The Evolution Of Marketing & The Future Retail Model

/15 Comments/in , /by

Recently, some companies have said some intriguing things about the omnichannel and the relationship between brick and mortar and online (for the record, when I say “online” I’m including mobile devices). I’ve also read some interesting things about generational behavior that made me think about the future of brands and retail structure.

It’s no surprise that buying patterns are different for the millennials (born 1982-2000) than they are for the baby boomer (born 1946-1964). Millennials have faced (and will continue to face) different and more difficult economic circumstances than boomers. And of course, they take technology for granted. They shop differently, have different priorities, and are less likely to be brand loyal.

I’ve written about brands that were originally focused on the boomers aging out, and the complexity around maintaining the loyalty of your original customer base while trying to appeal to younger customers. The first thing to note is that right now, boomers spend way more than the millennials. But, for obvious reasons, that’s going to change. If you’re a company that likes customers with money to spend, it’s hard, right now, to ignore the boomers.

Read more

Trade Shows, My Mother, and Generational Cycles; Ideas About Your Customer

/4 Comments/in , , /by

Okay, I’m back from Agenda and Surf Expo. I feel bad I didn’t go to the Zumiez 100K event even though it’s not, exactly, a trade show.  I’ll make it to Denver for SIA, but am not going to OR, though I should. They wanted me to pay to get in, but in the best industry tradition, I found a company already attending that would get me a badge.

Still, I just decided there wasn’t time. I had some god awful viral infection that lasted from Christmas Eve to sometime at Agenda and I’ve got clients that won’t pay me unless I do some stuff for them.

Unfortunately, I’ve never found a client who will pay me for doing nothing. Oh well.

I made a presentation at Surf Expo, and will make a related one at SIA, that actually related my mother to generational cycles and am going to try my hardest to relate that to trade shows. I think I can do it by talking about what drives long term buying habits, something we should all be interested in.

Read more

Mobile- That’s What Matters

/0 Comments/in /by

Last week at Surf Expo, I  made a speech where one of the things I highlighted was the importance of mobile.  I said, “How mobile influences brick-and-mortar sales is more important than what you sell online.”  I get back home and, low and behold, come across a presentation on just how dominant mobile is becoming worldwide.

It kind of looks like I may have understated the case for mobile in my presentation.  This isn’t specific to our industry, but if you take maybe 10 minutes to go through and reflect on the slides, you’ll see what I mean.  I guess I’d summarize and interpret the slides in the presentation as saying, “If you’re selling anything, anywhere, to anybody you have to be prepared to reach them on mobile devices as a condition of having a chance to compete for their business.”  Most of you are selling something somewhere to somebody.  If you’re not, you’ve got me intrigued and I’d like to hear from you.

This isn’t just in the so called developed world.  It’s everywhere and will become more so with time.

You know, in over 20 years of involvement in this industry, it seems like I’ve watched everything that started as a potential competitive advantage turn into a requirement just to be in business.  I suppose that’s because internet/mobile has given every customer access to nearly perfect information.  That customer’s perception of the brand/product can no longer be shaped by a company’s advertising and promotion to the extent it once was.  What, then, is the role and value of a brand?

Oh well.  Here’s the link to the presentation.

 

 

 

 

 

Quiksilver’s 2014 Results; Still a Work in Progress. Work Faster.

/6 Comments/in , /by

Quik filed their 10K last week, but the holidays kept me from any serious analysis until now. The best thing I heard in the conference call was CEO Andy Mooney saying, “The organizational restructuring of the company is now complete and the management team focused singularly on execution.”   We’ve learned, as we’ve watched other industry companies go through turnarounds, that cleaning up and getting organized is incredibly distracting from just running the business well.

I’m going to start with a summary of the financials. The first thing that jumped out at me was the year over year decline in stockholders’ equity from $388 to $58 million. That’s not an unexpected result given the loss for the year of $309 million, up from a loss of $233 million the prior year. Total liabilities, however, fell only 2.8% to $1.2 billion. Long term debt (net of current portion) declined 1.9% to $793 million.

The net loss includes a one-time gain of $30 million on the sale of Mervin Manufacturing and Hawk.

Obviously, no matter how you like to calculate it, the debt to equity ratio went through the roof compared to a year ago. I’ve written before about the need to get the turnaround producing positive cash flow and profits before the balance sheet deteriorated too much further. I’m still thinking the same thing, only with more urgency.

Sales declined from $1.81 to $1.57 billion (13.3%). There are some things you need to be aware of around goodwill impairments and licensing revenues. But first, here are the summary numbers according to GAAP straight from the 10K, which you can review here if you want.  The numbers are in millions of dollars.  Let’s run through these numbers and I’ll add a little “color,” as they say in earnings conference calls.

quik from 2014 10k 1-15

 

 

 

 

 

 

 

 

 

 

 

 

 

As you see above, revenues fell in all three regions. EMEA is Europe; APAC is Australia and the Pacific. The gross profit margin (not in the table) in the Americas declined from 41.5% to 41.3%. In EMEA it was down from 56.7% to 55.6%. In APAC, it rose from 51% to 54.6%. Overall, the gross margin rose from 48.2% to 48.6%. The increase “…was primarily due to the segment and channel net revenue shifts toward our higher margin EMEA and APAC segments, and retail and e-commerce channels versus our Americas segment and wholesale channel.” Gross margin dollars, you will note, were down in all three segments, though only very slightly in APAC.

You may recall that Quik is being selectively more aggressive on pricing, particularly on board shorts. If, while doing that, they can still improve their gross margin, it suggests that other parts of their program must be having some success. The caveat is that I don’t know the extent or breadth of those price reductions.

Sales in the U.S. represented 35% of Quik’s total sales, down from 38% a year ago.  Total U.S. sales, according to my careful calculations, fell 20% from $688 million to $550 million. Wow. The wholesale segment in the U.S. seems to suck for Quik. Not just for Quik.

Worldwide, wholesale business fell from 71% to 67% of the total. Brick and mortar rose from 25% to 28% and ecommerce was up from 4% to 5%. Quik ended the year with 683 company owned stores worldwide including 147 factory outlets. 100 stores are in the Americas. EMEA and APAC have 296 and 287 stores respectively. Those numbers do not include 252 stores “…licensed to independent third parties in various countries.”

I’d be curious about the financial model for those licensed stores. Does Quik get a fee for the licensed name and then sell them product at the same prices as to other independent retailers? Are they involved in merchandising? Anybody want to put a comment on my web site about how that works? You might as well as long as you’re hear reading this anyway.

Quiksilver brand revenue fell 12.9% ($93 million) from $721 to $628 million. $17 million of the decline was due to “Our licensing of peripheral product categories…”

Roxy fell 6% from $511 to $480 million. No impact from licensing for Roxy.

DC revenues were down 21%, falling from $542 to $427 million. $10 million of the decline was due to licensing. We learn in the conference call that additional categories may be licensed in the future.

I have no doubt that licensing the peripheral product categories is a good financial decision. But not long after it happened, I walked into my local Fred Meyers for my groceries and saw in their ad, “Quiksilver Kids- 25% off!”  Anyway, I worked my way to the clothing section and there in fact was the Quik and DC kids merchandise with a big sale sign on it.

So, I know it’s just the kid stuff, and I know it was a good financial decision, and I know I lack objectivity about this. But, damn it, it’s still representing the Quiksilver brand and I hated seeing it there and I hated the thoughtlessness with which it was merchandised and I hated what it was surrounded by. Okay, they needed to do it, and it was somehow the “right” decision and all that and it still depresses me to think about it.

Let’s move on.

Take a look at the SG&A expenses in the chart. The biggest reduction was in corporate operations ($24 million of the total reduction of about $30 million). Actually, I guess that’s what you’d want to see- spend the money in the places that can drive sales and profits. That’s generally not the corporate offices.

As a percentage of sales, however, SG&A expense rose from 47.4% to 52.7%. Obviously, that can’t continue. They note in risk factors that “We may be unable to continue to reduce SG&A at the same pace.” No kidding. I suspect Quik isn’t finished taking costs out of their supply and logistics chain, but SG&A can’t go down forever.

Promotion and advertising expenses totaled $78 million for the year. In the two prior years, they were $93 and $118 million respectively.

Now we get to the asset impairment charge of $180 million in EMEA. Yes, it’s noncash. Yes, it’s “one time,” though there always seems to be a new one charge time in the following year (Not just talking about Quik). No, that doesn’t mean you can ignore it. It is an indication of a real decline in future cash flows and the value of those assets.

Finally, at the operating income line, we see worse performance and a loss in all three segments compared to the previous year. Just for fun, let’s take out the asset impairment charge in EMEA. If we did that, we’d see the operating profit of EMEA was $13.7 million; positive, but down from the previous year.

Okay, almost made it to strategy. Just a few more financial comments.

The allowance for doubtful accounts has increased from $57.6 million at the end of fiscal 2012 to $60.9 million at fiscal 2013 end and $64 million 2014 fiscal year end. This has happened while sales fell 20%. Not necessarily supposed to work that way.

Also looking at the balance sheet, the current ratio has fallen from 2.49 to 2.13, but that’s still okay. Trade receivables were down 22.4%- more than the decline in sales. The same is true with inventories. They were reduced by 22.3%. They reduced the average day’s sales outstanding by four days to 93 and inventory days on hand from 122 to 118. Good work. I will not be surprised to see further improvement in the inventory numbers.

Interest expense was $76 million, up from $71 million last year and $61 million the year before that. Most of their long term debt is fixed rate, but the rates are between 7.8% and 10%. The first maturity of this debt is December of 2017.

Quik’s three fundamental strategies are “1) strengthening our brands; 2) growing sales; and 3) driving operational efficiencies.”

Nothing surprising there. I’m guessing every company would like to do that. You can read the details on page one of the 10-K. I see some progress in numbers one and three. Obviously, given the financial results, we aren’t there on number two yet. However, CEO Mooney tells us, ”Looking at the year ahead, we are pleased with our order book for spring ‘15 as it represents the stabilization of the business beginning in Q2 providing a foundation for significant EBITDA growth in 2015 with top line and incremental EBITDA growth coming in 2016 and beyond.”

Basically, he’s calling the bottom. And none too soon I’d say given the balance sheet. CEO Mooney projects a 2015 revenue increase “…in the low single digit range normalized for categories transitioning to a licensed business model.” They expect “proforma adjusted EBITDA” (whatever that means) to be $80 to $90 million assuming current exchange rates. Nobody is projecting a profit, though they expect positive free cash flow in 2015.

They make this statement in the 10-K:

“We believe that the integrity and success of our brands is dependent, in part, upon our careful selection of appropriate retailers to support our brands in the wholesale sales channel. A foundation of our business is the distribution of our products through surf shops, skateboard shops, snowboard shops, sporting goods stores, and our own proprietary retail concept stores, where the environment communicates our brand and culture. Our distribution channels serve as a base of legitimacy and long-term loyalty for our brands. “

You won’t be surprised I agree with that statement though, bluntly, I don’t quite see Quiksilver as having completely taken that approach since Andy Mooney became CEO.  But I’m partly willing to give them a pass because of the turnaround they had to engineer and are still engineering. There are some comments in the conference call about a being less promotional on their web site to support the core business and you’re aware they pulled DC back in distribution partly to address these issues.

With regards to marketing, Andy notes, “On marketing we went a little bit darker [in] marketing candidly in the transition, but we will come back with the vengeance in the spring as we said 40% increase in media. That media will be spent almost solely in core skate, surf and snow magazines in both print and vertical specifically to drive that business in the key markets of North America, Europe and Australasia. We are also going to increase our marketing spending in terms of point-of-sale presentations within the core surfer retail accounts reinvesting in grassroots and activating marketing the athletes that are important to those accounts and the consumers who shop in those accounts…”

That seems like a step in the right direction.

Given where they’ve come from, I really don’t dispute most of the operational steps Quik has taken. I haven’t liked seeing them all, but I understand them. I’m guessing we’re mostly though with SG&A reductions, though I’m thinking there might be some more improvement in gross margin through more inventory and supplier rationalization. For me, it’s right now about timely sales increases that improve cash flow to manage, and ultimately improve, the balance sheet.  We seem to have arrived back to where public companies in this industry always get- can you build strong brands while growing revenue enough to make wall street happy?

Altamont Acquisition of Hybrid; the Plot Thickens

/6 Comments/in /by

When Altamont bought Fox Head in early December, I wrote this article, reporting what little we knew about the deal and speculating on what Altamont was up to strategically, if anything. Here’s, in part, what I said.

“Altamont now owns or at least has investments in Brixton, Dakine, Fox Head, HUF and Mervin Manufacturing. That is quite a gaggle of action sports/outdoor/street wear/fashion businesses. Are these just opportunistic buys or is there a plan here? That is, will each continue to run independently, or is there enough overlap in markets and manufacturing to justify some coordination? Maybe Altamont is looking to build the next VF. I hasten to add that’s complete speculation on my part. Still, it does feel like there’s been a recent focus on this market by Altamont.”

Now, Altamont has gotten itself a Christmas present, investing in “Hybrid Apparel (Hybrid), a leading supplier of branded, licensed and private label apparel.” On its web site, Hybrid describes itself as”… a complete and vertical operation; designing, merchandising, developing, sourcing, producing and distributing branded, licensed, generic and private label apparel to all tiers of distribution.”

The Altamont press release continues: “Hybrid’s partnership with Altamont will allow Fox, the number one global motocross apparel brand and a recent Altamont and Hybrid investment, to benefit from Hybrid’s product development and supply chain expertise as well.”

Hybrid, then, invested in Fox Head along with Altamont.

Feel now, with the investment in Hybrid, that Altamont has a plan. In the last couple of years, we’ve watched pretty much every large brand or retailer improving manufacturing and logistics. They want to minimize SKUs, control inventory, and reduce time to market. There’s too much money on the table to not do that well and it’s an important attribute of brand building.

Altamont now has a partner that specializes in exactly those areas. I can’t for the life of me imagine that Altamont won’t ask Hybrid to take a look at Brixton, Dakine, HUF and Mervin. I’ll take a shot in the dark and guess that all those brands make t-shirts. Can you think of a reason Altamont wouldn’t “encourage” consolidation and coordination of those orders through Hybrid? I’m thinking you could take some significant cost out of each of those brands, not to mention get better pricing by increasing volume.

I suggested in the quote from my earlier article above that Altamont is thinking about building the next VF. If you follow VF at all, you know one of the things they do is bring a rigorous manufacturing and logistics process to their acquisitions.

Maybe Altamont started out making opportunistic buys, but it now looks like they are creating a package of related and coordinateable brands all of which have some growth potential that can improve their financial performance even before Altamont, through Hybrid, takes some significant costs out.

Okay, now let’s take the next step in speculation. Again, I’ll remind you that I have no actual information.

With some revenue growth and cost control over the next year or two, (and other acquisitions?) what an interesting group to take public as an exit strategy. The tag line would be something like, “Just like VF, only our brands are cooler!”

Just an idea. Go back to enjoying the holidays.

Abercrombie & Fitch’s Quarter: Now You See Him, Now You Don’t

/0 Comments/in , /by

When CEO Michael Jeffries is on the conference call on December 3rd, then “retires” on December 8th, you kind of figure out there are issues. The 10-Q can be viewed here. On page 24 you can read some of the details of his retirement, though not the reason for it. The recent financial performance of the company probably has something to do with that.

As always, I’ll get to the financial details. But let’s start at the 10,000 foot level and hear how Abercrombie & Fitch (A&F from now on) describes their market positioning on page 24 of the 10-Q. The quote is a bit long, but I’d like you to read it carefully and see how it feels given what you think about our market.

“The modern Abercrombie & Fitch is the next generation of effortless All-American style. The essence of laidback sophistication with an element of simplicity, A&F sets the standard for great taste. From classic campus experiences to collecting moments while traveling, A&F brings stories of adventure and discovery to life. Confident and engaging, the Abercrombie & Fitch legacy is rooted in a heritage of quality craftsmanship and focused on a future of creative ambition. abercrombie kids is the next generation of All-American cool. The essence of fun and friendship, a&f kids celebrates each moment by sharing its effortless great taste with the world. From documenting school spirit days and team sports to

traveling abroad and experiencing new cultures, a&f kids tells stories filled with youthful excitement and a touch of mischief. Confident and independent, abercrombie kids stands for quality, on-trend style, and creative imagination. Each day brings a new discovery, a chance for adventure, and the opportunity to make history. Hollister is the fantasy of Southern California. Inspired by beautiful beaches, open blue skies, and sunshine, Hollister lives the dream of an endless summer. Spontaneous, with a bit of edge and a sense of humor, it never takes itself too seriously. Hollister’s laidback lifestyle is naturally infused with authentic surf and skate culture, making every design effortlessly cool and totally accessible. Hollister brings Southern California to the world.”

I am not saying that’s not a valid market position and maybe that’s truly what they are aiming for. But it doesn’t feel like the customer group I associate with our target market in action sports, youth culture, outdoor or whatever we’ve become. There certainly ain’t no “authentic surf and skate culture” there.

I hate to say this, but there are a few things in that positioning statement that appeal to me and my generation (boomer). You probably already know how incredibly uncool I am. I only buy new clothes when my wife starts to hem and haw when she sees what I’m wearing. Sometimes, in desperation, she throws out pieces I’ve got and hopes I won’t notice. I think the lapel width on the emergency suit I own is back in style again, but I’m not sure.

Fundamentally, then, this is their strategic problem. For lack of a better word, A&F is preppie. That’s where their roots are. But that’s a shrinking market if only because those customers are aging. Growth, then, requires some new customers. How do you change your positioning to attract those new customers without alienating the old ones?

It’s not a new or unique problem, but it’s a hard thing to do. They seem to recognize this. I think it’s related when they note as a risk factor that,”Our inability to transition to a brand-based organizational model in a timely fashion could have a negative impact on our business.” I’d add that transitioning could have at least a temporary negative impact.

Sales for the quarter ended November 1st fell 11.8% compared to last year’s quarter from $1.033 billion to $911.5 million.

Sales in the United States fell 11.9% to $595 million. Europe was down 18.2% to $223 million. Other rose 9.2%, but only to $94.1 million, representing 10% of the quarter’s total revenue. Direct to consumer rose 7.4% from $174.6 to $187.5 million.

This is probably a good time to remind everybody that the strengthening dollar, a trend I see continuing, is going to cause revenues translated from other currencies to decline. It reduced A&F’s sales for the quarter by $8 million. I hope that’s the worst it causes.

Below I’ve pulled out of A&F’s 10-Q the changes by brand and for comparable sales during both the quarter and the first nine months of the fiscal year. I think the numbers speak for themselves from a revenue perspective. They expect fourth quarter revenues to be down “…by a mid-to-high single-digit percentage.”

A&F 11-1 10q 12-14

A&F11-110-Q12-14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The company ended the quarter with 1,000 stores, down from 1,049 a year ago. They expect to close a total of 60 this year, and a similar number in each of the next several years.

The gross profit margin fell from 63.0% to 62.2%. They describe the decline as “…primarily driven by increased promotional activity.” Store and distribution expense fell 13.9% from $481 to $414 million. It fell as a percentage of sales from 46.4% to 45.4% even with the decline in sales. That’s good work.

There’s also a 17.2% decline in marketing, general and administrative expenses from $126.7 to $105 million. It also fell as a percentage of sales from 12.3% to 11.5%. Again, good work. They characterize the decline as the result of decreased compensation expense offset by an increase in marketing expense.

Okay, now we have to get to the part where in last year’s quarter, they had restructuring and asset impairment charges totaling $88.3 million. In this year’s quarter, they “only” reported charges of $16.7 million. That’s a $71.6 million difference. In addition, they had other operating income in last year’s quarter of $9.9 million. In this year’s quarter, it was $1.5 million.

As you can imagine, this resulted in quite a change in operating income. In last year’s quarter it was a loss of $35.4 million. This year, it was a gain of $33.4 million. That is quarter over quarter improvement, but with huge impact from the various charges. If you eliminate all those charges and the other income in both quarters, you find their operating income rose from $43.1 to $48.5 million.

As you know, I don’t take at face value any management’s cry that “It’s a one-time charge” or “It’s noncash!” and the implicit suggestion that I just ignore them. The need to take those charges tell you something about the future of the business and its cash flow. That doesn’t mean you shouldn’t be aware of the difficulties those charges cause in interpreting the financial statements.

Interest expense rose from $1.7 to $5.6 million. Net income for the quarter improved from a loss of $15.6 million to a profit of $18.2 million. However in last year’s quarter they had a tax benefit of $21.4 million compared to a tax expense of $9.6 million this year.

On the balance sheet, the current ratio is mostly unchanged, hovering around 2.2. Long term debt to equity has risen from 0.34 to 0.48. Inventory has fallen consistent with the sales decline (down 20%), but cash is up. However, long term debt has risen from $123.7 to $292 million, explaining the increase in interest expense. Total equity has fallen from $1.68 to $1.4 billion. If you want to argue the balance sheet is a bit weaker than a year ago, I guess you can, but there is no fundamental problem here. In last year’s nine months, cash used in operations was $230 million. This year, it’s been a positive $29 million.

Last thing on the financials; the 10-Q included a review by PricewaterhouseCoopers, their independent public accountant. You don’t normally see that in a 10-Q. I think it’s due to the fact that the company had some accounting issues that, while not significant in their overall scheme of things, requires the restatement of prior year financials. Not a good thing to have happen when the company is having issues as it calls your other numbers into question at the worst possible time.

CEO Jeffries summarizes the changes they are making this way in the conference call.

“These changes include; first, shifting to a branded organization; second, making major changes in our assortments including faster speed-to-market and lower AUC; third, engaging how we — changing how we engage with our customer; fourth, introducing new store designs; fifth, aggressively investing in DTC and omni-channel; sixth, closing domestic stores; and seventh, taking well in excess of $200 million of expense out of our model.”

Shades of PacSun. Closing bunches of stores over a period of years and changing their market positioning. The difference is that PacSun had lost their market position and needed to get one back. A&F has one, but needs to change it. Their balance sheet better positions them to accomplish the task and the reduction in expenses over the last year is good progress.

But damn, it’s a hell of a challenge when the evolution of your target customer is involved.

The Cult of Your Brand?

/0 Comments/in /by

What’s a brand? These days, what makes brands strong or not strong? I’ve been thinking and writing about that a bit, but I don’t think I’ve ever quite conceptualized it as well as Derek Thompson does in this article in The Atlantic. We’re all talking about the importance of “community.” The article describes a couple of successes in community building including Apple, probably the first one many of us think about. Please don’t be put off by the “cult” label.

What the article doesn’t directly address is the role of distribution. I wonder if he’d argue that distribution doesn’t matter much if your community is strong enough. Most brands, I still think, need to manage their distribution cautiously to build brand strength. But maybe, as I’ve suggested, merchandising is becoming more important than distribution. When “cool” brands go into Walmart, there’s certainly some of that thinking going around. Anyway, just some food for thought.

The Buckle’s November 1st Quarter; Little Financial Change

/0 Comments/in , /by

For the quarter ended November 1, 2014, The Buckle’s revenues rose a little from $286.8 to $292.2 million. That’s a 1.9% increase over last year’s quarter.

The gross profit margin fell a little from 44% in last year’s quarter to 43.7%. In dollars it went up a little from $126.2 to $127.8 million.

Selling, General and Administrative expenses rose a little (1.7%) to $63.2 million. As a percentage of sales, selling expense stayed the same at 18.1% and general and administrative expense fell a little from 3.6% to 3.5%.

Operating income rose- you guessed it- a little, from $64.1 to $64.6 million.

Net income was up a really, really, really little (0.079%, or $32,000) to $40.6 million.

Well, these day holding your own isn’t the worst result we’re seeing among retailers in our industry.

The balance sheet is in good shape, with comparable store inventory down about 1.5% compared to a year ago. Net cash flow from operations was a positive $69.3 million in the three quarters of last fiscal year. It improved to $90.6 million this year. That’s more than a little. I like positive cash flow.

The company ended the quarter with 461 stores in 44 states, up from 452 stores in 42 states a year ago. So far this year, they’ve opened a net of 11 new stores and did what they call “substantial remodels” on 17. According to the conference call, plans presently call for 6 new stores next year and 10 of those substantial remodels. I’d love to hear something about the impact of the remodelings.

Comparable store sales were down 0.3% during the quarter. Online sales are not included in comparable store sales. They rose 3.7% during the quarter to $22.8 million compared to $22.0 million in last year’s quarter.

The conference call is short and not particularly intriguing either. Private label business, we hear, was 35% of revenues, the same as in last year’s quarter.

One analyst asked President and CEO Dennis Nelson “…about your philosophy on ecommerce versus stores.” I’d characterize his answer as noncommittal and understated.

“Well, we continue to look at new marketing and upgrading our staff and taking different approaches, so it is something we are not ignoring. We involve the merchandise teams continually more on that, so we would expect it to continue to have steady growth, and we have taken approach that it’s part of our business.”

While that isn’t the whole answer, you get the gist. Compare that to the soliloquy we’d get from Zumiez’s senior management in response to the same question. I’m not highlighting this as a problem. I doubt CEO Nelson’s answer encompasses his complete thinking about ecommerce. I hope not. But I do wish somebody had followed up and used the word “omnichannel” to see what response we’d gotten.

And that’s about it. I’d like to thank The Buckle for making this one easy for me, though I wouldn’t have minded a bit more information.

Net Income Down 17% But It’s All Part of the Plan? Tilly’s Quarter

/0 Comments/in , /by

In the quarter ended November 1, Tilly’s grew its sales 6.1% to $131.3 million compared to the same quarter last year. But net income fell 17% from $6.15 million in last year’s quarter to $5.11 million.

Meanwhile, in the conference call, President and CEO Daniel Griesemer’s first statement about the result is as follows:

“We’re pleased with the meaningful progress we are making on our initiatives to increase sales and profitability as our third quarter results exceeded expectations.”

I actually just went back and checked to make sure I was looking at the right conference call transcript and financial statement. I am. I know there’s a certain promotional aspect to conference calls- that you want to put your best foot forward and all that stuff. But don’t you need to oh, I don’t know, mention in passing that your profit fell when revenues and the gross margin were up?

Perhaps not if you’re Tilly’s. After all, when they took the company public it was done in such a way that the founders and owners still controlled the voting shares. Well, as I said when they went public, I admire them for going public but maintaining control, though I can’t figure out why people bought the stock under those circumstances.

I’m the first one to champion the idea that one quarter doesn’t matter in the scheme of things. But hey people at Tilly’s, you’re really making me dig to try and explain why in this case. They do, by the way, give me some possible reasons to think that. I’ll get to those.

The gross margin rose from 30.6% to 30.9%, due to an increase in product margin. SG & A expense rose from 15.5% from $27.7 to $32 million. As a percentage of revenue, they rose from 22.4% to 24.4%.

Selling expense as a percentage of sales rose from 15.4% to 17.3%. 1% of that increase was because “…store and field payroll, payroll benefits and related personnel costs increased at a higher rate than net sales primarily due to the addition of new stores…” There was a 0.9% increase “…related to increased marketing costs, supplies and other store support costs, primarily due to higher catalog and other marketing spend compared to last year.”

General and administrative expenses rose just 0.1% from 7.0% to 7.1%.

Operating income was down from $10.2 to $8.6 million, or by 15.7% “…primarily due to a decline in our comparable store sales and increased costs related to new stores growing at a faster rate than sales. Our comparable store sales decreased 1.2% for the thirteen weeks ended November 1, 2014, which followed a 1.9% decrease for the full fiscal year 2013 and compares to a 2.4% decrease in the third quarter of fiscal year 2013.”

Average sales per store during the quarter fell from $592,000 last year to $571,000. For three quarters, it was down from $1.777 to $1.623 million. They ended the quarter with 207 stores.  They had 99 stores at the beginning of fiscal 2009.

Tilly’s stores are located “…in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.” This feels like store location is strongly driven by how good a deal they can make on real estate. That may serve them well in coming years.

The balance sheet remains strong, with a solid current ratio and no long term debt. Cash flow from operations for the nine months was $21.1 million compared to $27.3 million in last year’s nine months.

CEO Dan Griesemer tells us in the conference call they are working to increase market share and improve profitability through “…increased product differentiation and innovation, a greater emphasis on our digital platform and evolving our real estate strategy.” Any retailer might say that. In fact, they mostly do. Tilly’s goes on to give us a little more information.

“In keeping with our history of offering our customer the most relevant assortment of action sports inspired merchandise, we introduce more products and brands that are new, unique or exclusive to Tilly’s. Our new brands, brand extensions, exclusives and collaborations continue to perform well and strengthen our confidence in this product strategy. We introduced new brand expansion including GoPro, Stance, Sector 9 and Full Tilt Dream. We delivered a number of exclusive products including collections from Hurley and LRG. We also introduced several new or exclusive collaborations including offerings from Volcom, Adidas and Vans.”

I don’t see how that differentiates them from what other retailers are doing, but having the right brands at the right time is obviously important. I also hate brands doing SMUs, but that just seems to be where we are in the market. If a brand does an SMU for Tilly’s just whose brand is it?

With regards to ecommerce, “…we launched a new state of the art responsive design e-commerce platform for desktop and mobile…The new platform offer significantly improved look and feel, navigation and performance and offers a much more compelling user experience… Given what we know about their shopping habit, we are now able to tailor our product, marketing and promotional activities based on user preferences as we believe will lead to improved sales and profitability.”

“We believe our new state of the art e-commerce platform dedicated e-commerce fulfillment center and omnichannel capabilities now put at significantly ahead of our peer set and position us well to take advantage of the extraordinary e-commerce opportunity we see ahead of us.”

Important, obviously, but what everybody else is trying to do. Is Tilly’s going to do it better? Don’t know.

In real estate, CEO Griesemer notes, “… our new stores opened this year are performing well and in line with the new store economic model and more stringent site selection process we outlined earlier in the year.” I don’t know what the specifics of that process are.

In the fourth quarter, Tilly’s “…expect to incur incremental marketing expenses in the fourth quarter based upon the continued strength in customer response to our marketing efforts to date.” Isn’t it wonderful to have a balance sheet and cash flow that allows you to do it!

In what was a pretty short conference call, a couple of analysts ask for some metrics around specific issues and were given none. It’s not like that never happens in a conference call, but I’m wondering if that doesn’t reflect the founder’s control of the voting stock.

Tilly’s has a strong balance sheet. Store growth has been pretty rapid, and may explain some of the higher expenses and lower profitability. I conjecture that real estate is a core competence for them and that may be particularly important over the next few years. Their other initiatives don’t seem different from other retailers. We’ll see if they can perform them better.

The stock opened at $18.80 the day Tilly’s went public on May 4, 2012. As I write this (December 15, 2014), it’s at $8.94. But it closed at $6.98 the day before earnings were announced, so I guess people liked what they heard.

You know, it took me a lot of work and reading between the lines to be able to conjecture on what might be going on here. Tilly’s is making money, and there are some possible reasons why the decline in profitability might make sense if you take a longer term perspective. But Tilly’s doesn’t do a very good job explaining that.

I wish they would, because then I wouldn’t be sitting here wondering what’s going on. I’m confused and don’t know what to think.

A Long Term Plan; Zumiez’s Quarter

/0 Comments/in , /by

Well, Zumiez had a pretty good quarter. Net sales rose 11.6% to $213.3 million from $191.1 million in last year’s quarter.   “The increase reflected the net addition of 54 stores…and a comparable sales increase of 3.7% for the three months ended November 1, 2014.” Those numbers include ecommerce sales, which rose 15.7% and represented 11.2% of net sales, up from 11.0% in last year’s quarter. Brick and mortar comparable store sales were up 2.2%.

European sales were $14.7 million, up 45.7% due largely to new store openings.

The gross profit margin was down a bit from 37% to 36.5% due to higher product costs. SG&A rose from $50.1 million to $52.9 million, but as a percentage of net revenue it declined from 26.2% to 24.8%.

Operating income rose from $20.7 to $25 million and net income was up 32.6% from $11.9 to $15.7 million. The balance sheet is solid and cash provided by operating activities was $34.4 million in the first nine months of the fiscal year. In last year’s first nine months it was $21.7 million.

They ended the quarter with 603 stores; 551 in the U.S., 35 in Canada and 16 in Europe.

You know, I don’t have much fun when things are going well. Not much to analyze. I’m kind of digging in the bottom of the barrel here, but there are a couple of things I’ll mention from the 10Q before I move on.

This is the first risk factor Zumiez lists: “Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in customer traffic in those malls could cause our sales to be less than expected.“

This issue isn’t unique to Zumiez, but malls are in for some hard times in coming years. Here’s an article I previously pointed you to on the subject. Indirectly, Zumiez addresses this in the conference call. I’ll point that out when we get to it.

Second, referring to Blue Tomato, Zumiez notes that “At November 1, 2014, we estimated we will not be obligated for future incentive payments.”   It’s not, according to Zumiez CEO Rick Brooks, that Blue Tomato isn’t doing well, though obviously they aren’t doing as well as they thought they might. It’s just that the European market is tough. Zumiez is “very encouraged” by what Blue Tomato is doing and thinks they have a big opportunity in Europe.

Here’s how CFO Chris Work describes the situation with Blue Tomato in the conference call: “So at the time of acquisition, it was on par from a profitability perspective with our U.S. business, and today it’s probably more a breakeven business excluding charges.“

I’d interpret that to mean that Blue Tomato is losing money right now under generally accepted accounting principles where you have to include those pesky charges.

Okay, let’s move on to my favorite statement of the conference call from Rick Brooks. This was Rick’s response to a question about what categories are performing and what new brands or products he saw coming around.

“The strength of our business, as I’ve said a number of times now, it’s always about diversity, diversity of brands, diversity of categories in our business because we serve the entire lifestyle for this consumer.”

I added the emphasis. “A number of times” is probably about 4,907 over the years he’s been CEO.

Let me give the answer I think Rick would have loved to give. “Look, we’ve been following the same strategy since we started the company. It’s not about a particular brand, or a particular trend or a particular product group. What matters is that we have the best trained and best connected to our customer base group of employees we can have so that whatever the trends, brands, or cycles (all of which will continue to come and go) are, we have maybe just a little better idea than our competitors what’s going on and can respond better or quicker. Consistent with whom we are as a brand, we want to identify and help the brands that can grow, support the trends those brands represent, and adroitly step aside when those trends change. “

“And stop asking me how many stores we’re going to have! I keep trying to explain that in the ecommerce/mobile world number of stores is just not as relevant as it was. What matters is connection and credibility with your customers. We’re still figuring out, like everybody else, what stores of what size and what layout you should have where. What we’re pretty sure of, however, is that number of stores is not as closely connected with revenue growth as it used to be.”

And just to finish up, here’s an actual quote from Rick, rather than one I’ve made up. “…our topline goals don’t change based upon whatever number of stores we have, but on how we optimize catching those shares, to optimize margins and optimize how we serve our customers.”

Let’s see, what else should you know. First, Zumiez doesn’t see an easy business environment in coming years. Rick says, “On a longer term view, I think our view is one of caution. I’m saying that the recovery has been slow and painful and I think from a planning perspective, we continue to think that’s – we’re going to continue to face kind of a slow bumpy volatile recovery for a period of years yet.”

Finally, getting back to the issues of the future of malls and the role of brick and mortar stores CEO Brooks notes that “We have opened a couple of suite stores and we continue to have a small portfolio of off-mall locations around different parts of the country.” So they’re thinking about it.

A consistent strategy, and recognition of how the market is changing should serve Zumiez well especially if it’s as tough as they (and I) think it’s going to be.