Canadian dollar hits Shermag
By Michael J. Knell -- Furniture Today, February 20, 2005
Sherbrooke, Quebec — The strengthening Canadian dollar continued to pummel full-line producer Shermag's bottom line in its third quarter, although revenues saw double-digit growth. The third-largest Canadian manufacturer sells about 70% of its volume in the United States.
Net revenues in the quarter ended Dec. 31 were C$63.5 million, up 12.5% from C$56.5 million in last year's comparable quarter. But net earnings sank 32.1% to C$2.3 million from C$3.5 million last year.
In the nine months, net revenues came to C$157.5 million, down 4.4% from the prior year's C$164.8 million. Net earnings plummeted 70.5% to C$3.8 million, compared with C$12.8 million a year earlier.
In addition to currency exchange challenges, Shermag said it still hasn't recovered completely from last summer's labor disputes. The company also cited under-performance in its juvenile division, including a recall of a new glider rocker model, and said Asian-made goods continue to exert considerable pressure on margins.
"There is strong demand for both our formal dining room (which is made in Asia) and our casual dining (which is made in Quebec)," said President and CEO Jeff Casselman in a conference call with analysts. "Our domestic case goods business performed very well but our upholstery business was flat; profits are down because of the Canadian dollar, and competition from Asia is affecting price points in that category."
Export sales, almost all to U.S. retailers, were C$46.8 million in the third quarter, up 10.5% from the previous year's C$42.3 million. The company's U.S. dollar revenues rose 25.7% to $35.7 million, compared with $28.4 million last year.
Meanwhile, third-quarter sales to Canadian retailers rose 19.6% from C$17.3 million to C$20.7 million.
"During the third quarter, we were able to significantly reduce the order backlogs created ... by labor disruptions at certain plants," Casselman said. "Notwithstanding this improvement, results were affected by ... the Disraeli (plant) strike, which was resolved during the quarter.
"The increase in revenue was achieved despite significantly reduced protection from the company's exchange rate hedging program," he continued, adding the most recent quarterly results are based on an average exchange rate of 76 U.S. cents to one Canadian dollar, a 13.4% strengthening of the Canadian dollar against the U.S. greenback from a year ago.
Shermag estimated the exchange rate's impact on third quarter net earnings at C$4.5 million. Asia-sourced product now accounts for about 20% of Shermag's shipments, he said.
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