As expected, sporting goods equipment manufacturer K2
Over the first nine months of the year, K2 saw an 11% increase in sales that grew to $960 million. But operating profit declined from $59.5 million to $50.4 million because of its acquisition of high-end ski equipment manufacturers Volkl and Marker, along with the clothing company Marmot Mountain it concurrently acquired. These seasonal products generally do not add much in the way of profits during the off season, although expenses for them can still run high.
That's a fine explanation for the first and second quarters, since consumers don't typically think about buying skis while they're lying on the beach soaking up the summer sun. But by the third quarter, avid skiers are starting to plan their winter activities -- and they don't usually wait until the snowflakes start falling to make their purchases. That's why K2's report that Volkl-branded products were down this quarter as compared to last year because of softness in the premium market is a problem.
For investors, that might be an area of concern to watch as Volkl has more than a dozen ski models that typically cost more than $1,000, whereas before the acquisition, K2 historically offered models that rarely exceeded $650. A primary factor driving the cost of the skis up is that they now come pre-mounted with special bindings that help skiers when they turn, but it's a performance enhancement that only a certain class of skier can notice.
K2 is not alone in its high-end offerings. Salomon has at least a half-dozen models in that price range, and Quiksilver's
Profits in the segment did increase to $25 million for K2, probably reflecting the higher margins these high-end, integrated skis generate. Yet it wasn't enough to offset the declines experienced in paintball and bicycles. Still, excluding paintball, K2 was able to generate sales growth of 4.2%, 16% growth in operating income, and a 23% increase in diluted GAAP earnings in the third quarter.
While K2 was able to keep its receivables in check, pacing as they did the growth in sales, inventories swelled 21% over last year as it added new products in its marine and team sports segments. We'll need to watch carefully to see whether all the added inventory ultimately ends up as sales.
So, although a number of segments have performed admirably, K2 has not yet shed its image as a first- and fourth-quarter company.
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