MONTREAL (BRAIN) — Dorel's bike division reported a drop in third-quarter revenue of $15.8 million, or 5.9 percent, and a year-to-date revenue decrease of $42.8 million, or 5.7 percent. Revenue for the quarter totaled $250.7 million, while year-to-date revenue was $703.7 million. Dorel's bike division includes both its mass and IBD bicycle businesses.
The company told investors during an earnings call Thursday that the bicycle industry continues to face challenges at different levels, but that it's responding by unveiling new products, offering fewer discounts on products due to lower inventory levels, increasing prices at Caloi, and aggressively cutting costs.
"For the quarter and nine months, the segment's lower sales can be attributed to a softer global bike market and changes in the North American independent bicycle dealer retail environment," the company said.
Specifically, Dorel's Jeffrey Schwartz told investors that traditionally suppliers, including Dorel Sports' CSG division, would try to sell or ship as much as 50 to 60 percent of retailers' order commitments in the third or fourth quarter for the following year. But that's evolving.
"What happened last year is a lot of retailers bought a lot of bikes in preseason. There were incentives to do that. Then with discounting that occurred in spring, they've woken up this year and said, 'Why do I want to take such a big commitment early if I can wait to see if there's discounting?' They are buying, but not bulk of commitments before they need them. We expect to see these commitments being followed up. We're still bullish, but I don't foresee this year as a time where IBDs will load up and stock their warehouses. They'd rather we keep the goods."
As a result, Dorel Sports expects fourth-quarter orders to move into the first quarter of next year. This will mean a reduction in second-half 2016 CSG shipments. But the company still expects the fourth quarter to result in improved earnings due to improvement in its adjusted operating profit.
Schwartz said Dorel Sports is taking a much more strategic inventory approach. "We're controlling our inventory so as not to have excess inventory," he said. "Hopefully what happened in the industry last year won't happen again."
Schwartz pointed to BPSA figures that show a decrease in supplier inventory from January through September of this year. "Supplier inventory position is in much better state than last year at this time," he said. "We're hopeful we'll get back to a good level. A proper balance between supply and demand, which is what this industry needs."
Dorel said that during the quarter, the CSG international business transitioned from a licensing revenue recognition model to a distribution platform where shipments are recognized as net sales and associated expenses in cost of sales. Previously, these costs were netted in licensing and commission income.
Excluding the revenue recognition change in the third quarter of 2016 and the foreign exchange rate variations, organic revenue declined by 10.7 percent.
The silver lining in its earnings report was operating profit, which rose $26 million to $5.8 million for the quarter, and adjusted operating profit, which increased by 0.9 percent to $10.9 million when excluding impairment losses, restructuring and other costs.
The year-over-year increased operating profit was mainly driven by margin improvement at all divisions, particularly Pacific Cycle and Caloi, as a result of price increases. Less discounting aided by reduced inventory levels at CSG also contributed to the improvement. The segment also reduced working capital and increased cash flow.
Year-to-date reported operating loss was $38.9 million, compared with a profit of $2.5 million in 2015. Excluding impairment losses, restructuring and other costs, nine-month adjusted operating profit declined by 34.9 percent to $21.4 million.
"This isn't a strong bicycle market by any stretch," said Martin Schwartz, Dorel's president and CEO, during the call. "We're going to focus internally on standard gross margin and actual gross margin. There's too much money left on the table by inefficient operations, quality issues and timing. All the internal operating stuff we can improve, getting product to customers faster and better. That's where our focus is and where we can get a lot of margin back into the company."
