Dorel Industries Inc.

 

Dorel makes products for the consumer baby market (strollers, car seats, etc.), bicycles for mass market customers as well as for independent specialized bike shops, and home furnishings.  Dorel has experienced challenges and change in their businesses but they are focused on improvements to drive growth.  The Schwartz family (whose members are also officers and directors of the company) controls more than 50% of the stock and eventually their exit strategy is to sell the business.  At approximately 10X trailing earnings which are depressed, I think the valuation is attractive, they have a solid balance sheet, and they pay a dividend that is currently yielding over 6% which I do not think is at risk and is great compensation while waiting for the business to drive improved results.

 

Dorel reports in $U.S. and pays its dividend in $U.S.

 

Ests:     1Q19   2Q19   FY19    FY20

Revs    665m   644      2.71     2.8

EPS      .38       .33       1.51     1.81

 

P=C$11.48, fx 1.3418, div=US$0.60, yield=7%, TTM EPS 1.22, P/E=7X, FY19 P/E= 6X, D/C=46%, excess NWC>debt by $1.79/share

 

1Q19   .18 vs .46 -61%, est .38 down from .52

  • May 10, 2019, P=$11.48, TTM EPS=1.22, P/E=7X

  • Revs -2.6% to 625.6m, GM 20.9% vs 23.1%, OM 3.1% vs 8.5%

  • Home +9.6% to 210.8m, GM 14.1% vs 17.7%, OM 6.9% vs 8.5%, OpInc -21%

  • Juvenile -5.4% to 230.3m, GM 26.7% vs 28.3%, OM 3.2% vs 1.1%, OpInc -2.7%

  • Sports -10.7% to 184.5m, -5.2% ex fx, GM 21.3% vs 22.1%, OM 2.4% vs 2.8%, OpInc -23%

  • Home ecommerce sales 59% vs 52% profits down due to costs of carrying high inventory in anticipation of tariffs (now normal?), less favourable sales mix and promotional activity also hurt margins.

  • Juvenile US end sales increased but a significant customer working down inventories, Chile seeing positive comps, EU highest sales in a year, China increased sales to 3rdparties

  • Sports CSG had its 4thconsecutive quarter of improvement, Brasil grew double digits ex fx, more than offset by Pacific Cycle due to retailers working down inventories and poor weather in certain regions, April rebounded and expect 2Q to be better as April recouped almost 60% of 1Q’s revenue loss in mass channel.

  • Mgmt. feels restructuring efforts are gaining traction, expects total cost 25-30m in in 2019/2020, 14m already incurred in 1Q, expect annualized cost savings 12-15m of which 5m expected in FY19.

  • Mgmt expects Home margins to improve in 2H (from 1Q levels but likely down y/y, Juvenile and Sports 2Q and FY revs and operating profit higher than last year.

  • Again shitty results and optimism that results are set to improve. Also in the middle of refinancing their debt, should be ok given their non-cash working capital is greater than their debt but their results have been bad, so much room for improvement if they can execute, Maxar looking like they are closer to achieving results.

4Q18   .31 vs .62, -50%, ex intang. impairments, est .52 down from .65, FY18 EPS 1.50 vs 2.14

Mar 14, 2019, P=15.85, TTM EPS 1.50, P/E=8X, FY19 P/E=6X

  • Dividend halved to $0.60, 5% yield, goal to get debt/EBITDA below 3 by end of FY19 (FY18 was 3.07X adjusted EBITDA, my calculation).

  • Revs +1% to 683.5m, GM 21% vs 23.8%, OM 2.9% vs 4.4%, 

  • Home +4.1% to 209.3m, GM 16% vs 19.3%, OM 8.5% vs 10.5%, OpInc -15.7%

  • Home e-commerce 59% vs 58%, profitability impacted by potential tariffs – accelerated demand driving transportation costs and higher inventories impacted warehousing costs

  • Juvenile +1% to 241.6m, GM 25.4% vs 29.5%, OM 0.7% vs 4%, OpInc -82%

  • Juvenile organic growth +4.1%, weak margins in Chile and EU, higher input costs and fx, expect price increases and new products to improve GM

  • Sports -1.7% to 232.7m, GM 20.7% vs 22%, OM 2.2% vs 2.6%, OpInc -17%

  • Sports organic growth +2.6%, CSG delivered double digit organic growth and significantly improved profitability, Pacific Cycle saw declines in revenue and profits due to weak holiday sales at mass retailers and continued inventory reductions at retailers.

  • Enacting another restructuring to evaluate global footprint as brick and mortar stores continue to impacted, need to be more nimble

  • Mgmt evaluating refinancing 120m converts due Nov 30, 2019, amended bank loans/revolver to repay convert, would extend maturity to July 1, 2021 (currently May 30, 2019)

  • Mgmt remains optimistic about improved results in FY19, investors will likely be skeptical as expected improved results have not materialized. Frustrating given value remains in the business but mgmt. has to execute.

  • New products are coming in earlier than expected and lower cost than expected, mgmt. says they have always been a year late and 20% above expected cost.  China had a strong finish compared to previously being a drag.  

  • 4Q and FY improved CFO and FCF

 

Dorel announced they will update investors on the dividend when they report 4Q.  There’s no information if this is positive or negative however the dividend has $1.20 since 2013.  In 2012 it was 0.90 and in 2011 it was 0.60. FY17 and FY15 were weak years for CFO and FCF. YTD18 has been a significant improvement in cash flow over the same period in FY17 however the business has struggled to demonstrate sustained improvement.   Stock is down to 7X trailing earnings.  Unless mgmt. sees a path to improved results and cash flow, it’s difficult to see them increasing the dividend.  Currently the dividend looks sustainable however if mgmt. expects deterioration, this announcement likely portends a dividend cut although they’ve had weaker results and maintained the dividend (although that could have been management was hoping for better results that haven’t really happened).  Another possible reason for a cut could just be the yield being near 10%.  

3Q18   .34 vs .44, -23%, est .37 down from .49

  • Nov 2, 2018, P=22.20, TTM EPS 1.83, P/E=9X, FY19 P/E= 8X

  • Revs +4.3% to 670.4m, GM 20.7% vs 23.5%, OM 3.4% vs 4.1%, CFO 31.2m vs 31.2m

  • Home +10% to 221.6m, GM 15.7% vs 17.6%, OM 8.8% vs 10.2%, ecommerce +26.6% to 58% of total sales vs 51%, OM down as price increases haven’t yet caught up with cost increases.

  • Juvenile -2.5% to 229.7m (-0.4% organic), GM 25.2% vs 29.5%, OM 0.7% vs 4.8%, US Sales +5% despite a major customer reducing orders to reduce their inventory, profits hit by higher input costs and unfavourable fx rates (we’ve seen this before!), seeing car seat price competition in EU

  • Sports +6.6% to 219.1m (+11.8% organic), GM 21.1% vs 22.3%, OM 3.4% vs 0.3%

  • Outlook: Mgmt expects 4Q Home profit flat y/y, Juvenile should also be “close” to last year, expect “much improved” Sports y/y

  • Continues to be a show-me story as the company’s juggling act continues. With 3 balls in the air, 1 does well while another stumbles, so far 2H improvement that management expected has not materialized (and is not based on their 4Q outlook).  25% tariffs into U.S. from China could impact longer term demand, primarily in Home and Sports.  

  • Purchased UK-based Alphason which produces home/office and audio-visual furniture, will serve as a base to grow EU business.

  • Dividend continues to be well supported by cash flow unless significant deterioration.

2Q18   .39 vs .38, est=.28 down from .46

  • August 3, 2018, P=24.32, TTM EPS=1.93, P/E=10X, FY19 P/E=9X

  • Revs +2% to 623.2m, GM 21.8% vs 23.9%, OM 3.6% vs 3.8%, EBT -18%, EPS slightly up due to lower taxes

  • Home -1.6% to 181.3m, GM 16.9% vs 17.8%, OM 9.3% vs 9.1%, ecommerce sales 55% vs 52%

  • Juvenile -0.3% to 217.4m, -2.5% ex fx, GM 25.8% vs 29.9%, OM 1.7% vs 3.7%,

  • Sports +7.4% to 224.5m, GM 21.3% vs 23%, OM 3.5% vs 2.7%

  • Juvenile was disappointing because of issues with a warehouse management system implementation in Europe which caused missed sales (est 8m in sales, 3.5m in OpInc) which is now resolved, Juvenile U.S. >+10%, best growth in 9 years, Chile continues to be difficult, mgmt. is shrinking its retail base and investing in online capabilities, their wholesale business has sizable market share to brick and mortar and got caught flat footed as customers shifted online.

  • Sports was better than mgmt. expected, still a slight drag from Toys R Us but other customers more than offset, lowest level of clearance inventories in many years

  • Home down slightly as brick-and-mortar sales were -10% due to store closing, e-commerce +5%

  • Mgmt still expects growth in 2H, while there is uncertainty from tariffs, they would similarly affect competitors. Decent results, FY18 estimate imply EPS decline in 2H, stock continues to look cheap on low earnings.

1Q18   .46 vs .69, est .67 ex .29 Toys R Us write-down

  • Reported adj EPS was .17 but includes .29 AR write-down from Toys R Us across all 3 divs.

  • Revs -0.7% to 642.3m, -3.8% organic, GM 23.1% vs 23.7%, OM 4.1% vs 5.2% ex Toys R Us w/d

  • Home -5.8% to 192.3m, GM 17.7% vs 16.9%, OM 8.5% vs 9.7% ex Toys R US w/d

  • Juvenile +6.4% to 243.3m (+0.4% ex fx), GM 28.3% vs 31.1%, OM 3.1% vs 6.7% ex Toys R Us w/d

  • Sports -3.4% to 206.7m (-6.2% ex fx), GM 22.1% vs 22.4%, OM 2.8% vs 4.4% ex Toys R Us w/d

  • Home had a difficult January but improving, March was stronger y/y and April looks solid.

  • Juvenile opinc down mostly due to Chile (marketplace shift online) and China, prodn stabilized but commodity prices and fx hurting earnings

  • Estimated total revenue headwind ~7m due to Toys R Us, 1Q more challenging than they expected, 2Q likely to feel some effects of the same issues impacting 1Q, still expect y/y improvements as the year progresses but feels like a 2H story.

  • Disappointing results partly due to Toys R Us bankruptcy, disruption will likely continue for a few months but sales should transition to other retailers, stock continues to be capped by inconsistent results, company appears to be underearning their potential, attractive valuation and solid balance sheet.

4Q17   .62 vs .24, est .44 down from .55, FY adj EPS 2.15 vs 1.79

  • Revs +4.4% to 677.1m, GM 23.8% vs 23.3%, OM 5% vs 1.5%

  • Home +13.5% to 201m, GM 19.3% vs 16.8%, OM 10.5% vs 7.8%, OpInc +53%, e-commerce was 57% of revs (52% for FY17)

  • Juvenile +1.2% (-2.5% ex fx) to 239.3m, GM 29.6% vs 30.1%, OM 4.4% vs (3%)

  • Sports +0.6% (-1.4% ex fx) to 236.8m, GM 21.7% vs 21.4%, OM 3.9% vs 4.3%

  • Dorel Juvenile continues its transformation to a consumer-centric organization, has strongest product pipeline in years to launch over next 18 months, new Maxi-Cosi stroller with improved time to market, 12m from concept to shelf. Chinese factory has improved substantially. Also made progress on e-commerce. Solid product development at Sports, new FY18 product launches doing well, inventory at end of 4Q lowest in 2 years.

  • Home continues to capitalize on growth in e-commerce, successfully and profitably supplying on-line retailers.

  • Expect FY18 tax rate 20-25% (vs 22.5% in FY17)

  • Outlook: Expects Home to continue to grow. Expects improved Juvenile in FY18 but lower 1Q. Expects improved Sports in FY18 across all channels but lower 1Q. Softer 1Q mainly due to last year having some solid results and certain positive elements that won’t repeat.

  • Mgmt feels their strategic focus on e-commerce has addressed most of the challenges supplying traditional retail brick and mortar but further deterioration of their financial condition could pressure their FY18 results.

3Q17   .44 vs .59, ex .04 gain last year, est .68

  • Revs -4.3% to 642.6m, GM 23.5% vs 22.6% ex 9.4m gain last year, OM 4.1% vs 5.0%

  • Home +1.3% to 201.4m, GM 17.6% vs 16.7%, OM 10.2% vs 9.1%, OpInc +14.1%, Online 51% vs 44%, bricks and mortar sales down to planned reduction at major mass merchant customer.

  • Juvenile +6.3% to 235.6m, GM 29.5% vs 30% ex 9.4m gain last year, OM 4.8% vs 5.4%, OpInc +11.8%, making progress on Chinese factory, investing in automation and quality control.

  • Sports -18% to 205.5m, GM 22.3% vs 20.7%, OM 0.3% vs 4.4%, continued weakness in global bicycle market and disruption in NA retail environment and weather.

  • Toys-R-Us bankruptcy resulted in a month-long disruption across all segments but have agreed to business terms going forward.

  • Expecting a very good 4Q with all segments improving opinc y/y

2Q17   .38 vs .31, est .65 up form .61

  • Revs -4.1% to 611.3m,

  • Home +7.1% to 184.2m, GM 17.8% vs 13.1%, OM 9.1% vs 8.6%, OpInc +13.2% to 16.7m, online 52% vs 43%

  • Juvenile -4.7% to 218.1m, GM 29.9% vs 31.7%, OM 3.7% vs 3.8%, largest US customer reduced inventory levels, fixed many of their 1Q manufacturing issues in China, lead to higher costs, prodn levels +20% from 1Q, positioned to rebound from 2Q w/ robust product introductions, will take a number of quarters to fully catch up, implementing a new ERP, some automation

  • Sports -11.6% to 209.1m, GM 23% vs 20.7%, OM 2.7% vs 2.2%, OpInc +8.1% to 5.7m, weakness in mass market due to poor weather, lower sales due to lower discounting at IBD (closeout sales 7% vs 21%), ex closeout sales were flat, weakness in mass market indicates weaker 3Q but expect a strong 4Q should more than compensate.

1Q17 .69 vs .60

  • Revs +0.1% to 646.7m, GM 23.8% vs 23.2%, OM 6% vs 5.2%

  • Home +8.8% to 204m, GM flat at 16.9%, OM 9.7% vs 9.4%, online 46% vs 42%

  • Sports -1.1% to 214.0m, GM 22.9% vs 21.9%, OM 4.4% vs 2.4%, benefits from better cost structure

  • Juvenile -5.5% to 228.7m, GM 30.6% vs 29.3%, OM 6.7% vs 7.2%, had challenges in its China facility due to large ramps coupled with labour shortages around Chinese New Year, delaying some launches.

  • Renegotiated credit facilities resulting in lower interest, expect to save $4m annually.

  • Decent results but more importantly improvements are taking place.

4Q16   .24 vs .43 ex items­, FY EPS 1.79 vs 1.78

  • Revs -3% to 648.7m

  • Home +1.8% to 177.0m, GM 16.8% vs 14.9%, OM 7.8% vs 6.4%, GP +14.3%, OpInc +23.7%

  • Juvenile -2.1% to 236.4m, GM 30.1% vs 29.9%, adj OM -3% vs 3.5%, OpInc ¯15m due to product liability costs 10.2m and abnormal severance not included in restr. exp of 7.8m,

  • Sports-7.3% to 235.3m (-14.6% organic), GM 21.4% vs 20.2%, OM 4.3% vs 3.6%, sales decline due to bike dealers reducing inventory prior to cycling season.

  • Outlook: expect improvement in all 3 segments in 2017, product liab costs to return to normal