The Amer Sports Sale of Bonfire and Nikita

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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.

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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.

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

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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.

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

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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.

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Vail Figures Out How to Generate Summer Revenue During the Winter

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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.

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Changes at Quiksilver

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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?

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

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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.

Skullcandy’s Quarter and Year: Good Results, Same Strategic Issues and Opportunities

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You recall that Skullcandy found itself in turnaround mode when it sold too much poor quality product in low priced distribution that wasn’t consistent with its preferred branding and market positioning. I suppose that happened when the newly public company tried to meet Wall Street growth expectations.

CEO Hoby Darling came in and put a stop to it. His five pillar strategy included, and continues to include, marketplace transform, create the innovation future, grow international to 50% of the business, expand and amplify known-for categories and partnerships, and team and operational excellence. I’ve reviewed each of those in detail in previous articles, and won’t do it again here. You can find his progress report in each one, as always, in the conference call transcript. And while I’m at it, here the link to the 10K.

Those pillars are all important and necessary. But to my mind marketplace transform was the essential first step, as the company pulled back from questionable distribution for the sake of growth and focused on working with the right retail partners in the right way. Note that this includes Walmart as well as specialty shops, and that tells us something about how the market has changed.

Because of progress in all five of those areas, financial results have improved and things look much better. But the company still has to confront the not insignificant competitive circumstances it’s faced since going public. If I were to sum it up, I’d say that I love what they are doing and have a lot of respect for the progress so far. However, it still feels like there might be some conflict between being a public company and the market position they want to have. We’ll look at the numbers, and then return to that issue.

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Globe’s Half Year; The Plan Seems to be Coming Together

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Back in 2002, Globe bought Kubic Marketing, the holding company for World Industries and Dwindle. It turned out that their timing couldn’t have been worse in terms of the skateboarding industry cycle. Just about the time they dug their way out of that glitch, the Great Recession hit and had the same kind of impact on Globe it had on other industry companies.

But for the six months ended December 31, 2014, Globe reported sales that rose 28.4% from $51.4 in the prior calendar period (pcp) to $66 million Australian dollars (all figures in Australian dollars). Net income was up from $818,000 to $1.58 million. They even reinstituted a dividend of three cents a share. That speaks well of cash flow.

Those results occurred while they increased SG&A and employee benefit expense by $6.7 million. Most of the increase was in SG&A.

The Globe brand, we learn in an investors’ presentation, rose 27% worldwide. Dwindle Distribution was up 16%, 4Front Distribution 22% and Hardcore Distribution 26%. They also started a new work wear brand called FXD.

Globe owns or distributes 25 brands. I suggest you go to their investor website here and download the investor presentation dated February 27th, 2015 to see which brands are sold by which distribution company. If you’ve been around the skate business even a little, you’ll recognize most of them.

Note that not all brands are sold worldwide.

North American sales rose 12% from $18.4 to $21.3 million. But earnings before interest and taxes (EBIT) in North America declined from a loss of $360,000 to a loss of $1.832 million. Neither the financial report nor the investor’s presentation explains what exactly happened in North America. They do say in the presentation that, “Segment result impacted by lower scale, margin pressures and introduction of new brands.”

I guess I know that “margin pressures” means gross margins were lower. “Introduction of new brands” might mean they spend a bunch of money on getting new brands started- specifically Fallen and Zero. No clue what “Segment results impacted by lower scale” means, especially as sales were overall up 12%. Maybe there’s a transcript that goes with the presentation, but it’s not on the web site.

They note that Dwindle hard goods and Globe apparel were up, but don’t say how much. I’m wondering how much growth there was in North America if we take out Fallen and Zero.

I’m also wondering how much sales grew in constant currency. Even at December 31, the Australian dollar was weaker against the U.S. dollar than in the pcp. In the presentation, they warn us that they “…expect the strengthening US dollar to have an impact on margins in Australia and Europe.”

Things were better in Europe. Net sales grew by 59% from $11.9 to $18.6 million. EBIT rose from $1.1 to $3.5 million.

In Australasia, sales rose by 23% to $26.3 million from $21.4 million in the pcp. EBIT was up 17.8% from $2.78 to $3.28 million.

The segment EBITs do not include certain corporate expenses and unallocated, unrealized foreign exchange losses that totaled $2.5 million in the most recent six months and $1.66 million in the pcp.

The balance sheet improved as equity grew by around one-third to $40.6 million. Current ratio at 1.88 was down a bit from 2.03 a year ago, but that’s fine. Receivables, inventory and payables have risen significantly, but it seems in line with the revenue growth.

The presentation notes that they have no borrowings, which is technically correct. But they are using a non-recourse receivables financing facility in North America in the amount of $2.5 million, up from $1.8 million in the pcp. Since it’s nonrecourse, it’s not debt but there is a cost to using it.

While Globe still has some work to do in North America, the overall result shows good progress. I just wish there was some more information on specific brand performance.

SPY’s Results for the Year and Some Thoughts on Their Market Position

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As I’ve written before, I have a lot of respect for how SPY has restructured and repositioned itself. There seems to be an alignment of their corporate culture and market positioning that not only has the potential to differentiate the brand (in their market), but to save money and increase the efficiency of the organization.

Here’s how they put it in the 10K for the year ended December 31, 2014:

“We have a happy disrespect for the usual way of looking (at life) and this helps drive our innovative design, marketing and distribution of premium products, especially eyewear for youth-minded people who love to be outside doing what makes them feel most alive and happy. We feel a primary strength is our ability to create distinctive products that embody our unique, happy, and irreverent point of view, and this has helped us become what we believe is one of the most recognizable action sports and eyewear brands in the world, with a twenty-year heritage in surfing, motocross, snowboarding, cycling, skateboarding, snow skiing, motorsports, wakeboarding, multi-sports and mountain biking. We have a happy disrespect for the usual way of looking (at life) and this helps drive our innovative design, marketing and distribution of premium products, especially eyewear for youth-minded people who love to be outside doing what makes them feel most alive and happy. We feel a primary strength is our ability to create distinctive products that embody our unique, happy, and irreverent point of view, and this has helped us become what we believe is one of the most recognizable action sports and eyewear brands in the world, with a twenty-year heritage in surfing, motocross, snowboarding, cycling, skateboarding, snow skiing, motorsports, wakeboarding, multi-sports and mountain biking.”

So is irreverence really an attribute that can provide a competitive advantage? Think about that and we’ll get back to it after going over the numbers.

For the year, sales rose 0.9% to $38.1 million. Below is the breakdown of those sales by product line.

spy 12-31-14 10k image 1

 

 

 

 

 

 

The sales increase was due to increases in prescription frames and goggles. Sunglass sales fell by 5.7%, or $1.5 million. They say that decline was “…principally attributable to an overall decline in the consumer market, particularly during the second quarter of 2014, coupled with several key retailers currently holding lower levels of inventory, lower closeout sales of our sunglass products and the loss of a key account.”

I’d note that SPY gets 64% of revenues from the very competitive sunglass category (down from almost 69% last year. 16.5% of revenue internationally is low compare to a lot of other companies, but that may turn out to be a good thing given the strength of the U.S. dollar. A strong dollar means that SPY’s product cost falls (same for all internationally sourcing companies). But it also means that the dollar value of their internationally sold product comes down when translated. The more international sales you have, the bigger the currency related decline in those sales.

Gross profit margin rose from 49.9% to 50.6%. The increase was due to purchasing more product from China (instead of Italy) and having lower closeout sales, which fell from $2.8 to $2.0 million.

Sales and marketing spending grew by $0.2 million to $11.5 million. I see they spent more on marketing events and promotions. Good. Advertising expense rose from $394,000 to $540,000. Also good.

Meanwhile, SPY cut general and administrative expenses by 6.9% to $5.7 million. They did it by reducing bad debt expense $0.3 million through better collections and consulting and outside services by another $0.3 million. They took a chunk of those savings $0.4 million) and invested them in salaries. I assume for people who are doing productive things for the brand.

The result was operating income that grew from $399,000 to $890,000.

Below the operating line, there’s that inconvenient line “interest expense.” It declined from $2.97 million in 2013 to $2.5 million in 2014. Remember the interest rate was reduced significantly during 2014 and you’ll see that impact even more in 2015.

Largely as a result of that interest expense, SPY reported a loss for the year of $1.9 million, an improvement from the loss of $2.9 million the previous year.

In terms of revenue, the fourth quarter was stronger than last year’s quarter, with revenue rising from $8.6 to $9.8 million. The net loss was $423,000 compared to $1.265 million in last year’s quarter. That explains most of the improvement in the bottom line over the whole year.

Over on the balance sheet, there’s still that note payable to shareholder of $21.6 million, but it’s up only very slightly from $21.5 million at the end of the previous year. However, the line of credit rose from $4 million a year ago to $6.8 million at the end of this year.

The current ratio has fallen a bit from 1.6 to 1.3. I see that receivables rose 9.6% with sales up just 0.9% and their mention of collecting receivables better. And I see yearend inventory up 31% to $7.7 million. I wonder if that might not have something to do with lousy snow conditions up and down the West coast making it difficult to sell snow goggles.

If so, SPY is hardly the only company with that issue. I see they’ve increased their allowance for returns from $1.6 to $2 million, so maybe I’m on to something.

As we transition from the financials to strategy, I want to remind you of the licensing deal SPY signed. Here’s how they describe it:

“In December 2013, we entered into a merchandising license agreement, pursuant to which we licensed the SPY IP [intellectual property] to a third party…The agreement provides that the licensee shall develop, introduce, market and sell certain licensed products incorporating the SPY IP, including men’s and boy’s apparel, bags and luggage, consumer electronics, protective cases, and other unisex accessories, throughout North America through certain distribution channels, other than deep discount retail channels.”

They expect those products to start generating revenue this quarter, but don’t offer any clue as to how much. Wish I knew what SPY’s definition of “deep discount retail channels” was. I also wonder if these products will get sold into any existing SPY accounts and how that will get managed.

To get out of its balance sheet hole, SPY needs more bottom line earnings. Perhaps these royalties will make a meaningful contribution to that. Meanwhile, SPY is a small company in a market of some big companies with much greater resources than SPY. The traditional response of smaller companies in this situation is to position itself as a niche company, and I’d say that’s what SPY has done.

Here’s how they describe it:

SPY “…is a creative, performance-driven brand that is fueled by collaborative efforts across various facets of youth culture, including competition, art, music and day-to-day athletic performance. We strive to ensure that our in function and design, as well as style. We do this, in part, through partnerships with our world class athletes who help us design, then wear and test our products during training and competition. We believe that the intimate knowledge of our customers’ lifestyles is what helps us develop a stronger, more relevant product offering for our market. We reinforce our irreverent brand profile through unique and disruptive marketing, using traditional and non-traditional means to convey our branded point of view to both entertain and edify people…”

You can’t have intimate knowledge of your customer’s lifestyle if that customer base is very broad- especially as a small company. This is a bit of a conundrum for SPY, and for similarly positioned companies. You need growth, but as you move to broaden your existing market, you may start to lose the thing that has made you special to the existing customer base without attracting the new customers.

What I think may happen is that the attitudes and lifestyles of the millennial generation (larger than the baby boomers) may reduce this challenge. Facilitated by mobile/internet/omnichannel/ecommerce, etc. certain traditional issues of segmentation and perhaps demographics are, I think, going to become less important.

That’s where SPY’s opportunity may lie.