Russell Corp Spends the Last of Acquisition Gains in Fourth Quarter; It’s All Organic Now….

Russell Corporation looked to the inclusion of the Brooks Sports business in the fourth quarter to provide all of the top-line gains for the period and also looked to tax benefits related to the shift of more business to lower tax countries for a nice boost to the bottom line. Excluding about $27 million in business from Brooks in the quarter, total net sales would have declined 1.9% for the year. Operating profits fell 21.6% for the period, despite a 21.3% improvement in operating income in the Activewear division.

Reported fourth quarter sales increased 6.2% to $354.6 million from $334.0 million in the year-ago period. Gross margins declined 90 basis points to 28.2% of sales from 29.1% of sales in Q4 2004. RML said the “positive impact of increased unit volumes in Artwear and higher margins associated with Brooks was generally offset by a shift in product mix and increased year-over-year costs for polyester, transportation and energy.” Losses at Huffy Sports also negatively affected results.

SG&A expenses increased 50 basis points to 22.5% of sales in the fourth quarter. RML reported net income of $11.8 million, or 36 cents per diluted share, compared to $10.3 million, or 31 cents per diluted share, in the fourth quarter of 2004.

The Sporting Goods business, which includes Russell Athletic, Bike Athletic, Brook Sports, Moving Comfort, Huffy Sports, AAI, and Spalding, grew 17.2% in the quarter to $169.8 million. Excluding Brooks, sales were down 1.5% for the period. The Activewear business declined 2.2% for the quarter to $170.7 million, but the Artwear element of that business grew in the mid-teens during the quarter. Operating profits in the Sporting Goods segment declined 57.8% in the period, a 450 basis point decline in operating margin to just 2.6% of sales. The majority of the profits in the Spalding group were attributed to its international licensing business located in Ireland. However, the Activewear segment, which saw a significant benefit from improved profitability in its Latin America operation, saw operating margins improve 230 basis points to 11.6% of sales in the fourth quarter.

For the full year, organic sales would have declined 2.1% when excluding approximately $164 million in sales from companies owned for less than a year. Sales in the Sporting Goods segment were down 8.1% to $535.7 million excluding the upside from Brooks, AAI, and Huffy Sports. RML said that Brooks contributed about 18% of segment sales for the year, but the Brooks EBIT contribution was roughly twice the sales contribution.

RML said that sales declines were “most notable” in the Russell Athletic and Mossy Oak businesses, and to a lesser extent, Spalding, which declined about 8% excluding the AAI and Huffy add-ins. Operational issues in the third and fourth quarter, the loss of the MLB license, and the loss of Discus revenues were all cited as culprits. Moving Comfort was a bright spot on the top-line, growing in the mid-teens for the year, but Mossy Oak sales declined 20% on the loss of a promotional line at retail.

Looking ahead, RML said it expects to report a loss in the first quarter of 2006 in the range of 29 cents to 41 cents, on expected 2006 restructuring charges. Ongoing earnings for Q1 are expected to be in a range from a loss of two cents a share to earnings of four cents per share on the planned shift to the FIFO method for accounting for inventory.