The Last Intrawest Annual Report: One Benefit of Being Bought

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

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

 

 

PacSun’s Quarter Ended 7/29/06; Numbers and Industry Implications

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I guess if you’re going to talk about a quarterly earnings release, you have to mention the numbers. Okay, fine. PacSun’s net income for the quarter ended July 29, 2006 was $0.14 a share compared to $0.28 a share for the same quarter the previous year. For the six months ended the same date, it was $0.30 a share compared to $0.51 for the same period the previous year. Those are drops of 50% and 41% respectively. Sales for the quarter grew only 1.3% from $309 million in the same quarter the previous year. Sales for the six month ended July 29, 2006 were up only 4.2% to $614 million.

 
What happened? Gross margin fell and expenses rose while sales were flat. That will put the kibosh on the old bottom line every time. On August 31st, PacSun announced that August sales were down 4.0% from August of last year and that same store sales for the period were down 9.4%.
 
If you’ve ever looked at PacSun’s stock chart, you maybe weren’t all that surprised by this. The stock fell about 10% the day after the announcement of the quarterly results, but the trend had been down for a while. The stock peaked at $29.05 way back on March 7, 2005. It fell as low as $20.33 on May 12, 2005, rallied back to almost $28 in November and has been mostly falling since. People who study this stuff tell me that a stock’s chart often shows weakness before the company’s fundamentals turn over. Speaking more generally, the stock market often leads the economy.
 
I hasten to add that PacSun’s chart doesn’t look much different from some other industry public companies, which is maybe a good way to move on to implications for our industry.
 
In its conference call on the quarterly results, PacSun acknowledged that business was tough, and that they were taking the usual and appropriate measures to respond. These included watching costs closely, controlling/reducing inventory and being cautious about their orders. Well, what would you expect them to do? They sounded like a competent management team in touch with reality. I imagine that’s because they are.
 
They also talked about meeting with the leading brands more often and earlier because of the challenging environment. They said they were trying to be “more responsive to their [the brand’s] insights around product.”
 
They talked about weakness in branded fashion denim sales, with the exception being Levis. They indicated they had added a specially designed selection of Levis for back to school in 200 stores and that the results had been “very positive.” They also talked in general about adding new brands for back to school.
 
This caused one analyst to ask whether PacSun was expecting to transition its business away from the core skate/surf brands. I seem to recall a reference to Volcom in the question.
 
PacSun’s answer was that the addition of new brands was a normal, ongoing, practice, that orders had been reduced consistent with the decline in business, and that they had no intention of transitioning the business away from the core brands.
 
But I think the analyst’s question went, or should have gone, deeper than that. What they were really asking was, “PacSun, what are you? Are you a skate/surf/lifestyle brand committed to the same market you’ve always focused on, or will a slowdown in that market’s growth and a saturation of its selling opportunities require that you expand your appeal? If so, how do you do that without losing your original, and very successful, franchise?
 
I think it was four years ago at the Surf Industry Conference where Bob McKnight warned us that the uptrend wouldn’t last forever. If the trend has stopped upping, is it a hiccup, or the beginning or a new kind of market? I don’t know. PacSun, and hopefully lots of other companies, are taking the appropriate tactical steps to manage it in the short term. But the longer term question is the one the analyst may have meant to ask but didn’t quite- What are you?