K2 Inc. sees flat markets in all of its product categories with the exception of paintball, forcing the company to fight a market share battle for most of its acquired brands while squeezing out incremental profits through its own manufacturing capabilities and operational efficiencies. K2 reported first quarter sales that came in roughly 10% above its guidance while posting earnings per share that beat analysts estimates by a penny.
The company also announced two new acquisitions last week that give it access to the upper-end of the paintball market and broadens its outdoor penetration with an ATV accessory line.
The market share fight appears to be working as K2 saw sales in its comparable business, which excludes acquisitions and divestures after first quarter last year, grow 7.6% to $161.1 million in Q1 versus $149.7 million in the year-ago period. While the profit picture is also said to be improving, there was no like-to-like comparisons on the earnings front.
The Marine and Outdoor and Outdoor group had no acquisitions of note in the past year, but the group did divest itself of the companys light pole business as K2 made the fundamental decision to focus on sporting goods. Operating profits were up 4.8% over last years Q1, excluding the light pole business.
One of the new acquisitions announced last week will reside here as well as K2 picks up Innovative Products, Inc., which markets accessories for all-terrain vehicles, including gun, bow and luggage racks. IPI will integrate into the Stearns division, benefiting from common manufacturing and distribution channels. Company CEO Dick Heckman said the deal originated from a suggestion from a retailer that saw it as a good fit.
The Team Sports group, which includes Rawlings, Worth, and K2 Licensing & Promotions (the former Fotoball USA), saw mid single-digit increase across “several” product lines including balls, bats and gloves. The group showed an $11 million profit from operations in Q1 versus a $500,000 loss in the year-ago period.
In a conference call with analysts, Heckman said that “happy would be an understatement” when he was asked about his view of the now year-old Rawlings deal and the subsequent Worth acquisition. He said that the group sold 30,000 Rawlings Liquidmetal bats in Q1.
The Action Sports group, which now all skis, snowboards, in-line skates, bikes, skateboard shoes and paintball products, reduced its “normal seasonal loss” in the first quarter to $4.1 million versus a $4.7 million loss in the year-ago period. Organic growth was achieved here through double-digit increases in skis and snowboards and a 72% increase in sales of skateboard shoes. The balance of the sales increase for the group came from the acquisitions of Atlas and Tubbs snowshoes through the Q4 WinterQuest deal, and Brass Eagle paintball products.
Brass Eagle was said to have generated a 59% sales increase to $21.3 million compared to the year-ago quarter. K2 feels they own roughly 30% of the paintball market. Brass Eagle markers are now being manufactured in China for the first time. The other acquisition announced last week for Worr Games paintball products is expected to give K2 a access point to the specialty market for paintball as Brass Eagle is seen as “strong on the low end”, while Worr Games is expected to benefit from K2s distribution and manufacturing.
The skate shoe category, led by the companys Adio brand, saw sales jump 72% in the quarter and shows no signs of slowing anytime soon. Current bookings were reportedly up 71% at quarter-end.
Heckman said that K2 is the last-standing U.S. ski company and indicated that the brand sold almost one out of four skis sold this past season. He said he thinks the same thing is true in snowboards. Sales were up 16% in Q1 and K2 pre-season orders for next season are said to be “up again” over a “strong” 03/04 season.
The company said Q2 will be “flat to last year”, forecasting sales of $230 to $240 million and diluted earnings of about 16 cents, which is expected to be driven by Marine & Outdoor followed by Team Sports. Analysts said they were looking for sales of $242.4 million and earnings of 20 cents per share.
Heckman was also asked about Reeboks acquisition of The Hockey Company and said that K2 pulled out late in the process due in part to his belief that there is going to be an NHL strike. He said Reebok probably has ways to weather a strike.
“Were not gonna do diluted deals,” said Heckman in reference to the THC deal. “Deals are coming back around these days,” he said, referring to deals that K2 has passed on so far that we assume are being offered again at more attractive terms.
