When the announcement about Nautilus, Inc.s acquisition of Pearl Izumi USA first came across the wire on Friday morning the SportsNewsSource office had three general responses to the deal, and none of them — especially one that contained an expletive and the word nuts — came close to positive. It appears we werent alone, as others in the press and on Wall Street took to scratching their heads over the benefits for either company in the deal.
Nautilus, Inc. announced Friday morning a deal to acquire Pearl Izumi USA for $68 million in cash and about $6 million in assumed debt. NLS said the deal would be neutral to earnings in 2005, but would be accretive to the tune of roughly 6 cents to 8 cents per share in 2006. Pearl reportedly posted about $49 million in sales in 2004 and has increased sales 15% per year since 2001. Based on those numbers, the deal would figure at about 1.3x 2005 sales or 1.5x the 2004 numbers. To keep the deal in the 7.5x earnings neighborhood — which seems to be the sweet spot for the sector — Pearl would need to generate operating margins of about 17.5% in 2005.
A contributor to MotleyFool.com did the math that indicated, based on Nautilus EPS and sales growth estimates, Pearl Izumi should generate $65 million in sales in 2006 and about $2.6 million in profits, or 8 cents per share times 32.87 million shares. The writer noted that profit margins would only be about 4% of sales.
Gregg Hammann, chairman and CEO of Nautilus, Inc., indicated in a release that the acquisition is “a natural extension” of their strategy and would “provide a highly complementary entry into the $2 billion high-performance fitness apparel market.” He also said that Pearl Izumi had a 16% share in the high-performance cycling apparel market and had recently established a presence in the running apparel segment. Market watchers told SEW that Pearls share in the better cycling apparel market is closer to 35%. The retailers that have been carrying Pearl running apparel for years would be surprised to find out that they were a recent addition to their mix. Perhaps Mr. Hammann was referring to Pearl Izumis entry into the running footwear business, a venture that has seen mixed results according to retailers SEW spoke with recently.
Where Nautilus sees the synergies is anyones guess. SEW cannot identify any sourcing upside and sees little to no synergy in distribution. As for getting into the “high-performance fitness apparel market”, it is a category dominated by strong brands like adidas, Nike, and Under Armour that have a near-stranglehold presence at sporting goods retail. If they expect to compete in the womens market, they will need to build legitimacy as a womens brand as well. After the top tier, the business is made up of small companies doing $10 million to $25 million each, if that.
Pearl Izumi USA has about 130 employees. Nautilus said that the leadership, including president, Jerry Edwards, and staff are “expected to continue with the organization.” Some administrative functions may be moved to Nautilus HQ “eventually”.
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