“Hey! How Come You’re Still Around?” Conversations With Survivors

/0 Comments/in , , , /by

It’s old news, of course, that we’ve gotten to the point in this industry where probably north of eighty-five percent of the snowboards sold come from a handful of brands, mostly made by ski companies with the usual exception. And if that concentration is not how we’d like it to be, it’s how it almost always is. Don’t worry; I’m not going to give you the lecture on consolidation again- it’s too late to help anyway.

 But there are a number of small brands still out there when hundreds of others aren’t. How have they done it? Have they found the proverbial “defendable market niche?” Or did they just luck out and find an investor with too much money and not enough common sense? Or maybe, at different times, both.
 
So I’m going to call some of them up and ask something tactful like, “How come you’re still in business?” If they don’t hang up on me, maybe we’ll all learn something.
 
My Guess?
 
Okay, not completely a guess, as I’ve talked to most of these people before over the years and have watched them build their brands and companies. We’re going to find a high level of continuity in management, and a lot of support from shareholders. These are brands that have been around a while.
 
None of them ever thought they were going to be “the next Burton.” They were balance sheet aware, and never tried to grow faster than their financing allowed. They’ve generally figured out how to make money, and are bemused and perplexed when they hear about brands doing 30,000 snowboards and losing money. Advertising, promotion and team riders? It’s a good thing- as long as you can actually afford it. Having happy retailers who sell through at full margin, call for more product, and then can’t get it seems to be their approach to marketing. Oh, and, for some reason, they seem to only want to sell to people who can pay them on time.
 
They have generally discovered a market niche, and it’s typically high end. In one case, they’ve discovered that they aren’t only a snowboard company. Here they are in alphabetical order.
 
Glissade
 
“We’ve been making snowboards for seventeen years,” says Glissade founder and president Greg Pronko. “I think we might be the sixth oldest snowboard brand in the world.”
 
But Glissade no longer sees itself as strictly a snowboard brand competing only against other snowboard brands. They produce a relatively small volume of a few thousand very high-end boards, and don’t want too much volume. What they’ve learned to love is working with materials and figuring out how to use new ones. They have evolved to the point where they earn revenues from materials research and development, and rapid prototyping for other companies in snowboarding and other industries.
 
In spite of these other activities, the Glissade brand is the founder’s true love. But the love that goes into these custom, low-volume boards has a price. One of their decks will set you back a bit north of $500 at select retailers. For a little more, they’ll be happy to make you a custom board. Or you might call them and see if you can get on the list to get one of only twenty-five 195s they make each year.
 
So what have we got? Year around cash flow, a redefinition of their market niche that allows them to compete, no warranty problems, and a product that doesn’t require a big advertising and marketing campaign to check at retail. Oh- and good margins for Glissade and the retailer. 
 
Heelside
 
Heelside started as a boot company before expanding into bindings and, more recently, boards. They are heading into their seventh season. President Jim Ferguson emphasizes the continuity in investors and employees they’ve enjoyed since the company was founded. “Consistency of ownership and management has been key for us,” he says.
 
They have also enjoyed a few other advantages. Jim’s background in making boots went a long way towards getting Heelside started without some of the startup and growing pains that other companies have typically experienced. When they did decide to make boards (interestingly enough, at just about the peak of the consolidation), they purchased high quality equipment for not much money from a factory going out of business and hired the manufacturing team to make Heelside’s boards. Good for cash flow, and good for avoiding mistakes in learning the manufacturing process.
 
Growth is a good thing, but “The numbers have to make sense,” says Jim. “We’ve always lived within our means,” he emphasizes. “We do as much marketing as we can, but keep a close eye on the bottom line.”
 
Evidently Heelside isn’t sure how much being cool will help if you can’t pay your bills.
 
Of the up to 15,000 boards they expect to sell this year (depending on the snow) most will be sold in North America. One thing Heelside has in common with many of the other brands being discussed here is no dependence on the Japanese market for financing. I’m sure we all remember when Japanese prepayment for boards dried up, and one hundred plus brands vanished in short order.
 
Never Summer
 
They were profitable when they were only making 7,000 boards. That was the plan. Now, they’re making more, but maybe not as many as you might expect from a brand that’s been consistently pursuing its plan for ten years. They’re still making money. “Clean distribution, limited supply, unmatched customer service and exclusive territories for retailers,” is the foundation of their market position, explains co-founder Tracey Canaday.
 
The average wholesale price is higher than most brands, but Never Summer uses a layered, precured, pretensioned fiberglass that, according to Tracey, costs about three times as much as the glass in a traditionally made board. They also make their sidewalls out of sintered ptex. The result, according to Tracey, is a construction that makes the board more durable and responsive and gives the retailer something to sell.
 
Never Summer, located in Colorado, doesn’t sell a single snowboard in Japan. Zero, zip, nada, the big goose egg. So clearly when the Japanese market crashed, it didn’t hurt them much. Might even have helped their competitive position. Would they sell some boards there? Sure, but they haven’t been approached by the right potential partner and don’t want to be distracted from their retailer focus.
 
There’s little discounting at retail, and typically few Never Summers left over at the end of the year. Scarcity does much of the marketing for them. Want to buy a Never Summer? Better go find one now (October 3) and expect to pay full retail.
 
There are only four or five managers at the company, and two of them are owners. They are careful where they spend their dollars. For example, all new accounts are COD, no matter who they are. “This is our retirement,” says Tracey.
 
I’d be careful too.
 
Option
 
“We’re modest in our goals and live within our means,” says Option President Geoff Power. “We have really good people who don’t have stars in their eyes.”
 
Option was started in August of 1992. Geoff gives a lot of credit to the company’s investors, who have always taken the long term view, don’t need a return to live on, and have been willing to help the company over some rough spots or to take advantage of opportunities. One of those opportunities was the acquisition of the snowboard apparel company NFA at a time when lots of apparel companies were available for purchase. NFA has been able to grow and transition nicely in the direction of the street ware/lifestyle market. 
 
There was never a big dependence on Japan, so when that market cratered, it didn’t have as much impact on Option as on its competitors.
 
Option has done many of the same things as the other smaller, successful, brands mentioned in this article. They are careful with distribution. Their product cost is above the average but also, according to Option, better made. Customer service is critical. They like to be paid by the people they sell to, and control their marketing expenses consistent with their overall financial plan and capabilities.
 
It seems to be working.
 
Silence
 
One of these days, I have to remember to ask BK Norman, the lead dog at Silence, what BK stands for. Silence is nine years old. Their story is a bit different from the other brands mentioned above, but BK has been there for the whole ride. Continuity seems to be important.
 
When Silence was started, it had the good fortune to be owned by a guy who, in terms of his understanding of the snowboard business, had more money than sense. He had a whole lot of money. Like a real lot. He spent it on Silence. After all, snowboarding was hot. So they could build up the brand in a few years, go public and all retire rich. Seems like I’ve heard that story somewhere else before.
 
Never mind. Anyway, BK kept going “Uhhhhh, I’m not quite sure we can sell as many boards as you want,” but who was he to turn down all this marketing money? It’s just too much to ask a snowboard guy to do. The marketing money got spent. As BK had foretold, not as many boards as the inflated corporate plan required were sold. It was a financial mess, but the literally millions of dollars spent on advertising and promotion created brand awareness.
 
Silence has changed hands twice. The first time, it was sold to A Sports which also bought Avalanche. Now, a new investment group has picked up both Silence and Avalanche, and is working closely with BK, Dale Rehberg and Maureen ter Horst to run the brands the right way. “I always managed to find a new investor before things really cratered,” was the way BK put it. “A lot of money was wasted on huge corporate business plans that never came true. Now, we are concentrating on building our business on a grass roots level working closely with our retailers all over the world.
 
So now, well financed and with a realistic business plan, BK uses the brand awareness created in Silence’s early “drunken sailor” spending period to make some money.
 
The Japanese distribution has been kept intact over nine years. The distributor didn’t go bankrupt and the market was never over supplied. BK has stayed focused on building and selling snowboards. Most of the business is to specialty shops, but that is changing gradually. Because of the wider awareness the brand has and the presence of Avalanche, he can expand his distribution a bit more than some other smaller brands without damage. “We’ll keep Silence true to its history as a specialty shop brand and expand the distribution for Avalanche,” he says.
 
I Think I See a Pattern
 
These brands have quite a bit in common. Continuity in management would seem to be high on the list. Financial acumen with a balance sheet focus is up there too. Growth was kept consistent with their financial capabilities, and an awareness of whom their customers were. They focused on the bottom line, not the top. They tend to have their own factories. They spend a lot of time thinking about their distribution.
 
Anything there that should surprise us? Nah. Any small company that successfully competes against much larger brands has to have an answer to all those issues.

 

 

Cash Flow Revisited; Why Hardly Any Successful Business is Just Snowboarding Anymore

/0 Comments/in , , /by

I know it’s because of crossover, and the mainstreaming of action sports, and because we’re selling to parents as much as to kids. I know all that. Largely, I believe it. I just did my occasional and not nearly frequent enough sojourn into a bunch of local snowboard retail stores, big and small, and looked at what they’re selling. Snowboards and snowboarding equipment, apparel and accessories- sure. But they are also selling skateboarding, surfing, skiing, wakeboarding, bikes, roller blades, tennis and/or some others depending on the time of year.

 
Have they become as diversified as they are because of “the market?” Yes, “the market” demands it. But lurking in the lichens is the financial requirement of businesses that are highly competitive and selling products that are awfully similar to each other in a given product category, differentiated largely by the brand marketing strategy. Bottom line is that the less seasonal your business is, the more money you can expect to make.
 
Let’s take a journey into fantasy land and take a look at a couple of hypothetical business that are in snowboarding (retailers or manufacturers- makes no difference) and see how their financial equations differ with the seasonality of their sales. I know you already know that it’s bad to be seasonal, and good to sell all year around. But the extent of the difference on the two company’s financial results-especially the return on investment- may surprise you.
 
Meet the Contestants
 
Seasonal Enterprises (SE) and Year Around Ventures (YAV) both sell snowboard hard and soft goods. But while SE sells almost exclusively snowboarding and snowboard related products, YAV has diversified into other action sports.
 
Both SE and YAV sell $12 million a year. SE does all its business in five months. YAV boringly sells $2 million a month, month in and month out. 
 
At the end of the year their income statements, down to the Income before Interest and Taxes Line, look identical.
 
Net Sales                                                                   $12,000,000
Cost of Goods Sold                                                 $ 7,800,000
Gross Profit                                                               $ 4,200,000 
 
Operating Expenses                                               $ 3,600,000
 
Income Before Interest and Taxes                        $     600,000 
 
Now, $12 million is kind of an awkward revenue number. It’s much more than your typical specialty shop sells, and it’s probably less than a snowboarding brand needs to do in revenue to break even (I think that number is maybe a little north of $20 million unless you have a very well established brand and market niche).
 
Just for your information, in their most recent complete years, Vans, K2, and Pacific Sunwear had gross profit margins of, respectively, 43.5%, 31.1%, and 33.5% of sales. Operating expenses, respectively, were 35.7%, 25.3%, and 22.7%. Unfortunately, no specialty shops publish their financial results.
 
This hypothetical income statement is kind of a cross between a retailer and a brand. The goal, however, is to make a point so allow me a little creative license as I set the stage to make it.
 
Balance Sheets and Working Capital
 
Working capital is the money you have invested in a business so that it can operate.   Rent, salaries, product costs all of which are incurred before you sell anything represent working capital invested in the business. To the extent that you can get terms from the supplier of the product or service you are using, your working capital requirements can be reduced.
 
The balance sheet shows, as a point in time, the financial viability of a company and its ability to finance itself. Let’s compare the working capital and balance sheet situation of SE and YAV.
 
Seasonal Enterprises
 
SE, you will recall, does all its business in five months. But it has to operate for twelve months, and buy the product it sells in a way that it has product to ship during its selling window. Assume its total expenses of $3.6 million are spent evenly over the year- $300,000 a month. In practice, selling and marketing expenses would be weighted towards its selling season.
 
It’s got to buy its product for a total of $7.8 million. Remember SE is getting some terms from its suppliers, but it may also be giving some terms to its customers. Where does that all net out in the real world?    Obviously it’s different depending on whether you’re a retailer or a manufacturer.
 
SE’s going to spend $300,000 a month for seven months before it sells a thing. It will probably collect some money from the previous season during this period, but it will also have some expenses that go out during its selling season before much comes in the door. If, then, it has to borrow $300,000 a month for seven months it will have $2.1 million in loans just for operating expenses by the time it starts selling. And of course you won’t pay it all off the day you start selling.
 
Then there’s the $7.8 million in cost of goods sold SE has had to finance. For how long? Shall we say four months?
 
The last prime lending rate cut was to 6.5 percent on August 22nd. Just to make my calculations easier, let’s say you are borrowing at 10 per cent. I know that may be high for some borrowers, but if we think about credit card fees (which I consider basically financing costs) letter of credit fees, commitment fees, etc. maybe it’s not too far off when you look at your real cost of borrowed capital- especially for smaller businesses.
 
If you assume you pay off the loan for operating costs completely literally the day you start selling, your interest charge would be $70,000. It’s more realistic to say you pay it off over a couple of months at best, so let’s say it’s really $90,000.
 
At 10% for four months, financing the cost of goods sold comes to $240,000. Total interest expense, then, is $350,000.
 
After interest, pretax income is $250,000. Assuming a 30% tax rate, the business earned $175,000 for the year, or 1.46 percent of sales.
 
Year Around Ventures
 
This is a little easier to explain. They just do $2 million in business each month. No big inventory buildup. No operating expenses to finance without any income.  They get some terms from their suppliers, and, with luck and depending on the type of business it is, may even collect before they have to pay. They don’t need millions of dollars in temporary working capital just to get through the business cycle. All they have to finance, more or less, is a month’s worth of expenses or maybe a little more. Their interest expense? Hardly anything. Maybe if they’ve got any sort of balance sheet at all, nothing. If that’s the case, and with the same 30 percent tax rate their net income for the year is $420,000, or 3.5% of sales.
 
Balance Sheets and Rates of Return
 
Income statements don’t happen in isolation from balance sheets. On your balance sheet, you (hopefully) show some equity- the total of the investment in the business plus the profit you’ve made, less any losses you’ve incurred, and less any dividends you’ve paid out. The larger the number is, the stronger the business is, and the less money you should have to borrow. So, you can truthfully exclaim, “If I’ve got a whole bunch of equity in my business I don’t have to borrow squat and I’ll have no interest expense! My return on sales will be the same whether I’m SE or YAV.”
 
True, but that’s a misleading and incomplete analysis. The financial issue is always what are you earning on the money you have invested (the equity in the company, more or less) and how much risk are you taking? Most simply stated, return on investment is net income divided by total equity. YAV, due to its year around sales, doesn’t need much equity to have basically no interest expense. It’s probably got a great return on equity, and because of the diversification that allows it to sell the same amount each month, it’s risk is lower.
 
SE, on the other hand, has to have a pile of equity if it’s going to eliminate its need to borrow money. If it does that, it will have the same net income at YAV, but it’s return on equity will be much, much lower. And its seasonality makes its risk higher.
 
As you consider your return on equity, be aware that if you’d invested your equity in an intermediate term bond fund for five years, you would have earned around eight percent a year before taxes. Over the last twelve months, with the Fed cutting rates, you would have earned something like thirteen percent. We can probably agree that the risk in an intermediate term bond fund is less than the risk of an action sports business.
 
In the market we’re in right now, is there any competitive advantage to being a “snowboarding only” business? I can think of a couple of possible exceptions but generally, I’d say probably not. If there was, it would be financially rewarding from a return on investment point of view. Isn’t it interesting how the industry’s requirements for success from a marketing and a financial perspective have come together?

 

 

A Good Snow Year Does Not Make Us Heroes of Management; A Minor Reality Check

/0 Comments/in , , /by

1980- Michael Porter, the Harvard strategy Guru published Competitive Strategy.   In it, he discusses how industries change, and how companies have to change, as they transition from growth to maturity.

 I want to look briefly at what Porter says stereotypically happens during this transition and see how it applies to the winter resort business. Like all industries, this one has become insular- we talk to each other too much. Yet basically, we are experiencing the same trends that every other maturing industry faces. Maybe if we realize we aren’t different or immune, it will make it easier to respond to these inevitable and ongoing changes. Twenty years working with companies in transition has convinced me that the sooner you respond, the easier and more successful your transition will be. There must be something to what Porter writes, because I’ve found him relevant to every industry I’ve worked with.
 
He recognizes, of course, that maturity doesn’t happen at a fixed point in an industry’s development, and that it can be delayed. He also notes that rapid growth can return due to strategic breakthroughs, and that mature industries can therefore go through more than one transition to maturity.
 
Here are eight things he says happen during this transition.
 
  1. Slowing growth means more competition for market share.
  2. Firms in the industry increasingly are selling to experienced repeat buyers.
  3. Competition often shifts toward greater emphasis on cost and service.
  4. There is a topping-out problem in adding industry capacity and personnel. Thus companies’ orientations toward adding capacity and personnel must fundamentally shift and be disassociated from the euphoria of the past.
  5. Manufacturing, marketing, distribution, selling, and research methods are often undergoing change. The firm is faced with the need for either a fundamental reorientation of its functional policies or some strategic action that will make reorientation unnecessary.
  6. New products and applications are harder to come by.
  7. International competition increases.
  8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently.
 
Does any of this look familiar? Can we just for a moment see through the industry’s historical momentum and inbred myopia to recognize that this is us? I lived through it in the snowboard industry. I’ve watched it in computers, automobiles, and funeral homes. It’s happening right now in retail, telecommunications and, by the way, winter resorts.
 
The winter resort business is no different from any other industry in how it responds to maturity and consolidation. One good snow winter doesn’t change that.
 
At best, we’re growing slowly. Maybe demographics will change that. We’re sure as hell selling to more repeat buyers, and they mostly want to get more and spend less.
 
Cheap season passes are competition based on price no matter how you rationalize it. That’s not to say there aren’t valid business and competitive reasons for some resorts to utilize them. But hopefully, those reasons are consistent with a carefully thought out business plan- not just a response to needing to improve cash flow.
 
If you’re adding capacity and personnel and our industry growth rate doesn’t pickup, then the only way you succeed is by taking market share from other players. I’d say we’ve turned the corner as far as euphorically adding capacity and personnel goes. But competitive conditions, in the overall leisure as well as in the winter sports market, seems to require resorts to invest in new facilities and capabilities just to stay even with other resorts.
 
If you’re big enough and well enough capitalized to diversify into real estate, golf courses, conference centers, retail, theme parks or whatever then perhaps at some level it can be business as usual for you. If you’re strictly a winter resort and you make most of your money from lift tickets, then you are going to have to do business better than you’ve done it before. Tubing, snow skates, snow bikes and mini skis can all add some incremental revenue. But there’s not another snowboarding on the horizon. Like the man said, new products and applications are harder to come by unless you can change what you are.
 
What can you say about profitability when the before tax profit was only eight tenths of one percent (0.8%) in the 1999-00 season? That’s down from 5.8% the previous season (that season was six days longer). Leading short term government bond mutual funds have one year returns of eight to twelve percent with just a bit less risk.
 
If margins are lousy and competition extreme, it’s hard to justify investing in the winter sports business because of its seasonality and the financial implications of that.  On the one hand, you’d really like to operate the business with somebody else’s money, because you don’t want to tie up all year equity you really only need in the business for four or five months. On the other hand, lacking a good balance sheet and reserves for bad snow years, which I expect we all agree will continue to happen, nobody will lend you the money you need to get through the season, because they see it as an equity risk. And if they do lend it to you, and your margins and/or total revenue are too low, the interest expense will kill you.
 
You know from the number of resorts that have reported financial problems that this is a very real problem. On the other hand, there are a significant number of resorts that make money year after year. They are big and they are small and they are all over the continent. They are mostly privately held so you don’t hear much about them. Besides, a financial and management crisis is much more interesting than a low key, boring, resort that just goes along knowing who their customers are and meeting their needs in consistent and predictable, but changing, ways.
 
How do they do it?
 
In any industry I’ve ever seen, there are always a few who are in the right place at the right time. I’ve got nothing against luck, but it usually doesn’t last. What I expect you’ll find if you talk to the people running these resorts (or any manager of a company succeeding in a maturing industry) is that they mostly never heard of Michael Porter. They do know who their customers are and why they come to their resort. They know whom they compete against. They have good management information systems, and their finger is on the pulse of their cash flow. They have had to deal with most of the issues listed above, and continue to deal with them.
 
But not in a crisis mode. Not with the bank threatening to pull the line of credit and uncertainty about how they will make payroll next week. They were more or less open-minded and aware of the changes that were happening. They have responded, and continue to respond, over a period of years with changes in how they do business. For the most part, no single change represented, by itself, a life or death issue. But the cumulative impact was dramatic.
 
Paraphrasing Les Otten, “They didn’t have a problem- they had an opportunity.” It was an opportunity because they saw the need for change and dealt with it before it was paralyzingly threatening. They never had to step outside their box. They just extended it a little at a time.
 
Don’t feel comfortable because it snowed.

 

 

Benefiting from Recent Industry Initiatives; It’s Up to Each of You

/0 Comments/in , , /by

By now, you should all have seen SIA’s study “Growing the Snow Sports Industry” and NSAA’s growth model for the resort business. They don’t claim that any industry initiative by a trade association is the salvation of the winter sports industry’s issues of participation and profitability. They say, if not exactly this way, “It’s up to each of you.”

From the 20,000 foot level, where the oxygen is thin, here’s what they said, how you can use their work, (whether you’re a brand, a retailer, or a resort) and why it’s such a hard thing to do well.
Industry Initiatives
SIA commissioned Growing the Snow Sports Industry: Marketing Analysis and Strategy for Breaking Down the Barriers. NSAA created a growth model for the snow resort industry based at least in part the conclusions of the SIA study, which you should also make sure you see.
SIA and NSAA did not position their studies as “industry initiatives.” They didn’t make any claims that their programs offered industry wide solutions. They acknowledged that previous industry initiatives hadn’t worked, or hadn’t had the funding and support to be implemented consistently over a long enough time frame.
They said, and this is the most important thing they said, here are some facts and ideas-It’s all up to you. We can’t fix the industry’s problems, but we hope we can give you some guidance and support as you do it.   They are exactly right.
I think that industry initiatives only work, or appear to work, when you don’t need them. When there is lots of growth, lots of money and less competitive pressure, everything seems to be working. In fact what’s going on is that consumer demand and cash flow can cover up a lot of shortcomings in a company’s strategic position.    When that changes, focus often becomes internal and understandably a bit more selfish. Support for industry initiatives, both in terms of time and money, is harder to come by.
In any event, in a consolidating or mature industry there is no rising tide to lift all boats. It’s up to each company to find their market position and respond to the particular needs of their carefully identified customers. The individual companies in addressing their particular circumstances can almost certainly put the resources that might be committed to an industry initiative to better use. That’s just business- in any industry.
What They Said
NSAA proposed focusing on two things; getting a 6% annual increase in beginners and increasing the conversion rate of beginners from 15 to 25 percent with the goal of increasing skier [their word] visits from 52 million to 67.2 million by in 2015. In their words, “The success of this formula for growth…lies not in any national campaign, but rather in the dedicated efforts of individual area operators consistently implementing achievable trial and conversion goals that make sense for their resorts.”
They go on to say that, “…this was developed with input parameters that reflect the national environment. At the regional level and at the level of the individual resort, the underlying dynamics of the Model change and, therefore, the specific goals also change…The great strength of NSAA’s approach toward growing the industry over the next 15 years is that it encourages individual self-gain and entrepreneurial spirit to achieve collective benefits” (Quoted from the September 2000 issue of SAM magazine, page 10. NSAA’s Model for Growth: What It Is, and What It Is Not. By Nolan Rosall, RRC Associates and Michael Berry, President, National Ski Areas Association).
Good strategy is the process of defining where you are, envisioning where you want to be and when, and filling in the time in between with appropriate tactics.   That’s what NSAA is suggesting to each of its individual members.
The SIA study recommends that each member company take steps appropriate to its specific circumstances and opportunities. Like NSAA, the SIA study is meant to support its members, not kick off any national campaign.
It starts by stating that “We must:”
  • Develop a unified understanding of the marketing problems and opportunities
  • Identify the market segments that hold the greatest “acceleration potential”
  • Focus our marketing resources on those productive audience segments
  • Apply those resources in an integrated, efficient manner
All true. For any business in any industry any time and I wouldn’t expect anybody to be even slightly surprised by that. The devil, as usual, is in the details.
They went on to “explode the industry myths that bind us to the obsolete remedies of the past.” Simplified, the five myths are:
  • That participants aspire to be “extreme.” They don’t. They are in it for the wholesome, lifestyle activities.
  • That the dominant barrier to increased participation is increased cost. It’s more complex than that and involves time, quality of experience and proficiency.
  • That we have a big opportunity with underserved populations who have never been on the hill. Maybe not. They have to be lured to the slopes, sold on winter vacations and cold weather activities, and convinced to adopt an activity their peers don’t participate in.
  • There’s a single advertising message that will work for the whole industry. There isn’t. The consumer base is too diverse.
  • That awareness of various “make it easier” technologies like shaped skis and of the technology’s benefits are high. Nope. Most are unaware of its existence or benefits.
After that we’ve got six key findings.
  • There is a strong relationship between proficiency, enthusiasm, participation and sales.
  • The industry is bleeding new triers and participants of low proficiency.
  • The biggest opportunity is in reactivating lapsed participants and upgrading light and moderate users.
  • New technology can produce marketing leverage.
  • Children can be a barrier or a motivator to increased participation.
  • Introducing consumers to skiing/boarding young and keeping their loyalty can have an exponential impact on revenue.
Based on this, they suggested a “new” approach to the market that included:
·         Looking at snow market as the sum of many segments- not as a mass market.
·         Communicating the brand snow sports in terms relevant to each of these customer segments.
·         Allocating marketing resources based on the potential value of each segment.
They go on to suggest more specific strategies and tactics for retailers, suppliers and resorts.
I’m sure most of us recognize that this “new” approach is old. It represents a pretty traditional market strategy that is new to winter sports only because it was, historically, unnecessary for success or, more recently, resisted. Why is that?
Déjà vu All Over Again
It doesn’t matter what industry we talk about. In periods of difficult transitions, all companies tend to react the same way. Specifically,
·         They do what they perceive to be in their own (short term?) best interest. They don’t ask, “How can we help the industry?” when they are dealing with gut renching issues of change and survival.
·         They resist change and tend to do “more of the same.” Change is uncomfortable and most of us dislike stepping out of our comfort zones.
·         They have a hard time just recognizing the new environment they are operating in and frequently don’t until they are slapped upside the head.
·         They focus on tactics that are responsive to short term pressures rather than identifying and reacting to critical strategic issues.
·         Typically, an outside change agent (the bank, big customers, a consultant or new CEO) is required to motivate the change process.
Before I’d ever heard of a snowboard, I’d worked with companies in banking, pharmaceuticals, light manufacturing and retail where this was the case. I can assure you it’s true in snowboarding and in all of winter sports as well.
Many of the people making skis and running resorts have been doing what they do for a long time. There’s a tremendous amount of inertia and continuity in the industry. With such long histories, established relationships, and common perceptions firmly entrenched in a comfort zone, it can be difficult to make the kinds of changes the industry required.
Those of us who got into action sports through snowboarding have the same issues, though perhaps not to such an extreme if only because we haven’t been involved as long. Like skiing in another era, snowboarding could rely in its early years on the enthusiasm of its youthful participants to overcome issues of expense, poor facilities, lousy equipment and inconvenience. If, as an industry, we didn’t handle our consolidation as well as we might have, we can plead that it happened too quickly to react to, and we’d be partly right.
Now, we’re getting older (which is fine given the alternative). Larger corporations, most of who are also in the ski business, dominate snowboarding. The snowboard, ski and resort industries increasingly have common issues, interests, and relationships.
What You Can Do
One of those common interests is making money, which has been a hard thing to do for a lot of organizations. I know we’re also interested in the lifestyle, and the product, and the experience, and supporting the sport, but if there isn’t enough money made, we won’t be here to do that. Everybody reading this knows somebody who’s committed to snowboarding, use to be in the business, and isn’t anymore as a result of financial issues.
SIA and NSAA have now provided their members with a justification and a framework, rigorously validated through actual data, for changing the way they do business in response to new competitive conditions. But they can’t (and have learned they can only get in trouble if they try to) do it for you.
That’s all they can do. A basic blue print is in your hands.   Adapt it for your organization and go and do it. You can’t “fix” the industry anymore than SIA and NSAA can. But you can sure take a shot at fixing your piece of it. Bottom line? Marketing, and customer identification and segmentation, not discounted season passes, longer terms for retailers, and discounting at retail that starts in November are the answer if we have the patience and longer-term perspective to do it consistently. Step out of your comfort zone.

 

 

The Retailer’s Dilemma; Are There Any Snowboard Shops Left?

/0 Comments/in , , , /by

Use to be that I’d scurry home from Vegas in March with my extra backpack full of snowboard dealer packages and, like a kid at Christmas, throw myself into them to see what was new. It still takes an extra backpack (though a smaller one- fewer brands but a lot more pages per brand). This year, though, there didn’t seem to be any urgency to reviewing them. Not having to make buying decisions, in fact, I didn’t get around to really reading them in detail until, well, actually, it was late June.

I’ve also been thinking lately about what “the snowboard industry” is now and how things have changed for retailers. That thought process, and the realization that it hadn’t mattered that I waited to June to read the new product packages, led me to think about retailer strategies and buying decisions. Retailers, I think, have to make buying decisions differently. And they look at snowboarding as just one piece of their selling strategy. Here’s why.
 
The Snowboard Industry- What Is It?
 
Five or seven years ago, snowboarding lead the way, representing an emerging demographic of young people interested in individual sports. Posers were disdained. If you didn’t snowboard, you shouldn’t have been wearing snowboard clothing. Margins on hard goods were a lot higher, and retailers could build credibility around snowboarding.
 
Today, thank God for posers.   They buy a lot of high margin soft goods, shoes and accessory items. They aren’t even posers anymore. They are just people who want to wear stylish, functional soft goods. We all got to wear something, after all. Retailers carry hard goods because they legitimize them as an action sports lifestyle store. But they’d much rather sell shirts, jackets or jeans that earn them a fifty percent plus margin than a snowboard that earns them a thirty-five.
 
I’m not suggesting that retailers don’t care about hard goods, or that selling them doesn’t make a contribution to a store’s overall success. But retailing is a very tough business, and my hat’s off to those who succeed at it. Selling higher margin items to a bigger potential customer group is a significant chunk of the success equation.
 
And it’s not just true in snowboarding. There’s not a lot of margin in skateboards, wakeboards, or surf boards (or skis or roller blades) either. In all these sports, the brands produce the hard goods and support the teams, advertising, and promotion to legitimize the sport and, maybe more importantly, the lifestyle image with the target audience. But it’s the soft goods players who grow like mad and make a lot of the money because they can sell to a bigger group of consumers.
 
Retailers who are still in business figured out a long time ago that they can’t just sell snowboard product. They’ve got to have cash flow year around because their overhead goes on all year, and they generally don’t have the balance sheets to support a long period of low sales. As larger corporations and the media have grabbed hold of action sports and demographic it represents, the lifestyle has come to be, for better or worse, more of a focus than the sport in the larger population.
 
Surfers skate, skaters snowboard, snowboarders surf. A skate shoe company I know does snow influenced clothing. The commonality isn’t the equipment- it’s the attitude, music, clothing, lifestyle. The equipment is just a tool. It use to be more of a statement. The equipment makers have contributed to this by making lots of quality equipment that’s often hard to tell apart and then endlessly trying to distinguish it by claiming various technical innovations that most of the time aren’t significant. If they are significant, they are drowned out by the promotional noise.
 
If you want to know what’s happened to the snowboard retailers who’ve fought this trend, check out your local court’s bankruptcy filings. But why should they fight it? A shop may have its roots in snowboarding, but here’s its chance to sell higher margin product to a larger customer base year around in more than one sport without the former danger of being seen as “selling out.”
 
Retailers can’t set the general trends- they can only recognize and take advantage of them. Since they are operating in an environment where there are, frankly, more of them than the market can reasonably support, recognizing and taking advantage of trends is a critical thing to do.
 
I hate this, but snowboarding has become a cog in the great corporate, action sports, youth demographic, marketing machine with the result that snowboard retailers have to approach the sport differently. The sport is still distinctive, but what it represents isn’t.
 
Retailer Challenges
 
With this background, I’ll try and put myself in a snowboard retailer’s shoes for a minute. I have the privilege of ordering in March or April something I won’t receive or start selling until late summer or fall, and have only three or so months to sell at full margin. If it doesn’t snow, I could be screwed, but that’s life. The hard goods margins aren’t that great, and I’ve got to work the system for all the discounts, free POPs, and show bonuses I can get. I know all my choices aren’t going to be right, and the probability is very high that after Christmas, or even before, I’ll have to offer some discounts. I feel better than I did a few years ago that the stuff will show up more or less when I want it, but I know there will be some delivery glitches.
 
Where I am right on the product I choose, I may not be able to get any more of the hot selling stuff when I run out in early December. My flexibility in ordering is constrained, to some extent, by brand requirements that I take product in certain proportion, by minimum order requirements, or by the space I have in my store. My ability to grow my order may be reduced by the brand imposed credit limit.
 
Boy, life was almost better when you couldn’t get enough product, it was always late, and the quality was suspect. At least you could count on selling it all at a good margin.
 
Back to the Brochures
 
There you sit, having gone (or not gone) to more trade shows at the worst time of the year than you could possibly have a use for. Before you is a pile of paper two feet high with catalogues, price sheets, credit applications, terms and conditions and order forms. These are just the official snowboard brands. Now what?
 
My recommendation is to always begin with the Mervin catalog. At least you their narrative will keep you grinning as you review their product line. And it might ward off the depression you feel when you see some brands have the ski and snowboard prices in the same place. But shortly reality and inertia set in. Reality is:
 
·         You’ve got to carry the right hard goods mix, but really want to leave as much room as you can for the higher margin soft goods.
·         Your customers are probably a more diverse group, and you may not live and die by snowboarding like you use to.
·         All the major brands offer monster products lines that start, after a few hours of study, to look a little too much like the others. They all cover all the price points, have comparable terms and purchasing programs, and similar advertising and promotional programs.
 
Inertia comes from the fact that you’re already carrying – what? Burton, one or two other major brands, maybe one of the few surviving niche brand where you don’t have too much local competition, and one of the former high flyers that tanked and has been sold to somebody who’s trying to capitalize on any left over brand equity as your el cheapo model? Five brands is about the max I’d say. Merchandising them all well is going to be an effort. Three brands would be better.
 
What’s going to make you change brands? The rep from a brand you don’t carry has pictures of you at that Vegas party you don’t want to see the light of day? Okay, that might do it. A major customer service or delivery snafu? Maybe. Prices and terms are pretty comparable. A lot of kids asking for a brand you don’t carry? Yup, that would do it. Major technological differences among product? In your dreams.
 
The bottom line is that with five or even three brands, you’ve got all your bases covered. If I were a retailer, I’d try to pick brands that helped me sell soft goods, though I admit to not knowing exactly how to do that.
 
Hard goods have become props to support the apparel and shoe sales that I suspect provide more than half the revenue and gross margin a typical store earns. It doesn’t seem to me like successful retailers are in the snowboard business anymore. They’re in the lifestyle, action sports, soft goods business.     

 

 

Snowboards from Afar; The Potential Impact on Retailers

/0 Comments/in , , , /by

In the early 90’s, when snowboards started pouring into the U.S. from the Austrian ski factories, there were claims that consumers wouldn’t accept boards labeled “Made in Austria.” Mostly, those claims were made by U.S. factories threatened by foreign production. If there was a marketing advantage to a board “made in the USA,” it didn’t last long, and smaller inefficient U.S. producers went out of business.

In our consolidated, mature industry, brands are taking the next and inevitable step of looking for ways to cut production costs while maintaining or even improving quality. Boards have and are coming in from China, Tunisia, and Spain, and we can reasonable expect to see numbers from lower cost countries grow.
 
In seeking lower cost product, what are the issues the brands have had to consider? What’s in it for the retailer?
 
The Cost Equation
 
There are four basic components to the cost of a snowboard- materials, direct labor, factory overhead and allocated overhead.
 
No matter where you build it, Tunisia, China or Tierra del Fuego (uhhh, there are no factories in Tierra del Fuego as far as I know) the materials that go into the board are the same. You have the same choices of where to buy them. If everybody buys their materials from the same suppliers, the material cost of making a snowboard will be more or less the same for everybody. Would it make sense to start your own factory to make, for example, cores in a low labor cost country? Maybe. If you have enough volume. If you can get the right wood. If you could actually make them for less than it would cost to buy them from an efficient, established source.  
 
Direct labor is often the major advertised justification for making a snowboard outside of Europe or the U.S. Let’s say that you’re paying somebody $13 an hour, including taxes and benefits in the U.S. to make snowboards. If they work, for example, eight hours a day, 25 days a month, labor cost is $2,600 a month.
 
For sure direct labor is cheaper in China. Jim Ferguson, the President of Heelside doesn’t make boards there, but he’s a thirteen-year veteran of China, lived there, and has a boot factory there. “You don’t pay an hourly wage in China,” he said. “You pay monthly and the cost includes room and board.” He estimates his average cost is $150 per worker per month, and indicates that he’s more generous than many employers. But from his point of view, he more than gets it back in continuity and loyalty.
 
 Well, even without a calculator, I can tell that $2,600 a month is more than $150 a month. A lot more. So clearly if you compare the cost of a worker in a less developed country with the cost of one in the developed world, you’ve got a savings that’s somewhere between significant and huge.
 
Hold on. It’s not quite that simple. There are two related issues. Training and productivity.
 
If it took 11.33 (2,600 divided by 150) workers in China to make the same number of boards that one worker in the U.S. could make in a month, then there would be no direct labor cost advantage to making boards in China.   Both factories would spend the same amount of direct labor money to make a given number of boards. And maybe, when you first open the doors in China, that’s the case. Don’t underestimate the labor training costs in a new manufacturing operation. It’s easy to find people to make skate shoes in Korea. They’ve been making shoes there a long time. Out in the fabled Isles of Langerham, though, they’ve never heard of snowboarding.
 
Let’s also dispose right now of a common delusion about labor. Just because it’s cheap doesn’t usually mean that if one worker isn’t doing the job you can throw ten more at it and fix the problem. It may be true in ditch digging, but not in snowboard manufacturing. Only one person can work a snowboard press at a time, and ten untrained people can’t resolve the problems caused by one who doesn’t know what he’s doing. 
 
Having said that, it’s important to recognize that a lot of complicated products are produced perfectly well in so called third world countries and making a snowboard ain’t rocket science.
 
Things start to get really interesting when you look at overhead. Here in the States, if we want to start a factory, we see either a contractor or a commercial real estate agent, tell them what we want, and they either build it or find it. Maybe we’ve got to make changes or improvements in a rented facility, but we can generally assume that the place will have a level floor that isn’t dirt, and that water and power is easily accessible. We probably count on a road. 
 
All the money you have to spend to get the place the way you want it is called leasehold improvements. It gets amortized over time on the income statement. It can be a huge number in a low labor cost country.   
 
What does it cost a brand to have managers live in third world country? Maybe it’s only temporary until things are up and running smoothly- like a year or two. Who will perform maintenance and repairs on complex machines? How long does it take to get parts? In the States, you get them by FedEx the next day. In a low cost labor haven, you may have the expense of keeping a big inventory to keep things going.
 
But then, there are those costs for workers again, so it doesn’t cost much to keep the place clean. Or maybe you don’t have too. No Environmental Protection Agency after all.
 
Putting It All Together
 
Obviously, there are cost savings in making many products in low labor cost environments. Everybody’s doing it. In making the decision to go for it, the brands are asking the following questions:
 
·         Is the product already being made in the country I want to produce in? If so there’s probably already some experience there, and it’s easier to get going.
·         Can I just buy from an established producer, perhaps helping them improve their technology and processes, rather than starting my own factory?
·         Am I in this for the long run, and can I build enough volume? There will likely be some surprises and additional costs, both ongoing and of the one time startup nature.
·         Are those seductive, loudly trumpeted, low worker costs enough to make up for the additional expenses and surprises? As much as anything, that comes back to the issue of volume. There has to be enough volume so that the direct labor savings per piece are greater than the additional overhead costs.
 
The Retailer Perspective
 
Assuming that, in fact, it turns out to be cheaper to produce a board (or other product) of the same quality in these new locations, what benefits can the retailer expect?
 
For a start, it should be clear from the above discussion that production in low labor cost countries is not the magic potion of higher margins. Obviously, the benefits are expected to be there. But one manufacturer I spoke with described the years it took to get it right.
 
Also, remember that the brands aren’t necessarily rolling in dough. It’s not easy to make a buck in the snowboard hard goods business right now whether you’re a retailer or a brand.
 
So what retailers shouldn’t expect is to see sudden, big price reductions on wholesale product prices.
This is especially true because not all of anybody’s boards are likely to be made in lower cost countries. Marketing and research and development considerations suggest that production at traditional sources will continue. I’m sure we can all hear it now. “Well, yes, we’re making a few boards in Nepal, but our high end stuff still comes from our hi tech factory in the states and all our R & D is done there.”
 
But retailers may benefit in other ways. If there is, indeed, more margin for brands, you could see some of that show up as better customer service and expanded advertising and promotion by the brand. Part of the extra income may just stay on their balance sheet as additional profit, making it easier for them to make and sell the retailer boards they often don’t get paid for until six or more months from manufacture.
 
Often, the relationship between the brand and the retailer, at least in terms of product wholesale pricing, seems like a zero sum game. One wins, one loses. In this case I don’t think that’s true.
 
Assuming that the brands did pass through all of their supposed cost savings realized from moving production to low labor cost environments, retailers would inevitably, in the normal course of competing with each other, begin to lower prices. Each would know they didn’t really want to do it, but would feel the competitive situation required it.
 
Do you think that such cost reductions would make your sales volume go way up if your competitors had reduced prices in the same way? My guess is no.
 
Would you rather earn your usual margin on a $400.00 board, for example, or a $300.00 board?
 
If you sell the same number of $300 boards as you were selling of $400 boards, your total margin dollars decline. That’s a bad thing.
 
Cost reductions from new production locations won’t happen overnight. When (if?) they do happen, I’d select certain select, gradual price reductions to be passed on to retailers because the brands compete with each other in the same way that the retailers do. Overall, my hope is incremental profit for the brands goes into supporting the sport and the retailers. Maintaining brand image is key to everybody making a few bucks.
 
 
Check out the table below, taken from U.S. government data, showing snowboard imports from selected countries in 1999.
 
Country                      Units                           Value                         Cost Per Unit
 
Austria                       198,535                      $14,587,818              $ 73.48
Spain                          39,679                      $   3,771,523             $ 95.05
China                          67,765                      $   3,379,457             $ 49.87
Taiwan                        39,676                      $      623,477             $ 15.71
Tunisia                           4,600                      $      581,826             $126.48
Canada                      230,326                      $12,033,129              $   52.24
 
Some caveats and warnings about these numbers. Call me naïve, but I just have a hunch that all those boards coming in from Canada aren’t made there. I also suspect, especially in the case of the product coming from Taiwan, that the goods aren’t all what we’d call snowboards. Just materials for a real board cost several times the unit cost of $15.71.
 
As a retailer, you should keep in mind that these prices include second qualities, closeouts, kids stuff, and snowboard like products you wouldn’t be caught dead with in your store. So don’t look at any of these unit costs as necessarily indicative of what you’re favorite brand is getting the new season’s first quality boards for.

 

 

Snowboarding the Internet; Taking the Tour at 26.4

/0 Comments/in , , /by

Slow connections suck. So while we wait for my 56k modem to connect at 26.4 kbs, consider this.

All the dotcoms with money (typically from an egregiously successful public offering) are advertising like mad. On TV, on the sides of buses, everywhere.
 
Why?
 
Because there’s not much difference between Barnes&Noble.com and Amazon.com if you want to buy a book. There’s no price difference, at least on the books I bought last week.
 
So entry barriers in this business are low, especially if you’re already doing fulfillment. Admittedly, the cost of maintaining a quality site is often underestimated. Price comparisons are easy to do. Similar sites are selling products that are often absolutely identical.
 
Under these conditions, prices should tend to move down, and consumers are more likely to view the product as a commodity. Spending increasing advertising and promotional dollars is critical to building brand awareness and keeping market share. Homegrocer.com will deliver an order free if it’s seventy-five dollars. New entrant Albertson’s.com will deliver for free if the order is sixty dollars. And so it goes.
 
Lower gross margins, too many competitors, high advertising and promotion costs, competition based too much on price. Hmmmm…….
 
He had to think for a minute. Hadn’t he seen this happen in another industry? Which one could it have been? How did it all shake out (so to speak)? Perhaps he’ll remember later.
 
Meanwhile, the computer has finally connected. Let’s go hunting for snowboards on the internet.
 
Brands on Line
 
I checked out the web sites of most of the significant brands. Some were good and some bad. Some fast, some slow. Several under construction. None were selling product. All referred you to dealers. Hardly a surprise. Brands have worked hard to build relationships with dealers. I can’t imagine anything that would make a retailer scurry to a competitor quicker than a supplier competing directly with it.
 
So brands aren’t selling boards directly on the web, through their own web sites- yet. And that’s where clarity on the issue ends.
 
I used a couple of search engines and searched under different brand names, and under snowboard or snowboarding. I went directly to some retail sites. Certain ones were sports specific. Others weren’t. The by no means complete and certainly not scientifically selected list included Performance Snowboarding, Fusion, Costco, OnSale, REI, FogDog, Gear, WorldwideSports, and OutletZoo.
 
They all had some snowboards. OutletZoo had a couple of Kemper 2000 Strike 151’s with bindings for $199. Costco was offering K2 Electras and Futuras for $359.99 (plus $18.57 shipping). FogDog had boards from Palmer, Salomon, Libtech, Option, Ride, World, Rossi, Santa Cruz and Hyperlite. I don’t know if they were all at manufacturers’ suggested list prices, but these were not heavily discounted boards. Sometimes there was just one model, sometimes damn near a whole line. Gear had what looked like nearly full lines of Arbor and Option, again at full or nearly full price.
 
I don’t suggest that my search was either indicative or all-inclusive, but the only major brands I couldn’t find at least some of were Sims and Burton. It’s interesting to note that if you do a search under either Sims or Burton, you find lots of references to places selling those brands, but the only ones who actually seem to have them are retailers.   If I were trying to attract snowboarders to my site, I’d certainly include “Burton” as a key word whether I had any product or not.
 
It’s the wild, wild west out there. You never know what brand, what model year, what quantity and what prices you’re going to find. Right now, it looks like most of the major brands selling on the web are doing a pretty good job keeping the prices at or near to what they would sell for in a quality retailer. 
 
What isn’t clear, of course, is how these boards are getting to these sites. Some brands I assume are legitimately placing product with sites under agreements to maintain pricing. Product may also be finding its way to sites through traditional, if I can call them that, gray market channels. I’m also wondering what will have happened to prices on the internet by the time you read this, well after Christmas.
 
The Internet Financial Model
 
Early financial discussions about the internet model postulated a cost structure that would allow internet merchants to make an attractive margin, but still give the consumer a better deal than he could get through conventional retail channels. The thinking was that total costs would decline dramatically with the elimination of “brick and mortar” and the associated expenses.
 
Certainly some costs are eliminated. But my sense is that they are basically replaced by others. Fulfillment (getting the product to the consumer, handling returns, warehousing, packing) is the same whether you are a traditional mail order retailer relying on a catalogue, or an internet merchant. It’s interesting to note that some internet merchants also offer a catalog- either through the mail or downloaded. That’s what Performance Snowboarding does. It’s also true that creating and maintaining a really good web site, and having adequate telephone customer service, costs a lot of money.
 
Irrespective of what costs are added or eliminated by selling over the internet, internet retailers are going to be competing against each other as much as against traditional retailers. That competition is going to result in the same business cycle for internet retailers as we saw with snowboard companies. A lot are going to disappear. A few larger, well-capitalized ones will have the bulk of the market.
 
A True Retail Story
 
The other day, I wandered into the Garts in Bellevue, Washington. For some reason, I gravitated to the snowboard section. It was a foreboding sight. The overall impression was like a snowboard junkyard. Boots of various brands were stacked in their boxes up to my eyes, with no apparent concern for brand or size. The stacks were leaning over, the boxes on the bottom being crushed by the weight of the ones on top. Boards of all brands were leaning against the wall many deep. Burton was mixed with Vision. Parts from Morrow Exchange step-in bindings spilled out of their boxes.  The clear message was that Garts didn’t care. It was all the same to them. If you wanted to buy some snowboard stuff, great. If not, they’d mark it down or sell it again next year. Whatever. There was clearly no concern for the product and no pride in being a dealer.
 
I’m not critical of Gart’s for taking that approach to snowboarding. If that’s the retail model that works for them, fine.
 
If, however, your question is what is the future of snowboard product sales on the internet, then we have to be concerned with the Garts model, because product that is treated that way is a candidate for internet sales. If it’s just another thing you buy, if no assurance comes from buying a specific brand, if the purchase process isn’t worth spending any time on because the stuff’s all the same and you don’t need the advice of a knowledgeable retailer, then buy it on the internet to spend the least possible time and use a bot to find the best price.
 
A Glimpse of a Possible Future
 
Get on the internet. Go to www.eshop.msn.com. In the little box in the upper left hand corner, type in “snowboards” and hit go. On the next page that comes up, under “matching categories,” click on “Snowboards.” On the next page, in the left hand column under “Related Links” click “Search for snowboards.”
 
Okay, now we’re to the part where it gets a little scary. You can, if you choose, specify one of something like 110 brands. Some of them aren’t even in business any more as far as I know. Maybe they’ve got closeout inventory out there. If you don’t choose a price range, model year, length, waist width, sidecut radius, or board style, you’ll have 3,758 boards to choose from, the page tells us. But you can select by any of those features, and I may have left a couple out.
 
Let’s pick a board in the $350 to $400 price range from the current model year. I want a freeride board that’s from 161 to 164 cm with a waist width of more than 25 cm (big feet). There are 42 boards available that meet those specifications. Let’s sort them by price (cheapest first of course) and list the models for sale on the internet ahead of others. I’ve selected all brands.
 
Okay, there’s the Lamar Hetzel Lite Freeride at 163 cm. Obviously, that’s a core brand. Clicking on that board, I get a list of its stats. I’ll add it to my wish list. When I do that, I get another screen, with a picture of the board and one of my choices under “Online Store” is to click on “Where to Buy.”
 
When I click there, the screen comes up blank. The product is not available online anywhere this site is aware of. It offers to help me find a retail store where I can buy. It comes up with a list of local sporting goods stores, but doesn’t tell me which carry the product I’m looking for.
 
The Microsoft site has been launched within the last month or so. Its format seems excellent even if the product availability isn’t too great yet. It’s going to be scary when it can really match buyers with the product they want to buy.
 
I recently bought a graphic card for my kid’s computer. I went to cnet.com. I clicked on sound and graphic cards. I clicked on graphic cards. It gave me a list with reviews and specifications. I picked one. It gave me a list of places I could buy it sorted by price. I went to the place where it was cheapest and bought it. It showed up in two days. I didn’t pay any sales tax. I was happy.
 
Is that the future of snowboard equipment on the internet? To some extent, that’s up to us. If we nurture our brands and control distribution, maybe giving up some immediate sales for longer term success, it doesn’t have to be.
 
But you know what? That would be good advice even if there was no internet. 

 

 

Numbers, Numbers Everywhere And Who Knows What They Mean

/0 Comments/in , , , /by

I do confess it. I was trained as a finance guy. I have an MBA, started out in international banking (Ask me about Carnival in Brazil sometime!), and did some corporate treasury and investment banking kind of work. Given the way things have changed, I decided it was okay to come out of the closet. Please don’t throw me out of the industry.

Using this experience to get a handle on the snowboard industry isn’t an easy thing to do. With the acquisition of Ride and Morrow by K2, there is no snowboard only company left that provides public financial information. What is available is not all prepared in the same way. Canadian accounting standards are different from French accounting standards, are different from United States accounting standards are different from German accounting standards. Details on the snowboarding parts of business are typically unavailable.
Nevertheless, phone calls, internet searches, and rummaging through some file folders produced public information on K2, Far West, Adidas (Salomon), Quicksilver, Vans, and Rossignol. What trends, or confirmation of trends are visible from reviewing this data? How much small print can I read before going crazy or blind?
As required, I’ve converted numbers to U. S. dollars based on exchange rates on November 3, 1999.
Size Matters
The first thing to note is that, with the exception of Far West, the owner of Concept Outerwear (revenues of $7.4 million in 1998), there are no small companies in this group. Vans, at $205 million in its last full year, is next in size. Quik and Rossi were $316 and $338 million respectively. K2 comes in at $575 million and Adidas wins the heavyweight division at $5.3 billion.
It’s easier to compete in a highly seasonal, very competitive market where margins aren’t that great and products are, for the most part, only differentiable by marketing if you’re big enough to spread your overhead and have year around cash flow. Even Far West, by orders of magnitude the smallest company in this group has some of those things going for it. Without diversification, having a viable financial model in the snowboard business is a struggle unless you’ve got Burton’s market share.
These numbers represent each company’s total revenues. The snowboard portion is much smaller.
In some ways, then, it’s good to be big if you’re going to be in the snowboard business. It can also be seen as bad, if you believe that the sport derived its energy and success from the commitment of people who were 100% focused on snowboarding, risking everything they had, and were as much concerned with snowboarding as with the business of snowboarding. If snowboarding is just one of your lines of business, and sometimes a small one at that, it may not always have your full attention.
How Big Is It?
The people at Rossi were great. They sent the English language version of their annual report Fed Ex. It tells us that 8.4% of their revenue, or $28.4 million is from snowboarding.  Their snowboard business grew by 13 percent over the prior year. They sold 143,000 boards.
They also estimated worldwide board sales at 1.45 million units in 1998/99. They thought it had grown 5% over the prior year.
I don’t know if that estimate is at the wholesale or retail level. It really doesn’t matter. What’s interesting to note, based on my own estimates of board sales four or five years ago, is that the rate of growth in board sales hasn’t exactly been spectacular. Probably not much more than the five percent Rossi estimated over last year. Makes you wonder about some of the estimates of growth in the number of snowboarders we see. Could be that a lot more people are renting. It could also mean that a lot of people try it and get counted as “snowboarders” but don’t go very often if at all.
For all I know, the culture has been so furiously marketed and the style so widely accepted that people who have never snowboarded consider themselves snowboarder and get reported as such in the surveys.
Just kidding, I hope.
Boards, boots, bindings and accessories made up $10.7 million of Quiksilver’s sales in 1998- approximately 3.4% of total sales.   That includes Mervin and the late, lamented Arcane step-in binding system. Quik also sells some snowboard apparel, but the amount isn’t identified separately.
Vans snowboard sales come from a number of sources. They sell the Switch binding and boots that work with it. They also sell traditional strap bindings. Vans has a line of snowboard apparel. They also earn some amount of revenue from licensing Switch technology to other brands, including Nike, North Wave, and Heelside. Finally, the company now owns the High Cascade Snowboard Camp. There’s not a number anywhere that indicates how many dollars this all comes to,
K2 is no help either. All their annual report says is that the “Sporting Goods” segment of their business had sales of $405 million in 1998. That includes inline skates, skis, bikes and fishing tackle, not to mention snowboards.
Well, it’s time for some creative estimating. Somewhere around here, I’ve got some carefully prepared, hand scrawled estimates of relative market shares for snowboard brands.   Go with me on this, and we’ll assume that those estimates are valid worldwide and not just in the US. I know what Mervin’s and Rossignol sales were. If these market share percentages are at all reasonable, a seat-of-the-pants guesstimate for K2 snowboard hardgoods sales would be (drum roll please) $65 million, or eleven percent of their total sales. That’s before the acquisition of Morrow and Ride, of course. Those two deals should more or less double K2’s snowboard hard goods sales.
Adidas reports that Salomon doubled its snowboard sales to $42 million. It doesn’t indicate if that number includes Bonfire. $42 million is about three-quarters of one percent of Adidas’ total sales for the year.
It just doesn’t look like anybody is going to live or die by snowboard related sales, though with the addition of Morrow and Ride, K2 is going to have an even greater focus on it. It’s more like companies are having a hard time figuring out how to grow and be profitable in sporting goods, and winter sports especially, and think snowboarding can help them figure it out, beyond what it contributes to sales.
The Bottom Line
Soft goods are good. Hard goods are bad. Winter sports are tough. Summer activities bring diversification and hope. And there you have it.
Quiksilver and Vans are both growing and making money. They have limited exposure to snowboard/ski hard goods and sell product all year around. Other soft goods players we haven’t talked about are doing well too.   They are riding the demographic crest and the culture snowboarding and other so-called extreme sports have created.
Rossignol has seen its sales shrink over the last two years. It’s also lost money in the last two years. 72.5% of its sales came from ski related hardgoods (skis, boots, bindings, poles, cross country skis) and 85.8% came from winter sports. They hope to double their snowboard revenue over the next three years.
Adidas lost a little money in 1998, the first year in which Salomon was consolidated into their financial statements. They had earned a profit in each of the previous four years. Salomon’s overall winter sports business grew only one percent. Eighty percent ($364 million) of Salomon’s total sales were from winter sports. The Adidas annual report described Salomon’s overall financial performance this way: “The operating result improved due to a number of measures to enhance earnings and almost reached break even.” YeeHah!!
The good news was that twenty percent of Salomon’s business was summer related, up from eleven percent the previous year.
K2’s sales have grown in each of the last four years. They have been profitable in each of the last five. But in 1998, their net income fell to $4.8 million from $21.9 million the previous year. This was largely due to increases in their product costs and selling expense out of line with the sales increase.
K2 divides its business into three segments; sporting goods, other recreational and industrial. Sporting goods include snowboard hard goods, as well as skis, bikes, fishing tackle, and some other stuff. Sporting goods did $405 million in sales, down from $411 million the previous year. This represents 70% of the company’s total revenue. It earned an operating profit of $5.3 million and, after a reasonable allocation of interest expense and corporate overhead, probably lost a little money.
Mountain bike and ski sales fell. K2 snowboard product sales increased, though we don’t know by how much. They do say the following:
“Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for its Clicker step-in binding, related boots and snowboards.”
Other recreational includes apparel, skateboards and shoes. Industrial is mostly monofilament line. It earned them $18.4 million in operating profit on sales of $125 million. There’s a lesson there somewhere. Screw snowboarding. Sell line for weed trimmers.
The Bottom, Bottom Line
The hard good guys slug it out with each other to get a bigger share of slower growing markets with lower margins and high marketing expense- an impossible financial model. Mean while the shoe and apparel guys, who can appeal to a broader demographic because they aren’t tied to a particular sport, clean up.
It’s not a pretty picture, there’s not a happy ending, but that’s what the numbers show.

 

 

Changes in Market Focus; The New Snowboarding Reality

/0 Comments/in , , /by

Most of us are in a different business than we were a few years ago. Retailer, brand, manufacturer, or even consultant, our customers have changed. There are only a handful of companies out there that can say they are snowboard companies. Others have adjusted their strategies, or aren’t around anymore.

 Remember the “C” word? Consolidation wasn’t just about a bunch of brands going away. It was about companies pausing, taking a deep breath, and recognizing that the opportunity represented by snowboarding went beyond selling boards, boots and bindings.
 
What is the snowboard market now? Who’s succeeding in it and why?
 
It’s the Culture, Dude
 
We’ve been over this before, so let’s keep it short. Hard goods have tended to become a commodity with lower margins. This has been especially true with boards but increasingly applies to boots and bindings as well. The days of rapid advances in quality and technology are nearly over.   
 
Young people represent a big demographic bulge everybody wants/needs a piece of. The lifestyle is what a lot of people are into whether they participate in the sport or not. There are more similarities than differences among the snow/surf/skate/BMX cultures. That’s hardly a surprise given the number of people who participate in more than one.
 
The term “participant” has to be viewed differently by hard and soft goods companies. Somebody who snowboards three days a year is a participant just like somebody who snowboards a hundred days a year. The hundred dayer probably spends more on equipment than the three dayer, but both need shoes and clothing for all one hundred days and probably want to look good wearing them.
 
Someone who perceives himself as a member of the culture is always a candidate to buy soft goods. But they may not buy any hard goods.
 
The sports have become the foundation of the lifestyle market. Nautica, ESPN, Mountain Dew and Tommy Hilfiger can make their money and grow their businesses as long as snowboarding ET. Al. is cool. Growth in the sport of snowboarding would be nice for them, but cool is more important than big.
 
It would actually be to their detriment if they were thought of as snowboard companies.   They wouldn’t be able to go after the broader market. Their potential wouldn’t be nearly what it is if they had a sport, rather than a lifestyle, focus.
 
Limits on Growth
 
Existing snowboard brands pretty much have their market niches. Those who are still standing and have been around a while are probably secure in those niches, but have a hard time figuring out what to do next. Let’s take Burton as an example just because they are far and away the most successful snowboard company.
 
Burton’s sitting there with, say, forty percent of the market. No doubt they’d like to grow. Their percentage share of the market is unlikely to grow much. They will get their share of general snowboard market growth, but that’s not what it use to be.
 
Real growth, if it’s going to happen, has to come from some new directions.    Skateboarding? Surf? Bikes? Bet they’ve looked at every action sport category there is to look at. But they haven’t done much.   Why?
 
Because of the danger of diffusing the strength of the brand and confusing people about what Burton stands for.
 
Think of a skateboard with the Burton name on it. “Why are they doing that?” you would wonder. It’s confusing and somehow disturbing. It’s a gratuitous new product with no meaning.
 
Apparel is different from hard goods. Burton has announced an initiative in brown shoes. They already sell a lot of apparel. We aren’t offended or confused if somebody who doesn’t snowboard wears some Burton clothing, but has chosen it because it’s stylish and functional.
 
But a Burton skateboard might get some strange looks from other skaters and, more importantly, from snowboarders.
 
Apparel, then, opens up a bigger market, and can be managed so as not to damage a brand’s credibility.
 
Moment of Clarity
 
It’s not a new thought that differentiation among hard goods is tough to achieve, and that margins are better in soft goods. But it was last March, from my perspective, that the market officially changed and the link between hard and soft goods largely severed.
 
It was the day Nike announced that they would not introduce a snowboard line. Their thinking, I imagine, had three basic components.
 
First, that they couldn’t introduce a snowboard that was any better than what everybody else was already making. Second, given that fact, selling snowboards wouldn’t help them sell soft goods. Indeed, if the board was received with a yawn or worse, it might even damage soft goods sales.
 
Finally, like all the other big players, Nike wants to capture some of the energy and legitimacy of the action sports culture, but they don’t want to be too closely associated with any one sport, less it restrict their broader sales prospects.
 
I didn’t think of it this way at the time, but that was the day the new market officially arrived in snowboarding.
 
And the Winner Is……
 
There isn’t one winner. But there does appear to be a single characteristic of companies likely to succeed in the lifestyle/action sports/youth culture market. Come with me now while we visit the Securities and Exchange Commission’s Edgar web site to see if we can distinguish that characteristic of success.
 
Listen to how Vans, Pacific Sunwear, and Quiksilver talk about their customers in the first paragraph or two of their most recent 10Ks (annual reports). By most measures, these are three successful companies. PacSun is a retailer that doesn’t sell any hard goods, possibly excluding some accessories. Van owns Switch and Quiksilver owns Mervyn, but neither Switch nor Mervyn contributes dollar sales, which, as a percentage of total revenue, are critical to their respective companies.
 
Vans characterizes itself as
 
….a leading lifestyle, retail and entertainment-based company which targets 10-24 year-old consumers through the sponsorship of Core Sports,(TM) which consist of alternative and enthusiast sports such as skateboarding, snowboarding, surfing and wakeboarding, and through major entertainment events and venues….
 
The retailer Pacific Sunwear says it is
 
selling everyday casual apparel, accessories and footwear designed to meet the lifestyle needs of active teens and young adults. The Company’s customers are primarily young men aged 12 to 24, as well as young women of the same age, who generally prefer a casual look.
 
Quiksilver
….designs, arranges for the manufacture of, and distributes casual
sportswear, swimwear, activewear, snowboardwear and related accessories
primarily for young men, boys, young women and girls….
 
 
All three are focused on the lifestyle market. All three are focused on the same age groups. None is associated with only one sport. All, if you read further in their annual reports, are concerned with staying close to trends and their markets.
 
They all start out by telling us not who they are as companies, but who they think their customers are.
 
There is, then, a new model for companies that want to grow quickly in the youth lifestyle market, as opposed to the snowboard market. Be compulsive about staying close to trends and be prepared to turn on a dime. Don’t be too closely associated with only one segment of the market. Focus on products that permit you to make a margin that’s high enough to fund the required advertising and promotional expenses. And finally, be big.
 
What To Do
 
If you’re a snowboard retailer……wait a minute. I guess what I’m suggesting is that there aren’t many snowboard retailers in the sense there use to be. There are retailers who sell snowboards. A growing percentage of their sales profit are coming from soft goods, and they probably sell skateboards, or wakeboards, or surf boards in addition to snowboards. Are you limiting your growth by focusing too much on only the snowboard market? Maybe you are, and maybe it’s what you should be doing. But please make sure it’s a conscious decision.
 
Choose the brands you carry with an eye towards the company’s ability to stay on top of the trends. Welcome customers who aren’t necessarily snowboarders. Maybe you can convince them to try the sport.
 
With the consolidation largely completed, growth for most brands is more or less limited to the market’s rate of growth. Unless you have a lot of capital to work with, and even if you do, you try and change your existing market position at your peril.
 
K2’s recent acquisition of Morrow and Ride seems to suggest they believe, given the prices they paid, that they can get a better return on investment through new brands than by investing similar resources in further building the K2 snowboard franchise. I think they are probably right.
 
If fast growth is no longer an option, and you not longer have sky rocketing capital requirements it imposes, then maybe it’s time to settle down and just run the business. Make incremental improvements in how you operate that improve you return on investment.
 
Control your distribution to encourage sell through. If you do that, you have the opportunity to raise prices a little and reduce end of the season discounts. Resist at all costs the urge to accept the 3,000-board order from Bulgaria. You know they will show up in either Japan or the U.S.
 
Negotiate with your supplier for better prices. With continued excess production capacity that should be possible.
 
Take a hard look at who your customers are. Do all your advertising and promotional activities really reach them? Can you cut back or redirect any of those expenses?
 
The pace of market change has been phenomenal. Not long ago, it seemed that demographic changes and endless snowboarding growth made the sky the limit. Now retailers have to be cautious about being too closely associated with one sport, and brands need to operate efficiently rather than prepare for fast growth. Large soft goods brands not closely associated with one sport seem to be the beneficiaries of our hard work.
 
Looks like resistance was somewhat futile, and we’ve been partly assimilated, maybe changing the assimilators in the process. Oh, the hell with it. I hope it snows soon.

 

 

Good News And Bad News; Ride Reports Third Quarter and Preseason Orders.

/0 Comments/in , /by

            It must suck to be the only public, pure snowboard company left standing. All the other snowboard brands are suffering from some of the same industry issues as Ride, but they can equivocate about it with impunity.

 
            But Ride’s management wouldn’t want to do that anyway. Like the title says, there’s good news and bad news. The good news is the improvement in the income statement and the preseason orders (up 26 percent). The bad news is a weak balance sheet and a capital structure that needs, well, restructuring.
 
            The income-statement result and preseason-order growth is all the more impressive given the balance sheet Ride has had to work with and the constraints placed on what the company can do. A weak balance sheet means the CEO spends all his time managing cash, assuaging banks, and trying to raise capital. Who knows what Ride—or any other snowboard brand for that matter—could accomplish if the management team could actually focus on running the business?
 
The Income Statement
 
            Sales for the nine months ending March 31, 1999 are up 14.2 percent to 38.1-million dollars over the same period last year. Ride’s loss for those nine months was 1.389-million dollars compared to 14.645-million dollars last year. The improvement isn’t as spectacular as it seems at first glance. Last year, the company took an 8.6-million-dollar write-down for impairment of goodwill. In other words, given market conditions at the time of the write down, it had some assets that were worth a lot less than what Ride paid for them.
 
            Nine-month selling, general, and administrative expenses have been more than cut in half, but that includes the 8.6-million-dollar write-down. If you take that out of the equation, the expense reduction is still 19.7 percent—which is pretty impressive. According to Ride, and excluding the impact of the 8.6-million-dollar write-down, the expense reduction “ … was primarily due to staff reductions and lower executive salaries.”
 
            Gross margin over nine months was up to 27.4 percent, an increase of 1.3 percent. May not sound like much, but 1.3 percent of Ride’s nine-month sales is half-a-million bucks, which would buy a lot of beer at Vegas. Perhaps you recall, many years ago, when having your own factory was the Holy Grail of the snowboard industry because “it would let you have a really great gross margin.” Numbers like 45 percent were once thrown around. Too bad everybody had the same idea.
 
The Balance Sheet
 
            Ride’s receivables at March 31 were 6.5-million dollars net of a bad-debt allowance of 750,000 dollars. That would be bad if those receivables represented uncollected accounts from last season. But according to Ride President Robert Marcovitch, those receivables represent early 1999 sales of last season’s product that will be collected this fall.
 
            The 10Q confirms this, stating, “The company made the decision to move our closeout inventory at prices lower than would normally be the case in order to gain quick sales and hence borrowing availability.” Translation, we needed the cash!
 
            If it isn’t getting paid until fall, how does that get the company any cash? The bank line from CIT allows Ride to borrow a percentage of eligible inventory and receivables. Ignoring the issue of what’s “eligible” and what’s not, the percentages for Ride are 55 and 85 percent respectively. Let’s say you’ve got a million bucks in inventory. You can borrow 55 percent of that, or 550,000 dollars assuming it’s all eligible. If you’ve got a million in receivables, you can borrow 85 percent or 850,000 dollars. Because I went to business school, I know that 850,000 dollars is better than 550,000 dollars, so Ride sold at lower prices to create receivables. 
 
            Inventory of 7.3-million dollars on March 31 gives you pause for a moment. But the footnotes in the 10Q tell us that 2.5-million dollars of that is raw materials and work in progress. That will turn into next season’s product. The remainder is finished-goods inventory. According to Marcovitch, almost all of the finished goods are product for the coming season. Not only do we know from this that the inventory is good, but it suggests that however tight cash is, Ride is finding enough dollars to run its factory efficiently. That is, it’s getting materials from suppliers and not having to start and stop the plant because of material or cash shortages. The major liquid assets then—inventory and receivables—are more or less worth what the balance sheet says they are. And, in the normal course of business, when Ride ships that inventory to customers it will turn into receivables (and, hopefully, someday cash), that will be worth substantially more than the current inventory value.
 
            Meanwhile, down on the liability side of the balance sheet, we find current liabilities of 15.1-million dollars broken down as follows:
 
            Accounts Payable: 4,247,000 dollars.
            Accrued Expenses: 2,383,000 dollars.
            Short-term Borrowings: 8,484,000 dollars.
 
            The short-term borrowings include three million dollars owed to U.S. bank and a note for 1,725,000 dollars payable to Advantage Fund II, Ltd. The remainder is owed to CIT Group/Credit Finance, Inc. under Rides’ revolving line of credit. Accounts payable and accrued expenses are moneys owed to the phone company, materials suppliers, insurance agents, employees, and everybody else Ride needs to get goods and services from to operate its business. Ride’s current ratio (its current assets divided by current liabilities) is 0.98. The current ratio is a standard financial measure of a company’s ability to meet its ongoing operating expenses. The lower
the number gets, the tougher things are. You can’t continue to operate with a current ratio under 1.0 for too long.
 
            Let’s put that in a little perspective. In a highly seasonal business, in the part of the season where the cash is drying up (like the end of March for example) no snowboard company has a great-looking balance sheet and is rushing to pay all its bills. Nevertheless, Ride’s current ratio is symptomatic of the need for a balance sheet restructuring and additional working capital.
 
Preseason Orders
 
            Up 26 percent to 43-million dollars. Wow. Any other snowboard company that had a bigger increase, step up and claim it. I won’t be holding my breath. The only category that’s down is “OEM, wakeboards, and other.” That’s only down, according to the press release, because it chooses not to accept certain OEM orders, which is probably a correct strategic move.
 
            What I like even better are the categories the increases came in. Boards are up nineteen percent. However, boots, bindings, and apparel and accessories (excluding SMP) are up 38, 33, and 58 percent respectively. That is, higher margin products represent an increasing percentage of total sales, which should bring the whole margin up.
 
            Some of these sales may get shipped before June 30. But just for fun, let’s say Ride sells that 43-million dollars, and nothing more, in the nine months of their next fiscal year. Let’s assume the company’s gross margin stays the same. Its gross profit will be 11.78-million dollars.
With the preferred stock dividend eliminated, that increase in gross profit by itself will bring Ride to break-even. A restructuring should reduce the company’s interest expense from 798,000 dollars, if only because Ride is paying punitive interest rates right now. Margins should go up a point or two just based on the change in the product mix. Obviously, the quarter ending June 30 isn’t a strong one, but for the twelve months ending June 30, 2000 Ride ought to earn a few bucks just from what’s in place right now. That is, if Ride management can get the restructuring done.
 
Restructuring
            The U.S. Bank facility is a term loan for three million dollars that is due and payable August 31, 1999. That loan, according to the 10Q, “ … is secured by promissory notes from Global Sports, Inc. in the original aggregate amount of 1.8-million dollars. Additionally, the facility is secured by the personal guarantee of one of the Company’s outside directors, including certain real-estate property owned by the director.”
 
The note for 1.725-million dollars, also according to the 10Q, “ … has a term due date of June 30, 1999 which date is automatically extended to September 30, 1999 in the event the company has executed a letter of intent for a transaction which would raise capital sufficient to fully redeem the note.”  The note’s interest rate is ten percent, but it has a default rate of
eighteen percent. The CIT line of credit expires August 30, 1999.
 
            So, there are a lot of critical deadlines coming up, and the 10Q is replete with the usual statements companies in these circumstances make about dire consequences if Ride can’t meet some of these deadlines.
 
            My guess is that there will be a successful restructuring. The improvement in operating performance and increase in preseason orders makes me believe that. Its likely shareholders will be hit by additional dilution as a result of the restructuring. Concern over that dilution is probably the reason the stock price didn’t go up significantly in the wake of Ride’s healthy preseason order numbers.
 
            Ride has hired Ladenburg Thalman & Co. “ … as its financial advisor to provide advice regarding potential strategic alternatives available to the company,” says the 10Q. Negotiations are ongoing.
 
The Bottom Line
            If Ride had paid maybe two-million less for its factory, not hired quite so many people so quickly, and had paid some of them less, and not built the Taj Mahal in Preston, Washington, I suspect the managers at Ride would be smiling and looking forward to closing out their fiscal year June 30 with a twelve-month profit. But that’s not how it happened, and Ride was hardly the only snowboard company seduced by perceived endless growth.
 
            Ride’s market position seems sound and the product line complete and well received. Management and employees are industry experienced.          I still have some trouble with the financial burden of owning a factory, but Ride management has made its a marketing asset. So, strategically the brand seems positioned to succeed. By the time you read this, we’ll probably know if Ride’s managers pulled off the financial restructuring that will allow them to do it.