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Dorel Remains Optimistic Despite Dismal 2nd Quarter

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Company executives point to the Tour de France, potential in China, and pent-up demand as bright spots in a dark and stormy first half of 2013.

Dorel Remains Optimistic Despite Dismal 2nd Quarter
Dorel expects that the rest of the year will see improvement in the financial picture of its cycling segment, with the company’s flagship brand – Cannondale, continuing as a strong contributor.

Dorel President Martin Schwartz did his best to bring a positive outlook to the company’s second quarter results released last Friday, but the markets weren’t impressed. The company’s stock dropped as much as 15%, to US$ 31.20, in trading on the Toronto stock exchange, following the announcement of the second quarter numbers.

Overall, the company’s revenues fell 5.2% to US$ 600.5 million compared to the second quarter of 2012 (US$ 633.7 million). Net income for the period totaled US$ 13.2 million (US$ 0.41 per diluted share) a big decrease of 56.4% over 2012 (US$ 30.3 million). Total revenue for the first six months of 2013 stood at US$ 1,194,617,000.

Blame It On the Rain

Bad spring weather around the globe was blamed for results below expectations in the company’s Recreational and Leisure division, which includes Cannondale, Schwinn, GT, Mongoose, IronHorse, and SUGOI. The division had total revenues of US$ 238,174 million, 5.5% lower than 2012 Q2; with gross profit down 13.7% to US$ 54,550 million and operating profit taking a big hit, losing 83% over last year (US$ 21,606m) with a second quarter total of US$ 3,681 million.

Discounting

“In a nutshell… what happened to the bike business in Q2; we look at it from three areas,” said Schwartz. Sales were quite disappointing due to weather and getting off to an incredibly slow start. In addition to that, the discounting that was done in the industry has caused us to match discounting and therefore our margins dropped. And, the third thing, which is probably the biggest factor, is our spending in SG & A (Selling, General, and Administrative Expenses) was set at the beginning of the year to match our expected double digit increase in sales.”

Cost-saving measures

The company has responded to the challenge with cost-saving measures in response to the weak sales in its Recreational and Leisure division. “We have implemented significant expense-cutting and completed a comprehensive reorganization in our bike segment to improve profitability moving forward,” said Schwartz.

Discounting Contributes to Drop

As noted, Schwartz pointed to pressure to discount prices from retailers with high inventory levels contributing to the second quarter woes, along with unfavorable foreign exchange rates, and severance costs associated with a 5% reduction in the Recreational and Leisure division workforce.

“Independent bike dealer competitors are carrying heavy amounts of MY 2013 product and in order to make room for next year’s models, discounting activity has been widespread. Because of this we’ve been under pressure to increase our discounting, which in turn has driven down our margins.”

Last Half of 2013 to Bring Better Results?

Schwartz believes that the rest of the year will see improvement in the financial picture of its cycling segment, with the company’s flagship brand – Cannondale, continuing as a strong contributor to the company’s bottom line – in part because of Cannondale team rider Peter Sagan’s performance in the Tour de France which translated into 2.9 billion impressions.

Another reason Schwartz expects Cannondale to do well for the remainder of 2013 and 2014 – the brand’s entry into the burgeoning Chinese market and the equally promising e-bike segment of the cycling landscape.

“While still a small component of the overall bicycle business, we see further potential in this very large market. Of course we will be at Eurobike at the end of this month and Cannondale in particular will be launching exciting new products for the European market including new e-bikes, which represent an important opportunity in Europe.”

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