At the end of Q2 last year, the deal environment was just beginning to
stagnate. Today, mergers and acquisitions are practically a non-issue
as the private equity market is at a standstill and the major strategic
buyers have gorged themselves on deals and now need to focus on
integration. As such, second quarter financial results are strictly
impacted by organic growth, or in a few cases the lack there of. The
softgoods sector outpaced the hardgoods sector in both bottom and
top-line results, while retailers profits out-paced sales
The B.O.S.S. Report presents an overview of second quarter industry
results in the chart on page three. Results are posted for those
companies that have reported for the period ended closest to the end of
June.
One of the biggest impacts on softgoods growth for the quarter was
again Crocs, which remained the leading company in organic growth.
Without the gaudy rubber clogs in the picture, sales would have been up
16.6% with footwear vendors leading the way in both sales increases and
decreases.
Other than Crocs, the biggest top-line gains in footwear came from
Deckers and LaCrosse. However, in Deckers case, this sales gain came
with a hefty price tag a 400 basis point decline in gross margin.
Apparel sales gains were led by Under Armour, Volcom and VFCs Outdoor
Coalition including TNF and JanSport. There were no sales declines in
the apparel sector.
The heaviest declines in softgoods came from Timberland and Phoenix
Footwear, which recently divested its Royal Robbins apparel brand to
Kellwood. Most of Timberlands declines were the result of its
struggling “Yellow Boot” business, which is undergoing a distribution
rationalization.
Overall margins in softgoods remained steady, with a 1 percentage point
increase in the sector average. However, the underlying numbers reveal
a chaotic market, with some brands showing 300+ basis point increases
and others showing 400+ basis point declines.
Profitability in the softgoods sector was up considerably thanks to
gains at COLM, CROX and Under Armour. However, those gains were held
back by a heavy loss from Quiksilver and expanding losses from both
Timberland and Rocky Brands.
Quiksilvers problems actually stemmed from its recent acquisition of
Rossignol and Cleveland Golf, which may both be sold off shortly (see
page 4). Without Quiksilver in the mix, outdoor softgoods income would
have increased 33% for the second quarter.
Return on sales, a metric that measures net income as a percentage of
sales, increased in the second quarter for the softgoods sector to 4.9%
compared to 4.0% last year. Much of this improvement is due to
Columbias impressive triple-digit increase in earnings on a
low-single-digit sales increase.
Hardgoods sales were up in the double-digits overall in spite of a
major slow-down in the snow sport industry caused by unseasonably warm
weather and no snow throughout all of Europe and most of both coasts in
the U.S. The biggest increases came from the two sunglass companies
Oakley and Orange 21. Without the impact of the slow wintersports
companies, sales would have increased 20.8% for the quarter.
Hardgoods gross margins increased considerably during the quarter with
gains from every company in the sector. Head is the only company to
show any margin erosion and this was primarily due to its reliance on
winter sports.
Hardgoods profitability was also impacted by the three major snow
sports companies, which all reported expanding losses for the
seasonally slow second quarter. In addition, most of these companies
are cutting back their production for the year to reflect the realities
of this shrinking market.
Return on sales in the hardgoods sector is still in negative territory,
but the sector did show some improvements, narrowing the loss to -0.9%
of sales compared to -1.5% of sales last year. Most of this gain was
due to Easton Bell Sports, which is now reaping the rewards of
integration between the two large hardgoods companies that were its
namesake.
Retailers showed improvements in every major metric, with only two
companies showing slower sales for the quarter and only a few of the
publicly reporting companies showing slight margin erosion. Lululemon
took over as the fastest growing retail chain in this report, while
Zumiez, which held the title last year, continued to show impressive
results. In addition, Dicks Sporting Goods posted it first $1 billion
quarter, thanks in part to the addition of Golf Galaxy. Timberlands
U.S. retail business showed a continued slow-down also related to its
urban business slow-down. West Marines business was impacted by a slow
power boat market due to higher gas prices.
Retail gross margins inched up just over half of a percentage point
with Lululemons gains pushing the sector higher. However, the majority
of all retailers showed consistent gains in this metric. All four
companies that showed any margin erosion held prices high enough to
limit any movement to less than a percentage point.
On the bottom line, retailers made considerable gains with double- or
triple-digit increases from every reporting retailer except for four.
Big 5s earnings slipped due to “macro economic issues” that brought a
45 quarter positive comps streak to an end. GSICs quarterly loss
widened during this seasonally slow quarter and both Sport Chalet and
The Walking Company slipped to a loss due to expansion investment.
Return on sales increased 70 basis points to 2.9% of sales compared to
2.2% last year due to solid increases in profitability at Forzani,
Dicks Sporting Goods, Zumiez and West Marine.
Overall, the publicly reporting outdoor companies are performing well
and the mood on the OR show floor supports the numbers reported in the
market. Snow sports companies continue to struggle with weather related
issues; however, massive restructuring efforts underway at Salomon and
Rossignol promise to return the sector to profitability, if not growth.
