Vendor companies in the sporting goods industry continued to find new ways to spike profits in the first quarter of 2004. Even the hardlines segment is getting into the act as net income there outpaced sales growth for the first time since Q1 last year even as acquisitions and a weaker dollar helped the apparel and footwear companies expand their profit gains yet again. Wall Street cooled a bit to the sector’s stocks, exhibited by a total industry market cap index that dipped 3.8% since the end of the first quarter, due primarily to a pullback in retail stocks.

Hardlines were the lone gainer in the last two months with a 1.7% increase in value. The total SportsNewsSource Sporting Goods stock market index is still up 7.8% since January 1.

The following pages will represent a brief overview of first quarter performance for each of the segments covered. A full chart of vendor company results for the first quarter ended March 31, 2004 can be found on page three. A review of industry retail results will be found in next week’s issue. As always, for those companies not reporting on the calendar year, results are taken from the last reported quarter ending closest to the calendar end date. Again, the charts presented only cover those companies that report quarterly financial information to the SEC. As always, any companies, divisions, or subsidiaries listed that are part of a larger public company will only have operating income listed rather than net income.

The industry vendor sector saw sales for the first quarter increase 18.8% while an average 125 basis point improvement in gross margin helped fuel a staggering 35.5% increase in profits for the overall vendor sector. Return on Sales for vendors was pegged at 7.5% for the first quarter, up 1700 basis points from the year-ago quarter.

Inventories for the reporting vendors and suppliers rose 19.3%, a number that is roughly 500 basis points higher the inventory growth at the end of the fourth quarter, due primarily to acquisitions and the weaker dollar. The increase was still seen as clean by most companies as many reported lower aged inventories and fewer close-out sales. Futures backlog gains, where reported, continued to outpace the growth in inventory.

Fill-ins certainly became a larger part of the business for footwear and hardlines companies, but less so for apparel, except in basic goods.

The Apparel segment includes one new listing for Q1, with the Warnaco’s Speedo swimwear division joining the segment for the first time. Please note that companies reporting for an April-end quarter are not updated. The segment saw sluggish gross margin improvement, due primarily to tighter margins and lower average selling prices in the commodity blanks business at Gildan and Russell Corp.

Without RML and GIL in the numbers, GM would have increased 125 basis points for the segment. MJ Soffe was a positive for the numbers, as they offset declines at new parent Delta Apparel to help boost GM by 650 basis points.

Everlast joined the ranks of the profitable in the quarter and Cutter & Buck continued improvements in narrowing its loss one again. The drag for the segment came from Russell, Sport Haley and Speedo. Without the addition of Speedo’s declining operating profit for the quarter, segment profits would have increased more than 55% in the period, but increased just 5.1% when removing the companies that last reported their January-end quarter. Return on Sales, or ROS, improved 30 basis points to 7.0% in Q1 versus 6.7% in the year-ago period. The use of operating profits at Speedo helped spike these results. ROS without Speedo would have been 4.7%, up 100 basis points from Q1 last year.

Sales for the Apparel segment rose 19.3% for the quarter, or 17.1% when excluding the companies that reported January-end numbers. Russell was again helped by its acquisition of Spalding and Bike Athletic and would have seen flat sales in the quarter without the inclusion of the new businesses. Sport-Haley and Speedo were the lone decliners for the most recent period. The Speedo decline was due to a shift in deliveries to Q4 while SPOR blamed its decline in large part to a change in how they bill sales samples.

The Apparel stock market index has dipped 0.8% since the end of Q1, but is still up 6.8% since the end of the year. Only Russell Corp. has declined since the same time last year, while Cutter & Buck leads the segment with a 162% increase in share price since the end of May last year.

The Footwear segment saw its stock index decline 3.9% in the first quarter, managing to maintain a 5.4% increase since the beginning of the year due to huge year-on-year gains from Deckers, LaCrosse Footwear, Vans, and Puma. Net income gains outpaced sales growth by a three to one margin, as gross margins widened for the first quarter on supply chain improvements, fewer close-out sales, and upside from the weaker dollar.

We broke out the adidas-Salomon divisions this quarter to better measure it against its competition on an apples-to-apples basis. Using adidas-Salomon’s total sales and net income figures, ROS for the segment still came in at 7.0%, up 210 basis points from the same period last year. In Euro terms, adidas-Salomon net sales dipped 2.8% for the period but gained 3.0% on a currency-neutral basis, while net income jumped almost 35%, resulting in a 4.4% Return on Sales versus 3.1% in Q1 last year.

The Nike numbers were aided by the acquisition of Converse and currency exchange benefits. Nike estimated the business actually grew about 6.0% on a “normalized” basis.

The overall profit gains in the segment were obviously helped by the fact that six, count ‘em, six companies delivered net income increase of more than 60% versus the prior year period. Only Skechers and Stride Rite remained a drag on the business, with both reporting profit declines for the period, continuing a trend we saw in Q4…
Details on the Hardlines Segment Next Week…