Russell Corporation reported fiscal 2005 second quarter earnings fell 54.1% to $4.7 million, or 14 cents per diluted share, compared to $10.2 million, or 31 cents per diluted share, in the second quarter last year. Russell issued a earnings warning two weeks ago when it became clear that they woudl fall far short of analysts' expectations for the period.
Sales increased 18.1% to $342.1 million, primarily due to the inclusion of more than $50 million in revenue from acquired companies. Excluding the incremental revenue related to acquisitions, the Company experienced a slight increase in sales for the quarter.
Operating income was $18.0 million in the quarter, down from last year's $23.9 million which included the one-time gain of $4.4 million associated with the sale of the Company's position in Marmot Mountain, Ltd.
Sales in the Activewear segment increased more than 10% and were particularly strong in the Artwear channel, which recorded sales increases of nearly 15% for the quarter. Increased product demand led to significant cost increases associated with ramping up production quickly and reacting to changes in style mix, negatively impacting second quarter profits. Further impacting earnings, Activewear did not achieve all of its cost savings goals.
For the Sporting Goods segment, sales increases of nearly 30% were driven by the 2004 acquisitions of AAI, Huffy Sports and Brooks. Overall, these acquisitions were on plan, and, as expected, had no material impact on EPS in the quarter. Excluding these acquisitions, revenue in the Sporting Goods segment declined 12% in the quarter.
Mossy Oak experienced declines in revenue and profits for the quarter versus a year ago. Lower prices and the reduction of a major retail program resulted in a revenue decline of more than 30% in the quarter. Even though most of Mossy Oak's sales are planned for the second half, the negative impact to profits is not expected to be offset for the balance of the year.
Also in the Sporting Goods segment, increases in sales in the quarter for the Russell Athletic Group's base business only partially offset the absence of Major League Baseball and the discontinuance of the Discus brand at a major account.
“Given the expectations we had for the quarter, we are certainly disappointed with the results,” said Jack Ward, chairman and CEO. “The good news is that there is solid consumer demand for our products and the major impacts experienced in the second quarter were primarily operational issues. We are rapidly addressing these issues, but we expect continued impact into the third quarter. We have already taken a number of steps to improve our cost position and further leverage our growth opportunities.”
“Our strategy, to maximize our presence in the sporting goods industry by developing new business and expanding programs within our core brands, continues to be successful with our customers,” Ward added. “An example is the integration of Spalding, AAI and Huffy Sports into the Spalding Group, the world's largest provider of basketball equipment. We are achieving both operational and sales synergies with a number of accounts beginning to introduce new Spalding products into their markets. We believe we can leverage the strength we have in basketballs with the product offerings from these integrated businesses to create a strong foundation and increased sales, particularly with the turn-around at Huffy Sports.”
As demand has remained strong, Russell continues to anticipate that the Activewear segment will achieve strong sales and profit growth for the year, especially for the Company's market-leading men's fleece business.
“In the Sporting Goods segment, Brooks is having a strong year with continued sales gains planned for the second half as well,” Ward added. “With ongoing improvements that are being made through the Spalding integration of Huffy Sports and AAI, we expect to continue building momentum into 2006.” Russell Athletic also anticipates sales increases in the second half, based on the reception of new styles and expanded floor space at retail.
Ward continued, “With expectations for second half sales growth from existing businesses in the 4 to 6% range, we are maintaining our 2005 fiscal year sales forecast in the range of $1.500 billion to $1.520 billion versus $1.298 billion in 2004.”
Based on the second quarter results, the company is revising the forecasted range of earnings per diluted share for fiscal 2005. Excluding the 2004 one-time gain associated with the sale of the position in Marmot Mountain, Ltd., in 2004, revised expectations now include an increase in operating profits of 17 to 19% for the year. Fully diluted earnings per share on an ongoing basis are now forecast to be in the $1.40 to $1.48 range. In addition, the Company may take certain actions to improve organizational effectiveness and reduce administrative costs which could result in special charges.
For the remainder of 2005, Russell expects total diluted EPS on an ongoing basis between 62 cents and 70 cents for the third quarter. Fourth quarter total diluted EPS on an ongoing basis is expected to be between 52 cents and 60 cents.
RUSSELL CORPORATION
Consolidated Statements of Income
(In Thousands Except Share and Per Share Amounts)
Quarter-to-Date Year-to-Date
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
July 3, July 4, July 3, July 4,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $342,099 $289,771 $655,341 $541,564
Cost of goods sold 251,895 209,426 479,245 396,586
Gross profit 90,204 80,345 176,096 144,978
Selling, general and
administrative expenses 73,186 61,686 146,703 118,164
Other income - net (1,023) (5,247) (1,568) (5,109)
Operating income 18,041 23,906 30,961 31,923
Interest expense, net 10,064 7,754 18,953 14,941
Non-controlling interests 747 274 1,421 274
Income before income
taxes 7,230 15,878 10,587 16,708
Provision for income taxes 2,566 5,716 3,741 6,015
Net income $4,664 $10,162 $6,846 $10,693
Net income per common
share:
Basic $0.14 $0.31 $0.21 $0.33
Diluted $0.14 $0.31 $0.21 $0.33
