Abercrombie & Fitch’s October 31 quarter; Will it Be Enough to Try the Same Things as Everybody Else?

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A&F (owner of the Hollister brand) had a pretty good quarter. I’m thrilled that their sales fell a bit and want to start by reminding you why I’d think like that (though they tell us it was mostly caused by exchange rates).

Here we sit over retailed as an industry and a country with a cautious consumer, a lack of product differentiation and a still weak economy. Here’s how A&E describes what they are doing to improve their business in their 10Q for the quarter ended October 31.

“Our ongoing efforts to improve our business are focused on:

  • Putting the customer at the center of everything we do.
  • Delivering a compelling and differentiated assortment.
  • Optimizing our brand reach domestically and internationally and optimizing our performance in each channel.
  • Defining a clear positioning for our brands.
  • Continuing to improve efficiency and reduce expense.
  • Ensuring we are organized to succeed.”

All good things. They’ve always been good things regardless of economic conditions. But regular readers will know we’ve seen similar to almost identical lists from other brands and retailers I’ve written about. Some of this stuff is expensive to do. Unless you believe that the management team at A&F is better than the team at other companies, there’s no reason they can be a better competitor doing the same stuff as everybody else.

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The Quiksilver Bankruptcy: Where Should We Be Focused?

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As we go through the process of watching Quiksilver try to resurrect itself what issues should have our attention? Certainly not the endless pages of bankruptcy court filings. Not even I’m reading all of those. The process will grind through to its conclusion. The secured creditors will come out more or less intact, the common stockholders and unsecured creditors, not so much. As I read the deal right now, the common shareholders will get the big goose egg and most of the unsecured creditors 2.7% of whatever they were owed.

Those chips will fall where they may. In the meantime, there are four things we might care about as an industry. Or at least there are four things I think we might care about. Here’s the short list. You’ll see that they are not unrelated.

  1. Quik’s balance sheet
  2. Brand value and position
  3. The management team
  4. Any possible combination with Billabong.

Let’s take a brief look at each.

The Balance Sheet

It’s common knowledge that the level of Quiksilver’s debt is one of the things that led to the bankruptcy filing. Their last published 10Q (for the quarter ended July 31) showed long term debt of around $800 million. Interest expense during that quarter was $18 million. Multiply that by four and it’s around $72 million a year; simply unmanageable given their revenue.

Comparable debt when they exit bankruptcy, as the plan is currently structured, will be $318 million, or 60%, lower. In projections filed with the court, Quik projects interest expense in 2016 at $27.5 million, which is way better than $72 million. If you accept their assumptions, the projected balance sheet seems reasonable and manageable.

The projections Quik has provided the court are for the years ending October 31, 2016-18. For the first year, they are projecting revenue of $1.247 billion, ending receivables of $224 million and ending inventory of $292 million. The last full annual report we have was for the year ended October 31, 2014. For that year, Quik reported revenue of $1.57 billion. Year end receivables were $320 million and inventory $278 million. We don’t have a full year number for the year ended October 31, 2015. Revenue for the nine months ended July 31, 2015 were $1.01 billion down from $1.17 billion from the same period the prior year.

Okay, I’m just sort of thinking out loud here. I’d like to see a further decline in inventory given the decline in sales, but they are going through a chapter 11 proceeding and there’s going to be some further store closing and rationalization of the business so I can see why it wouldn’t happen the first year.  I also notice they are planning for little to no inventory increase in the next two years as sales grow to $1.297 and $1.391 billion respectively. That’s a good thing.

So the balance sheet seems reasonable, which is as much as I can ever say about any projection.

Brand Value and Position

 Not to overstate the obvious but if the brands can’t keep/recapture/build some credibility with the target customers, nothing else matters and a bankruptcy filing and the associated restructuring will just buy some more time for Quiksilver before it finds itself in trouble again.

In that regard, I am actually encouraged by the revenue decline Quik is projecting for its first year.  Let’s look at a couple of comments Quik makes in discussing its projections.

“Global wholesale revenues in 2016 are projected to decline compared to the prior year, primarily impacted by decreased volume, particularly in North America, and will partially be offset by increased selling prices. Growth is projected to be 7% in both 2017 and 2018 and will be largely driven by sales volume and increased revenues from ex-licensed categories. “Global retail sales in 2016 are projected to decline compared to the prior year due to the impact of store closures, a majority of which will occur in the U.S. New store openings and store growth, focusing on Boardriders and shop-in shop retail concepts, will drive sales growth in through 2018.”

Then, talking about the Americas (United States, Canada, Mexico, Brazil) they say:

“Sales in 2016 are largely impacted by a decline in North American orders as the Company exits certain distribution channels. Going forward, sales growth is projected to be driven by increased revenues from sales of previously licensed product categories and growth in Mexico and Brazil, with modest growth in North American orders.”

The part where they talk about exiting some distribution in North America and increasing selling prices gives me a warm, fuzzy feeling. Regular readers know I think being cautious with distribution is critical to brand building and getting good margins when, as in the case for most brands in this industry, your product isn’t fundamentally different from the competition’s.

And if that helps you raise your prices, as Quik seems to allude to, that means you can improve your bottom line even if you don’t grow your revenues and you can also reduce the working capital invested in the business.

On the other hand, I don’t much like the part where they talk about revenue from the previously licensed products being one of the drivers of global growth in 2017 and 2018. As I read that, instead of royalty income, they will have top line revenue. Nothing wrong with that (and I like that they are pulling back from the licensing program) but it’s kind of robbing Peter to pay Paul.

 

Quiksilver has damaged its brands’ positioning and credibility as a result of some of the distributions decisions it has made in recent years. It sounds like they are going to reverse some of those. Good. I hope it’s not too little too late.

The Management Team

Remember how Billabong bemoaned how hard it was to keep good management as they went through their restructuring travails? Quiksilver, I imagine, has the same problem. Billabong resolved the issue not just by completing their financial restructuring but by bringing in a new CEO who has made big changes in both the organization and the management team.

Quiksilver tried that with Andy Mooney and it didn’t work out. I know all the reasons people say Andy was the wrong person and I agree with some of them. I also know he started taking some required actions that should have been started way before he got there but weren’t. He also didn’t have the advantage of coming in as the financial restructuring was completed.

I wrote at the time with some sympathy about how founders and long established CEOs often had a hard time making difficult decisions a business required because of momentum and their long standing relationships with the people and organization. Maybe having to file a chapter 11 wipes out any hesitancy about making fundamental changes (not just tough decisions- plenty of those have been made at Quiksilver) in the business focus and direction. I hope so. At the very least, potential new senior hires will have to note (fairly in my opinion) that existing leadership bears some responsibility for Quiksilver’s current circumstances.

Combination with Billabong

 With Oaktree Capital Management involved on both sides, one can’t help but wonder if a merger between Billabong and Quiksilver is a possibility. Though we know the subject has come up, we’re still left wondering. As you may recall, the Oaktree representatives on the Billabong Board resigned right before the Quiksilver filing, and Oaktree’s involvement, was announced to avoid an obvious conflict of interest.

I don’t have enough information to even form an opinion as to whether or not a merger would be a good idea. Both Billabong and Quiksilver management kind of have their hands full right now, so I’m pretty confident it’s not imminent.

The reason some might like the merger idea is because it would imitate the highly successful VF actions sports coalition that includes Vans, The North Face, Timberland, Reef and other brands. Except it doesn’t really. Quiksilver and Billabong are direct competitors. The VF brands mostly don’t compete with each other. I expect that Billabong, as I’ve written, has already benefited from Quiksilver’s problems. If I were Billabong, I’d keep my powder dry and see how Quik manages its brand positioning issues. I might even be cheering for Quiksilver to succeed, because I as Billabong might not want well known surf and skate brands thrashing around in the market.

So you (and I) are saved from reading too much small print on legal documents. You can assume that the balance sheet is adequate and that a merger between Quiksilver and Billabong is not imminent (please no announcement to the contrary the day after I publish this). The overriding issue is the direction the management team takes the brands. At the end of the day, that’s what will matter.

Billabong Holds Its Annual Meeting; Progress and Headwinds

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At Billabong’s annual meeting a couple of days ago, CEO Neil Fiske and Global Billabong Brand Manager Shannan North made presentations describing the company’s progress and challenges since the results for the year ended June 30 were announced in July. Let’s see what they said.

It’s only been four months since the year’s results were presented so, as CEO Fiske put it in his opening remarks, “The themes of our presentation today are not new.”

He reemphasized that the turnaround, while taking hold, was a long term effort. “We said a couple years ago that this was a complex difficult turnaround. That it is going to take time to build the foundation necessary to sustain growth and margin expansion.” Below is the list of areas, taken directly from the presentation, where the turnaround continues to be focused.

  1. Brand
  2. Product
  3. Marketing
  4. Omni-Channel
  5. Supply Chain
  6. Organization
  7. Financial Discipline

If you’re looking for more detail on these, you can see Billabong’s earlier discussions in documents on their investor web site, and I’ve reviewed them in previous articles on my web site. I’m sure we agree that all seven are important. But in which areas can Billabong do something better than other industry companies? Where can it build a sustainable competitive advantage?

Overall, I believe that size is now an advantage in this industry, if only because of the investment in systems and in the omnichannel that’s required. Billabong, compared to most industry companies (depending on how we define the industry) has that going for it. I’ll also say I think Quiksilver’s problems have given Billabong an opportunity in some markets.

Starting from the bottom of the list, financial discipline gets easier as your balance sheet gets stronger. Billabong’s has certainly strengthened and I note that they are funding marketing programs through reduced expenses in other areas. Sounds like financial discipline to me.

I’ve no doubt there is money to be saved through revamping both the organization and the supply chain. But these are things other companies can and are doing as well. If you see these as a long term competitive advantage, it’s because you believe Billabong’s revamped management team can do it better than competitors.

Neil thinks that “over the next several years” they can get to the point where they are spending $30 million less annually on sourcing and logistics. He thinks they can cut their product lead times by 30%.

Making good product seems like the price of entry. Not something you can do better than others in the long run- you just have to do it to have the chance to compete. You can come up with some product innovations from time to time, but I doubt you can keep your competitors from doing the same.

Branding is a place where Billabong has an opportunity. This has a lot to do with their organizational changes. As Neil Fiske put it, “We are moving from a fragmented and regional business to a brand led, global company focused on building big powerful brands and maximizing their reach.”

The focus on what they decided are their three strongest brands with the greatest potential- Billabong, Element and RVCA- allows for certain efficiencies in all areas of the business. Remember, none of the seven strategies stand in isolation from each other.

Billabong is 52% of the company’s wholesale business, with each of Element and RVCA representing 16%. I suspect RVCA has the most growth potential. It’s not closely tied to a single activity like the Billabong and Element brands. In this regard, I thought Shannan North’s comment, talking about the Billabong brand, that “The brand’s turnaround is as much based on gross margin expansion as it is on revenue growth…” was interesting and appropriate.

For now, the Billabong brand (and I suspect Element as well) will be focused on its core (I still hate that term) market. At some point, with that further solidified, it will be interesting to see if they have the ability to break out of their core positioning without damaging that positioning. That’s pretty much the challenge for any brand in this industry as it grows, isn’t it?

Okay, omnichannel. Yes it’s important. As Neil puts it, “…probably the biggest game changer. Being able to connect all our channels – retail, wholesale, and ecommerce – to give the customer a seamless brand experience. Anytime, anywhere. Bricks and clicks. Content and Commerce. Social, mobile, local. Knowing our consumer like the back of our hand and being able to engage them on their terms, the way they want to interact. Omni is about unlocking the full value of the multi-channel shopper from one global unified platform.”

If Billabong was doing it badly, they need to do it well. Again, I’ll ask if that’s a source of competitive advantage or something you have to do well to compete.

2016, we learn, “…will be a year of heavy implementation on our big initiatives,” as CEO Fiske puts it. But, he points out, “…we have a set of external market challenges that must be met and overcome. Here’s what he says they are.

Billabong Holds Annual Meeting 11-15

 

 

 

 

 

 

 

He says, “Last year at this time, the Australian Dollar was 87 cents to the US dollar and the Euro was 1.25 to the US dollar. Today the Australian Dollar is closer to 71 cent and the Euro closer to 1.07 Euros.” The problem, he says, isn’t so much the level as it is adjusting to the new level when currency values change quickly. I agree.

“Our second challenge,” he continues, “is the sector weakness we are seeing in the last several months in North America. This includes the big action sports chains, department stores, teen retail, and tourist retail. Specialty retail, where we hold the number one position, is better but still relatively flat and cautious. The hardgoods market in skate has been particularly slow in the first few months of our fiscal year and this has hurt sales of both Sector 9 and Element skateboards.”

Finally, he notes that “…price discounting and promotion online and in the mall remain high and the consumer is waiting for deals. We don’t intend to enter the fray. We will stay focused on quality products, quality distribution, and price integrity… on strengthening our brands with the core consumer.”

I like that decision. If you’re focused on building big brands, how else can you approach it?

The overall financial result is that EBITDA for the first four month of this fiscal year is $2.5 million Australian dollars less than what it was last year.

Billabong is working to pull off a complex turnaround in market conditions that are not improving quickly if at all. Though their balance sheet is restructured, they are not without financial constraints on what they can do and how quickly. I like their plan and focus. Anybody who expected to see faster, stronger results in this economy was kidding themselves.

The thing I wish I understood better is where they are going to be able to consistently do better, not just as well, as their competition. I’m also wondering if Billabong and Element can find ways to eventually expand beyond their surf and skate franchises with the brand positioning they are working so hard to manage intact. If there is some constraint on revenues growth by these two brands (perhaps offset by improved margins and profitability even with lower revenue growth), maybe some of their other brands, in addition to RVCA, will step up and surprise us.

Marketing and Positioning Matter. So Do Other Things. Skullcandy’s September 30 Quarter

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The thing is, I really like Skullcandy’s marketing.  There is some commonality of message and attitude among their sponsored people (notice I don’t just say team riders) even when those people come from very different places and perspectives.

I like it is because while they have, for example, sponsored surfers the message isn’t just about surfing. It’s about life and living it- the experience, if you will. With that approach, they can be aspirational to a broader group of potential customers. You may never ride a 30 foot wave, but there’s no reason you can’t be positive, innovative and willing to take a risk as you live your life.

The issue isn’t getting a lot these ambassadors, to use Skull’s word. It’s getting the right ones. Those would be the ones who are not only in sync with Skull’s corporate culture and market position, but who can, maybe, be attractive to an additional customer segment , allowing revenue to grow, without Skull losing credibility and causing customer confusion as it gets further from its “core.”

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This Should Get Your Attention: Amazon Opens Its First Brick and Mortar Store

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Unfortunately, I didn’t write that just to get your attention. It’s true. You can read all about it in this article.

As you read it, please focus on what it says about Amazon’s goal in having the store. It’s all about gathering and using data, says the author.

Retail today is about getting the right product to the right people at the right place at the right time. There seems to be a consensus around that. It’s also about the omnichannel- letting your customer shop whenever and wherever they want.

Those two aren’t exactly the same thing, though there’s some significant overlap. It’s always been a good idea to get the right product to the right people at the right place and time. In some ways, that’s easier now. In some ways, harder. I guess mostly harder, as what’s “right” changes so much more quickly.

Omnichannel didn’t exist not very long ago- at least not as the sophisticated concept it is now. There was pretty much only brick and mortar.

Taking this approach to the market requires data, the systems to analyze it, flexibility, and logistics. It also takes recognition that customer groups are amorphous, coming and going and changing size and composition very, very quickly. It’s hard to keep up with them.

When you hear brick and mortar focused retailers talk about these issues, they put them in the context of better serving the customer. As the article describes Amazon’s collection and use of data, it feels manipulative. I don’t sense any respect for the customer. To be fair, Amazon didn’t write the article and I imagine they would have phrased it differently. Still, would that attitude be completely surprising in a retailer that wants to sell everything to everybody?

When your target market is everybody, do you have a reason or a need to focus or to know your customer group? I’d say no, and maybe that’s hopeful for retailers who have a more defined market in mind.

Sell the Experience, Not the Product: The Wavestorm Board

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I knew about this article on the Wavestorm $100 surfboard before it ever came out. In some ways, it’s old news. Less expensive surf boards of various constructions and materials have been popping up for years now, and the Wavestorm isn’t new. I guess the genie was out of the bottle around the time Clark Foam went bell y up.

So on the one hand it’s old news. It was highlighted on Boardistan, and I kind of decided there was nothing to discuss. But it kept popping back into my consciousness, and I couldn’t bring myself to delete the link to it. I even wrote 500 words at one point and trashed it.

But here I am. It’s Sunday morning and I think I’ve figured out what’s bothering me. That is, I finally know, from a business point of view, why I care.

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More of the Same: Spy’s September 30 Quarter

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I’m going to try and keep this pretty short. Nothing has really changed strategically. Spy is still in business only because its major shareholder has lent the company around $20 million. In terms of operations and expense management, they’ve done everything that I can see they can do. They tried to stake out a differentiable market position with their “happy” campaign. I thought that was pretty creative.

But they are in a market (sunglasses) dominated by big players and luxury brands. It’s an oversupplied market and to many of the brands, it’s just an accessory rather than the place where they have to make their money.

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The Challenge Hasn’t Changed: GoPro’s September 30 Quarter

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On the face of it, GoPro had a pretty good quarter and, as usual, we’ll take a look at the numbers. The stock closed at $30.21 on October 28th. They released their earnings after the market closed. The next day, the stock closed at $25.62, down 15.2% on by far the biggest trading volume since July of 2014. What’s everybody worried about?

CEO Nick Woodman notes in the conference call that, “…this quarter marks the first time as a publically traded company that we delivered results below the expectations that we outlined in our guidance.”

That never makes Wall Street happy, but I hate knee jerk reactions to quarterly results. Still, the stock’s been in a downtrend since October 2014. What are people seeing from a longer term, strategic perspective?

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Camp Chairs as a Game Changer; Supporting Your Customer’s Experiences

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So, in a market where your customer may value the experience more than the product, how do you know that your product improves their experience? How do they find out it will? Why should they associate your product with the experience? What, exactly, is the experience you are improving?

Let me tell you a story

Every summer, a local winery (Chateau St. Michelle) holds a series of concerts.   Various combinations of my friends and family go to see, typically, one to three concerts there.

You can reserve some really uncomfortable plastic chairs a little closer to the stage, but we always buy cheaper tickets for the festival seating. Below is a picture of what it looks like at a typical concert.  The picture below is taken from the back of the festival seating area. You can see the stage and the uncomfortable, white plastic chairs in front.

Camp Chairs as a Game Changer 10-15

 

Now, it might be that you don’t want to be this far from the stage. If that’s the case it’s either the higher priced, uncomfortable plastic chairs or getting there early. The gates open at 5PM for a 7PM show start. But people start lining up at, well, I don’t know, noon. They bring their chairs, food and drink, blankets, and various other picnicking accouterments, some of which are profoundly clever. The closer to the front of the line you are, the better your space can be when you’re let in. I think the correct strategy is to give a blanket to mark out your spot to whoever is youngest and quickest and send them sprinting as soon as their ticket is taken.

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Kering Reports on Volcom and Electric, Kind Of

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Kering’s report for the quarter ended September 30 included almost no information on Volcom and Electric. No analysts asked questions about either brand, but that’s pretty standard.

Historically, there’s been enough in the slides and prepared remarks that I can use some simple math to figure out things are going, but not this time. Here’s all they tell us.

“Volcom and Electric: softer Q3. Volcom nearly stable with strong resilience in wholesale, against still adverse action sports market in the US.”

That’s it. They note in the prepared remarks that Electric also suffered from some higher costs, but don’t tell us which costs or why and they confirm what they say in the above quote.

Growth, as reported, in the Sport & Lifestyle segment which includes Volcom and Electric, but is dominated by Puma, grew 8.4% to a billion Euros.

Shortest report ever I think.