The industry continued its winning streak in the fourth quarter of 2003 as profit gains again outpaced sales growth despite the effects of integration and restructuring charges related to the record number of mergers and acquisitions last year.

The energy in the sector has certainly gotten the attention of the investor class as fourth quarter numbers and a generally positive outlook for the sporting goods, athletic footwear and athletic apparel markets fueled an 11.4% gain in market cap value in the first quarter of 2004 for the 100 stocks we track weekly in our segment indices.

The following pages will represent a brief overview of fourth quarter performance for each of the segments covered. A full chart of vendor company results for the fourth quarter ended December 31, 2003 can be found on page three and a full chart of retailer results for the fourth quarter ended January 31, 2004 can be found on page five. As always, for those companies not reporting on the calendar year or retail calendar year, results are taken from the quarter ending closest to the respective calendar end date. Again, the charts presented only cover those companies that report quarterly financial information to the SEC.

The industry vendor sector saw sales for the fourth quarter increase 13.4% for period and an average 190 basis point improvement in gross margin helped fuel a healthy 16.8% increase in profits for the overall vendor sector.

Return on Sales for the vendors and suppliers was 4.3% for the fourth quarter, up 900 basis points from the year-ago quarter, but fell far short of the strong 7.8% Return n Sales delivered in Q3 2003 that was due in large part to a $300 million profit swing from Nike in their fiscal first quarter.

Inventories for the reporting vendors and suppliers rose 14.3%, a number that is roughly double the inventory growth at the end of the third quarter. The increase was seen as “clean” by most companies as many reported lower aged inventories and fewer close-out sales. The good news looking ahead into 2004 is that futures backlog gains, where reported, continued to outpace the growth in inventory.

The other redline we saw in the year-end reports for many was the consistent feeling that fill-ins would become a larger piece of the business in the current year as retailers played the order book closer to the vest and challenged the vendors to provide chase opportunities for stronger items business.

Hardlines were again a drag on overall profit results for the quarter as big gross margin drops at Callaway, Huffy and Nautilus impacted the segment’s results. Return on Sales for the segment was just 2.4% for the period as net income fell 35.1% for the group and segment sales increased 18.2% for the quarter.

Callaway (SEW_0404), which saw its net loss increase almost 500% and gross margins decline more than 20 percentage points, pointed primarily to its acquisition of Top-Flite as the culprit to the bottom line shortfall. On a pro forma basis excluding Top-Flite from the numbers, the pro forma net loss for the Callaway business would have increased 62.5% to $9.1 million, or 14 cents a share, from $5.6 million in Q4 2002 on a 9.2% decline in sales to $111.5 million. Return on Sales for the overall Hardlines segment would have been a full percentage point higher without the Top-Flite issues at ELY.

Huffy Corp. (SEW_0408) was wrestling with its own acquisition woes, albeit not recent ones. The Gen-X acquisition in September 2002 had finally come home to roost and HUF made some quick changes over the last month, first consolidating all sporting goods wholesale operations to its Dayton headquarters and selling the close-out business back to the Gen-X founders, who then quickly flipped the unit to The Forzani Group (SEW_0413).

Nautilus margins and profits took a hit as the company continues to re-position the business as a wholesale to retail business and away from the direct-to-consumer infomercial format (SEW_0405). Direct sales were just 38.7% of sales in the fourth quarter compared to 58.8% of sales in the 2002 fourth quarter. EPS in the Direct channel were just nine cents a share in Q4 versus 59 cents in the year-ago period.

Acquisitions also played a large part in a 16.3% growth in inventory in the Hardlines segment at year-end. K2 Inc.’s acquisitions of Rawlings, Fotoball USA, WinterQuest and Worth all played into a 66% gain in inventory for the company, a gain that was responsible for six full percentage points of the gain for the segment. Top-Flite’s inclusion in the Callaway numbers also played into the inventory growth for the segment.

The Hardlines segment Stock Index was also the weakest gainer in the first quarter of 2004, rising just 3.8% against the double-digit Industry Index average. Huffy was the big drag here as HUF shares were down almost 26% in the quarter, offsetting strong gains at Cybex (+147%), Adams Golf (+89%) and Johnson Outdoors (+30%). Head NV and Brunswick also had strong share price gains in excess of 20% in the first quarter.

The Apparel segment had to rely on a nice turnaround story at Cutter & Buck and solid gains at Columbia and Quiksilver to keep the group out of the red for the quarter. CBUK cut its loss by almost $9.0 million in the quarter, accounting for roughly 73% of the total profit gain for the segment.

Quiksilver and Columbia continue to find new ways to improve the business and both see stronger International businesses and brighter non-apparel prospects delivering heftier sales and profits down the road. Columbia is also looking to its spring 2003 acquisition of Mountain Hardwear for a bit of a bump as well. The improved performances for the three companies helped push group net income up 29.4% for the quarter, resulting in a 5.1% Return on Sales versus a 4.4% ROS in the year-ago period.

Sales for the Apparel segment rose 11.8% for the quarter, driven by the inclusion of Soffe’s numbers in the Delta Apparel results (+52%) and other strong double-digit sales growth at Quiksilver (+33.3%), Gildan (+20%), and Columbia (+18.5%). These positive results were impacted in part by declines at G-III Apparel (-27.6%), Everlast (-8.7%), and CBUK (-12.1%). Everlast said more of there business has shifted to licensee versus direct sales, impacting product sales.

Stocks for the segment increased in value an average of 7.6% in the first quarter of 2004, with Quiksilver (+21.3%, Sport-Haley (+15.2%), and Delta Apparel (+10.3%) all turning in double-digit share price gains, while Columbia inched a bit lower and Everlast fell 13.6% to $2.55 on March 26, giving the company a market cap of just $7.9 million, the lowest cap of any public company we track in the industry.

The Footwear segment saw its stock index increase 9.7% in the first quarter after the segment led the vendor/supplier sector in Q4 with a 35.5% increase in profits and an 11.9% increase in sales. Gross margins rose an average of 260 basis points.

The profit gains drove the Return on Sales to 4.9%, a 160 basis point improvement from the 3.3% ROS in the year-ago period. Five companies had profit increases in excess of 75% with Puma showing a 95.7% jump in earnings in reporting Euro terms, Saucony reporting an 87.5% gain, and K-Swiss and Reebok both posting gains of 81.3% for the quarter. Deckers reported a 78.6% increase in net income and Vans swung to a profit for the period. Puma and K-Swiss both had a double-digit Return on Sales for the period. Only Skechers and Stride Rite posted losses for the quarter, with the Skechers loss widening 43% versus last year.

Nike’s nearly 18% profit gain in their quarter ended November 30 actually held back overall profit gains for the Footwear segment. Excluding Nike, the segment saw profits jump 63.4% for the period.

adidas and Skechers were the lone decliners in sales for the period, with adidas decreasing 10.4% and Skechers dipping 3.0% in the quarter. K-Swiss led all gainers for the quarter with a 51% increase, followed by Deckers (+38%) and Puma (+27%).

Skechers shares actually led all gainers in the Q1 Footwear Index, increasing 45.6% for the period ending March 26. VANS shares jumped 30% and Deckers and Puma both saw shares rise 22% for the period.

The Retail sector was the key driver for industry stock prices for the first quarter 2004 as the total Sports Executive Weekly Retail Index rose 11.8% and the Specialty Index, which includes all Mall Specialty and Sporting Goods stocks, jumped 13.5% for the period. The sector was driven by the Mall Specialty guys, primarily The Finish Line, Pacific Sunwear and The Buckle.

Overall Retail sector profits were up 19.3% on a 16.0% increase in sales for the fiscal fourth quarter. Sector gross margin was up 10 basis points to 37.1% and the sector showed a 6.0% Return on Sales.

The Specialty segment saw an impressive 8.8% Return on Sales, delivering a 40.4% jump in net income on an 18.3% sales gain. Gross margin for the segment improved 100 basis points to 38.0% for the period.

All retailers in the segment showed dramatic improvement in the net income line for the quarter, led by Pacific Sunwear (+48%) and The Finish Line (+36%). Luxottica Retail, which includes the Sunglass Hut chain saw operating profits jump almost 47% in the period.

The Buckle, Foot Locker and Genesco all saw profits increase in excess of 20% in the fourth quarter.
Much of the profit and gross margin gains came on increased leveraging of stores due to increased sales. On the sales side, it was FINL again with comps increasing 19% for their fourth quarter that ended February 28.

Vans’ owned-retail is a bright spot for that brand’s total business as comps rose 14.4% in the quarter. Pacific Sunwear comps increased 12.0% in the fourth quarter.

On a total sales basis, Oakley’s owned-retail led the growth with a 66% increase in sales for the period. Golfsmith posted a 38% sales gain for the quarter, due largely to the acquisition of the Don Sherwood Golf & Tennis chain in San Francisco.

The Sporting Goods segment was heavily impacted by the merger integration expenses at the New Sports Authority. Net income for the segment were off 4.0% for the quarter, but was profits for the segment were up 5.6% excluding TSA’s integration costs. Galyan’s was the other drain on segment profits as net income there fell 40% in Q4. The other retailers in the segment without TSA and Galyan’s actually saw profits jumps 88% for the quarter and would have shown a 5.4% Return on Sales.

The segment welcomes two new companies this year, with Outdoor players Cabela’s and Gander Mountain announcing IPO’s in the first quarter. Gander has started to turn the business around into a profitable venture following at least five years of losses, but Cabela’s has been a solid performer with its catalog business as a profitable base.
Gander and Hibbett led the segment on a Return on Sales basis, both exceeding the 7.0% mark. Gander and Cabela’s also introduced double-digit comp store sales gains to the segment, followed by Hibbett’s 8.3% gain for the period. Galyan’s was also a drag here as the retailer saw comps decline 4.5% in Q4, in part challenged by the growth seen at Cabela’s and Gander.

Inventory growth at Sporting Goods also outpaced the 11.5% Retail segment increase.