TORONTO (Reuters) - Dorel Industries Inc DIIb.TO warned on Thursday that earnings from its recreational unit will be weaker than expected as wet weather has dampened bicycle sales in the United States, Canada and Europe, driving its shares down 6.4 percent.
The Montreal-based company, which also makes strollers, car seats and home furnishings, said weather conditions have led to widespread discounting in the bicycle market by rivals. It no longer expects full-year earnings from the bicycle business to top 2012 results.
Dorel said that in response to market conditions it is now cutting roughly 50 positions worldwide from its recreational unit, or about 5 percent of the segment’s workforce.
While Dorel’s chief executive, Martin Schwartz, said in a statement that the weakness in the bicycle business is “mainly related to matters beyond our control,” investors indicated they were worried that other issues were also at play.
“The market is telling us that it believes that this is more a structural issue than just seasonal. And you see that with the sell-off in the stock,” said Kash Pashootan, a portfolio manager with Raymond James in Ottawa.
Pashootan, who said that Dorel is among his top 10 holdings, added that the company’s stock is more susceptible to bad news given its strong performance in the past 12 months.
When Dorel reported first-quarter results last month, it said it expected bicycle division earnings to top those from a year earlier, despite the unfavorable weather conditions.
But on Thursday, Schwartz said, “The reality is that we are now into mid-June and the weather has not improved sufficiently which means that we will be unable to make up the accumulated year-to-date sales shortfall.”
The company said it still expects results from its juvenile and home furnishings units to be in line with the expectations outlined last month.
The company’s warning prompted National Bank analyst Leon Aghazarian to cut his rating on Dorel to “underperform,” from “sector perform.”
“We continue to like Dorel’s dividend profile, but today’s announcement supports our cautious view on the stock given a challenging consumer environment in North America and Europe,” Aghazarian wrote in a note to clients. He also trimmed his price target on the stock to C$35.50 from C$41.
Shares of Dorel fell C$2.50 to C$36.27 in afternoon trading on the Toronto Stock Exchange.
The company said it expects the cost cuts will allow it to report double-digit earnings growth from its bicycle business in the second half of the year. Dorel is expected to report second quarter results on August 9.
Editing by Jeffrey Hodgson and Leslie Adler