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Agenda Show Registration Is Now Open

The Editors — Tue, 24 Apr 2018 21:06:33 GMT

Still go to trade shows? Then you should probably click the red rectangle and get yerself set up for Agenda Long Beach June 28 -30, 2018. We hear Brockhampton and Lil Yachty will be there along with our new favorite musicians Activations, Pop-Up Shops, and Panels. Oh, wait, those last three aren’t musicians they’re the […]

Billabong Is All Boardriders’ Now

The Editors — Tue, 24 Apr 2018 17:57:45 GMT

Tuesday April 24, 2018 is the day that Boardriders, Inc. (Oaktree Capital’s action fashion brand holding company) officially takes the reigns at Billabong. The company has wasted no time waving bye-bye to Billabong’s board of directors and others including Neil Fiske, Peter Myers, Tracey Wood, Jim Howell, Mara Pagotto, and Paul Burdekin. But that list […]

No Store Growth; Perhaps a Good Decision, But What’s the Strategy? The Buckle Annual Report

jeff — Thu, 19 Apr 2018 20:40:52 GMT

The Buckle ended its February 3^rd fiscal year with 457 retail stores and expects to end the current year with the same number. These days, that may be exactly the right decision; the days of open more stores, automatically earn more money, are gone.

So what’s the strategy? Over three years, revenues have fallen from $1.120 billion to $975 million and to $913 million in the recently completed fiscal year. Pretax income is down from $235 million in the year ended January 30, 2016 to $156 million last year and $139 million in the most recent year. Gross margin, however, rose from 40.7% last year to 41.6% in the year just ended. On the other hand, SG&A expenses rose a bit in the face of declining revenues.

Here’s how The Buckle describes its business and operations in the 10-K:

“The Buckle, Inc….is a retailer of medium to better-priced casual apparel, footwear, and accessories for fashion-conscious young men and women.
“The Company’s marketing and merchandising strategy is designed to create customer loyalty by offering a wide selection of key brand name and private label merchandise and providing a broad range of value-added services. The Company believes it provides a unique specialty apparel store experience with merchandise designed to appeal to the fashion-conscious 15 to 30-year old.”
“Management believes the Company provides a unique store environment by maintaining a high level of personalized service and by offering a wide selection of fashionable, quality merchandise. The Company believes it is essential to create an enjoyable shopping environment and, in order to fulfill this mission, it employs highly motivated employees who provide personal attention to customers.”
“Merchandising and pricing decisions are made centrally; however, the Company’s distribution system allows for variation in the mix of merchandise distributed to each store. This allows individual store inventories to be tailored to reflect differences in customer buying patterns at various locations. In addition, to ensure a continually fresh look in its stores, the Company ships new merchandise daily to most stores. The Company also has a transfer program that shifts certain merchandise to locations where it is selling best.”
“The Company’s management information systems (“MIS”) and electronic data processing systems (“EDP”) consist of a full range of retail, financial, and merchandising systems…The system includes PC based point-of-sale (“POS”) registers in each store. The registers trickle transactions to a central server using a virtual private network for collection of comprehensive data, including complete item-level sales information and employee time clocking. The transactions are then swept into the central computer (IBM iSeries). Price updates are sent daily for the price lookup (“PLU”) file maintained within the POS registers.”

This is all good stuff. Indeed, it’s all necessary stuff. Doing it, however, is the price you pay to get a chance to compete rather than a source of competitive advantage. And I have a hard time with the use of the word “unique.” I’ve always thought The Buckle did a great job integrating their owned with purchased brands, but “unique” is pushing the envelope.

The balance sheet remains strong with no long-term debt, though equity has fallen 9.1% since last year from $531 to $391 million. Two years ago, cash flow from operations was $159 million. Last year it was $149 million and in the most current year, $120 million. It’s profitable but, as we’ve already reviewed, revenues and earnings are down over three years. I’d add that they had a 7.2% decline in comparable store sales.

Here are the questions I’d like to ask The Buckle’s management. For all I know, they may have great answers. They just didn’t want to put them in the 10-K

What is your process for identifying and bringing in new brands? If that’s as important as I think it is, you must have one to succeed.
Your online sales in the fourth quarter were $33.5 million, or about 12% of fourth quarter revenue. But there’s no discussion of how you tie your brick and mortar and online presence together. I think that’s become increasingly important to critical. Have you made a decision to focus on a brick and mortar strategy?
Your private label business was 36% of revenue in 2017, and you list ten private label brands you carry. I can’t tell if this is all of them. I’ve noted how well you merchandise private label and purchased brands together, but I’d sure like some more information on what limits, if any, you consider the private label business to have. You note you expect purchased brands will continue to be a majority of sales. You actually have “Dependence on Private Label Merchandise” as a risk factor and note, “The Company may increase or decrease the percentage of net sales from private label merchandise in the future. The Company’s private label products generally earn a higher margin than branded products. Thus, reductions in the private label mix would decrease the Company’s merchandise margins and, as a result, reduce net earnings.”
The purchased brand Miss Me/Rock Revival was 18.2% of the year’s revenues. Another purchased brand, Axis Denim, was 14.0%. That’s 32.2% from two brands and seems like a troubling concentration. Are you confident those two brands will remain popular?
You aren’t opening any new stores this year but are doing four full remodels. You note that construction costs for a remodel are about the same as for a new store. Should we expect remodels rather than new store openings to be emphasized in the future? What kind of sales bump do you get from remodels?

So there you have it. The Buckle is a profitable business with a strong balance sheet. But the three-year trends are going in the wrong direction, and the public information doesn’t describe a strategy to address the issue or respond to the new retail environment.

2018 Vans Park Series On ETN

The Editors — Thu, 19 Apr 2018 17:17:32 GMT

The Vans Park Series, arguably the best skateboarding contest series to be streamed online, is partnering up with ETN in an exclusive (yet free to all of us) deal for 2018. The 2018 Vans Park Series Pro Tour will be broadcast live and for free on the ETN app, ETNlive.com, and vansparkseries.com. The new partnership […]

The IASC Summit Series #1

The Editors — Thu, 19 Apr 2018 16:57:25 GMT

The annual skateboard industry conference hosted by the International Association of Skateboard Companies is getting a change up with year. Rather than a three day event that requires hotel rooms, travel, and more the IASC is breaking it up into one day events — quick and easy like. The first stop is May 3, 2018, […]

Kering Starts Volcom “Disposal Process”

The Editors — Thu, 12 Apr 2018 16:59:26 GMT

We talked about this a while ago (November 1, 2017 to be exact), but it appears that the day of Kering’s off-loading of Volcom has officially arrived, according to a story on SGB Media. “In accordance with Kering’s strategy to fully dedicate itself to the development of its luxury houses, Volcom no longer constitutes a […]

Some Ideas About the Retail Environment

jeff — Wed, 11 Apr 2018 20:29:18 GMT

My research department has been coming up with interesting reads I haven’t had time to pass on. Here are three worth a few minutes of your time.

“5 Ways the Future of Retail is Already Here” shouldn’t surprise anybody who’s been paying attention. But it’s interesting to see these five retail evolutions listed together and consider the cumulative impact. What does it cost to do this stuff? What’s the impact on customer service and how it’s staffed and carried out? Perhaps we need to pause and redefine what customer service is.

Do we believe that by “giving the customer what they want, when they want it, where they want it, and how they want it” we’re building our brands and any loyalty to them? I’m worried we’re just making it easy for customers to move seamlessly and without friction among brands. Chasing today’s mantra of customer service is starting to feel like a defensive response to competitors rather than a strategy for building customer loyalty.

We’ve all acknowledged that the customer is in charge. What’s the sound business model when the customer expects more, wants higher quality, and doesn’t feel compelled to come back to your brand? When your product is hard to differentiate from your competitors, I’m pretty sure it involves scarcity and thoughtful distribution.

Okay, item number two. Not an article but a website for 3D printing. It’s been a few years now that I’ve been saying, “Hey! It’s coming. Please pay attention.” Here’s the link to a company called Shapeways. Spend a few minutes understanding their process. If you didn’t find it yourself checking out the web site, I strongly suggest you go here, scroll down a bit and watch the four minute video under “We’ll Produce It For You.” The capabilities and variety of materials they work with are quite impressive.

Finally, I call your attention to, “A new report says 1 in 6 millennials has $100,000 in savings. This is how some found a way to stockpile cash.”

It’s not the most rigorously prepared article I’ve ever come across, but it’s worth thinking about. First, people who are saving money aren’t using it to buy our products. I’ve suggested before that the millennials are like my mom’s generation that grew up during the Great Depression in the sense that they have been through a tough financial crisis. For my mom, the experience evolved into a life long financial conservatism and reluctance to spend- even when she had lots of money.

If true, how do you address it? Perhaps a group that thinks this way might be interested in quality and long-term value.

That’s it. Hope these three are thought provoking.

Zombie Brands Never Say Die

The Editors — Mon, 09 Apr 2018 15:36:48 GMT

Ever launch a brand that functionally went out of business years ago? Not to worry. Brand licensing wizards will resurrect your brand over and over and over again to keep those checks rolling in. The most recent example of brand reanimation is this — Airwalk for Aéropostale. Airwalk for Aéropostale launches online and in stores […]

A Brief Remembrance of SPY CEO Seth Hamot

jeff — Mon, 02 Apr 2018 17:59:26 GMT

This isn’t the kind of thing I usually choose to write about. After some thought, I wanted to express how sad I was to hear about the recent passing of SPY CEO Seth Hamot. For years before I met Seth, I gave him a hard time. As a public company, SPY was a valuable source of information for us all into how a smaller industry company competed. So every quarter for years I would write about how SPY was doing.

Like clockwork, I would review Spy’s balance sheet and criticize some of the problems they had created for themselves. As things evolved, and as Seth got more involved, I’d still critique their upside-down balance sheet, but over time I began to become a supporter of what I considered to be realistic and appropriate strategies. It felt like they were doing most things right. But SPY was still an experiment in a small company building a brand niche in a highly competitive market. I didn’t know if they could pull it off and said so.

One day at a trade show, some years ago, I was at the SPY booth and somebody said, “Hey! You should meet Seth.”

Yeah, great. I always have terrific meetings with CEO’s of public companies I’ve criticized in print.

It didn’t come down that way. Seth was engaging, funny, and open minded about my take on the company. And smarter than I am- a trait I always love to run into.

That conversation lasted as long as we had time for. Over the years that followed there were more phone calls, informal meetings at shows, and occasionally I’d get together with Seth and perhaps a couple of other SPY people to talk about the company.

Damn. Just realized I did all that for free. Nice work Seth. Well, the secret of getting me to work for free is to make sure I learn more from you than you learn for me.

Seth and I didn’t always agree, and that was okay. If you only talk to people you agree with, you aren’t likely to learn much. What was important was the quality of our conversations. Coming from outside the action sports/active outdoor industry, Seth wasn’t burdened with the baggage of preconceptions we all carry around. I’d spew some industry common knowledge that “everybody” knew was “the way you had to do things,” Seth would ask me why, and when I didn’t have a solid answer Seth would suggest an alternative that I, in my brainwashed, industry groupthink mind set, would never have thought of.

Seth tried a bunch of such things at SPY. Some worked, and I imagine some didn’t. But if you’re trying to differentiate a small brand in a market dominated by big guys what possible reason could you have to do anything else?

And that is Seth’s legacy to me. And maybe to you. Question every assumption you ever had and talk to people you don’t agree with. And have fun doing it.

Had Seth and I lived near each other, I imagine we would have been good friends and I regret we didn’t spend more time together. If I’ve turned this remembrance into a bit of a business lesson well, sorry. But you know what? Seth would be fine with it. I hope he might even laugh a bit.

Zumiez’s Annual Results; And Tales from its Conference Call

jeff — Fri, 30 Mar 2018 17:44:03 GMT

My favorite part of a Zumiez’s conference call is when CEO Rick Brooks apparently decides the analyst has asked the wrong question or doesn’t quite understand the implications of what’s been asked. Two plus pages of transcript later, sometimes ably supported by CFO Chris Work, we may have forgotten the original question, but we’ve always learned something new and intriguing.

So it was for the recent call discussing the quarter and year ended February 3^rd, 2018. But before we have that fun, let’s go through the numbers.

The Numbers

Fourth quarter revenues rose 16.9% from $263.6 to $308.2 million. “Contributing to this increase were positive comparable sales growth of 7.5%, the net addition of 13 stores since the end of last year’s fourth quarter, the 53rd week in 2017 were $10.3 million and the positive impact of foreign exchange were at $5.3 million. Also benefiting fourth quarter 2017 net sales is an adjustment to deferred revenue related to our STASH loyalty program were $3.8 million,” explained CFO Chris Work.

The gross margin rose 1.5% to $37.2% compared to last year’s fourth quarter. Chris notes, “The increase was primarily driven by 120 basis points of leverage in occupancy, 80 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program, estimated redemption rate, and 70 basis points of improvement in product margins. These increases were partially offset by 70 basis point increase in inventory shrinkage and 20 basis point increase in incentive compensation. Inventory shrinkage has been difficult for us in 2017.”

I’d say it has been. When your improved product margin is 100% eaten up by disappearing inventory, it’s a problem. Zumiez has always tried to drive responsibility down to the store level. Remember that a year or two ago, they transferred responsibility for online sales to their stores? I’m wondering if that isn’t somehow related to the shrinkage problem.

SG&A as a percentage of sales for the quarter rose just slightly from 25% to 25.2%. “The…increase was primarily driven by 100 basis point increase related to our annual incentive compensation partially offset by 40 basis points of leverage in our store operating cost and 30 basis points of leverage across other corporate costs.” I never mind seeing incentive compensation expense rise, as it’s indicative of good results.

Net income for the quarter rose 9.6% from $18.2 to $19.9 million. For some perspective, the chart below shows the quarterly results for the last two years.

Zumiez ended its year with 698 stores; 607 in the U.S., 50 in Canada, 34 in Europe, and 7 in Australia. The number of new store openings, especially in the U.S., is declining. But Zumiez has been telling us that would happen for some years. Over the last three years, stores opened has declined from 57 to 28 to 17. The 2016 number of 28 was impacted by the acquisition of five stores in Australia. The estimated number for this fiscal year is 13 new stores worldwide.

The chart below shows the composition of sales by category during the last two years.

It’s always intrigued me to see how much revenue is from men’s’ apparel compared to women’s. It seems unusual for a mall-based retailer (if I can still classify Zumiez that way?). I don’t know if it’s a problem, an opportunity, or a competitive advantage. Also note the decline in hard goods as a percentage of revenues- takes up a lot of room but doesn’t offer great margins. But it’s an important part of Zumiez’s market positioning.

For the whole year, revenues roses 10.9% from $836 to $927 million. Sales in the U.S. were $774 million, or 83.5% of the total. In fiscal 2016, they were $711 million, or 85% of the total. “The increase reflected a $48.6 million increase due to comparable sales and a $23.6 million increase due to the net addition of 13 stores (made up of 12 new stores in North America, 5 new stores in Europe, and 2 new stores in Australia offset by 6 store closures). Net sales include $10.3 million related to the additional week in the 53-week period and a $6.3 million increase due to changes in foreign currency rates.”

Zumiez’s business in Europe has not performed as management hoped. They’ve had some losses there. As Chris put it, “…we have not had the results from the investment we’re hoping [for].” Rick Brooks talks about the “amazing results” they had in 2015 driven by a “…really huge long board trend and then in 2016 it basically completely reversed and of course we were still playing out as Chris said investing and building the business at that point when sales actually went – got considerably more difficult relative to what we assumed to be appropriate pace of growth at that point.”

By 2015, most of us were amazed the long board market hadn’t cracked already, but none of us had any doubt it was going to. Because that’s what bubbles do. If Zumiez was looking at success with their European acquisition that they could see was overly reliant on one product category, perhaps they could have called it out. But who want to sound a note of caution on a new (second half 2012) acquisition you paid a hefty price for.

Zumiez launched “…over 150 new brands…” during the fiscal year. It was just last year they were saying they tended to launch 100 a year. These are not Zumiez owned brands, but brands where Zumiez works with the owner at various levels to launch them in Zumiez stores.

The gross margin rose to 33.4% from 32.9% the previous year. “The increase was primarily driven by an 80 basis point impact due to leveraging of our store occupancy costs, 30 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program estimated redemption rate and 20 basis points on product margin. These were partially offset by 60 basis points in higher inventory shrinkage and 10 basis points due to higher annual incentive compensation.”

Net income rose 3.5% from $25.9 to $26.8 million.

There’s no need to discuss the strong balance sheet, except to remind you of the competitive advantage it offers, allowing you to pursue your strategy and initiatives even in the face of a bump in the road.

One last financial note before we get to the fun stuff. Zumiez 10-K includes the following risk factor: “The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.” It’s last in a list of many risk factors.

Companies, as you know, have been buying back their shares to boost their earnings per share. Some (not Zumiez) have been borrowing money to do it and leveraging up their balance sheets. We’ll see how that works out as interest rates rise.

Share buy backs are inevitably touted as a benefit to shareholders though you might also view buy backs as an admission by management that they can’t figure out any good investment opportunities in their business. I find it amusing that this benefit requires a risk factor in the 10-K. You might also consider that if the buy backs reliably raised the share price consistent with the reduction in shares outstanding, the cost to a potential controlling shareholder, in dollar terms, doesn’t change. If that were the case, I don’t think a risk factor would be required.

Tales from the Conference Call

Now for the fun stuff. I’m not going to start by reviewing Zumiez’s Competitive Strengths. They are the same they’ve been for 20 plus years and, most importantly, work in any retail environment. Instead, I want to remind you of two issues I’ve written about- not just related to Zumiez.

I’ve characterized the term “omni-channel” as the authoritative sounding word legacy brick and mortar retailers have used to make it sound like they’ve got things under control and know how to manage the brave new retail world where the consumer is in charge. I’ve also stated that doing ecommerce right is a continuingly expensive undertaking. Unless you can generate enough incremental revenue and operating income to at least pay for it, you are failing.

Being online- selling on line- having web sites and connecting ecommerce with brick and mortar do not represent a strategy. They are the necessary tools for implementing a strategy.

“We believe now we’re entering into a new phase in servicing our customer,” says CEO Brooks, “moving beyond omnichannel into a new consumer environment with yet higher expectations. While we’re not sure what to call this new consumer phase, the New World will be characterized by key themes and words, such as trade area, localization, optimization, speed, intimacy, engagement, connection, innovation, and community.”

I’m relieved I’m not the only one who doesn’t know what to call it. If Rick’s descriptors of the consumer environment are reasonably accurate, or at least not too far off from what the future holds, they are the basis for a strategy using the tools Zumiez has in place or is developing. If forced to reduce his already short list of words, I come down to flexibility and informational immediacy. Let’s talk about some things Zumiez is doing to succeed in the world Rick is describing.

As you know, Zumiez introduced 150 brands in fiscal 2017, up from around 100 the previous year. At this point, I imagine Zumiez has a robust system for onboarding, and offboarding when they don’t work out, new brands. In the environment Rick describes, imagine the value of seeing these new brands and the trends they may, or may not, represent when they are still small and, for lack of a better word, pure. How else does a retailer find enough new brands to satisfy the consumers’ requirement for constant newness?

Zumiez’s largest third-party brand accounted for 8.5% of revenues in 2017. That’s up from the previous two years. Meanwhile, Zumiez’s private label revenues have fallen over three years from 21% of revenues to 20.2% and 16.8% in 2017. Given the emerging competitive environment, I wonder if the Zumiez management team might not be conflicted if private label (regardless of the margin) grew too much or a single brand became a larger chunk of total third-party revenues.

Obviously, Zumiez’s size and resulting ability to support the new brand process gives it an advantage. Here’s how they describe it in the 10-K. “Given our scale and market position, we believe that many of our key vendors view us as an important retail partner. This position helps ensure our ability to procure a relevant product assortment and quickly respond to the changing fashion interests of our customers. Additionally, we believe we are presented with a greater variety of products and styles by some of our vendors, as well as certain specially designed items that we exclusively distribute.”

Zumiez’s new brand process isn’t restricted to the market the brand originated in. Says Rick, “…we have brands as well as trends that are already flowing across the oceans for us and working on multiple continents.”

Finally, Ricks longest answer to a short question highlighted another Zumiez’s advantage I, I’m embarrassed to say, hadn’t focused on before. You know that Zumiez has trade areas, and the goal is to maximize revenue from that area, not just to open new stores in it. You might find yourself closing stores to grow revenue. You also know that Zumiez has transferred ecommerce fulfillment to their stores. I always thought that was a great marketing/customer relations thing to do.

I hadn’t focused on the financial benefit.

“…when our web business grows digital sales today, we’re now able to lever physical store, our physical store cost structure,” says Rick.

“Lever our physical store cost structure.” Just a few little words. Where the hell has my mind been! Zumiez is in the process of solving the problem of making the cost of the “omnichannel” pay off. By having fulfillment done through the stores they’ve made what used to be two cost centers into one and made that one more efficient. Completely in sync with their customers, Zumiez literally doesn’t even have to think about whether it’s an ecommerce or a brick and mortar sale. They don’t care because there’s largely just one cost structure. Rick continues:

“…this is one of the measures of what you mean when you say you have an integrated seamless experience right, you have to integrate it into everything you do in the service of customers. And of course our store teams and digital sales teams they all work as an integrated unit now, looking at all the touch points and how we can best drive consumers to whatever channel the empowered consumer prefers.”

“Probably the easiest example, Sharon, I could give you of evidence here about this idea of how we’d recreated this kind of new integrated business model is localized fulfillment. So through localized fulfillment and in particular already our order routing algorithms, we’ve now levered store payroll and our other store cost structures in two successive holiday seasons. And when I hear a lot of retailers talk, they talk about how a significant growth in web revenue is de-leveraging their business.”

Brick and mortar retailers were initially dragged into ecommerce as a defensive measure focused on giving their customers what they wanted. Zumiez has said that with their trade areas, new systems, and brick and mortar responsibility for ecommerce, they have figured out how to synchronize market and financial imperatives.

Can you make ecommerce a competitive positive if you don’t do that? I’m guessing no and expect all successful retailers with a brick and mortar footprint to have to do the same as Zumiez.

Golf Thang: The Skaters of Malbon Golf

The Editors — Thu, 22 Mar 2018 22:37:23 GMT

Los Angeles’ Fairfax golfing street boutique Malbon Golf gets the Golfworld write up. Malbon Golf does club-fitting, but hats, gloves, bags and flasks are the hot items. With a putting green and simulator, the shop has become a kind of clubhouse for an eclectic network of skaters, musicians and artists united by golf and irregular […]

Babes On Bikes: Women Can Do It All

The Editors — Wed, 21 Mar 2018 20:16:19 GMT

Yes, aside from being able to create new humans inside their own bodies, women can also ride motorcycles, and snowboards, and skateboards. They can also surf. We should all be past needing these reminders, but it’s always good to see evidence every now and […]

VF’s Management Process and Strategy: Thoughts on Their Annual Report

jeff — Sun, 18 Mar 2018 19:49:00 GMT

I’ve spent some time on VF’s 10-K filing for the year ended December 31, 2017. It was a thought provoking read (yes, I know I’m the only one who would say that about a 10-K) that left me thinking about how VF tries to derive its competitive advantage. There are some lessons in it for all of us who sell products that are an awful lot like your competitors’ products. Here are some VF facts on which we can base the discussion. I’ll also review their numbers for the year.

More than 30 brands (23 of which they call primary) divided into three segments; Outdoor & Action Sports, Jeanswear, and Imagewear. Vans, The North Face, Timberland, Wrangler and Lee are the five largest.
They sell through specialty stores, department stores, national chains, mass merchants, and through theirs owned brick and mortar and online retail. In international markets, they also sell through licensees, agents, distributors, and independently operated partnership stores.
65% of revenue is from the Americas, 24% from Europe, and 11% from Asia-Pacific region.
Total revenue for the year was $11.8 billion.
Direct to consumer revenues were 32% of total revenues. At the end of the year they had 1,518 stores worldwide, opening 111 in 2017. They also have 1,100 “concession retail stores” mostly in Europe and Asia.
Vans, Timberland, The North Face, Kipling, Dickies, Lee, Napapijri, and Wrangler have stores under their names that sell only that brand’s products. There are also 80 outlet stores that sell many VF brands.
Ecommerce is 21% of direct to consumer.
VF owns 21 factories and produced 23% of 473 million units there. It works with approximately 1,000 other factories in 50 countries. It has 38 distribution centers.

Consider the complexity. How many combinations of where it’s made, where it’s sold, how it’s distributed, who the customer is and how the brands are positioned against each other (where that’s an issue) are there? That’s a big, big number. To some extent, it’s simplified by the fact that the five largest brands are a big chunk of total revenue, but still, this is quite a management challenge. Here’s how they describe part of it in the 10-K.

“Managing this complexity is made possible by the use of a network of information systems for product development, forecasting, order management and warehouse management, along with our core enterprise resource management platforms.”

Talking about how VF manages its manufacturing base, the 10-K says:

“Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors. Products obtained from contractors in the Western hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives us greater flexibility, shorter lead times and allows for lower inventory levels. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing.”

CEO Steve Rendle’s nearly full-time job must be getting quality people he trusts into the right positions. They had 69,000 employees at the end of the year. He notes in the conference call, for example, “To support the execution of our strategy and better enable the growth of our large global brands, we have realigned the roles of our Group Presidents and redirected our leadership talents at our most important objectives. Going forward, each Group President will be responsible for a single geographic region and have one global brand reporting to them.”

So, what are the foundations VF builds its business on? People (like any organization), systems, procedures, and disciplined management processes.

Oh – wait – I didn’t say brand or product. From the 10-K: “In addition to the design functions of each brand, VF has three strategic global innovation centers that focus on technical and performance product development for apparel, footwear and jeanswear. The centers are staffed with dedicated scientists, engineers and designers who combine proprietary insights with consumer needs, and a deep understanding of technology and new materials. These innovation centers are integral to VF’s long-term growth as they allow us to deliver new products and experiences that consistently delight consumers, which drives organic growth and higher gross margins.”

I’m guessing they have one innovation center focused on each of their geographic areas. For certain of their brands (surely the top five) they have enough size to develop, if appropriate, area specific product.

They can do this because of their size. But size can be dysfunctional if you don’t have the four foundations I mention above. What are the other benefits of being this big and managing like VF tries to?

Higher gross margin. Your volume, number of contract manufacturers, and having your own factories will give you some advantage.

Lower advertising and promotion expense as a percent of sales. They spent $716 million, and in fact have accelerated their brand building spending, but it was just 6% of revenues.

More flexibility and faster response to market changes. Anybody think that’s competitively useful these days? It’s valuable in brand building but having the ability to make some product quickly and perhaps in smaller quantities rather than making too much of the wrong stuff is also good for your margin. There’s also value in having a distribution network that lets you move product around in response to changes in demand. Also improves inventory control which, I believe, helps with brand building.

The cost of increasingly complex logistics and important systems is more efficiently spent. That is, VF, as an $11 billion business, doesn’t have to spend 11 times as much as a $1 billion business.

As I watch companies like VF focus on flexibility and shorter product cycles, I continue to wonder about the changing role of trade shows. For certain products, they seem built on the assumption of product cycles that increasingly don’t address what the market and end consumer want and when they want it.

Let’s move on and look at the numbers.

VF showed a revenue increase of 7.1% in 2017 from $11.0 to $11.8 billion. $489 million was from existing brands and $247 million from the Dickies acquisition. $49 million was from a positive foreign currency impact. The gross margin improved 1.2% to 50.5%. “…reflecting a 180 basis point benefit from pricing, a mix-shift toward higher margin businesses and lower restructuring costs, which was partially offset by a 60 basis point impact from foreign currency.” SG&A expenses grew 11.9% from $3.99 to $4.46 billion. As a percentage of revenues, it was an increase of 1.6%. “This increase is primarily due to investments in our key growth priorities, which include direct-to-consumer, product innovation, demand creation and technology initiatives. The increases were offset by lower restructuring costs in 2017 and a pension settlement charge of $50.9 million in 2016, which did not recur in 2017.”

Operating income rose from $1.368 to $1.503 billion. Interest income rose from $9.2 to $16.1 million while interest expense was up from $94.7 to $102 million.

Income taxes rose from $206 to $695 million. The new tax law passed in December resulted in a $465.5 increase. That’s tax on income that had been earned and held offshore. It’ a one-time thing. The result was a 42.7% decline in net income from $1.07 billion to $615 million.

As you probably know, VF acquired Dickies in 2017 and has put Nautica up for sale. On the income statement, they separate discontinued operations, and provide separate information on the late in the year acquisition of Dickies. I’m not breaking any of that out in my discussion and want to explain why.

The first of four long term drivers of their strategies is, “Reshape our portfolio. Investing in our brands to realize their full potential, while ensuring the composition of our portfolio positions us to win in evolving market conditions.” Buying and selling brands is part of their normal operations. They are very disciplined about what they buy and how much they will pay. They don’t necessarily buy something every year, but it’s an active and ongoing part of their operations and I don’t believe in viewing their results net of it.

Acquisitions remain a top priority for VF as they are “…transforming VF into a more digitally-enabled consumer and retail-centric organization.”

Below are revenues and operating income by segment- what they call coalitions. The key thing to notice is that Outdoor & Action Sports provided 69.5% of revenue and 72% of operating income.

Vans’ revenues were up 17% in 2017. The North Face was up 4% and Timberland 2%. Total segment revenues were up 8% for the year.

“Global direct-to-consumer revenues for Outdoor & Action Sports grew 17% in 2017, driven by an expanding e-commerce business, comparable store growth and a 1% favorable impact from foreign currency. Wholesale revenues increased 2% in 2017, driven by growth in the Vans brand and Europe, partially offset by the above-mentioned U.S. retailer bankruptcies, lower year over- year off-price shipments and efforts to manage inventory levels in certain markets.”

The dominance of and dependence on Vans, as well as its continued and rapid growth is rather remarkable. You won’t be surprised to learn that CEO Rendle lists “…protecting and enabling the explosive growth in Vans…” as the first of their 2018 top priorities. VF expects “…high-teen growth from Vans through the first half of this year.”

During the conference call, an analyst asks the following question, which has been on my mind for a while as well.

“You talked about protecting the brand. You talked about not letting it overheat. What does that mean to how you’re going to manage the brand into the wholesale channel and your DTC, right? Are you going to constrict some of the deliveries into the wholesale channel? Are you going to limit some of the inventory across the channel? Are you going to segment the styles further? How do you plan to maintain a double-digit growth rate, as you alluded to, so that this doesn’t roll over, like we’ve seen other brands do in the not-too-distant past?”

Good question. You can read into it the inevitable and often discussed in Market Watch public company problem; How do you grow without screwing up the brand? Here’s part of Steve Rendle’s answer.

“…our Vans team is really the benchmark business on how they look at product segmentation across the different consumer touch points that we have to sell into, with our stores being the most premier expression of our brand. They’re really evolving how they’re looking at using stores and coming up with a mix of formats that play into the specific communities across the globe, but being very thoughtful, and direct partnerships with those wholesale partners, placing the right amount of inventory, being very thoughtful about not having one style over-torque, but really having it be a balanced approach with the right amount of newness to keep the brand moving forward each season.”

His answer sort of comes down to, “We manage the brand better than other brands are managed.” Apparently so. Yet it doesn’t really address the public company conundrum and I’ve never known a brand that didn’t, eventually, hit a dump in the road- “roll over” as the analyst puts it. And I wonder, given the relative growth rates, why they can’t manage The North Face and Timberland as well as they are managing Vans. It has something to do with the brand and the competitive environment, not just the brand management it seems.

Given the dependence on Vans, I hope they can continue to be disciplined in how they grow sales while protecting the brand.

A quick note on “risk factors” as listed endlessly in the 10-K. I used to spend a lot of time on them. Now, I find myself skimming them and rarely having anything to say about them- and not just for VF. That’s because risk factors seem to be evolving from meaningful business considerations to a list of anything that the lawyers think could possibly go wrong. They aren’t written to inform investors as much as to protect the company.

The balance sheet is weaker compared to a year ago. Total equity fell 25% from $4.9 to $3.72 billion. The current ratio is down from 2.4 to 1.5 times and cash declined from $1.227 billion to $566 million. Debt to total capital was up from 31.9% to 44%.

The growth in receivables and inventories seems consistent with revenue growth and the acquisition of Dickies. Also due to the Dickies acquisition, short term debt jumped from $26 to $729 million. Hope they can refinance that before rates rise. Long term debt was also up a bit from $2.04 to $2.19 billion.

The percent of their earnings they paid out as dividends was 96.2%. That’s up from 59.9% last year and 38% in 2013. It’s not that the balance sheet is weak- it’s just not as strong as it was. If I were an investor in VF, the balance sheet changes and payout ratio would leave me wondering what happens if Vans should hit that bump.

The majority of VF’s growth for the year came in it’s fourth quarter, when revenues jumped 20.5% from $3.04 to $3.65 billion. They reported a loss of $90 million in the quarter but remember the big accrual for taxes they were required to take due to the new tax law. Vans, by the way, was up 35% in the fourth quarter, which puts some perspective on the 17% growth for the year.

Like all companies, VF tries to put its best foot forward in its public filings and conference calls. I’m sure they have as many things go wrong as the next company. Still, I walk away from reading their 10-K (and that of some other companies) with a strong sense that what used to give smaller companies a chance for an advantage is no longer exclusively available to those smaller companies.

Nyjah Huston Profiled In LA Weekly

The Editors — Thu, 08 Mar 2018 16:01:41 GMT

With Nyjah Huston’s ‘Til Death seared into our retinas we were reminded of how strange his trip really has been thanks to a profile by Lily Moayeri in LA Weekly. In an interview, Huston is prepared for personal questions. His responses are tailored and efficient, his […]

Jagger Eaton Wins 2018 Tampa Pro

The Editors — Mon, 05 Mar 2018 05:43:09 GMT

Turns out you can win Tampa Pro by dropping a casual bag of unrushed, polite hammers. Here, let Jagger Eaton show you how it’s done.

Revenues Flat, But Strong Bottom Line Performance; Globes Half Year Results

jeff — Thu, 01 Mar 2018 18:34:33 GMT

Globe’s report for the six months ended 31 December 2017, as usual, gives us very little information. The only 17 page report makes just one incomplete mentions of their brands and tells us exactly nothing about how any of them are doing individually.

Perhaps I’ll start by reminding you of their brands. They own are Globe, Salty Crew (50% I think), FXD, Dwindle, Enjoi, Blind, Darkstar, Almost, Tensor, Dusters and Sample. Their third party brands, which means they distribute them, are Stussy, Obey, M/SF/T, Xlarge, Andale, Kryptonics and Hardcore.

Total revenue, compared to the same six months the previous year, fell by 0.71% from $70.7 to $70.2 million (all numbers are in Australian dollars). Pretax income, on the other hand, rose 24.1% from $2.81 to $3.49 million. How’d they do that?

“This growth in profitability was due mainly to an increase in gross margins across the board. The gross margin improvement came from a combination of factors including brand mix, customer mix, sourcing improvements and foreign exchange impacts. While overall costs were largely flat compared to the same period last year, there has been a reallocation of costs towards emerging and growth brands, to drive the growth in those brands over the coming years.”

Revenues from the Australasia segment fell from $41.3 to $38.3 million. However, the segment earnings before interest and taxes (EBIT) was up just a bit from $4.95 to $5.06 million. In North America, revenue rose 13.4% from $17.75 to $20.13 million. The EBIT loss improved, declining 41% from a loss of $2.15 million to a loss of $1.27 million. In Europe, revenues were little changes, rising from $11.68 to $11.76 million. However, EBIT fell from $284,000 to $83,000.

From a bottom line perspective, then, Australasia is carrying the load. North America is losing money and Europe is barely above breakeven.

I don’t know what the change in gross margin was. Of the factors they point to as responsible for the improvement, I’d be curios how much foreign exchange accounted for. But fundamentally, they leave us with a picture of a company that’s managing its brands, distribution and customers consistent with a competitive environment where revenue growth is harder to come by. I’d call that being in touch with reality. Globe has tended to be that way.

Changes in the balance sheet, which is strong, are consistent with management’s description in the quote above of what led to the gross margin increase. With revenue more or less constant, we see an 8.6% decline in inventory from $19.2 million a year ago to $17.6 million at 31 December 2017. I also note that a current interest bearing liability of $4.59 million last year is down to zero this year while cash and cash equivalents is basically unchanged.

Based on the very limited information in the report, Globe is positioned to do well if its competitors struggle for whatever reason.

One Last Time! Billabong Reports Its Half Yearly Earnings.

jeff — Sat, 24 Feb 2018 17:17:09 GMT

Thursday’s earnings call by Billabong for the six months ended 31 December 2017 was its last unless something unexpected happens. With an anticipated late April closing of the acquisition of Billabong by Boardriders for $1.00 a share, with Billabong ending up private, we won’t be seeing any more of the company’s numbers.

Everybody knows that and as a result the call, in a word, was perfunctory. Current CEO Neil Fiske and CFO Jim Howell went through the numbers without some of the usual details, explanations, and nuances. I think there was only one analyst with any questions. I wonder how many even listened.

The discussion was mostly about how tough the market was, why the acquisition had to happen, and the hard things Billabong would have to consider doing if it didn’t close.

Here’s a summary of the 6 month results:

Note that there are two lines for EBITDA; one including discontinued operations and significant items and one without them. Because there are always, in Billabong’s case anyway, significant items and/or discontinued operations, I tend to focus on the line that includes them. As reported, revenues were down 6.8% to AUD$476.4 million from AUD$511 million.

Here are the as reported numbers by segment:

Remember both tables are in Australian dollars.

I’m not going to undertake my usual analysis. I said what I wanted to say when I wrote earlier this week about the document Billabong published discussing the rationale for the acquisition. You can read it here.

Billabong’s efforts to restructure and make its operation more efficient were working. But they were taking too long, and the benefit was offset by revenue declines in a tough market (closing 41 stores, even though it was the right decision, didn’t help). That’s been the story for three or four years. That meant that their balance sheet and financial profile didn’t improve enough to permit the debt to be refinanced. Billabong is also getting 45% of revenue from its retail operations. Retail is not particularly popular in the financial world.

Earlier this week I ended my analysis by saying, “The question is whether the opportunities of two companies in the same tough market improve just because you put them together.” There’s going to be some uncertainty and transitional issues as the synergies (which I believe exist but can’t begin to quantify) are achieved.

Market conditions aren’t going to improve just because Boardriders bought Billabong. Both these companies own brands that suffered some abuse as their owners had financial problems. Becoming private is a good first step towards giving them the flexibility they need to try and rebuild and grow those brands. One wonders if their growth won’t be constrained by the percent of the surf market they already own. Remember what happened to Burton when, already controlling a big chunk of the snowboard market (45%? Just my guess), tried to expand their market share some years ago?

The secret sauce, if it exists, will require 1) patience, 2) great management of distribution, and 3) some subtlety in positioning the brands in the market and against each other. Number three is the hardest and, to me, the most important. A private company can be way more effective than a top line driven public company in doing all three.

Insights on the Sale of Billabong to Boardriders

jeff — Wed, 21 Feb 2018 04:34:57 GMT

On February 14^th, Billabong released a 194 page document explaining the deal under which Boardriders (formerly Quiksilver and owned by Oaktree) will buy it for $1.00 a share (all number in Australian dollars unless otherwise noted). You can go to this page and click on “Court Orders Convening of Scheme Meeting” to download the document as a PDF. It includes the independent expert’s report prepared by Grant Samuel & Associates Pty Ltd (“Samuel”) explaining and justifying the purchase price.

Perhaps the best way to start is to review a little industry history. I posted a link to “Subcultural enterprises, brand value, and limits to financialized growth: The rise and fall of corporate surfing brands” last year. Here’s the link again. Those of you who didn’t read this study ought to take the time.

We learn that the deal is expected to close on April 24^th. In a strategic sense, despite the length of the document we don’t learn much that’s new. Some of the comments on possible synergies from the combination are interesting and there are some new facts/opinions we’ll get to. Let’s get started.

The report values Billabong between a range of $190 and $239 million, or $0.96 to $1.20 a share. The Samuel report says, “The valuation assumes Billabong has the funding in place to continue to execute its turnaround strategy.” Prior to the proposal, “…Billabong had a market capitalization of approximately $133 million.”

As part of the deal, Boardriders has a commitment for a US$450 million term loan facility. Of that amount, the most that can be needed to fund the purchase would be $159,973,809. That’s about US$126.4 million right now. The rest will be used, “(ii) to refinance certain existing debt of the Billabong Group and Boardriders Group; (iii) to pay the fees, premiums, expenses and other transaction costs incurred in connection with the Scheme; and (iv) for working capital and general corporate purposes.”

We already knew that cash was getting tight at Billabong and that the term debt to Centerbridge and Oaktree (maturing September 2019) will not be repayable from cash flow, so a deal had to happen. Focus on what Samuel is saying; the valuation is only $190 to $239 million if that term loan is in place. If it’s not in place, it’s lower. How much?

If this deal didn’t happen, what else could Billabong do? It could sell more equity. Let’s say the term loan amount of US$450 million represents the amount Billabong needs to put its house in order. Billabong shares were trading around $0.75 before the announcement of the deal. The current exchange rate is $0.79 Australian dollars to each U.S. dollar. To raise US$450 million (equivalent to $570 million Australian dollars), Billabong would have to sell, at $0.75 a share, around 760 million new shares. But who’s going to want to buy those shares and why would they pay $0.75 a share? Samuel puts it a little more delicately than I do, but we agree that the answer is nobody, and certainly not at a price close to $1.00.

Billabong’s next choice is to sell one or more of their brands. Here’s what Billabong management says about that option.

“A sale of one of Billabong’s major brands would not necessarily repay in full the outstanding Centerbridge/Oaktree Senior Secured Term Loan. Such a sale would also require consent of the enders under the Centerbridge/Oaktree Senior Secured Term Loan.”

“• The sale of one of the Company’s three major brands would also mean that the scale of the remaining business would not be viable to allow the Company to fulfil its strategy of building global brands on global platforms.”

The senior secured term loan is for $221 million- US$172 million. It’s interesting to note that Billabong isn’t sure that even the Billabong brand is worth that much. We should recognize, however, that they would be selling it under conditions when they had to have a deal. That’s never when you get the best price.

Anyway, I agree with Billabong and Samuel that selling a brand doesn’t solve the problem. I might go further and suggest that the sale of one brand implies the eventual sale of the others.

I suppose you can also ask the question, “Isn’t there another buyer out there who will pay more?” The discussion above is enough to convince me that there probably isn’t. Samuel seems to feel the same way.

“While the synergy benefits (net of costs) may be significant, they are to a degree unique to Boardriders. There are only two businesses that compete (globally at similar scale) directly with Billabong in terms of product lines, Quiksilver and Rip Curl and Rip Curl is understood to not be in a position to acquire Billabong. Normal valuation practice is only to include synergies common to several acquirers in fair value. Synergies unique to one party are excluded.”

Something had to happen. Selling equity wasn’t going to work. Selling a brand wouldn’t solve the problem. There was no other buyer at a price that would make sense if only because they couldn’t benefit from the synergies Boardriders can (hopefully) benefit from.

Like Monty Hall used to say, “Oaktree, come on down!”

As I’ve been writing for a couple of years now, Billabong CEO Neil Fiske has pursued a strategy I largely agreed with. Some benefits have been recognized, but more slowly and at a higher cost than anticipated. A difficult market which, at best isn’t improving, hasn’t helped. This paragraph in the document from Billabong’s board of directors to shareholders in a section called, “KEY CONSIDERATIONS RELEVANT TO YOUR VOTE” lays out just how big and long term the challenge is.

“The prerequisites to Billabong’s EBITDA margin improvement ambitions include revenue growth, gross margin improvement and improved efficiency in cost of doing business, to be achieved by transforming the Billabong Group from a predominately standalone regional model to an integrated global business. While Billabong has generally described these improvements as long-term goals, they would need to be achieved on a sustainable basis across all brands, in all markets, and at the same time in the inherently risky fashion sector. Having regard to expected market conditions and other risk factors… the achievement of the Company’s long-term goal of double digit EBITDA margins is inherently uncertain and highly unlikely to occur in the foreseeable future.”

So a lot has to go right in a coordinated way in a risky market (anybody ever been in a business where things worked out that well?) and it’s going to take an indefinite, but not short, amount of time. Samuel confirms this and adds some details.

They tell us that Billabong, RVCA and Element together are “just under” 80% of Billabong’s revenues. “Billabong’s other owned brands account for approximately 7% of total sales revenue and third-party brands represent the remaining 13% of total sales revenue.” I imagine we’ll see those other owned brands sold. RVCA is about 13% of sales revenue and Element 14%. Samuel expects RVCA and Element to have “limited impact on overall results.” The report characterizes Billabong’s other brands as “…extremely small but add complexity to management of the business.”

“The three key brands, Billabong, Element and RVCA have leading or very strong market positions in their key markets in each region. RVCA and, to a lesser extent, Element, are regarded as having significant growth potential. On the other hand, the Billabong brand, which represents more than 50% of Billabong’s total sales revenue, [ about 52%] is a mature surf brand where growth is more difficult and expensive to achieve.” (Italics added).

“The turnaround strategy is midway through implementation. While there is upside potential from further cost efficiencies and ongoing benefits from roll out of the global platforms (including the omni-channel platform), [ I agree] progress has been slower than expected and there is no certainty that all elements of the turnaround will be implemented successfully. In any event, it must be recognised that these new global platforms, even if successful:

– are likely to result in incremental rather than dramatic enhancements to sales and margins; and

– will require continued investment in the platforms to maintain their effectiveness”

Boardriders has not provided Samuel with any estimate of synergies. Let’s remember why we’re interested in synergies- it’s not just about the money that can be saved, but about who has, or does not have, a job, what they are doing and where.

Samuel estimates that Billabong’s expenses from being a public company would decline by $1.7 million in FY17 and by $2.2 million in FY18. These reductions are included in their valuation. They make the following additional comments:

“Global Operations and Corporate and Head Office Costs Billabong incurs costs related to running Billabong’s global operations as well as corporate and head office costs, which include the costs of:

 international advertising and promotion costs;

 central sourcing costs;

 certain group shared services (such as human resources, IT etc);

 the Billabong executive office (such as costs associated with the offices of the Chief Executive Officer and the Chief Financial Officer, company secretarial and legal, corporate affairs, treasury, tax etc); and

 being a listed company (such as directors’ fees and insurance, annual reports and shareholder communications and share registry and listing fees).

Any acquirer of 100% of Billabong would be able to save the costs associated with being a publicly listed company. The ability to save other costs is less clear.”

“Boardriders, as owner of the Quiksilver brand (one of the two major competitors to Billabong), has the potential to extract substantial synergies from merging the two businesses. Boardriders has not made any public statements as to its expectations of synergy benefits… nor have these been conveyed to Billabong, so it is not possible to reliably estimate them. However, at the very least, they are likely to include:

 elimination of head office functions and duplicated shared services;

 merging of operations such as sourcing and logistics;

 purchasing power benefits;

 e-commerce fulfillment rationalization; and

 inventory realignment in multi-brand stores.

On the other hand, it would be reasonable to assume each brand would need to maintain its distinctiveness and character so there would be limited savings in marketing, design or retail operations. At the same time, the costs to achieve many of these synergy benefits would be significant (requiring a comprehensive restructure of Billabong’s operations) and would only be able to be achieved over a relatively long-time frame.”

We can’t be specific about the changes and the expense reductions involved but we can, I think, expect them to be extensive. In a continually difficult market where growth is hard to achieve (as the Samuel report emphasizes) synergies, whatever and wherever they are will be critical to the improving bottom line.

Billabong needs to be private and to get out from under its paralyzing capital structure. This deal achieves that. Certainly the synergies matter and there will be some. The question is whether the opportunities of two companies in the same tough market improve just because you put them together.

Deckers Has a Strong Quarter; Sanuk Shows More Signs of Life

jeff — Wed, 14 Feb 2018 18:39:23 GMT

A revenue increase of 6.6% from $760 to $810 million for the quarter ended December 31^st compared to last year’s quarter is a pretty good result these days. When you couple that with gross margin rising from 50.5% to 52.2% and reduce your SG&A expense 30.3% from $330 to $230 million, you get a pretax income that rises 279% from $50.9 million to $193 million. Net income “only” rose from $41 to $86 million due to a jump in income tax expense from $9.9 to $107 million. The new tax law (I refuse to call it a “reform”) is largely responsible.

Let’s remember that the UGG brand dominates Deckers’ results, generating $735 million of revenue for the quarter- almost 91%. 60% of the quarters $50 million revenue increase ($30 million) was the result of UGG’s growth.

As much as $30 million of the revenue increase was influenced by favorable weather conditions. CFO Thomas George said, “$20 million was from the timing of wholesale orders originally scheduled for delivery early in our fourth quarter that our wholesale partners requested to be shipped sooner due to the strong third quarter sell through. $10 million of better than expected DTC performance as a positive 1.7% comp compared favorably to our expectations of negative low single digits and $3 million from foreign exchange fluctuations.”

The increase in gross margin “…was primarily driven by lower input costs as we execute our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling, as well as favorable foreign currency fluctuations compared to the prior period.”

I’d be curious what the currency benefit was. Also, remember Deckers undertook a restructuring plan two years ago and they credit the plan with some of their overall improvement. It’s cost them $55 million since it began. Charges for the plan were $149,000 this quarter and $4.9 million in last year’s quarter.

The big number in the decline of SG&A expenses was the $118 million charge for Sanuk goodwill and patent in last year’s quarter. Ignoring that, you’ll see an increase in SG&A expense. Page 28 and 29 of the 10-Q breaks down the other increasing and decreasing components of SG&A You can see that here. Mostly, I view the increases as being for positive things.

At December 31^st, Deckers had 168 retail stores worldwide. 101 they call concept stores and 67 outlets. As part of their restructuring plan, they’ve closed 27 retail stores. Long term, they see their total number of stores stabilizing at 125.

The balance sheet is strong, with cash rising from $296 to $493 million. The current ratio is 3.24, up from 2.93 times. Except for a $31 million mortgage, there’s no long-term debt and effectively no short-term borrowings. Total liabilities as a percent of equity is 48%. For nine months, cash provided by operating activities was $253 million, up from $168 million in last year’s nine months.

Let’s talk about Sanuk. Deckers bought Sanuk back in 2011 for an amazing price- $120 million plus a big earnout for a company doing $43 million in revenue. Here’s a link to what I wrote at the time.

I’ve never thought Deckers knew exactly what they bought or what to do with it. They got rid of the entire team that had made Sanuk successful. As a public company, they had to push it to grow to justify the somewhat unbelievable price they’d paid. They pushed it in the wrong way and towards the wrong places. We all spent the next five years or so watching things go bad.

Finally, eighteen months ago, Magnus Wedhammar was brought in to run Sanuk. I have no idea why the management change didn’t happen sooner given Sanuk’s results, but we are seeing progress now.

First, Sanuk’s revenues for the quarter were more or less constant at $13.88 million. Those results included a small increase in wholesale and a small decline in direct to consumer. The operating loss for Sanuk’s wholesale business was $350,000. In last year’s quarter it was $120 million, but that included the $118 million asset write down. Let’s estimate the proforma operating loss has been reduced from $2 million in last year’s quarter to $350,000.

I’m not concerned that revenues didn’t rise. Remember, Sanuk had a massive inventory problem that we’re no longer hearing about every quarter. They also had to clean up their distribution which had a bit of a hangover from the failed growth binge. SG&A expense for the brand has been reduced by $1.1 million, and we’re told that the gross margin rose.

Here’s how CEO Dave Powers talked about Sanuk in the conference call:

“As for Sanuk, sales were flat to last year, which surpassed expectations, while the brand continues to rationalize international distribution and clean the market place. Sanuk recently launched the Chiba Quest for both men and women, which is an extension to the Sidewalk Surfer franchise. The initial offering was exclusive to our DDC channel and will be available through our wholesale partners in our fourth quarter. The design and distribution plan for the Chiba Quest is focused around the core center consumer and we’re very encouraged with the initial feedback.”

What’s interesting and positive is that a CEO at Deckers is finally, actually, talking about Sanuk.

Deckers is finally acknowledging what Sanuk is and what it can be (and what it can’t be). With the CEO responsible for the purchase of Sanuk and its performance while he was CEO gone and the investment written off, there’s no pressure to show growth to justify the purchase price.

So, you clean up your inventory and distribution, cut expenses, refocus on the product and what the brand stands for. Maybe, just maybe, you can salvage some of the brand’s cache and see some growth and certainly a positive bottom line.

The most important thing Deckers corporate can do is leave Sanuk alone. I hope Magnus keeps an inflatable bat by his desk with which to beat upon any suit from corporate who shows up to ask him to grow revenues faster. Maybe the bat should be hickory rather than inflatable.

I don’t have a sense of just how much growth Sanuk can reasonably expect as it focuses on brand rebuilding and its market position. Perhaps not enough to make it a serious contributor to Deckers’ earnings per share. If that’s the case, it wouldn’t surprise me to see it sold to private equity once the brand is solid and the bottom line positive.

The changes going on at Sanuk are going on at Deckers’ other brands as well. The conference call is replete with references to changes in inventory and supply management, distribution, and spending. Even if part of the revenue increase turns out to be a one-time event, I’m expecting further long-term improvement in Deckers’ bottom line as the benefits of the restructuring plan are realized.

Trade Shows and Scooters

jeff — Thu, 01 Feb 2018 18:16:39 GMT

I’m back from the first combined Outdoor Retailer/Snow Show trade show in Denver. The most impactful thing I brought back from the show was the flu. You guys who had dinner with me Thursday night- let me know if you got it.

You know, last year I came home from Denver with what turned out to be pneumonia. Two years before that I was hospitalized in Denver with a staph infection in my knee. I don’t know- maybe I’d like to see us back in Vegas. I never got sick there.

With what were probably inevitable glitches and inconveniences resulting from combining two shows in a new location (took me 15 minutes to find the new coat check location and they now charge $3.00), the show got off to a great start. It was busy, positive, and high energy. It reminded me of the SIA show in 1995 or 1996, when exhibitors spilled out of the main hall and filled every nook and cranny they could be shoehorned into. There’s no doubt these two shows belong together, and I’ll spare you my opinion as to what took so long.

The previous week, I went up to the KnowShow in Vancouver to make a speech and walk the show. That was very valuable. Sometimes I forget about, or take for granted, regional shows. Denver was upbeat, loud, crowded and positive. The KnowShow was positive too. But it was focused, disciplined, and structured. What you had was reps and distributors meeting with retailers to do business. Sure, there was some beer and dinners. It wasn’t loud or crowded but you felt and saw the business getting done.

Perhaps as we think about the future of trade shows, we need to remind ourselves how cost effective and business focused the regional shows are and how well they fit industry needs in the days of the functionality offered by the internet.

There were no scooters at Agenda, the Know Show or, as far as I could tell, OR/SIA. I wrote about scooters back in November. It garnered surprisingly little attention, but Nick Adcock, currently the CEO of Spyder Active Sports and a former executive and consultant with many industry brands we all know, made an insightful comment. It might be useful to follow the link and read his at the bottom of the article.

Here’s how I interpret, or maybe add to, Nick’s comment.

When I pull my phone out of my pocket, or sit down at my computer, or pick up a tablet, it’s because I’ve chosen one of those three tools for some task. There may be other tools I could choose for the same task, and sometimes I use them. For example, I often take notes with a pencil on an actual piece of paper. I find it helps my thinking.

My suspicion is that the scooter kids don’t think of digital devices as tools to be selected. It’s not a considered choice. It’s just what they do. They’ve never known anything else. It is the environment they operate in. Not by choice, but by inevitable cultural bias. It’s the way they think, but they don’t actually think about it.

I’m I grave danger here of representing that I actually know what a 10-year-old kid with a scooter thinks. I don’t. Call it a hypothesis. But I haven’t seen any scooter brands at trade shows. I haven’t seen them running ads. Yet I have this troubling sense that there’s a market out there we, or somebody, is missing. Here- if you haven’t seen it- is an article on scooters that was in Rolling Stone. Oh god, if it’s in Rolling Stone maybe it’s reached its peak and is down trending.

There’s apparently some ongoing competition (if that’s the right word) among scooter kids and skaters at parks. Sounds a bit like the competition between skiers and snowboarders in the early 90s. That ultimately turned out to be positive for snowboarding.

Interestingly, though perhaps not surprisingly, skate brands don’t seem interested in scooters. They either don’t believe in it as a category or fear damaging their existing brand due to the tension between skate and scoot. Feels a little like the decisions the skate brands made when longboards first appeared on the scene motivated by the same factors.

I guess they’re right- there is some risk. But risk seems inherent in our existing environment (or any business environment- business is a risk). And an opportunity in a new category (if it still exists) is inevitably full of risk. Want to avoid risk? Be like all the brands that waited to get into longboarding once it was firmly established and “lower risk.” They looked lame and defensive.

If I were a skate brand I might find one of these scooter brands, buy it, and set it up miles from my headquarters to do what I could to avoid contamination and damage to my skate brand. I’d give them a little working capital, support them with my back office, and see what happened. Oh- and apparently all the kids with scooters wear skate clothing. Might be some opportunity there, but I haven’t quite worked that one out.

Meanwhile back at the Denver show, I saw a few interesting things. There was a booth selling bongs. I suppose that was inevitable. Somebody was selling a product for plantar fasciitis relief a nod, I suppose, to the fact that some of us are getting older.

I didn’t spot the usual handful of new, small, typically regional, snowboard brands. Maybe that somehow represents an industry inflection point.

I liked 686’s Hydro Stash apparel with build in hydration in the jacket and SPY’s new snow goggles with electrically variable intensity for different conditions without changing lenses. Hope I’m explaining it right. Here’s the link for the SPY product. Can’t find one for 686.

Burton wasn’t listed in the directory, but they had a room though no booth. Wonder if there’s a backstory there.

I talked to a few people at Sanuk. It seems like 18 months after a badly needed management change, there’s a lot of progress being made. Deckers has written off its huge investment in Sanuk and Martinez, the CEO who presided over the acquisition is gone. I don’t think it’s too late for the brand to recover from earlier missteps. The key is that Deckers not again place unrealistic growth expectations on Sanuk. If they can clean up their inventory, revalidate the brand, grow sales some and make a profit I’d expect it to be a candidate for sale to a private equity firm.

Being public or owned by a public company seems to have been the kiss of death for too many of our industry’s brands. On the other hand, who can blame the owners for taking the big pay day.

Not sure why SOLE, a maker of foot beds, wanted to sponsor all the restrooms. Can’t quite decide if it’s brilliant or brand limiting. I mean, I guess I’ll never forget SOLE, but is that the association they were hoping for?

I’m wondering if, as a result of consolidating two shows, brands saw new customer they might not have seen if they had previously only attended one of the two. Results were mixed among the brands I asked. I suppose that in the days of the internet and fewer small retailers, trade shows have lost some of their importance as places to find new customers. And perhaps that’s why I was a bit surprised to see that November 8-11, 2018 Denver will host the OR Winter Market show followed by the OR/SIA Snow Show January 8-11, 2019. This must be what their constituents wanted or Emerald Exhibitions wouldn’t be doing it. Yet one of the reasons most of us applauded the consolidation of the two shows was for efficiency and to save a few bucks. Now, for at least some attendees, that’s out the window.

I went to SIA’s intelligence day on January 24 and came away feeling more intelligent as usual. I did miss former SIA Director of Research Kelly Davis’ dissection of the data. That’s always been a highlight for me. If you also miss that, you can find Kelly at the consulting firm of Davis + Kaplan. Here’s the link.

I particularly enjoyed Vail CEO Rob Katz’s lunch time presentation that day. I thought the most important thing he said, and I’m paraphrasing here, is that everybody gets excited when you say “innovation” but terrified when you say “change.”

He’s right, but we’re well and truly in a big fur ball of change and whether it’s in how you utilize trade shows or how you react to a bunch of kids on scooters operating in a way you aren’t completely clear on, being terrified isn’t likely to yield a successful approach.