Quiksilver’s April 30 Quarter; Where is Sales Growth Going to Come From?

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Quiksilver reported a loss of $37.6 million for the April 30 quarter compared to $60.9 million in last year’s quarter. Last year’s quarter included a loss of $23 million loss on discontinued operations. Ignoring that, the net losses are almost identical.  Net revenue fell 16.1% from $397 to $333 million. The revenue results by operating segments are below.Quik 4-30 10q #1

 

 

 

 

 

 

As reported, the decline was 14% in the Americas, 23.2% in EMEA, and 5.77% in APAC.

The Quiksilver brand revenues fell 17% from $167 to $139 million. Roxy was down 13% from $120 to $105 million and DC dropped 21% (Yikes!) from $103 to $81 million. Across all three brands, currency was responsible for $44 million of the decline. We don’t get any discussion about how each brand is doing in various markets.

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Abercrombie & Fitch’s May 2nd Quarter: Another Turnaround in Progress

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I guess what I’d like to do is start with the list from their 10-Q of where the company will be focusing their turnaround efforts.

“• Putting the customer at the center of everything we do

  • Defining a clear positioning for our brands in a rapidly changing and highly competitive marketplace
  • Delivering a compelling and differentiated product assortment
  • Optimizing our brand reach domestically and internationally
  • Continuing to improve our efficiency, pare under-performing assets, and reduce expense
  • Ensuring we are organized to succeed”

All good, essential, stuff. The conference call describes precisely how they are doing this in more detail. As you read it, you think, “Yeah, no kidding. Why didn’t you all this before?” This takes us back to their “resigning” of their long time CEO at the start of this year. Here’s the article I pointed you to previously that explains how that came about.

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PacSun’s Quarterly Results: More of the Same

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There wasn’t that much to say in either the 10-Q for May 2nd or the conference call. Bottom line is we’re all kind of hanging out waiting to see if PacSun can get further traction with its strategy before the continuing losses take too big a toll on the balance sheet and some more dramatic action is required.

Sales fell 2.7% from $171million in last year’s quarter to $167 million in this year’s. The west coast port slowdown had some impact there.

“For the first quarter of fiscal 2015, comparable store net sales decreased 2%, average sales transactions increased 13% and total transactions decreased 13%, as compared to the same period a year ago. E-commerce net sales decreased 3% for the first quarter of fiscal 2015 compared to fiscal 2014. Excluding the impact of e-commerce net sales, comparable retail store net sales for the first quarter of fiscal 2015 decreased 2% compared to fiscal 2014.”

The gross margin improved slightly from 26.1% to 26.8%. The merchandise margin rose form 54.3% to 55.6%. SG&A expenses were pretty much unchanged at $52.1 million, though as a percentage of sales they rose from 30.4% to 31.3%.

The operating loss, at $7.5 million was just slightly higher than the $7.4 million of the previous year. The net loss declined from $10 million to $2.6 million, but that’s due to the noncash gain on their derivative liability rising from $1.2 million $9.1 million. That moves around ever quarter.

PacSun ended the quarter with 605 stores, down from 618 a year ago. They expect to open 10 new ones during the balance of the year and close between 10 and 20. In discussing stores, CEO Gary Schoenfeld noted in the conference call that opening those 10 new stores is, “…the first for us in many years. I would add to that last week’s meeting with key landlords at ICSC [ph] in Las Vegas. The renewed enthusiasm for PacSun was quite different from years past and much of this year’s new store openings will be funded with TI dollars from landlords.”

I wonder how much of that enthusiasm is based on there being a lot of retail space available.

On the balance sheet, shareholders’ equity was a negative $12.7 million compared to $8.1 million a year ago. Cash fell by $4.7 million to $15.2 million and inventory was pretty much stable at $95.4 million. Current liabilities fell by about $5 million to $121.5 million. Long term liabilities rose around $8 million to $147.7 million in spite of the derivative liability falling by $10 million.

The 10Q disclosed that in the second quarter (the quarter we’re in now) PacSun “…borrowed $15 million on the Wells Credit Facility primarily for the purposes of financing inventory purchases in advance of the peak back-to-school selling season. The Company expects to repay such borrowings during the third quarter of fiscal 2015.” That borrowing does not show up on the most recent balance sheet.

PacSun also has a term loan with the principal plus accrued interest due on December 7, 2016. The principal balance due on that date is $75.6 million. I have a hard time imaging circumstances under which PacSun can make that payment and expect the debt to be restructured or refinanced.

CEO Schoenfeld tell us in the conference call that the goal is to establish “…PacSun as the number one specialty retailer on the most relevant Men’s and Women’s brands for 17 to 24 year old guys and girls.”

Among the strategies are “…not to let us [PacSun] fall back into that private label abyss that the company entered into many years ago.”

It was noted above that total transactions fell 13%, but the size of the average transaction was up 13%. Now, keep in mind that those don’t necessarily balance each other out, but in response to a question about it, Gary said, “…I think the bigger thing is more coveted products and brands that are going out with higher AURs [average unit retail]…”

You know I’m a big fan of retailers carrying “coveted” brands and products.

I think, and have said before, that the PacSun team has done most things right since Gary Schoenfeld became CEO. However, the positioning goal is a tough one given PacSun’s roots as a surf retailer, the economy, and generally difficult retail conditions.   They are taking PacSun into a difficult competitive space and, though I think it’s probably where they had to go, they don’t have endless time to translate it into profitability.

Deckers’ Annual Report: Can Niche Brands Become Global Lifestyle Brands?

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Deckers (owner of Sanuk) has gone and changed their year end from December 31st to March 31st. So the recently released 10K reports on the year that ended March 31st, 2015 compares it to the year ended December 31st, 2013 as well as reporting on the quarter that ended March 31st 2015. I’ll compare the two annual results, each of which covers 12 months.

As usual, we’ll focus mostly on what’s going on with Sanuk. Here’s the link to the 10-K if you want to peruse it yourself.

Deckers’ revenues rose 16.7% from $1.557 billion in the year ended December 31st 2013 to $1.817 billion in the year ended March 31, 2015. Their five largest customers were 22.2% of worldwide sales and none were 10%. They ended the year with 142 stores (mostly in the U.S. and China) up from 113 in the previously reported year.

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Quiksilver Director Resigns- and She Doesn’t Sound Happy.

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Quik filed an 8K today announcing that a director, Elizabeth Dolan, had resigned from the board effective immediately. Here’s what she said in her resignation letter.

Dear fellow Quiksilver Directors:

It is with regret that I inform you that I am resigning from the Quiksilver board effective immediately.

I joined this board with a strong commitment to carrying out the full responsibilities of a Director. By excluding me from crucial board discussions and votes, I have been prevented from fulfilling this role. Indeed, your lack of trust in me has been made clear. On my end, this can’t be rebuilt.

With respect, I wish the best for the future of Quiksilver.

The terse, blunt language in her resignation seems to me to be a bit unusual for a resigning director. Here’s a description of Ms. Dolan’s background from Quik’s last proxy statement.

Elizabeth Dolan currently serves as Chief Marketing Officer of FOX International Channels (FIC), which includes global television channel brands such as FOX, National Geographic Channel and FOX Sports, where she oversees all brand development, consumer communications, new programming launches and trade marketing for more than 350 television channels in Asia, Latin America, Europe and Africa. Ms. Dolan joined FIC in January 2011. Prior to joining FIC, Ms. Dolan served as Chief Marketing Officer for OWN: The Oprah Winfrey Network from January 2009 to June 2010. From November 2003 until September 2008, Ms. Dolan was President of Mudbath Productions, which produced radio shows for the ABC Radio Networks. From September 1997 until November 2003, she operated a marketing consulting practice. Prior to that, from August 1988 to September 1997, Ms. Dolan held various positions with Nike, Inc., including serving as Corporate Vice President and VP of Global Marketing. Ms. Dolan earned a bachelor’s degree from Brown University in 1979. As a result of her extensive experience in the worldwide marketing of globally recognized brands, our board of directors believes that Ms. Dolan will bring important insights and guidance to board deliberations regarding our brand development and overall marketing strategies.

If you want to know more, check out her LinkedIn profile.

To be clear, I don’t know what happened, and have not met or talked to Ms. Dolan. But based on the description of her experience, she’s the kind of person I think I’d want around if I were dealing with some of Quik’s problems.

This almost feels like a continuation of the management transition that happened when Andy Mooney got fired.

I will be interested to see what Quik’s quarterly report looks like when we see it in a week or so.

The Surf Industry and Bob McKnight’s Conference Speech: Points of Contact

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Most of you are probably aware that the Surf Industry Summit took place in Cabo starting about 10 days ago. The keynote speaker on the first night was Quiksilver founder and Chairman Bob McKnight. His speech was somewhat controversial. The text is available on Shop Eat, Surf, but only if you’re an Executive Member. I’m not, but some people sent me a PDF. I’ve read it a few times and listened it to, but was not at the conference. You should find a way to get yourselves a copy.

My goal is for this to be useful and professional. That doesn’t mean I won’t disagree with Bob on some points. I do and I will. But as always, my goal is a discussion that makes us think differently, and do better business. A quality disagreement is the best way to learn new things.

I’m going to use Bob as a bit of a stalking horse, responding to some of the issues he raises but doesn’t fully address if only because of the limited time available. But these, I think, are precisely the issues that future conferences should focus on. When it does, I might start coming to the conference again.

If they’ll have me.

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Skullcandy’s March 31st Quarter; Confronting the New Retail Environment

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I’ve been writing, talking and thinking a lot lately about the evolution of the retail market; about HOW YOU SELL STUFF TO PEOPLE and WHY THEY BUY IT.

Skullcandy CEO Hoby Darling has a plan, and he sure talks pretty about how the company is making it happen. I recommend you read his opening statement in the recent conference call. As he does on every call, he reviews his five strategies. They are, as a reminder,

“…one, marketplace transform; two, create the innovation future; three, grow international to 50% of our business; four, expand and amplify known for categories and partnerships; and five, team and operational excellence.”

Skull is a public company or I probably wouldn’t be writing this. As such, it needs quarterly growth and, as I’ve written, there can be a conflict between getting that growth and differentiating your brand if your brand’s distinctiveness is based mostly on marketing.

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SPY’s March 31 Quarter; Curious About the Inventory

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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

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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.

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

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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.