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Martin Schwartz looks like he’s about to pass out from exhaustion. The CEO of $2-billion consumer products manufacturer Dorel Industries Inc. got back from China last night. Schwartz can be combative when faced with questions he doesn’t like. But on this day in late April, it appears, during an interview in his office in Westmount, Quebec, that the fight has gone out of him.
That changes once the subject turns to Dorel’s trophy asset, Cannondale Bicycle Corp., which it purchased in 2008 for $202 million. It seemed like an odd match at the time: Cannondale was a maker of elite, high-performance bicycles; Dorel sold mass-market high chairs, infant car seats, assemble-it-yourself furniture—and cheap bikes. Cannondale customers were typically hard-core types who spent thousands for state-of-the-art riding machines at expert-staffed independent bike dealers; Dorel customers walked into Canadian Tires and Walmarts looking to buy a bike for $100 with little help from teenaged store clerks.
Industry players worried Dorel would drag Cannondale down-market and move units by the millions at Walmart. After all, Dorel was already the biggest peddler of bikes to U.S. mass merchants—including its Schwinn brand, which had been banished by many independent bike shops when the brand started selling for Every Day Low Prices.
When I tell Schwartz there are those who still suspect Dorel will start churning out $100 Cannondales, he becomes feisty. “I’m not surprised,” he snaps. “I think we’re going to get this forever—‘Dorel is not a high-end bike company, when is the axe going to fall, when are they going to find it in mass merchants,’” he says mockingly. “All of that stuff is just not going to happen.”
You can’t blame Schwartz for resenting the second-guessing. By most measures, Dorel has had a successful run—it’s one of the last significant Canadian-owned consumer products manufacturers, boasting top brands including Safety 1st car seats, Cosco high chairs and Sugoi athletic apparel. Free trade killed a lot of Canadian companies, and cheap Chinese imports wounded others; Dorel, by contrast, grew stronger by moving big time into the U.S. market and offshoring production to China early.
But when it comes to the stock market, Dorel seems to wear the “kick me” sign. Dorel barely registers with investors. It recently traded in the $25 to $30 range—which is where it was in 1999, when it was a much smaller business. Schwartz, who manages and controls Dorel along with two younger brothers and a brother-in-law, has complained for years that people don’t appreciate his company.
Even when it adds a new business, Dorel gets no respect. Take Cannondale. In the past four years, Dorel has consistently acted like a company that wants to excel in the specialty bike business and to restore Cannondale’s name as an innovation and performance leader. Indeed, Cannondale is the best news coming out of Dorel these days. In 2011, Dorel’s bike-focused recreation and leisure division posted a stellar 11.2% revenue gain and a 17% operating profit increase. Strip out the stagnant mass-merchant brands such as Schwinn, and the results are even better: Sales to independent dealers grew 25% last year. The division earned a first-quarter operating profit of $21.4 million, up 20%, making it Dorel’s most profitable business.
But the success has done little to shake Dorel out of a seven-year funk. It started with problems in its furniture business. Then mass-market bike sales softened. The recession hit, plastic prices rose, and its children’s products business has suffered ever since. Profits have bumped along—$104.6 million net income last year on $2.4 billion in revenue—which is less than any of the prior three years, and barely ahead of the $100.1 million Dorel earned in 2004.
So what to make of Dorel? It’s both a low-margin supplier to mass merchants and a high-margin supplier to specialty stores—and, since buying a chain of juvenile products stores in Chile and Peru last fall, it’s also a retailer. That makes it hard for investors to value. Would it be better to break it all up and unearth the value analysts say is buried within? For that matter, could Dorel be sold? “If someone comes with the right deal, we’d definitely look,” says Schwartz. “For me to say, ‘No, we’d never sell,’ I’d be lying to you.”