The Sport Chalet Acquisition and Their 10K; Some Perspective

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Sometimes we just get lucky. I guess that’s you get lucky, and I get to review something like 650 pages of small print- the estimated total (so far) of documents filed by Sport Chalet between their 10K and the deal.

I’m not going to do quite the typical review of a public company’s financials that I usually undertake. I’ll do a brief review of the 10K with the goal of explaining where and how Sport Chalet got to where it got. That will set the stage for a look at the deal and how they made one. I’m not so interested in explaining what the deal is (I imagine you’ve read that) as in talking about the process and dynamics of how they got there. Let’s get going.

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What This Industry Needs is More Sunglass Brands!

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Well, you have to admit I got your attention, and that title is way more intriguing than “What I Learned at Agenda.” I never thought I’d say this about any category, but I think there may have been more sunglass than shoe brands. And if case anybody is actually confused, that title is written in the full bloom of major sarcasm.

If you are in the sunglass business, I hope your price points are either around $20.00 or north of around $150 and very boutique focused. I know the margins have made this category very attractive (hence all the brands) but I’ll be surprised if the competitive landscape allows those margins to persist – especially in the crowded market middle.

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Pretty much the only thing I pay for online

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Really, really, really want to know what’s going on in the world in a straight forward, no bullshit, analytical way that you won’t come close to hearing in the mainstream media?  Sign up for Stratfor. This is pretty much the only thing I pay for online.  But if you understandably don’t want to pay, there’s a free sign up where you can receive occasional articles.  And if you should decide it’s worth a few bucks, don’t pay the asking price.  They will negotiate!  I know.

GoPro Goes- Public, That Is. A Look at the Final Prospectus

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As pretty much everybody knows, GoPro went public last Wednesday. How refreshing to see a company go public that’s actually making a product and money. GoPro sold 8.9 million shares of its class A common stock at $24 a share and raised a bit less than $200 million. $110 million will go right out the door to repay a line of credit they took out so they could pay a dividend to shareholders back in December of 2012.   Hmmm. Wasn’t January 1, 2013 when taxes on dividends went up?

Existing shareholders sold an additional 8.9 million shares, but the company won’t see the proceeds from that. I should also note that the class A shares will have just one vote per share. Well, that’s not so weird, but what should be noted is that the class B shares will have ten votes per share. What’s the result?

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Quiksilver’s Quarter: The Impact of Market Trends

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In the quarter ended April 30, Quiksilver’s revenue fell 10.4% from $456 to $408 million. The net loss grew from $32.4 to $53.1 million. Discontinued product lines contributed $9 million to revenue in last year’s quarter, but none in this year’s. A year ago, they also owned Mervin and the Hawk brand. I’m a little surprised they didn’t mention how much revenue those brands contributed a year ago.

I’ll spare you a long quote from CEO Andy Mooney on the profit improvement plan (PIP), but basically he says, we’ve done what we said we’d do and we’ll do more. He notes they’ve cut brands and product lines, are rationalizing sponsored athletes and event participation, licensing peripheral products, closing losing stores, reducing headcount, managing expenses down, centralizing merchandising and design, cutting SKUs and factories, and reducing SG&A.
But then they announce that they are pushing back the PIP profit target for a year to the end of fiscal 2017. Why, if they are doing all this good stuff, is that necessary?

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Can the Golden State of Mind Take Hold? PacSun’s First Quarter

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Though PacSun still reported a loss in the quarter ended May 3, the income statement improved compared to the same quarter last year. Sales were up 2.9% from $166.4 to $171.1 million. The increase was the result of comparable store sales being up 3% compared to last year’s quarter. The average sales transaction was up 6%, though the number of transactions was down 3%. Ecommerce sales during the quarter grew 6% compared to last year’s quarter and represented 7% of total sales.

The store count was down to 618 from 638 a year ago. They expect to open four stores during the remainder of the year and close another 10 to 20.

 The gross profit margin rose from 25.1% to 26.1%. The merchandise margin rose 1.4% but increases in other costs left Pacsun with a net gain of 1%.
Selling, general and administrative expenses fell slightly from $52.8 to $52 million. As a percentage of sales they were down from 31.7% to 30.4%.
Higher sales and gross margin combined with unchanged SG&A expense meant that the operating loss fell 33% from $11 to $7.4 million. The net loss was $10.4 million, down from $24.2 million in last year’s quarter.
In between operating income and net income is the dreaded “(Gain) loss on derivative liability” which is related to the 1,000 shares of convertible series B preferred stock issued to Golden Gate Capital as part of a $60 million term loan they got a couple of years ago. In last year’s quarter, it was reported as a loss of $9.3 million. This year’s quarter showed a gain of $1.2 million. That’s a cumulative difference of $10.5 million before the impact on income taxes.
I imagine most of you will be both thrilled and relieved to learn that I am not going to spend time discussing how those numbers are calculated. Feel free to review footnote 10 of the 10Q here if you just can’t stand not to know.

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“We’ll Go Anywhere Our Customers Give Us Permission to Go;” Zumiez’s Quarterly Report

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A few reports ago, I opined that while Zumiez owned the action sports space in the mall, the relatively small size of that niche and the evolution of the market to youth culture or fashion or whatever you want to call it was going to require Zumiez to move beyond it to achieve their growth plans.

During the conference call for the quarter ended May 3, an analyst asked, “…you guys have been incredibly successful at being the authentic action sports retail in the mall but clearly there’s a move towards more diverse fashions I guess, how do you feel about the balance between kind of the core action sports apparel versus potentially street wear…?”
The quote in the article title is part of CEO Rick Brooks answer. In more detail, he said, “…we have permission from our customer to do much more than just action sports and we’re really serving this consumer who wants to be different, who wants to be unique, wants to make a statement about who they are and what lifestyle they’re embracing through what they wear and, not just what they wear but they do on a holistic basis…”historically we kind of get pigeon holed as an action sports retailer. But we’ve always been able to move much more broadly.”
You go where the customer wants you to go. Who could argue with that? But the trick, and the management challenge, is figuring out in a timely manner where that is and how far, exactly, to go.

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Skullcandy’s First Quarter: Signs That the Strategy is Taking Hold

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The improvement in Skull’s financials for the quarter ended March 31 is clear on both the income statement and balance sheet, though the company still reported a loss. You can see the 10Q here.

Skull, as you may recall, is focused on building the brand by aggressively reducing off price sales, being cautious with distribution, taking product development in house, and focusing on some specific niches. They’ve also, of course, managed their expenses down.
We’ll see the results in their numbers, but what I think will be the barometer of their success was stated early in the conference call by CEO Hoby Darling.
“We need to be a brand that works within our exiting retailers to organically grow versus just increasing revenue through new doors. This is somewhat new, as much of our historical growth came from continually adding new doors versus doing a great job in doors where we already sold.”

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What Does the Data on Our Target Market Say About Your Business Strategy?

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It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.

I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.

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SPY’s Results for the Quarter; Operating Income Rises, but Interest Expense is a Killer.

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As usual, SPY had the courtesy to file its 10Q with the SEC about the same time they did their conference call, making my job easier and my analysis more timely. You can see the 10Q here.

Sales for the quarter ended March 31 rose 2% from $9 to $9.2 million compared to the same quarter last year. In this market, I wouldn’t necessarily call 2% increase in revenue a bad result. Especially since we discover during the conference call that SPY lost some revenue in three ways.
For the first time ever, SPY had no goggles to sell during the first quarter because they were all sold out.

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