Dorel declares huge 2018 loss
MONTREAL – A sustained drop in its share price over the course of the year, compounded by other factors such as the loss of the Toys R Us chain in the United States and changing shopper buying habits forced consumer goods giant Dorel Industries to record impairment losses of US$501.4 million during the fourth quarter of 2018.
Interestingly enough, the losses were recorded against Dorel Juvenile and Dorel Sports as the publicly-held company sang the praises of Dorel Home, which will serve as the template for the restructuring effort announced in conjunction with its fourth quarter and annual results.
Dorel reports its quarterly and annual fiscal results in U.S. dollars.
Revenue for the three months ending 30 December 2018 was US$683.5 million, up 1.0% from US$677.1 million a year ago. Reported net loss for the quarter was US$443.9 million or US$13.68 per diluted share compared to US$6.1 million or US$0.19 per diluted share a year ago.
Revenue for the year also ending 30 December 2018 was US$2.62 billion, compared to US$2.58 billion the previous year. Reported net loss was US$444.3 million or US$13.70 per diluted share, compared to a reported net income of US$27.4 million or US$0.84 per diluted share the previous year.
“Dorel Home has again performed well and continues to benefit from our market-leading innovations in e-commerce. At the same time, we were disappointed by fourth quarter earnings at Dorel Juvenile and Dorel Sports. Both segments were affected by lower than expected industry-wide consumer demand over the holiday season and the on-going changes in the consumer products industry. We are in the process of actively addressing these realities,” Martin Schwartz, Dorel president and chief executive officer, said in a statement.
“Despite the challenges facing the retail sector as a whole, we are committed to continuing to take action to build value for Dorel shareholders, including making some tough but necessary decisions. We have been acting on the recognition that the way our industry does business and the expectations and behaviours of customers and consumers are all changing,” he continued, adding, “Dorel is in the process of initiating a restructuring program to evaluate our global footprint and to optimise our company to meet these new realities. We’re confident that this program will help us be more efficient, improve performance, and maximize long-term value for our shareholders.”
Schwartz noted like all consumer products companies, Dorel is not immune from the impacts of a changing retail landscape and evolving consumer habits. Traditional brick and mortar stores – stores that existed as recently as 2018 – are shuttering as the buying patterns of consumers evolve.
“We have recognized these new realities of retail require Dorel to be efficient, innovative, and nimble to maintain alignment with consumers,” he told shareholders in the company’s report. “Dorel has been taking important steps to ensure that we can be competitive for the long-term and the online success of Dorel Home is indicative of this. Each of these new realities impact our business lines in different ways and require a unique approach to ensure the long-term success of each.”
Using the innovations developed at Dorel Home, the company has begun a global restructuring program which will include every one of its individual business units and has already resulted in some minor moves in its juvenile segment operations in South America.
“The implementation of the restructuring program will be on-going throughout 2019 with resultant benefits expected to begin later this year and extending into future years, leading to improved performance, cost savings and enhanced long-term returns for shareholders. Dorel will provide periodic updates to the market,” Schwartz said.
He also noted a drop in Dorel’s stock price caused its market capitalisation to be significantly lower than the carrying value of its net assets. This prompted Dorel to record impairment losses on goodwill, intangible assets and property, plant and equipment of US$501.4 million during the fourth quarter of 2018. Some US$264.2 million was assigned to Dorel Juvenile and US$237.2 million was to Dorel Sports.
According to the Toronto Stock Exchange, Dorel’s stock price was $17.64 on 30 December 2018, down from $30.10 on the same day in 2017 and $38.80 at the end of 2016. It was trading at $11.80 at the end of March 2019.
Dorel Home leads the way
Total fourth quarter revenue for Dorel Home – which includes DHP, Dorel Living, Signature Sleep, Little Seeds, Ameriwood Home and Cosco Home & Office – was up 4.1% at US$209.3 million even though operating profit fell 16.9% to US$17.5 million.
For the year, revenues were US$804.4 million, up 1.7% over the US$790.6 million recorded for 2017. Operating profit fell 10.1% to US$70.2 million.
The increase was despite certain customers cancelling orders in response to U.S. tariffs being imposed in the second half of the year,” the company noted. “Dorel Home’s online business continued its upward trend. For the fourth quarter and the full year, e-commerce sales represented a record 59% and 56% of total segment gross sales respectively compared to 58% and 52% for the comparable periods in 2017.”
Brick and mortar sales saw a slight improvement in the fourth quarter, aided by new business for Cosco Home & Office at a major DIY chain.
Looking to 2019
Schwartz believes the consumer products industry has reached an important stage in its evolution and Dorel is well positioned to take advantage of the opportunities it presents.
“In 2019, we expect improved adjusted operating profit in all business segments with expanding product lines, e-commerce innovations, and improved efficiencies. In addition, implementation of the global restructuring program is expected to result in cost savings,” he said.
He told shareholders management expects Dorel Home to deliver revenue and adjusted operating profit improvements in 2019 led by continued growth in e-commerce sales as consumers become more accustomed to purchasing furniture online.
“Dorel Home’s expansion of key product brands – including Little Seeds, Novogratz, and Cosmo Living – is expected to drive revenue growth across various categories, while the recent acquisition of UK-based Alphason is expected to boost adjusted operating profit by the second half of 2019 as we continue to build-out our infrastructure and sales channels in Europe,” Schwartz said, adding, “While tariffs in the home furnishings segment are not expected to impact sales or adjusted operating profit in 2019, we remain watchful on the effects of expected anti-dumping duties on mattresses made in China and its impact on costs.”