Head N.V. saw strong results in winter sports and diving boost overall sales for the third quarter by 11% in euro terms, in spite of a slight decline in tennis sales. The strengthening of the U.S. dollar against the euro also increased revenues. When measured in dollars, Heads former reporting currency, sales would have increased over 16%. The company also saw several operating efficiencies boost both margins and earnings.
Roughly 61% of Heads Q3 revenue came from winter sports and roughly 90% of winter sports revenues are realized in the third quarter. Increased revenues were due to higher sales in all product categories and across markets on account of good snow conditions in '05-'06, which caused a higher level of re-orders for this season. Improved logistics were also a major benefit to Heads winter sports sales this year, with nearly all shipments arriving at retailers on time. This improvement has positive and negative points. With stronger Q3 shipments, Head must now rely on the weather to produce a strong Q4.
Europe continues to be the dominant market for Heads winter sports sales at 79% of the total with North America representing 16%, and the rest of world representing 5%.
Year-to-date ski production, including contract manufacturing, increased 26.6%, from 248,000 pairs to 314,000 pairs. Binding production was up 13.0% from 850,000 pairs to 961,000 pairs and ski boot production was up 7.4% from 283,000 pairs to 304,000 pairs. Snowboard equipment production increased 26% from 140,000 units to 177,000 units.
Referring to Salomons recently announced delivery issues, Johan Eliasch, chairman and CEO, said, “I would say that our market share improvements in our segments have been — first of all, remember that the sell-in season is February through to June. So logistics problems wouldn't actually affect the numbers at this stage for any company. So in our case it's very much due to a very strong product offering, very good performing products and good marketing and sales and not due to the demise of any competitor.”
Management believes that the general consensus is that winter sports is not a growth market and that this is unlikely to change. However, due to the companys strong performance in Q3, they believe they may see an improvement in the market share for 2006. The product mix and sales for winter sports is broadly consistent with last year. Gross margin in the winter sports division for the third quarter improved 230 basis points to 40.1%.
Heads racket sports division represents 29% of total revenues, and while the third quarter saw a year-on-year decline in sales, the division remains up for the year-to-date. Gross margin in the division for Q3 increased 180 basis points to 37.7% due mainly to better margins on rackets. Rackets accounted for 66% of racket sports division's revenues and balls 34%. This is identical to Q3 '05.
Racket sports sales are spread more evenly by geography than for Heads other divisions with 48% of third quarter revenues coming from North America, 38% from Europe, and 14% from the rest of the world. In terms of quantities, tennis racket sales were up 5.1% for the year-to-date from 1.47 million units to 1.54 million units, tennis balls increased 6.9% from 5.0 million to 5.3 million.
The diving division's revenue increased due to new, positive trends in the market and improved logistics. Year-to-date, the divisions revenues remain slightly below last year.
Licensing revenues decreased due to the termination of a footwear license agreement, which will be replaced by Heads own in-house distribution, and the termination of an apparel license agreement in the UK, which will be replaced next year.
Overall gross margins for the third quarter improved 1,440 basis points. Selling and marketing expenses increased 100 basis points to 20.4%, compared to 19.4% last year, due to higher advertising and departmental selling costs and relative weakening of the euro against the dollar. General and administrative expenses decreased 50 basis points as a percentage of sales to 6.8%.
As a result of the increased efficiency with deliveries and improved margins, the company posted a solid increase to its bottom line with operating earnings and net income both seeing double-digit increases.
While management did not give exact guidance, based on these developments, they did state that the company is “positive in our outlook” and they continue to expect an improvement on last year's operating result.
|Third Quarter Results|
|(in $ millions)||2006||2005|| Chg|
|Rest of World||$12.8||$12.3||flat|
|Rest of World||$4.5||$2.9||+49.7%|
|Rest of World||$6.0||$6.9||-16.7%|
|Gross Margin||40.6%||37.9%||+270 bps|