Market Spotlight: Recreational Products

In a recent Moody's Investor Service report on the consumer durables industry, analyst Kevin Cassidy said the recreational products sector is most vulnerable to the U.S. housing market decline, rising fuel prices and credit constraints.

Cassidy said during a downturn brand strength and product innovation are keys to maintaining pricing power and favorable margins. He said Jarden Corp., which sells Coleman camping gear and K2 outdoor equipment, is likely to be buoyed by brand strength.

"When you're the number one in the market you're in a better position to protect your turf, if you like, when retail demand gets a little tougher, than if you are the third guy on the roster who's struggling to get some space," said Jarden Chairman and Chief Executive Martin Franklin in a conference call after the company's third-quarter earnings release.

Even so, Jarden Corp.'s stock is now trading at a 52-week low, and the company expects macro-economic pressures to extend into 2008. "Our strategy is to focus on margin discipline and not to chase some profitable revenue simply for revenue's sake, while staying true to our long-term growth and financial goals," Franklin said.

Golf club maker Callaway Golf Co., which reported record sales in the first nine months of the year, has a sunnier outlook. Wedbush Morgan Securities analyst Rommel Dionisio cited the company's "powerful brand equity in the marketplace" as a major reason behind his "Buy" rating of Callaway shares.

Analysts also expect Callaway to benefit from product innovation, specifically its spring 2008 product launches. However, consumer spending concerns led some analysts to inject a note of caution into their forecasts.

"While we expect the company's spring 2008 product launches to provide a substantial boost to first-quarter revenue, it is currently too early to determine how well retailers, and ultimately consumers, will respond to Callaway's new product offerings in fiscal 2008, especially given the current weakness in consumer spending sentiment." said Susquehanna Financial Group analyst John Shanley, who maintained a "Neutral" rating on the shares.

However, brand strength and market share are not always enough to withstand macroeconomic woes.

Brunswick Corp., the world's largest manufacturer of recreational boats, is among the hardest hit companies in the sector. Although Brunswick's third-quarter adjusted earnings topped Wall Street expectations, a hefty impairment charge pointed to what management called an "unprecedented" drop in demand for boats and marine products.

In July, Chairman and Chief Executive Dustan McCoy said retail demand in the marine industry was at its lowest level since the National Marine Manufacturers Association started publishing data in 1965. He said consumers are putting off large-ticket discretionary purchases due to the slumping U.S. housing market, soaring fuel prices and higher interest rates.

In a conference call following the company's third-quarter earnings release, McCoy said the company has "had to continuously decrease production levels in an attempt to stay ahead of a declining market." Brunswick's cost-cutting measures included the closure of an aluminum fishing boat factory in Mississippi.

The company's shares are trading near four-year lows. The stock plunged from a 52-week high of $34.99 in late May to bottom out at $18.43 on Tuesday. Analysts said they see little catalyst for improvement.

"As we look ahead, we see the U.S. marine market continuing to be subjected to economic stress," McCoy said. He continued that the company does not expect conditions to rebound in 2008.