In looking at vendor side public companies for the 2007 fourth quarter, the sporting goods industry proved to be surprisingly resilient in an economy that seemed to head further south amid the ongoing credit crisis and subprime lending fiasco. Nonetheless, consolidated vendor sales increased in the mid-teens for the quarter suggesting that retailers continued to buy the hot product on the assumption the end consumer would eventually do the same. The issues will most likely come in Q1 as retailers saw tougher times liquidating those products.
Fourth quarter results shown in the charts on pages 6 and 7 are posted for those companies that have reported for the period ended closest to the end of December. 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.
Softgoods vendors were the dominant force in the marketplace for the fourth quarter, more than offsetting the weak results posted by hardgoods vendors. The slowdown in the economy and the uncertainty of what the future might hold likely caused timidity amongst both the consumer and the retailer when it came to deciding on purchases of larger ticket, durable goods. However, softgoods had a strong period as both sales and net income grew at approximately the same rate, up in the mid-teens.
The quarter saw little effect from acquisitions as the only major move of note was Easton becoming a part of Easton-Bell Sports in March 2006. The company was able to utilize the lost quarter to help boost this years results on the easier comparison. Excluding the company from the results dropped sales growth for hardgoods vendors to an increase of just 1.0% from the 1.4% improvement shown in the chart.
Crocs saw fourth quarter sales nearly double as the Mammoth helped to even out a sales distribution that was typically weighted more towards spring. Crocs success also helped to offset the sharp decline in Heelys sales that could not even approach the year-ago result when the company had the must-have for holiday 2006.
Apparel vendors posted stronger growth for the quarter than did footwear as the aforementioned Heelys declines paired with a weak white-leather-footcovering business for Reebok and K-Swiss to limit footwear vendors to only mid-teens sales growth. Apparel vendors saw sales increase in the low-20s for the quarter, led by strong growth at Under Armour at the higher price points and by Gildan at lower. However, the back-end was much stronger for footwear vendors than for apparel in the quarter, with combined footwear margins improving over 180 basis points to 45%, while apparel vendor margins decline approximately 200 points to 40%.
The integration work between adidas and Reebok, helped to boost combined net income for footwear vendors over 20% with return on sales growing to 7.2% from 6.7% for the year-ago quarter. For apparel vendors, consolidated net income declined nearly 40% as return on sales dropped to 3.5% from 7.2% last year. Part of the culprit here was Quiksilvers venture into hardgoods and the noose it has had around its neck in the form of Rossignol. However, the company still saw operating income decline, even without the Rossi business included.
Interestingly, sales for hardgoods vendors seemed to follow a global warming line as Golf vendors saw sales increase 8.0%, but Snow Sports vendors sales declined 11.1%. Snow Sports vendors will likely have a better quarter for 2008 than this year past as the winter of 2007 was much improved on a weather basis than in 2006. However, retailers used the good snowfall to clear out inventory bought a season ago and only just now are beginning to place orders again. Fitness vendors posted a modest 1.3% increase in sales, but that was not enough to help the segment post bottom line gains.
As one industry veteran put it, “you really solve a lot of issues in any business if your top-line growth performs.” Unfortunately for the hardgoods vendors covered in the report, the top-line really didnt perform in the fourth quarter. Sales increased only modestly for the year, which partnered with increasing labor, materials and shipping costs to depress margins. In turn, the decreased margins and increased expenses led to a bottom line that decreased over 40% for the quarter. The good news is that the large hardgoods net income decrease can be mostly attributed to Nautilus, who took a number of charges in the quarter for a cancelled factory acquisition, inventory reserves and other impairments. Without the $45.1 million charge, overall hardgoods vendor net income declined in the mid-teens, while excluding Nautilus altogether saw consolidated hardgoods net income decrease in the mid-single-digits.
Inventories grew slower than sales for the period, a sign of prudent caution amid the swirling winds in the marketplace. Looking ahead, the market is largely at the hands of the economy in general, which is not exactly the most reassuring of statements.
>>> The final word on just what happened this quarter will reside with the retailers to be reviewed next week…
