Deep and lasting snow across much of the country restored gear vendors to profitability in the first quarter, but combined with weakening consumer confidence to push retailers into the red. While sales rose about 13% among softgoods and hardgoods vendors and retailers, sales declined by 7.4% and profits by 24.5% at the full-line sporting goods stores. The decline at full-line retailers – excluding Dicks could reflect defection of consumers to Wal-Mart, Target and other discounters.
On the vendor side, two major forces distorted the numbers. In softgoods, Quiksilver took a $240.2 million write-down to prepare for the sale of the Rossignol business, while in hardgoods the acquisition of K2 Inc. inflated Jarden Outdoors sales growth. When adding K2 and Jardens Q1 2007 sales together (Pure Fishings numbers were not available) and using Quiksilvers pro forma earnings for the quarter, overall vendor sales and profits grew by nearly 14%.
Gross margins contracted in softgoods and at retail while rising in hardgoods as the abundant snow cleared out gear left over from the disastrous 2006-07 winter season and stimulated fill-in orders deep into the quarter. Indeed, strong and prolonged demand for snowsports gear caused the hardgoods sector to swing from a loss to a gain for the quarter. Yet, their profitability remained a mere fraction of those posted by softgoods vendors, helping to illustrate why Quiksilver jettisoned its Rossignol business so quickly.
Still, the bright spots are not expected to last long as increased costs out of Asia cut into margins in the back half of the year and the market starts to see early signs of a broader slowdown in the international markets that have sustained top and bottom-line growth for many companies in recent quarters.
First quarter results shown in the chart on page3 are posted for those companies that have reported for the period ended closest to the end of March. 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.
Hardgoods sales rose 67.1% to $2.78 billion, but that was due largely to Jardens acquisition last August of K2. When adjusting Jardens Q1 2007 numbers to reflect K2s sales, the rate falls to 13.1%. Solid growth in sales of winter gear at Amer Sports Winter & Outdoor and Head N.V. led the way.
Gross margins rose 12 basis points as higher sales were more than enough to offset rising shipping, commodity and other costs. That margin growth enabled the sector to swing from a $40.2 million loss in the first quarter of 2007 to an $11.8 million profit. Still, the hardgoods industry was left with a paltry 0.9% return on sales compared to 8.1% for softgoods companies, excluding Quiksilvers write-off.
Hardgoods inventories meanwhile rose 7.7%, well below the rate of sales growth. The figure did not include Jarden or Amer Sports, which do not disclose such data at the group level, but still indicated hardgoods manufacturers were carefully managing their inventory going into the spring. While inventories rose at Johnson Outdoors and Head, for instance, they fell 12.9% at Easton-Bell, which has been focused on whittling down inventory.
In softgoods, sales rose 13.8% and gross profits rose 11.4%, but gross margins declined 46 basis points, largely because of Crocs, where gross margins plummeted to 42.9% from 59.5%. Excluding Crocs, gross margins for softgoods manufacturers would have climbed 91 basis points to 46.8%. The sector swung from a profit of $187.8 million to a loss of $19 million thanks to Quiksilvers write-off. But when using Quiksilvers pro forma numbers, softgoods profits ran essentially flat at $225.9 million. Return on sales fell 110 basis points to 8.1%.
Apparel companies fared the best, reporting combined sales of $1.77 billion, up 16%, compared to a 9% rise in sales by footwear companies.
Softgoods inventory rose 29%, or more than twice the rate of sales growth, led by big build ups at Crocs and Under Armour, where inventory rose by $171.1 million (181%) and $87.8 million (109.8%), respectively. Both companies have reported plans to manage their inventory levels, but such large increases amid such low consumer confidence could herald problems ahead. Excluding those two companies, inventory rose 8.2%, indicating a fairly bullish posture toward the spring and summer.
On the retail side, sales rose a surprising 13.2% to $2.86 billion powered by strong gains at Cabelas, Gander Mountain and Lululemon. Nine of 12 companies posted double-digit sales gains, while sales fell 10% at West Marine and Sport Chalet and dipped 1.9% at Big 5 Sporting Goods. Gross profits rose 12.7% to $870 million, but gross margins fell at seven of the companies, dragging down the ratio for the group by 15 basis points to 31.4%.
At 15.2%, inventory growth outpaced sales growth, in large part because Cabelas, Dicks and Zumiez continued to add stores.
In this scenario, declines in same-store sales in the mid- to high-single-digits, were especially costly. Income for the retail group plummeted, swinging to a loss of $15.4 million from a profit of $5 million in the year ago quarter. Earnings declined or losses worsened at nine of the 13 companies with the biggest dollar swings at Gander Mountain and West Marine.
In the full-line sporting goods channel, meanwhile, sales dropped by $83.4 million, or 7.3%. Dicks Sporting Goods continued to chug along, racking up a 10.8% sales gain, while Big 5 and Sport Chalet declined in the low single-digits. All three saw gross margins and income drop. As a group, their income fell by $7.4 million, or 24.5%.
Comments from the industrys retailers and more recent data compiled by SportScanINFO seem to suggest that the second quarter is shaping up better for retailers as warm weather and tax rebates provide consumers with a needed uplift. However, whether that can be sustained in the face of the lowest consumer confidence numbers in 16 years remains to be seen. Moreover, increasing costs in labor, raw materials and transportation are only now coming ashore. When they hit next spring, they will present both vendors and retailers with strong headwinds.
