SCOTTS VALLEY, CA (BRAIN) — Easton-Bell Sports' cycling product sales declined $4.5 million in the quarter that ended Sept. 28, and CEO Terry Lee indicated much of the loss came from the Easton cycling division, which he called "troubled."
In a call with investors Tuesday, Lee promised strategic changes for Easton cycling in 2014. Easton sells components and wheels.
Lee said the outlook was good for Easton-Bell Sports' other cycling brands: Bell, Blackburn and Giro. He said preseason orders were up significantly, which he attributed to strong new products and dealer-friendly policies, including improved retail margins and enforcement of retail pricing policies.
But Easton's cycling sales are down about $9.5 million so far this year, Lee told investors, referring to the division as "our other troubled business" — the first being the Easton hockey division. Lee said Easton is mostly giving up on sales to OE bike makers, which he said were low margin and required high service costs. He promised to announce changes for Easton cycling in coming months.
"I plan to talk with you more in the next earnings call about Easton cycling," Lee told the investors. "We're going to really dive in to take a deeper strategic alternative view and come up with changes for 2014."
On the bright side, other cycling products are doing well, he said.
"We're experiencing outstanding preseason order writing in the past few months," he said. He said Giro footwear orders are up 115 percent and Bell orders are up 29 percent. Overall, cycling orders are up 41 percent.
"The trends are meaningful because at this point we generally have 50 t0 60 percent of our orders in," he said.
Lee attributed the strong preseason orders to a new keystone margin program for retailers, and a marketing campaign called "Freedom to Choose," which encourages IBDs to choose accessories and helmets independently of their bikes and other product categories.
"We're giving them some good reasons why they shouldn't select a mono-brand company to work with. A few of our competitors are trying to get them to sell only one brand and incentivizing them to not sell other brands, so Freedom to Choose has been a pretty effective campaign to combat that."
Lee said the company also has become "much more strict in how we enforce Internet sales policies and pricing in general."
In an earnings statement released earlier Tuesday, Lee ran through other financial results.
In the quarter that ended Sept. 28, Easton-Bell Sports recorded net sales of $199.4 million, compared with $213.3 million for the same period last year.
"Our financial results for the quarter reflect the continued strong performance of our Easton baseball and softball and Bell powersports businesses, where sales for the quarter were up 21 percent and 34 percent, respectively," he said.
"Our other businesses were either relatively flat or up during the quarter, with the exception of our Easton cycling products and hockey businesses, which collectively were down 30 percent. The combination of the challenges in those businesses and our exit of the low-margin, non-core fitness products category represent $20.2 million of year-over-year sales declines. We continue to align resources with our strategic initiatives and rationalize spending back to historic levels."
Gross margin decreased year over year to 35.1 percent from 35.7 percent. Adjusted EBITDA was $21.4 million, a decrease of $5.5 million or 20.3 percent from $26.9 million during the third quarter last year. The EBITDA was adjusted to exclude one-time severance package expenses.
The company's Action Sports division, which includes cycling, snow sports and power sports—and previously fitness saw net sales decrease by $6.7 million, or 7.5 percent, for the quarter. Growth in sales of Bell power-sports helmets and Giro snow helmets partially offset the declines elsewhere.
Easton-Bell Sports said the decline in gross margin was partly the result of closeout sales of Easton cycling products, as well as a sales mix "reflecting lower sales of certain high-margin products" that the company did not specify.
Easton-Bell Sports is not traded on a public stock exchange, but it voluntarily files reports with the Securities and Exchange Commission.