When we do get through the virus and at least some of the economic disruption, I’m wondering what the trade show environment might look like. It had already been changing and it seems pretty clear those changes are going to accelerate.
Kathmandu released its number for the six months ended January 31 and I’ve finally gotten through the statements. Maybe the first thing you should do is go read what I wrote when Kathmandu acquired Rip Curl on October 31, 2019. Here’s the link. I thought the deal could work, but I was concerned by the lack of solid financial information and wasn’t quite sure the integration was likely to go as smoothly as they projected. Then the virus hit.
Like I did with Zumiez, I want to focus on the world as it now exists- Not so much on the results for the six months Kathmandu is reporting. What does that mean exactly?
Zumiez reported their results for the year and quarter ended February 1st on March 12th. Great quarter and year. But about a week after their fiscal year ended, the impact of the pandemic on the economy became apparent. For all retailers who sell directly to the consumer, in our industry or not, the world is changing.
After I read the 10-K and conference call transcript, I asked myself if anybody cared, for any industry company, about financial statements that became potentially irrelevant financial history in ten days’ time?
While I was thinking about it, Zumiez announced the closing of all its stores and then, on April 2nd, a series of personnel and financial actions in response to the economic downturn (that’s way too benign a term). That convinced me I was right- nobody was likely to care about ancient history. You can read the two press releases on their investors’ web site.
And you think you’ve got problems with your brand? Actually- and I say this with a certain amount of relief- apparently relatively few people are stupid enough to relate the beer to the virus. Go take a look at this article on Snopes.com that discusses what’s happened to the brand in spite of some of the press it’s gotten. Corona is owned by Budweiser along with a whole host of beer brands so I imagine it will be fine.
The poster with the slogan was issued in 1939 by the British. We don’t have anybody bombing our cities or threatening to invade us- exactly- but the coronavirus is a national challenge with social, financial and health related impacts unlike anything most of us have experienced. I’m not sure I’m overstating it to say that you had to be alive during World War II- maybe the attack on Pearl Harbor- to have had a similar experience. The speed with which it has hit us is remarkable.
I lived in Dublin for two years and I can tell you that when the Irish close the pubs, it’s serious.
VF continues to manage its brand portfolio consistent with its strategic imperatives. Before moving onto the financials, we’ll take a look at their decision to divest their occupational work brands. It’s consistent with other brand decisions they’ve made.
The first thing you think when you walk into the show is what an incredibly great idea it was to consolidate The Snow Show with Outdoor Retailer. The second thing you think is, “What took them so long?” I imagine the answer to that is quite a soap opera.
The next thing I thought was whether I’d gone to the dog show by mistake. I like dogs, but the sheer number was rather remarkable this year.
For the two days I was there, it was a vibrant and active show. Not so sure about the third day, given the number of attendees who were on the Friday morning flight back to Seattle with me, but that’s what happens at trade show; the last day is typically slower.
It took two guys like author Chris Diamond and his editor Andy Bigford to make this book as valuable as it is. Their combined 88 or so years in the industry means they have the knowledge, perspective and access to write this book, and the book takes full advantage. When Chris says “ski” he means ski, snowboard, etc. through the whole book.
It’s both a strategic evaluation and a history of the ski/snowboard/mountain resort business. Like most of you, I was aware of the events and transactions Chris describes. But having them laid out chronologically and the competitive impact and interrelationships evaluated was great. It caused useful thinking.
What does Chris conclude? The subtitle of the book is a good place to start.
“Alterra counters Vail Resorts; mega-passes transform the landscape; the industry responds and flourishes. For skiing? A North American Renaissance.”
“My premise in this book,” he says, “is that the Epic revolution, as others have followed Vail Resorts’ lead has initiated a renaissance in skiing. For decades, the media focused on the high cost of skiing, but now the standard refrain is “what a deal” the new passes are. Total skier visits can be expected to grow coast-to-coast, and not just at the mega resorts. This energy will eventually expand the number of total participants, if that hasn’t happened already.”
“It is my view that these recent changes have rescued skiing from the trend of becoming, in effect, a rich person’s sport.”
Isn’t it interesting how consolidation has, so far, turned out to be a good thing? Or at least a necessary thing. In doing turnaround work I quickly learned that doing “more of the same” isn’t the path to success. I’d come around to the idea that some consolidation was necessary and appropriate for the industry, but that it would lead to a “renaissance?” Not sure I’m that far along in my thinking, though I can see how I might have to get there in the not too distant future.
What’s Chris’s business proposition? He states it pretty clearly using Holiday Valley’s strategy as an example.
That’s from his chapter on small to midsized areas but, you know, all pretty good business advice for any resort. Early on in this chapter I considered skimming it. Glad I didn’t. Aside from turning out to be really interesting, it highlighted some consistent themes over the history of the industry
1. How important commitment, passion and optimism have been (are, I’d say).
2. The role, for better or worse, of real estate.
3. The bad things that happen when commitment, passion and optimism obscure the importance of good financial management and a solid balance sheet.
When you think about it, what’s going on is that the survivors of the consolidation are doing better business. Well, that’s what happens in a consolidation. Like, for example, retail. Adapt or die. Know your market and take care of your guests (customers). What an original idea!
It’s true that many small hills have gone away and, as Chris acknowledges, they were great places to learn. But they only existed when times were easier and the industry was growing madly and they floundered (Chris describes plenty of this) when times got hard and the environment changed, but they wouldn’t or couldn’t change with it.
Now, as Chris also describes, some of these places are being resurrected by communities, local governments, and investors/skiers who have resources (including for the significant capital improvements required) and are prepared to run the places with best industry practices.
The story for the industry is not fundamentally different from other consolidating industries. A revolution? Nah. Too fraught a term for me. Let’s say that the pressures of a changing competitive environment have finally, after many years, reached a tipping point where it was, for the individual players, adapt or die.
Chris’ hypothesis is that the mega passes, along with cheaper lodging (VRBO, etc.) are bringing affordable skiing to more people as long as you’re willing to plan in advance. The mega passes have become the brand, and customers are planning and plotting to get the best deal. The resorts, meanwhile, are using dynamic pricing, buddy passes, and other permutations of pass terms to give their customers choices and control – what customers want in most industries these days- and influence their behaviors. Chris and I agree that this process is just beginning and that the ultimate result will be that few people will be walking up to the window and buying day passes.
But what, you say, about all those hills that have closed, mostly to never reopen again? Where will we get new participants? Yeah- problem even with all the positive changes Chris outlines.
He reports that retention has increased from 15% to 19% over the many years during which we’ve been trying to move the needle. He also reminds us of all the improvements in equipment, process and teaching technique for teaching beginners that have evolved.
Perhaps most importantly, he makes it clear that the larger, consolidating, remaining resorts know that developing new, committed skiers is imperative. Their acquisition of and relations with other resorts as well as the structure of their pricing and pass products are focused on the issue.
And perhaps, since we’re trying to change human behavior and tried to do it through the Great Recession, we shouldn’t be too hard on ourselves. I’m not sure 15% to 19% over a decade or more is so bad. With the changes going on now, I can even imagine it accelerating.
So, everything is fine, right? It’s conceivable that Chris as a consummate industry insider might be on the optimistic side, but he does point out some issues.
To paraphrase, he says the industry will be fine if we don’t have a recession. I’d change that to “until we have.” The business cycle has not been rescinded and we won’t have any more fun in a recession than other industries.
He also notes our inability to crack the diversity puzzle. I’ll just include myself on the list of people who don’t have a solution.
Climate change. Yes of course, though it’s amazing that this industry still has people resisting the idea. Tactically, we are relying on improved and increased snowmaking and warm weather activities to deal with this. The big players are counting on geographical diversification. Strategically, the industry is active in sustainability and confronting climate change.
He also discusses issues with demographics; an aging base and drop off in snowboarding. He spends just a paragraph on issues of income, and I think more time might have been warranted. Skiing may be getting less expensive, but it’s never going to get cheap. What I know about the stagnation or even decline in real middle class and below incomes over several decades gives me pause. Skiing may be “cheaper” but if taking advantage of that requires a $500 or higher outlay months before you hit the slopes (plus equipment, lodging, transportation, food, apparel even if they are all cheaper), does it matter? Economics limits our customer base.
The answer? Snowmaking, good management, and summer activities generating year around cash flow. It doesn’t hurt if some of your competitors have gone out of business. You need to read this book. The integrated strategic perspective is very important as you consider what your industry business should be doing.
I’ve never met Chris. I think I might have met Andy. If you guys are going to be wandering around Denver in a couple of weeks, I’d love to talk with you. Among the things I’d like to ask is if the numbers exist yet to evaluate the extent of the decline in cost to go skiing.
In its 10Q and conference call, Tilly’s is kind of tentative in explaining what they are doing right. Let’s go through the numbers and review a few conference call comments to see if we can tease out an explanation.
Revenue for the quarter ended November 2 rose 5.4% from $146.8 million in the prior year’s quarter (PYQ) to $154.8 million in this year’s. E-commerce revenues were 16.9% of the PYQ’s revenues ($21.2 million) and 17.2% ($22.7 million) in this year’s quarter. Revenue from proprietary brands were 25% of total revenues in the current quarter, the same percent as in the PYQ. Below is a table showing revenue by category for 13 and 39 weeks.
Comparable store sales rose 3.1% compared to 4.3% in the PYQ. That includes e-commerce sales, which means we don’t have an important metric of how their brick and mortar is performing.
The gross margin rose from 29.7% to 30.5%. They had a 0.8% improvement in the merchandise margin.
SG&A expense rose 6.9% to $39.5 million. The most significant increase was $1.0 million for e-commerce marketing and fulfillment.
Pretax income was up 17.7% from $7.32 million in the PYQ to $8.62 In this year’s quarter. Just to give you some perspective, pretax income for the first nine months of the fiscal year went from $22.0 to $22.3 million, an increase of 1.4%.
The balance sheet remains solid with lots of cash and no long-term debt. Equity declined from $183 million a year ago to $181 million, but this has to do with accounting for operating leases- something they didn’t have to do a year ago. They note that the $5.2 million increase in cash provided by operating activities was “…primarily due to lower inventory.” That’s a good thing.
Tilly’s starts its narrative by describing itself as “…a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 232 stores, including one RSQ-branded pop-up store, in 33 states as of November 2, 2019. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.”
Really nothing insightful or distinctive there. They seem to put stores almost anywhere, and I’ve always thought them as being particularly focused on their real estate- perhaps a source of competitive advantage. You can see that in the way they talk about the retail market and their brick and mortar strategy.
In describing the industry they say, “The retail industry has experienced a general downward trend in customer traffic to physical stores for an extended period of time. Conversely, online shopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue.”
Then they go on, “We continue to believe we have a meaningful number of opportunities to open profitable, new stores in the future. We believe we are under-represented nationally in terms of the number of stores in key population centers relative to many of our larger teen specialty apparel competitors who have a much greater number of stores than we do. We expect to finish fiscal 2019 ending February 1, 2020 with 14 new store openings. In fiscal 2020 ending January 30, 2021, we anticipate opening up to 15 additional new stores. We will continue to focus new store openings within existing markets and certain new markets where we believe our brand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.”
They tell us they aren’t committed to closing any stores in in 2020. “Yet some may likely occur as we work our way through our continuous lease renewal negotiations.” Once again, there’s that real estate focus, though all retailers are looking for better lease deals these days.
They acknowledge the e-commerce trend, then, but are focused on new brick and mortar. Perhaps it’s because Tilly’s is so good at picking real estate. Partly, it’s because they only have 232 stores. They think new stores can enhance their brand recognition. There are hints of an undescribed strategy here, though I can’t figure out what they are doing that might give them better brand recognition than their competitors.
Towards the end of the conference call CFO Michael Henry talk about the relationship between brick and mortar and e-commerce in a way that gives some insight into their strategic thinking. “SG&A leverage,” he says, “is going to have a lot to do with how sales are balanced between stores and e-commerce.” He explains that growing e-commerce sales generates a lot of costs (they mentioned $1 million in the quarter we’re discussing here) while improving comparable brick and mortar sales generate a real opportunity to leverage SG&A expense. That is, higher sales in a store don’t mean you have to pay more rent and other expenses. Remember brick and mortar is still around 85% of their business.
They’ve got to have improvement in both e-commerce and brick and mortar, CFO Henry explains, “Because as you’ve seen in recent quarters when it’s only e-comm those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along with the e-comm business.” Did you hear that? E-commerce sales are more expensive than brick and mortar I think he said.
So, what is Tilly’s doing right? First, they seem to be pretty good at managing their real estate and picking locations. Second, they believe they have some room to expand brick and mortar because they don’t have that many stores yet. Third they recognize, hopefully like all other retailers, the interaction between online and brick and mortar. E-commerce is critical for brand positioning and customer interaction- omnichannel and all that stuff. But it’s especially valuable if helps to improve brick and mortar comparable store sales and you can spread some of both e-commerce and brick and mortar SG&A across the store base, improving the bottom line.
Tilly’s isn’t the only big retailer in our space that understands this. We’ll figure out which ones don’t when they go away.
I imagine it’s happened to all of us. You need to paint (or if you’re lucky, have painted) a wall/room/house. You go into the store to pick “the right” paint color and are confronted with literally an infinite number of choices- because they can match any color you want. As if the paint chips by themselves weren’t more than you could possibly parse.
Home you go with a big bunch of small chips. After some agonization, you come back and maybe (at a paint specialty store) get some large chips. Then on the next visit, you get some small sample paint jars and slap them on the wall. By this time, any thoughts you may have had about being daring and, for example, having a bright accent wall has been bludgeoned out of you. You just want to get “the right” color.
I spend way too much time choosing and about 14 nano seconds after the project is complete, it’s fine and I never think about it again. I may not have gotten “the right” color but I sure spent a lot of time doing it.
Some new paint companies are trying to help me. They offer curated palettes of between 50 and 150 colors. One of the company names is actually Curator.
It was a decade or two ago when I suggested that snowboard companies should stop picking their SKUs based on what their competitors were doing. What mattered was what your customer wanted. More SKUs wasn’t automatically better.
True- following your competitors’ lead was easy, but it was lazy. It didn’t answer the question, who are my customers and what do they want? Mostly, I think we’ve figured that out. Many of you, I know, have cut your SKU count. It’s good for inventory management, cost of goods sold, branding and holding margins. May not help your top line, but it will sure help the bottom line.
Have you cut it enough?
If a paint company believes they can compete with just fifty colors against Benjamin Moore’s 3,500, well, maybe they are on to something. When you read this article think about how they’ve tried to have colors with a common theme that fit together. Looks to me like a lot of their colors work with each other. These companies are betting that the customer will have a better shopping experience with fewer choices with a product I’d have previously characterized as a commodity.
Can you make your brand special by offering fewer choices? Perhaps a lot fewer. You can if you improve their shopping experience.
