Dorel’s recreational and leisure segment, which is made up almost entirely of Pacific Cycle, parent company to the Schwinn, Mongoose, and GT brands, saw a tough second quarter as mass merchant customers looked to reduce inventories and an excess Stingray inventory sell-off impacted margins. Division revenues decreased 9.9% to $99.6 million from $110.6 million last year. The decline in revenues was partially offset by new product extensions and a 29% increase in sales to the Independent Bike Dealer channel.

Gross margins decreased by 590 basis points in the quarter to 15.6% compared to 21.5% last year. This decline includes the $3.5 million pre-tax reserve taken against Sting Ray bicycle inventory in the second quarter. Without this reserve, gross margins for the quarter would have been 19.1%. Earnings from operations were down 57.5% to $5.7 million from $13.4 million. Without the $3.5 million write-down, operating earnings would have been $9.2 million for the quarter.

Management said that this write-down would be a one time event, and “hopefully by the end of the year we dont have this ever again.”

Pacific is finding that the big retailers are increasingly going in a brand direction and looking for mid- to upper-price point merchandise. One of Pacific’s major mass merchant customers has integrated a new bicycle concept within their bicycle department, presumably the Wal-Mart shop-in-shop concept featured on the cover of Bicycle Retailer & Industry News last month. These departments have a distinct “Independent Bike Dealer look” and feature higher-priced items.

During a conference call with analysts and the media, Dorel’s president and CEO, Martin Schwartz said, “These have done so well, with comp sales up substantially, that the concept is being planned for six other outlets between now and next spring. Additionally, parts of the concept will be rolled out throughout the chain to as many stores as we can handle.”

Pacific’s Independent Bicycle channel continues to grow, with sales up 29% in Q2. The strategy to make the GT line exclusive to this channel “has proven to be the right one.” Total sales dollars, units, and an average dollar unit cost are all increasing.

Schwartz also said that moving forward, Dorel will be placing more focus on non-bike recreation categories. “I will tell you where our big focus is, is to grow outside of bicycles. Because we think that is where there is a lot of potential, and we are starting to see that,” he said. “As much as we focus on growing the bikes, we are focusing on growing the non-bicycle recreation products. I think that is what our future is going to be.”

For the six months year-to-date, recreation & leisure revenue dropped 8.7% to $176.8 million from $193.7 million. Year-to-date earnings from operations decreased 42.5% to $12.7 million from $22.1 million last year. While inventory cut-backs at retail impacted the first half substantially, Pacific management expects second half sales and earnings to exceed the first-half level and the division should return to year-over-year growth.


>>> Let’s see how the IBD’s respond to a mass retailer with IBD-like appeal. Of course, they’re still not opening their own Schwinn and GT shops right across the street…