MONTREAL, Quebec (BRAIN) — Dorel continued to feel the sting of weather on sales of bicycles globally during the second quarter, officials told investors during an earnings call Friday morning.
“There’s no doubt the second quarter was a bad quarter … and the bicycle business was the biggest driver of that change,” Martin Schwartz, Dorel president and CEO said.
"Discounting is rampant …” — Dorel
Revenue in the recreational and leisure segment, which includes Cannondale, Schwinn, GT, Mongoose, Iron Horse and Sugoi, dipped 5 percent to $238.1 million for the quarter ending June 30. That’s down from $251.9 million for the same period in the prior year. For the first half of the year, bike revenue was down 6 percent, totaling $441.6 million this year compared to $472.8 million in 2012.
“The recreational and leisure segment was affected by a late spring in all markets and it has created a domino effect,” Schwartz said. “Weather created a global slowdown, lowering sales everywhere. This has created higher inventories industry wide.”
For the quarter, gross margins decreased to 22.9 percent from 25.1 percent, with gross profits dropping from $63 million to $54 million. The company blamed heavy discounting for the drop in margins. “With key IBD competitors carrying heavy amounts of model-year 2013 product, and to make room for 2014 models, discounting is rampant…” officials said.
Dorel also pointed to an appreciating U.S. dollar that has led to unfavorable exchange rates and driven up costs of goods. Also affecting profitability were $2 million in severance costs for the layoff of 50 employees in June. For the quarter and the first half, selling, general and administrative (SG&A) expenses in the segment were up $8 million and $13 million, respectively.
Severance pay, increased marketing and promotional costs from investments in the Cannondale Pro Cycling team, Guru bike fitting system and opening of its New York retail store all factored into those increases. But the company has since cut expenses across the board and expects to see the results of those cuts in third and fourth quarter profits.
“Our spending in SG&A was set at the beginning of the year to match our expected double-digit forecast in sales,” said Jeffrey Schwartz, executive vice president and CFO. “When sales didn’t increase, we started to pull back spending, but that didn’t happen right away. Our confidence level going forward, being able to have a better second half, is mostly related to our spending — something we can control.
“We’re hoping for a small rebound in sales and small rebound in margin,” he continued. “But the key element to recovery is spending that’s in line with our current level of sales and margin.”
Citing BPSA numbers, Martin Schwartz said the company’s bike inventory levels are up only 3 percent year over year in dollars compared to supplier inventories that are up 50 percent in dollars in June. “[We] have weathered the storm better than other brands,” he said.
Like other manufacturers, Dorel is considering backing away from model-year introductions in certain models to reduce the amount of discounting that happens at the end of the season, Jeffrey Schwartz added.
Revenue at Dorel’s two other segments — juvenile and home furnishings — also slipped in the second quarter and first half of the year. Companywide, Dorel reported revenue of $600.5 million for the quarter, down 5.2 percent, and $1.19 billion year to date, down 4.8 percent.
Dorel is traded on the Toronto Stock Exchange under the symbols DII.B and DII.A. Its stock performance is tracked on BRAIN’s Industry Stock chart.