Serial acquirers, like serial murderers, can do a hatchet job on your portfolio, or so I opined last week. Despite some academic research that suggests performance has more to do with how successful the company was the first time it made an acquisition (good first-time acquisitions are said to lead to a "hubris effect," diminishing returns down the road), I maintain that too much good will is too much of a good thing. Usually.
My poster child for serial acquisitions is K2 Inc.
The K2 tent got bigger in the third quarter as it added Volkl, Marker, and Marmot, but it was still able to churn out organic growth of 11% year over year. Including its acquisitions, sales were up 99% from the same quarter last year. Gross profits also were up, as were margins.
The drivers for the quarter were once again its Action Sports segment, which saw double-digit increases in ski and snowboards, as well as strong growth in the "extreme" sport of paintball. It portends a strong fourth quarter, and K2 has raised guidance once again. Last year's hard winter foretold this year's demand as sales tend to be based on what already happened rather than on what's coming. The company expects earnings per share of $0.18 on sales of $325 million, though analysts predict $0.19 on $303 million in sales.
Does that foretell more share dilution? K2 has not been one to shy away from doling out new shares to make acquisitions.
Yet as this quarter's results show, K2 is moving beyond its self-described status as a "first- and fourth-quarter company." The only real negative point is the sale of in-line skates, which CEO Richard Heckman has used some choice language in the past to describe but which we'll refrain from reprinting on this family investing site. Net debt (debt minus cash) has also grown to $346 million as a result of acquisitions, even as cash reserves have risen 150% to $37 million.
As the company has made acquisitions, it has found it necessary to expand its reporting segments. Earlier this year it realigned its product offerings into three broad categories. This quarter it added a fourth, Apparel and Footwear, to recognize the acquisitions of the Earth Products, Ex Officio, and Marmot brands. This new segment, and the Action Sports division, helped boost K2's margins, with gross profits growing to nearly 36% of sales.
Growing sales, growing profits, and growing margins are proof that not every company that soaks up its competition like a sponge possesses, as Dr. Phil might say, the 14 characteristics of a serial killer.