Reebok International Ltd. capitalized on a combination of one-time charges in the second quarter last year, the acquisition of The Hockey Company, and a nice gain in gross margin to post a healthy increase in the bottom line in the second quarter ended June 30. Excluding the impact of the charge in the year-ago period, net income still increased 28.4%. Sales also got a boost from the inclusion of THC and benefits from FX rates as Reebok’s 7.7% sales increase for the period shrunk to just 0.1% when excluding the impact of THC and currency.

The company reported that order backlogs for the Reebok brand, which now includes the CCM, JOFA, Koho, and Roger Edwards hockey brands from THC, rose just 0.5% at quarter-end. Company CFO Ken Watchmaker did stress that futures were less of an indicator of forward-looking results than in the past, due primarily to a shift in how they handle licensed apparel jersey sales as well as a reduction in Classics leather sales to Foot Locker. He stressed his position by pointing out that 44% of the total reported sales for RBK in Q2 were not in the open order backlog reported at the end of Q1. The fill-in business was flat for Q2 and owned-retail was down, so the balance apparently came from a combination of fewer cancellations and increases at Rockport and Greg Norman Collection.

The Foot Locker issue may be interesting to watch as Reebok finds itself in the company of Nike and K-Swiss in disagreements with Foot Locker. Based on comments made by senior management during a conference call with analysts, it appears that Reebok is attempting to limit the amount of Classics product moving through Foot Locker. Foot Locker, for their part, is de-emphasizing the value Classics business as the consumer opts for more performance-oriented product at higher price-points. Watchmaker said that Reebok Classics were still generally among the top 5 selling footwear products on a weekly basis, averaging 50,000 to 75,000 pairs per week.

Based on how NKE and KSWS shares have performed since their Foot Locker disputes, maybe this signals an upside for RBK shares down the road. Still, these issues end well for the vendor only when there is the willpower to stay the course, something that the corner office in Canton has had difficulty with in the past.

The one element that may give Reebok a little more staying power is the fact that Nike pulled out of Sears and that move will certainly open up some open-to-buy there, OTB that Reebok lost when Nike went back in to Sears in the late 90’s. It’s not necessarily in line with the brand mission to become more aspirational, but it will keep revenues up as they shift energy to performance and music-related product.

Reebok stressed that they are seeing a move to more performance product, touting a 24% sales increase in those categories for Q2, while Classics sales declined on the Foot Locker changes. Sales of Classics to the balance of retail were said to be up for the period. Classics were also said to be performing well in Europe. Backlog for the performance categories, which includes basketball, running, cleated, training, and tennis, were up in double-digits.

Technology product as a percentage of total product offerings, excluding Classics and kid’s, is expected to increase to 52% of the business in 2005 from 37% in 2004.

One curious factoid came when Watchmaker revealed that despite the decline in Classics sales, and the increase in performance sales, average selling prices stayed flat for the quarter. He explained that some of the increase in performance sales replaced sales of higher price-point music-related product, and that Classics derivatives, which carry higher price-points, were also affected by the Foot Locker pull back on the category. It will be interesting to see what K-Swiss reports this week on their FL business.

(in $ millions)  Second Quarter Sales Comparison Backlog
2005 2004 Change Organic Change* Change Currency
Neutral 
Reebok Total $740.1 $681.0 8.7% -0.1% 0.6% 0.5%
Footwear $491.6 $450.7 9.1% 4.5% -1.9% -2.0%
Apparel $248.5 $230.3 7.9% -9.2% 4.3% 4.2%
Reebok U.S. $390.4 $368.9 5.8% 2.2% -0.1% n/a
Footwear $281.2 $279.3 0.7% -0.9% -0.7% n/a
Apparel $109.2 $89.6 21.9% 11.6% 1.0% n/a
Reebok Int’l $349.7 $312.1 12.0% -2.8% 1.7% 1.4%
Footwear $210.4 $171.4 22.8% 13.0% -3.9% -4.2%
Apparel $139.3

About The Author

Teresa Hartford

Teresa Hartford Editorial & Creative Director | SGB Media teresa@sgbonline.com | 704.651.5741

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