GT Bicycles Inc.

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GT Bicycles Inc.

founded: 1979

Contact Information:

headquarters: 2001 e. dyer rd. santa ana, ca 92705 phone: (714)481-7100 fax: (714)481-7111 url: http://www.gtbicycles.com

OVERVIEW

GT Bicycles, Inc. is a leading designer, manufacturer, and marketer of mid- to premium-priced mountain and juvenile BMX bicycles sold under the company's GT Powerlite, Robinson, and Dyno brand names. The company's Riteway Products distribution network is a leading distributor of the company's bicycles, parts, and accessories, as well as parts and accessories of other manufacturers, to 4,000 independent bicycle dealers. GT's juvenile BMX bicycles maintain a dominant market share of the BMX bicycles sold by independent bicycle retailers in the United States. The company offers 37 mountain bicycles (51 percent of revenue), 48 juvenile BMX bicycles (23 percent of revenue), and 14 road/speciality bicycles. GT also distributes one of the broadest lines of private label and branded parts and accessories (26 percent of revenue) in the industry.

COMPANY FINANCES

GT Bicycles' revenues more than doubled between 1992 and 1997. Net sales in 1997 for GT Bicycles were a record $216.2 million, up from $208.4 million in 1996, $168.9 in 1995, $145.7 in 1994, $123.7 in 1993. Net income for 1997 was $3.2 million, as compared to net income in 1996 of $11.6 million. The company received $1.6 million in life insurance proceeds following the death of its former president and chief executive officer Richard Long in July 1996. Sales of adult bikes were weak, as were sales of domestic parts and accessories. Domestic juvenile bike sales were up from 1996. International sales of juvenile bikes also increased, with sales in Japan topping all the company's foreign divisions in adult and juvenile bikes, parts, and accessories. Overall, however, foreign sales declined as the strong U.S. dollar, especially relative to European currencies, hurt sales in the United Kingdom, France, and Germany. GT Bicycles expected sales in the adult market to continue to be soft in 1998 and beyond, according to a company press release. However, company president Michael Haynes stated, "our superior technology, powerful brand name and broad distribution channels will allow us to gain market share. We plan to continue improving manufacturing efficiencies and to increase the amount of product assembled in our new facility, which should further enhance gross profits."

In October 1995 GT Bicycles issued its common stock in an initial public offering at a price of $14.00 per share. GT Bicycles stock ranged from a low of $5.42 to a high of $10.37 during a 52-week period. The stock's price-earnings ratio is 19.53 and its earnings per share is $.32. The company has never paid a cash dividend and intends to retain its earnings for use in the business.

ANALYSTS' OPINIONS

"Weak earnings earlier this year, a stock price below $10 per share and a market capitalization (share price times shares outstanding) of less than $100 million leave [GT Bicycles Inc.] largely ignored and unloved," according to Robert Frick in a December 1997 article in Kiplinger's Personal Finance Magazine. "But those drawbacks camouflage the company's assets, including coveted brand name among kids and a reputation for shrewd marketing and innovation. In short, GT is a perfect buy for investors looking for a small company at a bargain price." Although bike and bike accessory markets are basically flat in the United States, Frick maintained that GT Bicycles has strong ties to its retailers and a good distribution system which extends to Europe and Asia. A strong brand identity among kids and a broad range of products make higher sales a good bet, predicts Frick.

Other analysts are a little more cautious about GT Bicycles. Mark Greenberg, who runs the Invesco Strategic Leisure Fund, said in a November 1997 New York Times article, "I don't own any of the bike stocks; that should tell you something. There are such high marketing and development costs that you never seem to make as much money as you'd like." David L. Rose, an analyst at Jefferson Company, in the same article stated, "Cannondale and GT, I think are positioned about as good as you can be in the long term, but it's going to be tough."

Sales of high-end bicycles were sluggish in 1997 and some analysts predicted that the trend would continue intact. According to James Sterngold in The New York Times, these sales results are due to large sales of children's bikes and stores' efforts to reduce inventory to make way for premium bicycles. However, many retailers are behind in responding to the demand for these premium bikes.

HISTORY

Founded in 1979 by Gary Turner and Richard Long, GT Bicycles Inc.'s focus as a company was on product innovation, a focus that still remains. Turner, an engineer, built bike frames in his garage for his son to race; Long was a BMX bicycle racetrack operator. Together they founded the company to make dirt track racing bikes for boys. Quickly becoming a hit among the dirt bike fans, sales hit $4 million in two years. Throughout its history, GT focused on design superiority and was credited with countless "firsts" within the bicycle industry. In its early years, GT focused on the application of innovative design and frame composites in the then-rapidly expanding juvenile BMX bicycle market.

In the 1980s GT entered the mountain bike market, a market that was faster growing and pricier than the BMX market. From 1989 through 1994 company revenues increased from $41 to $146 million. In 1998, GT controlled a 40-percent plus share of the independent bicycle retailers' juvenile BMX business. GT completed its initial public offering of stock on October 18, 1995, issuing 3.15 million new shares and receiving net proceeds of approximately $40.2 million, of which approximately $37.1 million was used to repay debt. GT established a rather impressive long term financial record.

In July 1996 Richard Long, GT Bicycles' co-founder, president, and CEO, was killed in a motorcycle traffic accident at the age of 46. The loss was devastating to the company. Long had fought diligently to expand the company's market share. In early 1997 GT consolidated the company's corporate headquarters, manufacturing, assembly, and West Coast distribution facilities into one combined facility in Santa Ana.

STRATEGY

The key to the success of GT Bicycles is its distribution subsidiary, Riteway Products, a leader in the $3-billion parts and accessories market. In order to maximize flexibility and engineering expertise while minimizing capital commitments, the company's manufacturing strategy used a combination of internal manufacturing for its higher end products, and outsourcing for its higher volume, lower cost products.

GT's marketing strategy is targeted at the bicycle retailer, not the end user. GT's research indicated that 50 to 70 percent of a purchase decision is affected by the preferences of the bicycle salesperson, while only 30 percent is affected by the customer's brand preference. High ticket purchases are often affected by a salesperson's input. Other marketing efforts include: annual catalogs, a monthly flyer detailing a variety of products, Hammer-down (a newsletter published nine times a year) and Geardown (a newsletter published six times a year for all GT dealers). GT also participates with its dealers in direct mail marketing programs three times a year. In March 1998 GT Bicycles began the production of a 30-minute television show, "Crank," for the Fox Sports Network. A nationally syndicated program, "Crank" features BMX and Freestyle cycling and other extreme sports targeted to the after school audience. The company continues to build brand recognition in the market by aggressively targeting the juvenile BMX segment with advertising, sponsorship, and more than 40 juvenile BMX models.

Building brand awareness at an early age and capitalizing on it as each generation matures is GT Bicycles's strategy for continued company growth. Current demographics bode well for the company as teen population growth is expected to outpace the overall population through the year 2010.

INFLUENCES

In March 1998 GT Bicycles initiated a recall of approximately 10,000 bicycles and frame sets manufactured since 1995. The recall affected less than 1 percent of the approximately 2 million bikes GT sold during that period and was the result of 17 reported cracks in the frames of its BMX bicycle models. According to the company, the financial impact of the recall should be minimal, as its warranty and other reserves should cover the recall costs.

FAST FACTS: About GT Bicycles Inc.

Ownership: GT Bicycles Inc. is a publicly owned company traded on NASDAQ.

Ticker symbol: GTBX

Officers: Geoffrey S. Rehnert, Chmn., 40; Michael C. Haynes, Pres. & CEO, 45, $312,000; Charles Cimitile, VP Finance & CFO, 43, $175,000; William K. Duehring, COO, 41, $228,000

Employees: 775 (1997)

Chief Competitors: GT Bicycles' primary competitors are: Cannondale; Huffy; Trek; Rockshox; Giant; Mongoose; Raleigh; Schwinn; and Specialized.

The weather also played a role in domestic sales of the company's bicycles in 1998, when the company faced some of the harshest weather conditions in recent history. Its largest winter markets—California, Florida, and Texas—were unseasonably cold and wet, resulting in flat sales of adult and juvenile bikes for the first quarter of 1998.

CURRENT TRENDS

Product development remains a top priority for GT and the company is beginning to realize its goal of developing direct distribution in key international markets. While GT established an important presence in international markets, representing some 30 percent of 1996 revenue, the company perceives an important opportunity to improve the growth and profitability of these markets. Internally, GT is focusing on the implementation of process improvements in manufacturing and distribution functions, which will allow for greater manufacturing efficiencies. In order to quickly fill orders from bicycle dealers, the company's wholly owned distributors maintain significant inventories. The company believes the close relationships with its principle manufacturing sources allow it to introduce innovative product designs and alter production in response to market demand for its product.

The bicycle market has undergone many changes in the recent past. The mountain bike boom of the 1980s has dwindled. In the early 1990s "hybrid" or cross bikes, which combined the ruggedness of a mountain bike with the cruising abilities of a road bike, broke into the market. "Many experts believe the future is in transforming bicycles into high performance status symbols," according to James Sterngold in The New York Times. The trend is toward high-technology bikes that appeal to yuppies. They typically have softer suspensions and wider, softer saddles. These bikes are not only comfortable for baby boomers who often complain of wrist, shoulder, and other soreness, but they also come with a hefty price tag, ranging from $600 to $4,000.

PRODUCTS

GT Bicycles designs mountain, street, and juvenile motorcross (BMX) bikes. More than 140 models are available. The company also makes bike helmets and other bike accessories.

GT Bicycles' Superbike 2, a handbuilt, featherlight racing bike, was honored as part of Popular Science magazine's annual "Best of What's New" awards. Also, GT formed a partnership with AeroVironment, an internationally renowned developer of energy efficient vehicles, to create Charger Bicycles. Charger Bicycles produces and markets an electric-assist bicycle called the Charger, which features an on-board power control center and a removable battery pack that can be recharged anywhere. Extensive market research has shown substantial worldwide demand for electric bicycles with a growing number of bicycle commuters internationally benefitting from assisted, clean transportation. GT's initial target market will be commuters and recreational riders, and the electric bikes will be sold by GT's Riteway Products distribution network.

Harley-Davidson has licensed GT Bicycles to make Harley-Davidson cruiser bikes. The bikes have a fake gas tank and the signature Harley-Davidson paint. At the other end of the spectrum, the company's new Jetstream model, with a light aluminum frame and a comfortably soft, wide saddle, is designed to appeal to middle aged baby boomers.

GT has been investing in new materials and manufacturing processes. The most significant new development has been the use of thermoplastics in frame manufacture, which are lighter, stronger, and absorb shock better than steel or aluminum frames. The thermoplastic frame manufacturing process takes less than an hour to complete and costs significantly less than the process for aluminum frames.

CORPORATE CITIZENSHIP

In addition to its sponsorship of independent teams such as the U.S. Cycling Team, U.S. Triathalon Team, Saturn, and Team Shaklee, the company supports and promotes its own Team GT racing and demonstration teams. In 1998 alone, the company supported a GT mountain bicycle racing team, four BMX racing teams, and a number of freestyle demonstration riders who perform at varying venues such as NBA halftime shows, state fairs, school assemblies, trade shows, and corporate events. GT has sponsored more than 1,000 events with its event support program.

CHRONOLOGY: Key Dates for GT Bicycles Inc.

1979:: Gary Turner and Richard Long found GT Bicycles Inc.
1980:: GT enters the mountain bike market
1995:: GT completes its initial stock offering
1996:: Co-founder Richard Long dies
1998:: GT holds a 40 percent market share of the independent bicycle retailers juvenile BMX business

GLOBAL PRESENCE

Internationally, GT Bicycles markets its products in 65 countries through 56 independent distributors. The company's wholly owned distributors are Riteway Japan, Riteway France, and Caratti. Distribution facilities are located in the United Kingdom, France, and Japan. The company goal is to expand GT Bicycles into a company with worldwide brand name recognition.

The company is highly dependent on products manufactured by foreign suppliers located primarily in Taiwan and Japan and to a lesser degree the People's Republic of China. The company believes that there are opportunities for expanded sales in foreign markets and intends to increase its sales and marketing efforts in these areas. The company's business is subject to the risks generally associated with doing business abroad, such as delays in shipment, foreign governmental regulation, adverse fluctuations in foreign exchange controls, trade disputes, changes in economic conditions, and political turmoil in the countries in which the company's manufacturing sources are located. The delay or disruption in supply of bicycles or bicycle parts and accessories could have a material adverse effect on the company's business, results of operations, and financial condition. Also, the market for bicycles, parts, and accessories, both in the United States and internationally, is highly competitive. In all its product categories, the company competes with other manufacturers and distributors, some of which have well-organized brand names and substantial financial, technological, distribution, advertising, and marketing resources.

EMPLOYMENT

The company offers profit sharing for all employees who have worked for the company at least 12 months. Also, in 1995 the company's "Stock Purchase Plan" was adopted by the Board of Directors, covering an aggregate of 300,000 shares of common stock. Employees are eligible to participate if they have been employed by the company for at least one year.