K2, Inc. Grabs Snow Sports Market Share in Fourth Quarter…

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 the fourth quarter of 2006 due primarily to increased sales of K2 and Volkl alpine skis and Marker bindings. Operating profit for the fourth quarter of 2006 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 the fourth quarter was primarily due to strong sales growth and lower SG&A expenses.

Apparel and Footwear net sales declined 10.4% during Q4 to $45.6 million compared to $50.9 million last year. 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.

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 as a result of lower gross margins due to product mix, and higher SG&A expenses.

Team Sports, which includes Rawlings, Worth, K2 Licensed Products and JT Sports (formerly known as Brass Eagle) had net sales of $89.9 million in the 2006 fourth quarter, up 3.3% from the 2005 period. The operating loss was $600,000 in the 2006 fourth quarter, compared to an adjusted loss of $2.8 million in 2005, excluding non-cash intangible charges and restructuring charges of $149.1 million. The improvement was primarily due to higher gross margins and lower SG&A expenses in the segment. Rawlings, Worth, Miken and deBeer currently have had “double-digits” increases in K2’s early order program.

The Rawlings brand grew product sales a little over 12% in '06. K2 also funded the establishment of a team tech center outside of St. Louis with $2.5 million in 2006.

The company now has 30 technical associates developing the next team product for Rawlings, Worth, Miken and deBeer.

Paintball has finally turned around for K2 and was profitable in 2006, compared to a heavy loss in 2005. The overall market has stabilized and is up mid-singles. Demand for paint balls is outstripping capacity and this year, the company will ship about 2.3 billion balls. Management also stated that the name change of the parent entity in the paintball business to JT Sports was to “better reflect the future product offering that will likely be part of that group, which will be more than just paintball.”

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.

>>>For more detailed discussion of Snow Sports product and the Apparel segment, see this week’s issue of The B.O.S.S Report…