Despite warnings from retailers and downgrades from analysts, Reebok appears to be convinced that their Licensed Apparel business is going to be okay. Even with sales and backlog slowing for the category and the company, they have little choice but to keep the momentum going in Licensed after making it the centerpiece of their growth strategy over the last couple of years. A near monopoly and continuous player movement around the pro leagues should give them enough to keep the wheels moving even as the business clearly turns back to its fan-based roots. At least for this year.
Reebok apparel sales fell nearly 18% in the U.S. in the second quarter and backlog declines in the category on the International side may be troublesome for that business that is traditionally stronger than the U.S. The Euro 2004 Championships probably didnt help matters here as retailers in Europe stocked up on home country football kits that drove tremendous increases in business for many retailers in May and June.
Still, the company expects that total U.S. Apparel will be flat for the year while International is expected to be down in low- to mid-single-digits. Growth in the Licensed Apparel business will increase in double-digits for the year — not a crazy proposition given that NFL and NBA product sales increased in double-digits in the first half. Throw in the fact that Nike is now out of the Swingman business, a business that is rumored to be worth north of $100 million when you throw in the teams they are losing as well, and Reebok may be able to count on some decent growth here.
The company also points to recent trades like Shaq and McGrady in the NBA and a plethora of NFL free agent signings as key drivers for sustained growth in the business. The company said they saw about $4 million in business from the Shaq and T-Mac trades. They also pointed to a new NFL EQT Jersey, which they said is similar to the Swingman, which was sold into inner city stores. RBK said initial sell through has been “excellent” and plan to put about 300,000 units into the market.
Sales of Licensed Footwear products more than doubled in the first half of 2004 off a very low base.
Regarding the shift to more fan-based product, the company said that Licensed sales are about 75% to 80% fan-based for them already.
Part of the shortfall in Licensed Apparel sales in Q2 also had to do with a new system that was installed in the Indianapolis warehouse. They completely shut down shipping for a month, but are now back up to 75% capacity. Ken Watchmaker, Reebok International EVP & CFO, said that they missed about $15 million in shipments in the quarter that will slide to third quarter.
The company is not counting on any boost to the Licensed business any time soon from the recently completed acquisition of The Hockey Company and their near-monopoly with the NHL business.
The looming NHL player strike has caused retailers to back off placing Licensed Apparel orders with THCs CCM unit as they take a wait n see position with a potential labor action. Watchmaker said the THC business was roughly one-third apparel.
Watchmaker stills feels that Branded Apparel is a “significant long-term growth opportunity for the company” despite its continued sharp declines.
On the Footwear side of the business, it was clearly Classics that drove a business that was up just 1.6% on a currency-neutral basis for the quarter. U.S. Classic Footwear grew 28% for the quarter while total U.S. Footwear increased just 2.8% for the period. The growth here is welcome on the gross margin line as Classics continue to represent the highest margins in the brands product stable.
A recent review of SportsScanINFO data show that Classics represented roughly 55% of Reeboks total YTD footwear sales at retail.
The company said that the Footstar bankruptcy impacted U.S. Footwear sales for the Reebok brand, indicating that sales would have been up 6.0% without the Footstar numbers included in Q2 for this year and last.
The company still feels that the Performance categories offer the largest long-term growth opportunities and pointed to a 10% increase in sales of Running Footwear in the U.S. as a key here.
Reebok feels they have a $550 million worldwide opportunity in Running, against its current level at around $150 million.
Basketball remains an issue, called out as “a little weak” in Q2, continuing a trend from the first quarter. The PUMP was again brought up as a initiative for the coming year and will be featured on Reeboks NBA All-Stars at the game in Feb. 05. The product will retail at $100 versus its original $170 price tag back in 1989.
Reebok will also unveil a new PUMP II running shoe that will be released on a test basis at $100 in “very limited quantities”. The product is supposed to be able to automatically adjust itself as the user runs.
Better Department Stores and Athletic Specialty continue to outpace the balance of the Footwear business in the U.S., evidenced by a 15% backlog gain in the channels for the back half versus a 7.0% gain for the category as a whole. Watchmaker said that Foot Locker backlog is up year-on-year.
In the Reebok International business, Sales increased in Austria, Belgium, Finland, Germany, Holland, Poland, Russia, Switzerland, and the U.K. on a currency-neutral basis. The company still sees issues in France, where retailers are still dealing with higher inventory levels.
International sales increased in Basketball, Training, and Walking. The company also said they were getting some play in Europe with the music-inspired Rbk product, citing sell-through rate at roughly 10% per week.
Greg Norman Collection net sales were up 12% for the second quarter and 14% for the first half of the year, including a 20% increase in its core Golf trade channel. Profits were said to be “up substantially” as well.
Driving growth in the core Golf trade channel were a 36% increase in PlayDry® products as well as an expanded offering of PlayDry Weatherknits. The Greg Norman Womens Collection, made up entirely of PlayDry fabrics continued to gain momentum, growing 200% from Spring 2003 to Spring 2004. Additional growth for the collection came from an increase of 220 new Green Grass golf accounts as well as larger orders from existing accounts.
While net income for the second quarter fell 15.0% versus the year-ago period, the company beat Street estimates and saw RBK shares end up 2.4% for the week to close at $34.00 on Friday. Excluding a one-time after-tax charge of $7 million or 11 cents per diluted share, earnings increased 12% from the prior year's second quarter.
Excluding the impact of The Hockey Company and currency, inventories declined approximately $16 million, or about 3%, and accounts receivable declined about $5 million or 1.0% year-on-year.
>>> The sharp increase in Classics sales against a sluggish total gain for the U.S. would appear to indicate sharp declines elsewhere
>>> Can new products in Licensed offset the fashion declines???
