What’s It Like Out There in the Real Skateboarding World?

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The Board Press published a really good interview with Ultimate Distribution founder Kevin Harris. It’s his description of what he learned visiting 55 skate shops in Western Canada. I didn’t know there were 55 skate shops in Western Canada.

Kevin’s description of what he learned reminds us, or at least reminds me, is how important it is to get the hell out of your office and visit shops (and, I’d add, skate parks). This is where the real business of skateboarding happens and where you can really discern the trends.

Here’s the link to the article. I’m going to go read it again. Then I’m going to get my ass out from behind my desk and go visiting.

 

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

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

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

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

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

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

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

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

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

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

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

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Some Insight from Rip Curl

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A reader sent me the article below that was published in the Australian on March 12th. I’d love to just provide you with a link, but The Australian would want you to sign up for an account and pay them money. I don’t blame them, but I doubt you’re going to do it and I thought you’d find this interesting.

You may recall that Rip Curl had some hard times and went through a restructuring back in 2013. It worked out, and Rip Curl director Tony Robert’s explanation of why is worth reading. He says in the article that

“…he believed the group had managed to avoid the worst of the global financial crisis and extended downturn in retail conditions because, unlike its bigger rivals, Rip Curl had stuck to its core product lines.”

“We are more of a core surf brand than either key competitors. They both grew bigger than us but in growing bigger they stretched into that non-core market more than we have and we have been very true to our roots in terms of our core products.”

Regular readers know I’m not necessarily against a brand expanding its market reach. But I believe it has to be done thoughtfully because there comes a time when your newly sought after customers may know your brand but not your story- then how are you going to compete? Anyway, the whole article is below.

·      Surfwear retailer Rip Curl valued at AUD310m after share buyback

·      The Australian March 12, 2015 12:00AM Eli Greenblat, Senior Business Reporter

Privately owned global surfwear retailer Rip Curl has been valued at $310 million by directors after the board approved a share buyback form former senior executives no longer with the company.

This compares with a $400m price tag placed on the iconic surfwear group two years ago when it was planning a sale, possibly through an initial public offer, which was later abandoned due to tough market conditions that slashed its earnings along with other brands in the retail category, such as arch rivals Quiksilver and Billabong.

Rip Curl director Tony Roberts told The Australian he believed the group had managed to avoid the worst of the global financial crisis and extended downturn in retail conditions because, unlike its bigger rivals, Rip Curl had stuck to its core product lines.

“We are more of a core surf brand than either key competitors. They both grew bigger than us but in growing bigger they stretched into that non-core market more than we have and we have been very true to our roots in terms of our core products,” Mr. Roberts said.

“For example, our wetsuits are our champion products and have been since the company was founded; probably that’s one reason why the GFC didn’t hit us as hard as it hit them.’’

Mr. Roberts confirmed the positive benefits of a restructure forged two years ago — which initially plunged the group into the red — had flowed through to 2015 with the surfwear retailer on track to reap its third consecutive full-year profit.

“Like a lot of retailers, and we are not a pure retailer, retail conditions are tough and patchy,” he said. “That’s a good way to describe them, both around Australia and globally. But we are performing well and are strong in some markets.”

Documents lodged with the corporate regulator show Rip Curl posted a 63 per cent increase in full-year net profit to $23.32m in the 12 months to June 30, 2014, as revenue increased 7.8 per cent to $429.58m.

“We had a great year last year and we are continuing to be above last year but definitely we are finding the way tough,’’ Mr. Roberts said.

He said the core business, selling surfwear products and apparel through independent surf shops, continued to be strong, while the “aspirational” side of the business — selling to customers who were not surfers but aspired to take up the sport or simply liked to be associated with the sport — had “taken a battering”.

The fresh valuation of $310m on the business came as Rip Curl, founded in the Victorian seaside town of Torquay 45 years ago by business partners Doug “Claw” Warbrick and Brian “Sing Ding” Singer, sought to buy back 1.5 per cent of its issued capital from investors.

It is believed former Rip Curl chairman and current Australia Post boss Ahmed Fahour will hold on to his small parcel of remaining shares after stepping down from the board of the surfwear equipment and apparel group last year and cashing in the majority of his stock for about $3m.

The new share buyback is part of an employee share agreement struck in 2000 that allowed senior executives to invest in the tightly held private company. The buyback will see about 76,000 Rip Curl shares bought back from former executives of the company with a price tag of $63 a share.

With just under five million shares on issue it gives Rip Curl a capitalization of $310m.

Rip Curl is still controlled by founders Mr. Warbrick and Mr. Singer, who jointly own 72 per cent of the company.

The company’s third-biggest shareholder is Francois Payot, who helped create Rip Curl’s European business.

Neither of the founders or Mr. Payot will be selling into the buyback.

Turning to the weakening Australian dollar, which puts stress on Rip Curl’s margins through the higher price of imported goods or imported product components, Mr. Roberts said the impact would need to be addressed, but in the current competitive climate it was difficult to lift prices at the retail level.

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

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

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

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

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

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

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Vail Figures Out How to Generate Summer Revenue During the Winter

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

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

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Changes at Quiksilver

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

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

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

Where are the sales increases going to come from?

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

 

 

 

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

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

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

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

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

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

Here’s how it changed by region as reported.

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

 

 

 

 

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

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

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

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note that not all brands are sold worldwide.

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

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

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

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

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

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

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

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

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

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