Though the weather was dismal for much of the first quarter and retail seemed to suffer from weak traffic and weaker comps, the picture was much brighter for the active sports lifestyle markets vendor community. Still, the bright spots here are not expected to last long as increased costs out of Asia cut into margins in the back half of the year and the market starts to see early signs of a broader slowdown in the international markets, an area that has delivered a significant portion of top and bottom-line growth for many of the U.S.-based companies represented in the analysis herein.
From the 30,000 foot view, the sporting goods market was a good place to be in the first quarter ending March 31, 2008 as the industrys vendor community posted sales growth in the double-digits, while net income grew in the high-singles. Gross margins expanded as well for the period, but sales growth that outpaced profit gains led to a decrease in return on sales.
First quarter results shown in the charts on pages 6 and 7 are posted for those companies that have reported for the period ended closest to the end of March. However, 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.
Industry manufacturers saw two major forces shift the numbers away from what would likely be a more realistic comparison. In softgoods, Quiksilver took a major write-down now as part of its efforts to sell off the Rossignol business, while in hardgoods Jarden Corp. saw its results get a boost from the acquisition of K2, Inc. Considering K2 Inc.s sales from Q1 last year (Pure Fishings numbers were not available) and using pro forma numbers for Quiks bottom line, overall vendor sales grew 9.0% in the first quarter, while profits rose roughly 18% for the period.
The consolidated Hardgoods vendor results outperformed the softgoods results in nearly every metric on a reported basis, but Jarden played a large part in that increase. When focusing on Jardens 3.6% organic growth for the quarter, 15.2% sales growth for the softgoods manufacturers well outpaced the 7.2% increase reported by the hardgoods guys.
Despite trailing in sales growth, the hardgoods segment saw the strongest growth where it counts – the bottom line. Consolidated profits for the reporting companies were up 44.8% versus the year-ago quarter as TaylorMade-adidas Golf swung to a strong operating profit from a loss last year and several snow sports manufacturers managed to slim their quarterly loss on a better winter season. Excluding Quiksilvers Rossi write-down, softgoods manufacturers bottom line result increased 21.6% over the year-ago level.
Taking a closer look at the softgoods segment, both footwear and apparel vendors had a strong quarter. Apparel outpaced footwear in sales growth, but reported a net loss after a profit last year. However, when using ZQKs pro forma numbers, apparel vendors saw profit grow in the high-teens.
Footwear vendors posted net sales growth of approximately 15% for the quarter, while profit increased in the low-20s. Growth focused on the athletic side of the footwear segment as Nike, Inc. posted a monster quarter with double-digit sales and net income growth. Outdoor footwear vendors saw an 11.2% increase in sales, but gross margins declined approximately 190 basis points, which led to a low-singles decline in net income, mainly due to softness at Crocs. Also attributable to Crocs, inventories in outdoor footwear grew just over twice as fast as net sales for the first quarter.
In hardgoods, golf was the place to be as both sales and profits grew double-digits, while margins expanded and return on sales improved. Sales for the quarter increased approximately 10%, with only Wilson Golf and Aldila posting declines. That growth, paired with a nearly 150 basis point jump in gross margins, led to a 38.5% net income spike and to a 110 basis point increase in return on sales.
Profits were down for several golf vendors for the quarter, but those declines were more than offset by over 20% bottom line growth at Callaway and TaylorMades previously mentioned swing to profit. The golf segment also saw the slowest inventory growth for the quarter, increasing only 4.6%. A large part of this tempered increase is the move to lean manufacturing that several industry vendors have adopted.
Fitness vendors had a tough quarter as sales slipped 2.3%. Growth at Cybex was more than offset by a steep decline at Precor. A similar trend occurred on the bottom line with double-digit net income growth at Cybex more than offset by Precors over 62% decline in operating profit. The soft fitness results were more than offset by snow sports vendors, as a decent showing from Old Man Winter helped the segment approach the sales levels seen in 2006.
On an overall basis, inventories grew in the double-digits for the quarter, but slightly behind sales at 15.1%. This metric, however, is where the softgoods and hardgoods manufacturers differ the most. With the consumer generally worried about a difficult economic environment, hardgoods manufacturers moved towards a leaner stance, carrying less product on hand.
This plan also applied to many of the softgoods vendors, but notable increases from several companies – especially more-than-doubled inventory levels at Under Armour and Crocs – left many analysts scratching their heads at quarters end. Both companies have reported plans to deal with the surge in inventory levels, but the retailer is the ultimate factor here and such large increases in times when overall economic growth is barely positive, could easily become an issue.
In general, comments from the industrys retailers and more recent data compiled by SportScanINFO seem to suggest that the second quarter is a much rosier picture than was the first as weather becomes more seasonal and tax rebate checks arrive and get spent. With a strong Q1 turned in by the industrys vendors, the retailer sentiment might signal a shift in the winds of recession that have been blowing since the third quarter last year.
However, headwinds caused by ever increasing costs in labor, raw materials and transportation that will not get passed on to retailers until 2009 threaten to weaken the full year results. (NOTE – See accompanying charts on pages 6-7)
