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

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

Read more

Hot Topic: A Competitive Strategy We Should Be Thinking About

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

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

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

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

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

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

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

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

ASR and Crossroads Make a Deal; What a Surprise!

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

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

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

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

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

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

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

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

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

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

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

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

Volcom Quarter & Nine Months Ended 9/30/09

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Volcom’s Quarter and Nine Months Ended September 30

Back on October 29th Volcom released a press release with its third quarter results and hosted a conference call on those results. Everybody read, and listened, and analyzed, and wrote stuff.
On November 9th, with no press release, they filed their 10Q for the same time period. Nobody seems to have noticed, and maybe nobody cares. But I do.
I don’t think there should be a conference call until the 10Q (or annual 10K) is out and people have had a chance to review it. The numbers in the press release and conference call are of course the same as in the 10Q. But there’s more detailed information in the 10Q, but some of those numbers only come out orally in the conference call and you have to write really, really fast to get it down. Either that, or listen to the replay fourteen times which isn’t any fun.
Then there’s the part where the analysts ask questions and request some additional “color” on an issue. You do sometimes get some good information this way and “color” can mean more detail. But it can also mean interpretation, estimate, evaluation, etc.
I read the press release and listened to the conference call. But here’s what I got out of the actual, uncolored numbers and management discussion from the 10Q.
The balance sheet is very strong, with about $90 million in liquid assets and no long term debt. It’s strong enough that we don’t even have to discuss it.
At the conference call, Volcom management said that the third quarter results had exceeded their expectations “primarily driven by revenue that was above plan in all three of our business segments. “ It was $9 million higher than the high end guidance provided at the last conference call.
That I suppose is a good thing, though another interpretation might be that they did a lousy estimating at the last conference call. I guess the worse you estimate one quarter, the better you can look next quarter. Oh well- a lot of that going around in this economy. Companies are justifiably cautious.
The conference call message is that they did a lot better than their last estimate but the 10Q tells us that revenue for the quarter fell 15.9% to $93.9 million, and net income was down 18.5% to $13.3 million. For nine months, revenues are down 18.2% to $216.5 million and net income fell 39.8% to $18.3 million. Net income as a percentage of sales fell from 14.6% to 14.1% for the quarter and from 11.5% to 8.5% for nine months.
Volcom reports their results for three segments; United States (which includes most of the world except Europe), Europe, and Electric. For the quarter and for nine months, revenue and gross profit were down in all three segments. Operating income for nine months was also down for each of the three segments. For the quarter, it fell in the United States and Europe, but rose in Electric.
They also report revenue for eight product categories; means, girls, snow, boys, footwear, girls swim, Electric, and other. For nine months, all the categories but snow were down. It rose from $23.3 to $23.9 million. For the quarter, everything but snow and girls swim was down. Snow rose from $22.9 to $23.1 million and girls swim from $110,000 to $156,000.
You can see the detailed breakdowns for the segments and product categories on pages 14 and 15 of the 10Q here. http://www.sec.gov/Archives/edgar/data/1324570/000119312509229368/d10q.htm.
Volcom believes that “…our overall decline in revenues was driven primarily by the deteriorating global macroeconomic environment and the decline in discretionary consumer spending worldwide.” I agree with that and it’s true for most, if not all, industry companies. The trouble is that nobody can do anything about it except protect your brand, control expenses, and take advantage of competitors’ weakness.
The discussion of Volcom’s relationship with PacSun was interesting, and I’m going to quote here what they said.
“Sales to Pacific Sunwear decreased 42.4%, or $17.6 million, for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. We currently expect a significant decrease in 2009 revenue from Pacific Sunwear compared to 2008. It is unclear where our sales to Pacific Sunwear will trend in the longer term. Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our brand continues to be an important part of the Pacific Sunwear business. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.”
It’s almost schizophrenic, isn’t it? ‘Well, the business is going to be down. But it’s important to us! We aren’t quite sure what this business will be in the future, but we want to maximize the business with them. But you got to be careful about customer concentration!’
This is indicative of the same old problem that companies in this industry face every day- especially when they are public. You have to find growth, but you can’t do it in such a way that it damages your distribution and, potentially, your brand equity.
Volcom is also in 105 Macy stores, they pointed out in the conference call.
Volcom managed to increase their gross margin from 49.4% to 51.6% for the quarter and from 49.9% to 50.5% for nine months. This is a good result that they attribute to limited discounting, better inventory management and an increased margin from Japan after they acquired their Japanese distributor in November, 2008. Total gross profit, of course, was down consistent with the decline in revenues. 
Acquiring your distributor increases your gross margin, but also increases your selling, general and administrative expenses. For the quarter, these grew from 27.1% to 30.7% of revenues and for nine months, from 32.5% to 38.3%. This percentage increase was also the result of having to spread costs over a lower revenue base, increased bad debt write-offs, and incremental expenses for retail stores. In dollar terms, these expenses fell in the quarter from $30.3 to $28.9 million. For nine months, they were down from $86 to $82.7 million
The decrease during the quarter was due to reduced commissions because of lower revenues, decreased amortization, bad debt declining by $400,000 and a $1.5 million decrease in other categories including tradeshow, warehouse and legal. A lower exchange rate also helped. These declines were offset by a $1.5 million increase associated with the Japanese distributor.
Volcom is of a good size and in a good market position to take advantage of other brand’s problems and rebounding consumer spending, whenever that happens. In the meantime, they are controlling expenses, trying to source better, managing inventory and doing everything else they can do to maximize those gross profit dollars. Every company should be doing all those things all the time- not just when the economy is lousy.
But there’s a limit to how much good operational management can improve your bottom line. You can’t cut expenses and reduce inventory forever.   Ultimately, I expect Volcom to be one of the strong brands that benefit from the impact of the recession. But where will growth come from, and when will it begin?  

Opportunities for new Labels and Small Brands. What, Exactly, Should You Do?

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I’ve been chanting for the last few months, and maybe longer, that our current economic environment represents a great opportunity for new and smaller brands. At an ASR seminar in September, somebody actually, finally, asked me, “What do you mean by that exactly?”

My answer was that if you were a specialty retailer, and were still standing, you weren’t likely to succeed by relying on big, national brands as much as you use to. I think I cited four reasons this was true.
 
First, a lot of that product has become available in different channels cheaper than you can afford to sell it. Second, a specialty retailer can’t differentiate itself (which it has to do) by carrying the same product everybody else carries. Third, the percentage of revenue large brands get from specialty retailers is declining and even though those brands may be supportive, specialty retailers are simply financially less important to them then they use to be. Fourth, the size of some of the offerings from the large brands makes it tough as a smaller square footage store to carry and effectively merchandise a selection from that brand that meets customer expectations. And of course, we’re not talking about just one brand.
 
I think I’ll add a fifth. If those big national brands are the focus of your store, then you risk being defined by the brands you carry, and I like to think it should be the other way around. The specialty retailer should give credibility to the brands they carry.
 
What Specialty Retailers Want
 If you’re a new label or small brand, and you agree with my above points, what should you do? First, consider this from the specialty retailer’s perspective. I think the ones I’ve talked with would mostly agree with what I’ve said. But that doesn’t mean they are ready to throw out the big national brands they have long term relationships with and make money on. The ones they don’t make money on are another issue, but that’s for a different article.
 
What do they get from, or at least expect to get from, the established, larger, brands?
·         An advertising and promotion campaign that, hopefully, creates demand.
·         Discounts and extended payment terms.
·         Maybe some POP and other kinds of in store support.
·         Reliable, though certainly not always perfect, delivery.
·         Some level of customer service.
·         Margins and a merchandise selection you can make money on. Hopefully.
 
And they also get a comfortable, long term relationship that has a certain momentum to it. I’m not quite sure if that’s a good thing or not.
As a new label or small brand, you might look at that list and think, “Well, I’m screwed. No way can I match that.” You are, I suppose, partly right. But if we cut to the chase, what does a retailer really require?
 
You have to be able to reliably deliver a quality product that offers the retailer some exclusivity and differentiation and that turns well at a good margin. That’s it. And if the retailer is sophisticated, or maybe has read an earlier column of mine, they might also be interested on the possible gross margin return on inventory investment.   If you can do that, I guarantee all the other stuff will fall into place.
On the other hand, if you can’t do that, forget it. You’re not in business.
 
A Checklist
Life’s a whole easier once you’re brand with a track record, so I’ll address my comments to people with new labels that they want to turn into brands. However, most of these items are appropriate to small brands as well.
 
First, we’re assuming you can make and reliably supply a quality product and have identified some trend or point of differentiation that makes the product relevant to the specialty retailer. You’re on your own as far as doing that goes. You also have to have access to some working capital. One of your advantages- maybe your biggest- is that unlike a large brand, you don’t have much to lose by trying something really innovative, creative, and maybe even a little controversial.
 
Second, you’ve got to prepare a business plan. This document will be important not just in clarifying your own thinking, but in building credibility with stakeholders. More on that later.
 
Third, you have to solidify your relationship with a supplier. A known, reliable one would be good. This is not a matter of a few emails and a phone call. It requires visits and takes some time. Show potential suppliers your plan. Explain to them the market opportunity you see. Make sure they understand how they will get paid, and what the longer term potential can be. A supplier can be a crucial source of support.
 
Fourth, figure out your initial target market. Are there three skate parks where you first want to show your product around? What local influential people do you know that can help you build a little credibility?
 
Gotcha founder Michael Tomson, in an interview in the last issue of Transworld Biz, pointed out that when you start, you don’t have a brand- just a label. “You become a brand once you develop equity in that name and label,” he said. That takes time. Maybe five years he suggested.
 
He’s right, and it’s a great distinction. But of course you’re not a label one day and suddenly a brand five years later. There are baby steps along the continuum of brand building. As a new label, you have to pick the place or places where you want to become a brand first. On a mountain, in a skate park, at a couple of local retailers in a club, or some combination of these and others. You aren’t a brand because you call yourself one. You’re a brand when people recognize the name and attribute certain characteristics to it and the product it’s on.
 
Now, it’s time to make some product, and because of all the work you’ve done educating and building your supplier relationship, that hopefully goes well. Or as well as production ever goes. I don’t mean you’re going to make three samples. That’s already happened. It’s time to make enough product to make a quality presentation to potential retailers (assuming you’ve decided you’re not strictly internet) and to begin to build some support and awareness in the local community you’ve chosen as your first target. If somebody says, “Okay, we’ll take it,” you need to be ready to supply and service your new account. “Great! I’ll have product for you in three months,” is probably not the answer you want to give.
 
The steps I’ve listed above don’t happen as independently and sequentially as I’ve listed them. But they all have to happen. Now comes the big moment.
 
Meeting With the Potential Customer
This cannot be a casual meeting where you talk in off the street.  And it cannot be with the second string, substitute, relief buyer. Because of all the work you’ve done, the owner/decision making buyer may have heard of you and your label. Maybe they’ve even had a few kids ask for it. You schedule half an hour or 45 minutes or maybe more and when they say, “I don’t have that kind of time for a brand I’ve never heard of,” you say, “Mr. Owner, we both know it’s a great time to look at new labels, but I have no idea how you’d decide to take a risk on one without spending that kind of time on it.”
 
And no matter what they say, you do not just “drop off a few samples” or let yourself be pushed down to somebody who isn’t in charge.
Now comes the hard work. You have to get ready for this meeting. Find all you can about the shop. Prepare a meeting agenda and send it to them in advance. Put together a folder or a power point for the meeting that might include, but is not limited to:
 
·         The executive summary of your business plan.
·         An explanation of your points of differentiation and the niche the product is going to fill. Why are you going to be competitive?
·         How you are financed and why that financing is adequate.
·         Information on your suppliers. Who they are, how long they’ve been around, who else they produce for. Perhaps a personal letter   to the owner of the shop explaining how you’ve been working with them and that they are prepared to provide product.
·         Personal and business references.
·         An explanation of your distribution strategy. Who else in the area will have the product and when?
·         A copy of your insurance certificate, business license, etc.
·         Brief biographies of the principals and investors.
·         A suggested order, terms sheet, and explanation of how you’ll support the shop in merchandising the product. If you’ve done your homework, you should be able to suggest where in the shop the product should go, and how much space it will take.
·         Your marketing and promotional program- what you’ve done, and what you plan to do.
 
This list isn’t all inclusive, and not everybody will be able to make equally strong presentations of all the items. But if you do this, and you’re making the presentation (which you have practiced for hours and hours) to a business person, I can pretty much guarantee you will blow their socks off. Because for some unfathomable reason, in this industry, they will generally not have seen this level of professionalism from a new label.
 
This whole discussion started with the premise that it’s a great time to be a new label or small brand. Here’s a link to an article in the New Yorker that talks specifically about why opportunities exist right now. http://www.newyorker.com/talk/financial/2009/04/20/090420ta_talk_surowiecki.