While the pace of acquisitions and industry consolidation has slowed from its fever pitch of previous years, Sporting Goods industry vendors are still relying on acquisition-aided growth to post double-digit gains on the top-line. But of the mega-deals occurring over the last year - Quiksilver acquiring Rossignol, adidas selling Salomon to Amer, and then adidas acquiring Reebok International — only the Quiksilver deal had a major impact on the numbers reported by public companies in the fourth quarter and reflected in this report. And the smaller deals executed by Rocky Shoes & Boots and Phoenix Footwear, and Stride Rites acquisition of Saucony, are also reflected in the overall number as non-organic growth.
Most of the other major deals are still reflected as individual brands in the Fourth Quarter Vendor Performance Report on page two of this newsletter. Results are posted for those companies that have reported for the period ended closest to the end of December.
Most of the serial consolidators spent the year integrating previous deals as they started to capitalize on economies of scale or realize the benefits of the planned synergies of consolidation.
We may have seen the last quarter for a while where the European companies are at a disadvantage to their U.S. counterparts when it comes to the impact of currency exchange rates. U.S. companies lost the benefit of the weaker U.S. Dollar to the reported top-line in Q4, a benefit that now appears to be swinging in the other direction as the Dollar strengthens and European companies see a boost to their reported U.S. businesses. The other impact that we will be watching over the next year is the impact on U.S. brown shoe companies that will be hit with new duties for non-Athletic leather goods shipped into the EU in 2006.
For the 2005 fourth quarter, companies in the Softgoods sector, which includes Footwear and Apparel, saw profit growth continue to outpace sales growth, but by a much smaller margin in Q4. The year-ago margin was three-to-one in favor to the profit line.
The Hardgoods sector again saw low- to mid-single-digit organic sales growth, but the overall profit line took a major hit from K2 Incs write-down of goodwill in the quarter. Excluding the impact of the various KTO charges, profits in the hardgoods segment would have jumped 16.2% for the quarter, nearly five times the pace of the revenue growth line.
Total sales increased 10.9% in the fourth quarter for those companies tracked in this report, about a third less growth than the vendors saw in Q4 last year when acquisitions played a bigger role. Excluding the impact of acquisitions on the most recent Q4 results, vendor revenues would have grown 8.5% for the period. Overall bottom-line results would have improved 15.3% excluding the K2 Inc. anomaly. Still, because the report is not a clear picture of the entire industry, SEW feels the total numbers are less significant than the trending information provided in the percentage increases and decreases.
SportsOneSource does a broader analysis of the industry each quarter by comparing vendor wholesale performance against retail sales performance based on data provided through SportScanINFO. The first SportsOneSource Annual Sporting Goods Market Report reflecting both wholesale and retail performance of brands will be available in May.
Return on Sales, which is the measure of net income as a percentage of sales, declined 160 basis points for the quarter versus the year-ago period, coming in at 4.3% of sales versus 5.9% in Q4 last year. However, the K2 charges again impacted the overall industry numbers that would have actually improved 20 basis points to 6.2% of sales for the period, still a sharp decline from the 9.8% of sales achieved on the ROS line for the 2005 third quarter.
The honors for most organic growth in the Softgoods sector easily goes to Crocs, the freshly-minted public company that has posted gains over the last year that makes the Deckers mark of 108% growth last year pale in comparison. Crocs saw sales increase more than five-fold. Rounding out the top five in organic growth were Volcom (+35.8%), Everlast (+34.8%), Brand adidas (+29.0%), and Cutter & Buck (+29.0). Where acquisitions played a role in the reported figures, organic sales growth was a bit more sluggish than elsewhere. Quiksilver revenues would have increased only 1.8% for the quarter, while Stride Rite would have seen just 1.2% growth, and Rocky Shoes & Boots would have posted just an increase of just 0.6% for the period. Phoenix Footwear would have actually seen a 3.9% decline in revenues on an organic basis. VF Corp. still posted an 18% increase in organic growth excluding its Reef acquisition, thanks to strong double-digit gains at Vans and The North Face.
Aside from Phoenix Footwear, only Sport-Haley (-11.4%) and Reebok International (-4.6%) posted revenue declines for the period in Softgoods.
In the Hardgoods segment, please note that the numbers for Brunswick exclude the boat and motors business, which throws off the trends in the general sporting goods hardgoods business. The honors for highest organic sales growth went to Aldila for the fourth quarter, thanks to a 76% increase in branded shaft sales. Rounding out the top five vendors were Precor, with 37.7% growth; Riddell-Bell Holdings, which is now Easton-Bell Sports, with a 37.7% increase; Cybex, with a 20.4% gain; and Wilson Sporting Goods, which posted a 16.9% increase in revenues for the period, but would have only seen a 7.2% increase when measured in U.S. Dollars. Precor, the other Amer Sports company in the top five, would have still seen 26.3% growth when measured in U.S. Dollars.
Escalade Sports (-23.2%) had the biggest revenue decline in Hardgoods as sales to Sears plunged and more consumers turned to electronics from table games for Christmas. Another Amer company, Suunto, made the bottom five, posting a 12.8% decrease in sales for the period. ICON (-6.4%), Johnson Outdoors (-3.2%), and Head NV (-3.1%) rounded out the decliners list for Q4.
