Reebok International Ltd. reported net income for the fourth quarter ended December 31, 2004 increased 70.4% to $47.7 million, or 78 cents per diluted share, compared to net income of $28 million, or 44 cents per diluted share in the fourth quarter of 2003.
In the fourth quarter the Company recorded a one-time income tax benefit of approximately $12 million as a result of the recently enacted legislation regarding foreign earnings repatriation and foreign tax credit carry forwards (including the Company’s re-evaluation of its position with respect to deferred income taxes provided on unremitted foreign earnings) and due to the favorable resolution of certain outstanding tax matters.
Excluding the effect of this one-time income tax benefit, net income for the quarter was $35.7 million or 59 cents per diluted share, an earnings per share increase of 34% as compared to last year’s fourth quarter earnings per diluted share.
For the full year ended December 31, 2004, net income was $192.4 million or $3.05 per diluted share, an earnings per share increase of 26% when compared with net income of $157 million or $2.43 per share for the 2003 comparable period. The full year also includes the one-time income tax benefit of $12 million from the new legislation and resolution of certain outstanding tax matters as well as a one-time after-tax charge of $7 million resulting from the early redemption of the Company’s $250 million debentures in the second quarter of 2004. Excluding the effect of these unusual items, net income was $187.5 million or $2.98 per diluted share, an earnings per share increase of 23% as compared with net income of $157.3 million or $2.43 per diluted share for the 2003 comparable period.
Net sales for the 2004 fourth quarter were $975 million, an increase of 16% from 2003’s fourth quarter net sales of $844 million. The acquisition of The Hockey Company, effective on June 30, 2004, favorably impacted sales comparisons as did foreign currency exchange rate fluctuations. The Hockey Company sales which were $59 million in the fourth quarter and $146 million since the date of acquisition are included in the reported sales of the Reebok Brand. On a constant dollar basis, fourth quarter sales increased approximately 13% over the prior year’s fourth quarter sales. For the Reebok Brand, worldwide sales in the 2004 fourth quarter increased 18% to $817 million.
In the U.S., sales for the Reebok Brand increased 9% in the fourth quarter as compared with 2003’s fourth quarter. The Company’s international sales of Reebok branded products amounted to $400 million in the quarter, an increase of 29% over 2003’s fourth quarter sales. On a constant dollar basis, fourth quarter international sales increased approximately 20% over the prior year’s fourth quarter sales.
Sales for the Company’s other brands; Rockport, the Greg Norman Collection and Ralph Lauren Footwear, were $158 million in the fourth quarter of 2004 compared with 2003’s fourth quarter sales of $149 million, an increase of 6%.
Net sales for all of 2004 were $3.8 billion, an increase of 9% from 2003 net sales of $3.5 billion. On a constant dollar basis, net sales increased approximately 5% over the prior year’s sales. Worldwide sales for the Reebok Brand in 2004 were $3.2 billion as compared with 2003’s sales of $2.9 billion, an increase of 10%.
The Company reported that its total worldwide backlog of open customer orders (including those of The Hockey Company) scheduled for delivery from January 2005 through June 2005 for the Reebok Brand increased 2% from the prior year’s comparable amount. On a constant dollar basis, worldwide backlog for the Reebok Brand decreased 1%.
Paul Fireman, the Company’s Chairman and Chief Executive Officer said, “I am pleased with our overall results for the year. We achieved the highest sales results in the history of the Company. During the year, all of our brands; Reebok, Rockport, Greg Norman and Ralph Lauren Footwear reported sales increases over comparable 2003 levels. This also marks our fifth consecutive year of earnings improvement. We achieved our earnings growth this year through increased revenues and by accomplishing our previously stated goal of improving the operating margins for the Company. We were able to improve our operating margins while at the same time investing in brand building initiatives that we believe are necessary for the long-term health of our brands. For our Reebok Brand, we continued to invest in our three product and marketing platforms: “Performance”, “Rbk” and “Classic”.
“One of our key strategic objectives in 2004 was to strengthen the Reebok Brand’s performance positioning and we are pleased with the progress we made this past year,” Fireman said. “The success of Premier running in running specialty shops has been a critical component in improving our running business worldwide. We are beginning to experience the benefit of leveraging the authenticity of Premier running products into other running product offerings to reach multiple channels of distribution and a broader consumer base with a greater range of price points. As a result, worldwide sales of footwear running products during 2004 increased by 26%.”
“Another key component of our performance platform is our sports licensing initiative, which includes agreements with all four major professional sports leagues in the United States. Sales of sports licensed apparel products increased during the quarter and for the full year. This marks the fourth consecutive year of increased sales for this important aspect of our performance positioning. Our league partnerships underscore our commitment to be a true performance brand. Our acquisition of The Hockey Company in 2004 and its portfolio of three of the world’s most respected hockey brands – CCM, JOFA and KOHO – is consistent with our strategy to build a powerful global sports performance company across the broad spectrum of sports activities,” Fireman added.
“With respect to our Rbk product and marketing platform, we continue to have success in connecting our Brand with global youth around the world. The original strategy behind Rbk was to become relevant to young men as a street-inspired brand through inspirational basketball product and marketing. What we found is that Rbk has been well received as a fresher, newer look for the entire Reebok Brand and that we can leverage the possibilities of Rbk across multiple segments of our business for both men and women. We are introducing Rbk products in multiple categories such as basketball, running, training, tennis and cleated for both the suburban and urban consumer. During 2004 we also expanded the reach of our music partnerships into multiple product categories. Rbk is becoming more relevant with younger consumers and has paved the way for a much broader Rbk presentation at retail in the future,” Fireman said.
“Our third product and marketing platform, Reebok Classic, continues to target the various lifestyles of our consumers with several distinct product collections. These collections are segmented by different channels of retail distribution and satisfy our consumers needs in both the lifestyle and fashion categories of athletic footwear. We believe that our strategy to evolve the mix of Classic product into new collections that are more contemporary and appeal to a younger consumer is working,” added Fireman.
“Looking forward to 2005 for the Reebok Brand, we will continue to focus on growing quality market share and making the investments necessary to return the Brand to its rightful place as an industry leader and innovator. Our mission is to enroll global youth through sports, music and technology. We plan to expand our successful Rbk product and marketing platform to include a broader range of aspirational and stylish products that appeal to young consumers. Our strategy is to establish Rbk as a collection of the Brand’s most influential and aspirational footwear, apparel and equipment. We intend to evolve our Rbk platform into a broader initiative that includes performance and lifestyle product for men and women. The feedback we have received from consumers and retailers regarding our Rbk branding is very positive,” Fireman said.
“Footwear technology will continue to play an important role in our performance positioning during 2005 and beyond. There is a tremendous consumer demand for breakthrough technology that enhances individual performance. The Pump, DMX and DMX Shear are three of our primary technologies that differentiate our products from that of our competitors. Debuting for the first time in February, just in time for the NBA All Star game, is the ATR Pump which all Reebok athletes participating in the game will wear. In April we plan to introduce our newest Pump technology which we refer to as Pump 2.0, an evolution of our original and highly successful Pump technology. This Pump system is designed to automatically inflate with the first step and then with each subsequent step, it adjusts itself for a customized fit. Pump 2.0 will be featured across multiple product categories during 2005, including running and basketball for both men and women,” Fireman added.
“In support of our new product introductions and our brand building initiatives, we plan to launch, in February, our new global advertising and marketing campaign for the Reebok Brand. The campaign will link all of our marketing efforts under one message to create our largest marketing investment for a single brand campaign in many years. This campaign includes many of our athletes and some of the entertainment industry’s most influential personalities. We believe that our new Brand campaign will resonate with our target consumers and will be an effective communication vehicle to elevate the Brand’s positioning and appeal,” said Fireman.
“The Company’s other brands; Rockport, the Greg Norman Collection and Ralph Lauren Footwear, all improved their sales and operating performance during 2004,” Fireman noted. “2004 has been a turnaround year for the Rockport Brand. We are particularly pleased with their second half results and their trends going into 2005. Sales at Rockport have begun to grow again and their key financial indicators are trending up. But perhaps most importantly, the brand has regained its rightful position in the marketplace as an innovative, aspirational and quality brand. Rockport’s products that are currently being delivered into the marketplace are the best this brand has shipped to retail in many years. Our Greg Norman brand turned in another solid performance in 2004. During the year, Greg Norman sales to green grass golf accounts increased significantly as many of their new product offerings were extremely well received by consumers. The Greg Norman women’s collection made up entirely of Play Dry fabrics, also continues to gain momentum,” Fireman said.
The Company reported that its gross margin for the fourth quarter of 2004 was 38.5%, an improvement of 30 basis points when compared with the gross margin of 38.2% in the fourth quarter of 2003. “For the quarter, the margin improvement came in both the U.S. and international businesses,” Fireman noted.
Accounts receivable at December 31, 2004 were $661 million compared to $532 million a year ago. Worldwide inventories at December 31, 2004 totaled $458 million, compared to $353 million a year ago. “The increase in accounts receivable is primarily related to our acquisition of The Hockey Company and to the effects of currency. Excluding these factors, our accounts receivable increase is in line with our constant dollar sales growth in the quarter,” Fireman noted. “With respect to inventory, excluding The Hockey Company and the effects of currency, our inventory increased $40 million over the prior year’s comparable amount. A portion of this increase relates to our sports licensed group of products due to the inclusion of new NBA product categories that are now part of our NBA license, as well as inventory to support the growth of our fan-based business. In addition, the growth comes from product to support the improved outlook of certain of our businesses such as Japan, Asia, Korea and retail. For 2004 our inventory turns improved slightly from 2003 levels,” Fireman said.
The Company noted that during the year it had returned $101 million dollars to shareholders in the form of dividends and share repurchases, representing approximately 52% of its after-tax earnings.
“2004 was a good year for the Company, but we still have much work to do. We must improve the operating margins of our Company,” Fireman said. Our goal with respect to 2005 is to grow our earnings per share in the range of 15% from our 2004 earnings per share of $2.98 which excludes the effect of the unusual items in 2004. We are planning for this earnings per share improvement to come from a combination of revenue increases in the mid-single digit range and improvement in our operating margins. I am confident that our management team is up to this task and that we will continue to deliver improved operating performance which will result in increasing returns for our valued shareholders,” Fireman concluded.
Reebok International Ltd THREE MONTHS ENDED DECEMBER 31, (Amounts in millions except per share data) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003 ------------------------------------------------ -------- -------- Net sales $ 975.1 $ 843.6 Cost of sales 599.6 521.6 -------- -------- Gross Margin 375.5 322.0 % of Net sales 38.5% 38.2% Selling, general and administrative expenses 320.3 277.0 % of Net sales 32.8% 32.8% Interest expense, net 4.0 4.3 Other expenses, net 0.7 0.3 -------- -------- Income before income taxes and minority interest 50.5 40.4 % of Net sales 5.2% 4.8% Income taxes (1) 2.8 12.3 -------- -------- Income before minority interest 47.7 28.1 Minority interest - - -------- -------- Net income $ 47.7 $ 28.1 ======== ======== Basic earnings per share $ 0.82 $ 0.47 Diluted earnings per share (2) $ 0.78 $ 0.44 (1) Includes a $12.0 one time income tax benefit resulting from new legislation regarding the repatriation of foreign earnings and tax credit carryforwards and due to the favorable resolution of certain outstanding tax matters. Reebok International Ltd TWELVE MONTHS ENDED DECEMBER 31, (Amounts in millions except per share data) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003 ------------------------------------------------ --------- --------- Net sales $ 3,785.3 $ 3,485.3 Cost of sales 2,287.3 2,147.1 --------- --------- Gross Margin 1,498.0 1,338.2 % of Net sales 39.6% 38.4% Selling, general and administrative expenses 1,203.7 1,085.8 % of Net sales 31.8% 31.2% Interest expense, net 13.4 17.4 Other expenses, net 4.9 0.8 Loss on extinguishment of debt (1) 10.2 - --------- --------- Income before income taxes and minority interest 265.8 234.2 % of Net sales 7.0% 6.7% Income taxes (2) 68.5 72.1 --------- --------- Income before minority interest 197.3 162.1 Minority interest 4.9 4.8 --------- --------- Net income $ 192.4 $ 157.3 ========= ========= Basic earnings per share $ 3.26 $ 2.65 Diluted earnings per share (3) $ 3.05 $ 2.43