Billabong’s Half Year Results- 12/31/06; The Impact of Acquisitions

/0 Comments/in /by

I love reading Billabong’s reports. No, wait, I hate it. Actually I’m hopelessly conflicted. On the one hand, being traded in Australia, they don’t have to comply with the U. S. Security and Exchange Commissions filing requirements. There’s less small print and less mind numbing and sometimes superfluous information. But there’s also less information in general. Still, though they are allowed to take a bit more, let’s say, poetic license, they do a pretty good job of presenting the critical information.

 
And it’s not like they have anything to hide.
 
In the six months ending December 31, 2006 they had revenue in Australian Dollars of $614 million (all these numbers are in Australian Dollars). Today, February 27th, there are about 1.2712 Australian Dollars to a US Dollar.).
 
Oh, and while I’m thinking about it, here’s the link to the reports themselves in case you want more detail than I can provide here. http://www.billabongbiz.com/investors-reports.php
 
Anyway, that six month revenue number was up 25.3% from $490 million in the six months ending December 31, 2005. I’m just going to refer to those two six months period as 2006 and 2005.
 
2006’s net profit was 90.5 million compared to 79.5 in 2005. Now, EBITDA stands for earnings before interest, taxes, depreciation and amortization. It’s kind of a measure of operating income. Below, I show you their comparative revenues by geographic segment and the EBITDA associated with those segments, along with a couple of other numbers. This table is taken directly from their report. Billabong has allocated its corporate overhead to each of these segments based on sales. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
You can see that Australasia sales grew 13%, the Americas by 31%, Europe by 39% and the rest of the world’s sales fell by 28%, but the last number was small to start with. EBITDA for the whole company was up around 11.2%, though it fell in Australasia by 6.8%. My favorite number in this whole report is the gross margin of 53.7% for 2006, more or less the same as the 53.8% in 2005.
 
Okay, you might wonder, is all this about just growing their existing business? Let’s start to answer that with a little side trip to the balance sheet.
 
It’s a strong balance sheet. Current ratio (current assets/current liabilities- a measure of liquidity and the ability to pay operating expenses) is 3.48. The debt to equity ratio is less than one.
 
Long term debt grew 110% to 332 million. The table above showed interest expense up from 1.7 to 7.7 million, so that’s no surprise. Inventory grew 42%. Property, plant and equipment were up 76% and the ever popular intangible assets grew from 542 to 662 million. The balance sheet’s close relative, the cash flow, shows big increases in receipts from customers and payments to suppliers and employees, and a payment of 23 million for property, plant and equipment. 
 
These balance sheet and cash flow changes don’t occur just because of the sales increase, so it’s off to the footnotes we go to find out what happened.
 
Note 6, Business Combinations, seems a likely candidate for some explanatory information. On November 1, Billabong acquired the Amazon Group, and paid cash of 21.146 million. That’s mighty close to the 23 million payment for property, plant and equipment shown in the cash flow.
 
Amazon, by the way, is a 19 store multi-branded retail business in New Zealand. As of December 31, 2006, Billabong “international retail presence lifted to 144 stores (up from 110 at 30 June 2006) and contributed more than 16% of the Group’s global revenue for the first half of the financial year. Retail EBITDA margins were above those achieved by the Group” (italics added).
 
I’m guessing we can expect more retail growth from Billabong, if only because they say, “Further store openings are planned in the second half in Europe.”
 
We also learn that in October of 2005, they acquired 60% of the assets of Beach Culture International and in November, the Pacific Brands Retail group, “which had been operating Billabong outlet stores under license.” Also during this period, “The previously licensed Billabong operations in Singapore, Malaysia and Indonesia were integrated into the group.”    Just to finish the list, Nixon, acquired in January, 2006, now accounts “for approximately 6% of the Group’s global sales.”
 
You can see where the balance sheet changes came from when you think about the impact of these acquisitions. Some new assets came into the balance sheet. New sales, and new expenses also showed up, in some cases in place of royalty payments. Nixon’s numbers don’t show up in the six month comparison because they were acquired in early 2006. The debt? Well, Billabong had to pay for all this stuff.
 
You also get a glimpse into the company’s strategy. They’ve told us to expect more retail and I wouldn’t be surprised to see more acquisitions. If, like most brands, they are interested in expanding into the broader fashion/apparel market (because how else can they continue to grow?) look for brand extensions, and maybe advertising and promotions that start to position the brand in the broader market.
 
How about B for Billabong? Oh, wait, never mind. Somebody already did that.

 

 

American Skiing Sells Steamboat; Leverage and Seasonality- a Tough Combination

/0 Comments/in /by

How many of you were with me in nineteen ninety whatever at the Transworld Snowboarding Industry Conference when then American Skiing Company (ASC) Chairman Les Otten stood up and thanked the snowboard industry for saving the ski resorts? Apparently we didn’t do enough- at least not for ASC. Its last ten years have been largely a process of trying to deleverage itself after an aggressive expansion left it, judging from its reported results, with an untenable financial model.

The sale of Steamboat to Intrawest for $265 million in cash was announced on December 19th, 2006. At that time it was expected to close on or before March 31, 2007. The sale was the result of a review of ASC’s strategic options that it initiated in July.
 
What are they going to do with all that green stuff? “It is anticipated that net proceeds from the sale will be used to repay all existing senior debt and outstanding revolver balances under ASC’s senior credit facility and certain other indebtedness.”
 
ASC is going to pay down debt, which is what they’ve been doing for a long time. A little bit of historical financial data is instructive. The numbers below are in millions of dollars and are for fiscal years ended July 30th.
 
 
 
 
 
2000
2001
2002
2003
2004
2005
2006
Net Revenue
 
$372
$373
$272
$265
$284
$276
$308
Operating Expenses
 
$377
$441
$385
$262
$274
$269
$289
Interest Expense
 
$36
$53
$50
$47
$88
$82
$87
Net Loss
 
 
$52
$142
$207
$82
$29
$73
$66
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$927
$807
$522
$475
$431
$423
$383
Total Liabilities
 
$540
$538
$416
$414
$671
$737
$763
Shareholders’ Equity
 
$185
$45
($155)
($237)
($241)
($314)
($380)
 
I recall thinking back when this all started that ASC was counting on no bad snow years and very optimistic growth projections. You can see that their revenue has trended down. But so have their operating expenses, which they worked hard and effectively to control. For the last four years, in fact, they managed to show a small operating profit.
 
But it didn’t matter, because that was overwhelmed by their interest expense which grew from $36 to $87 million in six years. Notice the decline in total assets as ASC sold other assets to try and get out from under their debt and interest burden. In spite of their actions, total liabilities grew and shareholders’ equity fell.   
 
There were various kinds of creative financings and refinancings where, to use one example, preferred dividends were accrued, rather than being paid in cash. Why? Because ASC didn’t have the cash to do it any other way.
 
They could do everything right- hell, I think they did do a lot of things right- they were at the forefront of some of the reengineering of ski/snowboard schools and rental programs that took place- and it just wasn’t enough. Even if the snow was good every year and they grew regularly I don’t think they could have gotten out from under their growing mountain of debt without asset sales. It’s interesting to note, for example, that ASC’s resort revenue per skier visit grow from $64.92 in fiscal 2002 to $73.87 in the year that ended last July.
 
Look at the chart again. Consider what happens when too much leverage and seasonality are mixed with some bad luck and perhaps a little too much optimism. Still, I don’t criticize ASC for trying. If nobody ever took a calculated risk, we wouldn’t get in our cars in the morning to drive to work.
 
Look at your seasonal business and your growth plans. How much leverage is enough and how much is too much? Are you going to constructively use debt or is it going to use and abuse you?               

Can We All Please Just Calm Down? A Business Perspective on Blanks

/0 Comments/in , , , /by

I can’t believe I’m doing this. Oh lord, how many people am I going to piss off this time? I mean, I could just lay low and let the slings and arrows fly back and forth but no, I just don’t have the intestinal fortitude to keep my mouth shut. Instead, there’s this almost pathological need to try and reduce a highly controversial and frankly emotional issue to a series of business bullet points. I guess I’ll console myself by remembering that I’m not going to say anything here I didn’t say some years ago in Market Watch.

I might as well get it over with. Maybe it will help me sleep at night.
For those of you who live at the United States Air Force weather station three miles from the South Pole (and don’t have an internet connection), IASC and the leading skate hard goods companies created and wrote the 32 page insert called “Under Fire” that you all received in the recent issue of Transworld Business.
My hats off to them for achieving a level of efficiency and cooperation that, honestly, I wasn’t sure they could pull off. And they succeeded in highlighting what I think most of us would agree are the major issues confronting the skateboard hard goods industry today and identifying some action items. What I’m going to do is review those issues and then go a little deeper into the business implications of what they are saying and advocating.
Remember that “Under Fire” is a consensus document. That is, not everybody who was represented in it would agree with everything everybody else said. Still, I thought there was remarkable consistency across a number of key points.
And the Key Points Are……
The bedrock of the whole argument is that pros are the foundation on which skateboarding is built and that their influence is key to getting kids excited about and continually committed to skating. Okay, I agree that pros have big influence on the core of skating. How much? As much as they use to? Don’t know.
The next point is that the brands’ marketing activities, including their support of pros, is critical to the health of skateboarding. If skaters are buying blanks and shop decks (I consider those separate categories, and will discuss why later) rather than the more expensive branded decks, the brands can’t afford the same marketing programs. That’s simply a financial equation. Can’t argue with it.
And, the argument continues, if professional skateboarding and the associated promotional activities aren’t strong and can’t be continued at the same level skating, as an activity, a lifestyle, an attitude, and as a business is fated to decline.
Well that would suck if it actually happened. What do the brands want to do about it?
First, they acknowledge that it’s time to introduce some technology and innovation into skate hard goods to give skaters a reason to buy the more expensive branded decks. We’re already seeing some of that start to happen and you’ll see more. But of course it’s not an instant solution. The industry has spent a lot of time, effort and marketing dollars to convince skaters that a skateboard is a seven to nine ply laminated product made of hard rock Canadian maple. Skaters seem to believe it. Getting some of them to pay more for something that ain’t quite that, even when the benefits seem obvious, will take some persuasion and some time.
I guess where we’d like to be in where, for example, golf is. You know- they come out with “new and improved” models every year and people buy them even though there’s nothing wrong with their old stuff and the new stuff is expensive and doesn’t necessarily make a difference in their game. Or like in automobiles- where the newest technology appears in the top of the line product and works its way down year by year.
This will require, however, that the pros be in lock step with their sponsors.
Second, they recognize the shop’s need for a better margin on branded hard goods. What are they going to do about it? Somewhere between lots and nothing. There are brands already offering better margins and some that just don’t want to compete at the lower price point. There is, by the way, nothing wrong with a business decision to not offer a less expensive product if that’s what your market position and targeted customers require.
“Under Fire” is only “the first step in IASC’s plan to continue educating and informing the industry about this issue.” There will be additional steps in the program. The supplement ends with a call to action suggesting some tactics that all the industry’s stakeholders should consider.
So, Where Are We Exactly?
You remember all this from a few years ago. Skating takes off, skate parks start to sprout like mushrooms, brands can’t keep up with demand. Everybody’s happy. Then the market gets big enough for the foreign, low cost manufacturers to notice it. “Hey, we can make this cheap,” they say. They’re right. The usual startup problems. Problems resolved. Eight bucks landed cost for a blank skateboard if you’re buying in quantity. Maybe less. Consumers get the idea that the quality of blanks and shop decks are the same as the branded deck. Big price difference. Product wears out. No fundamental change in the product in 20 years or so. Percentage margins decline. Worse, total margin dollars earned on a deck decline. Fifty to seventy percent of deck sales world wide (you pick the number you believe) are blanks and shop decks.
So after a period of rapid growth, the industry matured a bit and started to consolidate. Product becomes a bit of a commodity, price and margin pressures, volume matters, etc. Look, I’m not going to go through this for the 14th time. All the usual things happen that happen to any industry in its life cycle. Big surprise. It’s so predictable it’s boring.
Anyway, wherever you go, there you’ll be. And here we are. There are some business issues implicit in Under Fire that it didn’t specifically discuss. Well, you can’t blame them- if they had, you’d be confusing this thing with the telephone book. But me, I always wanted to write a phone book.
Why People Buy
As far as I know, there are three things that motivate people to purchase a product. They are advertising and promotion, product features, and price. It appears, right at the moment, that advertising and promotion isn’t working too well for branded skate decks. If it was, there would be no Under Fire and I wouldn’t be writing this. Which, frankly, would be fine with me. There must be a better use for a Saturday morning. I mean, I could be doing yard work. Never mind. I’ll write and send the two teenagers out. Same to you kids. No, you can’t play with the chain saw.
New product features? Well, uhh, there really haven’t been any that have caught on, though hopefully that’s starting to change.
That, I am afraid, leaves us where we really, really didn’t want to be. At price. Let us then discuss the elasticity of demand with regards to price. If the blank/shop deck is, say $20.00 and the branded deck is $50.00 and you’re a fourteen year old without a lot of money or the a parent of a fourteen year old who knows you’re going to be back in this shop in a month, that’s a big difference. Apparently, too big a difference for a lot of people.
How big a difference wouldn’t be too much? Judging from the discussion of the demand for the $35 branded deck in the sacred supplement, the retailers seem to think that’s a price point at which they can sell branded product. But would $40 also work? Or does it need to be $30? What kind of and how much advertising and promotion and product innovation can change that?
We don’t really know. Or at least I don’t know. Actually, I guess I do know the answer. The answer is, “It depends.” Isn’t that helpful? It depends on the brand. It depends on the shop. It depends on buyer motivation. Has anybody out there rigorously asked 500 skaters, or even 100, why they bought the skate board they bought?
Right at the moment, if we asked a bunch of skaters, we know quite a few of them (fifty to seventy percent I suppose) would say that price was a big factor, as is their belief in a lack of meaningful product differentiation. More troubling, I suspect that if we asked our questions just right, we’d find that many are indeed influenced by the pros- but that doesn’t translate into buying a branded deck.  Finally I’d expect to hear, “I support my local skate scene.” And that brings us to our next topic.
Blanks and Shop Decks
Let’s define a blank as a skate board either with no graphics at all or with graphics with absolutely no legitimate connection to skateboarding. There will always be a market for both. Some percentage of the market, especially lacking any real or perceived product differentiation, will always want to buy the cheapest thing they can. It’s true in any market. And somebody will always supply it.
I’d like to say that again- If the customer wants it, somebody will always supply it. Lacking a change in skater perception and motivation, every store and shop that stops selling blanks creates an opportunity for somebody who does sell them.
The non branded board with graphics has been the province of the larger chains and sporting goods stores, often as completes. There’s no possible reason for a “real” skate retailer to carry them, if only because they’d make more money on their shop decks as well as promoting their shop. They are going to be around, and I imagine the quality has improved.
Shop decks, though, are a different story. What I hear, and what I suspect is often true, is that a shop deck, in a good shop’s neighborhood, is essentially a lower priced substitute for the traditional branded product. It offers a certain customer the same sense of legitimacy, belonging, and connection to skating and the skate culture that they use to get from the branded pro deck. And it’s cheaper. And shops make good money on them. I wonder how many shops put out their own pro models. Shop decks are not going to disappear. In fact, they may get stronger. And as I said, I don’t think the success of shop decks is just a price issue.
Maybe, with the right technology and promotion by the brands, shop decks can become the entry level boards.
It would be interesting to collect some good information on sales of shop versus blank decks as I’ve defined them. They really are separate categories, but they’ve been lumped together.
The Role of the Pro
I suspect there are some people who feel no need to collect any data on buyer motivation. They believe they already know the answer they’ll get back. In Under Fire, most of the brands say their companies are rider driven, or words to that affect. Always have been, always will be. That’s a valid statement of principal, but it may not be an adequate basis for a business, judging from the decline in the sale of full price branded decks.
I would not try to push a comparison between snowboarding and skateboarding too far. But I will point out that snowboarding use to have a pile of pros and sell lots of pro decks. Once the industry matured, that started to decline until today, the number of pro snowboards sold is vanishingly small.
That doesn’t mean that the pros don’t still influence snowboarders. But what the snow board brands finally figured out was that the best pros were worth whatever you had to pay them. The ones that you just flowed product to and maybe offered contest and photo incentives were influential at their local scene. All the riders in the middle? Not worth what they cost was the decision, and they are gone.
By the way, my definition of the best pro is not just the one who’s the best skater. It’s also the one who’s personable, responsible, professional, and shows up on time.
The other things that happened, in surf especially, is that the apparel and footwear companies picked up most of the team/pro sponsorship and other marketing expenses.
Is this how skateboarding will evolve? I don’t know. Skate hard goods companies have historically been the bedrock of skate boarding.   Certainly shoe and apparel companies are spending plenty of money supporting skateboarding.
So here’s the marketing matrix. Some skaters are influenced by the pros and buy pro decks. Some are influenced and buy the pro’s brand. Some are influenced, but still buy what’s cheap, maybe spending their money on shoes and clothing again. Some are influenced and would like to buy the pro deck but can’t afford it. Some don’t give a shit and buy whatever is cheapest as long as they perceive the quality is equivalent.
Well, we’re back to buyer motivation. Let’s talk to those few hundred skaters and figure out just where the industry (and individual companies) should be spending its advertising and promotional dollars.
Distribution
Everybody gets together to discuss distribution, tries to blame the other guy for the so called mess, and nothing changes. I’ve seen it too often, and I’m not talking just about skateboarding. Anybody who runs a company in the action sports business sits at their desk and ponders distribution every day. They know who they can absolutely sell to. They know who they should definitely not sell to right now. They try and figure out when and what and how much they can sell to all the accounts that don’t fit neatly in the “sell” or “don’t sell” categories. They ask themselves, “What will other accounts think? How will it impact the brand? How much money can I make? What’s the potential for growth? Is it consistent with my brand’s market position and brand strategy?”
So distribution evolves as companies grow and brands change. It just does. There is no mess. There’s just normal industry/brand/retailer evolution. Do what’s right for your business given this inevitable fact. Don’t look for somebody to blame, and don’t wait for it to be fixed.
Industry Evolution
Industries change. They just do. Companies adapt or die.  The customer always gets what they want. You can influence them, but not always as much as you’d like. An industry succeeds when the companies that make it up compete. Part of that competition is always innovation. Some do well, some don’t. But the industry itself progresses; sometimes kicking and screaming, but it progresses. I guarantee that every company will do what it perceives to be in its own best interest.
I went to the Park and Recreation Convention here in Seattle last October. Basically this is the convention of people who sell stuff to playgrounds, and I can only say that I wish I was a kid again. Lots of cool stuff that’s beyond what I could have imagined when I was of an age to use it.
I saw Per Welinder from Blitz there, manning the IASC booth and promoting skate parks. I walked around a corner and came face to face with Beau Brown, formerly of Sole Tech and now COO of Radius 8, a seller of portable skate ramps. His face was all aglow from the huge number of business opportunities he thought he had at the show. As we talked, a guy from some municipality came up and, apparently amazed to learn that portable ramps existed, asked how quickly he could get some. He guessed at the price, kind of suggesting that one might cost $3,000 as I recall. Beau, who seems to have a nasty ethical streak he needs to get over, told him that no, the one he was looking at was only $300. The guy scurried away to get his boss.

Zumiez’s 10/31/06 Quarterly Report: Pretty Much Nothing But Good News

/0 Comments/in /by

Well hell, this is a lot more fun when there’s something negative or at least controversial to gossip about. All I’ve got to go on is the 10-Q for the quarter ended October 28th and things seem awful solid. No executives fired. Sales growing, margins holding up, no interesting litigation. You might as well go read another article.

Net sales for the quarter were up 43.3% to $82.3 million. Comparable store net sales were up 10.7% compared to being up 9.8% in the same period the previous year. So not only are same store sales growing, but they are growing faster than they were in the same quarter last year.
 
Gross margin fell from 37.3% in same quarter last year to 36.8% in the quarter ending October 28th this year. For nine months, it’s up to 34.6% from 33.8%. They explain the fall in gross margin for the quarter as being “due primarily to occupancy costs related to the 32 new stores we added in the three months ended October 28, 2006 compared to 14 stores added in the three months ended October 29, 2005.”
 
That’s easy to quote. What does it mean? You open all these stores. The occupancy costs begin immediately. Landlords are funny. They want to be paid every month no matter what you sell. On the other hand, the customers may not rush in quite as quickly as you want. If, therefore, you include certain occupancy costs for new stores as a cost of goods sold, you are going to reduce your gross margin a bit if you are opening a lot of new stores.
 
Interestingly, Zumiez states that the way they calculate cost of goods sold may not be the same as the way other retailers do it. They kind of go out of their way to do that. If you know much at all about accounting, you know that while there are rules, there are often choices, or maybe judgments is a better word, to be made about how to account for things.
 
I have the perception that Zumiez has been mindful and focused on the choices they have made when they set up their accounting system. I’m guessing it’s contributing to their success. We can tend to look at our accounting system as a necessary inconvenience and generally a pain in the ass. A good system that gives you the management information you need to make decisions is as important as your brand image. No, I don’t think I’m overstating that.         
 
They also said their gross margin had been reduced by their “stock based compensation expense.” That is, the value of certain stock options has to be included as an expense. This is the first October quarter in which accounting standards have required that be included as an expense.
 
These costs that reduced gross margin were partially offset by an increase in margin because their larger purchase volume allowed them to get better prices from vendors. I’m sure we’re all stunned to hear that.
 
They also said gross margin was positively impacted by lower markdowns because of less aged inventory (an indication of good purchasing) and “our ability to leverage certain fixed costs, such as distribution, and product teams over greater overall net sales.”
 
The balance sheet is strong, though their cash and marketable securities have declined and inventory has grown, consistent with their growth including the acquisition of the twenty Fast Forward stores.   I mean, financing growth is what they had those liquid assets sitting there for.
 
Net income for the quarter grew 29.3% to $6.83 million, or from $0.19 to $0.25 cents a share before dilution. Net income as a percentage of sales was 8.3%, down from 9.2% in the same quarter last year. 
 
I’ll be waiting to see Zumiez’s filings in the next couple of quarters. It will be interesting to see if any of the issues impacting other public action sports companies will affect Zumiez. Right at the moment they are kind of in their sweet spot in terms of their size and growth. Hopefully, they can continue that.

 

 

Make Love, Not War; Blanks and the Park and Recreation Convention. What’s a Skate Brand to Do?

/0 Comments/in , , /by

First time I’ve ever had two subtitles. That must be meaningful. Either I’ve been thinking a lot about this, or I’ve got nothing to say and am desperate to use up space. I suppose each reader will decide which it is.

 Not long after I read Cullen Poythress’s article “The War on Blanks” in the September issues of this publication, I went to the Park and Recreation Convention here in Seattle. Basically this is the convention of people who sell stuff to playgrounds, and I can only say that I wish I was a kid again. Lots of cool stuff that’s beyond what I could have imagined when I was of an age to use it.
 
I saw Per Welinder from Blitz there, manning the IASC booth and promoting skate parks. I walked around a corner and came face to face with Beau Brown, formerly of Sole Tech and now COO of Radius 8, a seller of portable skate ramps. His face was all aglow from the huge number of business opportunities he thought he had at the show. As we talked, a guy from some municipality came up and, apparently amazed to learn that portable ramps existed, asked how quickly he could get some. He guessed at the price, kind of suggesting that one might cost $3,000 as I recall. Beau, who seems to have a nasty ethical streak he needs to get over, told him that no, the one he was looking at was only $300. The guy scurried away to get his boss.
 
Anyway I know this article is about something besides vignettes from a trade show. I guess I’ve got to go back to Cullen’s article to get to it.
 
I thought it was a good article. Balanced, dispassionate, and talking about an important issue. I would have liked to see some numbers comparing costs, prices and margins on blanks and branded decks, but that was really my only criticism of the article. And I agreed that the brands are critical to building and supporting skating and that blanks undercut their financial ability to do that.
 
I talked to some other business people in the industry who seemed to share my perspective, and were as surprised as I was by the outpouring of concern and criticism the article engendered. That got me thinking and the convention helped that thinking to jell.
 
What would I do if I was running a skate brand?
 
Congratulations!
 
First thing I’d do is recognize that I’d had something to do with skateboarding having broken through and becoming a growing, recognized, and broadly accepted activity. I’d made some money, had some fun, and did it while being involved in something I loved. I’d helped position skateboarding so it probably wasn’t in danger of disappearing like it nearly has before.
 
Good stuff.
 
But after the sweet glow of success had worn off, I’d recognize that the “good old days” weren’t likely to come back, that blanks would be here to stay as long as skaters wanted to buy them, that hard good brand have had a hard time being successful in shoes or apparel (Fallen and Element are the exceptions I can think of), and that the financial model in the “core” part of market, where most hard goods brands are positioned, has gotten tough.
 
And that’s bad stuff.
 
But you know, it’s just business. And when an industry evolves, as it always does, the question isn’t usually how do you turn back the clock, but how you react to the new circumstances to make your business successful. I’ve got a couple of ideas. Maybe not the best ones, and certainly not the only ones, but you got to start somewhere.
 
New Areas of Focus
 
In 1995 I wrote in TransWorld Snowboarding Business (May it rest in peace) that it was time for every serious snowboard brand to hire a Director of Resort Relations. In what can only be characterized as a flash of brilliant insight I said, “Uh, don’t a lot of people snowboard at resorts? Maybe you should be doing something with the people who run them.”
 
I know that people do an awful lot of skating at places other than skate parks. I wouldn’t begin to try and estimate how much skating is done where. Still, the skate industry is doing everything it can to support the improvement and growth of skate parks. There must be some business opportunities there.
 
How about appointing a Director of Skate Park Relations? That person might start by identifying the 100 most important skate parks in the country. Find somebody who regularly skates each park. Make him/her your representative. They get free equipment and a commission on anything they sell at the park. I’ll bet you’d find a few who would really shine. They might find kids they know who would take responsibility for smaller parks in their area. Hell, pretty soon you’d have the Amway of skateboarding going on.
 
Consider creating a Director of Park and Recreation Commissions Relations. Visit the people who run them. Find out their level of commitment and plans for skating. See how you can help them. Help them make good buying decisions. Offer to sell them some decks co branded between your brand and the new park. Call Microsoft and see if they’d pay to have the Xbox logo on the bottom of a skate bowl, and keep a piece of the action while helping the Commission pay for part of the cost of the park.
 
I have no idea what opportunities there might actually be, but I bet 20 meetings with different Park and Recreation Commissions would turn some up. It’s worth a try. If you’re already doing it, never mind.
 
Improving Brand Positioning
 
It’s all about your brand. At the end of day, still lacking any meaningful product differentiation as perceived by consumers, your brand is all you have. Skate companies may be well positioned in the core skate market. But I think that market is a shrinking percentage of the total skate market as I would define it.   Taking advantage of skate’s growing, and more diffused, audience requires you to expand your market positioning.
 
The people who skate, or who just like skate, but are outside the core market need to know who you are and understand why you are credible. How do you do that? Depends on your brand. I’d suggest you start by studying other companies who have done it. How does Reef manage to sell its sandals at Nordstrom and still be a core surf company? Why can Burton sell its hard goods almost anywhere and still be so credible in snowboarding? What’s Volcom’s plan for expanding its very successful franchise without losing its core credibility? How do the skate shoe brands do it?
 
Now if somebody was to say, “It’s not the same. Skate is different,” I’d probably agree with you but with two caveats.
 
First, it’s never the same. Nobody’s business model is ever exactly the same as your’s and soft goods are different from hard goods. But these companies have made, or all still making I guess, a transition that skate companies probably need to make. So you might think about how they’ve done it.
 
Second, skate is different, and that’s part of the problem.   It’s different enough that it’s impeding the ability of brands to break into the wider skate market. Over twenty plus years, skate brands have made an implicit decision to stick to the core market. For the longest time, there wasn’t much to decide because that was the whole market. Now it’s not, and there are two choices.
 
You can stick to the core market and figure out ways to get skaters to buy more branded product. Or you can do what other successful action sports brands have done and expand your brand’s recognition and franchise to the larger market you’ve helped create. Any skate brand that was able to do that could be successful in the soft goods market. The Tony Hawk brand comes to mind.   
 
If you study the action sports brands that have made the transition to the broader market, the first thing you will notice is that none of them did it quickly. They were all around years before it happened. At some point in the action sports business, when you’ve been around five years or maybe longer, it’s suddenly possible for you to expand your distribution without losing your credibility with your historical customer base. Skate brands mostly qualify from this point of view and then some and that’s good news.
 
I was talking to Jamie Stone at TransWorld on another subject and he had what I thought was a good idea about building skate brands. Jamie’s concern was that pro graphics were changing too quickly. There was never a chance for the skater to build a bond among the brand, the skater, and the graphic. “What if the graphic lasted a year?” Jamie asked. “Then wouldn’t you have a chance to build a marketing campaign around it?”
 
Good question. It reminds me a bit of when the snowboard companies kept expanding their lines in response to what their competition was doing. They were focused on their competitors- not their customers.     
 
I hope there’s a strategy that reverses or at least halts the rise of blanks and shop decks. I know the industry is working hard to find one. But I came out of the Parks and Recreation Convention blown away with the new opportunities there can be for skate brands. Think about it. And go to that convention next year.

 

 

The Relationship Between Marketing and Business Risk; Do One and Reduce the Other

/0 Comments/in , , /by

Have you ever noticed how often the group of people who create ads, run promotions, and manage sponsorships are called the marketing department? That’s always struck me as kind of odd. I think marketing is the process of figuring out who your customer is, or can be, and why they buy your product. Advertising and promotion are the tactics you use to reach and attract those customers after you’ve reached some decisions about your customer based on your marketing.

I suppose it’s so obvious it shouldn’t have to be said, but if your advertising and promotion isn’t based on solid marketing you can spend a lot of money and damage the only real asset you have in this business- your image. We’ve all seen retailers and brands do it.
 
The thesis of this article is that good marketing reduces business risk and the perception of business risk, perhaps helping you to think in a way that facilitates recognizing new customers and markets.  It’s critical if you’re shop or brand is going to stand out in a crowded and highly competitive market.
 
The Status Quo and Its Downside  
 
 Right now, in this industry, everybody pretty much does the same advertising and promotion stuff. You all know what’s on the list of the ways we compete and I won’t bother repeating it here. I recognize that sometimes somebody’s ad is cooler than somebody else’s, or a particular team rider breaks out from the crowd for some period of time. But at the end of the day if we’re all doing the same stuff, and our products are more or less all the same, how do you, as a shop or a brand, break out from the crowd?
 
Answer- you don’t. If you’re doing the same as everybody else, and your product is no better, the best you can do is to be as good as they are. The exception, of course, is that you can do more of what all the others are doing. It may not be better or different, but it has an impact. But to do more, you have to have more- dollars that is. Then it’s only the big guys who win.
 
It probably hasn’t escaped your attention that the big are getting bigger and controlling more and more of the market. I’m suggesting that’s inevitable- in any industry- if, lacking solid marketing, the only basis for doing better over the long term is to spend more on advertising and promotion and cut prices. That tendency is exacerbated by the fact that it’s the larger businesses that are most likely to really do good marketing.
 
The Perception of Risk
 
I suppose this article had its genesis over a year ago when I talked to Santa Monica based ZJ Boarding House co-owner Todd Roberts at ASR. In the course of talking about a whole bunch of stuff, we got around to the ongoing travails of smaller retailers and what they needed to do. Todd said, “Jeff, you can’t be afraid to take some risks.”
 
I thought he was right. Still do. But at the time, I didn’t know where to go with it. It didn’t seem useful to say, “Take more risks!” unless I could explain why the risk was worth the potential payback and how it could be controlled.
 
Still, it seemed an important point, so I put it in whatever the part of my brain it is that holds ideas to be thought about and addressed later. It recently popped out more fully formed.
 
In helping businesses in this industry manage transitions, I’ve known for a long time that we all, including me, like to do what we’re comfortable with and have done successfully in the past. It’s human nature. So we go with the flow in running our businesses, following the annual schedule for developing ads, sponsoring events, attending trade shows and all the other stuff. It feels low risk, doesn’t it? That’s because it’s what we’ve always done.
 
Conversely, from time to time, really new ideas for advertising and promotion come across our desks. But they don’t fit our frame of reference. There isn’t a place for them in the annual advertising and promotion schedule. Other companies aren’t doing them. Doing the new things seems risky. Doing the same old stuff doesn’t.
 
Granted, it’s also a matter of available funds. It’s much less risky to do something new when you don’t have to cut out something old to try it. Another advantage to bigger companies with strong balance sheets.
 
We tend to perceive low risk in doing what we’ve always done. We perceive higher risk in doing new things. I think it’s the other way around. Industry conditions and the difficult competitive environment require that you do some of these new things if you are going to succeed. If you don’t, you have no opportunity to be better than anybody else.
 
And that gets us to marketing as a competitive tool, a money saver, and a way to fix your perceptual problems.
 
Doing Marketing
 
Sometimes I just have good karma. I’d been working on a talk I had agreed to give on how we compete as an industry and how we can do it better. Before I finished preparing, I flew off to ASR. I walked into the room late, but managed to hear most of Mikke Pierson’s (the other co-owner of ZJ Boarding House) talk on how to utilize your data base effectively. I know this article is turning into a damned ZJ Boarding House promotional piece, but sometimes you just have to go with the flow.
 
So here I am, thinking about how the industry competes, why brands and shops need to take some risks, and why they often seem reluctant to do it. Having managed to put off my article deadline until after ASR, I was getting desperate for a good way to tie this all together in the real world.
 
And Mikke saved my ass.
 
To make a longer story short, he said, “We spent $4,000 with Customers First to clean up our mailing list and plot our customers on a map so we knew where they were coming from. We did our usual promotional mailing at a cost of $16,000 and it generated $135,000 worth of business. The cost of doing the mailing was a whole lot lower because we knew who we were mailing to and why. We didn’t have to pay the post office for returns, and we didn’t waste money on duplicates, people who weren’t interested, or who were too far away to come to the store.”
 
The $4,000 spent with Customers First is real marketing. And I want you to notice the following things.
 
  • It wasn’t some esoteric, company wide, long term, epic undertaking that produced a ream of data that nobody knew what to do with. It was practical, cheap, quick, and the return was immediate and measurable.
 
  • It reduced risk. They knew much better who they were doing a mailing to and why. Maybe just as importantly, it also reduced the perception of risk.
 
  • It generated additional sales- quickly.
 
  • It didn’t cost them money- it saved them money.
 
  • It wasn’t some change of direction, risk the company strategy. It was a fairly minimal, common sense sort of thing. If it hadn’t worked out they would have been out $4,000 and a little time and would have learned something.
 
  • It focused on their customers- not on their competitors and not on the industry.
 
What I said I was trying to do at the start of this article was demonstrate the relationship between marketing and business risk. The relationship is both perceptual and practical. Good marketing reduces your business risk. It also reduces the perceived risk because your actions and decisions are based on good data. That means you are more willing to try some new things.
 
And I don’t think you have much choice. Focus on your end customer and why they buy from you. Think of a dozen questions you’d like to have answers for and how those answers would make it easier to reach those customers. Answer just one and see what you can do with the information. The risk of not trying is just too big. Like Walt Disney said, “You don’t build it for yourself. You know what the people want and you build it for them.”

PacSun Quarter and 9 Months Ended 10/28/06- Good Tactics. What’s the Strategy?

/0 Comments/in /by

         Pacific Sunwear’s (NASDAQ: PSUN) official SEC filing isn’t out yet (I’m writing this November 26 because I love working Sundays), but I’ve read the press release, reviewed the associated financial statements for the quarter and nine months ended October 28, and listened to the conference call. Let’s look at the numbers first, and then talk about the conference call.

 The Numbers
        The quarter showed a slight decline in sales from $377 to $375 million. But gross margin fell from $144 to $106 million—or from 38.2% to 28.3%. Selling and General and Administrative expenses rose from $81 to $93 million. Net income fell from $40.5 to $9 million or from $0.54 to $0.13 per share on a fully diluted basis.

         On the balance sheet, the current asset fell from 3.45 a year ago to a still strong 2.34 at the end of this October. The only other thing I’d note from the balance sheet is that, even after a write down, inventory—at $253 million—was still nearly $10 million higher than a year ago.

         In the mix was a same-store sales decrease of 6.7% and the ten cents a share inventory write down—primarily for footwear and accessory categories. The CEO resigned and was replaced by Company Lead Director Sally Frame Kasaks as interim chief executive officer. At different times in her career, Ms. Kasaks was Chairman and CEO of Ann Taylor Stores, President and CEO of Abercrombie & Fitch, and Chairman and CEO of Talbot’s, Inc. I think we can conclude she knows a bit about specialty retailing.

         With financial results like that, the stock must have cratered, right? Nope. The press release was dated November 9. The stock closed that day at $17.27. The next day it rose to $18.56—a 7.47% gain on volume that was 3.76 times the average volume. The company’s most recent closing price as I write this was $19.48. The conference call was held on the November 10 at 5:30 in the morning Pacific Time. No, I did not listen to it live.

       Clearly some people were pleased with what they heard on that call, and maybe had been expecting quarterly numbers that were worse than they were. But what made them so happy?
 
The Conference Call
        I wish they made transcripts of conference calls available or—if they do—I wish I knew where I could get them. Trying to write down all the good things Ms. Kasaks said they were doing as quickly as she was talking was a real pain in the butt. I kept trying to stop and restart the replay, but Media Player isn’t built for rewinding fifteen seconds. And another thing, left-handed people with lousy writing should not be allowed to own fountain pens—much less try and take fast notes with them. Uh, I seem to have gotten off track.

         Anyway, Ms. Kasaks highlighted three key big ideas for Pac Sun to focus on. They were:
      1. A commitment to build the juniors business to increase sales and store productivity.
      2. A focus on improving the in-store presentation of merchandise.
      3. A strategic assessment to understand how they can reconnect with their customers.
 
These three big ideas followed a list of initiatives Pac Sun was undertaking. I want to quote one of those initiatives: “Put more focus on transitional merchandise with the implementation of our spring floor set at the end of January. This will insure that our spring product is presented earlier than last year while being merchandised with more wear now product than in the past.”

         I thought this initiative required a little explanation and discussion.
 
Transitional merchandise is product that’s brought in during one season (winter in this case) and can be worn in that season, but can also be worn during the upcoming season (spring). Sweaters in spring colors might be an example. You sell it now and wear it now—but they carry over into the next season.
         The reason you do this is that it has the potential to improve your sales in the existing quarter. The danger is that if you don’t do a really good job in selecting merchandise, picking the right quantities, and merchandising it well, you may get to the next quarter with assortments that are old.
         In other words, at the extreme, you could theoretically end up just transferring sales from one quarter to an earlier one. PacSun spent some time on its conference call discussing some issues in just these areas, so it will be interesting to watch them implement this initiative.
         I think there were seven initiatives in total, including the one I quoted above. Somehow, I’ve managed to write down nine. I was either listening too slowly or writing too quickly. They included a review of the company’s customer communications program and in-depth customer research. Other initiatives will focus on inventory and in-store presentation. They want to reduce inventory density in their stores “to provide assortment clarity and in store presentation.” They noted a decline in their sneaker business and have plans to improve their assortment.  They will review it “to be in line with customer preferences.”
         They have plans to improve their merchandise presentation “without undertaking a major investment in time and capital.” They are utilizing something they called a “refresh” format that involves certain new design and layout elements. And they’re trying to improve the process by which they update their monthly floor sets.
         Due to time and cost constraints, you can’t wave a magic wand and have all 1,169 stores (835 are PacSun) updated. They are working to figure out what seems most likely to work and to implement the changes as time and capital permit. They are developing a new logo and new layout that provides what they characterized as a much more sophisticated look, and expect to do 30 to 40 remodels utilizing this concept next year. Sounds like the right direction and right process to me.
         That they are doing this isn’t a surprise to anybody who has been in a PacSun, Zumiez, and Hollister store lately. In Hollister, there’s a certain calmness that makes you feel like you’re on the beach. Their attempt to connect to the surf market—and they seem to do it pretty well—is clear. Zumiez carries hard goods. That has given them credibility in the market even as their store numbers expand. PacSun has the right brands and competitive prices but needs, in the words from the conference call, “To understand how they can reconnect with their customers.”
         During the conference call, Ms. Kasaks acknowledged that she doesn’t think PacSun can be authentic at their size. While that may cause a gasp of dismay and prognostications of their demise in some action-sports circles, I found it refreshing. It’s inevitably true for a company with this many stores. So you recognize it, work on evolving your inventory and your look, and undertake a strategic reassessment.
         So what’s the strategy? That’s what PacSun management is figuring out. They’ve done an awful lot in three months. They’ve been open about their issues and have moved to implement tactics that address them. I can’t wait to walk into one of their remodeled stores and see where the strategic reassessment came out. In the meantime, we’ll all keep watching PacSun as a barometer of what’s happening in the broader lifestyle market and worry about how their initiatives impact orders and sales of our brands.

 

Globe Annual Report and the Pacific Brands Deal

/0 Comments/in /by

Being traded on the Australian Stock Exchange, Globe doesn’t have to file the usual reports with the Securities and Exchange Commission here in the U.S. But they did file an annual report (109 pages, but happily for me full of pretty pictures and big type) and, in conjunction with the announcement of the pending sale of its Australian and New Zealand street wear apparel division to Pacific Brands for a maximum of $42 million Australian Dollars, it was worth taking a look at.

 
By the way, all the numbers in here are in Australian Dollars. Currently, an Australian Dollar will get you about $0.76. Do your own math. Oh, and just so I don’t have to say it continually, Globe’s fiscal year ended June 30, 2006. The annual report was released October 13th.
 
The first thing I want to say is that I like these guys. I mean, thanks to them, I now know how to bounce quarters into a glass. You know who you are. Maybe more importantly is that I love any management that starts off its annual report directly and honestly with the Chairman and CEO saying, (I’m paraphrasing here) the first quarter in North America really sucked, but the brands are in better shape and we’ve got our financial and management ducks in order, but we didn’t make as much money this year as we’d hoped. All you can ask of any management is competence, honesty and integrity.
 
Sales fell in 2006 from $204.5 to $197.3 million. Net Income dropped from $3.3532 to $0.471 million. There’s no way to make that look like a good result. However, the improvement they talk about in the annual report is better seen in the cash flow. There we see that in 2005, operations used $7.381 million in cash. In 2006, operations generated $2.780 million. And that is almost entirely the result of increased receipts from customers. That’s a good thing, and suggests they are doing all the appropriate management things that a company has to do when things aren’t going its way- controlling inventory, collecting receivables, being tough on spending. Let’s see if the balance sheet bears that out.
 
Inventories and receivables both down a bit. Good. Payables down almost $10 million. Great. Current ratio went up from 2.43 to 2.83, a 16.5% improvement. That’s a strong current ratio. My only caveat is that a current ratio is as of a moment in time (June 30 in this case) and seasonality, to the extent Globe has it, can wreck havoc with that. As a former President of a couple of snowboard only brands, I am justifiably paranoid about that.
 
Meanwhile, back on the cash flow, I see that Cash Used in Financing Activities fell from $11.1 to $0.3 million. Of course, $8.3 million of those savings came from not paying dividends in 2006 that they paid in 2005 and I suppose the people who use to get those dividends aren’t that thrilled, but I imagine it was the right thing to do.
 
The bottom line is that while they used $22.2 million in cash in 2005, they used only $3.0 million in 2006. The conclusion? They responded appropriately to their business conditions, but now they have to improve their bottom line by selling more at better margins.
 
There’s a limit to how much you can accomplish that by controlling spending. So they are taking the strategic step of making the apparel sale to Pacific Brands. The brands being sold “…include Mooks, M-ONE-11 and Australia and New Zealand licensed brands together with eight concept retail stores in Melbourne and Sydney and two Direct Factory Outlets stores,” according to the Melbourne newspaper The Age. The same article says these assets represent about 35% of Globe International’s group revenue.
 
Certainly, this sale gives Globe some additional resources to use in focusing on its core brands. Apparently, it’s the result of the strategic review that Globe announced it would be conducting last February.
 

The interesting thing to me is that this leaves Globe with a bigger percentage of its revenues in skate hard goods- a tough market for anybody. Hopefully, the tighter focus and proceeds of the asset sale will help them improve their performance there.   

 

What Forward Thinking Retailers are Doing: Trends That Probably Won’t Surprise Anybody

/0 Comments/in , /by

The issues that smaller retailers are facing haven’t changed much. There are too many retail stores, pressure from chains, brand stores and big boxes, a tough financial model, the challenge of keeping margins up, lack of product differentiation, increasing costs, over distribution.

 
That’s a cheery environment, isn’t it? You’ve got a choice. You can bemoan the unfairness of it all or you can take advantage of this tough environment that’s putting a lot of pressure on your competitors and do some things to stand out and that help you address these issues.
 
Here’s what I’m seeing successful retailers doing.
 
One- They Are Growing
 
Higher costs, more competition and margin pressure, too much similar product in too many places means that you need more revenue to make it. This seems so non controversial as to make this a really short section. It’s basically an equation; a fact. It just is.  But I’ve put it first because it’s the ultimate motivating factor for the other actions I discuss below. You have to make a profit if you expect to be around very long.
 
Two- Making Themselves Important to Their Brands
 
How does a shop do this exactly? Well, for a start, it pays its bills to the brand on time. It’s absolutely honest with the brand’s sales reps and management. It merchandises the brand well. It includes the brand in its own promotions. It provides feedback (good and bad) on what’s selling, why, and on trends it sees emerging. It does not abuse the brand’s warranty and return policy. And finally it does not let the brand talk it into buying products it doesn’t think will sell well or order sizes it doesn’t think it can move. As we all know, the season end conversations such moves engender are not helpful in building a relationship.
 
It may have occurred to you that growing (point one) contributes to making a shop important to the brand (point two). Could be a trend emerging here.
 
Three- Gives Credibility to the Brands They Carry
 
The best shops are the ones the brands just have to be in. The shop gives the brand credibility- not the other way around. Any brand carried by the shop is, by definition, credible. For a shop this can translate into flexibility in your relationship with the brand. That may mean, among other things, better terms and conditions, priority in new product and shipping, patience from the brand if you hit a rough spot, support for your community based activities, faster and more positive response from management, and more ability to pick the products and categories you carry. Obviously, it’s kind of a subset to point two above. However, I chose to separate it because at the extreme, when a shop really does this well, there is pretty much no brand they absolutely have to carry to be successful. And that ties in with……………….
 
Four- Expanding Their Circle of Influence
 
When it’s the shop that gives the brand credibility it’s because the shop has become acknowledged as an arbiter of trends and technical product attributes. They are a destination store for their customers. They are part of their community, but of course the definition of that community has changed. It no longer means just the geographic community, but a community of people with shared interests and lifestyles.
 
A customer’s awareness of an established brand is typically the result of that brand’s advertising and promotion programs. Those programs may have a lot to do with getting the customer into the store. But the decision to purchase that brand, in a shop with this kind of stature, can be heavily influenced by the experienced and knowledgeable sales people. You can hear the conversation in your head- “Brand X is a great brand and that deck would certainly work for you, but here’s a couple of others you might consider based on what you’ve told me about your style and level of experience.”
 
And that product, whatever it is, doesn’t necessarily have to be one the customer has ever heard of. If it’s in this store, it must be good. Kind of frustrating to a big brand, I suppose, to think that all their work advertising and promoting their brand and getting the customer into the shop turned out to be a chance for the sales person to sell a brand the customer has hardly heard of.
 
On the other hand, it might give hope to smaller, new brands. The support of shops like this ideal type shop I’m describing may be the best chance such brands have to prove themselves.
 
Five- Buying Together
 
I can’t tell you this is a wide spread trend, but I did have a conversation with one European retailer who was very happy with the result. He was a specialty shop in, I think, Southern Austria. He was practically chortling as he explained to me the happy circumstance he found himself in as part of an 11 store buying group. You see, it happens that the other ten stores were all in Northern Austria. So while all eleven stores got the benefit of better prices from buying together, the ten in the north suffered from the possible disadvantage of all having the same product. He, happily segregated in the south of the country, didn’t have to worry about that. No wondered he positively glowed as he described the scheme.
 
Of course, if you’re getting better pricing through some cooperative buying, maybe the pressure for growth (point one) declines a bit, and lord knows you’re becoming more important to the brands (point two). Maybe not more popular, but more important.
 
Interestingly, my advice to brands has always been, “Europe is different from the US. You can’t think of Europe as one market. You can’t even think of Germany as one market.”
 
That’s still good advice, and I expected it to apply to specialty retailers as well. I thought retail in Europe would be “different” from retail in the US. Imagine my surprise when, in the two years I just spent in Europe, I discovered that it really wasn’t- at least not in terms of the challenges European retailers were facing.
 
 Wow- wherever you go, there you’ll be.
 
By which I mean Europe seems to have the same damned problems we have, and I suppose if we can take any comfort from that it’s because it means we here in the US haven’t done anything egregiously stupid that Europe somehow avoided.
 
Finally- Taking Risks, But Not Really
 
I hope I’ve made the point that these five operational imperatives, to coin a really pompous sounding phrase, don’t stand in isolation from each other. Nor do they stand in isolation from the specialty shop’s retail environment I briefly described at the start of this article. There are as many tactics as you are clever enough to think of that you can try to move your shop towards the market position I’ve described.
 
I’ve talked to lots of retailers who were cautious about trying them. They cost “too much,” had never been tried before, there wasn’t time to do them, etc. In a word, they were risky.
 
And you know what? They are risky- especially if you try and implement them on a piece meal basis. It might even be true that it would be a waste of time.
 
What I’ve tried to demonstrate in this article is that the operational imperatives are related to each other and in fact support each other. Each of them is comprised of a group of tactics that each shop needs to identify based on its particular circumstances. There is a certain momentum you build as you support a tactic from one imperative with a tactic from another. You don’t increase risk by doing more- I think you reduce it.
 
Or look at it another way; If you agree that you got to have a financial model that makes sense, and you are struggling with your current one, and you agree that your business environment isn’t getting any easier and calls for some change, then even if there is some risk here, isn’t it less risk than doing nothing?
 
I’m going to use a word here I usually avoid because (at least for me) it frequently engenders serious confusion about what it means accompanied by a sense that it’s futile to try and figure it out and implement it. The word is strategy.
 
But of course we’re all following one even if we don’t know what it is, speaking of risk taking. And if, like me, you’re just a bit intimidated by “strategy” because you’re not quite clear what the hell it is, maybe we can get some clarity by just considering it a bunch of related tactics.
 
My five operational imperatives, or rather the tactics that would make them up, are a strategy to deal with the existing retail environment. You don’t have to say, “It’s time for a new strategy,” but you might consider picking some appropriate tactics for each operational imperative and start doing them. Might be fun, probably wouldn’t cost much, you might find that the results are cumulative and often quick to see, and there’s not much risk involves. Your business environment requires you give it a shot.

 

 

The Last Intrawest Annual Report: One Benefit of Being Bought

/0 Comments/in , /by

I’ve always admired Intrawest’s ability to combine and coordinate its real estate activities with the development and management of its mountain resorts. It always seemed like they managed to choreograph the two to maximize the value of both. That didn’t mean, however, that I looked forward to reading their annual  Form 40-F filing with Security and Exchange Commission and now that they are about to be acquired by Fortress Investment Group (probably a done deal by the time you read this) I guess I won’t have to do it any more.

 
But I’m a sentimental kind of guy. Just for old time’s sake, I decided to slog through the last one when it came out. And as long as I was being sentimental, I thought I might as well try and figure out exactly why Intrawest decided to sell to Fortress.
 
This all began with a February 28, 2006 press release in which Intrawest announced “…that it had initiated a review of strategic options available to the company for enhancing shareholder value…” Intrawest Chairman Joe Houssian is quoted as saying, “It makes sense for us at this time to evaluate all of the different ways in which we can capitalize on the opportunities in front of us for the benefit of shareholders, and to ensure that we have the bets possible capital structure in place.” Here’s a link to the Intrawest site where you can click through to see the press release: http://www.integratir.com/newsrelease.asp?ticker=IDR
 
Okay, well enhancing shareholder value is a fine thing. Who could argue? But my question was why they thought they had to go through this process to do it. Couldn’t they just run the business themselves? Did they need more capital than they could raise on their own? Were they concerned about softness in the real estate market? Did the diversification of their business (only 32% of revenue now comes from mountain operations) require a different kind of support? The release didn’t say.
 
By way of background, Intrawest went public in June of 1997 at $16.75 a share. The stock bounced around for some years, closing at $18.94 at the end of September, 2004. From there, it moved up smartly, closing at a high of $37.60 the week of May 5, 2006. It then reversed course and went down for eleven of the next thirteen weeks, closing at $26.70 the week ending August 4th. Then the sale of the company was announced and the stock rocketed up to $34.50 ($35.00 a share is the purchase price) and has stayed near that price since.
 
The June 30, 2006 balance sheet is hardly changed from the previous year and the changes are positive. Total assets are almost identical, while liabilities are down and equity is up.
 
Net income rose from $33 to $115 million. The contributions from resort and travel operations fell 11% to $89 million. Management services contribution fell 14% to $37 million. The real estate contribution, however, more than doubled to $143 million. That component of Intrawest’s income can swing around a lot from year to year. I guess it’s normal for that business, but it makes year to year comparisons a little difficult.
 
I thought a telling section of their Form 40-F was the section called “General Development of the Business. It listed what they consider to be “key developments” during the last three fiscal years. There were thirteen accomplishments listed and every single one of them was raised money, sold this, bought that, refinanced this, retired that debt, started our review of strategic options. No doubt these were key developments, but I thought it was interesting that not a one was focused on running and improving the core business operations. I mean, they must have done some good things in those areas. They’ve been doing them for years. 
 
You read the press releases, scour the documents, and listen to the conference call. You still don’t get a specific and satisfying explanation for why Intrawest sold.
 
But if you go to the web site of the Fortress Investment group (http://www.fortressinv.com/) and spend just a few minutes reading about it, you will learn that they are a large, diversified organization with access to capital and the ability support companies in putting in place financial structures that allow those companies to take maximum advantage of their opportunities. Whatever Intrawest can accomplish on its own, it can do more with the support of Fortress. With the support of Fortress, management’s time won’t have to be focused on refinancing, buying, selling and restructuring. They can worry about running the business.
 
If you read a bit about Fortress, the apparent generalities which Intrawest used to explain the motivations for the transaction make a whole lot more sense.