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All About Outdoor & Action Sports: VF’s Quarter

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That the outdoor and action sports segment (OAS) of VF’s business is critical to its overall success is pretty obvious from the numbers. Total company revenue for the quarter rose 8% from $2.22 to $2.4 billion. OAS revenue rose 16% from $1.1 to $1.28 billion. OAS generated more than 53% of the quarter’s total revenues. OAS revenue experienced “…double-digit percentage growth in every region and channel.”

But revenue from VF’s other segments- coalitions as they call them- grew by just one half of one percent from $1.116 to $1.123 billion. These other segments are jeanswear, imagewear, sportswear, contemporary brands, and other.
The same trend can be seen in VF’s operating profit. Total operating profit rose 6% from $269 to $285 million. OAS operating profit was up 16% from $100 to $131 million. Ignoring OAS, total operating profit for the other segments fell 8.4% from $168.6 top $154.5 million.

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VF’s Quarter; Outdoor and Action Sports Continue to Lead, But…

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There are, to my way of thinking, three main points to be made about VF’s September 30 quarter. The first is that the Outdoor & Action Sports (OAS) segment revenues as reported rose 6.43%. Excluding a $32 million foreign exchange gain, the increase was 4.7%. Jeanswear was up 3.89% as reported and the other segments (Imagewear, Sportswear, Contemporary Brands, and Other) were basically flat for the quarter.  Excluding foreign currency changes, OAS reported an operating loss of $1.7 million.  There are good, even positive, reasons why, and I’ll discuss them below.  But I still don’t like it.

OAS includes, as you know, Vans, The North Face, Timberland and Reef. Don’t forget it also includes Jansport, Kipling, Smartwool, Eastpak, Eagle Creek, Lucy and Napapijri. I’d suggest you take a minute to check out VF’s web site and see where those other brands are positioned. I found it kind of interesting as I continue to think about the junction of action sports, youth culture, outdoor and fashion.
 
The second point is the wonderfulness of a strong balance sheet. VF spends some time in their conference call discussing some additional investments they are going to make. As CEO Eric Wiseman puts it, “…we think a challenging environment is the ideal time to upshift and hit the gas pedal a bit harder on marketing and product initiatives, supporting and helping to drive traffic to our wholesale partners, and of course, our own Direct-to-Consumer business by strengthening our connection with consumers, and creating even more meaningful engagement with our brands is key to our long-term success.”
 
He goes on to discuss how they’ve done this before, and that they are going to spend an additional $30 million in the fourth quarter and a total of $40 million extra in the second half, 80% on OAS and most of that focused on Vans, The North Face and Timberland. It’s also “…about 70% positioned outside the U.S. and heavily D2C weighted…”   He acknowledges that’s $0.25 a share, but that they will still be on plan. One of VF’s strengths, to my way of thinking, is their capacity (and financial ability) to take the longer term view while accommodating the quarterly requirements of a public company.
 
Third, VF projects a rigorous, consistent, but flexible management approach to running their businesses. That’s not to say that things don’t go wrong and they don’t make mistakes (though you generally don’t read about them in the earnings press release or conference call unless they’re whoopers). But it sounds like (and it’s sounded this way for a while) there’s a consensus as to goals and objectives among the management team and hopefully the employees that creates efficiencies. There is, at the risk of oversimplifying, institutional knowledge off what’s “right” and what’s “wrong” for the brands and the company. That is a powerful competitive advantage not easily come by.  I see this discipline, for example, in a balance sheet where inventory actually dropped a bit in spite of the sales increase.
 
The problem comes when that institutional consensus and momentum needs to be changed but is so stubbornly imbedded it won’t change. Then you become JC Penney. That’s just a general comment- not an expectation for VF.
 
Total revenues for the quarter rose 4.7% from $3.15 to $3.3 billion.  Net income rose from $381 million to $434 million.  Across all segments, international rose 7% to represent 40% of the total, and direct to consumer was up 14% to 40% of the total. $32 million of the revenue increase came from foreign currency translation. OAS, at $1.97 billion, represented 60% of the total. Jeans wear was an additional 23% of the total.
 
The gross margin increased 0.9% during the quarter from 46.7% to 47.6%. “The higher gross margins…reflect lower product costs and the continued shift in our revenue mix towards higher margin businesses, including Outdoor & Action Sports, international and direct-to-consumer.”
 
“Selling, general and administrative expenses as a percentage of total revenues increased 40 basis points during the third quarter…primarily resulting from increased investments in marketing and direct-to-consumer, partially offset by the leverage of operating expenses on higher revenues.”
 
OAS’s operating profit for the quarter was $421 million or 21% of revenues. It grew 1.94%. In last year’s quarter it was $413 million. Of that increase of $8.2 million, there was actually a $9.9 million currency translation gain. Ignoring the currency gain, OAS had an operating loss of $1.7 million for a quarter. Hmmmm.
 
They provide the following additional detail on the OAS results;
 
“The North Face ®, Vans ® and Timberland ® brands achieved global revenue growth of 3%, 16% and 2%, respectively. U.S. revenues for the third quarter increased 5% and were negatively impacted by retailer caution and a calendar shift for key retailers, which pushed approximately $40 million of shipments [mostly the North Face] from the third quarter into the fourth quarter of 2013. International revenues rose 8%, reflecting growth in Europe, Asia Pacific and the Americas (non-U.S.).”
 
The additional demand generation expenses and calendar shift had a meaningful impact and OAS results for the quarter would look better without them.
 
It would be particularly interesting to see what kind of revenues and operating income other brands in VF’s OAS segment were generating, but I guess there’s no chance of that. I’d settle for just a little information on Reef.
 
VF has growth in OAS and jeans, but its other segments are flat on a quarter over quarter basis. One quarter, of course, doesn’t mean much. It looks like OAS is running into some headwinds that have to do with a difficult economy, but then so are most other companies. There’s also the fact that their success with Vans, just as one example, means that the percentage increases they could generate in the past will be harder to come by. That’s just the law of large numbers.
 
Even given the reasonable and even positive explanations, I find the operating loss in OAS, excluding foreign exchange, interesting and I’ll be watching that in future quarters.

   

VF’s June 30 Quarter; Net Income Down, But Kind of Not Really.

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VF’s net income fell 11% from $155.4 million in the quarter to $138.3 million in the same quarter last year. But last year’s quarter included a gain of $41.7 million from the sale of the John Varvatos brand that was booked under Other Income (Expense). In this year’s quarter, instead of a gain of $41.6 million, that line showed an expense of $1.5 million. Without that gain from the sale, net income would be up over last year’s quarter. 

Which is what you might expect with total revenues up 3.7% to $2.19 billion and the gross margin rising from 46.1% to 48.5%. As we’ve gotten used to, VF’s Outdoor & Action Sports segment (that includes Reef, Vans, The North Face and Timberland) led the way. Below is a table from the 10Q with the revenues and operating profit for each segment. And, while we’re at it, here’s the link to the 10Q for anybody who wants it. I always wonder if anybody but me ever looks at them.
 
 
As you can see, Outdoor & Action Sports (OAS) represented 49.7% of revenue and 37.3% of operating profit. The result in Jeanswear is impressive, delivering a bit more operating profit than OAS on only $612 million in revenue.
 
North Face revenue rose 5% in total. There was “…moderate growth in the wholesale sales, a 15% increase in the brand’s D2C [direct to consumer] business and a more than 20% increase in international sales.” In the Americas, wholesale revenue declined in the mid-single digit range. D2C there rose in the mid-teens.
 
Vans revenues grew 15%, with growth balanced between wholesale and D2C. Outside of the Americas, Van’s growth was over 20%. D2C growth was over 40%. They don’t tell us what Van’s growth was in the Americas, but obviously it was below 15% since outside of the Americas, it was 20%. I thought their take on Van’s apparel was interesting. “By taking classic action sports products the consumers are already connected to and adding performance benefits to them, such as weatherization, we’re equipping the Vans consumer with a whole new level of quality and technology in both warm and cold weather. This allows us to have more relevant, year-round offerings as we extend our reach into cold-weather months and cold-weather markets.”
 
We hear that Reef’s results were “solid,” but aren’t given any details. Timberland’s global revenues fell 3%. They were up low single digits in the Americas and down high single digits in the rest of the world. They expect revenue to be up for the year. We’re into VF’s second year of ownership of Timberland and to some extent it’s still a work in progress.
 
The 3.7% total revenue growth included 3% in the U.S. and 6% internationally including 10% in the Americas not counting the U.S. and 2% in Europe.
 
The gross margin improvement of 2.4% resulted from “…lower product costs and a favorable mix shift towards higher margin businesses.” Partly that’s due to growing D2C business. They don’t tell us anything about exactly how the lower product costs came to be. I wonder if there isn’t some benefit from the fall in cotton prices included there. I’d just like to know what part of it reflects good management and what reflects factors over which they have no control.
 
Inventory fell 3% even with the sales growth and certainly reflects good management. Inventory management is something they noted several times as an area of focus. They characterize their supply chain as a competitive weapon. “And as others are feeling the pinch of higher costs, we’re in many, many cases able to offset those costs through efficiencies in our own plants.”
 
They specifically connect inventory and supply chain management to marketing when they note that they are very satisfied with their retail inventories because it gives them “…the opportunity to really get our new product well positioned and upfront for the consumer as it starts to ship into our dealers…” That’s an important idea.
 
Marketing, administrative and general expenses rose 1% as a percentage of revenues. Half was for their D2C business and half for “…increased marketing investment in our brands.”
 
If VF has issues, and isn’t growing as fast as it used to, those issues are pretty much the same ones all retailers and brands in our industry have. Europe is weak, and VF especially calls out problems in Southern Europe. Hardly a surprise with unemployment rates north of 25%. The U.S. is recovering slowly, but consumers are cautious in their spending. “Retailers,” they note, “Are buying much closer to demand.”
 
But VF points out that their pension plans are almost fully funded (that’s a big deal, though you don’t hear about it much), they are paying down $400 million in Timberland related acquisition debt in the third quarter, and they will be out of the commercial paper market by year end. Their long term debt is down $400 million from a year ago. That leaves them with a balance sheet with which they can consistently pursue their strategy. Not everybody enjoys that. 

 

 

VF’s First Quarter: Outdoor and Action Sports Continue to Shine

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VF’s March 31 10Q reported an overall 2.15% increase in revenues from $2.556 billion to $2.612 billion from the same quarter last year (Would have been 1% more, but they sold the John Varvatos brand).   But outdoor and action sports revenue was up 9.7% from $1.264 billion to $1.384 billion, representing 53% of total revenue for the quarter.  Here’s the link to the 10Q.

Just to remind you, the brands in the outdoor and action sports segment are Vans, The North Face, Timberland, Reef, Jansport, Kipling, Lucy, Smartwool, Eastpak, Eagle Creek and Napapijri. In 2013, The North Face and Vans are expected to be VF’s two largest brands by revenue, we learn in the conference call.
 
Total company revenues were up $55 million for the quarter. Outdoor and action sports revenue grew $120 million. Obviously, other segments were down to not up very much and action sports is carrying the load for VF right now. That, of course, is the whole concept behind having a diversified group of businesses.
 
The gross profit margin improved an impressive 2.4% to 48.1%. The improvement was across the whole company and “…reflects lower year-over-year product costs and the continued shift in our revenue mix towards higher margin businesses.” For the whole of 2013, however, they expect gross margin to be up only about 1%. The biggest improvement is in the jeanswear segment due to a big decline in cotton prices since last year’s quarter. 
 
Marketing, administrative and general expenses rose from $853 million to $899 million and as a percentage of sales from 33.4% to 34.4%. CFO Robert Shearer tells us that “Half of that increase came from out growing D2C [direct to consumer] business and the other half is due to higher levels of marketing spending.”
 
Operating income was up 14% from $314 million to $358 million. Outdoor and action sports reported what they call a coalition profit of $226.5 million, representing 53.5% of total coalition profits for the quarter of $423.6 million. Lower other expenses, including a lower tax rate, helped net income to increase from $215 million to $270 million.
 
The balance sheet is in good shape with a current ratio of 1.9 and a debt to total capital ratio of 28.4%, down from 36.1% a year ago. I was impressed to see a decline in inventory from $1.52 billion to $1.41 billion, though of course some of that decline is the result of the sale of the John Varvatos brand.
 
North Face revenues grew 6% globally, with a 25% increase quarter over quarter in the direct to consumer (D2C) business. There was a “slight” increase in wholesale business. Revenues in the Americas region were up 3%. They don’t break out the United States. Outside the Americas, the brand grew 11% “…with balanced strength on a D2C and wholesale basis.” In Europe, the increase was “modest.” Online was up more than 30%. Asian North Face revenues rose more than 40%. No idea what the base number is.
 
It’s really interesting to see VF take The North Face and evolve it from more of a technical mountain brand to a lifestyle, fashion brand. Obviously, that’s necessary if they expect it to continue its growth.
 
“Global revenue for Vans in the first quarter was up 25% with strong double-digit growth in all 3 regions, including both the wholesale and the D2C businesses.” In the Americas, it was more than 20%. Outdoor and action sports Group President Steve Rendle noted strong sell through in men’s apparel at the wholesale level. He said it was up over 50% year over year. I suspect that’s from a small base.
 
Outside of the Americas, Vans revenues grew 30% with D2C up more than 40%. Europe by itself was up 30% and Asia more than 20%.
 
Timberland revenues were up 2% for the quarter, including “double-digit growth” in D2C. Outside of the Americas, revenue was flat. VF acquired Timberland just over a year ago, and its integration is still a work in progress. I will be very interested to watch what VF does with Timberland. I wonder if there won’t be an evolution similar to what we’ve observed with The North Face.
 
We learn that “Reef had a very good quarter,” but that’s all we learn.
 
VF expects the direct to consumer business to represent 23% of total revenues in 2013 and expect to see it expand in the future. They plan to open about 160 stores this year after ending last year with “…roughly 1,100 doors across all of our brands across the world.”
 
One of the analysts asked, “And online, cannibalization with wholesale, is there any channel conflict there? I thought CEO Eric Wiseman’s answer was instructive, though he avoided directly addressing the issue of competing with the wholesale channel except to say “We try very hard to use this [D2C strategy I think he means] as a supportive strategy for our brands and to avoid cannibalization. And we actually work with our wholesale partners to where – they know where we’re going to put stores.”
 
I’m lacking some details here, but telling them where the new stores are going is hardly working with them.
 
Let me continue to quote his answer at some length:
 
“A great example of this is Vans, which in the last 2 or 3 years, has put up a lot of stores around New York City, around Boston, now around Philadelphia, where we didn’t have substantial distribution. And we just didn’t have the doors there that let the brand speak to the customers… And that’s true in markets in Europe and in Germany. It’s true in the U.K.”
 
“…didn’t have the doors there that let the brand speak to the customers…” he says.  Hmmm. So apparently they think that the other retailers that carry their brands in those areas weren’t doing a very good job? Or at least they believe they can do a better job themselves. 
 
He continues:
 
 “That’s how we look at it. And we have so much runway, because we ended last year with roughly 1,100 doors across all of our brands across the world. So we’re so relatively undeveloped that we still see lots of runway before the cannibalization thing comes into play. The e-commerce thing is a tricky thing. Because we don’t know if that’s — we can’t really say where those customers are coming from, whether they’re new customers to the brand, whether they used to shop in our stores or somebody else’s stores. What we do know is we have to create a compelling way for our consumers to engage with our brands from their phones, from whatever devices they have, and we have to let them shop while they’re there.”
 
Bottom line is we can expect more stores from VF and they’d like to perpetuate the idea that this is somehow good for other retailers that carry their brands. Like all of the rest of us, they are unclear as to if and how online sales relates to and impacts, for better or worse, brick and mortar sales.
 
A couple of weeks ago at the IASC Skateboard Industry Conference, I made a presentation suggesting, among other things, that distribution was much more complex that it used to be and that deciding who and where to sell was much more critical to your brand positioning. I further said that if you can’t get big sales increases, you can still hope to improve your operating income through recognizing the links between how you operate and manage your inventory and your marketing. I also noted that being more purposeful with your distribution and controlling consumer touch points had to potential to reduce expenses and improve margins and brand positioning. 
 
Effectively, VF is implementing most of the strategy I suggested. If they think it’s a good idea, you should at least look into it for your brand or store.        

 

 

VF’s Quarter. Thank God for 10Qs (What an odd thing to say)

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VF had a quarter in which total revenues rose 14.3% from $2.73 billion to $3.12 billion. Net income was up 26.8% to $381 million. I don’t find it as clear cut as that sounds, and the way to approach analyzing it is to go right to Note G- Business Segment Information in VF’s 10Q and reproduce part of it for our discussion. So here it is.

 

VF refers to its business segments as coalitions. In the chart above you see the revenue and operating profit each coalition produced during the quarter. Total company revenue rose by $398 million. The Outdoor & Action Sports coalition, which includes Vans, The North Face, Timberland and Reef, grew by $415 million, or 104% of total revenue growth.
 
Without the growth in Outdoor & Action Sports, VF’s total revenue declined very slightly.
 
Total coalition profit (profit before interest, taxes and corporate overhead which I call operating profit) grew by $111 million. Outdoor & Action Sports operating profit grew by $92 million to $413 million, representing 83% of operating profit growth and 67% of total operating profit. Outdoor and action sports revenue was $1.85 billion, up 29% from $1.44 billion in the same quarter last year. It represented 59% of total revenues for the quarter.
 
I guess we better dig into the Outdoor & Action Sports results as they appear to be kind of important to VF’s overall results and because they are what we’re most interested in.
 
First, let’s remember that Timberland, which is part of that segment, was acquired by VF on September 13, 2011. So its results were included in VF’s numbers for only a few weeks in last year’s quarter, but in the whole quarter this year. 
 
In last year’s quarter, “Timberland contributed $163.6 million of revenues and $11.0 million of pretax income…” In this year’s September 30 quarter, it contributed $499.1 million of revenues and $55.8 million of pretax income.
 
Let’s adjust the Outdoor and Action Sports segment for those revenue numbers. Without Timberland last year’s quarterly revenues would have been $1.27 billion. This year they would have been $1.35 million. That is growth of 6.3% in revenue for Outdoor & Action Sports.
 
I’m not going to try and do that adjustment for operating income, because the operating income number I have for Outdoor & Action Sports is before interest, taxes and corporate overhead, but the number they give for Timberland’s quarterly impact is just pretax and I’m afraid I’d be comparing apples and oranges.
 
The North Face and Vans grew 5% and 21% during the quarter respectively. Those brand’s direct to consumer businesses grew 10% and 18% respectively. Outdoor & Action Sports U.S. revenues increased 26% with 16% of that increase coming from Timberland. International revenues for the coalition rose 32%, but 30% came from Timberland. European revenues rose 24%, but fell 6% excluding Timberland.
 
We get some further interesting comments on those brands in the conference call. The North Face’s revenue growth in the Americas was in the high single digits. It experienced mid single digit declines in revenue in Europe for the quarter, though they say the brand continues to take market share there. If their revenues can decline, but they can still take market share, things must be pretty hard in Europe.
 
They also note that The North Face’s constant currency revenue were up 60% in Asia. No idea what size numbers we’re talking about.
 
Vans grew at a mid-teens rate in the U.S. Constant currency revenues were up more than 45% in Europe and more than 40% in Asia. Both Vans and North Face are increasing their marketing investments.
 
Total Timberland revenues actually “…declined slightly in the third quarter.” The growth in Timberland we talked about before was for the period when VF owned them. Timberland was obviously generating revenues before the acquisition. I gather it was down more (“moderately”) in the Americas due to the hangover in inventory from last year’s warm winter. It was flat in constant dollars in Europe. There’s further discussion about how they are still integrating Timberland into their business model with expected improvements in performance.
 
The company’s overall revenue growth of 14.3% came mostly from Timberland. Only 2% of that growth was organic. Direct to consumer revenue grew 28%, with 19% coming from Timberland. Direct to consumer was 18% of total revenue.
 
Gross margin grew nicely, from 45.3% to 46.7%. “Gross margin increased in the third quarter in nearly every coalition due to a greater percentage of revenues from higher gross margin businesses and the impact of lower product costs. The increase in the first nine months of 2012 also reflects the continued shift in the revenue mix towards higher margin businesses, including the Outdoor & Action Sports, international and direct-to-consumer businesses.”
 
Strategy
 
The first thing I’d note is CEO Eric Wiseman’s conference call comment that “We’re seeing some slowing in the U.S. economy, increasingly challenging conditions in Europe and slowing growth in China.” Those issues aren’t unique to VF.
 
Let’s go on and quote him again. “As you know, we’re constantly looking at the shape of our portfolio because we believe that the diversity of our portfolio is our strength.” What that means is that they will sell businesses that don’t meet their expectations and look to buy ones that do. And while, “We’re pretty focused on the integration of Timberland this year for all the appropriate reasons…acquisitions are our priority, and we’re beginning to look into 2013 about what we might do.”
 
Right now, Vans appears to be the best performing sizeable brand VF owns, and you know that performance has their attention. They are trying to create some of Van’s attributes at The North Face and I expect they will do the same thing with Timberland once it’s fully integrated.
 
Given the results they are getting from Vans and expect from The North Face and Timberland, I wonder if the sale of some of their brands that aren’t performing as well isn’t in the cards.
 
It used to be hard to be a big company and be “cool” in this industry. That doesn’t seem to be the case anymore. Either the formula has changed or they’ve figured it out. Or maybe it doesn’t matter like it used to. I just think the lines between action sports, youth culture, and fashion have blurred to such an extent that it’s harder to keep a specific identity that really differentiates you.            

 

 

VF’s Quarterly Results and Strategy: They Do Love Outdoor and Action Sports

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VF’s reported revenues rising 16.4% in the quarter ended June 30 compared to the same quarter last year. Net income was up 20% from $129.4 million to $155.3 million. As you look at those headline numbers, there are a couple of things to keep in mind.

 
First, the Timberland acquisition closed on September 13, 2011 so this is the first June quarter where it’s been included, and it was the largest acquisition VF has made. They paid $2.3 billion for Timberland. It’s part of VF’s outdoor and action sports group. During the quarter ended June 30, it contributed revenue of $239.4 million and reported a loss (as expected- apparently that’s just how the second quarter is for Timberland) of $37.2 million.
 
Second, on April 30th VF sold the John Varvatos brand and generated a pretax gain on the sale of $41.7 million. The sale of that brand reduced revenues in the quarter by $14.4 million.
 
Organic revenue growth (growth from brands they already owned) was $125.1 million, or 3%. International business grew 33%, representing about a third of total revenues. 26% of that growth came from Timberland. Direct to consumer revenues were up 37% in the quarter (29% from Timberland) and are 21% of total revenue. VF has opened 58 new stores so far this year, and expects to have opened 130 by year end. Comparable store sales in the stores VF operates were up mid-single digits in the second quarter.
 
Without the Timberland related acquisition expenses of $3.4 million and the gain on the sale of John Varvatos, net income would have been $122.9 million instead of the $155 million reported. Operating income, without the Timberland loss and related acquisition costs, would have been $193.7 million instead of the reported $164 million. By the way, my thanks to whoever it is at VF that presents this information in a fairly easy to figure out format. Oh- and here’s the link to the 10Q.
 
Before we delve deeper into those numbers, I want to remind everybody that back in the middle of June, VF did an investors’ day presentation just on Vans.   You can listen to the whole presentation here, and I suggest you do if you haven’t already.
 
When I wrote about Nike’s annual report a couple of weeks ago, I related it to a book called The New Rules of Retail. VF is discussed in that book as an example of a company that is creating neurological connectivity with its customers, using preemptive distribution, and controlling its value chain to compete as called for and explained in the book. You can see that all over the Vans presentation.
 
So why does VF love its outdoor and action sports segment? It has something to do with the fact that it generated 49% of its total revenues, including Timberland, during the quarter. Its next largest segment is jeanswear, which generated $594 million, down from $613 million in the quarter last year. Those two segments, then, were 76.3% of the quarter’s revenues and they generated 76.4% of operating profit.
 
VF’s overall operating margin was 7.9%, down from 10.3% in last year’s second quarter. 2.3% of that decline was the result of Timberland’s loss in the quarter.   
 
Of the $125 million in organic growth in the quarter referred to above, $113.4 million came from outdoor and action sports. That’s a 12% increase; 16% in constant dollars. Organic growth in operating profit for the whole company during the quarter was $18.4 million. In the outdoor and action sports segment alone it was $25.5 million, so that segment made up for the poorer performance of some others.
 
The North Face is part of outdoor and action sports. Its revenues in the quarter were up 14% (16% in constant currency) and it’s direct to consumer (DC) grew 9%. For the whole year, they expect The North Face to approach $2 billion in revenue.
 
VF is targeting Vans revenue of $2.2 billion by 2016. Revenues in the quarter were up 25% (29% in constant currency). Its DC business rose 18%.
 
Timberland revenues were up “…slightly on a constant dollar basis…” However, VF management sounds positively giddy as they talk about the opportunities in product, operations, and marketing they have with Timberland. It will be rolling out an apparel line in the near future.
 
One analyst asked about the impact of cleaning up Timberland’s distribution. Group President of Outdoor and Action Sports Steve Rendle answered it this way:
 
“As we look to right size that business, we are closing some of the distribution. Simultaneously, we’re rightsizing the product segmentation strategy, getting the right products in the right channels.”
 
Read that again and go listen to their plans for Vans. Read about what they are doing with The North Face in the conference call. You can detect in the conference call (see it here) a certain consistency across Vans, The North Face, and Timberland in terms of product development and the approach to the consumer. I would think there might be some real opportunities there as the brands come at overlapping customer groups from different perspectives.
 
Okay, let’s get back to VF’s overall financial results. Gross margin increased to 46.1% from 45.9% in last year’s quarter. This was “…due to a greater percentage of revenues from higher gross margin businesses, including the Outdoor & Action Sports, international and retail businesses, as well as an improvement of gross margin in our Jeanswear Americas business which reflects increased pricing compared to the prior period.”
 
Marketing, administrative and general expenses as a percent of sales rose from 35.7% in last year’s quarter to 38.4% this year. 2.4% of that increase was the result of the Timberland acquisition as it had higher expense ratios than the rest of VF. I won’t be surprised to see those Timberland ratios come down.
 
0.4% of the increase came from higher domestic pension expense. VF has a defined benefit plan. Those have to be funded based on an actuarial assessment of the number of people who will retire, when they will retire, how long they will live and what the assets in the plan are projected to earn. These days, it’s a bit hard to assume your pension assets will earn 7% and this is requiring some corporations (not just VF) to contribute more to their plans. That reduces net income.
 
Interest expense rose $7.6 million in the quarter because they borrowed money to pay for part of the Timberland acquisition.
 
The balance sheet was inevitably a bit weaker compared to a year ago after they borrowed money to buy Timberland. Long term debt is up $900 million. The current ratio fell from 3 to 1 to 1.9 to one and debt to total capital rose from 18.7% to 35.7%. Inventories rose 22.2% from $1.286 billion to $1.57 billion year over year. However, $246 million of that increase is the result of the Timberland acquisition. Excluding that, the increase was just 3%.
 
Receivables rose from $889 million to $1.03 billion over the year, but $121.7 million of that increase was Timberland. I should note that VF has an agreement with a financial institution to sell certain of its receivables on a nonrecourse basis. VF still manages and collects the sold receivables, but if they are ultimately uncollectable, it’s not VF’s problem. This sale of receivables reduced the accounts receivable on VF’s balance sheet by $135.5 million at June 30, 2012.
 
VF is the third company I’ve written about recently (Skullcandy and Nike being the other two) who seem to be responding to the changing retail/wholesale dynamic in ways that have some similarities. Those responses are consistent with the conditions described in The New Rules of Retail and that book’s prescription for success.
 
I expect VF to do some good things with Timberland. And I’ll be interested to see how VF manages the other brands in its portfolio if outdoor and action sports continues to grow and perform at such a high level. 

 

 

VF’s Quarter and some Broader Considerations

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As I’ve told you, I’m not so much interested in analyzing the financial statements of big multi-brand corporations like VF (or Nike, or PPR, or Jarden, etc.) but of seeing, to the extent we can, what they are doing in the action sports/youth culture space (or whatever industry we’re in). Mostly I don’t think you want to hear about Footnote F on pension plan contributions but might be interested in any strategic implications or trends I can glean.

To be honest, I do actually want to mention Footnote F briefly. VF noted one of the reasons their operating expenses as a percentage of sales rose was due to an increased pension expense. Companies with pension plans (as opposed to 401Ks) have to fund those plans based on complex actuarial calculations. When returns don’t meet what they project, they have to put more money into the pension plan, and that’s an expense. 

Continuing to do what I said I wasn’t going to do, VF noted that their gross margin for the March 31 quarter benefitted by 0.4% by a “…change in inventory accounting policy that did not recur in 2012.”
 
You’ll be pleased to learn I’m not going to go into that in detail. The point is that this arcane accounting stuff does matter. As much as we’d like it to go away, it’s hard to evaluate results without considering it.
 
VF’s sales for the quarter were $2.53 billion, up 31% from $1.94 billion in the same quarter last year. 12% of that growth was organic (from brands they already owned) and the rest was from the acquisition of Timberland. Direct to consumer business is 19% of the total, and international is 45%.
 
Net income for the quarter was $215 million, up from $201 million last year. Their balance sheet is just fine and I think with that we can move on to discussing their outdoor and action sports coalition (“the coalition”) where Vans, The North Face, Reef, and now Timberland reside.
 
The big news is that we got an actual number on Reef! Its revenues grew by 11% during the quarter. It’s not like that’s momentous or anything, but as it’s been many quarters since VF has offered any number on Reef at all, I take it as a sign that revenues were not necessarily increasing in prior quarters and now they are.
 
For the quarter, the coalition had revenues of $1.26 billion and generated an operating profit of $201 million. That’s 49.4% of the quarter’s revenues and 55.5% of its operating income. In the quarter last year the coalition’s revenue was $788 million. Of that growth of $472 million, $356 million came from the Timberland acquisition and $134.5 million was organic.
 
VF’s overall gross margin was down 1.5% during the quarter, but we’re told it was up in the coalition, though we aren’t told how much. The North Face and Vans revenues grew 14% and 25% respectively. Their direct to consumer business rose 18% and 21% respectively. The North Face’s annual sales are approaching $2 billion. Vans has passed $1 billion.
 
In the Americas, the coalition’s revenues grew 41%, with 29% of that being from Timberland. International revenues rose 84% in the quarter, with 65% of that increase from the Timberland acquisition. Ignoring the Timberland acquisition, the coalition’s operating margin grew from 18.3% in the quarter last year to 20.3% in this year’s quarter. You can see why they like this piece of their business.
With those numbers in mind, let’s list VF’s overall strategies. According to CEO Eric Wiseman, they are:
 
-Building lifestyle brands.
 
-Growing internationally.
 
-Serving consumers directly through our growing base of retail and online stores.
 
-Win with winning retailers. 80% of VF’s business is wholesale. They expect direct to consumer to top out at about 22%.
 
-Enable VF’s future. They “…recognize the importance of consistent investments behind a best-in-class infrastructure, including talent development, supply chain capabilities and technology.” The company’s capital expenditures in 2012 are expected to be $375 million.
 
-Lead in innovation. Their definition of innovation is “…something new that creates value.”
 
 With that as background, let’s consider the specific strategies for The North Face and Vans. Consistent with what CEO Wiseman said, coalition President Steve Rendle describes The North Face strategy as follows:
 
“The North Face key strategies in 2012 include delivering the most important, innovative outdoor products in the industry, leveraging our brand authenticity to connect more deeply with active consumers, providing a premium retail experience both in our owned stores and wholesale partner’s locations and growing our international business.”
 
He goes on to discuss how they connect with consumers:
 
“Centered on bold, athlete-tested, expedition-proven storytelling campaigns, we continue to invest in expeditions and events that define our brand through the eyes of the hard core user.”
 
Gee, some of these strategies sound vaguely familiar. If I were to summarize, I’d say that VF is busily turning The North Face into a $2 billion and growing action sports brand. 
 
Just one other thing on The North Face. They also note they are “…implementing a global product line rationalization program with the goal of reducing SKUS by 15% by fall of 2013.” I think every brand and retailer can benefit by reviewing their stocking units and figuring out which ones they can really do without.
 
Essentially they are pursuing the same strategies with Vans, though of course it’s already a solid action sports brand.
 
Timberland is apparently introducing apparel next year. It will be interesting to see how that’s positioned.
 
At some level, I’m starting to ask what the difference between “outdoor” and “action sports” is. Core action sports brands have often had trouble growing out into the broader market because they didn’t understand fashion or didn’t have the financial resources or infrastructure. But those brands expanded distribution enough that brands like The North Face (and maybe Timberland?) can approach it from the outside.
 
Maybe the thought for today is that it’s necessary for you to spend some time carefully defining what market you’re in. That’s hardly a new idea. But there was a time when you could say “action sports” and kind of know who your customers and competitors were. I’m not sure that’s true anymore.

 

 

PacSun’s Year and Quarter; Progress, but Work Left to Do

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I want to start by focusing on some comments PacSun’s management made that are indicative, I think, of why this is a harder environment for most industry companies and especially for one that is working through a turnaround.

Strategies

Improving their merchandise assortment planning is not a new theme for PacSun. It’s something that CEO Gary Schoenfeld has been focused on since he joined the company. They use to send pretty much all the same inventory to all their stores at the same time. They say in their 10K (you can see the whole thing here):
 
“We are now grouping our stores into a number of store clusters based on customer segmentations, brand performance, differences in weather and demographics, among other characteristics. In conjunction with this clustering, we have changed our allocation strategies to distribute what we believe to be the right products to the right stores for the right customers.”
 
That’s a good thing. It’s important, they need to do it, and there’s a lot of benefit to be realized. Some years ago, it might have conferred a strategic advantage. Now, though some retailers no doubt do it better than others, it’s just the price of entry. It’s something you need to do well just to compete.
 
As you know, PacSun has been, and continues, to close stores; 38 in fiscal 2008, 40 in 2009, 44 in 2010, and 119 in 2011. That got them down to 733 stores at January 28th, the end of their fiscal year. In fiscal 2012, they expect to close an additional 100 to 120 stores. They expect the store closings this fiscal year to cost them $13 million, but to save $9 million a year annually after that. Pretty good return on investment.
 
Referring to the stores closed and being closed, they note, “The affected stores generate on average annual sales revenue of approximately $0.6 million as compared to our remaining stores, which generate approximately $1.1 million in average annual net sales. “
 
You can be a specialty retailer or a chain, but the days of low volume stores being profitable are mostly over and, as I wrote years ago, has been for a while. With distribution as broad as it is, you just can’t earn the margin you need to earn to keep a low volume store profitable. By the way, I’d love to hear from stores that are the exception to the rule. Tell me how you do it. Working for free doesn’t count.
 
Moving on, here’s who PacSun identifies as some of their competitors; “…Abercrombie & Fitch, Aéropostale, American Eagle Outfitters, The Buckle, Forever 21, H&M, Hollister, J.C. Penney, Kohl’s, Macy’s, Nordstrom, Old Navy, Target, Tilly’s, Urban Outfitters and Zumiez, as well as a wide variety of regional and local specialty stores.”
 
It’s not that I think they are wrong. In fact you might want to see the article I posted just yesterday which deals with this. But if in fact Penney and Target are serious competitors for PacSun, then what market are they in and how do they differentiate themselves? It’s not just PacSun that has this problem, but I’d say they have it worse than most right now. It’s a problem they are trying to solve. How?
Here’s what they say their mission is:
 
“Our mission is to be the favorite place for teens and young adults to shop in the mall. Our objective is to provide our customers with a compelling merchandise assortment and great shopping experience that together highlight a great mix of heritage brands, proprietary brands and emerging brands that speak to the action sports, fashion and music influences of the California lifestyle. We offer an assortment of apparel, accessories and footwear for young men and women designed to meet the fashion needs of our customers.”
 
Referring again to the article I published yesterday, the assortment strategy seems the same as Buckle or Kohl’s. Or Zumiez for that matter. What is the different thing you have to do (for any retailer) “…to be the favorite place for teens and young adults to shop in the mall.”?
 
Your Volcom product can’t be any better than the next retailer’s Volcom product can it? Does your strategy have to focus on making your proprietary brands better than the next retailer’s proprietary brands? CEO Schoenfeld said in their conference call that “…the biggest shift we are seeing in our business is growth in our emerging and proprietary brands, offset by declines in some of our key heritage brands.
 
Think of the implications of that, especially if you’re a brand other than a proprietary brand. Perhaps we see a reason here why so many brands are becoming retailers. Although I can also imagine that some of what PacSun calls heritage brands (brands they don’t own) might be a bit cautious in their relationship with PacSun right now as stores are closed and until their financial position begins to improve.
 
Numbers
 
Revenues for the fourth quarter ended January 28, 2012 were $234.2 million, down from $237.6 million in the same quarter the previous year. The loss in the quarter this year was $38.1 million compared to $35.2 million in the same quarter last year. The loss from continuing operations (ignoring stores being closed) was about the same in both quarters at $30.5 million.
 
For the year, sales of $834 million translated into a loss of $106.4 million. The previous year sales of $837 million produced a loss of $96.6 million. The loss from continuing operations also grew from $84.3 million to $90.6 million. Internet sales were 6% of sales in 2011 compared to 5% the two previous years.
 
The discontinued operations (stores closed or being closed) by themselves for the year had sales of $62.7 million and a gross profit margin of 17.6%. They generated a loss of $15.8 million.
 
49% of revenue was men’s apparel, 37% women’s and 14% accessories and footwear. Before 2007, non-apparel represented 30% of their revenues. But now they’ve reintroduced footwear into 425 of their stores, and they expect it to continue to grow.
 
Comparable store sales fell 0.6% compared to declines of 7.9%, 19.1%, and 4.7% in the three previous years.
Gross margin fell from 22.3% to 21.7% due in part to a fall in their merchandise margin from 46.9% to 46.7% and also due to deleveraging of occupancy costs. When your comparable store sales fall, but your costs for achieving those sales don’t, your gross margin goes down.
 
PacSun reduced their selling, general and administrative expenses from 32.2% of sales to 31.3% of sales, and are working to reduce them further in light of store closings. Since CEO Schoenfeld joined the company, consistent with the reduction in stores, they’ve eliminated three zone vice presidents, gone from 9 to 6 regional directions, and from 90+ to below 60 district managers.
 
The balance sheet is not as strong as it was a year ago. The current ratio has fallen from 2.11 to 1.58 and debt to total equity has risen from 0.87 times to 2.14 times. Much of the debt increase is the result of the money they raised last year in the form of long term debt.
 
Inventory was down about 7%, which you’d expect with store closings. It was flat on a comparable store basis, which you’d also expect as sales haven’t changed much. They note that there’s no liability from closed stores sitting in their inventory today. Their inventory reserve sat at $12.7 million at the end of the year, up from $5.7 million at the end of the previous year.
 
I had commented at the time of that long term debt transaction that they’d bought themselves some more time to implement their strategy, and I think that’s still a valid assessment. They expect their current sources of cash will be adequate “…to meet our operating and capital expenditure needs for the next twelve months,” as long as they don’t experience declines in same store sales like they had in 2009 or 2010 or further gross margin decline.
 
Let’s conclude with a conference call quote from CEO Schoenfeld. “I think we all believe that if we can execute it right, there’s a real future for PacSun. A lot of the branded business is done across department stores, and we think that as a specialty retailer, we have the opportunity to offer something different than what a department store offers.”
 
As indicated when we talked about strategies in the first part of this article, operating well, while critical, may not generate any kind of advantage. There are a lot of smart people running a lot of good businesses out there trying to do the same things to generate their own advantage. I also think that “offering something different” is a great idea, but I don’t know exactly what it’s going to be.
 
It will be tough to see how PacSun is going to do until after the dust settles from all the store closings, and I guess that takes us through this year and maybe a bit beyond. The question, I suppose, and not just for PacSun, is whether doing everything well is enough in the market and economy we’re in.

 

 

VF’s June 30 Quarter Results; Pretty Impressive

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VF released its earnings and had its conference call back on July 21, but the 10Q was only released August 10th.  The results, as you probably already heard, were good. Revenue for the quarter was up 15.4% to $1.8 billion and net income rose 16.2% to $130 million. They accomplished this with a gross margin that fell from 47.1% to 45.9% partly by reducing their marketing, administrative and general expenses as a percentage of revenues to 35.7% from 36.5% in the same quarter last year.

The decline in the gross margin percentage was the result of product cost increases that weren’t fully passed on to their customers. The product margin was actually a bit lower as the reported gross margin benefited by 65 basis points from the closing of a European jeanswear facility. It also benefitted from the higher margins in the direct to consumer business.

They expect some further margin reductions in the rest of the year because of higher cotton prices and their decision not to pass through all the cost increases. They also note that cotton prices have fallen from $3.00 a pound to $1.00 a pound, and hope to see that positively impact product cost starting in 2012. 
 
VF has seen little impact from price increases on unit volume. But they are waiting to see how the consumer reacts to even higher prices in the second half of the year. All brands and retailers are waiting. VF is hoping that if cotton prices come down next year they might be able to recapture some margin they lost when they didn’t raise prices as much as costs rose.
 
Price increases accounted for 3% to 3.5% of the quarter’s total revenue gain of 15.4%. Two-thirds of that came from the U.S. jeans business. 
 
International revenues rose 30% in the quarter. They represented 29% of total revenue. Asia was up 30%. Europe was up 30%, Latin America 40%, and Mexico 26%.  They think international may hit 33% of total revenue this year, and they plan for it to reach 40% in five. If you’re interested in learning more about VF’s growth plans, you might go here.
 
Direct to consumer revenues were up 17% as a result of new store openings, a 46% increase in ecommerce revenue, and growth in comparable store sales. They’ve opened 44 new owned stores this year so far and are on track to open a total of 100. Operating margins for the direct to consumer business is up 3% this quarter, so you can see why they find it attractive.
 
There was no growth from new acquisitions this quarter compared to the same quarter last year. All $246 million came from existing businesses, though $43.5 million was the result of foreign currency translation. It’s great that VF breaks these numbers out in a separate table. 
 
VF, as you’re probably aware, divides its business into six segments they call coalitions. The quarter’s results for those segments are shown below.
 
       

Quarterly Sales

Change Since Same

Coalition Profit
       

In Millions of $

Quarter Last year

In Millions of $

Outdoor & Action Sports
  

$718
  

23.0%
  

$81.5
  

Jeanswear
    

$613
  

10.3%
  

$94.7
  

Imagewear
    

$244
  

15.6%
  

$26.0
  

Sportswear
    

$120
  

10.1%
  

$9.7
  

Contemporary Brands
  

$118
  

11.3%
  

$8.2
  

Other
      

$26
  

-3.2%
  

$0.0
  
                   
 
Most of our interest, for some reason, is in the Outdoor & Action Sports segment that includes Vans, The North Face, and Reef as well as other as six other brands. The North Face and Vans grew 21% and 22% respectively during the quarter. No mention, as usual, of what Reef did. The entire segment grew 14% domestically, and 42% internationally during the quarter (34% in constant dollars).  Revenues in Asia were also up 42% during the quarter compared to the same quarter the previous year.
 
These results don’t include the Timberland acquisition, which is expected to be completed in the third quarter.
 
The balance sheet remains very strong, but there are a couple of interesting things I want to point out. Just to give you a couple of numbers, the current ratio improved from 2.3 to 3.0 and the debt to total capital ratio fell from 24.5% to 18.7%. High current ratios are good, low debt to capital ratios are good for those of you who don’t have a financial background.
 
On January 2, VF changed its inventory accounting method from LIFO (last in, first out) to FIFO (first in, first out) for that inventory it wasn’t already accounting for using FIFO (about 25% of the total). The impact for the first six months of the year would have been to reduce their cost of goods sold by $8 million.
 
Okay, small number so why am I tormenting you with this technical accounting crap? If everything you put into inventory always cost the same, it wouldn’t matter. In an inflationary environment, the product you enter into inventory is going to be at a higher cost than the product you bought earlier. So if you decide you’re going to sell the older inventory first, you decrease your cost of goods sold and increase your profit. 
 
No big deal. This isn’t about VF but it’s about your need to be aware that this accounting change can matter if we’re dealing with product cost inflation, as we have been in the case of products made with cotton. 
 
On a related issue, inventory at the end of the quarter rose almost 17% from a year ago. But they note in the conference call that 9% of that was due to higher product costs. So units in inventory grew at a slower pace consistent with sales growth.
 
Three things stand out for me from reviewing VF’s quarter besides the good financial results. The first is the push into international. They’ve decided, along with a lot of other larger companies, that the growth opportunities are much greater outside of the U.S. The second is the growth of their direct to consumer business. Hardly a new industry trend, but I think we’ll continue to see more of it. Having this many brands with this kind of growth and margins makes it irresistible.
 
Finally, VF chose last year to make an incremental marketing spend of $100 million to promote their brands. They are continuing, and in fact have increased that spend slightly, this year. It shows a lot of confidence in their plan, as well as the strength of their balance sheet.     

 

 

PacSun’s April 30 Quarter; How Long for the Strategy to Get Traction?

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While CEO at Pacific Sunwear, Sally Frame Kasaks took some appropriate tactical actions. The problem, I conjectured at the time, was that she just didn’t “get it” when it came to the youth culture market/action sports market. Gary Schoenfeld, when he became CEO, knew that PacSun’s success ultimately depended on its ability to reconnect with its core customers and be relevant to them. No amount of tactical change and expense control, as important as those were, was going to change that. The customer had lost a reason to come into PacSun stores and had to be helped to rediscover it if PacSun was to have a future.

That implied a major organizational change that is long term, difficult, and a bit chaotic. Mr. Schoenfeld replaced almost the entire management team with the goal, I assume, of implementing a new way of thinking and approach to the business through the entire organization. He launched new marketing initiatives, closed (is closing) nonperforming stores, reintroduced the footwear that Ms. Kasaks had eliminated, localized the inventory assortment (an ongoing project), and revamped stores that needed new fixtures and merchandising (that initiative is constrained by cash flow issues).

PacSun undertook this not short term project at a time of economic weakness and reduced consumer spending. Now, with the economy possibly weakening again, and cost increases likely to show up in the second half of the year (not just for PacSun), there’s some additional urgency to see improvement.
 
And for the quarter ended April 30, they saw comparable store sales increase by 1%, which is improvement. Sales were down 2.39% from the same quarter the previous year to $185.8 million, but they ended the quarter with 827 stores versus 883 a year ago, so you’d expect some sales decline. Women’s comparable store net sales rose 4%. Men’s decreased 3%.
 
Their e-commerce business is about $50 million. They relaunched the web site in April. Their e-commerce sales were flat for the quarter. I haven’t heard many companies say that their e-commerce sales weren’t up, but they just relaunched so we’ll wait and see. My concern, of course, would be that flat e-commerce sales could be indicative of their marketing programs not getting traction. 
  
Gross margin, however, fell from 22.3% to 19.1%. Of that decline totaling 3.2%, 2.7%, or 84.4% of the total decline, came from a “Decrease in merchandise margin rate primarily due to increased markdowns as a percentage of sales.” I would expect that one indication that their new programs were having a positive impact would be an improving product gross margin. 
 
The remainder of the gross margin decline was due to deleveraging of costs because of fewer stores and a lower sales base.
I’m going to scurry right over to the balance sheet and point out that merchandise inventory on May 1, 2010 was $106.6 million. On April 30, 2011, it had actually risen it was $115.8 million. Now, an inventory number is as of single day, and there can be big timing issues (if you receive inventory on the last day of the month, it shows up in the quarter that day is in. If it’s received the next day, on the first of the month of a new quarter, it doesn’t show up in the quarter that just ended).
 
Still, with stores being closed, sales down, and additional markdown being taken, you might expect a drop in inventory levels. However, management indicated in the conference call that they were comfortable with inventory levels. As you think about inventories, there’s another issue impacting companies in our industry. As cost increases show up, the same number of units will appear in inventory with a higher value, increasing inventories to the extent of the price increase. No idea if that is involved here or not.
 
Sales, general and administrative expenses fell 9.7% to $66 million. As a percentage of sales they fell from 38.4% to 35.6%. The net loss for the quarter of $31.5 million was similar to the loss of $31 million for the same quarter last year.
 
Comparing the current balance sheet with the one from a year ago, we see that the current ratio has fallen from 2.25 to 1.80. Total debt to equity has risen from 0.59 to 1.03. Cash and cash equivalents fell from $56.6 million to $24.7 million, accounting for almost all the decline in current assets. Current liabilities rose slightly from $79.6 million to $88.6 million. Long term liabilities rose from $84.9 million to $101 million due to the mortgaging of certain of the company’s facilities to raise cash.
 
PacSun closed 25 stores during the first quarter, and anticipates closing a total of 40 to 50 during the whole fiscal year. They note in the 10Q that they have almost 400 lease expirations occurring through 2013. That will result in some additional closed stores, but I’d expect that some of the leases they keep will be renegotiated under more favorable terms.
 
I don’t have to come up with a conclusion for this article, because CEO Schoenfeld pretty much stated it for me during the conference call:
 
“There’s no question that the merchandising and execution in our stores has vastly improved, yet we know we still have a lot of work ahead of us. Customers have many choices. We still have real estate challenges to resolve. Consumer response to higher prices this fall is hard to predict, and having made so many organizational changes internally, it will still take some time for our team to consistently execute at the levels that I believe we are capable of.”
 
On the other hand, it’s my column, so I get the last word. It’s more or less what I said after their last report. Can PacSun’s new strategy get traction with the target consumer before the economy and cash flow issues get in the way?