In Case You Have Trouble Sleeping: A Report from the Bureau of Labor Statistics

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You can go here http://www.bls.gov/news.release/ecopro.nr0.htm to see the report. If it does help you sleep, it will probably give you nightmares. You can see in the first line of the report, released last Thursday, that they expect total employment "…to increase by 15.3 million, or 10.1 percent, during the 2008-18 period…"

Now, that may sound encouraging, but if you push a few calculator buttons, that’s on average about 125,000 jobs a month over ten years. Well maybe that sounds good to you too, but it sounds less good if you realize that 125,000 jobs a month is more or less what we need just to provide the jobs required by an increasing population.
You do yourself a disservice if all you do is listen to the monthly unemployment number thrown at us by the talking heads in the mass media. Earlier this month, for example, they announced that the unemployment rate had fallen from 10.2% to 10%. Obviously, lower is a good thing, but the reason it was lower was because 98,000 people who had stopped looking for work (the "discouraged" workers as they are called) were taken out of the unemployment calculation.
It’s a little more work, but I really suggest you try and get at least some of your news somewhere besides the popular press.

My Office Chair, Customer Service, and Expense Control

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 It’s a nice leather chair. I’ve had it less than two years.   So I wasn’t happy when it started tilting side to side as much as it rocked from front to back. It felt like it was going to leave me on the floor any day and, besides, it was practically making me seasick.

The nice people at Staples, where I bought it, gave me a copy of my receipt, the five year warranty, and the number of the Sealy company to call. I figured I was screwed. “Sorry to hear about your chair,” I could hear them saying. “Just package it up, ship it back, and in a couple of months we’ll send it back fixed, though the freight cost will be more than you paid for the chair and we have no idea what you’ll sit on until then.”
But determined to go through the motions, I called them anyway and told my story, then waited for the ax to drop. I’d already picked out my new chair.
“Sounds like you’ve got a broken weld in the pneumatic cylinder assembly. We’ll send you new parts and some instructions.”
I waited for the bad news. “You don’t want proof that the chair’s under warranty?” “No.” “You don’t need to see the chair first to confirm that it’s a manufacturing issue?” “No.” “How much do I have to pay for shipping and handling?”  “Nothing.”
I was pretty flummoxed, but I hung up and sure enough, ten days later (Christmas was in there) the parts showed up. I wouldn’t say the instructions were written perfectly, and there did turn out to be a sledge hammer involved, but here I sit in my repaired chair writing this and not swaying side to side.
Sealy’s has made a friend, and I’ll probably look for their chairs the next time I need one. But they’ve also saved themselves some money. They didn’t spend long on the phone with me. They didn’t have to manage a chair coming back or forth. They didn’t have to do the repair themselves. There was no administrative warranty management cost, and damned little accounting and tracking. Somebody threw some stock parts in a box and shipped them to me and they were done. They got me to do the work for them, and I was basically thrilled to do it and solve my problem.
From time to time I suppose they get had, and send somebody some parts who doesn’t have a valid warranty claim. But they don’t care, and I’m guessing not that many people want chair parts if they don’t have a broken chair. Sealy’s has calculated that the cost of those parts and shipping pale in comparison to the cost of carefully evaluating each claim, making repairs themselves, and making sure nobody gets parts they don’t deserve.   So their process makes sense even ignoring the customer service benefits.
It’s not easy to figure out what warranty claims cost you. The expense is hidden in and divided among customer service, cost of goods, freight and shipping, general and administrative, salaries and probably other categories depending on your particular accounting set up. Maybe that’s why more companies, as far as I know, don’t take Sealy’s approach to warranty claims.
There are some characteristics of Sealy’s business model that make their approach to warranty claims viable. I’m not suggesting every brand or retailer can honor every warranty claim for snowboards, skate shoes or board shorts that’s made. But I suspect that if you do the hard work of estimating what your warranty service costs really are, you’ll find you can save some money and make some customers happy at the same time.     

 

Aeropostale; the Power of Good Systems and the Right Market Position

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For the quarter ended October 31, Aeropostale reported sales up almost 18% to $568 million.  For nine
months, they rose almost 20% to $1.43 billion. Gross profit margin in the quarter rose from 36% in the
same quarter last year to 39.3%.  For nine months, it was up from 34.4% to 37.5%.  Selling, general and
administrative expenses were down as a percentage of sales for both the quarter and nine months
compared to the same period the prior year.  New income was up almost 47% for the quarter to $62.6
million.  It rose nearly 64% to $133 million for nine months.

Read more

Hot Topic: A Competitive Strategy We Should Be Thinking About

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Hot Topic has reported their results for the quarter ended October 31 and their sales for the month of November. Their sales were down some for the quarter and more in November, but they continued to make money in the quarter and their balance is very strong.

But I don’t want to crunch their numbers. I do enough of that. I want to focus on their strategy and its relevance to the Action Sports Space. I’ve talked about his before but I feel like doing it again. I think it’s important. Here’s how the company describes itself.
“We are a mall and web-based specialty retailer operating the Hot Topic and Torrid concepts, as well as the e-space music discovery concept, ShockHound. At Hot Topic, we sell a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories, music and gift items for young men and women principally between the ages of 12 and 22. At Torrid, we sell apparel, lingerie, shoes and accessories designed for various lifestyles for plus-size females principally between the ages of 15 and 29. At ShockHound, music lovers of all ages can come together and purchase MP3s and music merchandise, share their music interests, read the latest music news and enjoy exclusive editorial content about their favorite artists.”
“At Hot Topic, our business strategy is built on the foundation of pop culture and its relevance to our target teen customer. Within pop culture, we believe music plays a primary and integral role in the minds, activities and preferences of our target customers. Our comprehensive music strategy encompasses a high level of focus on the in-store music experience. We continue to: focus on music and music/pop culture oriented merchandise; operate a fundamentally regular price business; emphasize superior customer service; and ramp up our efforts to host unique in-store events.”
These people are after our customers. Not so much the people who actually surf, skate, and snowboard (though they’ll be happy to have those too, I’m sure) but the rest; the fashion influenced, lifestyle customers that are where at least a majority of our sales come from now.
We have to convince that customer that what we do (surf or skate or snow) is cool and that they should want to be a part of it. Hot Topic says, “Tell us what you think is cool and what you want your shopping experience to be like, and we’ll try and give it to you.” They don’t have roots to worry about and as we’re more and more the fashion business, I see it as a big advantage.
It’s not easy to make the transition from an activity based brand to a lifestyle, fashion brand. Hot Topic doesn’t have to.   

Alternative Camber; An Idea Who’s Time has Come- Again

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A couple of weeks ago, I was paging through Transworld Snowboarding’s Gear Guide, and I came upon the page on alternative camber. I read it with interest to try and keep with the latest technological trends, but paused when I saw the illustration of the cambered medley snowboard.

Something about the cross section of the board, showing camber at both ends, jogged my memory. I went down to my garage, ventured into the storage space under the house, and came out with my dust covered Inca snowboard, circa, I want to say, 2000.
It’s a 157 and was called a dual camber but you know, it looks identical to the cambered medley profile pictured in the gear guide. Back when I actually rode the board (because I thought the technology worked for me which seemed like a pretty good reason), the reaction of people, at best, was tolerance and sometimes it ran to ridicule. Granted, the graphics were ugly. And entrepreneur Jerry Stubblefield, the founder of Avia, didn’t come with a lot of snowboard credibility or cool factor. But damn it, I thought the thing worked.
So I was a bit perplexed to read that in three years the gear guide had gone from 0 to 170 snowboards having some kind of alternative camber and that “…their sweeping popularity can be attributed to one thing: it can make snowboarding easier.”
To my untrained eye, it looked like the dual camber of 2000 was essentially the same as the cambered medley of 2009, but what did I know. I mean, obviously they must be different because everybody who knew anything about snowboarding seemed to hate it in 2000 and love it in 2009.
I thought I’d better call in an expert, so I reached Mike Olson at Mervin Manufacturing. Mike has been designing and building snowboards for multiple decades, and it was the Mervin designs that lead and are leading the alternative camber charge.
I love talking with Mike and need to find more reasons to call him. Our nearly hour long conversation ranged all over the snowboard and action sports business. It was part history lesson, part standup comic routine, part “how to” guide for entrepreneurs and from time to time we actually got around to talking about the technology of camber, some of which went right over my head. Subtleties of materials and manufacturing that Mike takes for granted kind of escaped me as I tried to absorb it all. And of course the conversation tended to remind each of us of other topics, so we sort of careened from issue to issue.
Anyway, the bottom line is that Mike knows Jerry and has spoken with him on a number of occasions. If Lib Tech’s C2 Banana isn’t exactly the same as the Inca due to improvements in technology and materials, it’s certainly conceptually similar. According to Mike, “Inca has 2 huge cambers centered under each foot (which is what Gnu tried for a season in 1986) while we now have a giant rocker (Banana) between the feet with minute cambers out on the ends of the snowboard.”
But the clincher was when I described to Mike the complaints I got from people when I showed them the Inca and they (you know who you are) universally complained that it was too flexible. “Like a noodle,” as one industry insider put it as he trashed the concept.
“Of course it’s flexible,” says Mike. “That’s part of the cambered medley concept and without the flexibility, the construction wouldn’t work.”
Mike reports that Mervin’s sales have doubled from three years ago. 
I guess this is a cautionary tale about the dangers of stereotypes and preconceptions. If Mike Olson, who has been experimenting with alternative cambers for decades, had come out with as cambered medley snowboard in 2000, would it have been a big hit? Don’t know. But I’ll bet that no matter when Jerry Stubblefield came out with one (even without bad graphics) it wouldn’t have taken off no matter how good the technology.  Anybody want to claim we’re not in the fashion business? 
Just something to think about.        

Zumiez’s Nov. 2009 Sales Results- A Couple of Comments

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Yesterday, Zumiez reported that sales for the four week period ended November 28th, 2009 decreased 1.8% compared to the same period the previous year. For the same period, they reported that comparable store sales fell 8.5% compared to a decline of 15% in the same period the previous year.

In the first place, I want to suggest that paying attention to four week numbers may be fun, but it doesn’t really tell us anything about trends. It’s just not enough time.
Second, there are various attempts out there to position a decline of 8.5% in comparable store sales as a somehow positive result because last year they were down 15%. I’m not talking just about Zumiez here- it’s true for a variety of statistics and economic indicators. Be careful how you interpret that kind of analysis.
Finally, as I’ve been writing for a while, the focus should probably be on gross margin dollars in our new economy, which is another reason I think four week sales numbers are of limited value.
Zumiez has come out with their press release on the quarter that ended October 31, 2009 (On November 19) and has held a conference call. But as of today, the 10Q with the details and notes has not been filed. I’ll have more to say when I’ve seen that document.

ASR and Crossroads Make a Deal; What a Surprise!

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This is good news because it makes things easier for the retailers, which I may have said a time or two is what trade shows need to be about. Crossroads needed retailers, which ASR can help supply, and Jamie Thomas doesn’t want to have to manage the logistics that will be required if Crossroads grows. ASR needs the skateboard industry. I don’t think Andy Tompkins wants ASR to be thought of as “a surf show” when apparel, style, and fashion are so much a part of where the whole action sports industry is going (has gone?). Hmmm. By that logic, Surf Expo should consider changing its name. And ASR would like to bring back the additional exhibitors and revenue that the skate industry represents.

This is being billed as an experiment over the next two ASRs. I’m guessing, especially when the economy improves, that it will be extended and the relationship will become closer. At some point, I expect to see the skate companies back in the convention center if the economics can be made to work.
It’s kind of an open secret that there have been some disagreements between the skate industry and ASR about how the show could best serve the skate industry. When times were good, those disagreements were easy to paper over. But then things got tough and, to some extent, the Crossroads show was the response. I’m glad to see them working out their differences in the interest of the industry and the retailers.

PacSun Oct. 31 Quarter Results: New Strategic Focus From New CEO

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Okay, so I finally hold in my hand both the transcript of the conference call and the actual quarterly report filed with the Securities and Exchange Commission. I’ve read them and cogitated on their meaning and finally have a couple of things to say that maybe somebody besides me will find interesting.

The most interesting stuff is strategic in nature. A couple of years ago I wrote that PacSun’s biggest problem was their market positioning. Nobody knew what they stood for. I’m still not sure I know, but at least new CEO Gary Schoenfeld knows that’s a problem. Former CEO Sally Frame Kasak had her hands full just stabilizing the situation and cleaning up the mess, and perhaps that’s why she didn’t address it. Perhaps it’s also part of the reason she’s no longer CEO.

An analyst asked the following question:   “Looking at the strategies that have played out over the last two years, is it your position and the board’s position that you have sort of aggravated the effect of an already bad environment? I mean, you are reversing many of the things that were done under previous management, so can we take it that what has happened to your business is not just the environment but things that, strategies that you have pursued, that the company has pursued that have just been flawed?”
Gary Schoenfeld’s answer: “I’m not sure that I want to say it quite as blunt as you just did but your conclusions — you know, I can’t say are way off the mark…”
Which strategies are they talking about? CEO Schoenfeld says they have “four essential priorities.”
First is “people and culture.” They’ve got five senior positions they are looking to fill, and they want to affect “…a transformation in leadership, accountability, teamwork, and an absolute commitment to wow our customers every day…” I won’t be surprised if they take a page or two out of Zumiez’s handbook for this. I expect it to reach down to the sales associates on the floor. Good.
Second is product. They are bringing back footwear, though in a more limited way then before. They are going to shift to some lower price points. “…retailers like Target have become a leader amongst girls in this category and we are actively having conversations with our key heritage brands to recognize that there probably are some changes that need to further be made for all of us to regain this critical segment. “ They also need to be more fashion focused, he indicated. They expect to narrow some assortments and “…do a better job of bringing newness to a market where wear now has clearly become the mantra for teen shoppers.”
The third strategy is the customer connection, which is related to the people and culture issue. “…it is more important than ever that our store associates are able to communicate effectively about the brands and fashion that we carry and able to clearly articulate the latest promotions to customers looking for value. We believe that through improved education and training, and frankly more selective hiring and promotion, our store teams will become much more effective engaging with customers and the critical role that they play in driving sales.” Yup, a page out of Zumiez’s playbook for sure.
Fourth, they will “…move towards a much more thoughtful localized store assortment and allocation process in order to make this happen. We simply cannot be successful without a much deeper understanding of our different customers and how their style and brand preferences vary across 900 stores in 50 states. Simply put, we are missing sales, hurting our margins, and damaging the customer experience by having had too much of a one-size-fits-all approach to merchandising.”
I agree that one size fits all is a mistake. But when they talk about a “localized assortment strategy,” what exactly does that mean? Do you differentiate by store, by city, by region? Who does the buying? Would buying and merchandising for different categories or different brands be done differently by geography? Do the responsibilities of store or district managers change? Gary Schoenfeld says he expect to do it “without any major investment in systems.” I wonder. This is one of those issues where the devil’s in the details and the details can be as complex as you want to make them..
What’s the goal if they successfully implement those four strategies? CEO Schoenfeld puts it this way. “…at the moment, PacSun doesn’t offer a clear point of difference and that is what we need to go about addressing and when I talk about becoming their [teens] favorite place to shop, I choose those words particularly because I think that’s what we need to do. We need to be a place where they are excited to go, they love the brands that we carry, the marketing that the brands do and the excitement that creates in our stores complemented by things that we can design and develop ourselves that gives us the flexibility to move quicker and to hit key price points that may be dictated by our competitors.”
The last thing I found interesting was the following statement by Gary: “I don’t know that the world ever needed 900 domestic PacSun stores and if you had a perfect sheet of paper, that number might be closer to 600, 700 stores. I think we will end this year under 900 and as we look at 30 to 40 leases coming up over each of the next three years, it probably puts us to where we are — in three years time we are probably somewhere in 750 to 800, and that probably puts us in a pretty good position.”
I think he’s right, and that a smaller number of stores is consistent with the strategy he’s outlined. I wonder, though, if you’re an analyst interested in the price of the stock what you thought of that. With fewer stores, lower inventory per square foot, and reduced consumer spending, where does the growth come from? Right now, that’s not where the focus is, and nobody asked that question. Let’s hope things improve enough so that they are focused on growth.
On to the numbers starting with the balance sheet. Total assets are down from a year ago 25% from $713 to $537 million. $111 of this drop was in property, plant and equipment. Current assets fell 36% or $112 million to $200 million. Cash rose by $10 million, while inventories were way down (which you would expect). Other current assets, which includes stuff like prepaid expenses, income taxes receivable, and non-trade accounts receivable, declined from $74 to $16 million.
Current liabilities are down by almost half from $204 to $103 million. That includes paying off $43 million of their line of credit, which is now at zero.    Long term liabilities, which include things like deferred lease incentives and deferred rents and the mysterious “other” long term liabilities fell a bit from $111 to $92 million.
Total equity is down from $398 to $341 million. The current ratio improved from 1.53 to 1.93, and total equity improved from 0.79 to .059. So the balance sheet is smaller, as expected, but stronger by both measures. Remember all these balance sheet numbers compare the October 31, 2009 balance sheet with the one at November 1, 2008- a year ago.
Sales for the quarter were down 17% to $268 million compared to the same quarter the prior year. This was mostly due to an 18% decline in comparable store net sales. For nine months, sales fell from $903 to $734 million, or 19%.  Gross margin percentage for the quarter fell from 28.7% to 27.4% and for nine months, from 29.2% to 26.2%. The merchandise margin for the quarter actually improved by 1.7%, but the need to spread occupancy costs over a smaller sales base cost them 3%. 
Selling, general and administrative expenses were down 6.2% for the quarter to $89.4 million, but as a percentage of net sales, they rose from 29.5% to 33.4%. For nine months they fell 12.8% to $245 million, but rose as a percentage of sales from 31.1% to 33.4%. The loss for the quarter grew from $2.5 to $10.9 million. For nine months, it fell from $36.8 to $33.8 million. Total stores were 904 compared to 940 at the end of the quarter last year.
The four strategies seem right to me but the issue of what PacSun stands for in the market and why it should be a destination for teens isn’t clear right now. Maybe with the implementation of these strategies, it will become clear. 

What Does the Skate Industry Want From Trade Shows? I Think I Know.

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Transworld is trying to get an on line discussion of this topic going, and that’s a good idea. So far, it hasn’t generated much discussion and that’s too bad. Maybe the problem is that they’ve asked the wrong question by focusing on the skate industry. If they’d just asked, “What does a company- any company in any industry- want from trade shows?” they might have gotten some better answers.

 At the risk of oversimplifying, what any company wants from a trade show is to know that the benefit to their business, in terms of sales generated, or market positioning, or whatever, justifies the cost. If you ask any executive of any brand, you’ll find it really is conceptually that simple, though measuring the benefits can be hard.
Obviously, right now a lot of skate brands, and other action sports industry brands as well, feel the cost exceeds the benefits. Between tough economic decisions and changes in how we do business that isn’t surprising. 
I wrote in my recent article on trade shows that the role of trade shows was to make things easy for retailers, and that we weren’t doing that by creating more shows. I said that the internet, free communications, changes in order cycles, selling to non participants through expanded distribution channels and other things were changing the role of the trade show. And not just for skate.
How do we make trade shows most effective? Well, aside from having fewer of them, I’m not sure. To find out, I’d want very specific answers to the following questions:
·         What role do shows play in generating orders compared to ten years ago?
·         How has the cost of attending or exhibiting at a trade show changed?
·         Is there any relationship between size of booth and measureable success at a trade show?
·         To what extent is brand attendance and presentation driven by competitor behavior?
·         What are the measures of a successful trade show for a brand and for a retailer?
·         How long does a retailer need to be at a show?
I’m sure this list should be longer.   I assume that ASR, SIA and Surf Expo have asked these questions and others.  Trouble is, in this environment it’s no longer possible (or at least it’s a lot harder) to reconcile the needs of brands and retailers to the show formats the trade show companies need to make a buck and I imagine the answers to some of the questions above might demonstrate that.
Vested interests will, understandably and inevitably, make it tough to reach a consensus on what an appropriate trade show format is in the current environment where there’s no longer the cash flow to permit an easy compromise.
What industry companies want from trade shows is something that the trade show providers are having a harder time providing at a cost that makes sense to the companies. This cognitive dissonance is likely to continue to exist and leave us with our current, somewhat dysfunctional, trade show situation.            

Spy Optics (Orange 21) Sept. 30 Quarter and 9 Month Results

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I  always look forward to Orange 21’s filings. It’s just about the only chance we get to see the numbers from a smaller company in this industry, because there just aren’t many of this size that are public and required to show us their results.

I also like them because since their change in management, when Stone Douglass came in first as a consultant and then as CEO, they’ve done a lot of things right. They’ve controlled their inventory and reduced expenses (employee expenses have been cut 10% in the U.S. and 20 to 30% at their Italian factory on a temporary basis). They raised some capital (About $2.5 million net as of November 16th). The lawsuit with Mark Simo and No Fear has been settled. Their factory in Italy is being rationalized and its overall performance improved. As far as I can tell, the brand is well positioned.
So why are they losing money? Well, to nobody’s surprise, it’s a lot about the lousy economy.   But let’s start with their balance sheet. I went and pulled the balance sheet from a year ago so we can make a reasonable comparison between September 30 2009 and 2008.
Total assets are down 51% from $41.4 to $20.3 million. A huge chunk of that is goodwill (remember, that’s a non cash item) of $9.6 million that’s been written off over the year. Most of the rest is in current assets, and those changes are appropriate to their changing sales level and the overall business environment.
Cash has grown from $413,000 to $717,000. Inventory and receivables are down almost $8 million in total. You’d expect that. Deferred taxes have fallen $1.25 million to $0.00.
Total liabilities, of course, are also way down from $20.3 to $$13.8 million, a decline of 32%. Most of that decline is in current liabilities, down from $18.8 to $12.1 million. The line of credit outstanding, at $2.1 million, is less than half of what it was a year ago. Accounts payable and accrued expenses are down a total of $3.1 million.
The current ratio is basically the same, having fallen only very slightly from 1.31 to 1.26.
Stockholders’ Equity is down 69% from $21.1 to $6.6 million. As a result, total debt to equity has doubled from 0.96 to 2.06.
Net sales for the quarter fell 27% from $12 to $8.8 million. For nine months, they were down from $37.6 to $25.3 million, or 32.7%. The gross margin percentage for the quarter fell from 49% to 33%. The biggest reason for the decline in the quarter’s gross margin was “…a $0.7 million increase in inventory reserves for slow moving and obsolete inventory…” For nine months, it was down from 49% to 42% in the same period the previous year. Expenses in the quarter fell from $5.9 to $4 million, or 32%. The percentage decline was about the same for the nine months, from $19.1 to $12.9 million.
Sales and marketing expenses as a percentage of net sales fell from 25% to 20% in the quarter compared to the same quarter the prior year, and from 25% to 22% for nine months. Those percentages do need to come down, but you’d rather see it happen because of rising sales. Half a million of the decline during the quarter was from reduced commissions due to lower sales. 
In last year’s quarter ended Sept. 30, Orange 21 made $6,000. In the same quarter this year, they lost $1.136 million. The numbers for nine months are a loss of $2,194 million this year compared to a loss of $1,118 million in the nine months last year.
Orange 21 thinks “…its cash on hand and available loan facilities will be sufficient to enable the Company to meet their operating requirements for at least the next 12 months.” If the economy gets worse, or doesn’t improve, there may be a need for some additional capital. I guess we all have that problem.
Orange21 will have a hard time prospering with its existing sales levels and a 33% gross margin. One or both of those just has to improve. As I said, the low gross margin is at least partly the result of writing down some bad inventory, and that impact will go away.
The sunglass business, as we all know, has attracted a lot of competitors because of the historically high gross margins that have been earned both by brands and retailers. Even ignoring the impact of a lousy economy, those high margins didn’t persist in skate shoes or snowboards, and I can’t imagine why they would persist in sunglasses and goggles. But Orange 21, as a smaller company with a 100% focus on sunglasses and goggles, may have some advantages in the market over large companies that look at these products as accessories. Let’s hope that works for them.