2006 was a year of integration for many of the companies on the vendor side of the outdoor and snow sports industries, while retailers have been able to turn strong sales gains into even stronger earnings growth. In spite of one of the worst snow sports winters on record, fourth quarter sales increases were relatively balanced across softgoods vendors, hardgoods vendors and retailers. However, the top line is where the similarities in results ended. For many retailers, the consolidation that occurred over the past several years has worked its way to the bottom line, while many hardgoods vendors are still struggling with integration issues.
The acquisition environment that fueled much of the growth in publicly reporting companies over the past five years nearly came to a halt in 2006. Some relatively small deals were executed in 2006 by Thule, Crocs and Johnson Outdoors with a relatively small impact on Q4. The Easton-Bell Merger was the largest deal during the year to have any impact in Q4, but Easton delayed reporting this year and is not included in these results. The retail side of the industry is almost entirely organic growth.
The B.O.S.S. Report presents an overview of fourth quarter industry results in chart form here. Results are posted for those companies that have reported for the period ended closest to the end of December. Because the report is not a clear picture of the entire industry, BOSS feels the total numbers are less significant than the trending information provided in the percentage increases and decreases.
Retail sales in the industry increased in the upper teens, with much of the growth fueled by the rapid square footage expansion in the hunt/fish retail sector. These increases should slightly out-pace retail sales in the overall sporting goods market. In addition, increases in GSI Commerces internet sales contributed nearly two full percentage points to the retail sectors growth.
Retailers continued to drive the industry and boost their margins, apparently at the expense of vendors. Overall gross margins at retail increased over 500 basis points while hardgoods vendors saw a slight decrease in margins and softgoods margins inched up 85 basis points.
These healthy metrics trickled down to the bottom line, with retailer income growth nearly out-pacing sales growth by a three to one margin. Much of the increase in profitability was due to GSIC, which saw its bottom line increase by a factor of five.
The retail sectors return on sales increased sharply during the fourth quarter, jumping 170 basis points to 7.7% of sales compared to 6.0% last year. Overall retail inventories are slightly higher than at the same time last year, but they are still increasing at a slower rate than sales.
Hardgoods vendors were clearly impacted by the unseasonably warm winter weather conditions, with Head and Atomic both posting lower sales numbers than last year. The two winners for the year in snow sports hardgoods were clearly K2 and Salomon, with both companies showing increases around 10%. Overall, the 14% growth in the hardgoods sector outpaced the overall sporting goods market by one percentage point, as reported in The B.O.S.S. Reports sister publication, Sports Executive Weekly.
Profitability in the hardgoods sector increased considerably due to a $200 million non-cash write down K2 was forced to take in Q4 of 2005. On a pro-forma basis, K2s income actually declined 29%, leading the overall hardgoods sector to a 3% increase in earnings. Because of this, return on sales declined 90 basis points to 7.9% of sales.
The softgoods sector did not out-pace the retail sector for overall growth, but it did have the two fastest growing companies. Crocs reported a 236% revenue increase for the quarter and walked away with the award for most organic growth. Under Armour saw a more moderate top-line increase, but still grew sales by 55% through a combination of organic growth in apparel and its very successful product extensions into cleated footwear.
The only companies to show any declines in the softgoods sector were Royal Robbins parent company, Phoenix Footwear, which was suffering from slow business in its non-outdoor brands (see the article on page 4) and Rocky Brands, which declined due to military and western boot sales.
Earnings growth was hampered by a $23 million loss at Phoenix Footwear caused by heavy declines in profitability for nearly every brand except Royal Robbins. Excluding PXG results, income in the softgoods sector would have increased 13.9%. Declines in Quiksilvers profitability also impacted the softgoods sector, but the majority of this was due to the inclusion of Rossignol and the unseasonably warm winter.
The overall increase in profitability was primarily due to Crocs and Under Armours astronomical growth curves as well as Deckers and the turn-around initiatives implemented by CEO Angel Martinez. ROS in the softgoods sector dropped during Q4, but again most of this was due to the heavy losses at Phoenix. Excluding Phoenix from the results, return on sales would have been 8.5%.
While the weather clearly hampered Q4 results, especially in the hardgoods sector, the first quarter of 2007 is looking positive for most vendors. February comp store sales were generally good, with U.S. consumers continuing their buying spree in the face of several negative macroeconomic indicators. For the outdoor and snow sports industries specifically, the weather in Q1 seems to be cooperating more and retail inventory levels are reportedly in relatively good shape in spite of the slow start to the season.
