K2: Paintball Caused Downfall

Though it has the earmarkings of becoming an extreme sport, perhaps paintball still needs to be relegated to the ranks of fad recreation activities. Sporting goods manufacturer K2 (NYSE: KTO  ) has slashed its earnings outlook for both the quarter and the year, based on lackluster paintball sales, citing the fact that the segment will contribute virtually nothing to the profit picture.

This is a surprising development. K2 owns leading paintball industry names like Brass Eagle and Worr Games, which are sold through various mass distribution channels like discount retailer Wal-Mart (NYSE: WMT  ) and account for about 10% of sales. Last year, third- and fourth-quarter sales of paintball products totaled more than $8.5 million, or $0.10 a share in earnings. However, now that higher gas prices have hit the discounters, paintball product sales are suffering. Last year paintball was just one component of a strong action sports segment that saw double-digit increases in sales of skis and snowboards. Now it's apparently able to drag down performance for the whole company.

Even so, K2 expects to report sales that are still above last year's results with third-quarter earnings 23% higher than last year. For the full year, the company estimates sales of $1.29 billion to $1.32 billion and earnings of $0.75 to $0.77 a share. Not bad, considering sales were $1.2 billion last year -- an 8% to 10% increase -- but it's well below the company's previous guidance and what analysts were expecting.

What's worse for investors, though, is the dilution of ownership interest the company continues to report. Diluted shares outstanding continue to climb exponentially, growing more than 16% over the past three months and more than 56% since the third quarter of last year. CEO Richard Heckmann has temporarily satiated his appetite for acquisitions, which caused earnings indigestion last quarter, yet the results from the spending spree -- the unabated share dilution -- continue to be felt.

It's hard to fathom that in the diverse sporting goods lines that K2 represents, paintball could have such a dramatic impact on its own. Yet last quarter K2 warned that the division was performing poorly and the company has taken to restructuring it, hoping that it can revive its profitability next year. Now it needs to aggressively use the share-buyback program it previously announced to offset the horrendous dilution shareholders are experiencing.

With its stock careening downward more than 10% in early morning trading today, it would represent a good opportunity for K2 to show support to its owners.

More Foolish articles on K2's activities:

Fool contributor Rich Duprey owns shares in K2 and Wal-Mart. The Motley Fool has a disclosure policy.


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