MONTRÉAL (BRAIN) — Dorel Industries, which operates three divisions including home, juvenile and sports businesses, reported that Toys R Us' liquidation impacted all three, resulting in a first-quarter impairment loss of $12.5 million total — about $2.1 million in home, $3.8 million in juvenile and $6.6 million in its sports segment, which includes its bike brands.
This is in addition to the $3.8 million the company said it lost in the fourth quarter of last year.
"As we reported in March, all of our business units are being affected by the Toys R Us situation. We estimate that companywide sales were reduced by approximately $7 million in the quarter. The Toys R Us liquidation in the U.S. may cause a market disruption in the short term, but we believe this situation will stabilize, and both the juvenile and sports business will shift to other retailers or other channels during the second half," said Martin Schwartz, Dorel's president and CEO.
"While we were anticipating a slower start to the year, the first quarter was more difficult than originally expected at Dorel Juvenile and Dorel Sports," he added.
The company told analysts during a call Friday morning that the bad weather this spring meant a poor start in April for bike sales. "But in May, the weather so far is good and we're seeing strong POS sales," Schwartz said during the call. "Right now, it's difficult to bet on the weather."
Its sports business, which includes its bike brands sold both at mass and IBD channels, posted $206 million in revenue, down 3.4 percent from $214 million in last year's first quarter. Organic revenue dropped 6.2 percent, and Dorel said the decline was mostly in the mass-market channel due to weak consumer demand at major retailers, and the impact of halted shipments to Toys R Us in March.
"A less favorable sales mix accounted for most of the decline in gross profit of 80 basis points. However, excluding restructuring and other costs, the decrease in adjusted gross profit was only 30 basis points from 22.4 percent to 22.1 percent," the company said.
Operating profit decreased $10.9 million to an operating loss of $800,000, compared with an operating profit of $10.1 million in 2017. Adjusted operating profit decreased $10.2 million. Dorel pointed to the $6.6 million loss from Toys R Us as a major factor in this result.
"The coming months will see the introduction of several exciting model year '19 mountain and road bikes, expected to be enthusiastically received," the company said. "Cannondale will launch a complete e-bike line in Europe in response to the growing popularity of e-bikes abroad. As well, a new category of interactive ride-ons has been developed to launch this fall, which will set Dorel Sports apart from the competition."
Dorel said that its tax rate for the quarter was 6.9 percent, compared with 35.7 percent a year earlier. Its adjusted tax rate was 10.2 percent, compared with 22.6 percent a year ago.
"While 2018 started with lower sales and earnings than initially expected, we still expect improvements over last year as the year progresses. We are confident that much of the lost Toys R Us sales will be recovered commencing in the second half," Schwartz said.
"Dorel Sports' second-quarter earnings may be reduced by the residual impact of the Toys R Us insolvency as they liquidate on-hand inventory, and by the poor April weather in most of our markets. As we enter the second half of the year, the hangover effect of the Toys R Us liquidation should dissipate and our upcoming new products are expected to drive improved sales and adjusted operating profit," Schwartz added.
Photo by Phillip Pessar via Wikimedia Commons.
