After two strong years of sales and profit growth from acquisitions and operational efficiency improvement, sporting goods industry vendors and manufacturers came back to earth with a bit of a thud in the 2006 fiscal first quarter. U.S. companies were plagued by a strengthening dollar that cut into the large international gains posted over the last two years, while a reduced upside from acquisitions saw the companies represented in the quarterly report just barely eke out a profit gain for Q1.
With the last of the first quarter reports now filed with the SEC, Sports Executive Weekly presents a wrap up of industry public company results presented in the charts on pages four and five. Results are posted for those companies that have reported results for the period ended closest to the end of March. A complete analysis of the quarter is included in the full quarterly report due later this month.
After a first quarter last year that saw companies in the Softgoods sector post profit growth that outpaced sales growth by more than a two-to-one margin, the group this year saw profit growth shrink to a fraction of the sales growth for the quarter. The Hardgoods sector saw more organic growth than last year, but profits slid another 6.0% for the period after getting cut in half in the year-ago period as strides made in the Golf category were offset by declines in the Fitness category.
Total sales increased 8.6% in the first quarter for those companies tracked in this report, while the bottom line inched up just 0.3% for the period. 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. Return on Sales, which is the measure of net income as a percentage of sales, dipped 80 basis points for the quarter versus the year-ago period, coming in at 7.8% of sales compared to 8.5% in Q1 last year. The number is skewed a bit by the companies whose profit is represented by operating income or EBIT, rather than net income. It is best to use the ROS measure to look at the performance of a particular company versus its results in the year-ago period, or to assess companies that report on a like-for-like basis.
For the first quarter, the gross margin for the reporting companies averaged 40.9% of sales for the quarter, inching up 15 basis points from the year-ago period. A small improvement in Softgoods GM was not enough to offset the Hardgoods GM decline for the period.
The Softgoods sector saw less growth coming from acquisitions in the quarter, with Quiksilver, Phoenix Footwear, and Stride-Rite getting some help with acquisition deals since the year-ago period. The honors for most organic growth in the Softgoods sector goes to a number of newer public companies, with Crocs, Inc., which is new the report this year, posting a sales increase in excess of 300% versus last years first quarter. Under Armour, another company that went public since the Q1 report last year, posted a 50% gain in organic sales growth, and Volcom, which is also in the Q1 report for the first time, saw sales increase by nearly a third from last year.
Reebok, which is only shown for two months of the quarter due to the timing of its acquisition by adidas Group, had the biggest sales decline for the quarter. RBK was followed by Deckers, which topped the leader board in Q1 last year, but was a key decliner for the period this year on tough comparisons to UGG sales that rolled into Q1 last year.
Nike Inc. kept the Softgoods sector in positive profit territory for the period. Excluding the gain from NKE, sector profits would have declined 5.7% for the quarter. Russell Corp., Warnaco Swim, and Quiksilvers acquisition of Rossignol had the biggest negative effect on the sector. Excluding those three companies, sector profits would have risen more than 7.4% for the first quarter. Under Armour and Crocs were again key contributors for the sector, joining Gildan with triple-digit profit growth for the period.
While the Hardgoods sector relied heavily on acquisition-fueled growth in the year-ago quarter, deals had a limited effect on the most recent period. The 7.2% revenue increase in the sector was fueled in part by nice turn-around efforts at Adams Golf, Escalade, and some acquisition help at Thule.
TaylorMade led an improving Golf category, which nearly matched the overall growth for the Hardgoods sector, posting its second straight first quarter with 35% growth when measured in U.S. Dollars, thanks in large part to surging adidas Golf footwear and apparel sales. Adams Golf (+32.5%), Aldila (+16.6%), and Acushnet (+8.7%) were also in positive territory for the quarter, while Wilson Golf declined 21.5% versus the year-ago period. Callaway posted rather anemic growth (+0.9%) for the quarter. The Fitness segment was up 5.4% for the period, with only Nautilus in negative territory, while the SnowSports segment eked out a 1.9% gain due to declines at K2 Sports.
While the Hardgoods sector posted a decline in profits in the first quarter, the sector would have been slightly positive (+0.8%) when excluding the impact of the Riddell Bell Sports business.
Based on sell-through reports at retail, the industry may see more downward pressure on margins and profits in the second quarter as a slowing mall business may lead to increased markdowns for the footwear guys. Much of the Q1 increase in sales in the sector can be traced to an increase in average selling prices in both footwear and apparel and newer brands in the market, a trend that may reverse itself if a stagnation in unit sales starts to impact inventories at retail.
Look for an overview of first quarter Retail sector results next week.
