K2 Grabs Snow Sports Market Share in Q4…

K2 Inc. appears to be the only publicly reporting Snow Sports company to see any up-side in the 2006-07 winter season. The company reported solid top-line and bottom line growth during the fourth quarter with these results primarily driven by winter sports sales. However, KTO management holds no illusions about the strength of the industry as a whole. Given the terrible winter conditions throughout much of the early season, KTO is expecting higher than usual inventories at retail and considerably lower pre-season orders next season.

K2 Inc. net sales increased 9.9% during the fourth quarter to $388.6 million versus $353.5 million in the prior year. The increase was mainly due to growth in winter product sales within the Action Sports segment. The acquisition of Sevylor had no material impact on sales in the fourth quarter since the business is seasonally slow in that period.

Gross margins increased 30 basis points to 36.2% in the fourth quarter of 2006 compared to 35.9%, in the fourth quarter of 2005. SG&A expenses as a percentage of net sales on an adjusted basis increased 160 basis points to 29.3% in the fourth quarter of 2006 compared to 27.7% last year. This was due primarily to $3.6 million in legal expense and higher advertising and marketing expense in the Apparel and Footwear segment.

During last year’s fourth quarter, K2 Inc. took a $250 million non-cash intangible impairment charge that caused the company to post a net loss of $232 million, or $5.01 per share. This year, adjusted net income for the fourth quarter was $13.4 million compared to adjusted net income (excluding the impairment charge) of $14.7 million. Diluted EPS was 25 cents compared to 28 cents, on an adjusted basis, in the fourth quarter of 2005.

Action Sports net sales increased 22.6% to $178.2 million in Q4 due primarily to increased sales of K2 and Volkl alpine skis and Marker bindings. Operating profit for the fourth quarter was up 15.5% to $27.9 million compared to the operating profit in the fourth quarter 2005 of $24.1 million, excluding the non-cash intangible charges in the segment of $108.1 million. The increase in operating profit for Q4 was primarily due to strong sales growth and lower SG&A expenses.

Sales for winter hard goods for the fourth quarter were up $33 million or 22% led by K2 skis, K2 snowboards and Ride snowboards. Management expects pre-season winter sales to be down industry-wide 10% to 15%, with snowboard pre-season “a little stronger” than alpine skis. Management expects K2’s brands to have a pre-season decline of only 5% to 7% due to market share gains. K2 also stated that their brands inventories are “in good shape,” and any close-out activity will come from retailers with too much product currently on the shelves.

Management said that they are not looking for a ski-specific acquisition currently, but they might be considering something in accessories to skis. During a conference call with analysts, Mr. Merck cited specifically the fact that K2 doesn’t own a boot company.

Apparel and Footwear net sales declined 10.4% during the fourth quarter to $45.6 million compared to $50.9 million last year. This was due to reduced sales of Marmot winter outerwear products as a consequence of lower re-orders due to warm winter conditions, and due to declines in sales of skateboard shoes and apparel. Operating profit for the fourth quarter was $1.1 million, or only 2.4% of sales, compared to an operating profit of $5.4 million, or 10.6% of sales in 2005. This was due to lower gross margins and higher SG&A expenses.

In spite of the overall declines during Q4, management said that Marmot sales through the outdoor distribution channel were up in the low-singles. In addition, the colder weather in January and February has helped clean out inventory and Marmot reported record sales in the month of February. During the first two months of FY 2007, the Apparel and Footwear segment reported shipments increased 25%.

Marine and Outdoor generated net sales of $74.9 million in the fourth quarter of 2006, an increase of 6.5% from the comparable quarter in 2005. Operating income fell 33% to $3.2 million in 2006 from $4.8 million in 2005. K2 management pointed out that less than 30% of K2’s products are winter while the other 70% benefit from warm weather. The business is also benefiting from the aggressive retail square footage expansion. However, management doesn’t believe that demand will catch with the current square footage for many years.

Looking ahead, K2 believes sales will be in the range of $1.46 billion to $1.51 billion. Adjusted EPS guidance is from 90 cents to 94 cents per share. Management is “very confident” that every segment will have an increase in earnings in 2007. Sales for Team and Marine and Outdoor will increase in the low- to mid-single digits. Sales in Apparel and Footwear are expected to be higher. Looking out to 2008 and beyond, management believes earnings will grow in the 8% to 12% range.