Market conditions hit Coast Distribution System hard

MORGAN HILL, Calif. – The Coast Distribution System (AMEX: CRV), a supplier of aftermarket replacement parts, accessories and supplies for the RV, marine and outdoor recreation industries, saw its sales and profits decline for the second quarter and six months ended June 30, it reported in a recent statement.

Coast reported net earnings of $1.5 million on net sales of $50.8 million for the second quarter 2007, compared with net earnings of $3.0 million on net sales of $56.8 million for the same period of 2006. For the six months ended June 30, Coast reported net earnings of $873,000 on net sales of $94.5 million, compared with net earnings of $4.1 million on net sales of $108.3 million for the same six-month period of 2006.

The company attributed the 10.5 percent decline in year-over-year sales in the 2007 second quarter to softness in its core markets, due primarily to continuing high gasoline prices, higher interest rates and economic uncertainties. Those conditions led to declines in purchases of and in the usage of recreational vehicles and boats, which affect consumers’ need for and purchases of the products Coast sells.

Reflecting this softness was a 6.7 percent decline in sales of recreational vehicles in the month of May 2007, according to the latest data available from industry analysts, the company said. Industry analysts for the marine industry are reporting a double-digit decline in retail sales of boats.

“We are looking at a difficult year based on the markets we serve, as the second quarter is historically our strongest quarter and includes the peak buying season for our RV and marine customers,” said Coast Chairman and CEO Thomas R. McGuire. “However, we had a strong month in July 2007 with increased sales compared to last year, which may be a positive sign for the second half of the year. We also recently added new customers for our Kipor generators in markets beyond the cyclical RV and marine markets.

“The RV and boating markets are both sensitive to higher and unstable gas prices and interest rates. Gas prices are above last year’s levels and the price of gasoline has risen since the end of January. Despite these short-term issues, the long-term outlook for the RV market remains very strong. Industry analysts are forecasting a 3.5 percent increase in RV shipments in 2008 and a rise in RV ownership in the U.S. from 7.9 million households in 2005 to 8.5 million in 2010, an increase of 7.6 percent.”

Coast reported gross margin of 19.2 percent in the second quarter of 2007, compared with 21.3 percent for the same period in 2006. That decrease was due primarily to lower sales on fixed warehouse costs and increased costs for freight, product testing and warranty expenses as the result of increased sales of proprietary products, according to the company. Selling, general & administrative (SG&A) expenses increased by $140,000 in the second quarter of 2007 compared to the same period of 2006; however, due to the decline in net sales, such expenses increased to 13.5 percent of net sales from 11.9 percent in the second quarter of 2006.

“In the first six months of 2007, we have added leadership for our Kipor and Husky product lines and added a new product-testing center,” said McGuire. “We will continue to manage our overhead costs in the second half of 2007, while also focusing on new product development and programs that we have implemented to capture market share in advance of the eventual recovery in our markets.”

Coast supplies more than 14,000 products from 500 manufacturers through 17 distribution centers in the U.S. and Canada. Most of Coast’s 12,000 customers consist of independently owned RV and marine dealers, supply stores and service centers., according to the company.

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