The second quarter was a reversal of fortunes of sorts for Head N.V. as momentum it gained in the first quarter gave way to declines across all divisions of its business in Q2. Still, management said that they have met their internal expectations as the YTD business stayed “marginally” positive for the first half. Racquet Sports made up a larger portion of the business in Q2 as the division posted a smaller decrease than the Winter Sports and Diving segments. Management attributed the sharper decline in the Winter Sports business to a stronger Q1 business and better winter conditions.
The North America market also became a larger portion of the overall business in Q2, increasing to 35% of total sales from 32% of sales in Q2 last year. The gain was due to a 3.6% increase in sales for the region, which was generated by stronger growth in Racquet Sports and Diving.
Winter Sports had the largest decline for the quarter with high-single-digit declines in Europe and a mid-single-digit decline in North America. Globally, sales of skis declined 6% to 1.2 million ($1.4 mm), while binding sales decreased 7% to 7.8 million ($9.8 mm) and sales of boots fell 22% to roughly a half million Euros. Distribution of sales was roughly even to last year. Binding sales as a proportion of gross revenues were 81%; skis remained constant at about 12%; and ski boots were 5% of Winter Sports sales.
Gross margins in the division declined 450 basis points to 28.0% of sales in the second quarter from 32.5% of sales in the year-ago period, which was attributed to earlier shipping in 2006 versus last year.
Management said that bookings for H2 “remain favorable” to last year.
Racquet Sports accounted for 57.4% of Heads Q2 sales compared to 55.5% of the total in Q2 last year. North America now accounts for 52% of Heads racquet business versus 47% in Q2 last year, due to an 8% increase in sales to $22.2 million when measured in U.S. Dollars. The 2.1% decline in Racquet Sports sales were attributed to lower sales prices for racquets compared to last year and the introduction of the FlexPoint product.
Racquets accounted for 61% of division revenues, and sales in the category increased 21.9% to 22 million ($28 mm) from 18 million ($23 mm). Ball sales accounted for 39% of revenues versus 37% in the prior year period and increased 3% when measured in Euros to 14 million ($18 mm).
While the companys decision to outsource a portion of its racquet production to factories in China had a positive impact on the divisions GM in the first quarter, margins declined 520 basis points in Q2 on a less favorable product mix and higher raw materials costs. Gross margins were 38.5% of sales in the second quarter, compared to 43.7% of sales in Q2 last year.
Management said they had successful launches of HEAD branded tennis balls and the new Airflow racquets, which are targeted at female players, during the second quarter.
Diving continues to be a problem as the industry seems to be going through a major down-cycle. Roughly 67% of the companys business is done in Europe and only 16% in North America, but the North America market did make up a larger piece of the business versus the prior year.
Diving sales in North America increased in the high-single-digits, while Europe saw revenues decline at the same rate for Q2.
Mares still makes up the lions share of the diving business for Head, a share that grew even more in Q2. The brand made up 91% of segment sales for the period versus 88% in Q2 last year, while Dacor sales fell by roughly two-thirds to just 2% of the business. Spora was basically flat at about 7% of sales, or 1.2 million.
Management said that the revenue decreases were due to a number of factors, including a planned strategy to reduce DACOR business, unfavorable market conditions in Europe, and delayed product launch campaign compared to timing in 2005. HED said market conditions show improved sales in the Middle East and Eastern Europe, a stable, positive trend in the U.S., and moderate growth in South East Asia. Margins for the quarter improved 280 basis points to 42.3% of sales.
Licensing revenues declined due to the termination of a footwear license that went to direct distribution and the termination of a U.K. apparel license that will be replaced in 2007.
| Head N.V. | |||
| Second Quarter Results | |||
| (in $ millions) | 2006 | 2005 | Chg |
| Total Sales | $80.2 | $84.9 | -5.3% |
| Europe | $42.5 | $46.7 | -8.7% |
| N. America | $28.1 | $27.2 | 3.6% |
| Rest of World | $9.6 | $11.0 | -12.5% |
| Winter Sports | $12.1 | $12.9 | -6.0% |
| Europe | $10.8 | $12.0 | -9.1% |
| N. America | $0.5 | $0.5 | -6.0% |
| Rest of World | $0.7 | $0.4 | 88.0% |
| Racquet Sports | $46.0 | $47.2 | -2.1% |
| Europe | $17.5 | $20.3 | -13.5% |
| N. America | $23.9 | $22.2 | 8.3% |
| Rest of World | $4.6 | $4.7 | -2.1% |
| Diving | $21.1 | $22.4 | -5.1% |
| Licensing | $2.8 | $4.2 | -32.6% |
| Gross Margin | 40.9% | 44.4% | -350 bps |
| Net Income | ($5.1) | $4.1 | |
