Market Watch: Numbers, Numbers Everywhere

Who knows what they mean?

Market WatchI confess. I was trained as a finance guy. I have a masters in Business Administration, started out in international banking (ask me about Carneval in Brazil sometime!), and did some corporate treasury and investment-banking kind of work. Given the way things have changed inside the snowboard industry, I decided it was okay to come out of the closet. Please have mercy on me.

Using this experience to get a handle on the snowboard industry isn’t an easy thing to do. With the acquisition of Ride and Morrow by K2, there is no snowboard-only company left that provides public financial information.

What is available is not all prepared in the same way. Canadian accounting standards are different from French accounting standards. And those are different from United States accounting standards, which are different from German accounting standards. Details on the snowboarding parts of business are typically unavailable.

Nevertheless, phone calls, Internet searches, and rummaging through some file folders produced public information on K2, Far West, Adidas (Salomon), Quiksilver, Vans, and Rossignol.

So, what trends are visible from reviewing this data? How much small print can I read before going crazy or blind?

As required, I’ve converted numbers to U.S. dollars based on exchange rates on November 3, 1999.

Size Matters The first thing to note is that, with the exception of Far West, the owner of Concept Outerwear (revenues of 7.4-million dollars in 1998), there are no small companies in this group. Vans, at 205-million dollars in its last full year, is next in size. Quik and Rossi were 316-million dollars and 338-million dollars respectively. K2 comes in at 575-million dollars and Adidas wins the heavyweight division at 5.3-billion dollars.

It’s easier to compete in a highly seasonal, very competitive market where margins aren’t that great and products are, for the most part, only differentiable by marketing, if you’re big enough to spread your overhead and have year-round cash flow. Even Far West, by orders of magnitude the smallest company in this group, has some of those things going for it. Without diversification, having a viable financial model in the snowboard business is a struggle unless you’ve got Burton’s market share.

These numbers represent each company’s total revenues. The snowboard portion is much smaller.

In some ways, then, it’s good to be big if you’re going to be in the snowboard business. It can also be seen as bad, if you believe that the sport derived its energy and success from the commitment of people who were 100-percent focused on snowboarding, risking everything they had, and were as much concerned with snowboarding as with the business of snowboarding.

If snowboarding is just one of your lines of business, and sometimes a small one at that, it may not always have your full attention.

How Big Is It? The people at Rossi were great. They sent the English-language version of their annual report through FedEx. It tells us that 8.4 percent of its revenue, or 28.4-million dollars is from snowboarding. Rossi’s snowboard business grew by thirteen percent over the prior year. It sold 143,000 boards.

They also estimated worldwide board sales at 1.45-million units in ’98/99, and thought it had grown five percent over the prior year.

I don’t know if that estimate is at the wholesale or retail level. It really doesn’t matter. What’s interesting to note, based on my own estimates of board sales four or five years ago, is that the rate of growth in board sales hasn’t exactly been spectacular. Probably not much more than the five percent Rossi estimated last year. It makes you wonder about some of the estimates of growth in the number of snowboarders we see. It could be that a lot more people are renting. It could also mean that a lot of peoe try it and get counted as “snowboarders,” but don’t go very often–if at all.

For all I know, the culture has been so furiously marketed and the style so widely accepted that people who have never gone snowboarding consider themselves snowboarders and get reported as such in the surveys.

Just Kidding, I Hope Boards, boots, bindings, and accessories made up 10.7-million dollars of Quiksilver’s sales in 1998–approximately 3.4 percent of total sales. That includes Mervin Manufacturing and the late, lamented Arcane step-in binding system. Quik also sells some snowboard apparel, but the amount isn’t identified separately.

Vans snowboard sales come from a number of sources. It sells the Switch binding and boots that work with it. Vans also sells traditional strap boots and bindings. It has a line of snowboard apparel. It also earns some amount of revenue from licensing Switch technology to other brands, including Nike, Northwave, and Heelside. Finally, the company now owns the High Cascade Snowboard Camp. There’s not a number anywhere that indicates how many dollars this all comes to.

K2 is no help either. All its annual report says is that the sporting goods segment of its business had sales of 405-million dollars in 1998. That includes inline skates, skis, bikes, and fishing tackle–not to mention snowboards.

Well, it’s time for some creative estimating. Somewhere around here, I’ve got some carefully prepared, hand-scrawled estimates of relative market shares for snowboard brands. Go with me on this, and we’ll assume that those estimates are valid worldwide and not just in the U.S.

I know what Mervin and Rossignol’s sales were. If these market share percentages are at all reasonable, a seat-of-the-pants guesstimate for K2 snowboard hardgoods sales would be (drum roll please) 65-million dollars, or eleven percent of its total sales. That’s before the acquisition of Morrow and Ride, of course. Those two deals should more or less double K2’s snowboard hardgoods sales.

Adidas reports that Salomon doubled its snowboard sales to 42-million dollars. It doesn’t indicate if that number includes Bonfire. This is about three-quarters of one percent of Adidas’ total sales for the year.

It just doesn’t look like anybody’s going to live or die by snowboard- related sales, though with the addition of Morrow and Ride, K2 is going to have an even greater focus on it. It’s more like companies are having a hard time figuring out how to grow and be profitable in sporting goods–winter sports especially–and think snowboarding can help them figure it out, beyond what it contributes to sales.

The Bottom Line Softgoods are good. Hardgoods are bad. Winter sports are tough. Summer activities bring diversification and hope. And there you have it.

Quiksilver and Vans are both growing and making money. They have limited exposure to snowboard hardgoods and sell product all year around. Most of the other softgoods players we haven’t talked about are doing well too. They are riding the demographic crest and the culture snowboarding and other so-called “extreme sports” have created.

Rossignol has seen its sales shrink over the last two years. It’s also lost money in the last two years. Ski-related hardgoods (skis, boots, bindings, poles, cross-country skis) accounted for 72.5 percent of its sales and 85.8 percent came from winter sports. It hopes to double its snowboard revenue over the next three years.

Adidas lost a little money in 1998, the first year in which Salomon was consolidated into its financial statements. It had earned a profit in each of the previous four years. Salomon’s overall wintersports business grew only one percent. Eighty percent (364-million dollars) of Salomon’s total sales were from winter sports. The Adidas annual report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” Yee hah!!

The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.

K2’s sales have grown in each of the last four years. It has been profitable in each of the last five. But in 1998, its net income fell to 4.8-million dollars from 21.9-million dollars the previous year. This was largely due to increases in its product costs and selling expense out of line with the sales increase.

K2 divides its business into three segments; sporting goods, other recreational, and industrial. Sporting goods include snowboard hardgoods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did 405-million dollars in sales, down from 411-million dollars the previous year. This represents 70 percent of the company’s total revenue. It earned an operating profit of 5.3-million dollars and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.

Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. It does say the following: “Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots, and snowboards.”

Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned K2 18.4-million dollars in operating profit on sales of 125-million dollars. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.

The Bottom, Bottom Line The hardgood guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense–an impossible financial model. Meanwhile the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.

It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

________________________________________ Jeff Harbaugh works with companies in transition. Reach him at: (206) 232-3138, or by e-mail at: jharbaugh@email.msn.coml report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” Yee hah!!

The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.

K2’s sales have grown in each of the last four years. It has been profitable in each of the last five. But in 1998, its net income fell to 4.8-million dollars from 21.9-million dollars the previous year. This was largely due to increases in its product costs and selling expense out of line with the sales increase.

K2 divides its business into three segments; sporting goods, other recreational, and industrial. Sporting goods include snowboard hardgoods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did 405-million dollars in sales, down from 411-million dollars the previous year. This represents 70 percent of the company’s total revenue. It earned an operating profit of 5.3-million dollars and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.

Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. It does say the following: “Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots, and snowboards.”

Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned K2 18.4-million dollars in operating profit on sales of 125-million dollars. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.

The Bottom, Bottom Line The hardgood guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense–an impossible financial model. Meanwhile the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.

It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

________________________________________ Jeff Harbaugh works with companies in transition. Reach him at: (206) 232-3138, or by e-mail at: jharbaugh@email.msn.com