K2’s 2006 Annual Report

      For the longest time, I thought about K2 as a ski and snowboard company. But that’s ancient history. They call themselves a “premier branded consumer products company” and divide their business into four segments: Marine and Outdoors ($407.6-million in 2006 sales), Action Sports ($421.4-million), Team Sports ($383.4-million), and Apparel and Footwear ($182.3-million). That’s a bit over $1.3-billion in total 2006 revenues.

      Snowboarding, obviously, is included in the action-sports segment. And now, going directly to the discussion of that segment, I’m going to tell you exactly how each of their four snowboard brands are doing, right?
      Not hardly. They don’t provide a breakdown beyond those four segments. The only piece of information I was able to find was in footnote thirteen of the financial statements on page 92 of their 10K where they note that one-third of the action-sports segment (around $140-million) was snowboarding. They also note that one-third of the apparel and footwear segment revenue ($61-million) was skateboard shoes, apparel, and accessories.
      If only fifteen percent of K2’s 2006 revenues were in what we would all call action sports, why am I writing about them? Two reasons. First, $200-million still isn’t small potatoes in the action-sports industry as it has traditionally been defined. Second, in discussing their business, they say a number of insightful things about their strategy and the industry’s evolution that are worth highlighting.
      Let’s start by remembering what K2’s product lines include. Snowboarding and skate we’ve already mentioned, and we all know about their ski business. But they are also selling snowshoes, paintball products, baseballs and gloves, softballs, fishing kits and combos, fishing rods, personal flotation devices, hunting accessories, all-terrain vehicle accessories, inline skates, Nordic skis, and snowshoes. I think that covers it.
      K2’s management thinks that “the growing influence of large format sporting goods retailers and retailer buying groups, as well as the consolidation of certain sporting-goods retailers worldwide, is leading to a consolidation of sporting-goods suppliers.” As a result, they expect retailers to buy increasingly from fewer larger suppliers. This, according to K2, will allow those retailers to operate more efficiently and cut their costs. Those few larger suppliers will be “those with greater financial and other resources, including those with the ability to produce or source high-quality, low-cost products and deliver these products on a timely basis to invest in product development projects and to access distribution channels with a broad array of products and brands.”
      In its market, including the action-sports business but obviously going far beyond it, K2 thinks size matters. Their general strategy of improving operating efficiency, maximizing how they utilize their distribution channels, leveraging existing operations and “complementing and diversifying its product offerings” reflects this. 
      The second part of this strategy is making acquisitions “of other sporting-goods companies with well-established brands and with complementary distribution channels.” So far, they have made two in 2007. There were three in 2006 and two others in 2005. They note that much of their revenue growth in 2006 came from acquisitions made in 2003–2006.
      There are two things they don’t talk about—opening retail stores and expanding into the fashion/apparel business. K2 is largely a hardgoods (I think a baseball glove is a hardgood) company that believes an increasing percent of its sales and profits will come from large retailers and that those retailers will control more and more of the market. Fifteen percent of its sales were to Wal-Mart in 2005 and 2006. Given their strategy and analysis of how the market is evolving, that makes perfect sense.
      And now, three weeks later, after this story is long gone to the editors and basically out of my memory, but about one day before it was too late to do anything about it, K2 goes and sells itself to Jarden , who had revenues of $3.8 billion in 2006 (see the related story in this issue). Jarden is a “leading provider of niche consumer products used in and around the home.” They have a huge stable of brands, many of which we all recognize.  They divide their business into three segments- branded consumables, consumer solutions and outdoor solutions. K2 will become part of their outdoor solutions and snowboarding will become an even smaller piece of the whole pie. Jarden’s growth strategy “is based on introducing new products, as well as on expanding existing product categories which is supplemented through acquiring businesses with highly recognized brands, innovative products and multi-channel distribution” Go back and review K2’s strategy and market analysis and you’ll see why the two companies thought it made sense to get together.
      I’m not sure our comfortable little action-sports niche is still little, or comfortable, or a niche, but sitting in it we have tended to make fun of in-line skates, team sports and, not very long ago, skis. K2 doesn’t care. They’ve just looked at where they think the industry is going and have devised a strategy to respond to that evolution—which, as far as I know, is what management at any company is suppose to do.
      Okay, you’re not K2. There is no sale of fishing poles in your future. But if you think their analysis of the broader sporting-goods market and its retailers is valid, what does it mean for your brand? Snowboards, skateboards, and surf boards are, I’m afraid, sporting goods. They are not isolated from these trends.