Amer Sports had to issue a profit warning last week as it became clear that sagging consumer demand was affecting more of its North American business than anticipated. The Finnish sports group therefore estimated that, excluding extraordinary items, its operating profit (EBIT) would end the year in the range of €90 to €105 million, instead of the €100 to €130 it had previously projected.
For the second quarter, Amer’s sales remained flat but exchange rate changes pushed them down by 8 percent to €285.1 million. Only winter and outdoor sports managed a sales rise of 8 percent in constant currencies, with footwear described as the company’s stronghold. The ball sports division saw its sales dip by 4 percent but the fitness division has become all of a sudden a serious worry, recording a sales drop of 5 percent.
Amer’s EBIT improved sharply for the quarter, reaching a loss of €7.8 million, against a negative result of €12.8 million at the same time last year, but this was due exclusively to a capital gain of €13 million that booked in the quarter for the sale of its head office in Helsinki. Due to higher financing expenses, Amer still ended the quarter with a net loss of €11.4 million, a deterioration of 10 percent compared with last year.
Led by the Wilson brand, Amer’s sales of ball sports products ended the quarter down 13 percent in reported terms to €130.9 million. Golf suffered the worst downturn in euros, with a sales drop of 20 percent, equivalent to a decline of 12 percent in local currencies. This could be attributed chiefly to the fact that Amer decided to license its golf business in Japan last year and that it exited OEM production of golf balls.
The company pointed to two American retailers that launched their private labels of golf balls, thereby reducing Amer’s sales in the country. On a more positive note, sales of higher-end balls improved, indicating a clear shift in the mix of sales.
The EBIT for the ball sports division fell by 25 percent to €11.3 million during the quarter, butAmer still aims to make profit in its golf business for the full year.
More specifically, racquet sports sales were off by 5 percent in local currencies and by 12 percent in euros to €62.6 million for the quarter. Apart from the exchange rates, Amer Sports blamed this mainly on softness in consumer demand in America, as well as shortages in production. Roger Talermo, chief executive, explained that the problem came from Chinese ball factories, where steep rises in wages and raw materials had caused shortages, but these had been resolved.
As for the group’s team sports business, sales dropped by 10 percent in euros to €41.1 million for the quarter, but it managed a small increase of 3 percent in local currencies. For once the U.S. market was identified as a major source of this positive development, as specialty stores delivered robust sales. The sell-in of baseball products was satisfactory and sales programs agreed with key accounts for the second half of 2008 are expected to show in the last quarterly results.
Nearly all the product categories contributed to a sales rise of 4 percent for the winter and outdoor sports division in reported terms, reaching €104.6 million for the quarter. In local currencies, sales of winter sports equipment climbed by 18 percent, although the quarter is almost meaningless for this business.
More interesting is the division’s 3 percent rise in pre-orders, driven by a recovery in Central European markets and in Japan. On the other hand, North America was slow and the Nordic countries still suffered from the weakness of cross-country skiing. Amer Sports said that inventory levels had been cleaned up in the alpine ski industry after two rough seasons, but the same could not be said for cross-country skiing.
The cost and job-cutting plan launched earlier this year for the winter sports equipment division was rounded off in the second quarter, in line with the established schedule. Entailing 400 staff cuts and the divestment of 4 out of 10 production sites, it is still expected to yield annualized cost savings of €20 million from next year.
Trail running is still the buzz word in the apparel and footwear business, which enjoyed a sales increase of 11 percent in local currencies, up by 7 percent in euros to €38.9 million for the quarter. The growth of trail running strongly helped to lift sales in Europe, while sustained marketing investments in the U.S. market generated encouraging results. The order book at the end of the quarter prompted Amer to predict a similar trend for the remainder of the year.
In local currencies, sales of Mavic cycling products inched up by 2 percent for the quarter. Sales of cycling components were hit by capacity constraints, caused by Amer’s restructuring moves in France, but Amer is satisfied with its order book. In euros, cycling sales remained stable at €26 million.
Suunto sports instruments enjoyed a sales increase of 6 percent for the quarter, again in local currencies, driven by the training and outdoor categories. Reported sales ended up just 1 percent higher at €22.6 million. The operating loss of the winter and outdoor sports division narrowed to €26.7 million, compared with €28.8 million at the same time last year.
The picture is more alarming on the fitness side. Talermo pointed out that Precor continued to do well with sales in the commercial sector, which made up 74 percent of the company’s turnover. However, Precor’s sales were depressed by a massive drop in consumer demand for home equipment, and some de-stocking by retailers. Sales in some categories of home equipment fell by as much as 50 percent. There were signs that the market was flattening toward the end of the reporting period, but the fitness division’s sales still ended down 17 percent in euros to €49.6 million for the quarter.
The fitness division’s EBIT turned into a loss of €0.4 million, compared with a profit of €6.2 million at the same time last year, due in part to the higher cost of raw materials. To make matters worse, Amer took extra reserves on bad debts, although this problem has not yet materialized, and one-off quality issues had an impact of about €3 million on EBIT in the second quarter.
To deal with this loss-making situation, Amer has resolved to adjust both its manufacturing and selling costs in the segment.. It shut down a production unit, laid off all temporary workers and moved full-time employees to the commercial side of the business.
