The benefits that Head sees from reporting in U.S. Dollars wasnt enough to save them in the first quarter as the company struggles with the impact of weather on their Winter Sports business and a weaker tennis market and weather conspired to impact a Racquet Sports business that was already running at a disadvantage due to a lack of new product launches and the closure of the Irish tennis ball factory.
While the company appears to have narrowed its loss for the quarter, it is primarily a result of an $8.4 million benefit in interest expenses this year and a $7.5 million charge last year, both a result of the early redemption of older 10.75% senior notes and that were replaced with newer 8.5% senior notes issued last January. Head also got a $900,000 boost from currency exchange rates. From an operating perspective, Heads operating loss nearly doubled to $9.0 million (6.9 mm) from $4.6 million (3.7 mm) in Q1 last year. In home country Euro terms, the operating loss widened nearly 85% versus last year.
Measured in Euros, sales would have still decreased nearly 14% to 64 million for the quarter, compared to 74 million last year and the net loss would have been cut 39.5% to 7.0 million. Europe delivered 56% of overall revenue for the quarter, compared to 60% in Q1 last year, while North America contributed 31% and the Rest of World represented 13% of consolidated sales. Both regions outside Europe picked up 2% in share of company sales.
Winter Sports revenues, which are primarily generated in Europe, declined 8.5% in the quarter when measured in Euros. Europe decreased 11% in Euros and represented 82% of Winter Sports sales, down two points from Q1 last year. North America also lost a point of total division sales to 12% of sales, while the Rest of World region doubled its contribution to 6% of total division sales from 3% in Q1 last year. HED said that most European markets, with the exception of Italy, had “reasonably good sell-through” for the season, but the late start to the season cut into margins and made retailers more cautious in pre-season ordering.
Gross margins in the division declined 50 basis points to 21.9% of sales.
HED said the Q1 revenue decline was the result of lower sales volumes in Skis and Bindings, offset a bit by higher sales of Boots and the stronger Euro.
Bindings sales declined about 4% (-8.5% in Euros) versus last year. Skis reportedly decreased 13% in Q1 after a nice 30% increase in the same period last year, while Boot sales jumped 33% for the period. In Euros, Skis would have decreased approximately 17.5%, while Boots would have increased roughly 27% versus the year-ago period. Snowboard sales fell 15% in U.S. Dollars, a 19% decline when measured in Euros.
From a quantity standpoint, Head shipped 54,000 pairs of skis in Q1 versus 65,000 pairs in the year-ago period, a decline of roughly 17% year-on-year. Bindings sales, which include contract manufacturing, were down about 14% to 148,000 pairs from 173,000 pairs in Q1 last year. Ski Boot pairs rose to 45,000 pairs from 35,000 pairs last year. The Snowboard category saw unit sales down about 26% to 23,000 units versus 31,000 units last year.
Management were quizzed by analysts about the recently announced Amer Sports acquisition of Salomon and asked if they had been approached by Amer. Head said they had not been approached and did not know why they had not. Head chairman and CEO Johan Eliasch said he felt that an Atomic/Head deal would “probably not fly because of regulatory concerns.” He said he would be surprised if the Salomon deal would hit any severe roadblocks. What was lost in the question was the fact that Amer already has a significant Racquet Sports presence through their Wilson business. The Salomon deal is also far more complementary from a regional standpoint. (see AMER/Talermo Interview)
Racquet Sports was said to be the biggest drag on sales for the quarter, with Europe posting a 29% drop in sales to 13 million from 19 million in Q1 last year. Europes contribution to the Racquet Sports business fell to 41% of division sales in Q1, versus 47% of the total in Q1 last year. North America actually picked up more of the load even as sales declined more than 8% when measured in U.S. Dollars. The Rest of World region was the lone bright spot as sales rose 11%. Margins declined 40 basis points to 40.0% of sales.
HED said the strengthening of the Euro against the U.S. Dollar partially offset the negative market impacts.
Head was up against the launch of the Liquidmetal racquet in Q1 last year and did not introduce any new technology this year. The new Flexpoint product was held until Q2. The other key impact was the closure of the ball factory in Ireland. HED estimated that they lost about $1.5 million in OEM ball sales due to the closure.
Total Ball sales were down nearly 17% for the quarter to $15 million (12 mm) from $18 million (15 mm) in Q1 last year. Racquet sales were down 13% to $22 million (16.5 mm), compared to $25 million (20 mm) in the year-ago period. In Euros, Racquet sales declined 17% and Ball sales fell 21% year-on-year. In units, Racquet sales were down nearly 9% to 467,000 units versus 511,000 racquets in Q1 last year. Ball sales declined to 1.6 million dozen from 1.9 million dozen last year. It appears that average selling prices also declined in Racquets. Still, Racquets represented roughly 51% of division sales for the period.
Management said that, based on current bookings, the outlook for the Racquet Sports business is “slightly behind” last year.
Diving division revenues were heavily impacted by “difficult trading conditions” in the divisions home market of Italy, a market that, according to HED, dropped about 20% for the period. The decline there took total Europe sales lower by 20% when measured in Euros to 9 million from 11 million in Q1 last year. The North America Diving business surged 33% in U.S. Dollars to $3.4 million (2.6 mm), compared to $2.6 million (2.1 mm) in the year-ago period. Mares increased its share of the total Diving business for Head, with contribution rising to 90% of sales versus 84% of sales in first quarter 2004.
>>> With competition consolidating all around them, Head will either have to acquire, be acquired, or be left behind. K2 and Amer will have far more cards to play on the global stage as retailers play with those most likely to win
>>> Tough to generate energy in tennis when you dont have a young star in the player stable…
| Head N.V. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal First Quarter Results | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in $ millions) | 2005 | 2004 | Change | Chg | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Sales | $85.7 | $94.4 | -9.2% | -13.6% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | $48.0 | $56.6 | -15.2% | -19.3% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| N. America | $26.6 | $27.4 | -2.9% | -7.6% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of World | $11.1 | $10.4 | +7.3% | +2.2% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Winter Sports | $21.2 | $22.1 | -3.9% | -8.5% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | $17.4 | $18.5 | -6.2% | -10.7% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| N. America | $2.5 | $2.9 | -11.3% | -15.6% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of World | $1.3 | $0.7 | +92.2% | +82.9% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Racquet Sports | $42.4 | $49.5 | -14.4% | -18.5% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | $17.4 | $23.3 | -25.3% | -28.9% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| N. America | $19.5 | $21.3 | -8.4% | -12.8% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Head N.V. | ||||
| Fiscal First Quarter Results | ||||
| (in $ millions) | 2005 | 2004 | Change | Chg* |
| Total Sales | $85.7 | $94.4 | -9.2% | -13.6% |
| Europe | $48.0 | $56.6 | -15.2% | -19.3% |
| N. America | $26.6 | $27.4 | -2.9% | -7.6% |
| Rest of World | $11.1 | $10.4 | +7.3% | +2.2% |
| Winter Sports | $21.2 | $22.1 | -3.9% | -8.5% |
| Europe | $17.4 | $18.5 | -6.2% | -10.7% |
| N. America | $2.5 | $2.9 | -11.3% | -15.6% |
| Rest of World | $1.3 | $0.7 | +92.2% | +82.9% |
| Racquet Sports | $42.4 | $49.5 | -14.4% | -18.5% |
| Diving | $19.1 | $19.9 | -4.2% | -8.8% |
| Licensing | $3.0 | $2.6 | +15.1% | +9.6% |
| Gross Margin | 37.5% | 37.4% | +10 bps | n/c |
| Net Income | ||||
