Head NV continued to suffer through the winter of ‘06-‘07 with considerable sales shortfalls and corresponding earnings declines primarily due to the lack of re-orders for snow sports equipment. This slow-down in the winter sports segment is also expected to impact next winter’s sales due to stockpiled inventories at retailers in the EU and North America. Head management currently estimates that pre-season orders for Alpine skiing equipment may go down as much as 25% to 30% due to the high inventory levels at retail.

During the quarter, overall revenues declined in the mid-teens due to the slow Winter Sports division sales. However, in spite of the declining sales, Head leveraged its diversity in the Diving and Racquet Sports business to boost overall gross margins by 140 basis points. SG&A expenses as a percentage of sales increased over 10 full percentage points, due primarily to higher selling and marketing expenses relating to Head’s winter sports athlete sponsorships.

In the Winter Sports division, Europe continues to be the dominant region with 76% of revenues compared to 18% in North America. While Q1 2007 gross revenues decreased by 46.6%, revenues for the trailing 12 months only decreased by 1.6%. Gross margin for the division decreased 750 basis points to 21.8% from 29.3% in Q1 2006. The decline in margin was due to lower revenues in relation to fixed manufacturing costs. At the same time, gross margins for the trailing twelve months actually increased 140 basis points to 37.0% compared to 35.6% for the same period last year.

During the first quarter, Head shipped 71,000 pairs of skis compared to 67,000 pairs last year. Shipments of bindings, Head’s top volume product, were cut in half from 184,000 pairs last year to 90,000 pairs this year. Ski boot sales increased from 65,000 to 73,000 pairs. Snowboard equipment sales were down from 32,000 units to 19,000 units, and protection decreased from 6,000 to 4,000 units.

The Racquet Sports division also saw revenues decline during the quarter due to a shift in the new product launch cycle. Management said that they delayed the timing of new products this year to provide a revenue boost later in the season. Sales were also negatively impacted by a shift in distribution and the declining value of the U.S. Dollar versus the Euro. Gross margins for the division increased 210 basis points to 41.8% of sales compared to 39.7% last year.

Diving was the only division to show a sales increase during the quarter. According to management the gains were due to a general turn-around in the market and increased market share. Gross margins in the division increased 720 basis points to 42.4% of sales versus 35.2% during the same period last year. This gain was due to improved efficiencies in operations following the completion of restructuring activities carried out in 2005/2006.

Licensing revenues added about €1.7 million ($2.2 mm) to the top line, but was below last year due to lower sales of winter apparel.

Overall, the gains in gross margins Head experienced during the quarter were more than offset by the heavy increases in SG&A expenses. This offset caused heavy red ink on the bottom line, with the company’s seasonal net loss expanding 81% during the quarter.


>>> With heavy losses at nearly every publicly traded winter sports manufacturer this year and no end to the red ink in sight at least until after next year, we could be looking at a much smaller industry by 2010…

Head N.V. 
First Quarter Results
(in $ millions)  2007 2006 € Chg
Total Sales $75.1 $81.4 -15.3%
Europe $39.1 $43.2 -16.9%
N. America $27.8 $29.3 -13.0%
Rest of World $8.3 $9.0 -15.3%
Winter Sports $14.1 $24.3 -46.6%
Europe $10.7 $63.5 -84.5%
N. America $2.5 $12.2 -80.9%
Rest of World $0.8 $5.7 -86.4%
Racquet Sports $43.2 $43.6 -9.0%
Europe $17.7 $32.6 -50.1%
N. America $22.5 $42.3 -51.3%
Rest of World $3.0 $6.5 -57.4%
Diving $17.6 $13.3 21.9%
Licensing $2.2 $3.0 -33.1%
Gross Margin 40.7% 39.3% +140 bps
Net Income ($9.6) ($5.3)
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