Supply chain challenges, changes in consumer behavior and inflation all impacted quarterly results
MONTREAL – Citing a drop in demand in certain categories such as home office, along with supply chain challenges and inflation, RTA and baby/youth furniture resource Dorel Industries reported a drop in sales and earnings for the first quarter ended March 31.
The company’s first quarter revenues from continuing operations were $428 million, down 2.4% from the $438.6 million reported in the same period last year.
Meanwhile, the company’s net loss from continuing operations was $27.2 million, or 84 cents per diluted share, compared to a net loss of $12.8 million, or 40 cents per diluted share a year ago. The company’s adjusted net loss from continuing operations was $24.8 million, or 76 cents per diluted share, compared to $3.4 million, or 10 cents per diluted share last year.
“First quarter challenges generally mirrored those of the previous quarter,” said Dorel President and CEO Martin Schwartz. “Supply chain issues, high inflation as well as its impact on pricing and our consumers and uncertainty in Europe all contributed to lower earnings in the quarter.”
He added that sales at Dorel Home decreased compared to the prior year as consumers made fewer purchases of items such as home office furniture due to the easing of Covid-19, plus an increase in retail prices. He added that retail prices also increased at Dorel Juvenile, but that demand was strong in most markets.
At Dorel Home revenues totaled $211.5 million, down 7.5% from the $228.7 million reported in the same period last year.
The company said that both internet and brick-and-mortar sales were lower due to erratic supply chain issues, including a reduced availability of containers to ship product. It also noted that last year’s stronger first quarter also benefited from strong demand for categories such as home office as people continued to work from home.
“While demand is softer this year, there has been significant sales growth at DIY and other non-traditional Dorel Home retailers,” the company noted, adding that brand sales “have maintained their consistent increase, again improving prior-year numbers by double digits.”
The company also said that new machinery at its RTA factories in Tiffin, Ohio and Cornwall, Ontario is creating improvements in productivity at those facilities. In addition, one of two new mattress lines at Dorel Home Products’ Montreal plant also is running, and the second line is expected to be operational during the second quarter.
Operating profit in the Dorel Home division was $5.5 million, compared to $14.8 million last year. The company said that lower sales, increases in ocean freight costs, higher particle board prices and higher warehousing costs due to increased inventories all contributed to the lower gross margins.
However, these higher costs were partially offset by overall savings in demurrage and detention costs that were an issue last year.
In the company’s juvenile segment, first quarter revenues rose 3.2% to $216.6 million, from $209.9 million during the same period last year. Adjusted organic revenue improved 8.9% after removing the impact of varying foreign exchange rates year-over-year and prior-year revenue from its Zhongshan, China plant that it sold at the end of last year’s first quarter.
The biggest contributor to the revenue increase was strong sales in the U.S. market in travel systems, strollers, safety/infant health and home equipment. It noted this more than offset lower car seat sales that were limited by component shortages due to supply chain issues in Asia. This also constrained sales growth in Europe and Canada, although sales in Chile and Peru grew by double digits.
The segment also reported a first quarter operating loss of $12.5 million, compared to an operating loss of $7.6 million last year. Excluding restructuring costs, the adjusted operating loss was $10 million compared to an operating profit of $2.1 million a year ago.
The company said that its operating profit was negatively impacted by higher container freight and input costs as well as increased operating costs overall. It also said margins were also negatively affected by component shortages in the U.S. that led to lower manufacturing activity and less factory overhead absorption. It noted that price increases are in place in all markets, “although timing limited their positive impact, with greater benefit to come going forward.”
“In the two months since our year end guidance, visibility remains difficult,” Schwartz noted regarding the economic outlook.
“Volatility in our earnings is expected to continue given rising inflation around the world and its direct impact on input costs and the potential of slowing consumer demand,” he said. “In addition, the uncertainty around the war in Ukraine and China’s strategy on Covid containment has led to a surge in the value of the U.S. dollar against most currencies and has created new concerns around supply out of China. A positive development is that we are seeing some improvement in the supply chain situation out of Asia for now with better container availability and a stabilization of pricing.”
“The outlook for Dorel Home remains challenging given the lower consumer demand for furniture overall,” he continued. “In addition, with the attitude towards the Covid-19 pandemic changing, purchases for the home have slowed. Despite these givens, we continue to focus on “near sourcing” with our newly installed machinery, the integration of our recently acquired European business and our branded furniture lines. This will put us in a leading position as demand for our products picks-up in a more stable environment.”
Of the juvenile segment, he said, Europe is the market most impacted by uncertainty.
“The devaluation of the Euro to its lowest level in over five years relative to the U.S. dollar, and retailers ordering cautiously means our outlook for second quarter is less positive than previously,” he said. “As in Home, we have not allowed the current challenges to detract from our long-term direction, and we believe our strategy on recapturing market share remains valid. We are actively working with our retail partners on enhanced marketing, store investments and the roll-out of our new products in Europe, but the positive impact of these actions may be delayed.”