More on Winter Resorts Targeting Baby Boomers: I’m Not the Only One Who’s Worried

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You may recall (or not) that about a month ago I wrote an article expressing some concern that winter resorts were targeting baby boomers. My point was that dependence on high income baby boomers couldn’t be an exclusive, long term strategy because, inconveniently, those people are going to get older sooner and stop snow sliding. When that happens, it would be nice if we had some other customers. 

Now, a gentlemen I’ve never met named Roger Marolt, a columnist at the Snowmass Sun in, unsurprisingly, Snowmass, Colorado has written a really good rant (I mean that in very positive way) on the same subject. He makes some points I didn’t make and it’s a pretty fun read.
 
So here it is. Go and read it.     

 

 

Trade Show Season or, “Hi Ho, Hi Ho, It’s Off to Sell We Go!”

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My list this year includes Agenda, The KNOWSHOW in Vancouver, and SIA in Denver. Part of me would like to go to others, especially Surf Expo, part of me wouldn’t and, like all of you, I figure it out based on schedule, resources, expected results and, frankly, my tolerance for travel. 

I liked Agenda as usual. Also as usual, people think it’s a bit early but on the other hand it doesn’t conflict with another show and I expect they get a hell of a good price on the space given those dates which I hope they pass on to the exhibitors.
 
Here are a couple of things I noticed at the show:
 
Thinking About U.S. Manufacturing
 
I talked to four brands that are considering starting or increasing their manufacturing in the U.S. I’ll have more to say about this in an upcoming article, but I wanted to highlight it now as something maybe you should be thinking about too. Partly, it’s because Chinese wages have risen something like 17% a year for five years and are continuing to rise. And some of their factories have started to automate. But it’s also because U.S. wages, for better or worse, have fallen.
 
Once the labor cost differential isn’t so dramatic, then other costs become more important. Travel, freight, time to market (which impacts the amount of inventory you have to hold), communications issues, surprise delays, custom duties, control of intellectual property and quality control are among the costs that may be higher with foreign production. But most general ledgers aren’t set up to isolate those costs. 
 
It’s an accounting hassle, and no fun. But if you take the time to figure out those costs, you may find there’s a certain logic to making some formerly foreign produced products in the U.S.
 
The Great Skate Divide
 
When I go to Denver for SIA, I’m pretty sure I won’t find the snowboard companies that make pipe boards in one part of the show, and the ones that make all mountain boards in another. But at Agenda, I find the street skating companies in The Berrics, and the longboards mostly in one aisle far away.
 
Perhaps it’s just because of how the Berrics was organized and set up with Agenda. You know- institutional inertia. But I wouldn’t be surprised if there was still some left over and nonproductive stuff (I’m struggling here for a good word. You know me, I always want to be careful what I say) going on. A bit of a hangover from longboarding growing so much and street skating continually hoping it would go away?
 
I would like to remind us all (including myself) that we will never be the arbiters of how a twelve year old decides to roll down the street and have fun. The “stuff” we’ve got going on doesn’t matter to them. Can anybody say “plastic skateboards” or “scooters?”
 
I know longboarding is different from street skating like snowboarding in the back country or on groomed runs is different from being in the half pipe. But the snowboard companies all think they are in the same industry. I’m not sure I know how to get there, but the skate industry needs to think the same. Most of our retailers already do.
 
IASC
 
And speaking of progress, it isn’t a new development but it was great to see Steve Lake from Sector 9 and Monica Campana from Transworld sitting up there with the IASC board of directors at the open board meeting at the show. The meeting was well attended, but then they had a keg so what would you expect. They introduced a great new insurance product for skaters from Aflac at the meeting which is probably worth the cost of membership all by itself. You can find a link to it at the bottom of this page.
 
Hoodiebuddie
 
Hoodiebuddie is a couple of years old, but I chatted with them at the show and discovered some interesting business things (Full disclosure- they gave me a hoodie which I passed on to my kid, so he thought I was cool for almost 20 minutes).
 
As you probably know, they make the hoodie with the ear buds built in and you can put it through the laundry without removing them. The technology that allows them to make buds that can withstand the wash and dry cycle is patented.
 
That’s cool, but what really caught my attention was their business strategy. First, they do all the design, product development and marketing themselves. But they have a business partner that handles production, accounting and most of the back office. And the partner is big enough to defend their technology around the world as people try to rip it off. I like that arrangement.
 
More importantly, the company isn’t really just about a hoodie with washable ear buds. That’s their entry product that establishes their market position and gets them recognized as a brand. But longer term, they are building a product line that expands out from the basic hoodie, but is based on it. Essentially, they are trying to make hoodies into a category with a fashion component to it. This isn’t all that different from Clive in back packs and Nixon with watches.
 
It might be that they could have a nice little company just selling hoodies with ear buds, but I doubt that would be of much interest to their partner. The lesson for all of us is that the focus needs to be on the market position the product gives you, not just the product.
 
Okay, that’s it. See you at the next show. 
            

 

 

Abercrombie & Fitch’s Quarter and Some Consistencies with Other Retailers

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I haven’t followed A & F as closely as I probably should. Too many companies (especially now that our market is something broader than action sports), not enough time. But A & E is the owner and originator of that iconic surf brand Hollister (heavy sarcasm). And especially after my recent post on cosmetics and skateboarding where I got into core versus having fun and giving consumers what they want, A & E seemed worth a look. 

Some of management’s comments in both the 10Q and the conference call also reflected concerns and strategies similar to other retailers I’ve recently reviewed and I wanted to call those out. I think maybe they are all reacting to trends that are going to become obsolete over the medium term. We’ll see.
 
I’m going to start with the October 27 quarter numbers, because you need them as a background to understand some of management’s comments. Sales rose 9% to $1.17 billion from $1.076 billion in the same quarter last year (foreign currency issues had a negative $7.9 million impact on sales). Cost of goods sold grew hardly at all, while gross profit rose $647 million to $732 million.
 
Obviously, the gross profit margin rose for that to happen- from 60.1% to 62.5%. It’s increase was “…primarily driven by a decrease in average unit cost and an international mix benefit, partially offset by a slight decrease in average unit retail and the adverse effect of exchange rates.” I think what they mean to say is that the price of cotton came down.   
 
Other expenses as a percentage of sales didn’t change much in aggregate, so those higher sales and gross margin improvements went right to the bottom line. Net income rose 40.5% from $50.9 million to $71.5 million. I should point out that for the three quarters ended October 27, A & E’s net income was down from $108 million to $90 million due to some issues with inventory and not being on trend as well as general market conditions.
 
A & F has four kinds of stores; Abercrombie & Fitch, Abercrombie (kids), Hollister, and Gilly Hicks. During the quarter, comparable store sales fell 3% after being up in 7% in the quarter last year. For nine months, comparable store sales are down 6% after being up 8% in the same period the previous year. Hollister, down 1%, was the best performing segment.
 
Hollister’s revenues rose from $518 to $602 million during the quarter. Abercrombie & Fitch stores rose only slightly from $436 to $440 million. Abercrombie stores fell $4.4 million to $100 million. Gilly Hicks revenues were up from $17.6 to $27.3 million, but you can see they are small as a percent of the total. Hollister accounted for 52% of total quarterly sales and without their growth it wouldn’t have been much of a quarter.
 
How did they get the 9% sales increase when comparable sales were down 3%? On line sales rose from $132.4 million to $158.3 million, and from 12% to 14% of total sales. And they opened 12 new international stores of which nine were Hollister. They did not open or close any stores in the U.S.
 
U.S. store sales fell from $725 to $709 million. International store sales were rose from $215 to $299 million (Obviously mostly Hollister). Operating income on the U.S. stores was $162.4 million, or 22.9%. For international stores, it was 29.16%.
 
For on line, it was 44%. That would certainly get my attention.
 
Okay, on to some of the common issues among retailers. I guess it’s obvious that the first one is on line business. There’s a lot of it, it’s growing, and it’s very profitable. The thing I don’t know, and I’ve asked the question before, is whether it is cannibalizing in store sales or helping them. We all hope and want to believe that there’s some strategy that creates synergy among all the ways we reach customers, but I don’t have evidence in hand that it increases total sales especially in this current economic environment which I expect to last a while.
 
(Preview of coming attractions: What has to happen in order for Gross Domestic Product to increase? Either the population has to increase or productivity has to rise. There are no other choices. How are we doing in those two areas?)
 
Abercrombie & Fitch “…believe the improvement in sales trend during the quarter is attributable to our inventory flow getting back on track, which produced newer more trend right merchandise.”
 
“Going forward, we intend to remain highly disciplined with regard to our strategy of starting with  conservative merchandising plans, shortening lead times and increasing the percentage of our "open-to-buy" that is available to chase current trends. In addition, we have sharpened our focus on capturing current street and runway trends.”
 
“Going forward, we continue to focus on our key strategic initiatives with regard to merchandising, inventory productivity, expense and average unit cost, insight and intelligence, customer engagement and targeted closures of under-performing U.S. stores [a total of 180 from 2012 through 2015].”
 
 
CEO Mike Jeffries put it like this in the conference call: “…we’re working to become faster and we’re doing that with conservative plans, shorter lead times and more dollars open to chase, which we have said is 60 to 105 days. I think that’s affecting the fashion content of our inventory. We’re also working hard to be different by brand. We’ve invested more in brand-specific design talent. And just in terms of fashion component, we’re reacting quickly to runway and street. And I think all those things are impacting our fashion assortments.”
 
You know, that’s an awful lot like what management at PacSun, Tilly’s, and Zumiez has said recently. They aren’t talking about big sale increases. They are trying to improve their supply chain to control inventory, manage costs, and be responsive to trends. They are trying to manage all the touch points with their customers.
 
They acknowledge that how they operate has a big impact not just on their bottom line but on the quality of their market positioning. And while they don’t say, “Fast fashion is eating our lunch!” it’s clear they are responding to that.
 
Yet I’m wondering if fast fashion is really going to have legs. I don’t mean it’s going to go away, but what, exactly, is it once everybody responds by being more trend sensitive and shortening their time from concept to delivery? Doesn’t the novelty of buying inexpensive new stuff all the time wear off after a while if that’s what everybody is trying to sell you.
 
(Preview of coming attractions number two: What do my Aunt Jenny’s egg beater, a particular brand of hoodie, and a water heater have in common? Hint: They all are made in the U.S. and are meant to last a long time.)
 
With Hollister, Abercrombie & Fitch have proven that you don’t have to be core to be cool. Fun, they’ve shown us with that brand, is cool. It’s not me saying Hollister is fun; it’s their customers and that’s all that matters.
 
But meanwhile, they’ve run into some of the same issues as our industry’s other retailers and are taking many of the same steps to respond. I’ve been a big fan of improving your operational efficiency to improve profits and market positioning for a few years now. Think what that might have done for your bottom line if you’d done it when sales increases were easier to come by. But once everybody is doing it, it’s no longer an advantage, and I’m unsure of the lifespan of the trend they are responding to.