Trade Resources Industry Views PSG Swings to a Fiscal Q3 Loss on Retailer Bankruptcies

PSG Swings to a Fiscal Q3 Loss on Retailer Bankruptcies

Performance Sports Group Ltd. swung to a net loss in the fiscal third quarter ended February 29 as expected due to a precipitous drop in baseball and softball sales, retail bankruptcies and the impact of currency exchange rates  on its hockey business.

The maker of Bauer, Mission, Maverik, Cascade, Inaria, Combat and Easton hockey, lacrosse and diamond sports gear, reported revenues of $126.1 million, down 8 percent from the fiscal third quarter of 2015, or down 4 percent in currency-neutral (c-n) terms.

The 8 percent decline was primarily due to the significant downturn in the baseball/softball market and the unfavorable impact from foreign exchange, which disproportionately impacts hockey sales. Partially offsetting the revenue decline was 14 percent currency-neutral (c-n) sales growth in hockey, as well as a 6 percent increase in lacrosse sales.

An unexpected downturn in diamond sports

“As described in our March 2016 preliminary release, our third quarter results were impacted by adverse market conditions and related customer credit issues,” said Amir Rosenthal, President, PSG Brands and Interim CEO. “Specifically, the baseball/softball market is experiencing an unexpected and significant downturn in retail sales across all product categories, particularly in our important bat category. This downturn was in addition to the chapter 11 filing by one of the largest U.S. national sporting goods retailers [Sports Authority], which also impacted sales for our baseball and softball products. In light of these events, including the bankruptcy of an internet baseball retailer in our second quarter, we increased our bad debt reserves in the third quarter for certain of our U.S. hockey and baseball/softball customers.

“These challenges were partially offset by strength in our overall hockey and lacrosse businesses," Rosenthal continued. "We grew hockey sales despite retail consolidation in the U.S. market and recent financial difficulties experienced by several of our U.S. customers. Hockey sales in our third quarter were up 14 percent on a constant currency basis, primarily due to growth in protective, team apparel, goalie and street hockey, higher closeouts, sales from our Own The Moment retail stores, the acquisition of Easton Hockey, and hockey equipment price increases. Lacrosse sales grew by 6 percent due to strength in the Maverik line of heads, shafts and protective gear.

Currency headwinds

Adjusted Gross Profit in the third quarter decreased 13 percent to $40.2 million compared to $46.3 million in the same year-ago quarter. On a constant currency basis, Adjusted Gross Profit decreased 2 percent to $47.0 million. As a percentage of revenues, Adjusted Gross Profit decreased 170 basis points to 31.9 percent compared to 33.6 percent in the year- ago quarter. This was primarily driven by unfavorable foreign exchange rates, which more than offset hockey price increases in Canada and lower hockey product costs resulting from the company’s five-year supply chain initiative, as well as a reduction in commodity-related factory input costs from Asian vendors. On a constant currency basis, Adjusted Gross Profit margin was up 200 basis points to 35.6 percent

Gross profit in the third quarter decreased 16 percent to $35.4 million compared to $42.3 million in the year-ago quarter. On a constant currency basis, gross profit decreased slightly to $41.9 million. As a percentage of revenues, gross profit decreased 260 basis points to 28.1 percent compared to 30.7 percent in the year-ago quarter. On a constant currency basis, gross profit margin was up 110 basis points to 31.8 percent.

Bad debts send SG&A expenses soaring

SG&A expenses in the third quarter increased to $54.5 million compared to $34.1 million in the year-ago quarter. This increase was primarily due to the receivable write-down from a U.S. national sporting goods retailer that filed under chapter 11 and additional bad debt reserves, primarily for certain U.S. hockey customers.

SG&A expenses also included costs related to Own The Moment, the Easton Hockey acquisition, Q30 Technology, and IT infrastructure investments, partially offset by a reduction in performance-based incentives and a favorable impact from foreign exchange. On a constant currency basis, SG&A expenses increased to $56.1 million. Excluding costs associated with one-time acquisition and rebranding-related costs, share-based payment expense, and start-up costs related to Own The Moment, SG&A expenses as a percentage of revenues increased to 38.2 percent compared to 21.4 percent in the year-ago quarter. The increase was primarily driven by incremental bad debt expense compared to the same year-ago quarter of 1,470 basis points.

R&D expenses in the third quarter increased 8 percent to $6.4 million compared to $6.0 million in the year-ago quarter. On a constant currency basis, R&D expenses increased 15 percent to $6.9 million. As a percentage of revenues, R&D expenses increased 70 basis points to 5.1 percent compared to 4.4 percent in the year-ago quarter due to the company’s continued focus on innovative product development.

Adjusted EBITDA was a loss of $11.0 million compared to Adjusted EBITDA of $14.6 million in the year-ago quarter. Third quarter fiscal 2016 Adjusted EBITDA included $18.7 million in incremental bad debt expense compared to the same period last year. On a constant currency basis, Adjusted EBITDA was a loss of $5.1 million.

Impairment charge

The company’s third quarter financial performance and decline in market capitalization, combined with a reduction in fourth quarter Adjusted EPS guidance, required an assessment of the value of indefinite-lived and definite-lived assets, including goodwill by operating segment. As a result of the assessment, Performance Sports Group booked a non-cash impairment charge of $145.1 million within the Baseball/Softball reporting unit.

Goodwill and intangible assets related to hockey and lacrosse were not impaired. This impairment does not adversely affect the company’s debt position, compliance with financial covenants, liquidity or cash flow.

Adjusted Net Loss, excluding a tax valuation allowance and goodwill impairment, as well as other items described, was $14.8 million or $(0.32) per diluted share, compared to Adjusted Net Income of $5.6 million or $0.12 per diluted share in the year-ago quarter. The impact of foreign currency reduced Adjusted Net Loss by approximately $0.09 per diluted share compared to the third quarter last year, and bad debt expense reduced Adjusted Net Loss by approximately $0.25 per diluted share. The third quarter of fiscal 2016 also included an approximate $0.03 per diluted share impact due to a lower than expected effective tax rate, which the company estimates will be offset by less taxes on fourth quarter earnings. On a constant currency basis, Adjusted Net Loss was $10.6 million or $(0.23) per diluted share.

Net loss in the third quarter was $188.1 million or $(4.13) per diluted share, compared to a net loss of $12.5 million or $(0.28) per diluted share in the year-ago quarter. On a currency-netural basis, net loss was $185.7 million or $(4.08) per diluted share. Excluding intangible asset and goodwill impairment, the non-cash deferred tax valuation allowance, and bad debt expense, net loss was $18.3 million or $(0.40) per diluted share. With the same exclusions, net loss in the third quarter c-n was $15.8 million or $(0.35) per diluted share.

On February 29, 2016, working capital was $305.5 million compared to $338.6 million at February 28, 2015, and total debt was $439.7 million compared to $431.2 million at February 28, 2015. Performance Sports Group’s leverage ratio, defined as term debt outstanding plus trailing twelve months average revolver less cash, divided by trailing twelve months Adjusted EBITDA, stood at 10.98x as of February 29, 2016 compared to 3.87x one year ago.

Excluding the impact of foreign currency on the company's trailing 12-month EBITDA, the leverage ratio was 5.72x.

Outlook

The company continues to expect Adjusted EPS in fiscal 2016 of approximately $0.12 to $0.14 per diluted share ($0.59 to $0.61 per diluted share c-n), compared to Adjusted EPS of $1.02 per diluted share in fiscal 2015. Due to the aforementioned tax rate impact in the third fiscal quarter, fourth quarter Adjusted EPS is now expected to be approximately $0.18 to $0.20 per diluted share ($0.22 to $0.24 per diluted share c-n), compared to Adjusted EPS of $0.19 per diluted share in the same quarter last year. The updated fourth quarter outlook is compared to the company’s previous expectation for Adjusted EPS of $0.15 to $0.17 per diluted share ($0.20 to $0.22 per diluted share c-n).

“We expect the challenges that we faced in our U.S. baseball/softball business during the third quarter will continue into the fourth quarter. In hockey, we continue to expect our non-U.S. order book for the important Back- to-Hockey season, which begins in our fourth quarter, to show continued resilience, with constant currency orders up by low-to-mid single digits. Due to a SAP upgrade for our hockey business scheduled to go into effect in early June, we are working with our customers to ensure on-time deliveries for this all-important season, and as a result, our outlook includes approximately $20 million of early June booking orders that are likely to be shipped in May of this fiscal year.

“For the remainder of fiscal 2016, we continue to expect our cash will be used to reduce debt, and we expect to finish the year with a balance under $100 million on our asset-based revolving loan. Looking towards fiscal 2017, debt reduction will remain a top priority while we also focus on several initiatives to improve our profitability.

As a result of the company’s third quarter results and current Adjusted EPS outlook for fiscal 2016, the company currently expects its leverage ratios to be approximately the same by the end of fiscal 2016 and will communicate revised expectations for fiscal 2017 leverage in the future.

Source: http://www.sportsonesource.com/news/spor/spor_article.asp?section=4&Prod=1&id=60558
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