Industry vendors in both the Softgoods and Hardgoods categories looked to acquisition help to boost sales and earnings growth for the third quarter, with the Hardgoods companies relying much more on those deals over the last year to bolster the top line. Benefits from foreign exchange rates also pushed sales and earnings higher for the period as the weaker dollar continued to make U.S. companies look better, while many European companies struggled to keep pace with the FX rate-aided growth posted by their U.S. counterparts.
In a shift from the second quarter, it now looks that many of the acquisitions are starting to pay off on the bottom line as well.
Companies in the Softgoods sector, which includes Footwear and Apparel, saw profit growth outpace sales growth by nearly a two to one margin. Conversely, the Hardgoods sector again saw improving sales growth, due primarily to acquisitions, but also experienced a decline in profitability for the sector, due primarily to issues at Callaway and ICON.
Sports Executive Weekly presents an overview of third quarter vendor results in the chart on page two. Results are posted for those companies that have reported for the period ended closest to the end of September. If a particular company has not yet issued a report for the period, or the information is for a period ended before the end of August, SEW has opted to wait and add those companies to a full quarter report that will be made available by late December though our Sports Executive Research unit.
Total sales increased 17.5% in the third quarter for those companies tracked in this report, while net income rose 27.8% for the period. 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.
Return on Sales, which is the measure of net income as a percentage of sales, increased 80 basis points for the quarter versus the year-ago period, coming in at 10.1% of sales versus 9.3% in Q3 last year. More significantly, ROS jumped an impressive 260 basis points from the second quarter report for the same companies.
For third quarter, the gross margin for the reporting companies averaged 33.0% of sales for the quarter, up 50 basis points from 32.5% of sales in the year-ago period, but down 900 basis points from the second quarters average gross margin.
The Softgoods sector again saw more organic growth than the Hardgoods sector as well as besting Hardgoods in sales aided by acquisitions. Nikes fiscal Q1 period ended 8/31 got a lift of approximately $127 million from the inclusion of the Converse acquisition, while Delta saw a $22.0 million gain from its Soffe deal, and Phoenix Footwear got a bump of roughly $12.0 million from Royal Robbins and other deals. Russell picked up more than $20 million in the Huffy Sports and AAI deals and Reebok looked to its acquisition of The Hockey Company to add approximately $79 million to the companys top line.
Excluding the gains from all these acquisitions the sector would still show an organic growth rate of 13.1% for the period.
In the Hardgoods sector, subtracting out the roughly $92 million in incremental sales that the Brunswick Marine Engines and Boats division saw from acquisitions and excluding roughly $39 million in Top-Flite sales at Callaway this year and more than $146 million in acquisition contribution at K2 Inc., the sales increase for the Hardgoods sector rose just 6.4% versus the 15.2% gain reported.
The honors for most organic growth in the Softgoods sector again goes to Deckers, a company that is reaping very nice rewards from the Ugg boot phenomenon while taking full advantage of its acquisition of the Teva brand. Saucony was also a key leader in organic growth with their 32.2% increase in sales, boosted by a 38.5% increase in the U.S. Saucony did signal some potential issues as U.S. backlog started to slow at quarter-end. The VF Corp. Outdoor Coalition, which includes The North Face, Jansport, and Eastpak in their ongoing businesses, also saw nice organic growth of nearly 29% for Q3.
Everlast led the sales decliners in Softgoods, falling 17.1% in the quarter as the company moves closer to their licensing model. The Warnaco Swimwear business, which includes Speedo and other fashion brands, also saw a decline in sales for the period, a decrease they attributed to the loss of a fleece program at a large customer. Speedo brand sales fell 6.4% in the period. Excluding about $700,000 in sales attributed to the recently-acquired Ocean Pacific brand, total Warnaco Swimwear sales would have actually declined 8.8% for the third quarter.
K-Swiss sales growth rebounded in Q3 after a 3.5% decline in the second quarter. Worldwide sales were up 12.0%, but U.S sales lagged International sales with a 5.0% increase. The pull back at Foot Locker remains the biggest issue here as sales to the worlds-largest-athletic-footwear-retailer fell to 22% of total company sales from 30% of sales in Q3 last year. Excluding Foot Locker, the balance of the business was up 26% in the quarter. KSWS also saw the at-once business take a bigger piece of the pie in Q3, representing 35% of sales for the period versus 30% in the year-ago quarter.
Despite showing a 25.1% increase in profits for the quarter, Nike again held back growth on the net income line for the Softgoods sector. Total sector net income would have been up nearly 40.9% for the quarter without the Nike gain. Although off of a much lower base, the net income line was also affected by Everlasts posted loss and a dip in profits at Stride Rite.
Deckers also gets the nod as top-performer on the bottom line as net income jumped more than 1100% for the period to 10.4% of sales. LaCrosse Footwear did a nice job recovering from a Q2 loss, posting a 81.9% increase in net income for the period.
Looking more specifically at peer group performance, we break the Softgoods sector into three segments for our full report due out in December. Those segments, which include Apparel Only, Athletic Footwear & Apparel, and Outdoor Footwear & Apparel, show distinct patterns in their performance in the quarter. Currently, Apparel Only companies — we will add four to five more companies to the total report as they become available — saw an 11.4% increase in sales for Q3 and profits jumped almost 98% for the period thanks to Soffes impact on Delta Apparel.
Return on Sales (ROS) numbers posted by the Softgoods companies in the period were boosted by stronger contributions from the footwear companies. While Apparel ROS came in at 3.8% of sales, up 170 bps from last year, the number was kept low due to the historical operating loss seen at Speedo in Q3.
Outdoor Footwear/Apparel companies outpaced their cousins on the Athletic side, posting an 15.5% ROS in Q3 2004 while Athletic ROS came in at 11.6% of sales.
In Hardgoods, the honors for highest sales growth went to K2 Inc., with acquisition-aided growth of 98.5% for the period. KTO would have had just an 11.5% increase in sales for the quarter excluding its various deals over the last year and Brunswick sales would have increased 14.0% for the period versus its 22.9% increase in acquisition-aided growth.
Callaway Golf Company would have actually seen sales fall 41.6% in the third quarter if they did not have Top-Flite sales in the quarter.
The Fitness segment appeared to show the most health as Cybex (+36.6%) and Precor (+29.5) both posted stronger quarters in Q3. ICON was the lone drag, posting a 13.9% decrease in sales for the period that led the Fitness segment to post a small 0.4% sales increase for the third quarter.
The Golf companies were a mixed bag as the issues at Callaway (-16.4%) impacted its upstream vendors like True Temper (-13.6%) and impacting the Golf Segment as a whole. Golf segment sales decreased 2.2% for the period and would have fallen 7.7% if not for the inclusion of Top-Flite in the ELY numbers. Adams Golf (+13.7%), Aldila (+34.7%), and TaylorMade (+7.9%) were all in positive territory for the quarter, while Wilson Golf declined 3.9% versus the year-ago period.
The SnowSports segment posted the largest gain, again due to the K2 Inc. acquisitions of Volkl and Marker that resulted in a 153% sales increase in the K2 Action Sports business that houses the Winter Sports brands. Excluding K2, the SnowSports segment saw sales increase 12.0% for the period, with Atomic increasing 6.5%, Head Winter Sports gaining 5.7%, and Salomon rising 3.0% for the period. Rossignols fiscal Q2 sales dipped 0.4% for the period.
In looking at three key segments of the Hardgoods business, only SnowSports posted a profit gain for the third quarter while Fitness posted a loss thanks to ICON. After posting wider losses in the second quarter, the SnowSports segment saw income increase 31.3% for the quarter, with most of the gain again coming from K2. Salomon operating income rose 5.6% in the quarter, but Atomic saw profits dip 3.6% in the period.
Golf segment profits plunged 69.0% thanks primarily to Callaways acquisition of Top-Flite and ELYs struggle to maintain share in the driver category. The segment is dealing with a price war of sorts and saw a 705 basis point decline in gross margin in the quarter. Only Aldila posted a profit gain in the period, while Wilson Golf saw its operating loss increase 4.0% and True Temper net income fell 67.5% for the period to just 3.5% of sales. ROS for the Golf segment was just 2.9%, down 630 basis points from a 9.2% return in Q3 last year.
In Fitness, ICON pushed segment profits lower even as Nautilus started to recover in Q3. NLS was the only company in the segment to post a profit gain for the period as the Fitness segment as a whole posted a loss for Q3 versus a 3.3% Return on Sales in Q3 last year.
