Industry Vendors Shine in 2010 Fourth Quarter

The impact of increased input costs from raw materials, labor and transporatation were still absorbed for the most part in the fourth quarter as companies looked for strategic cuts elsewhere in their organization to offset the impact and limit margin pressure.

 

But that strategy may have played out last year as companies find it more difficult to find expense cuts to offset the cost increases even as their businesses continue to experience double-digits growth.

The top-line growth on the vendor side was a clear reflection of the preparation made by retail for what was expected to be a break-out 2010 holiday selling period that in reality started fast but ended with a whimper. (See the fiscal fourth quarter retail report next week once all retailers have reported). Vendor inventories grew at the end of the third quarter to meet expected demand and actual sales outpaced those inventory builds by a wide margin. It appears that vendors are building inventories to prepare for a strong first quarter, but much of the reported inventory growth is also the result of companies taking goods in early before certain price hikes and/or to meet the demand of their own growing direct-to-consumer businesses.

Fourth quarter results shown in the charts on pages 3 and 4 are posted for those vendor companies that have reported for the period ended closest to the end of December.  However, because the report is based mostly on public company filings and is not a complete picture of the entire industry, Sports Executive Weekly feels the total numbers are less significant than the trending information provided in the percentage increases and decreases.

Overall consolidated vendor revenues jumped more than 13% during the fourth quarter, with only eight of the 50 reporting companies posting a top-line decline for the period. Consolidated profits increased nearly 10% despite hits from numerous reported one-time charges.

By contrast, 24 of 48, or exactly half of companies reported sales growth in the prior-year fourth quarter when total sales growth averaged just 0.3%.  When excluding the troubled golf and firearms sectors and one-time charges associated with litigation expenses at Cybex — all reported in the Hardgoods segment of the business — consolidated profits would have jumped 25% for the period.

 

As expected, margin growth continued to moderate under pressure for the quarter, dipping to a decline – just 70 basis points – compared to the prior-year period. In comparison, margins jumped an average of 70 points in the third quarter of fiscal 2010 as reduced inventories leading into Q3 also reduced close-out pressures during the quarter.  More vendors are able to liquidate product through their own stores now, limiting the downward margin pressure historically experienced from aged inventories.

For the Softgoods sector, consolidated sales surged low-teens on growth by 24 of 26 brands as compared to the prior-year quarter, when only 12 of 26 brands reported top-line growth. Of note, brand Adidas (+14.5%), Asics (+11.2%) Nike (+9.9%) Reebok (+16.8%) and Under Armour (+35.5%) all turned in a stellar quarter from a top-line standpoint.

Earnings for the sector improved by more than 28% on bottom-line growth from Columbia, LaCrosse, Timberland and Under Armour, while Crocs and Broder Bros. turned their bottom-line frowns upside down and swung to profits for the quarter. The Softgoods sector maintained an solid average of 8.8% return-on-sales for the quarter, up almost a full point from the prior-year quarter, and clearly better than the Hardgoods sector’s ROS average.

All Softgoods segments exhibited double-digit sales growth for the quarter, but the Outdoor Footwear specialists fared the best, averaging 25% sales growth on strong performances from all brands and posted double-digit ROS ratios.

 

Athletic Footwear segment revenues were up 11% for the period on double-digit revenue gains from everyone but Heely’s (-41%) and K-Swiss (+1.5%).  Return on sales here were more modest, inching up 40 basis points to 5.4% of sales. For the Apparel specialists, a 17% sales spike was driven by Gildan (+50.3%), Columbia (+27.6%) and Under Armour. Earnings improved by nearly a quarter, resulting in return on sales of 10.4%, but margins slipped 140 basis points versus the prior-year period.

The Hardgoods sector – which includes more high-ticket product and “leisure” companies – continued its slow rebound as 18 of 24 companies reported flat or positive sales growth for the period. This compares to 16 of 23 in Q3 and just 12 of 22 in the prior-year period. Of the six companies in the Hardgoods sector reporting sales declines, two (Smith & Wesson, Freedom Group) were firearms companies and three (Aldila, Callaway, TMag) were golf companies. Gun companies have struggled mightily to compete with a 2008-2009 post-election buying craze and the golf industry may be the last segment to fully escape the recession.

The overall bottom line for the Hardgoods sector plummeted 53% versus the prior-year period on numerous one-time charges due to litigation or business divestures. Of note, Smith & Wesson reported a net loss of nearly $56 million due to the declining value of its newly acquired Universal Safety Response division and Cybex set aside $46 million for a lawsuit. Excluding the firearms and golf vendors and the Cybex charge, profits actually grew about 17% for the balance of the Hardgoods vendors.

For the fitness segment, sales dipped slightly due to a decline from Precor and flat sales at Nautilus. Cybex actually saw sales surge mid-teens for the quarter.  The segment continues to be challenged by lack of consumer credit and a dismal housing market