as an aggregate group.  Golf manufacturers were down roughly 18% for the quarter, with True Temper posting the biggest decline at 48.5%, but Callaway posted the largest brand decrease with a 25.8% decline for the quarter.
The golf group saw the biggest swing in fortunes on the bottom line, moving from an aggregate profit of nearly $125 million in Q1 last year to a loss of nearly $23 million for the comp period this year.  The fitness sub-segment also swung to a loss, but the shift was far less.  Look for analysis on the outdoor and snow sports groups in next week’s issue of The B.O.S.S. Report.

Inventories contracted a bit on the hardgoods side as companies reacted quickly to the slowing economy.