SPY’s March 31 Quarter; Curious About the Inventory

/0 Comments/in , /by

I have admired SPY for the organizational, strategic positioning, and expense control changes they’ve implemented in the last couple of years. But there’s a limit to how far you can reduce expenses. After that, SPY has to find ways to increase sales or its gross margin to find a way out from under its $21.5 million in shareholder debt.

That number, by the way, is actually down a few thousand from the end of last year’s quarter.   Good to see it no longer increasing.

Sales revenue was more or less constant, declining from $9.192 million in last year’s quarter to $9.131 million this year. The decline was “…principally attributable to lower sales of our sunglasses which decreased by 6.2% or $0.5 million during the three months ended March 31, 2015…The decrease was partially offset by an increase in sales of our goggle and prescription frame product lines, which increased by 44.1% and 9.4%, respectively or $0.4 million and $0.1 million, respectively, during the three months ended March 31, 2015…” Sunglasses are a tough market.

Sunglasses were 74.9% of total revenue, down from 79.4% in last year’s quarter. North American revenue was 86.5% of total revenue. Sales also included about $600,000 in closeouts, up from $400,000 in last year’s quarter.

The gross profit margin rose from 52.0% to 54.8%. That’s quite jump. It was the result of “…(i) increased efficiencies in product development and manufacturing that reduced the cost of our products; (ii) reduced air freight-in charges for new products.” Remember they’ve moved a lot of their sunglass production from Italy to China.

Sales and marketing expenses rose from $2.9 to $3.2 million “…primarily due to increases in marketing events, tradeshows and promotions.” I’m glad to see that increase. It sounds like they are spending it on the right things.

Income from operations improved from $84,000 to $193,000. Interest expense was down from $757,000 to $488,000 but remember the shareholder who owns most of the debt cut the interest rate last year and that largely explains the decline. The net loss declined from $742,000 to $409,000.

I do have a question or two about the balance sheet and cash flow. Cash provided by operations was $2.1 million ($2.28 million in last year’s quarter). Looking at the balance sheets for December 31, 2014 and March 31, 2015, we see a decline in receivables from $7.17 to $5.39 million. Inventory fell 13.1% from $7.7 to $6.69 million. They note in the 10-Q that, “During the three months ended March 31, 2015, the Company had positive cash flow from operations principally due to timing of inventory purchases and higher collections on accounts receivable.”

Last year, they said they had positive cash flow “…principally as a result of a significant reduction in operating expenses and increases in gross profit.”

So last year it was because they operated better. This year, as I read what they say, it was due to what sound like timing differences. People paid earlier than expected and inventory that was set to arrive didn’t. Cash flow from improved operations is lasting. Cash flows from timing differences reverse themselves in subsequent quarters.

Complicating this is that last year’s sales for the quarter were about the same as this year. But last year’s quarter ended with inventory of $4.34 million, where inventory this year was $6.69 million.

Their wording confuses me. Do they mean they would have had much lower or even negative cash flow if it wasn’t for the timing of inventory purchases and higher receivables collections?

Second, if the timing of inventory purchases helped cash flow that means to me that they didn’t have to pay for some inventory they thought they were going to have to pay for during that quarter. But their inventory at March 31, 2015 is already 54% higher than a year ago. And I guess that the inventory that they didn’t get in the first quarter will show up in the second. What are they going to do with it all?

My hope is that the explanation involves new orders and increasing sales. Maybe we’ll get better insight next quarter.

What it Takes to Succeed in Retail; Some Ideas from The Buckle’s 10-K

/0 Comments/in , /by

The Buckle’s results for the year ended January 31st are certainly not news at this point, but I do think they have a few things to tell us about retail. There are some commonalities emerging among retailers in the active outdoor/fashion retailers that I want to highlight.

The Buckle is a retailer I think does a good job. I’ve been particularly impressed with their ability to integrate owned with purchased brands and the way they merchandise them together. Just to review briefly they had, at year end, 460 stores in 44 states. For the year they had revenue of $1.153 billion, up just slightly from $1.128 billion the previous year. Their gross margin didn’t change much and gross profit was up just a bit from $499 to $507 million.

Expenses rose a similar amount with the result that both operating and net income were more or less unchanged. Net income of $162.6 million was the same as last year. They haven’t managed an increase in comparable store sales for the last two years. No balance sheet issues to discuss.

That’s the shortest financial review I’ve ever done, probably to the relief of some of you.

Read more

Volcom/Electric’s 2014 and First Quarter 2015 Results; Plus Some Interesting Market Data

/2 Comments/in , /by

Kering, as you know, owns Volcom and Electric. Because the two brands represent a very small piece of Kering’s annual revenue, we don’t get much information on them. But I’ll give you what we’ve got and I also want to point you to some market data Kering provides in one of its documents.

Let’s start with the whole 2014 year. Kering’s 2014 revenues were EUR 10.038 billion. 68% of that revenue came from its luxury division with brands like Gucci. The remaining 32% is from its sports and lifestyle division (S & L) which includes Puma as well as Volcom and Electric.

Of total S & L revenue of EUR 3.245 billion, Puma accounted for EUR 2.990 billion, or 92% of the total. Volcom and Electric’s combined 2014 revenue was EUR 255 million and they earned an operating profit of EUR 10 million, or 3.92% of revenue. We aren’t told what the bottom line net income or loss after any allocations and taxes might be, and that’s normal. In the prior year, Volcom/Electric had revenue of EUR 245 million and an operating profit of EUR 9 million.

I want to share with you a document on Kering’s web site and some data it includes. If you go to this link, you’ll see a list of documents. Currently, the sixth one down in the list is the 2014 Reference Document. It has all sorts of information on Kering and its brands, and you can download it as a PDF.

Pages 44 through 46 is their Worldwide Sports & Lifestyle Market Overview. It contains some data on that market from a 2013 study conducted by NPD.   Let’s see if I can give you a link to their web site.  Here it is, I think. I get asked for solid market data pretty often and don’t usually have it. So you might check out the Kering’s market overview and see what NPD has to offer. I don’t know anything about NPD, and am just supplying you with the link.

Back to Kering’s 2014 Reference Document. Pages 54 and 55 provide a narrative of what went on at Volcom and Electric in 2014. Here’s part of what they say about Volcom.

“2014 was another difficult year for the action sports industry, however for Volcom it was an inflection point. Efforts made around the strengthening of products and marketing, adding top talent across the company, and implementing a global organization structure has led to improved revenue momentum in all regions. Volcom has experienced positive sell-through in wholesale distribution and has continued to gain market share in core retail accounts. Volcom also drove significant operational improvements through streamlining business operations, implementing a PLM (Product Lifecycle Management) system, and tightening SKU counts to improve product performance. Volcom expanded the reach of its e-commerce platform by launching sites in Europe and Australia. Branded retail was also a key focus for Volcom, with five net store openings particularly in France and the United States during the year.”

Talking about Electric, here’s what they say about the competitive environment.

“Competition in the action sports eyewear market (the main category at Electric) is characterized by two main ideas. First, both young and established endemic action Sport competitors are vying for a decreasing retail footprint of core shops along with non-endemic global brands. Second, many of the brands that are entering the market target lower margins and price points.”

It’s not like we didn’t know that, but it’s kind of sobering to see it acknowledged like that. I suggest you go read the full discussion for both brands. It’s not very long.

We aren’t given much on the first quarter either in the press release or conference call. Volcom and Electric were down 5%.  This was due to “weakness across certain U.S. wholesale accounts” as well as some delivery issues. I think, but am not sure, they are referring to the West Coast port slowdown.

That’s it. Hope you go take a look at the Reference Document.

The Amer Sports Sale of Bonfire and Nikita

/0 Comments/in , /by

I thought I’d wait until I commented because I was hoping for some more details from Amer Sports. I asked them, but all I got was the comment you’ve seen from their interim report published on April 23rd.

“In March, Amer Sports divested Nikita and Bonfire brands to CRN Pte Ltd. The combined net sales of Nikita and Bonfire in 2014 was EUR 9.8 million. The divestment has no material impact on Amer Sports’ financial results.”

CRN is apparently a Singapore company, but a cursory internet search didn’t lead me any further information.

So why did they sell? Amer Sports 2014 revenues totaled EUR 2.229 billion. Nikita and Bonfire together, during the same period, had revenue of EUR 9.8 million. That’s less than one half of one percent of the total. O.44% to be exact.

Remember that Amer also owns Salomon. Salomon already owned Bonfire before Amer bought it. Nikita was acquired by Amer in 2011.

A reader of mine saved me some trouble and found the quote below from Amer when they bought Nikita.

“Amer sports acquired Nikita ehf, a snowboarding inspired action sports apparel brand which focuses on female consumers, on December 16, 2011. Annual net sales of Nikita is approximately Euro 8 million. Total purchase consideration was Euro 6.5 million, out of which Euro 1.6 million was allocated to Nikita’s trademark and Euro 3.3 million to goodwill. The acquisition of Nikita enables Amer sports to enter and invest into new business category where it had no strong presence in the past. As Nikita’s closing accounts at the date of the business combination have not been completed, the purchase price allocation is a draft and it will be finalized in 2012.”

You may recall that Nikita original tag line was “Street clothing for girls who ride.” I thought that was simply the best brand defining slogan I’d ever seen. I said that in one of my articles years ago. Then, having positioned the brand so well in the female riders market, they decided to make male clothing.

I guess that didn’t work out so well.

But what’s particularly interesting, as I’m sure you’ve noticed, is that Nikita was doing EUR 8 million at the time it was bought by Amer, but both Bonfire and Nikita had consolidated revenues of EUR 9.8 million in 2014. That implies quite a decline in either one or both brands.

I’m guessing Amer bought Nikita to be complimentary to Bonfire. But after investing some money and effort and not seeing results, they decided it wasn’t worth the trouble. I think they’re right.

Bonfire and Nikita are two brands I like and both have, or at least once had, solid market niches. I’d be curious to know just what happened and whether it was market or organization related.

Abercrombie & Fitch at the Beginning of a Restructuring. A Look at Their Results and Plans.

/0 Comments/in , /by

Well, as you know, A&F is having some troubles. You may recall that they fired their long time CEO late last year and have retained seven new board of director members and two new brand presidents, all with significant retail experience. They are in the process of finding a new CEO. If you want to refresh your memory as to what got them to that point, here’s a link through my web site that tells the whole story.

The good news, I suppose, is that A&F is still profitable and has a balance sheet that supports their change efforts, unlike some other companies I’ve written about. Let’s take a look at just what their challenge is and then review the numbers.

Directly from the 10K (which you can see here) are their descriptions of their three brands.

“Abercrombie & Fitch. Abercrombie & Fitch stands for effortless American style. Since 1892, the brand has been known for its attention to detail with designs that embody simplicity and casual luxury. Rooted in a heritage of quality craftsmanship, Abercrombie & Fitch continues to bring its customers iconic, modern classics with an aspirational look, feel, and attitude.”

“Abercrombie kids. Abercrombie kids stands for American style with a fun, youthful attitude. Known for its made-to-play durability, comfort and on-trend designs, Abercrombie kids makes cool, classic clothing that kids truly want to wear.”

“Hollister. Hollister is the fantasy of Southern California. Inspired by beautiful beaches, open blue skies, and sunshine, Hollister lives the dream of an endless summer. Hollister’s laidback lifestyle makes every design effortlessly cool and totally accessible. Hollister brings Southern California to the world.”

I’ll leave it to you to decide if those are reasonable brand positioning statements in our current market for a large public retailer. Hollister, as you’ll see below, is their largest brand. Their Hollister positioning statement sounds a bit like PacSun’s “Golden State of Mind” concept, but the brand is way more surf specific.

Read more

PacSun’s Results for the Year; The Good and the Bad

/2 Comments/in , /by

It’s always the same conversation around PacSun. They are doing a lot of things right, and you see progress in the income statement (though there’s still a net loss). But you worry about the turnaround advancing far enough and fast enough before liquidity becomes an issue.

As usual, we’ll dive into the financials, but I also wanted to point out a couple of interesting things they say that seem to me to be indicative of where the whole retail environment is going.

Read more

Zumiez’s Annual Report and Their Approach to the Omni Channel

/0 Comments/in , /by

Zumiez ended its fiscal year on January 31st with 603 stores; 550 in the U.S., 35 in Canada and 18 in Europe. How many stores do they expect to ultimately have? In the past, they’ve opined that 600 to 700 might be about the limit in the U.S. Obviously, they’ve got some head room in Canada (Maybe 70 stores total?) and a lot more in Europe. I imagine that limits of growth in North America had something to do with their acquisition of Blue Tomato.

But the Omni Channel changes things. One of their risk factors in the 10K is “Our growth strategy depends on our ability to open new stores each year, which could strain our resources and cause the performance of our existing stores to suffer. That’s true, I guess, but is kind of a normal business risk.

I haven’t read every word in Zumiez’s (or anybody else’s) list of lawyer induced cautionary risk factors. But I don’t think I’ve seen anything about the omni channel in them. Seems to me the risk factor above has to go away, or maybe changed to say something like:

“The omni channel changes things in ways we’re still trying to figure out. It’s not just about opening stores; it’s what shape and size of stores to locate where to make sure that they integrate with everything online with particular attention to how our mobile customers want to shop. If we don’t do this right, we’re screwed.”

Okay, lawyers might put it differently, but I think you see the point. This is something every retailer is thinking about (I hope) and I want to talk about how Zumiez views it.

Read more

Vail Figures Out How to Generate Summer Revenue During the Winter

/2 Comments/in , /by

It figures. Over the weekend I finished up a long article for SAM (Ski Area Management) on winter resorts generating summer revenue. I think it included some interesting approaches to the issue, but apparently I missed one.

Today Vail Resorts announced that it’s acquiring Perisher Ski Resort in New South Wales, Australia. Here’s the link to the resort web site. It’s fall there, so the web cams show no snow. Hmmm. Looks a little like some West coast resorts right now.

Read more

Changes at Quiksilver

/25 Comments/in , /by

I’m assuming you’ve all seen the Quiksilver press release. Andy Mooney “…is no longer with the company.” President Pierre Agnes, the President has been promoted to CEO. Bob McKnight has returned as Chairman of the Board and APAC region president Greg Healy is now President of Quik. Former CFO Richard Shields has resigned, but will be around as a consultant to help new CFO Thomas Chambolle, who was formerly Quik’s EMEA region CFO, transition to his new job.

Out with the new, in with the old I guess.

We can, and no doubt will, all have a wonderful timing speculating how this all came down and what’s next. But people, let’s focus! I want to ask the same old question I’ve been asking about Quiksilver for years now, way before we’d ever heard of Andy Mooney.

Where are the sales increases going to come from?

Read more

Quiksilver’s Quarter: Right for its Brands, Hard for a Public Company?

/10 Comments/in , /by

At the risk of sounding like a broken record….oh, damn, do I need to explain that outdated cultural reference? You see, back in the day when there was something called a record…never mind.

Anyway, I’ve said this a lot. It can be hard to do the right thing for the brand and still meet the expectations for growth of a public company. But what it now sounds like is that Quiksilver management has figured out that if they don’t do right by their brands, they won’t have to worry about the public company issue.

Here’s how CEO Andy Mooney put it in the conference call:

“We listen to the issues that were important to a longtime course our partners and based on their feedback made several changes to better support their business. First we’re holding back and [not] opening additional owned and operated retail stores in the areas that could negatively affect their businesses. Second we’re substantially altering the form and substantially reducing the frequency of promotions in our branded Web sites. Going forward, we will conduct limited promotions solely in past season merchandise and entirely exclude technical products like wetsuits from any price promotion in our direct-to-consumer channels.”

“With the restructuring of the company essentially completes, I am looking forward to now spending time with core surfer skates specialty accounts around the globe and we continue to allocate the lion share of our company’s marketing resources to the specialty channel. In Q1 for example, we increased media spending by 40% in core surfers’ stake media as well as trade marketing in various forms.”

This is the first time I’ve heard Andy put this “thing of importance” as directly as he just did, and it’s about time. I think (and so do a lot of other people, if my conversations are any indication), that Quik has missed some opportunities in this area over the last year or so, and I’m really happy to apparently see them acknowledge and move to correct it.

Regular readers will know I expect this to not only improve brand equity but to help with gross margin and maybe eventually allow some reduction in advertising and promotion expenses, or at least make what they do more effective.

With that good news as background, let’s review the financial results for the quarter ended January 31. Before we jump into the explanations and adjustments, let’s look at the reported numbers.

Revenues were down 13.4% from $395 to $341 million. The gross profit margin fell from 50.8% to 49.7%. Below are revenues and gross margin broken down by segment.

Quik 1-31-14 10q #1 3-15

 

 

 

 

 

 

 

 

As you know, Quik licensed certain “peripheral” product categories in the Americas. There’s a chart on page 30 of the 10Q (here’s the link to the 10Q) that adjusts revenue for licensed product revenues as well as currency fluctuations.  Licensed revenue during the quarter was $11 million compared to $1 million in last year’s quarter. Currency adjustments had a particularly significant impact in EMEA (Europe) because of the strengthening of the dollar against the Euro. It reduced reported revenue from that segment by $20 million.

In the Americas, “Net revenues on a constant currency continuing category basis decreased by $13 million, or 8%, due to a reduction in apparel category net revenues of $13 million in the Americas wholesale channel. Americas wholesale apparel net revenues decreased across all three core brands, but more significantly in the DC and Roxy brands.”

Ignoring currency impacts (which I’m reluctant to do if you’re a dollar investor) EMEA revenues fell just $3 million. “Net revenue on a constant currency continuing category basis decreased by $3 million, or 2%, primarily due to a reduction in apparel net revenues of $11 million in the wholesale channel. EMEA wholesale apparel net revenues decreased across all three core brands, but more significantly in the Quiksilver and Roxy brands.” Russia was down 29% as reported, but up 13% on a constant currency basis. Nothing like collapsing oil prices and economic sanctions to do a currency in.

The Quiksilver brand revenue was $141 million. It fell $23 million or 14% as reported. Ignoring the impact of currency and licensed products, it was down $6 million, or 4%. Roxy revenue was $100 million. It was down $18 million or 15%. Ignoring currency and licensing, it fell $7 million, or 7%. DC was down $14 million or 14% as reported to $89 million. Ignoring the usual, it was down $3 million or 3%.

Reported wholesale revenues fell from $211 to $192 million. Retail was constant at $119 million. Ecommerce revenues rose from $22 to $27 million.

The overall decline in gross margin “…was primarily due to unfavorable foreign currency exchange rate impacts (approximately 130 basis points), increased discounting in the Americas and EMEA wholesale channels (approximately 70 basis points), and increased air freight and other distribution costs associated with the U.S. West Coast port dispute (approximately 20 basis points), partially offset by net revenue growth from our higher margin direct-to-consumer channels (approximately 110 basis points).”

Here’s how it changed by region as reported.

Quik 1-31-14 10q #2 3-15

 

 

 

 

Consistent with the revenue decline, SG&A fell from $204 to $171 million. As a percentage of revenue it was down from 51.6% of revenue to 50%. Remember that foreign expenses decline when the home currency appreciates. That impact was a positive $13 million for Quik during the quarter. Also, “Restructuring and special charges reflect a gain of $1 million versus a $6 million expense in the prior year period.”

Operating income improved from a loss of $4.03 million to a loss of $1.32 million. Below is operating income by region for the two periods. 2015 is on the left.

Quik 1-31-15 10q #3 3-15

 

 

 

 

The next line troubles me. Interest expense was $18.4 million, an improvement from the $19.4 million in last year’s quarter, but still a sizable amount. What happens to Quik and other companies when interest rates finally rise? It depends on each company’s debt structure.

Due to all that interest, the loss before taxes was $20.4 million, compared to $26.3 million in last year’s quarter. Tax benefits gets us to a loss from continuing operations of $18.3 million compared to a loss of $21.9 million in last year’s quarter.

As you are aware, Quik has sold a number of businesses over the last year or so. In last year’s quarter those sales generated income of $37.6 million. The number in this year’s quarter was down to $6.7 million.

Lacking that big pop from discontinued operations, net income fell from a positive $15.7 million last year to a loss of $11.6 million in this year’s quarter.

The balance sheet has weakened from a year ago. Equity is down from $380 million to $26.6 million as a result of operating losses and non-cash asset and goodwill write downs. Total liabilities have declined only 5.2% from $1.221 to $1.157 billion with total debt making up $803 million, down from $828 million a year ago.

I’m encouraged by Quik’s apparent decision to refocus on brand building and support of specialty retailers and what I take to be their acknowledgement that it requires some caution is distribution and discounting. But the issue then becomes where does revenue growth come from? I’ve been asking that question since they completed the Rhone financing.   As we’ve seen with other brands, getting your distribution and brand position right can cost you some sales in the short term.

In the 10-Q Quik notes they anticipate “Year-over-year net revenue comparisons continuing to be unfavorable due primarily to the impact of licensing and currency exchange rates. Within this trend, we expect the rate of year-over-year net revenue erosion to decrease in the North America and EMEA wholesale channels. Also, we expect continued net revenue growth in our emerging markets and our e-commerce channel.”

I hope at least part of that is due to their decision to support the specialty channel and that we see a positive impact on their income statement pretty quickly. At some point, a weak balance sheet doesn’t allow you to continue reporting losses.