Kellwood, the parent company to American recreation and its subsidiaries Sierra Designs and Kelty, reported a third quarter sales increase of 11.3% to $716.8 million compared to $644.1 million. The majority of the sales increase was attributed to an organic growth rate of 7%, while the Phat Farm acquisitions contributed $29 million to the top line.

The corporation experienced its first decline in gross margin in over two years, with an 80 basis point drop to 20.8% of sales compared to 21.6% last year. SG&A expenses increased by 50 basis points to 13.6% of sales because of additional costs associated with the recent acquisition of Phat Farm and Baby Phat.

The bottom line dropped slightly, with net earnings of $28.4 million compared to $30.3 million last year. Diluted EPS declined 10 cents to $1.01 per share compared to $1.11 last year.

Hal Upbin, Kellwood’s chairman and CEO, told analysts that the deal flow for acquisitions is relatively steady, but he called into quality of available deals.

Nonetheless, he said the company is in the process of “looking at one or more” that may be appropriate. Upbin expects the search to be more difficult as the company seeks out stronger brands than in the past.

Kellwood CFO Lee Caps told analysts that KWD had accumulated $209 million in cash, including the proceeds raised from the company’s $200 million convertible debenture. This cash is being held for a future acquisition.

Upbin also told analysts that the company’s American Recreation division, which houses Sierra Designs and Kelty, posted a sales increase of $900,000 or 3% during the third quarter, “reversing the downward trend” of the first half of the year.

Upbin feels the market for camping product becoming healthier, particularly for specialty retailers. However he was also happy to report that the mass market is seeing a stop in the price deflation it has experienced over the past few quarters.

“Following three years of acute price deflation in which selling prices dropped 20% to 25%, selling prices at retail have flattened…” said Upbin. “The market for camping products is improving, especially for the specialty store channel of distribution which carries our Sierra Designs and Kelty brands.”

Kellwood sales are expected to increase 13% to 15% in the fourth quarter to roughly $600 million compared to $521 million last year. The company expects growth from all divisions, including American Recreation. Net earnings from continued operations are expected to increase 7% to 13.7 million, and the company expects to see gross margin improvement once again.