An Interesting Advertising Observation; What Does it Mean?

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I was recently paging through a couple of Transworld consumer mags (Surf and Skate I think) and something caught my attention. I don’t know what made me notice it, but I suddenly realized there was not one non-endemic advertisement in either mag. Okay, maybe I missed one, but there was no Ford Trucks, Mountain Dew, AT&T or any other of the major brands that had previously graced their pages. There was Nike. I’ll get back to that.

Talking about coming full cycle. I remember when there use to be none of these big advertisers in Transworld’s magazines at all and we thought that was a good thing. I had conversations with various Transworld people years ago about their efforts to work with these major brands. The brand, having exactly no understanding of the industry or the demographic they wanted to reach, would submit ads that were, well, not specifically too good. Transworld would try to work with the company to get it to change its ad, but that meant working through the advertising agency who could hardly go back to their client and say, “Actually, our ad sucked and we didn’t know what we were doing.”

And Transworld, no matter how much they wanted the money (and they charged these companies more than they charged industry brands) wouldn’t take the ads that sucked. Those ads made Transworld’s magazines look bad and inevitably generated irate phone calls from industry advertisers who found their ads next to the sucky ads of the companies that didn’t know what they were doing.
The economy has led brands in all industries to cut back on their advertising. But I can guarantee that Ford, Mountain Dew and AT&T have not stopped advertising everywhere. They have stopped advertising, however, in what I still consider the leading action sports consumer publications and have decided their dollars are better allocated somewhere else. Why?
I should note that if I had other action sports publications in front of me, I bet I’d find the same trend so this is not about Transworld.
You advertise through a particular channel because you believe that channel is the best way to reach and influence customers and potential customers. I can guarantee that action sports publications do not take up a big chunk of Ford’s advertising budget. Even though it’s a relatively small number, they found it expendable. Aside from the economy, there are a couple of possible reasons for that decision.
First are the changes in distribution that have occurred in the industry. Recent attempts to control certain distribution channels not withstanding, our products are all over the place. I suppose we could be critical of that (Hell- we are! All the time!), but it’s pretty much inevitable industry evolution.  In general (some brands are exceptions), we have sent the message that we’re not as exclusive as we use to be. And more and more of our customers are non participants so I’m guessing that the big non endemic companies no longer think it’s quite as necessary to be in the core publications to reach most of the action sports customers.
There’s also a certain decline in the panic that big non endemic companies felt when surf/skate/snow were growing like weeds and generating all kinds of publicity and excitement. Big brands were worried they were missing something, even if they weren’t exactly sure what it was.
Finally, there’s the recognition that the disposable income of the core magazine consumer has declined. Obviously, this has been made worse by the recession, but the decline in middle class real income is a long term trend that started before 2007.
Then there’s Nike, still advertising away in Transworld. The difference is that Ford, whoever they want to sell them to, still wants to sell pickup trucks. Nike wants to sell skate/surf/snow products and, in the process, build brand credibility across our demographic to sell the other related products they make.
So you can see why Nike is still in action sports magazines, but other big companies aren’t. The same analysis applies to Quik, Billabong, Volcom and other large action sports brands (if we can call them large in the same breath with Nike). They’ll be advertising in action sports magazines, but will spread their dollars to other advertising platforms as well. Because just like Nike, they want credibility in action sports to translate into sales in a broader market.
Only it’s not quite like Nike. Nike already has credibility and consumer recognition in the broader market and now wants to build that credibility in a small subset of that market. If they should fail (and it doesn’t look like they are going to), Nike will be just fine. Action sports industry brands are trying to go the other way- from a smaller, defined market to a much larger one. They focus every day on how to gain credibility in the larger market while keeping it in the smaller. They believe that without the later they can’t develop the former. And yet, ultimately, if they want to keep growing, they have to be able to keep larger market credibility even if they lose it in the market where they have their roots.
I think that, as much as anything, explains why our industry has evolved the way it has.

 

 

Zumiez’s 10K for Year Ended Jan. 30, 2010; The Strategy’s the Thing

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In my analysis of Billabong and Genesco, I have spent some time talking about their retail strategies and the possible impact on the action sports retail market, especially on the core retailers.  Zumiez’s 10K has me thinking about this again.

I would first like to thank Zumiez for keeping their 10K to only 75 pages, simplifying my task and reducing my work load.  I have a theory that the best companies have the shortest 10Ks; business models that are simple to describe and fewer problems to explain.  Maybe that’s a new investment strategy.

Zumiez’s financial results, like with every other publically traded company in any industry, reflect the recession and their efforts to manage through it.  There was inventory control, expense management, a reduction in capital expenditures, and focus on continuing to follow their basic strategy (which can be done, as usual, when you have a strong balance sheet like Zumiez’s).

Zumiez ended their fiscal year with 377 stores in 35 states averaging 2,900 square feet each.  As they note, their size seems to leave them room to grow given the number of stores that other similar retail chains have.  New store openings have declined from 58 stores in fiscal 2008 to 36 in 2009 and a projected 25 in 2010.

Their customers are “…young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMX and motocross.”

They go on to say:

 “Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with store associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers.  Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates. To increase customer traffic, we generally locate our stores near busy areas of the mall such as food courts, movie theaters, music or game stores and other popular teen retailers. We believe that our distinctive store concept and compelling store economics will provide continued opportunities for growth in both new and existing markets.”

 They talk about this strategy in more detail in the 10K and you can see the whole thing at http://www.sec.gov/Archives/edgar/data/1318008/000119312510064532/d10k.htm.  Focus on pages one through nine.

Ignoring whether or not you think this strategy is valid (their history tells us it has been), you’ll notice that this description of their stores and how they position themselves could essentially be the same description that any independent core retailer would use.  Except of course the core retailer wouldn’t be in the mall (I guess by definition?) and doesn’t, therefore, have the ability to locate in high traffic areas in the mall.  So your typical independent core retailer might to be more dependent on destination traffic than a Zumiez.   Zumiez pursues, on a national scale, the same branding strategy the best independent retailers pursue.  “We seek to build relationships with our customers through a multi-faceted marketing approach that is designed to integrate our brand image with the action sports lifestyle.” They spent $822,000 on advertising in fiscal 2009.

In other words, as I’ve said a few dozen times before, the best retailers, chain or independent, give credibility to the brands they carry and do not rely on those brands to define them.  Zumiez is clearly not dependent on a handful of brands.  No single brand accounted for more than six percent of net sales in 2009.  Their private labels in total accounted for 15.7% of net sales, up only slightly over the last two years.  Ecommerce sales represented 2.3% of the total, up from 1.1% two years ago.

 And Zumiez has undeniable advantages in terms of negotiations with vendors and landlords, systems, and overall efficiencies associated with size.  Like they say, “compelling store economics.”  Genesco, by the way, pretty much said the same thing.  So would any multi hundred store retailer.  Here’s another kind of long quote that described part of that advantage.

“We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management. We also coordinate inventory levels in connection with our promotions and seasonality. Our management information systems provide us with current inventory levels at each store and for our Company as a whole, as well as current selling history within each store by merchandise classification and by style.”

Pretty powerful stuff.  Then I noticed that in 2008, Zumiez’s net investment to open a new store (net of inventory and landlord contribution) was $311,000.  In 2009 it was down to $221,000.  In part that’s because of economic conditions, but it’s also indicative of the advantages of scale.

Let’s talk about the numbers while all this strategic stuff sinks in.  I’ll come back to it in my conclusions.

Net sales for the year were about even, falling $1 million to $407.6 million.  Comparable store sales were down 10% after having been down 6.5% the previous year.  Net sales per store were down 12.8% from $1.24 million to $1.08 million. Comparable store sales had grown an average of 12.6% a year in fiscal 2005 to 2007.  Gross profit as a percent of sales actually grew from 32.9% to 33.1%, an indication of good inventory management and control of the need to discount.  This gross profit percentage may look a bit low, but you have to consider how the company calculates it.

“Cost of sales consists of branded merchandise costs, and our private label merchandise including design, sourcing, importing and inbound freight costs. Our cost of sales also includes shrinkage, certain promotional costs and buying, occupancy and distribution and warehousing costs. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold.”

I agree.  There’s no right or wrong way to do this but, though detail is lacking, I think Zumiez includes some costs that other don’t. 

Selling, general and administrative expense rose from $109 to $122 million both due to store openings and, I assume, because Zumiez had the balance sheet to let it continue to pursue its strategy.  As a percentage of sales, it rose 3% to 29.9%.

Operating profit fell by half from $24.6 to $12.7 million.  Though cash and cash equivalents grew from $78 to $108 million, interest income fell from $2.059 to $1.176 million, reflecting not only the difficulty in finding yield under current conditions but, I suspect, an unwillingness to take risk.  Net income fell from $17.2 to $9.1 million for the year.

Comparing fourth quarters you can see what looks like the beginning of some level of economic recovery (this is not unique to Zumiez).  Sales rose 5.5% from $125.5 to $132.4 million.  Same store sales had fallen 13.4% in the quarter ended Jan. 31, 2009.  They only fell 1.7% in the quarter ended Jan. 30, 2010.  Okay, so maybe that isn’t good news but it’s sure less bad.  Gross profit as a percent of sales was up from 32.4% to 36.3%.  Net income rose from $6.3 to $8.8 million in the quarter ended January 30, 2010 compared to the same quarter the previous year.

The balance sheet has actually strengthened slightly from last year by the measures I use and is in good shape.  I won’t bore you with a detailed analysis of nothing interesting.

Now we’re back to those pesky strategic issues and you know what?  I don’t think I’m going to write a new conclusion.  I’m just going to go see if I can’t use the same one I used when I wrote about Genesco (the owner of Journey’s) a few days ago.  Here it is.  I’m quoting myself, which is a little strange.

“I wrote not too long ago about Billabong’s retail strategy.  They might agree with Genesco executives about how the retail environment is evolving.”

“My own expectation is that due to some of the pressures on core store described above, their numbers will tend to decline until we have just the right number to service the enthusiasts who are truly prepared to pay extra for expert advice and service in a community based environment.  I don’t know how many stores that is or how long it takes, but when it happens, we will have come full circle in the action sports core store business; because that’s how it use to be.”

Zumiez thinks they can be a core store in a mall.  They are the only one who puts it quite so directly, but others are thinking that way too.  If they’re right, and they have other business advantages (as described above) what does the model of a successful independent core retailer look like?

I’m going to the IASC sponsored skateboarding conference this month and am going to moderate a panel discussion on retailing.  As you can see, I’ll have some interesting questions to ask.

 

Genesco’s Take on The Retail Business

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Genesco, the owner of Journey’s, reported its results for the quarter and year ended January 10th in early March. A couple of days later they made an investor presentation that discussed these results. I’ll talk briefly about their numbers, but what really caught my attention was their discussion of the retail environment and their retail strategy.

Genesco operates 2,270 retail stores in the United States and Canada. 90% of their revenues are retail and 10% wholesale. Revenues for the year were $1.57 billion, up only slightly from the previous year’s $1.55 billion. Earnings for the year were $28.8 million compared to $150.8 million the prior year, but there was a huge legal settlement that accounted for $124 million of the difference. The company says that adjusting for that settlement and some other non operating items, earnings from continuing operations grew from $40.8 to $43.1 million. Net earnings per share declined from $1.87 to $1.81.

Comparable store sales were flat in the 4th quarter compared to the same quarter the previous year. The Hat World group increased by 6% and Journey’s declined by 3% in the quarter.
 
The Journey’s group represents 48% of the year’s sales. Hat World group is 30%. However, they each generated about the same level of operating income during the year. The Journeys group, which includes Journeys, Journeys Kidz, and Shi by Journeys includes 1,025 stores of which 819 are Journeys. The Hat World group had 921 stores at fiscal year end.
 
Genesco is looking at “very modest” store growth in Journeys. They say they don’t want to have happen to them what has happened to other retailers who have over extended themselves on their store count. They mention Footlocker, The Gap, and Starbucks as retailers who are closing stores because they got a bit overextended. They might have mentioned PacSun as being over extended as well. They plan to open only 50 net new stores over the next five years across the whole company. The majority will be in the Hat World group.
If you can’t grow stores, you’d better improve your comparable store sales and control costs. One of the trends they think may be favorable to them is “a shift out of athletic shoes into brown.” They say they are only seeing hints of it now, but should know in the spring. That should get our attention don’t you think? Would it be completely a surprise given the number of athletic shoes and shoe brands out there? Yes, there can be too much of a good thing and markets can become saturated.
 
They also note that they have another wave of store leases coming up for renewal. They expect to get lower costs and more favorable terms when those leases are renegotiated. Overall, they expect that with very modest store growth and comparable store sales growing by only two to three percent, they can expand operating margins from the current five to eight percent and grow earnings per share by 15% to 20% annually. Obviously, they see a lot of opportunity in reducing costs and operating efficiently.
 
The other thing that’s happening, as they describe in discussing their hat, uniform and sport apparel business, is that they “…are consolidating the industry. The mom and pops are going out of business or they are credit constrained and can’t stay fresh.” That sounds the slightest bit familiar.
 
The hat business, by the way does include stores that just sell hats. But it also includes stores, under the Lids name, where you can buy branded sports apparel of all kinds and the uniforms that you need, for example, for school sports. They go very deep in their hats, apparel and uniform stores, and the merchandise mix favors the local teams.
 
President and CEO Robert Dennis talked about how the economics of their hat and hat related business has changed as they have gone from 150 to 800 stores since he got there. The difference, he says, “is enormous.” There is tremendous leverage with landlords, the leagues from whom you license product, vendors, and infrastructure.
 
He notes that the team sports business is highly fragmented with perhaps 5,000 dealers, and Genesco’s business in this area is already the second largest even though it’s small. He doesn’t quite know whether to characterize their strategy in this space as a rollup or displacement. But he notes that when, for example, a five store chain has a lease coming up for renewal, it will find Genesco on their landlord’s doorstep taking over that space. Wonder who the landlord would rather have as a tenant? He also characterizes most of these small players’ systems as being “from the dark ages.” That, I’m afraid has the ring of familiarity as well.
 
Action sports is kind of in the hat business, but we’re sure not interested in selling uniforms and team jerseys. But Genesco’s description of this retail environment and how they take advantage of it has to sound at least a little familiar as well. Larger retailers in our space are certainly taking advantage of the same pressure points Genesco is, and we can’t expect it to stop.
 
I wrote not too long ago about Billabong’s retail strategy. They might agree with Genesco executives about how the retail environment is evolving.
 
My own expectation is that due to some of the pressures on core store described above, their numbers will tend to decline until we have just the right number to service the enthusiasts who are truly prepared to pay extra for expert advice and service in a community based environment. I don’t know how many stores that is or how long it takes, but when it happens, we will have come full circle in the action sports core store business; because that’s how it use to be.    

 

 

Billabong’s Semi-Annual Report

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Billabong released its numbers for the six month ended December 31, 2009 last week and held a conference call. Though clearly not immune to a tough economy, the company’s raising of capital to strengthen the balance sheet, long term focus on brand equity, willingness to lose some sales rather than become too promotional, realism as to the operating environment, and nuts and bolts management of costs and inventory has left them in a pretty good position.

But what really caught my attention was the discussion of retailing during the conference call. I’d like to spend some time on that before I get to the financial results.
Billabong’s Retail Perspective
Billabong closed the year with 360 company owned retail outlets, up from 335 June 30th. 90 of those are in the European segment, 157 in Australasia, and 94 in the Americas. Retail now represents just a little more than 25% of the company’s sales.
No, I don’t know why those three numbers don’t add up to 360. I’ve emailed Billabong to ask.
Billabong CEO Derek O’Neill is clear in the conference call that we shouldn’t “…expect for retail to suddenly become a huge component of our business but it’s clear we will continue to identify opportunities to get our product to market where required.” I read a little bit of ambiguity as to Billabong’s retail strategy into that statement, or maybe a little understandable reluctance to state what they really think of the retail situation. Later conference call comments provided more insight into their thinking and created an intriguing picture of the retail market as Billabong sees it and how they may approach it.
They start by noting that there is still some softness in prebooks (though things have improved) both in terms of the size of the orders and the numbers of retailers they have received orders from for summer. CEO O’Neill indicates that 80% of the account base (referring, I think to the US) had orders in, where it would have been 90% two years ago. There is still “…a little bit of an apprehension to actually placing forward orders, and some customers preferring to do a little bit of business in season.” “I’d say that’s a trend that’s probably going to be there for a little while,” he continues.
I’d be curious to know just what he means by “a little while.”
Next, he talks about tight credit conditions and the health of independent retailers. “I can’t sit here at all and say that all the accounts that we are currently dealing with will still be there in three months time,” is how he puts it. He also thinks they may have to tighten credit by the end of the current six months.
Finally, he says, “If you look at the wholesale level, most of the business going on, the buyers are focused on your price point category and up to your mid price print category.”
Any brand talking about the US market (and some other countries as well) might say the same thing. We’ve got a new set of economic conditions that look to be long lasting where independent retailers are falling out, the survivors are ordering more cautiously, consumer spending is down and focused on low to middle price points.
No surprise there, but now the plot thickens. “…in our own retail, which has definitely outperformed our wholesale side in this period, in our own retail we can showcase and merchandise a product across all the price points and we’re doing really well right across the board.”
“The cycles with our own retailers, we are beginning to drop product into our own retail even faster than wholesale channel. We are beginning to, on certain key styles…build product that may go into our own retail before even the wholesale consumer sees it in an indent (sic) process. But we’re beginning to utilize our own retail to test product a lot more and we’re just becoming a little more focused on that shortening of the whole supply side.”
And then, just to make this even more interesting, he says, “If you look at the big retail brands out there, they don’t have a buyer to get past, they just decide what they’re going to make and they put it in their own stores and therefore they could have a very short cycle.…we are looking more and more at some of our own retail stores where we can looking at touching on a more vertical model. And not having that delay with going out and having an eight week ordering pattern and then go away and ordering product, we’ll just go straight to retail.”
What percentage of total revenues could retail represent?” somebody asked. “It’s probably going to depend on what happens with the wholesale account base,” O’Neill responded.
There’s more, but I think that’s enough quotes. You can see the report and the conference call here. http://www.billabongbiz.com/news-business.php
In summary, given foreseeable economic conditions, Billabong isn’t sure what level of growth and profitability it can rely on from its independent retailers. Right now, it believes it can merchandise and sell its product better in its own stores because of the independents’ reluctance to order and tendency to order the lower to mid priced items, and its results bear that out. It’s also looking for ways to short cut its product cycle so it can have product sooner that it will just drop in its own stores before it gets to the independents. This is also, in part, a response to the branded retailers. Dare I say Forever 21? Seems like they are the poster child for product cycle blues these days.
Not to belabor the point, and certainly not to put words in Billabong’s mouth, but if a well managed company like Billabong is unsure of the role and importance of independent retailers going forward, and thinks they can do better business in their own stores, how will the role of those independents evolve? It’s always been an industry article of faith that core retailers were the bedrock of the business but that might be changing as companies get large and we become increasingly fashion based and fashion competitive.
By the Numbers
I have to begin by reminding you that Billabong’s functional currency is the Australian Dollar, and the numbers here are in that currency. Just for reference, at the moment one U.S. dollars equals 1.12 Australian dollar. A year ago a U.S. dollar cost 1.55 Australian dollars. That’s a 28% change over the year and that can wreak havoc on your financial planning and reporting. In this case, it did so I’m going to report some constant currency results along with reported results. Management notes that each one cent movement in the average monthly exchange rate between the Australian and the US dollar for the five months of the year that are left above or below the 0.90 rate they are planning will change reported net profit after taxes by $500,000 from their projection. 
Revenues fell 10.8% in reported terms from $810 million in the half year ended December 31, 2008 compared to the half year ended December 31, 2009. They were only down 2.8% in constant currency.
In the Americas, reported sales were 17.6 lower, but only down 6.2% in constant currency. They point out that “…direct comparisons to the prior year are somewhat misleading. The latest result includes a full six months of trading from DaKine versus three months in the prior year. The prior corresponding period also included three months of trading in the period that preceded the global financial crisis.”
They also note that sales to PacSun were down about 50% for the half year. Billabong anticipates that “…the retailer’s percentage contribution to the Group’s overall North American sales will decline to the single-digit level across the full financial year.”
Given Billabong’s focus on brand equity and interest in selling higher end product, I have to agree with their approach, though I don’t know how they easily replace those sales.
European sales were $164 million, down 7.6% in reported terms but up 2.6% in constant currency. Billabong reports strong momentum in Europe. Australasia revenue fell 2.5% in reported terms but only 1.4% in constant currency.
With sales down, cost of goods fell 14.2% as reported from $373 to $321 million. Gross margin percentage actually strengthened from 53.8% to 55.5%.   Selling general and administrative expenses were down 7.7% from $260 to $239 million. Finance costs fell 40.8% from $20.6 to $12.2 million due to the repayment of debt following the May 2009 raising of capital.
Reported net profit was down 15.4% from $82.4 to $69.7 million. They blame that almost entirely on unfavorable movements in exchange rates.
Much of the strengthened balance sheet is the result of the capital they raised in 2009. Between December 2008 and December 2009 cash increased from $169 to $213 million. Receivables fell 15% from $394 to $334 million and they reduced inventories 23.8% to $247 million. Total current assets were down 10.6% and noncurrent assets fell 11.3% from $1,317 to $1,168 million.
Trade and other payables were down 34.5% from $273 to $178 million. That explains most of the drop in current liabilities from $302 to $215 million. The current ratio improved from 3.04 to 3.81.\
By far the biggest change in the non-current liabilities is in borrowings which, as a result of the capital raised, were reduced by half from $810 to $397 million. Deferred payments also fell significantly from $161 to $107 million, reflecting a $34 million payment to the former owners of Dakine and other payments as well.
Between earnings and the equity raised, total equity grew 34% to $1,190 million. Total liabilities to equity plunged from 1.51 to 0.67. This is my kind of balance sheet!
Billabong is confident, but a bit cautious about the rest of the year.
“Retail markets remain extremely volatile and difficult to predict, consumer spending patterns remain erratic and global economic concerns continue to weigh on general sentiment. Against this backdrop, the Group’s North American business continues to experience challenging conditions. While there is some stability emerging within the independent specialty channel, there is no recovery evident amongst the Group’s larger mall-based customers. Australasia is showing mixed performances, with South Africa, Japan and New Zealand expected to remain soft but the balance of the region remaining steady. Europe, a highlight in the first half, is expected to remain relatively buoyant.”
They expect better foreign exchange hedge rates and the impact of previous expense reductions to help their results. The most intriguing thing to me, however, is still their perspective on and approach to the retail business. It will be interesting to see if other action sports brands share their perspective and if any take a similar approach.

The BRA/IASC Roundtable at ASR

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As they do every ASR, IASC and BRA hosted a round table meeting by invitation only to discuss issues of mutual interest and, as usual, I attended. The meeting was well attended and the exchange lively.

The first issue on the table was Manufacturers’ Suggested Retail Pricing (MSRP) and Minimum Advertised Pricing (MAP). I’ll assume you know what those things are. People in the room were generally in favor of both and I’d have to admit that I’m not necessarily against them. Though as I mentioned in the meeting, managing distribution well is perhaps more important in keeping prices up.
What concerns me about both MAP and MSRP is that they feel like potential excuses not to manage your business well. I was impressed with the retailer in the meeting who said, more or less, “We got some belts with price tags on them but we ripped them off and priced those belts $5.00 higher because we knew that’s what we could sell them for. MAP? MSRP? How about knowing your customer, your market, and your inventory? Don’t let these kinds of tools, which may have their uses, have too much influence on your thinking.
Honestly, I’m not quite sure what the second issue was, but it ended up with the usual hand ringing about margins on skate hard goods needing to be higher.
I worked up some righteous anger, but then Don Brown ended the meeting before I could get a word in. Probably just as well.
But after the meeting I reminded everybody who would listen that the previous ASR, IASC had sponsored a seminar where a major topic of discussion was Gross Margin Return on Inventory Investment (GMROII). Cary Allington from Action Watch had presented some very interesting numbers showing that if you took inventory turns into account, the margins on skate decks were not nearly as bad as people thought.
I had been arguing for a while that our new economic circumstances required a focus on gross margin dollars- not just gross margin percentages. Actually, I first suggested that years ago.   Cary brought GMROII to me attention and I wrote an article about it. I knew that inventory turns and inventory dollars were important, but GMROII gave me an elegant and effective way to put them together and compare how profitable it to sell a skate deck compared to, say, a pair of skate shoes.
So the source of my pissedoffness was that here we were again lobbying for higher margins, while ignoring turns and margin dollars and data suggesting that on a GMROII basis, margins on skate decks weren’t half bad. And I’m sure we’ll have the same discussion at the next ASR.
The article is on my web site and has a date of August 15, 2009 on it.  Cary’s numbers are in there and I think they will surprise some of you.

Notes From the SIA Show in Vegas, Uh, I Mean Denver

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The beer is a lot cheaper in Denver, assuming you don’t actually consider the beers they handed you at the gambling tables in Vegas to be free. The hotels are more expensive and getting to said hotels from the airport takes longer.   Most of the people I talked with (by no means a scientific sample) would have preferred the show was still in Vegas but I’m sure we’ll all adjust. I have never had so many friendly people ask me if I needed help finding anything and tell me they hoped I had a nice day. If that happened in Vegas I’d probably think I’d done something wrong. They were certainly glad to see us in Denver.

But was it a “good” show? You know, I have certainly gotten old enough, and maybe wise enough to know that you can’t judge a show just by walking around it, though we are all guilty of that to some extent. It was a good show for me, and snowboard industry booths seemed busy enough. I have to confess I didn’t spend much time in the ski part.
So I’ll leave the show analysis to others who have more and better data than I have. At the end of the day, the question is was it a good show for your company? But I do have a few observations we might have some fun with.
Happiest Company
Had to be Never Summer. Not only is their factory in Denver (they were offering tours) but economic conditions have suddenly made their long term business model of high quality, good margins, and limited distribution that leads to strong sell through something that absolutely everybody understands. They swear they won’t screw it up and I believe them.
Best Show Favor
Betty Rides party panties. Owner Janet Freeman gave me a couple of pair, but they were a little snug so I had to give them away.
Interesting Business Model
I ran into Cec Annett, formerly with Adidas, who’s now the CEO of The Clymb (www.theclymb.com).   It’s a membership site where they sell, for only a couple of days for each item, quality overstocks of product at big discounts from industry brands. There’s no charge to be a member, but an existing member has to recommend you. The brand doesn’t have to worry about the product showing up on Ebay, and the presentation is very professional- the brand image is supported. The financial model is also intriguing. Cec, please remember this nice plug when you’re rich and famous and, in the meantime, can you get me signed up as a member?
Small Booths
A number of major brands had much smaller booths than last year and I say good for them. A trade show booth should be exactly the size you need to do whatever business you do and not influenced by the size of your competitor’s booth. I guarantee that if you have a product that sells well at retail with good margins your customer will buy it even if you don’t have a two story booth the size of a house with a helicopter on top (who besides me remembers that?)
Large Booth
Burton and its associated brands took up around 10% of the total floor space in the snowboard area. The Burton brand by itself had the largest footprint of any company there. Things must be going really well at Burton for them to have paid SIA’s standard rate of $11 per square foot for premium members for all that space.
Guy with the Best New Job
It has to be Ryan Hollis who, after 12 years with Quiksilver, is now the General Manager of Mervin Manufacturing. Guess this means Mike Olson can give up doing the accounting.

Quiksilver’s Annual Report

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In the middle of December, when Quik came out with its quarterly and fiscal year results and held aconference call, I pretty much ignored it.  I glanced at the release and read the conference call transcript, but I had no idea how to evaluate the results of a company that was highly leveraged without a complete balance sheet and the associated notes even though they included some summary balance sheet information in the release.

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In Case You Have Trouble Sleeping: A Report from the Bureau of Labor Statistics

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You can go here http://www.bls.gov/news.release/ecopro.nr0.htm to see the report. If it does help you sleep, it will probably give you nightmares. You can see in the first line of the report, released last Thursday, that they expect total employment "…to increase by 15.3 million, or 10.1 percent, during the 2008-18 period…"

Now, that may sound encouraging, but if you push a few calculator buttons, that’s on average about 125,000 jobs a month over ten years. Well maybe that sounds good to you too, but it sounds less good if you realize that 125,000 jobs a month is more or less what we need just to provide the jobs required by an increasing population.
You do yourself a disservice if all you do is listen to the monthly unemployment number thrown at us by the talking heads in the mass media. Earlier this month, for example, they announced that the unemployment rate had fallen from 10.2% to 10%. Obviously, lower is a good thing, but the reason it was lower was because 98,000 people who had stopped looking for work (the "discouraged" workers as they are called) were taken out of the unemployment calculation.
It’s a little more work, but I really suggest you try and get at least some of your news somewhere besides the popular press.

My Office Chair, Customer Service, and Expense Control

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 It’s a nice leather chair. I’ve had it less than two years.   So I wasn’t happy when it started tilting side to side as much as it rocked from front to back. It felt like it was going to leave me on the floor any day and, besides, it was practically making me seasick.

The nice people at Staples, where I bought it, gave me a copy of my receipt, the five year warranty, and the number of the Sealy company to call. I figured I was screwed. “Sorry to hear about your chair,” I could hear them saying. “Just package it up, ship it back, and in a couple of months we’ll send it back fixed, though the freight cost will be more than you paid for the chair and we have no idea what you’ll sit on until then.”
But determined to go through the motions, I called them anyway and told my story, then waited for the ax to drop. I’d already picked out my new chair.
“Sounds like you’ve got a broken weld in the pneumatic cylinder assembly. We’ll send you new parts and some instructions.”
I waited for the bad news. “You don’t want proof that the chair’s under warranty?” “No.” “You don’t need to see the chair first to confirm that it’s a manufacturing issue?” “No.” “How much do I have to pay for shipping and handling?”  “Nothing.”
I was pretty flummoxed, but I hung up and sure enough, ten days later (Christmas was in there) the parts showed up. I wouldn’t say the instructions were written perfectly, and there did turn out to be a sledge hammer involved, but here I sit in my repaired chair writing this and not swaying side to side.
Sealy’s has made a friend, and I’ll probably look for their chairs the next time I need one. But they’ve also saved themselves some money. They didn’t spend long on the phone with me. They didn’t have to manage a chair coming back or forth. They didn’t have to do the repair themselves. There was no administrative warranty management cost, and damned little accounting and tracking. Somebody threw some stock parts in a box and shipped them to me and they were done. They got me to do the work for them, and I was basically thrilled to do it and solve my problem.
From time to time I suppose they get had, and send somebody some parts who doesn’t have a valid warranty claim. But they don’t care, and I’m guessing not that many people want chair parts if they don’t have a broken chair. Sealy’s has calculated that the cost of those parts and shipping pale in comparison to the cost of carefully evaluating each claim, making repairs themselves, and making sure nobody gets parts they don’t deserve.   So their process makes sense even ignoring the customer service benefits.
It’s not easy to figure out what warranty claims cost you. The expense is hidden in and divided among customer service, cost of goods, freight and shipping, general and administrative, salaries and probably other categories depending on your particular accounting set up. Maybe that’s why more companies, as far as I know, don’t take Sealy’s approach to warranty claims.
There are some characteristics of Sealy’s business model that make their approach to warranty claims viable. I’m not suggesting every brand or retailer can honor every warranty claim for snowboards, skate shoes or board shorts that’s made. But I suspect that if you do the hard work of estimating what your warranty service costs really are, you’ll find you can save some money and make some customers happy at the same time.