Head’s revenues increased by 2.0 percent to €366.8 million for 2006, and its gross margin climbed to 39.3 percent, as compared to by 38.4 percent in 2005, with improvements in all the segments except in racquet sports. Before restructuring costs and gains on the sale of property, operating income went up by nearly €5.1 million to €19,978,000, but foreign exchange losses and higher taxes led to a drop in net profit to €4,415,000 from €6,728,000.
Sales growth was remarkable in the winter sports division, which generated revenues of €188.1 million, up by 6.1 percent, representing half of the total turnover. Volumes increased across all categories and in nearly all markets, as previously reported (SGI Europe #4 of Jan. 30), thanks to good snow conditions for most of the year and good demand for Head’s products. The gross margin in this segment improved to 37.0 percent from 35.0 percent in 2005, due to a better product mix and to production efficiencies.
Sales in the racquet sports division slipped by 0.2 percent to €132.7 million. This was because of a poor product mix despite higher sales volumes in racquets – up to 1.89 million units from 1.88 million in the previous year - and balls – up to 6.4 million dozens from 6.3 million. Head estimates that the global racquet market dropped slightly in 2006, although the situation is more positive in the USA, while the ball market increased. The gross margin in this segment fell from 38.5 to 36.5 percent, mainly due to higher raw material costs and the launch of the new Head brand of balls.
Revenues generated by the diving division slipped by 0.6 percent to €48.6 million, mainly because the figures for 2005 had been boosted by a limited edition product launch, but they jumped sharply in the fourth quarter. Here the gross margin jumped from 32.6 to 37.1 percent, in line with a strategy to improve margins instead of sales. New product lines helped to boost sales by 10 percent in the 2nd half.
Revenues from licensing were down by 13.2 percent to €8.1 million. This was blamed on the termination of a footwear license agreement, which Head plans to replace through its own distribution, and the termination of an apparel license agreement in the UK, which it hopes to replace later this year.
During the 4th quarter, net revenues dipped by 4.2 percent to €123.3 million and gross margin climbed to 37.3 percent, as compared to 36.5 percent in 2005. Head’s operating profit before restructuring costs rose by €1.5 million to €10.6 million. The group made a net profit of €3,285,000 for the quarter, slightly down from €3,523,000 in the year-ago period.
Sales in the winter sports division were off by 4.9 percent to €87.9 million in the quarter, mainly because of poor snow conditions that affected reorders. Racquet sports revenues also slipped, by 7.3 percent to €26.4 million. But sales of diving goods rose by 20.7 percent to €10.6 million and revenues from licensing inched up by 1.6 percent to €2.2 million.
Predicting a difficult year because of the recent lack of snow, which may cause the winter sporting goods market to drop by 15-20 percent this year, Johan Eliasch, chairman and chief executive of the group, said it will to continue to invest in new athletes, technological product development and branding to try to offset difficult market conditions.
But some analysts and shareholders are dissatisified with some of the company’s financial policies. In an unusual intervention at the end of a conference calls where the results were commented by the management, one of them criticized the fact that Head is not using its cash flow instead to redeem some of its bonds, worth $115.8 million, on which it is paying 8 percent interest.
He asked Eliasch whether he was directly or indirectly a bondholder.Eliasch replied in the negative and said that some of the cash was being set aside for possible acquisitions. Another analyst asked whether he wanted to keep Head’s share price down in order to take the company private, but Eliasch refused to comment.
