Gantry Investment Research
Kazz Industries Inc. - On The Rise
There are very few opportunities where one can participate in the initial stages of a high growth industry. Presently, the snowboard industry is such an opportunity. And Kazz Industries, which manufactures snowboards in all the price classes, is an excellent way of capitalizing on the growth of this new sport.
Snowboard Industry
Let's begin with a comparison. At one time, the ski industry was a high growth industry. It started with a base of approximately 1 million participants, and each year for the next four years, the participation rate doubled. Accordingly, expenditures on ski equipment and accessories grew at the same rate. Inevitably, these growths rate - in participation and, thus, in ski expenditures - reached a plateau. In other words, out of the millions of people who participate in recreational sports, only a set amount, or a percentage of the total, would become avid skiers. Once that set amount was reached, the ski industry no longer became a high growth industry. This is not to say that the ski industry stopped growing entirely, but rather than growing by double digits, the industry grew by single-digits. That is to say, the growth rate became more reasonable. For those few investors who invested in this industry during its infancy stage, the return on their investments were quite impressive. This is a pattern that, in different industries and with different products (for example, computers, radio, TVs, athletic shoes, etc.), has played itself out several times: a new product either creates or satisfies a new need; there is a quick, fast run on sales for several years before it levels off.
We are beginning to see this pattern in the snowboard industry. The participation rate has doubled and is expected to double in the next few years. Expenditures on snowboards and accessories are expected to double to $2 billion within the next 3 years, according to SnowSports Industries America. As a testament to the strength of the snowboard industry, the '98 and '97 winter seasons have not been kind to the ski industry. Sales of skis and ski accessories have been poor due to unfavourable winter conditions. Yet during this same period, snowboard sales have done very well. And the mass consumer market has not as yet embraced snowboards. Now that the Olympic committee deemed snowboarding an Olympic event, the industry will gain the worldwide exposure and acceptance that should help to propel its growth even further.
A recent development within the snowboard industry should help to support the argument that the underlying economics of the snowboard industry is very promising. K2 Inc. is a leading manufacturer, designer, and marketer of sporting goods and other recreational products, such as mountain bikes, fishing tackle, in-line skates, skis and ski bindings, and, of course, snowboards. As of its 1998 year-end, the company had sales of $575 million and a gross profit (before extraordinary charges) of $166 million. On March 26, 1999, the company acquired, for an undisclosed sum, Morrow Snowboards Inc. K2's management has stated that this acquisition will have an immediate effect on earnings. One can only guess at the company's motive to purchase Morrow - they could have easily expanded any one of their other businesses (fishing tackle, mountain bikes, and skis) through an acquisition. But their motivation seems easy enough: over the past two winters, K2's ski business has not done well. In fact, their other businesses have not met expectations: sales of mountain bikes have stalled and fishing tackle, although a steady business, does not have much expansive possibilities. The acquisition of Morrow is an attempt to increase the company's exposure to a high growth business, especially when management has consistently argued that K2 is a high growth company. They have recognized the excellent economics of the snowboard industry.
Kazz Industries
Kazz is well positioned to take advantage of the high growth in snowboards. First, the company has several strong product introductions, such as the "Color Me" snowboards. Designed for beginners between the ages of 6 and 10, this snowboard is the only board of its kind that allows children to color and create their own designs. Then there's the "Gorilla" snowboard, which is an injection-molded board with metal edges and simple, attractive graphics geared to the beginner aged 10 and up. In fact, most of Kazz's snowboards are injection-molded, which allows for greater flexibility for the rider and is more cost-effective for the company to manufacture than the traditional method. This manufacturing technique should help the company to expand profit margins rapidly. More importantly, the company offers snowboards in all the price classes. For years, those interested in snowboarding found the price of entry for a new board (approximately $450 US) too steep. As a result many potential participates - who could have been steady customers - were stalled in their attempts to try this new sport. But Kazz offers snowboards from $176 US to $650 US, that is, snowboards to satisfy the price conscientious first-timer to the advanced snowboarder, who is willing to spend more for a good, top-of-line board.
Furthermore, to accompany the snowboarder, the company will be introducing the "Vector" goggles. This electronically controlled goggle will provide readings across the top of the lenses, such as the outside temperature, distance, speed, digital compass and pitch of terrain. Undoubtedly, viewing the speed and time of one's descent down a mountain will be a definite attraction, not only to the expanding snowboard industry, but to the ski industry as well. This product should have a strong introduction.
Kazz Industries is a great opportunity for investors to capitalize on the growth of an industry that is, presently, at the infancy stage. Given the rapidity by which the snowboard industry has grown thus far, by all expectations the next few years should be good indeed.
|
