Some Additional Financial Information on Mervin

/0 Comments/in /by

For some reason, following the November 7th sale of Mervin, Quiksilver had to file an 8K that showed Quik’s proforma financial statements as if the sale of Mervin had already occurred. To do that, Quik shows us the adjustments they have to make to represent their balance sheet as if Mervin had been sold at the beginning of the 9 months ended July 31, 2013 and to the income statement to show what the Quik income statement would have looked like for the year ended October 31, 2012 if Mervin had been sold at the beginning of that year. 

They do that by inserting a column between Quik’s historical and proforma financial statements that shows the Mervin numbers that have to be subtracted to get to how Quik would have looked without Mervin. Below is the part of the income statement that shows Mervin’s numbers (center column).
 
 
Quik points out in the 8K that this is subject to certain assumptions and doesn’t necessarily reflect what the results would have been if the split had actually happened October 31, 2011. Don’t be confused by the brackets around the Mervin numbers in the middle column. That just shows they are being subtracted to get to Quik’s proforma numbers without Mervin, as shown in the third column.
 
You can see, then, that Mervin’s revenue for that full year was $33.5 million, and they had a gross margin of 52.7%. Seems impressive to me given they make lots of hard goods and much of it, as far as I know, is made in the U.S. Down at the bottom, you can see Mervin had net income of $6.79 million while Quik, including Mervin, lost $10.76 million. Mervin, then, made a big contribution to Quik’s bottom line in that year.
 
I want to emphasize again that these Mervin numbers aren’t necessarily what Mervin would look like on a stand-alone basis. I’d think the revenue would be the same, but issues of taxes, interest expense, allocation of corporate expenses, etc. would probably mean a different result. Still, you can see why Altamont was prepared to pay $51.5 million for Mervin. Actually, if they could rely on Mervin, as a stand-alone company, to earn $6.8 million after taxes on revenue of $33.5 million (20.3%!), they would probably have been prepared to pay more.
 
I had been prepared to see the Mervin revenue number be higher on the assumption that Quik had really pushed them for sales while they were working through their issues. As regular readers know, my point of view is that the bottom line looks so good, and the gross margin is so high, exactly because they didn’t push revenues too hard.
 
The July 31, 2013 balance sheet shows Mervin with accounts receivable of $7.2 million. That’s higher than you’d want to see a snowboard company of this size have at July 31 of any year. I suppose that’s just a reflection of snow conditions the prior season. Mervin inventory was $13.8 million, which doesn’t seem out of line going into the shipping season.
 
Anyway, that’s all there is. Just thought you might be curious.

 

 

How’s Sanuk Doing? Decker’s Quarterly Results

/3 Comments/in /by

So I guess I’ll start by telling you what Deckers says about Sanuk. In the 10Q for the quarter ended March 31, 2013 they provide this Sanuk Brand Overview (page 17). I’ve highlighted the phrase I want you to pay attention to. 

“The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a global presence. The Sanuk brand’s use of unexpected materials and unconventional constructions has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities within the action sports market, as well as other domestic and global markets and channels in which Deckers is already established.”
 
In the June 30, 2013 10Q the Sanuk Brand Overview (page 17 again) says exactly the same thing, but they’ve added the following sentence at the end (which I’ve highlighted): 
 
“However, we cannot assure investors that our efforts to grow the brand will be successful.”
 
They say exactly the same thing in the current 10Q (September 30 quarter). I’m kind of embarrassed I was a quarter late noticing it. But I’m also kind of concerned I noticed it at all. I have so got to get a life. 
 
Why did they think they had to add it?
 
Decker’s management paid $120 million in cash for Sanuk (subject to adjustments at closing) plus earn outs. The deal closed in July of 2011. In its last complete year as an independent company, Sanuk did $43 million in sales. I don’t recall what Deckers has paid out so far for the earnout, but as of September 30, 2013, they estimate the discounted value of the remaining required payout at $47 million (page 7 of the 10Q which you can see here). That payout assumes a “compound annual growth rate” of 16.9%.  They used 17.3% last quarter.
 
Below, from the 10Q, is a table showing Sanuk’s sales by channel and the change from last year’s quarter. Column one is this year’s quarter, and column two last year’s. The last two columns are the dollar and percentage changes (dollars in 000’s). You can see that total sales were up by just $85,000, and they fell in the wholesale channel. 
 
 
And here are the numbers for the 9 months ended September 30 compared to last year. 
 
 
With 9 month revenue of $79.4 million, Deckers has certainly gotten some good growth out of Sanuk in a bit over two years, though growth has now slowed. 
 
Sanuk’s income from operations from its wholesale business rose from $2.86 million to $3.66 million during the quarter and from $16.2 million to $19.5 million for the nine months. Here’s what they say about why the operating income increased in the quarter:
 
“The increase in income from operations of Sanuk brand wholesale was primarily the result of decreased expense related to the fair value of the Sanuk contingent consideration liability and decreased marketing and promotional expenses. The decrease in expenses was partially offset by the decrease in net sales and resulting gross profit.”
 
Let me translate- We cut expenses and, because the brand isn’t performing as well, didn’t have to book at much for the earn out. That helped, but with sales and gross margin down, not as much as we would have liked.
 
We aren’t provided with operating income for the direct to consumer sales. Here’s what they have to say about Sanuk’s wholesale results for the quarter.
 
“Wholesale net sales… decreased primarily due to a decrease in the average selling price, partially offset by an increase in the volume of pairs sold. The decrease in average selling price was primarily due to increased closeout sales in the US, partially offset by increased average selling prices outside the US primarily due to the addition of international wholesale sales, which generally carry higher price points than distributor sales. The increase in volume of pairs sold was primarily due to our wholesale customers in the US and UK, as well as our distributors throughout Europe and wholesale customers in France, Japan and Benelux. These increases in volume were partially offset by a decrease in volume to our distributors throughout Asia. For Sanuk wholesale net sales, the decrease in average selling price had an impact of approximately $2,500 and the overall increase in volume had an impact of approximately $2,000.”
 
Go back and read that carefully. Note that when they talk about the decrease in average selling price in the US, they say it’s “partially offset” by increased prices outside the US. But that’s because they apparently changed some distribution from distributor to wholesale. I mean, it’s true that you get higher margins selling at wholesale than through a distributor, but you also incur more expenses in getting the sale.
 
Net, is this a good thing? Well, we don’t really know, though obviously they think it made sense to change the distribution or they wouldn’t have done it. But they try and spin it as a counterbalance to lower prices due to closeouts in the US, though I don’t think it is. Everything they say is no doubt true, accurate, and complete as interpreted by a squad of lawyers.
 
Here endeth the daily lesson on the care you have to take when reading SEC filings (and press releases and conference calls even more) for any company. Especially when they have to share some bad news.
 
One symptom of the problems Deckers seem to be having with Sanuk is that “…Sanuk brand inventory increased $3.9 million to $12.5 million.” That’s a 45% increase from $8.6 million a year ago. 
 
Deckers, as you know, also own UGGs and Teva, as well as some smaller brands. Total company sales rose 2.75% during the quarter compared to last year’s quarter from $376.4 million to $386.7 million. The gross profit rose from 42.3% to 43.2%. This increase was “…primarily attributable to a shift in the mix of channel revenue with a greater contribution coming from our Direct to Consumer division…”
 
Once again, I feel obligated to point out that you get higher margins from direct to consumer business but also incur higher expenses. The question for any company is whether there’s any of that extra gross margin left after you cover those higher costs.
 
Deckers reported an increase in selling, general and administrative expenses of 20.8% from $99.7 to $120.4 million. About $12 million of the increase was for 37 new retail stores that weren’t open a year ago. Operating income from retail stores for the quarter fell from $321,000 to a loss of $2.26 million. Same store sales revenues rose 1.9% for the quarter. For nine months, operating income from retail fell from $8.5 million in 2012 to a loss of $1.6 million in 2013.  
 
Largely as a result of that SG&A increase, Decker’s income from operations for the quarter declined from $59.6 to $46.5 million. Net income was down from $43 million $33 million.
 
Overall, Deckers is suffering from the same worldwide economic problems that are afflicting everybody else. They also got hammered when their UGG brand, which accounted for 87% of total revenues during the quarter, was hit by spiking sheepskin prices over the last couple of years. My perception is that they’ve managed that pretty well after initially trying to push through more of the cost increase than the consumer would accept.
 
But they are having trouble with Sanuk, and I’m starting to believe that some of that trouble is of their own making. Growth has slowed, they’re having to close out some excess inventory and, probably inevitably, gross margin is down. They’ve cut spending in response.   
 
I’d remind Deckers management of Nike’s various attempts to enter the action sports business some years ago. They were pretty certain of their success, thought they could buy their way in and that they understood the business. As I’ve noted, we went to their parties, ate their food, drank their beer, but for a long time didn’t buy their product.
 
Then Nike figured out that they didn’t understand this business after all. They got humble (or maybe just more determined), developed some patience, hired a few people who knew what was up, and left them alone. They backed them up with their balance sheet and logistic resources even when they weren’t quite sure what the hell those guys were doing and it worked.
 
The situation isn’t the same, and the market has changed. Still, there’s a lesson there somewhere for Deckers and how they might consider managing Sanuk.

 

 

SPY’s Quarter: More of the Same. That’s Good and Bad

/2 Comments/in /by

To sum it all up, the good news is that sales for the quarter ended September 30.2013 rose 2.7% compared to the same quarter last year from $9.89 to $10.15 million and the net loss declined from $1.78 million to $302,000. The bad news continues to be the balance sheet, where the long term debt to stockholders is $20.86 million, up from $17.53 million a year ago. Here’s the link to the 10Q for those who might be interested, though I’m pretty sure most of you read my stuff specifically to avoid having to look at the 10Q. 

I suppose I could stop here and have the shortest article ever. But there are a few financial points that need highlighting and a big strategic issue.
 
The sales amounts are pretty much all SPY branded product except for $100,000 in last year’s quarter. However they note that there was $600,000 in SPY sales this quarter “…which were considered to be closeouts, defined as (a) older styles not in the current product offering or (b) the sales of certain excess inventory of current products sold at reduced pricing levels.” The amount in last year’s quarter was $800,000 and it’s good to see it declining. It’s about 6% of sales. Apparently, they are still clearing up some inventory issues.
 
Sunglasses and optical were 56% of sales. Goggles were 43%. The numbers in last year’s quarter were 64% and 35% respectively. North American sales were 80% of the total compared to 84% last year.
 
The reduction in the net loss was driven by two things. First was a monster improvement in the gross profit margin from 43.5% to 48.5%. 
 
“The increase in our gross profit as a percent of net sales during the three months ended September 30, 2013 compared to the same period in 2012 was primarily due to: (i) improved overall sales mix of our higher margin products; (ii) a higher percentage of lower cost inventory purchases from China; (iii) lower overhead as a percentage of sales partially due to the consolidation of our European distribution center to North America; and (iv) lower sales of closeout products at reduced price levels.”
 
I would be very interested to know what their margin was on the $600,000 in closeout sales.
 
The second was a 19% decline in operating expenses from $5.53 to $4.47 million resulting in an operating profit of $454,000 compared to an operating loss of $1.22 million a year ago. Most of this was the result of a $900,000 decline in sales and marketing expense to $3 million due to “…(i) a $0.3 million decrease in advertising, public relations, marketing events, and related marketing costs; (ii) a $0.6 million decrease in sales and marketing salary and travel related expenses primarily for reductions in headcount.”
 
I’d also note that cash provided by operations over the nine months of the year so far was a positive $2.49 million compared to a negative $4.13 million in last year’s first nine months. Keep in mind that the interest on the shareholder debt is not being paid in cash but being added to principal and that has something to do with the improvement.
 
Enough on the numbers. Let’s talk about the brand’s positioning. Here’s how they describe it in the 10Q:
 
“…the Company believes it has captured the imagination of the action sports market with authentic, distinctive, performance-driven products under the SPY ® brand. Today, the Company believes the SPY ® brand, symbolized by the distinct “cross” logo, is a well-recognized eyewear brand in its segment of the action sports industry, with a reputation for its high quality products, style and innovation.”
 
Fair enough. Now, here’s some branding discussion from the press release:
 
“We have a HAPPY disrespect for the usual way of looking (at life). This mindset helps drive us to design, market and distribute premium products for people who "live" to be outdoors, doing intense action sports, motorsports, snow sports, cycling and multi-sports-the things that make them HAPPY. We actively support the lifestyle subcultures that surround these pursuits, and as a result our products serve the broader fashion, music and entertainment markets of the youth culture.”
 
I think the happy disrespect approach is great as long as they can keep it up. It really can supply some differentiation. Irreverence works in this industry. But note that the second quote talks about the broader youth culture market, and the first does not.
 
Maybe I’m reading too much into this. It seems symptomatic of a problem I’ve been highlighting for a while. How does a company maintain its positioning in the historical action sports industry while expanding into the broader youth culture business? It’s proven to be difficult (Burton? Volcom? Skullcandy? Sanuk?).
 
Long term, SPY’s challenge is exactly to do that. I think it has to if it’s going to find enough growth and profitability to get out from under its debt to shareholders. Strategically, that’s what I’ll be watching for.

 

 

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

/0 Comments/in /by

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

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

   

Skullcandy’s Quarter; Consolidating to Grow

/1 Comment/in /by

Skullcandy’s 10Q for its September 30 quarter came out yesterday. I’ve been through it and the conference call. They are continuing to apply the tactics they’ve adopted as part of their turnaround strategy. That means, in the words of CEO Hoby Darling, “…as we go into Q4, we’re going to do the exact same things that we did in Q3 that are working. And that is we’re going to continue to edit off-price, we’re going to continue to cut accounts that are brand-dilutive. We’re going to continue to cut accounts that break map pricing and don’t allow us to control our brand online.” 

As you know, I like these things. Well, let’s not say I like them so much as I don’t think brands like Skull have much choice. Given their competitors and the nature of the product, what else can they do but start by trying to stake out a market niche they can be a leader in and, hopefully, grow from? If they watch their distribution, and are the leading brand in the youth culture “cool” niche, I suspect they can improve their margins, reduce operating expenses, and bring more money to the bottom line. I’ve described in various articles how I think that works in general.
 
And that would be a fine result if they weren’t a public company. But they are, and the markets want to see regular revenue growth. Skull management thinks they can resume their growth (though they aren’t specific about how much growth) in the second half of 2014. But they are preparing for that growth by hunkering down in a niche where they see the brand as having a competitive advantage.  Ask Burton or Volcom, just to name a couple of brands, how easy it is to grow out of a niche you are strong in when the competitors are big and well resourced.
 
Okay, hold that thought while we take a look at the numbers.
 
I’m going to start with the balance sheet just to get it out of the way. There’s not much to say. It’s pretty strong. Cash has risen to $34.7 million from $1.9 million a year ago. Receivables are down from $60 to $41 million, consistent with the decline in revenue. Inventory has fallen from $55.4 to $48.7 million.
 
Given the sales decline, I might have expected more of a year over year inventory decline. Part of the reason it isn’t down more is that they’ve got $2.5 million of inventory newly tied up in direct distribution in Canada that they started in the September 30 quarter. But they acknowledge that they’ve got some current inventory of high end product that isn’t selling well, and they are working to get rid of it.
 
Notice that the lawyers made them add “Our business could be harmed if we fail to maintain proper inventory levels” as a risk factor in the 10Q. Now, lawyers take an abundance of caution approach to risk factors, but it wasn’t included before and now it is. I conclude that whatever the level of excess inventory is, it’s not completely insignificant. An analyst might have asked about this in the conference call, but the call is before the 10Q is released so they didn’t know about it.
 
Aside from a few bucks in deferred taxes, there’s no long term debt, and equity has risen from $129 to $136 million. The current ratio and total debt to equity are solid.
 
Revenue fell from $71 million in last year’s quarter to $50 million this year. They’ve got two customers who represented $21.4 million of total revenues for the quarter, or 43%. They don’t say this, but I suspect they are Target and Best Buy. That’s kind of a serious concentration.
 
North American sales, which include Canada and Mexico, were $34.8 million down from $57.4 million in last year’s quarter. That’s a decline of 39.4%. International sales rose from $13.6 to $15.2 million, or by 11.8%. They point out that, “Included in the North American segment for the three months ended September 30, 2013 and 2012 are international net sales of $932,000 and $2,976,000, respectively, that were sold from the United States to customers with a “ship to” location outside of North America.”
 
They talk a lot about the tactics I highlighted at the beginning of this article. Get out of off price, enforcing pricing, etc. Good stuff. But when we get to the 10Q and they talk about the reasons for the sales decline, here’s what they say:
 
“Contributing to the decrease in net sales is increased competition in the audio and gaming headphone markets. Additionally contributing to the decrease, and consistent with the strategy stated in previous quarters, we continued to scale back our sales to the off-price channel, which were down approximately $4.4 million, or 74.6%, compared with the three months ended September 30, 2012. We expect sales to the off-price channel to continue to be down more than 50% in the fourth quarter of 2013. There was also a decrease in net sales of $2.2 million as a result of the transition to a direct distribution model in Canada. We also actively stopped selling products to certain retailers and distributors that were violating our policies on minimum advertised prices which further contributed to the decrease in net sales.”
 
Long quote. But what I noticed was that they started the explanation by talking about increased competition, not their distribution and pricing tactics. Does that imply that increased competition is more of a factor than intentionally reduced tactics? I don’t know and no analyst had an opportunity to asking in the conference call. 
 
Gross margin fell from 47.4% to 44.9%. As reported, it was 43.4% in North America, down from 46.6% in last year’s quarter. For the international segment, it was 48.1%, down from 51%. Eventually, they’d like to grow the international business to 50% of their total from 25% right now. I am sure the better margin has something to do with that.
 
The theory is that if you tighten up distribution and enforce pricing agreements, your gross margin is supposed to improve as you cut off price sales. Interesting that we’re not seeing that. Maybe it’s too soon. “The decrease in gross margin was primarily attributable to increased allowances to the Company’s retail customers and a shift to a lower margin product mix,” they tell us.
 
The “allowances” are from 1% to 1.5% that they are giving certain retailers who have inventory of the high end product I mention above. The “shift to lower margin product mix” I’m a bit confused about. Some of you may recall that under Hoby Darling’s predecessor, they were pursuing higher priced, over the ear product that had lower margin, but generated more gross margin dollars. Now, we’re told, they are going to focus on the $100 and under market where they have a strong market position but which apparently has a lower margin than the higher price products, which I thought had lower margins and they are moving away from. That’s another clarification I’d be asking for if I were an analyst and had the 10Q before the conference call. Yes, I’m kind of on a “Conference calls are useless unless you have the actual filing and time to look at it,” rant. Just ignore me.
 
In the conference call they refer to difficult conditions in Europe, an expectation of a highly promotional holiday season, and the ongoing industry consolidation. Those things are not usually good for margins.
 
Selling, general and administrative expenses (SG&A) fell from $23.1 to $22.4 million, or by 3%. There was $1 million in expense associated with closing the San Clemente office. Without that, the decline would have been 7.4%. As a percentage of net sales SG&A rose from 11.3% to 43.8%.
 
In discussing these expenses, they note they invested an additional $300,000 in “marketing and demand creation efforts” and there is discussion about how Skull is continuing to “…leverage our powerful portfolio of brand ambassadors and roster of athletes in fun and compelling ways that generated consumer excitement and demand.” In case anybody hasn’t figured it out, this is a youth culture and fashion brand- not an action sports brand in spite of its roots there.
 
Operating income fell from $10.6 million to $514,000. It went from $7.4 million in North America to a loss of $2.2 million. In international, operating income fell from $3.2 million to $2.7 million. Net income declined from $6.5 million to $1.1 million. Net income was higher than operating income during the quarter due to an $842,000 tax credit.
 
Over on the cash flow, we see that they’ve generated $18.8 million in cash from operating activities during the nine months ended September 30. During the same period last year they used $11.3 million. That’s quite an improvement. You’d expect it given the balance sheet.
 
In 2014, Skullcandy “…plans to selectively add new distribution in the U.S. in underserved geographic areas and where our consumer expects to find us based on where our competition sells.” They are also going to open their first outlet store in Park City before the end of this year. They will be looking to open some additional ones during next year. As you’re all aware, outlet stores have evolved way past where they are just a place to get rid of slow moving merchandise.
 
They are also launching this quarter a blue tooth speaker called Air Raid that will retail for $149. This is their first non-headphone technology product and it’s probably a place they need to go to get the revenue growth they require. As CEO Darling puts it, “…expanding into new adjacent audio categories is an important part of our growth strategy.”
 
Skullcandy is tightening its distribution and pricing with the goal of solidifying its brand positioning. They are trying to lead in the youth culture “cool” headphone space in the $100 and under price range and also offer distinctive product, both in terms of performance and branding, to their customers. If they can do that in what they characterize as a highly competitive, consolidating market, then they have to figure out how to grow out of that niche while maintaining the positioning they are working so hard to achieve.
 
In the action sports business, that’s been damned difficult. We’ll watch to see if their different positioning, even though they are action sports based, makes it any easier.

 

 

Rip Curl Financial Results

/0 Comments/in /by

Thanks to an alert from a reader, and a follow-up with a journalist who wrote about their results, I was able to come up with a copy of Rip Curl’s financial statements for the year ended June 30. There’s no discussion of operations or breakdown of what’s selling and where like we’d have if they were a public company. But I’ll take what I can get and I thought you’d be interested in their year over year improvement. 

You may remember that the company was for sale earlier this year but was pulled from the market when management decided there was no prospect of getting an offer they considered acceptable.
 
The numbers, of course, are in Australian dollars.
 
Total revenue for the year fell 3.4% from $412.5 to $398.3 million. Revenue from the sale of goods was down 3.7% from $406.8 to $391.6 million. Some may ask how I can characterize that as part of an “improvement.” Obviously, it can’t go on forever or there will be no company left. But long term readers know that I think there are a lot of competitive and financial advantages in being focused on managing your distribution and generating operating margin dollars rather than just sales growth. To be clear, I’m not against sales growth, but it should not be your only engine of profit improvement. 
 
Below is a table from their report that shows some of their expenses during the past two years ended June 30 (in thousands of Australian dollars).  The first column is 2013 and the second 2012.
 
 

  
You can see that they reduced their employee, rental, and selling and marketing expenses in 2013 compared to 2012. They had to take a restructuring charge of $4.5 million last year to do it, but the result is an EBITDA that rose 42% from $26.2 to $37.2 million. Rip Curl’s pretax profit increased from $938,000 in 2012 to about $14 million in 2013.
 
Now, anybody can slash expenses and do better at the bottom line. For a while. I guess we won’t know until next year how this looks as a more cohesive strategy and whether there’s further pay off.
 
That’s partly because the restructuring is still going on. Of the $4.5 million provision they took in 2012, they used only $195,000 in that year. $2.7 million was utilized in 2013 and the rest is expected to be used in 2014 as they complete the restructuring. No further charges are anticipated. The restructuring costs were for “…employee termination benefits, exit costs in closing retail stores, write down of assets no longer required and consulting fees.” None paid to me unfortunately.
 
The balance sheet showed some improvement. The current ratio rose from 1.03 (way, way too low) to 1.93. There was a rise in cash from $10.7 to $14.9 million and a decline in receivables from $85.5 to $77.7 million, which you like to see when sales fall. Inventory went up just a bit from $85.4 to $86.7 million. Overall current assets were down about $3 million to $185 million.
 
The improvement in the current ratio is largely the result of some reclassification of debt. Loans and borrowings classified as current liabilities fell from $111.2 to $32.1 million. But non-current loans and borrowings rose from $3.2 to $32.1 million. So basically it looks like they pushed their payment schedule out, though total loans and borrowings did decline from $114.3 to $94.8 million.
 
Total liabilities fell by 12.9% from $198.8 to $173.2 million. The balance sheet improvement plus profit growth means that equity rose from $66.9 million to $86 million. Total debt to equity improved from 2.97 times to 2.01 times.
 
Rip Curl improved during the year, but it’s still a work in progress. We’ll see what happens next year. I’m getting tired of saying that about industry companies.

 

 

Billabong: Restructuring News and Sale of West 49

/4 Comments/in /by

I got four pieces of information for you. If you’d prefer, you can read Billabong’s announcement which came out Monday their time. It’s the first item under “Recent News.” 

The most interesting, which they leave for last, is the pending sale of West 49 to YM Inc., “a leading fashion retailer with a number of highly successful stores including Stitches, Urban Planet, Sirens, Siblings, Suzy Shier and Bluenotes.” They are buying 92 stores for a total of between $9 and $11 million Canadian dollars. Billabong will keep six Billabong and two Element stores in Canada.
 
I recommend you take a few minutes and look over YM’s web site. They say what I think are a number of insightful things about operating and their target market. 
 
YM and Billabong also signed “…an initial two year supply agreement” under which Billabong brands will continue to be sold in West 49 stores. We don’t get any specifics about which brands or how much. At the end of the day, I assume that YM, like any retailer, will choose to carry the brands that sell best at good margins.
 
You will remember that Billabong bought West 49 in the summer of 2010 for $83 million Canadian dollars. At the time, West 49 had 140 store fronts. I can’t tell what the West 49 assets are presently carried at on Billabong’s balance sheet, so I don’t know what the accounting impact of this deal on the income statement will be. But its cash positive and, most importantly, it gets Billabong out from under the lease obligations of those 92 stores. West 49 will now be strictly a wholesale customer, so some margin and revenue goes away, but so do all the operating expenses.
 
We also learn that US$300 million of the previously announced US$360 million 6 year senior secured term loan was received and used pay off the US$294 million term loan and associated interest and fees previously received from Altamont. That gets Altamont out of the picture. 
 
Third, we learn that the seven person board of directors will consist of independent directors Sally Pitkin, Ian Pollard and Howard Mowlem. “The other directors are founder and substantial shareholder Gordon Merchant, Jason Mozingo (nominated by Centerbridge), Matt Wilson (nominated by Oaktree), and CEO Neil Fiske.” The two directors who had represented Altamont are out of there.
 
Finally, we’re told that “Billabong continues to work with GE Capital to provide an asset-based multi-currency revolving credit facility of up to US$100 million. This has been reduced from up to US$140 million in part due to the sale of West 49.”
 
That it’s being reduced because the sale of West 49 reduces their needs make sense. But that’s only “part” of the reason it’s being reduced and we don’t know what the other reason or reasons might be. I’m kind of interested to see that it isn’t done yet and would love to ask why.
 
Billabong’s restructuring and refinancing continues. I’m happy to see it moving forward, but I’m still waiting to understand the results of the customer and brand positioning analysis that started under former CEO Launa Inman. They can restructure and cut expenses till the cows come home, but customers still have to like the brands.