Head managed to make up for some of the sales it lost in winter sports last year, enabling it to lift overall revenues by 4.3 percent in constant currencies for the third quarter. However, the company suffered from deteriorating markets in tennis and diving, and it was unable to convert the higher winter sports sales into more profits. In reported terms, Head’s sales inched up by 0.3 percent to €93.1 million for the quarter.
Winter sports sales were up by 11.1 percent to €54.3 million for the quarter, with improvements in all categories except ski bindings, for which Head obtained fewer OEM deals. The company confirmed it was on track to recover about one-third of the sales it lost in 2007 for winter sports products.
Since the beginning of the year, including OEM orders, Head reported sales of 262,000 pairs of alpine skis, up from 215,000. The volume of ski boots jumped from 193,000 pairs to 244,000 pairs, and the number of snowboards sold rose from 109,000 units to 112,000 units. Sales of protective equipment also grew from 32,000 units to 56,000 units. Only ski bindings saw their volumes decrease, down to 643,000 compared with 697,000 last year, as Elan and Fischer ordered less.
The gross margin of Head’s winter sports business decreased to 34.9 percent, down by 2.7 percentage points, on account of higher prices for energy and raw materials. But again the bindings were the exception, with an increase in gross margin due to a lower rate of OEM sales.
The racquet sports business was badly hit, with a sales decline of 12.3 percent to €30.5 million for the quarter. This came amid a slump in the global tennis market, due to poor weather and economic uncertainty, with research on the first half of the year showing a sales decline of nearly 8 percent for racquets in Europe, and a fall of more than 12 percent for balls. In the U.S. markets, sales of racquets fell by about 4 percent, while sales of balls remained stable.
In this context, Head could probably claim to be gaining market share, because its volumes fell by only 4 percent in racquets and they actually increased in balls. However, Head’s sales were affected by the strengthening of the euro against the dollar, as well as a less favorable product mix. The same factor depressed the division’s gross margin, which was down by 1.9 percentage points to 36.4 percent for the quarter.
When it comes to diving, Head reported a sales dip of 3.6 percent to €10.0 million, but this was due to the strengthening of the euro – in constant currencies the company’s diving sales increased. Head could therefore claim that Mares, its leading diving brand, expanded its market share owing to its advanced products and improved operations. Furthermore, diving was the only large division in which Head’s gross margin firmed up, with an increase of 2.7 percentage points to 36.3 percent. This was explained through lower inventory write-offs and fewer bad debts than last year.
However, Head confirmed the market weakness that became apparent earlier this year, for example with a sales decline of 10 percent in the Italian market for the season. Head’s own orders for diving products have decreased significantly, so it is expecting a small sales slump in this business in the last quarter.
The group’s gross profit margin for the quarter ended at 37.3 percent, down by 1.9 percentage points. Furthermore, it received less share-based compensation income than last year, and forked out restructuring expenses of €0.6 million, relating to the partial transfer of its ski production from Austria to the Czech Republic. Its operating profit therefore fell to €4.8 million for the quarter, down from €8.8 million for the same period last year. Net profit ended at just €1.2 million, compared with €4.1 million.
For the first nine months of the year, sales have registered a small dip of 0.4 percent to €211.0 million, but an increase of 4.2 percent in constant currencies. The gross margin declined to 38.2 percent, down by 1.3 percentage points.
The picture is then muddied by share-based compensation expense and restructuring costs, which contrived to reduce Head’s operating loss to €5.3 million, compared with €5.4 million at the same time last year. Excluding the share-based compensation, Head’s operating loss over the nine-month period would have worsened by €4.7 million to land at €9.7 million. The group’s net loss stood at €8.5 million – a little less than the loss of €11.9 million reported at the same time last year, because it enjoyed more income tax benefits and currency gains.
In the third quarter, which is demanding in terms of working capital, Head tapped out its existing credit lines, awaiting payment for deliveries of its winter sports products. The short cash situation emerged due to reduced gross margins, as well as capital expenditure of €11.3 million, chiefly due to the start-up of a tennis ball manufacturing plant in China. Head therefore secured a credit facility of €8 million that expires at the end of the year to tide it over, and by the middle of November it had drawn down €3 million of this credit.
Head’s managers said that they would address the market situation by continuing to focus on restructuring and other adjustments. In any case, they still expect to report an operating loss for the full year.