Outdoor financials: K2 stock falls 20.6 percent after 2005 earnings estimates slashed, plus Cabela's, trends tracker warns of tough holiday, Amer/Salomon, Winmark, U.S. Commerce Department

Oct. 14, 2005

K2 stock falls 20.6 percent after 2005 earnings estimates slashed
K2 Inc. (NYSE: KTO) lowered its fiscal 2005 earnings and sales estimates, citing softness in the paintball business, triggering a chain of events that saw its shares fall 20.6 percent

K2 lowered its fiscal 2005 per-share earnings estimate to between $0.66 and $0.68 from a July forecast of $0.77 to $0.81. The revised estimate is significantly lower than fiscal 2004 earnings of $0.86 a share. It also cut its fiscal 2005 adjusted earnings estimate to between $0.75 and $0.77 a share; down from an earlier projection of $0.87 to $0.91 a share and missing analysts’ current mean estimate of $0.89 a share.

K2 also trimmed its fiscal 2005 sales range to between $1.29 billion and $1.32 billion from a prior range of $1.3 billion to $1.35 billion. The revised sales estimate is below Wall Street’s average projection of $1.33 billion. In fiscal 2004, sales were $1.2 billion.

Several analysts downgraded K2 after the news. Piper Jaffray downgraded the company to “market perform” from “outperform” with a $9 price target due to the reduced estimates, slow growth and limited confidence in a turnaround. Wedbush Morgan kept its rating at “buy,” but lowered the company’s price target to $13 from $18 due to the negative earnings announcement. Caris & Co. downgraded the company from “outperform” to “market perform.”

K2 shares fell $2.20, or 20.6 percent, to $8.49 in midday trading on the New York Stock Exchange, below its prior year-low of $10.66. The stock, which saw a 52-week high of $17.25 in December, has shed 47 percent of its value since the start of the year.

In the third and fourth quarters of 2004, the company said its operating income from paintball was more than $8.5 million, which is about $0.10 a share, but in its updated forecast for 2005, it is now expecting little if any contribution from this business line. K2 said it is restructuring the costs in its paintball business, which should allow a return to profitability in 2006.

K2 will report third-quarter financial results on Oct. 19.

Cabela’s releases preliminary Q3 results, expects flat earnings
Cabela’s Incorporated (NYSE: CAB) forewarned the market that its third-quarter results will be below analysts’ expectations as rising fuel prices cut into both sales and margins at its stores. Also, hurricane news and damage in Louisiana, Mississippi, Alabama, Texas and Florida cut into its catalog and Web-based sales.

The company said it expects earnings per share to be flat to down slightly from the $0.25 a share reported in the 2004 third quarter. On average, analysts had been expecting earnings of $0.32 a share for the 2005 quarter. Also, same-store sales are expected to fall 8 percent to 9 percent.

Total revenue is expected to be up about 23 percent, helped by an increase in revenue from financial services, Cabela’s said.

Cabela’s will release its actual third-quarter fiscal results on Oct. 27.

Consumer trends group warns of tough holiday season for retail
With U.S. consumers expected to keep a much tighter rein on expenses, retail companies are looking at a gloomy holiday season and overall fourth quarter, according to consumer-trends tracker America’s Research Group. One of the retail gauges — the Standard & Poor’s retail index — may log its first fourth-quarter decline in nine years, which analysts warn can only be avoided by a warmer-than-usual winter, an easing of crude prices or heightened innovation from retailers.

When September retail sales were reported, chains that sell gasoline, including Wal-Mart Stores and Costco Wholesale, posted better-than-expected sales growth. But several apparel retailers and department stores missed forecasts, and some trimmed profit forecasts as heavy markdowns eroded margins.

Retailers are caught in a Catch-22 situation where their costs, such as transportation costs, are going up and won’t be changing in the short term. Meanwhile, their consumers are going to be extremely deal focused, America’s Research Group said. If retailers don’t offer strong incentives to consumers during the holiday season, it expects markdowns of as much as 60 percent to 70 percent after Christmas.

EU authorities approve Amer’s buy of Salomon
Amer Sports had cleared another hurdle in its acquisition of Salomon from adidas-Salomon with the approval by the EU competition authorities on the buy-out. The U.S. competition authorities already gave their OK recently. Amer said the transaction is expected to be completed within the next week.

The Salomon business segment includes the related subsidiaries and brands Salomon, Mavic, Bonfire, Arc’Teryx and Cliché. According to the agreement, the final price will be set in accordance with net assets as of Sept. 30. Amer Sports and adidas companies said they will cooperate for a maximum period of three years to ensure smooth transition of the businesses.

Winmark reports more stores, less money
Retail franchiser Winmark Corp. (Nasdaq: WINA), parent of Play It Again Sports, reported a lower third-quarter net income of $926,100, or $0.14 per share diluted, compared to $1.01 million, or $0.15 per share diluted, in 2004. Winmark’s revenue for the quarter was $6.3 million, down 4 percent from last year’s $6.5 million.

John Morgan, chairman and CEO, said in a statement, “The third quarter saw our franchising business grow the number of franchisees and increase royalties over last year. The leasing business is still in the start-up stage and activity has been mostly limited to building infrastructure.”

Winmark has 805 stores in operation and an additional 36 franchises awarded but not open. Of the stores in operation, there were 405 Play It Again Sports as of Sept. 24.

Retail sales up 0.2 percent in September
U.S. retail sales rose a slightly weaker-than-forecast 0.2 percent in September after car purchases tumbled, but sales excluding autos were helped by higher gasoline prices, the Commerce Department reported. Wall Street analysts forecast retail sales to rise 0.4 percent in September following an upwardly revised 1.9 percent fall in August. August retail sales had initially been reported as a 2.1 percent decline.

Excluding autos, retail sales rose 1.1 percent, compared with expectations for a 0.8 percent advance, building on the 1.0 percent increase in August. Some sources of discretionary spending showed weakness, with clothing sales down 0.2 percent, sporting goods and sales from hobby, book and music stores off 0.9 percent and department stores sales declining 0.5 percent.

Analysts fear high energy prices could sap consumer spending, on top of any negative fallout from Katrina and Rita, although the economic evidence so far has been mixed. The Federal Reserve expects U.S. growth to be held back somewhat in the second half of 2005 due to the storms, but then pick up as reconstruction-related spending kicks in.

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