On the surface, it appears that Russell Corporation easily beat analysts consensus earnings estimates for the quarter, but the company saw a tax benefit of $4.5 million, or 14 cents per share in the quarter, which reduced earnings to $22.4 million, or 68 cents per share. Those results still showed a 21.4% increase in net income, but fell 6 cents short of the consensus estimate.
Sales benefited from acquisitions and currency exchange rate fluctuation. Excluding about $20.4 million in incremental sales from acquisitions owned for less than a year, organic sales increased 3.7% for the quarter and rose about 3.0% when excluding the impact of foreign currency exchange rates. The impact of acquisitions were clearly felt more in the Athletic group, which declined roughly 3.0% excluding the AAI and Huffy Sports deals.
Management said the weakness seen in the Athletic group was primarily due to Russell Athletic.
The company pointed to some weakness in the retail market, with the mid-market showing more weakness that the sports specialty channels.
Management said the integration of the Huffy Sports into Spalding is going well and is on track to be profitable next year. RML advised its backboard licensee that they will not renew their existing license after December 31 of this year. The company is raising prices in the backboard business due to increasing steel prices, an increase they said most retailers understand.
The company will integrate more Russell and Spalding functions going forward, planning to leverage synergies in back-end services as well as front-end sales and marketing functions.
Russell Athletic sees some upside in the team uniform business as they move to lower costs through the shift of production of longer lead time uniforms to their Mexico plant. Quick turn product is still expected to be serviced out of Alabama.
Moving Comfort was said to be making “great progress” with its sports bra and underwear programs, expanding into 345 additional sporting goods doors so far with 132 more doors planned for next year.
The revenue increase in the Activewear group was due in large part to double-digit sales increases in the Artwear market, helped by a new distributor, and programs at Target and Dollar General. RML pointed to market share data that showed a five point gain in T-Shirt share to 16%, Fleece share that rose 200 basis points to 40%, and a five point Sport Shirt share gain to 25% of the market. The new Honduran plant is expected to begin production in Q1 2005.
The International sales increase was due in large part to the FX rate benefit, which comprised 9% of the gain.
Gross margin declined due to “higher year-over-year costs of fiber, transportation, energy and other increased costs” on top of “continued pricing pressure”, which more than offset the positive impact of increased revenues and cost improvements. RML pointed to rising steel prices that hurt Huffy margins and “almost anything oil-related”.
RML sees fourth quarter EPS in the 30 cents to 40 cents per diluted share range. Full year earnings are estimated in the range of $1.45 to $1.55 per diluted share on sales of $1.30 billion to $1.33 billion, which would represent a 9% to 12% increase over the $1.19 billion in sales in 2003.
