Home furnishings, juvenile segments drag down Dorel earnings

Earnings per share decline 29.3% in second quarter

Michael J. Knell -- Furniture Today, August 11, 2011

MONTREAL — Despite sagging home furnishings and juvenile product sales, consumer goods giant Dorel Inds. reported minor upticks in total revenue for both the second quarter and first half of 2011 on the strength of its growing bicycle business. However, net earnings fell 29.3% on a per share basis.

Revenue for the quarter totaled $619.0 million, up 1.9% over the $607.7 million for same period last year. Net income for the company, which reports its results in U.S. dollars, was $23 million or 70 cents per diluted share, compared with $32.9 million or 99 cents per share a year ago.

Year-to-date revenue was $1.23 billion, a 1.9% gain from the first half of 2010. Net income fell to $54.2 million or $1.65 per diluted share, a decline of 22.9% per share.

However, the company noted that it has moved to the IFRS reporting standard for public companies, prompting a restatement of its earnings per diluted share for both the second quarter and first half of 2010 - from $1.05 and $2.18 respectively to 99 cents and $2.14.

In a statement, Martin Schwartz, Dorel's longtime president and CEO, praised the recreational and leisure segment for the strides made in developing the Cannondale and Schwinn bicycle brands. However, the rest of Dorel's business was severely challenged during the first half.

"Costs in the first half of 2011 are higher than last year, and given the highly conservative spending of today's typical consumer, initiating price increases to our customers is a challenge, particularly within our juvenile segment in the U.S.," he told analysts. "Home furnishings was affected by the still weak U.S. economy which impacted POS (point of sale) levels, as well as by the weaker U.S. dollar which hurt our Canadian plants shipping into the U.S."

The smallest of Dorel's three business segments, home furnishings saw its second-quarter revenues fall 5.3% from a year earlier to $126 million although they remain up a slight 0.7% for the year to date at $263.7 million. Operating profit was down 44.4% for the second quarter to $6.3 million and down 36.2% to $14 million for the first half of 2011.

"As in juvenile, POS levels were affected by the fragile U.S. economy," the company said. "The segment's products appeal primarily to opening price point consumers, who are being prudent in their spending choices. As well, revenue was affected by the decision by Cosco Home & Office to exit unprofitable product SKUs. An increase in other furniture lines at the segment's other divisions, mainly upholstered furniture and futons, partially offset this decrease."

The company also said that cost increases on steel, textiles, container freight and other inputs affected margins.

"Second quarter profitability was further compounded by the strength of the Canadian dollar which is increasing costs for two of the segments plants that are based in Canada and ship the majority of its product to the United States," Dorel said.

Looking to the rest of the year, company officials expect recreation to continue to outperform the rest of the company while the prospects for juvenile remain challenged.

"In home furnishings, the impact of the poor economy has been less pronounced than in juvenile and the second half is expected to be slightly better than the prior year," the company said.

Schwartz added that global economic uncertainty, recent volatility in the stock markets and ongoing events in Europe continue to drive fears of another recession.

"This is depressing already weak consumer confidence and is further undermining the existing fragile retail environment. On the positive side, with the economy not recovering as many had anticipated, we are seeing some easing of commodity prices as well as some excess capacity at our overseas suppliers," he said.

"Should this trend continue, this could alleviate some of the margin pressure experienced during the first half. Notwithstanding the difficult economy, Dorel is remaining aggressive in new product development and exciting new products will be introduced in the upcoming months," Schwartz added.