From economic sluggishness to raw material costs, the poor spring weather and cautious retailers, a full array of adverse conditions were enumerated by Head as it reported another sales drop and a deeper operating loss for the second quarter, as well as a meager order book for the coming winter season.
Group revenues declined by 8.8 percent to €56.2 million for the quarter, as a sales increase in diving products could not make up for double-digit slides in both winter sports and racquet sports.
The winter sports division took the toughest blow, as its sales narrowed by 20.7 percent for the quarter, although the period is not very meaningful for this unit, with sales of just €7.9 million. While sales of skis remained roughly stable, sales of boots and bindings both declined by more than 20 percent. Bindings suffered from lower OEM orders, while the decline in boot sales was attributed to the timing of deliveries. The gross margin of the winter sports division fell to just 3 percent, compared with 9.2 percent for the same quarter last year, because its capacity was used less efficiently.
More significantly, the order book shows that Head has yet to recover fully from poor winter conditions and retail caution over the last years. Now that the pre-orders for the 2008-09 season have nearly all come in, the company has only recovered about one-third of the sales lost in 2007. However, Head managers still believed that they were ahead of the market, partly due to the strong racing performances of sponsored skiers.
The racquet sports division suffered the largest sales decline for the quarter in absolute terms, with a drop of 10.8 percent to €30.8 million. Head enjoyed higher sales of tennis balls and the division’s turnover was boosted by its newly introduced tennis footwear, but this was not sufficient to make up for unfavorable exchange rate changes and lower sales of tennis racquets. This factor unfavorably altered the mix of products sold by the division, so that its gross margin fell by 1.8 percentage points to 39.8 percent for the quarter.
The diving division’s revenues were hurt by the weak dollar but they still went up by 6.7 percent to €18.0 million for the quarter. Head observed that the sell-in of diving products continued to hold; but then again there were signs that the sell-out was starting to weaken, due to the poor consumer climate. The diving unit’s gross margin inched up by 1.3 percentage points to 41.6 percent. As for licensing revenues, they slid to €1.3 million compared with €2.1 million at the same time last year, because of exchange rates and fewer orders.
The weaker product mix in winter sports and racquet sports depressed Head’s overall gross profit, which fell by 11.8 percent to €21.1 million. Although Head enjoyed a decrease in selling and marketing expenses, its operating loss deepened to €6.7 million, compared with €5.3 million at the same time last year. However, due to €1.1 million in non-operating income and higher income tax benefits, Head could still report a smaller net loss of €6.2 million, compared with €6.5 million in last year’s second quarter.
Adding the first quarter, Head’s sales were down by 0.9 percent to €117.8 million for the first half. The winter sports business lifted its sales by 12.6 percent to €23.3 million, as Head easily improved on the disastrous re-orders of the first quarter last year. Including OEM sales, sales of alpine skis increased from 47,000 pairs in the first half of last year to 77,000 pairs this year, and sales of ski boots nearly doubled from 33,000 pairs to 64,000 pairs. However, sales of ski bindings declined sharply from 351,000 to 270,000, chiefly due to a shift in deliveries. Sales of snowboard equipment went down from 21,000 units to 17,000 units, but sales of protective equipment multiplied from 5,000 units to 13,000 units.
The racquet sports division suffered a sales decline of 6.3 percent to €63.2 million for the six months. Excluding a small rate of OEM products, sales of Head tennis racquets improved slightly in volume, up from 1.04 million to 1.07 million racquets for the first half of this year, while sales of tennis balls remained roughly flat at 3.6 million dozen. Johan Eliasch, Head’s chairman and chief executive, said the global tennis market appears to have declined in the first half of the year.
The company was less than upbeat about its outlook for the remainder of the year, anticipating tough trading conditions and confirming that it should report an operating loss for the full year.