Deckers Turns in an Impressive Quarter (Except for Sanuk)

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Deckers, the owner of Sanuk, not to mention UGG and Teva, had a great quarter. Revenue rose 24.2% to $480.3 million from $386.7 million in last year’s quarter. The gross margin was up from 43.2% to 46.6%. The acquisition of their brand distributor in Germany and a decline in the cost of sheep skin had a lot to do with the gross margin increase. SG&A expense was up 36.5% from $120.4 to $164.3 million. Net income was up 23% to $40.7 million from $33.1 million.

Here, from the 10Q is a breakdown of revenue and operating income.

Decker1 9-30quarter

 

 

 

 

 

 

 

 

 

 

 

 

You’ll note right away that Sanuk’s wholesale business fell by 4.2% and that operating income for that wholesale business was down 16.8% from $3.66 to $2.68 million. But in the chart below, you’ll see that Sanuk’s total revenues were up 3.2% due to some growth in e-commerce and retail store sales. I’ve included Decker’s other brands and segments to give you a picture of the whole company, and so you see how dominant the UGG brand is.

Decker2 9-30 quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You’ve probably noticed way before now- and it’s certainly not unique to Deckers- that international growth is higher than U.S. growth. I expect that to continue for many companies, though the increasing strength of the U.S. dollar may impact it. In case you haven’t noticed, we’re threatening to be in the middle of a currency war, though “a series of competitive devaluations” sounds much more benign.

What do you think your sales in Japan are going to look like when the Yen gets to 200 to the dollar?

Now, let’s focus on Sanuk’s wholesale decline for a minute. Inevitably, the decline in the number of specialty action sports retailers has impacted wholesale revenues of action sports based brands including, I suspect, Sanuk.

And I hypothesize that as you replace that revenue with revenue from larger retail chains, you’ll find your margin impacted. How do you manage that? By focusing on e-commerce and by becoming a retailer yourself. There’s plenty of both going on. Deckers opened one concept and one outlet Sanuk store in 2013.

Here’s what Deckers says about the decline in Sanuk’s wholesale revenues: “Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the weighted-average wholesale selling price per pair as well as a slight decrease in the volume of pairs sold. The decrease in average selling price was primarily due to a shift in product mix.”

They go on later: “The decrease in income from operations of Sanuk brand wholesale was primarily the result of a 7.1 percentage point decrease in gross margin as well as a decrease in net sales, partially offset by decreased operating expenses of approximately $500. The decrease in gross margin was primarily due to a decrease in margin on closeout sales as well as increased sales discounts.”

We also learn that Sanuk inventory was 39.2% higher than a year ago. Yikes! Remember, Sanuk’s revenues were only up 3.2%. Perhaps they shipped in some extra in case of a port strike, but that’s still a big increase.

Sanuk sold, then, fewer pairs at a lower price in its wholesale business, took a big margin hit due to discounts and closeouts, and appears to have a bit too much inventory; hence discounts and closeouts. That’s not good.

Deckers ended the quarter with 130 retail stores worldwide (45 are outlet stores) and expects to open an unspecified number of additional stores this year. As you may have noticed in the chart, they had an operating loss of $7.1 million on their retail stores, up from a loss of $2.3 million in last year’s quarter.

Deckers is one of the companies that is very actively engaged in figuring out the omnichannel. CEO Angel Martinez puts it this way:

“…the changes taking place in the retail environment are nothing short of dramatic. The consumer is now completely in charge and is dictating what distribution models will work and what models will fail at a rapid pace. The days of visiting the mall to peruse and shop have changed and are evolving. Now it’s all about building strong brands and creating access to product through integrated multi-channel distribution platforms that make it as convenient as possible for consumers to review and purchase the products they want. “

A great quarter for Deckers, but Sanuk still seems to be struggling, and is certainly not measuring up to the price Deckers paid, and is still paying, for the company. Nobody asked about that in the conference call. Probably because Sanuk was only 4% of Decker’s total revenues for the quarter.

Possible West Coast Port Strike or Slowdown.

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I trust you’ve all been following this.  Some companies in their conference calls are acknowledging that they’ve brought in some inventory early in case things go south in the negotiations.  I would imagine that unions feel they have the most leverage  now during the holiday shopping season.  Most of you have product that arrives in West coast ports.  You might also note that automation is one thing they are negotiating over.

Hints of a New Business Model; Skullcandy’s Quarter

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I love it when a plan starts to come together. Especially when it’s a plan I’ve endorsed and follows an approach I’ve been recommending for many companies since about 2008. As you know, I’ve been concerned that public companies have pressures on them to grow that make it hard to be brand builders because getting that growth can require you to distribute your product in ways that are bad for the brand. But often, the brand is all you’ve got, and you damage it at your peril.

The larger a public company is the more of an issue it becomes. Skull has the advantage of not being that large. It further benefitted, if you want to call it that, from being an acknowledged turnaround from which nobody had much in the way of immediate expectations. This left new CEO Hoby Darling, when he joined the company in March of 2013, free to clean up the distribution, reduce off price channel sales and focus on building the brand even though the immediate result was a big reduction in revenues.

I’m not claiming “Problem solved!”, but the results for the September 30 quarter are very positive.

Sales grew 16% from $50 million in last year’s quarter to $58.1 million. The gross margin rose from 44.9% to 45.3%. SG&A expenses were up about 3.7%, but operating income still rose from $514,000 to $3.58 million. Pretax income was up from $236,000 to $2.66 million in spite of $780,000 in additional other expenses that were foreign currency related.

Net income doubled from $1.08 to $2.15 million in spite of a tax bill that went from a benefit of $842,000 to an expense of $507,000 representing a total increase of $1.35 million.

So what’s the secret sauce? There isn’t one! I will remind you, as Hoby does every chance he gets, what Skullcandy’s five pillar strategy consists of. “…the pillars are: One, marketplace transform; two, create the innovation future; three, grow international to 50% of the business; four, expand and amplify known-for categories and partnerships; and five, team and operational excellence. “

Make good product, compete where you can identify an advantage, support your retailers, get the right people in the right jobs, run the business well, cherish the brand. Gee, it sounds way cooler when you call it five pillars and use lofty phrases like “marketplace transform.”

I’ll bet you that it isn’t just the analysts that hear this. Every employee probably hears it all the time and has been hearing it since he rolled it out shortly after taking the job. It’s Skullcandy’s mantra. It brings focus, direction, and efficiency to the company. Once you internalize it, you know what’s important and what’s not, and what to do and not do. Okay, I admit it’s not that simple, but I hope you see the advantage to any company.

I’m having a lot of fun talking about issues of strategy, but I need to give you a few more pieces of financial information. I’ll get back to strategy.

Skull’s domestic sales (just the U.S.) were $38.5 million, up 18.9% from $32.4 million in last year’s quarter. International sales rose 11.1% from $17.6 to $$19.5 million. International, then, represented 33.6% of total revenue for the quarter.

The table below from the 10Q shows gross profit and gross profit margin broken down by domestic and international and the change in each.

Skull

 

 

 

 

 

 

 

 

“Domestic net sales increased primarily due to sales of earbuds, wireless speakers and opening a new account.” I assume that new account in Walmart, which I’ll discuss below. “International net sales increased primarily due to increased sales in Canada, and to a lesser extent Mexico and China.” Europe is conspicuous by the absence of its mention.

Domestic operating profit improved from a loss of $2.47 million to a profit of $397,000. In international, it grew from $2.98 to $3.19 million. That’s about a 1% return domestically and 16.3% internationally. No wonder they want to increase international sales to 50% of the total. I should note, however, that I expect some further improvement in domestic operating profit as/if they make progress on their strategy. Hoby Darling notes in the conference call that they continue to “…edit accounts that don’t support Skullcandy’s premium yet accessible brand position.”

In addition, note that “The Domestic segment also includes the majority of general corporate overhead and related costs which are not allocated to the International segment. “ As a result, it’s not quite fair to compare domestic and international operating income percentages straight up.

The gross margin increased partly because of a shift to sales of higher margin products and also because of “…decreases in warranty expenses as a result of enhanced product quality.” The second is particularly good to see. It’s no secret that Skull had quality issues.

SG&A expense fell as a percentage of net sales from 43.8% to 39.2%, though in total dollars they increased by $824,000 with the first reason for the increase given as “…increase in marketing and demand creation efforts…” and the other being higher research and development expense. Both are consistent with the strategy.

Two other things for you to note:

“In the third quarter of 2014, the Company sold products to certain customers through consignment arrangements. The Company had approximately $1.0 million of inventory consigned to others included in inventories at September 30, 2014.” I generally hate consignment, because it implies some brand weakness if that’s the only way a company can get a retailer to take its product. But perhaps in the day of selling to huge retailers, it’s inevitable when you start up with one of those retailers, and I’m wondering if this isn’t part of the deal with Walmart.

There’s one customer that accounted for 17.4% of revenue and 17% of Skull’s receivables during and at the end of the quarter. I’m guessing Best Buy.

Okay, Walmart. I’ve been arguing that the days of easy distribution decisions were long over, and that each new retail channel had to be evaluated individually. I’ve also suggested that in the day of the omnichannel and mobile devices, where you sell may not matter as much; how you merchandise in the channels you choose and how you connect with your consumers is what counts. That seems to be how Skullcandy is thinking about Walmart. In the conference call, CEO Darling lists five questions they asked as they considered a relationship with Walmart. The questions are:

  • “…does our consumer shop there?”
  • “…does out competition sell there?”
  • “…can we segment our product line so that by adding Walmart, we aren’t cannibalizing sales of our existing retail partners?”
  • ”…can we reach a new consumer in a geography that has been underserved by Skullcandy?”
  • “…can we deliver good in-store experience and tell our brand story?”

They believe the answers to one, two, and four are yes. Three is so far so good. Five is something they are working on into next year.

My suggestion is that every company shamelessly steal these questions and use them in evaluating your own distribution decisions. One catch- you have to figure out with some rigor who your consumers are first.

Obviously, I’m pretty impressed with what Skullcandy is doing. But hey, it’s me and I have some longer term strategic issues which I’ve raised before.

First, consumer technology products have always, eventually, become a commodity. Skull thinks they can prevent that for their brand at least. They have to.

Second, the competitors are many and larger and better resourced than Skullcandy. Part of Skull’s plan is to compete with new and improved products and technology. We’ll see. Maybe it’s becoming about the smarts of the people you have and the connections with consumers as a source of new ideas rather than just the size of your budget.

Finally, if Skullcandy continues to improve, they may find themselves in the position where they have that age old conflict between curating the brand and growing revenues to the satisfaction of Wall Street. I suppose that’s a problem they’d like to have.

As you know, there’s a lot we don’t get told in 10Qs and conference calls. But I’m intrigued by Skullcandy because what I’m hearing, or think I’m hearing at least, is that they have wiped the slate clean and are building a brand for the online/internet/mobile/omnichannel/empowered consumer era. I don’t yet know the extent to which all these changes obviates some of the common business knowledge around distribution, marketing , merchandising, niche building and product development. I don’t think extrapolating the past into the future works as a predictive mechanism. What I think is that the reason Skullcandy may succeed is because they are embracing some of these changes. It can change the competitive equation.

SPY’s September 30 Quarter: Not Bad

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Last time I wrote about SPY (see it here) in August, they had reported a quarter over quarter sales decline of 18.1% from $10 million to $8.2 million. They told us their largest retail sunglass customer had stopped carrying their brand in the quarter that ended June 30.

But in that quarter’s 10Q they said “The decrease in sunglass sales during the three months ended June 30, 2014 is principally attributable to an overall decline in the consumer market coupled with several key retailers currently holding lower levels of inventory and fewer closeout sales of our sunglass products.”

I was left to wonder whether they had a one-time issue with a big retailer, or a more fundamental problem with the overall market.

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Portfolio Theory at Work at VF; Their Quarterly Results.

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VF’s 10Q for the quarter ended September showed another strong result. You can see the 10Q here. However, as with recent quarters, the good news was pretty much limited to their outdoor and action sport segment (OAS). I want to talk a bit about what that might mean, but first, let’s lay out the numbers.

VF’s revenue grew 6.8% from $3.3 to $3.52 billion. Gross margin rose from 47.6% to 48.3%. OAS has the highest gross margin of any of the company’s segments.

SG&A expense rose 8.1% from $0.989 to $1.069 billion. Operating income was $633 million, a 6.2% increase over the $580 million in last year’s quarter. At $20.7 million, net interest expense was almost unchanged. Net income rose from $434 to $471 million.

Okay, let’s break it down a little. Below is the chart from the 10Q that shows revenue and operating profit by segment- by coalition as they call their segments. I’ve included the information for both the quarter and the nine month period.

Untitled

 

 

 

 

 

 

 

 

 

What do we see when we evaluate this chart? First, note that OAS revenues were up 10.6% for the quarter. Remember that total quarterly revenues for the whole company rose by 6.8%. That translates into a revenue increase of 1.1% for all the segments combined excluding OAS. So OAS saved the day for VF.

OAS represented 62% of total revenue for the quarter, up from 60% in last year’s quarter. And it generated 67.5% of all operating profits, up from 64.5% in last year’s quarter. OAS operating profit rose by 12.8% from $421 to $475 million, or by $54.2 million. Operating profits in all other segments combined actually fell slightly from $232.4 million to $228.9 million. That’s not good.

OAS, and especially The North Face, Vans, and Timberland, are the engines pulling this train right now. Their revenues grew by 9%, 12% and 15% respectively during the quarter. OAS revenues in the Americas, European and Asia Pacific regions were up, respectively, 11%, 10% and 13%. Direct to consumer (online and their own retail stores) rose 20%. Wholesale revenues were up 8%

Here are some comments from the conference call on brand performance. For The North Face, “In the Americas revenues were up at a low double-digit percentage rate with almost 30% growth in D2C and high single-digit growth in wholesale.”

In Europe, “…The North Face revenues increased at the low single-digit rate. Our wholesale business was essentially flat due to a combination of a sluggish outdoor retail environment and a shift in the timing of product shipments into the fourth quarter. However our D2C business was up nearly 30% in the quarter…” In Asia, North Face revenue rose “…at the mid-single digit rate.”

Now for Vans. “In the Americas, revenues increased at a high single-digit rate.” In Europe, “…revenue grew at the mid-teens rate with D2C growth of 25% and low double-digit increases in the wholesale business.”

“In Asia Vans revenue grew nearly 40% with China increasing more than 40%…”

And finally, Timberland. “Third quarter global revenues were up 15% driven by 18% wholesale growth and a 6% increase in D2C.”

“In the Americas, revenues were up 22% driven by more than 30% growth in the wholesale business. This growth, similar to the second quarter was very balanced across all products and channels…On the apparel side we continue to expand our distribution and see strong sell-through as our fall 2014 collection hits retail floors across our own and wholesale partner doors.” My guess is that Timberland has quite an opportunity in apparel.

“Timberland’s revenues in Europe were up 15% in the third quarter with balanced growth in both D2C and wholesale… In Asia, third quarter revenues increased at the low single digit rate.”

Not a word about Reef. That never surprises me, but I’m always disappointed.

For the whole company, direct to consumer revenues grew 16% quarter over quarter. VF ended the quarter with 1,333 retail stores with direct to consumer revenues representing 22% of total revenues. They expect add around 150 stores a year “…over the 2017 planning period.”

Here’s a quote from the 10Q about the company’s overall business. “VF reported revenue growth of 7% in both the third quarter and first nine months of 2014 [was] driven by growth in the Outdoor & Action Sports coalition, and continued strength in the international and direct-to-consumer businesses.”

I guess if I took the obverse of that, or maybe I mean the converse, it sort or says, “Our wholesale business in the Americas outside of OAS wasn’t specifically too good.”

The balance sheet is fine, and I won’t even risk putting readers to sleep by analyzing it. Current ratio, at 2.0, was the same as a year ago. I would note that inventory was up just 4%- less than the increase in sales. There’s a whole lot of money to be made in good inventory management and not just for VF. It is also, in my judgment, an important part of differentiating and building your brand.

All’s fine with VF as long as all’s fine with Vans, The North Face and Timberland. Some other OAS brands are doing fine we’re told, but those three are responsible for most of VF’s revenue and profit growth right now.

VF has 35 brands in total. They are interested in further acquisitions (because they’ve told us so in the conference call) and have been willing to sell brands that didn’t seem to have the potential they were looking for (most recently, John Varvatos in 2012). They are focused on OAS, they tell us, because that segment represents the best opportunity to increase revenue and gross margin.

The numbers we’ve reviewed above tell us there are some issues with certain brands in other of VF’s segments, though we can’t know exactly which brands. The 24 brands that are not part of OAS did not all grow revenue at 1% during the quarter. Some did better, some worse.  It’s the nature, in fact the justification, for having a portfolio of brands that the overall portfolio can do well even when some brands aren’t performing.  Over time, you can expect different brands to perform at different levels.

I’m wondering if VF, especially if they can find some attractive OAS acquisitions, might not consider selling some of these other brands that are apparently not performing.

Strategically, that’s what I’ll be watching at VF.

Lowe’s New Customer Service Representatives and the Minimum Wage

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Lowe’s new in store service representatives won’t need bathroom breaks, vacations, or retirement account. They won’t get sick. Hell, you don’t even have to pay them a salary. And what’s even better, or maybe worse- I’m not quite sure- is that they may be able to help me find the esoteric piece of hardware I need better than the current human ones. And they will be able to do it in as many languages as are necessary.

They’re robots, and you can read about them here. Make sure you watch the video. Read more

Peak Resorts IPO; If, At First, You Don’t Succeed……………

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Peak Resorts has filed to do an initial public offering again. Here’s the link to the new S1.   They first filed back in April of 2011. After a serious of amendments to their S1 filing, they withdrew it due to poor market conditions for IPOs. I analyzed their situation and initial filing back in October of 2011. Here’s the link to that original article.

In the newest filing, they describe the company this way:

“We are a leading owner and operator of high-quality, individually branded ski resorts in the U.S. We currently operate 13 ski resorts primarily located in the Northeast and Midwest, 12 of which we own. The majority of our resorts are located within 100 miles of major metropolitan markets, including New York City, Boston, Philadelphia, Cleveland and St. Louis, enabling day and overnight drive accessibility. Our resorts are comprised of nearly 1,650 acres of skiable terrain that appeal to a wide range of ages and abilities. We offer a breadth of activities, services and amenities, including skiing, snowboarding, terrain parks tubing, dining, lodging, equipment rentals and sales, ski and snowboard instruction and mountain biking and other summer activities. We believe that both the day and overnight drive segments of the ski industry are appealing given their stable revenue base, high margins and attractive risk-adjusted returns. We have successfully acquired and integrated ten ski resorts since our incorporation in 1997, and we expect to continue executing this strategy.”

Peak Resorts had about 1.8 million visits in the 2013/14 season. By all accounts, this management team knows how to operate mountain resorts. They’ve been doing it for long enough.

The original filing had financials up to the fiscal year end in April 2011. For the year ended April 30, 2014, reported in the new filing, they had revenue of $105.2 million and a loss of $1.5 million. In the previous year, they had a profit of $2.7 million on revenues of $99.7 million.

Some of you may be relieved to learn that I am not going to my usual deep (and admittedly, sometimes a bit pedantic) dive into the S1 filling. Go back and read the article I wrote in 2011 if you’re that interested. All I want to note is that in the most currently complete year, they had interest expense of $17.3 million, up from $12.7 million the prior year. Long term debt at April 30, 2014 was $175 million.

Compare net income in the last two years with interest expense. I suspect, like me, that you’ll spot an opportunity for improvement.

They are going to try and raise around $100 million. About $76 million of this amount will be used to pay down that debt, with an immediate favorable benefit to their interest expense and bottom line. They will also have to pay a $5 million fee to their lender to get them allow to pay this off. Apparently, no prepayments were allowed.

There a couple of other interesting things. Three of the four largest shareholders in Peak Resorts are Tim Boyd, Steve Mueller, and Richard Deutsch. They own, respectively, 32.0%, 12.3%, and 12.1% of shares outstanding before the IPO. When the deal is done, the lender (EPR Properties) will release them from their personal guarantees. It is good not to have to provide personal guarantees.

I also noted that the shareholders are not selling any of their personal shares as part of the offering. That is, there’s no “taking the money and run” going on.  No way to know if that was a condition of doing the deal or not.

Finally, they note that they are going to start paying a quarterly dividend. They don’t say now much. Like most initial filings, there are bunch of financial holes in this one. Vail pays a dividend (current yield 1.97%) but Intrawest does not. Dividends can be highly problematic in one season businesses due to cash flow considerations. But it occurs to me that we may see larger mountain resorts paying them as they continue to turn themselves into year around operators.

I don’t know if Peak Resorts will succeed this time around, but I can certainly see why they want to get it done. Proven experience as operators, a diversified resort base, an industry that’s ripe for more acquisitions at good prices, the ability to integrate new properties, and growing year around revenue are things they will be able to take advantage of once debt reduction improves their cash flow and net income.

Rents Versus Income: How Does It Impact Your Customer?

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Thought you might be interested to see what’s happened to rents compared to average incomes in recent years. Take a look at this link. Anybody with kids trying to get started on their own probably won’t be surprised by this.

While this is for all employees, I’m pretty sure it’s especially impactful on our target customers. With a bigger percentage of income going to rent, there’s less available to buy the products we want to sell them, which can’t compete as a priority with paying the rent.   What does this suggest about the kind of product your customers are likely to buy?

The web site you’re seeing this on, by the way, is one I look at every day.

Et Tu, Nordstrom?

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Okay, I don’t precisely feel like Julius Caesar when he was stabbed by Brutus (Hey, at least his problems were over!). But I was initially kind of surprised by what my ever vigilant research department fed me from Nordstrom’s web site.

I’ve written about the tough retail environment. Among the topics I’ve highlighted are how over retailed the country is, the difficulty in getting sales growth, how hard it is for independent specialty retailers to compete, that consumers are increasingly in control, the impact of online and mobile and probably other stuff I just don’t remember.

I’ve never claimed to have “the answer.” But I’ve suggested that part of the response of brands and retailers has to be to manage distribution, control inventory and have systems such that you can hope to improve your bottom line even when sales aren’t growing as quickly as they used to. And know your customer and market position. Yeah, easy for me to say in two sentences. Not so easy to do. I know.

So when my wife- uh, I mean my research department- showed me this link from Nordstrom’s web site, I glanced at it but didn’t think much about it.

My wife likes Eileen Fisher, but this was available only in plus sizes so it was no sale. I couldn’t figure out why you’d want to boil perfectly good wool. Fermenting hops and barley I understand, but boiling wool?

Anyway, I said something like, “Nice coat.” She urged me to look again and showed me what had just popped up.

Nordstrompricematch

 

To be clear, she hadn’t found a lower price herself and requested a better deal. Nordstrom found it for her and offered a lower price.

This is Nordstrom. As far as I know, they compete on quality, service and ambiance. You don’t go there for the best price. You go there because it’s Christmas or your wife’s birthday and you want to pick out something nice in clothing, but you know if you do it yourself it won’t be right and at Nordstrom, some nice woman will talk you down and help you figure out what size your wife is and not say you should have checked in her closet before you came and help you pick out something that your wife might actually like and you don’t care what you have to pay for it. At least that’s what I’ve heard.

How does their business and expense model support price matching?

Okay, here’s how it works. This is from their web site.

“Price Matching”

“We are committed to offering you the best possible prices. We will meet similar retailers’ prices if you find an item that we offer available elsewhere. We’ll also be happy to adjust the price of an item you’ve purchased if it goes on sale within two weeks of your order date. Please note that price matching only applies to items of the same size and color. Designer items can only be matched when purchased at regular price.”

“We are unable to match prices from auction and outlet stores or their websites, or other retailers’ discount promotions, shipping offers and gift card offers.”

I feel a little less aggrieved after reading that. This is carefully controlled and managed and focused only on retailers that Nordstrom perceived to be their direct competitors.

This is a tactic by Nordstrom that probably just formalizes what’s going on anyway, so I’m now feeling less flummoxed. Nordstrom controls who they compare prices with. It’s not Kohl’s. It’s only retailers who have what I expect are cost structures similar to Nordstrom. And apparently, they don’t price match if the other retailer has it on sale. Wonder exactly how they program for that? How do you decide how much lower the other store’s price can be before that product is “on sale” and you no longer offer the price match? There are some interesting issues here. All part of figuring out the omnichannel I guess.

Perhaps this discourages some shoppers from doing their own price shopping while at the same time limiting the discount and making the shopper feel that Nordstrom is looking out for them. Maybe price matching only happens if you are slow to put the item in your cart, or leave it and then come back.

And as long as we’re on Nordstrom’s web site looking at women’s coats, check out this page. Look at the list of featured brands part way down on the left. Notice that The North Face is the only brand we’re likely to recognize as part of our industry. They are also the first brand listed even before you click through to see their offerings and their page has 53 coats.

The reason you might reflect on it is that VF owned North Face has somehow navigated the branding and positioning wars so that it’s fine for it to be an outdoor brand and a fashion brand among other fashion brands that are clearly not outdoor brands. My perception is that somehow The North Face’s credibility as both an outdoor and a technical mountain product has been translated so it provides credibility as a fashion brand.

We’ve watched and are watching lots of industry brands struggle with this. What is VF doing with The North Face (and Vans) that other brands don’t seem able to do? No magic wand I’m afraid. It’s VF’s processes, operational discipline, and strong balance sheet that make the difference.

Quiksilver Gets a Letter from an Unhappy Investor

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A reader sent me an article I imagine most of you have already seen, though I haven’t seen it covered in industry media. It tells us that Ryan Drexler of Consac, an owner of 2 million Quiksilver shares, has sent a letter to Quik Chairman Bob McKnight and CEO Andy Mooney stating that the company’s turnaround strategy has failed and that they should look to sell the company. Here’s a link to one of the articles that was published. A simple Google search will lead you to others.

And look what I just found! If you go here and click on the small document in the center of the page, the actual letter will open as a PDF. God, I love the internet.

He says, in part, “The 11-point turnaround plan announced by Andrew Mooney 16 months ago has thus far failed to deliver the desired results and, based on the deterioration in the company’s core brands since that time, has in actuality had a profound detrimental effect on the financial position and operating performance of the company, in my opinion.”

Mr. Drexler is known in some circles as an activist investor, and this isn’t the first company with issues he’s approached this way. There is a certain rhythm/process/ that happens when an investor does this, and the letter reflects it. I am not prepared to say, as Mr. Drexler does, that Quiksilver’s turnaround plan has failed. But I will continue to say what I’ve been saying; there’s a certain conflict between being a public company and Quiksilver maximizing the value of its brands, and the company’s weakening balance sheet limits the time they have to reinvigorate those brands.

The performance of the stock, as Mr. Drexler points out, suggests that he isn’t the only one with concerns. I’ve also become aware that certain of Quicksilver’s European debt is trading at $0.60 on the dollars. Actually, that’s on the Euro. The CUSIP is Z4840DAB6 if you want to check yourself.

I don’t know what’s going to happen, and maybe this is the last we hear from Mr. Drexler. On the other hand, it may be the start of a process. Quiksilver is on a shortening financial leash. At one time, I thought the solution might be to take the company private by doing a tender for the shares, but I no longer think that can happens. Even if you paid $0.00 for the shares, you’d own a company losing money with $900 million in debt and be faced with the same problem current management has.

I guess Quik’s board will have to respond to Mr. Drexler and perhaps we’ll see that response. The company’s next quarterly results are due to be released in early December. I’ll probably have more to say about their options when I see those. I mostly like Quik’s strategy. But I‘m becoming worried that they don’t have the time or money to pull it off.

About a year ago, a reader reminded me, I wrote this article relating some of Quiksilver CEO Andy Mooney’s comments in a conference call to the broader market and conjecturing on what some of Quik’s challenges might be. I don’t think I’d looked at since I posted it (I tend to be really, really, tired of articles by the time they finally make it on my web site), but it seems to have held up pretty well.