Reebok International Ltd. reported net income for the third quarter increased 30.5% to $82 million, or $1.36 per diluted share, compared to net income of $63 million, or 96 cents per diluted share, in the third quarter of 2003.
Net sales for the 2004 third quarter were $1.165 billion, an increase of 12% from 2003's third quarter net sales of $1.041 billion. 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 results are included in the Reebok Brand for the third quarter of 2004. On a constant dollar basis, third quarter sales increased approximately 9% over the prior year's third quarter sales. For the Reebok Brand, worldwide sales in the 2004 third quarter increased 12% to $1.003 billion compared to 2003's third quarter sales of $892 million.
In the U.S., sales for the Reebok Brand increased 4% in the third quarter as compared with 2003's third quarter. The Company's international sales of Reebok branded products amounted to $497 million in the quarter, an increase of 23% over 2003's third quarter sales.
Sales for the Company's other brands; Rockport, Ralph Lauren Footwear and The Greg Norman Collection, were $162 million in the third quarter of 2004 compared with 2003's third quarter sales of $149 million, an increase of 9%.
The Company reported that its total worldwide backlog of open customer orders (including those of The Hockey Company which was recently acquired) scheduled for delivery from October 2004 through March 2005 for the Reebok Brand increased 5% from the prior year's comparable amount. On a constant dollar basis, overall backlog for the Reebok Brand increased 2%.
Paul Fireman, the Company's Chairman and Chief Executive Officer said, “I am pleased with our overall financial performance for the quarter. We were able to increase our revenues and improve our operating margins despite some very challenging retail conditions in many of our key markets around the world. One of our key strategic objectives entering 2004 was to improve the operating margins of the Company and we have achieved our goal in both the quarter and on a year-to-date basis. Another goal for 2004 was to grow quality market share for our footwear business with those customers that support and enhance the essence of our Brand. According to NPD, an independent market research firm, Reebok has achieved positive market share comparisons in the critical athletic specialty and sporting goods channels of distribution for 18 consecutive months. As part of our strategy to grow quality market share, we continue to invest in three key product and marketing platforms: Performance, Rbk and Classic. These three platforms have been instrumental in helping us to improve our operating results during the year.”
“The improvement in the Reebok Brand's Performance positioning around the world is a strategic priority of the Company and we are making steady progress. The Premier Series collection of Performance running footwear is an important element of this strategy. We launched Premier approximately two years ago and we have been successful in consistently improving our penetration into running specialty accounts around the world. Our success with running specialty accounts has allowed us to begin to expand Premier running products into the athletic specialty and sporting goods channels of distribution. And we are beginning to successfully execute our previously announced strategy to leverage the authenticity of Premier into other product offerings to reach multiple channels of distribution and a broader consumer base. As a result, during the quarter sales of Reebok running products worldwide increased by 46%,” Fireman added.
“Our technology platforms also play a significant role in our performance positioning. We believe that consumers today are looking for technology and customization to improve the performance and fit of the products they purchase. Over the past twelve months we have introduced several new enhancements to our DMX technology platform such as DMX Max and DMX Foam. And we've introduced some new performance technologies such as Shear Strip. However, our recent announcement concerning the introduction of an entirely new Pump technology that we refer to as Pump 2.0, is both exciting and revolutionary. Pump 2.0 is self inflating and self regulating, providing the consumer with an incredible custom fit that enhances performance. You will see the new Pump 2.0 running product being used at the upcoming N.Y. Marathon in November. At the same time, we will make a limited number of pairs available at retail. In 2005 we will begin our initial roll-out of the Pump 2.0 product in both the running and basketball categories,” Fireman said.
“Another important initiative in Reebok's global performance strategy is our relationship with Yao Ming and the impact he will have in the Asia market. We are working closely with The National Basketball Association (“NBA”) to develop an integrated marketing plan for China that leverages our partnerships with Yao and the NBA. Last week, Reebok was a sponsor of the first ever NBA games in China where Yao Ming's Houston Rockets played the Sacramento Kings in pre-season games in Beijing and Shanghai. NBA All-Star Yao Ming also debuted at the China games his new signature shoe from Reebok, the NBA High Post. We are optimistic that our association with the NBA and Yao will help us achieve our long-term goal to strengthen the Reebok Brand's visibility and grow quality market share in Asia and throughout the world.”
“Our Rbk platform is evolving into a broader initiative that includes performance, classic and lifestyle product for both men and women. We are introducing Rbk products in multiple categories such as basketball, running, training, tennis and boots for both the suburban and urban consumer. The recent feedback we've received from both consumers and retailers regarding our Rbk branding is very positive. Rbk is a big idea and we intend to leverage the possibilities across multiple segments of our business. During the quarter, sales of Rbk footwear products endorsed by music icons 50 Cent and Jay-Z more than doubled from the prior year's third quarter. Our new Ice Cream footwear collection, inspired by Pharrell Williams, also had strong sell throughs in directional accounts which help to set the trends for future seasons. In addition to Rbk music products, the Company will introduce several Rbk performance products to the market for the upcoming holiday season. The Answer 8, Iverson's newest game shoe which he will debut in the 2004-2005 NBA season, will hit retail in November. And the all new styling of our Above the Rim “ATR” basketball product collection will be seen at retail throughout the fourth quarter,” Fireman noted.
“Our third product and marketing platform, Reebok Classic, continued to perform well at retail during the all-important back-to-school season. Reebok Classic has evolved into more of a lifestyle business that targets various consumer groups with several distinct product collections. The Classic and lifestyle segments of Reebok's footwear business provide us with a long-term growth opportunity with both Classic originals, retro styled Classic products and newer, more fashion forward, lifestyle collections,” Fireman added.
The Company reported that its gross margin for the third quarter of 2004 was 40.4%, an improvement of 80 basis points when compared with the gross margin of 39.6% in the third quarter of 2003. “For the quarter, approximately one third of the margin improvement came from the U.S. with the balance of the improvement from our international business. Primarily all of the international margin improvement resulted from the strengthening exchange rates in many of our international businesses,” Fireman said.
Worldwide inventories at September 30, 2004 totaled $505 million, compared to $411 million a year ago. Accounts receivable at September 30, 2004 was $814 million compared to $687 million a year ago. “The increase in inventory and accounts receivable is primarily related to our acquisition of The Hockey Company which was effective on June 30, 2004 and to the effects of currency,” Fireman noted. “Excluding the impact of The Hockey Company and currency, our inventory increased approximately $20 million or about 5%, and our accounts receivable increased about $16 million or 2%,” Fireman said.
The Company announced earlier today its intention to conduct an Exchange Offer for its outstanding $350 million Convertible Debentures. The new $350 million Convertible Debentures that the Company plans to offer in exchange for the existing debentures will retain many of the same terms as the existing debentures but will have a net cash settlement feature that will allow holders to receive, on conversion, cash for the principal amount of the Debenture and stock for any remaining amount due. The purpose of the exchange offer is to address changing accounting principles and the impact they may have on future reported earnings per share. The Company will discuss the possible effect of the intended Exchange Offer on its earnings at its scheduled quarter-end conference call.
The Company noted that it had purchased 1,102,700 shares of its common stock for $37 million during the quarter. “The acquisition of shares is in line with our previously announced strategy to utilize share buybacks to partially offset the dilutive effect of outstanding stock options,” Fireman added. “During the first nine months of this year the Company has returned $95 million to shareholders in the form of dividends and share repurchases, representing approximately two-thirds of our after-tax earnings during that period,” Fireman noted.
“In summary, I am pleased with our performance in the quarter. We achieved the largest sales and earnings per share results in the history of the Company. Based on our results for the quarter and our goals for the balance of the year, we are re-affirming our most recent earnings guidance. I believe that our strategies are sound and that we have the product, marketing and valuable partnerships around the world to enable us to increase our sales and earnings and to generate greater returns for our shareholders,” Fireman concluded.
Reebok International Ltd
THREE MONTHS ENDED SEPTEMBER 30,
(Amounts in millions except per share data)
------------------------------------------------------------ ---------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2004 2003
------------------------------------------------------------ ---------
Net sales $1,164.7 $1,040.8
Cost of sales 694.1 629.1
--------- ---------
Gross Margin 470.6 411.7
% of Net sales 40.4% 39.6%
Selling, general and administrative expenses 346.1 312.2
% of Net sales 29.7% 30.0%
Interest expense, net 4.3 4.6
Other expenses, net (0.5) -
--------- ---------
Income before income taxes and minority interest 120.7 94.9
% of Net sales 10.4% 9.1%
Income taxes 36.8 29.8
--------- ---------
Income before minority interest 83.9 65.1
Minority interest 2.1 2.4
--------- ---------
Net income $81.8 $62.7
========= =========
Basic earnings per share $1.40 $1.06
Diluted earnings per share (1) $1.36 $0.96
