Early cool weather helped the pace of sales and profit growth during the third quarter for Bicycle, Outdoor, and SnowSports vendors and retailers alike. With rising average selling prices and strong early sell-through delivering double-digit sales growth for vendors and retailers, the wholesale and consumer markets seem to be on a strong growth curve. At the same time, the recent wave of consolidation is finally working its way down to the bottom line, with double digit increases in net income from both manufacturing sectors, and triple digit increases coming form retailers.
The B.O.S.S. Report presents an overview of third quarter industry results in the chart on page three. Results are posted for those vendors that have reported for the period ended closest to the end of September and the retailers for the period closest to the end of October.
Overall, vendor wholesale sales increased 16.2%, while profits jumped 15.4% during Q3. 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.
Softgoods sales out-paced hardgoods by roughly two percentage points, but much of the growth in the softgoods sector was spurred by Crocs 190% increase in sales for the quarter. Without Crocs in the mix, softgoods sales increased 14.2% during the quarter. The Crocs phenomenon also impacted the bottom line of the softgoods sector. Overall income grew 16.7%, but with Crocs in the mix, it was up 12.9%. Not all of the sales and income growth was based on the Crocs fad, however. Quiksilver contributed a considerable portion to the bottom line, nearly doubling their net income after realizing some strong synergies with Rossignol during their most recent fiscal Q4 (see the full story on page five of this issue). Also, Deckers was able to leverage a 19% organic growth rate into a 30% increase in earnings.
While both sales and income grew during the quarter, the ratio between these two metrics, return on sales, was flat to last year at 12.7%. This indicated that income is keeping pace with sales growth, but not exceeding it.
In the hardgoods sector, Oakley wins the award for strongest organic growth, while Easton-Bell Sports and Thule both used acquisitions to bolster their top-line. Suunto also showed a strong performance during the quarter with a mid-teens organic growth rate.
Overall, hardgoods category sales increased 14.9%, while income grew only 11.6%, primarily due to the Easton-Bell merger. The combination of the two companies inflated Easton-Bells sales by 81%. Without this acquisition-based sales boost, the sector would have seen top line growth of 8.9% and income increase 9.0%.
At the same time there were some very solid performances from several hardgoods companies, particularly in the snowsports categories. K2 is finally realizing some benefits from the addition of Volkl and Marker into their stable of brands with income growth out-pacing sales growth by more than a five-to-one margin. Head N.V. saw profits out-pace sales by nearly a seven-to-one margin.
Not all of the hardgoods companies are through their respective integration processes. Orange 21 is still struggling with their acquisition of LEM, which weighed heavily on their profits for the quarter. In addition, overall inventory growth in the hardgoods sector is out-pacing sales growth, implying there is some excess production that will need to work its way through the supply chain.
Retailers, like manufacturers, are beginning to see their acquisitions and subsequent integrations pay off. At the same time, an unprecedented consumer awareness of outdoor brands is driving more traffic to retailers. Overall in the Bicycle, Outdoor, and SnowSports industries covered in this report, sales increased 18.4%, while profits more than doubled, increasing 111% during the quarter.
Interestingly, the two primary contributors to top-line growth were the only two mall-based retailers, Zumiez and The Walking Company. While most of these revenue increases for these two retailers was due to aggressive expansion, both are also reporting strong comp-store results as well. The only retailer covered in this report to show declining slaes was Timberlands U.S. retail operation.
Profit growth was driven primarily by past integration and restructuring efforts paying dividends during the present quarter. Dicks Sporting Goods and Forzani both saw their bottom lines increase in the 80% range following Dicks integration of the former Galyans stores and Forzanis restructuring and re-merchandising efforts at several of the Canadian retailers banners.
However, some of the growth in profits is coming form improved margins at retail as well. Overall, retailers in this sector were able to boost their margins by 200 basis points. The strongest margin gains came from Gander Mountain and Forzani. In addition, two retailers were able to swing back into profitability during the third quarter of 2006. Sport Chalet and Gander Mountain both posted net losses last year, but were able to turn a profit this year.
Retailers return on sales was up considerably due to the synergies from acquisitions and the overall improvements in profitability of this sector of the market. ROS jumped 90 basis points from 1.1% last year to 2.0% this year. Retailers have also been able to keep their inventories relatively clean during the third quarter, with inventory growing at just over half the rate of sales growth.
