Analysts say industry dealing well with pain

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Wall Street sees little hope for ’08 recovery,  but likes companies’ long-term positioning

The industry’s publicly held companies and the analysts who follow them remain cautious about the remainder of 2008 as most companies continue to report sluggish sales and earnings or, in some cases, higher losses. While international sales partially offset declines in the U.S. market, manufacturers and retailers alike expressed a lack of confidence about the rest of the year.

“Economic uncertainty in the U.S. is starting to have an effect on outdoor retailers, which are keeping inventory levels below last year until they can gauge consumer demand at [the] shelf in the next few months,” said Helen Johnson-Leipold, chairman and CEO of Johnson Outdoors.

At MarineMax, chairman and CEO William H. McGill Jr. said, “Continued deterioration in the marine retail environment, impacted by widely publicized pressures in the housing and credit markets, resulted in second-quarter performance that fell below our expectations.”

Economic recovery will be “more gradual and protracted than most anticipate,” according to Tim Conder from Wachovia Capital Markets.

“We continue to believe that late 2008, early 2009, will be the bottom for housing, but point out that boat unit sales trail housing by one year,” Conder added.

He estimates U.S. marine sales will finish the year with a 12 percent decline in dollars and about a 15 percent reduction in units. He said in April that year-to-date dollar sales were off 15 percent from last year, with unit declines approaching 20 percent year over year.

Sales, profits decline
Brunswick Corp. reported a 71 percent drop in profits for its first quarter. Profits were $13.3 million, or 15 cents a share, in the first quarter of 2008, compared to $45.6 million, or 50 cents a share, last year.

The Lake Forest, Ill.-based company reported sales of $1.34 billion, down 3 percent from $1.38 billion for the year-ago quarter.

“Sales for the quarter reflected lower demand for marine products, particularly in the United States where industry retail sales were down about 17 percent in units in the first quarter,” said chairman and CEO Dustan E. McCoy.

The company’s boat segment reported first-quarter sales of $637.8 million, down 9 percent compared with $699 million in the comparable year-ago period. The drop in domestic sales was partially offset by growth in sales outside the U.S., primarily in Europe.

McCoy says the company will continue to curb production to reduce inventory. Brunswick already completed the closure of its Aberdeen, Miss., boat plant in the first quarter. There were about 2,800 fewer boats in dealers’ inventories than at the same time last year.

The company’s engine segment reported first-quarter sales of $566 million, down 1 percent from $572.6 million in the year-ago quarter.

McCoy said the company’s financial results are good, considering the “unprecedented” market conditions.

Analysts seemed to agree.

“We continue to applaud management for the initiatives in cost, manufacturing footprint and solid execution in a very challenging environment,” said Conder of Wachovia. “However, we have heard nothing from our industry sources … nor from management that gives us any indication that 2008 will be nothing but a down year, visibility into 2008 is any better now versus Q4 2007 or management has any material degree of comfort where the bottom is.”

Laura Richardson from BB&T Capital Markets echoed those sentiments.

“We continue to expect Brunswick to be a long-term winner in the global boat market, with the current downturn enabling it to accelerate restructuring efforts for long-term profitability,” she reported. “In addition, the company is gaining market share, as evidenced by its 13 percent decline in Q1 U.S. marine sales versus the 20 percent industry decline.

“However, given the difficulty of timing when the boat market’s sales stabilize, and [Brunswick’s] earnings can begin rebounding, we retain our hold rating,” Richardson added.

The slowdown in U.S. markets also had a negative effect on Johnson Outdoors’ bottom line, but as with Brunswick, international sales helped to offset some domestic declines.

The Racine, Wis.-based manufacturer reported net sales of $121.8 million in the second quarter ended March 28, compared to $121.9 million a year ago. Net income fell to $462,000, from $1.74 million in the 2007 second quarter.

“In addition to ongoing cost-savings initiatives, we have instituted strict company-wide cost-control measures and are working hard to manage inventory levels down,” said Johnson-Leipold.

 

Calm amid the storm?
Marine Products Corp. reported positive news for its first quarter. The Atlanta-based manufacturer of Chaparral and Robalo boats, posted a 5.5 percent increase in profits to $4.1 million, from $3.9 million in the same quarter last year.

Sales were up 0.9 percent to $65.5 million, from $64.97 million a year ago. The company attributes the increase to a 9 percent bump in the average selling price of a boat, offset by an 8.7 percent decrease in the number of boats sold.

Despite the relatively upbeat numbers, company officials say they remain cautious about the economy.

“Due to continued problems in the housing market, high fuel prices and concern regarding an economic slowdown, we believe that the weak market for our products will continue for the immediate future,” said CEO Richard A. Hubbell.

Hubbell said the winter boat show season was slow in many markets and the company is extremely cautious about this year’s retail season.

The company took several cost reduction measures, including layoffs, during the quarter. Hubbell did not specify the number of workers laid off. He says cost reduction measures will continue during the downturn.

 

Store sales battle downturn
On the retail side, MarineMax reported a net loss for the second quarter of $3.5 million, or 19 cents a share, compared with earnings of $3.3 million, or 17 cents a share a year ago.

Revenue was $233.3 million, for the quarter ended March 31, compared with $325.1 million last year. Same-store sales declined about 28 percent, or $90.4 million, compared with a 2 percent increase in the 2007 quarter.

Revenue from stores recently opened or closed that were not eligible for inclusion in the same-store sales base decreased $1.4 million.

“Everyone at MarineMax is disappointed with our financial performance,” said CEO McGill. He called the economic environment likely the worst he’s seen in 30 years.

McGill noted that a particularly weak March drove down the entire quarter for same-store sales, though April was not nearly as soft as March.

Inventory levels are high, McGill said, but not at “problematic levels.” Inventory levels, he noted, are being better managed by both the manufacturer and the dealer and steady business internationally is helping boat makers continue to assist dealers and invest in research and development.

He expects to order more than 30 percent less in units this year than the company did last year.

Analysts praised the company’s efforts, but they expect the rest of 2008 to remain sluggish.

“Inventory should fall with reduced orders, but more progress will likely be needed in fiscal 2009,” said Edward Aaron, director of equity research for RBC Capital Markets.

Richardson, the BB&T analyst, said she “cannot be assured that the worst is over for the company.

“While its Q3 (June) is off to a better start than Q2 finished, the company’s sales remain highly sensitive to outside influence, especially the regional economic weakness in Florida and California, financial market shocks and extreme weather such as hurricanes,” she said.

Still, Richardson added, “We continue to expect MarineMax to be a long-term winner among U.S. boat dealers when the market recovers. In addition, we think that the prolonged depression in retail boating could trigger acquisition opportunities for the company.”

 

West Marine below expectations
West Marine’s net loss widened in the first quarter amid a weak market and the resulting lower sales.

“Our overall results are only modestly below our expectations,” said CEO Geoff Eisenberg.

Net loss for the quarter ended March 29 rose to $17.7 million, or 81 cents a share, compared to a loss of $11.4 million, or 53 cents a share, in the first quarter of 2007.

Net sales for the recent quarter totaled $113.3 million, compared to net sales of $125.8 million for the 13 weeks ended March 31, 2007. Same-store sales fell 9.4 percent.

Sales in the company’s stores for the first quarter were $97.1 million, an 8.9 percent decrease from the same period last year. Direct sales fell 19.2 percent to $7.1 million. Wholesale business was $9.1 million, a decrease of 12.9 percent.

“While we’ve always experienced a loss in the first quarter, we have taken significant steps to ensure that West Marine remains very strong financially during this current industry downturn,” Eisenberg said.

These include refining the Port Supply business; improving systems and processes to increase efficiency; and “real estate optimization.” The latter refers to having fewer, but larger, retail stores in the West Marine portfolio. The company plans to open seven new stores, but close 10-15 others, in 2008.

“It’s still a challenging market, to say the least,” Eisenberg said.

Nevertheless, he said, “We believe that our present inventory position, our reduced capital spending plan and our roughly $100 million credit availability will allow us to make appropriate strategic investments and weather current market challenges.”

This article originally appeared in the June 2008 issue.

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