Manufacturing: Dorel on a roll

2009 won’t be a cakewalk, but the Montreal-based manufacturer and distributor has held its own. Here’s how.

Like a lot of executives of companies selling products to recession-sapped retail consumers, Martin Schwartz wasn’t expecting much good to come of 2009. But Dorel Industries Inc. (TSX: DII.B), a maker and distributor of a diverse range of baby products, home furnishings and bicycles, seems to be holding its own, and the Montreal-based company’s CEO actually sounds a little optimistic. “I would be foolish to say I’m not concerned about what’s going on out there, but I think we can handle it,” says Schwartz, whose family controls Dorel through multiple-voting shares. “We’re trying to be as nimble as possible.”

Dorel’s first-quarter results, released on May 7, were cause for some relief. While the three-month period ending March 31 showed evidence of a weak economy, with revenue of US$525.2 million down 5.5% from the same time last year and earnings-per-share of 84¢ down 20%, Dorel reported significant progress working off some US$90 million in excess inventory that had accumulated in late 2008, when retailers suddenly stopped restocking. “In the fourth quarter, a lot of the major stores just shut the taps when it came to buying,” says Schwartz. “No rhyme or reason, they just cut back.” But in Q1, things started moving again.

Dorel’s stock has started moving, too. As of May 8 — two months since the S&P/TSX composite hit its 52-week nadir — Dorel shares outperformed the index by 10%, up 45% versus the index’s 35% gain. At press time, the stock was trading at about $22.50, with a modest price-to-earnings ratio of 6.

That’s still well off its 52-week-high close of $35.84 on Sept. 12 — just before the market meltdown. Up to that point, Dorel had been on a roll, its shares up 20% since the start of 2008 in part thanks to its all-cash US$202-million acquisition of Cannondale Bicycle, a maker of high-end bikes based in Bethel, Conn. Of course, everything changed in the last 15 weeks of the year.

But analysts think Dorel is well positioned for recessionary conditions. One strength is the breadth of its brands and retail channels. In its juvenile division, for instance, Dorel is the company behind the Safety 1st, Maxi-Cosi and Quinny brands (among others) of furniture and accessories for young children, which largely target the opening and mid-market price points to which consumers are shifting. Similarly, in its home furnishing division, Dorel’s ready-to-assemble brands are sold at Wal-Mart, Costco and Staples. “This year, [the] ready-to-assemble [segment] has started off much stronger than we anticipated,” says Schwartz. “People are moving down in price-points. They’re buying more of their furniture in Wal-Mart, for example, or some of the do-it-yourself centres.”

The same trend is at play in bikes — although in Dorel’s case, it works against its higher-end GT, Schwinn and Mongoose brands, and hurt Q1 margins. But the Cannondale acquisition is opening up opportunities: the recreation division will consolidate operations this year to step up product innovation, and push deeper into the independent bike dealer retail channel, which in the first quarter experienced 8% organic growth.

No one holds illusions that 2009 will be a cakewalk for Dorel, though. Schwartz acknowledged in the quarterly conference call with analysts a lack of visibility in bike sale trends this year, for example. Also, a lot rests on how Europe’s economy recovers: about 50% of revenue in the juvenile division (itself about half of the company total) comes from that market, where Dorel is more positioned with high price-point brands. “Europe is a little bit of concern for us,” says Schwartz. “The recession started there later, and I think it will probably take a little longer for things to reverse.” The company is also exposed to currency fluctuations between the euro and the U.S. dollar. With analysts giving Dorel two Buy and three Hold ratings, only RBC Capital Markets’ Sara O’Brien sees much upside in the shares, with a 12-month target of $36.

But for Schwartz, 2009 is a year to continue working down inventories, to regain momentum in free cash flow, and to pay down some of Dorel’s US$420 million in long-term debt. “In today’s world, we want to get through 2009 and get into 2010,” he says. “And if we ring in the new year about where we were last year, I think we would be very satisfied.” Textbook cautious optimism.