Sales were brisk in the second quarter for both vendors and retailers in the outdoor industry. However, margins contracted during the period, forcing declines in profits and return on sales. Inventories grew at nearly the pace of sales on a consolidated basis, a good sign as the industry continues to find stasis amongst increasing costs for everything from raw materials to transportation and utilities.
Second quarter results are posted for those companies that have reported for the period ended closest to the end of June and retailers closest to the end of July. However, because the report is not a clear picture of the entire industry, BOSS feels the total numbers are less significant than the trending information provided in the percentage increases and decreases.
The quarter was fairly straight forward in terms of one-time charges and acquisition boosts, with the exception of Jarden and its acquired K2 business. Adding K2s sales for the year-ago quarter into the mix, hardgoods vendor sales would have grown only 3.2% instead of the 33.1% growth shown in the reported numbers. Overall vendor net sales added an extra 3.8 percentage points of growth as a result of the acquisition. Net income was even more strongly swayed by the inclusion of JAH in the numbers. Without the company, vendor net income would have declined 57.7%, while hardgoods vendors would have increased their net loss by 1.5%.
The charts seem to suggest the back-end was harder to manage this quarter as a result of the increased costs in manufacturing and sourcing and everything else. Margins declined for retailers, softgoods vendors and hardgoods vendors in the quarter. More noticeable was the over 150 basis point declines in gross margins for both softgoods and hardgoods vendors as they to absorb increased costs. Retail margins declined over 60 basis points, suggesting they too had to absorb some costs and share the pain.
The decreased margins led to consolidated vendor net income that was down in the mid-single-digits. Removing Jardens profit growth pushes the overall decline even further south. Retail profits faired even more poorly with only Lululemon posting a bottom line improvement for the second quarter.
A sharp decline at West Marine and continued net losses from GSI Commerce sparked the consolidated net income decline for retailers.
From 30,000 feet, it was a bit of a mixed bag between softgoods and hardgoods vendors for the quarter, excluding the numbers from Jarden. Softgoods vendors posted mid-teens sales growth, while hardgoods was up only mid-singles when accounting for the effects of the K2 acquisition. However, hardgoods vendors saw consolidated gross margins contract less than their softgoods counterparts, while the bottom line slipped at a lesser rate. The lesser rate, unfortunately, was of net loss expansion, while softgoods vendors consolidated net income declined sharply, but was still in the black.
Within softgoods, apparel far outperformed footwear, with a big disparity between bottom line performances. Footwear sales increased mid-singles, but segment vendors reported a consolidated loss of approximately $3.4 million compared to net income of $56.6 million last year. Both a sharp decline at Crocs and a net loss from Columbia contributed to the weak showing.
Apparel sales increased mid-teens, boosted by over 25% growth from Under Armour and Volcom. Apparel vendors actually managed the bottom line well for the quarter as net income growth outpaced the sales gain by approximately 400 basis points. Quiksilver posting a net income after a $7.9 million loss last year also helped as did consolidated apparel gross margins increasing approximately 25 basis points.
Hardgoods was a much less pleasant place to be in the second quarter as it looks like the increased raw materials prices finally started to hit home.
Though net sales increased in the high-single-digits for the quarter, the segment reported a quarterly loss when excluding the Jarden result. That loss came mainly from Amers Winter and Outdoor unit, which improved its loss slightly, but was unable to post a profit in the seasonally slow quarter. Inventories grew at a slightly quicker pace than sales for the quarter, but with some retailers reporting at the end of August that there were sales left on the table due to lack of product, the increase might not be all bad.
Speaking of retail, industry retailers did well on the top line in the second quarter as sales grew over 10%. Unfortunately those sales came at the expense of decreased margins and a sharp downward turn in net income and return on sales. Inventory growth was flat to sales for the quarter. Of all the retailers covered in the chart on page 3, only two, Forzani and Gander Mountain saw gross margins expand. Not surprisingly, there was very little growth on the bottom line with only Lululemon posting net income growth and Gander decreasing its quarterly net loss. Consolidated net income dropped approximately 51.7% for the quarter as GSI Commerce reported a widened net loss and West Marine saw net income drop.
All in all, the second quarter was somewhat mediocre for the outdoor industry. While sales grew, earnings ultimately did not. Until the increased costs of raw materials, transportation and seemingly every other aspect of doing business and building product are completely understood – if not at least comped against – the pattern will likely hold for a little longer. There remain a few bright spots out there, but a strong winter and a happy, ready-to-spend consumer will do much more for the industry than consolidations or currency benefits.
