A & F’s Annual Report: Like Other Teen Retailers, But Not.

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As I just noted in my last post on Tilly’s and expect to note as I get to other retailers, the teen market is sort of lousy right now. People seem a bit perplexed as to why it’s fallen so hard, but I believe it’s as simple as a lack of money and jobs for teens. And I suppose I’d add a lack of product differentiation and very broad market with way too many competitors and retailers.

A & F’s results for the year reflect that and some of their responses are interesting, though consistent with what other retailers are doing.  But remember that, unlike many retailers they compete with, they only sell their own brands.  Let’s start with the numbers after which it will be easier to explain their reaction to market conditions.

The Results
 
Net sales for the year ended February 2, 2013 declined 8.7% from $4.51 to $4.12 billion. Be aware that 2012 had a 53rd week in it, which happens from time to time. That’s about a $63 million difference caused by the extra week. Below are the sales by brand and geography for both years.
 
 
 
 You can see that most of the sales decline was in the U.S. and split between the Hollister and Abercrombie & Fitch brands. Gilly Hicks stores are by now all closed, though certain of the product is going to be sold in their other stores. Total Hollister sales, including direct to consumer, were down 14%. Abercrombie & Fitch fell by 10%.
 
Note that the U. S. stores delivered sales of $2.16 billion and operating income of $195 million. The international stores had sales of $1.18 billion and operating income $249 million. And direct to consumer’s revenues of $777 million generated operating income of $295 million. Of the three segments, guess which two they will be focusing on.
 
Here’s what they say about online sales. “Total net sales through direct-to-consumer operations, including shipping and handling revenue, were $776.9 million for Fiscal 2013, representing 19% of total net sales. The Company operates 46 websites including both desktop and mobile versions. In addition, the websites are available in nine languages, accept seven currencies, and ship to over 120 countries.”
 
Like other retailers, they are big on the omnichannel, and are enthusiastic about growing online business. And, like other retailers, they really don’t talk about whether said online sales are incremental or taking away from brick and mortar sales. That to me is the big question nobody seems to be addressing publically. Amazing the analysts don’t ask. Especially since brick and mortar comparable store sales fell 16% during the year while direct to consumer was up 13%.
 
The company ended the year with 843 stores in the United States and 163 stores outside of it for a total of 1,006. That’s down from 1,041 at the end of the prior year. They opened 24 international stores but closed a net of 59 in the U.S. 21 of the closed stores in the U.S. were Hollister. They expect to close 60-70 stores in the U.S. during 2014. They’ve got 500 leases expiring between now and 2016 so they’ve got a lot of flexibility in term of what they do with existing stores.
 
Gross profit at 62.5% was up just one 0.1%. Store and distribution expense went down a bit from $1.981 to $1.908 billion but as a percentage of sales rose with the sales decline from 43.9% to 46.3%. Marketing, general and administrative expense rose from $474 to $482 million. As a percentage of sales, it was up from 10.5% to 11.7%.
 
To add to the fun, there were restructuring charges of $81.5 million and asset impairment charges of $47.7 million. That was offset a bit by $23 million of other operating income. The $81.5 million was for closing the Gilly Hicks stores.
 
Operating income got whacked by the double whammy of lower sales and higher charges, falling 78% from $374 to $81 million. Net income for the year was down a similar 77% from $237 to $55 million.
 
Fourth quarter sales were down 11.5% to $1.3 billion. The quarter’s gross margin was down 4.4% from the same quarter in the prior year. We learn in the conference call that the decline “…reflected an increase in promotional activity during the high volume holiday season, including shifting promotions in the direct-to-consumer business and an adverse effect from the calendar shift.”   Net income fell from $157 million in last year’s quarter to $66 million in this year’s.   Note that net income for the whole year was $55 million.
 
The balance sheet is fine, with a current ratio that’s improved though equity has fallen in spite of still earning a profit from $1.82 to $1.73 billion. I’m particularly interested to see inventory rise 24.4% from $427 to $530 million while sales fell. I would note that the reserve for inventory at February 1, 2014 was $22.1 million, up from $9.9 million a year ago. They remind us that inventory is down 22% from two years ago.
 
Cash at year end is down slightly from $643 to $600 million. There are also some borrowings of $135 million of which there were none last year. Cash provided by operating activities took a tumble, falling from $684 to $175 million.
 
Okay, here’s a fun financial fact. During the year they spent $115.8 million to buy back their own common stock. In addition, in March 2014 they entered into an Accelerated Share Repurchase Agreement with Goldman, Sachs & Co., paid them $150 million, and received 3.1 million shares of A & F common stock. There will be some more shares bought under the agreement.
 
Here’s what CEO Michael Jeffries said about that: 

“Our capital allocation philosophy remains to return excess cash to shareholders.  To that end, on February 27, we entered into a $150 million accelerated share repurchase agreement pursuant to the existing open share repurchase authorization of 16.3 million shares.  The accelerated share repurchase agreement reflects our confidence in our ability to achieve significantly improved performance and create sustainable value for shareholders.  We anticipate additional share repurchases over the course of the year, utilizing free cash flow generated from operations in addition to utilizing existing or additional credit facilities.”

Okay so I’m confused. I’m not a shareholder but if I heard that I’d probably ask Mr. Jeffries why he didn’t just pay me a dividend. I know the concept is that reducing the shares outstanding increases the share price, but I don’t think shareholders feel any “excess cash” in their pockets as a result of the share buyback. And I might wonder how many shares had been issued to executives and other employees in the form of options or grants and the extent to which that offset the buy back. I might even wonder why it was that the company couldn’t find anything better to do to with that cash to increase the value of my shares.    And I wouldn’t just wonder that for Abercrombie & Fitch, but for a whole bunch of other companies.

A little off the topic, but an interesting thing to think about.
 
Issues of Strategy
 
Under the Long Term Strategic Plan section of the 10K, A & F tells us their priorities to improve operating margins:
 
• Recovering productivity and profitability in our U.S. stores
 
“…we are focused on continuing to improve our fashion, particularly in our female business, and increasing brand engagement. We are taking steps to evolve our assortment, improve our product test capabilities, shortening lead times and increasing style differentiation across all classifications. In addition, we will be launching global marketing campaigns….While we expect that a number of initiatives will improve average unit retail over time, we believe we will need to be more competitive on average unit retail in the current environment and will look to aggressively reduce merchandise average unit cost in order to give us that flexibility.”
 
• Continuing our profitable international growth
 
They will be focused on Japan, China and the Middle East and would like to see international reach 50% of revenues. They don’t say by when.
 
• Increasing direct-to-consumer penetration
 
They’d like to see that be 25% of sales.
 
• Reducing expense
 
They’ve got programs in place to reduce costs by $175 million on an annualized basis, though that will be offset by $30 million in new marketing programs. They don’t say this, but I wouldn’t be surprised if the program includes some consolidation of vendors. They note that they’ve got more than 175 vendors, none of which made more than 10% of their product. As described above, their online presence also seems a bit complicated, and I can imagine some consolidations of their web sites as well.
 
• Maintaining capital expenditures at approximately $200 million
 
• Returning excess cash to shareholders
 
This is where they further discuss their share buyback program. You already know how I think about that.
 
A lot of this seems like goals rather than strategies to me. And, as I’m finding myself saying for most every retailer I review, they don’t seem particularly different from their competitors.
 
They go on to describe how important their employees are in creating the store atmosphere and how they are “evolving” their consumer engagement strategy “…to further develop leading digital experiences.”
 
They note that the in-store experience “…is still viewed as a primary means of communicating the spirit of each brand.” Not “the” primary means but “a” primary means. Well, just how does mobile and online interface with brick and mortar? We’re all going to find out how that works together.
 
And, correctly in my judgment, but once again like pretty much everybody else, A & F “…continues to invest in technology to upgrade core systems to make the Company scalable and enhance efficiencies, including the support of its direct-to-consumer operations and international expansion.”
 
A & F, you need to remember is different from other retailers in our space as all their product is their own brands. If those brands are strong enough, that’s a major point of differentiation and competitive advantage. But it requires spending marketing dollars on brand building in excess of what other retailers have to spend. I noted above that they are going to spend more marketing dollars this year.
 
Then of course there’s the minor problem that if a brand isn’t working out, you can’t just say, “Screw it, let’s go get another brand” like retailers who sell third party product can do. Recognizing this, A & F announced during the conference call that they are “…looking at selling third party brands through our channels and selling our branded merchandise through third party channels.” They don’t give any details.
 
If this happens, it will be very interesting to watch. I’m wondering what channels would carry Abercrombie & Fitch or Hollister and what impact that will have on consumer perception of the brand. I have a hard time imaging Zumiez, just to pick an example, carrying their brands. Why would they help validate the brands of a competitor?
 
And then I wonder why an established brand would want to be in a Hollister store where 80% of the merchandise, to pick a number, would still be Hollister. I’m not against this. I don’t even think it’s necessarily a bad idea and I applaud A & F for thinking some out of the box kinds of thoughts. I’ll be interested to see what the details are and how it works out.
 
Management also talked about the Hollister brand moving more towards fast fashion, and its average unit retail (AUR) price coming down. They talk about the competitive environment that requires it. CEO Jeffries put it’s like this:
 
“We think that the opportunity in AUC reduction is in the Hollister brand, and we think that we have an opportunity to reengineer some of that product, take some costs out of the products, which is still maintaining the quality level that is appropriate for that customer and that brand. Most of the cost initiatives will come from Hollister. But as we compare A&F for the rest of our competition, and Hollister, as we are looking at that brand and who the core customer is, we will be better quality than the competition, but there will be some reengineering of that product.”
 
There’s a lot going on at A & F. Much of it is consistent with what other retailers are doing. Like all of the teen retail space, A & F is having to be reactive in a hard market. As it always does, a strong balance sheet will help them. I’m intrigued by how carrying other brands and offering their own brands to other channels will work out. Not doing that has been a source of differentiation for the company and has given them some control of brands that other retailers don’t have. It’s a big change, and for it to meaningful it may be hard to do just a little. The devil, as they say, is in the details. But as I’ve always encouraged risks, thinking that doing nothing is the biggest one, I’m pretty much for trying it.

   

More of the Same: Tilly’s Annual Report

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There is getting to be a certain sameness to all the reports I read from the retailers in our space. It’s not that Tilly’s has done anything bad, though their results aren’t good. It’s just that we seem to be in an environment where it’s hard to do something really distinguishing as a retailer. 

Tilly’s store numbers have grown from 111 at January 30, 2010 to 195 when the latest fiscal year ended- February 1, 2014. Revenues over the same period have risen from $283 to $486 million, up 6% from $467 million the prior year, though comparable store sales fell 1.9% during the year after rising 2.2% the previous year. Average sales per store were $2.396 million, down $2.676 million the prior year. They opened a net of 27 stores during the year. 
 
E-commerce sales were $57.8 million, up from $53 million the prior year.
 
Gross margin peaked in the year ended January 28, 2012 at 32.2%. It fell slightly to 32.1% last year and was down to 30.7% for the most recently ended year. One thing that contributed to the decline was markdowns:
 
“Total markdowns, including permanent and promotional markdowns, on a cost basis were $35.7 million, $32.2 million and $23.2 million and represented 7.2%, 6.9% and 5.8% of net sales in fiscal years 2013, 2012 and 2011, respectively. We accrued $0.9 million and $0.5 million for planned but unexecuted markdowns, including markdowns related to slow-moving merchandise, as of February 1, 2014 and February 2, 2013, respectively.” 
 
They had the smallest increase in SG&A expenses in dollar terms they’ve had in the last five year. They rose by just 3.16% from $118.8 to $122.6 million. As a percentage of sales, they fell from 25.4% to 24.7%.  Operating income was down from $31.4 to $29.7 million.
 
Net income fell pretty dramatically from $23.9 to $18.1 million due to a big jump in income tax expense from $7.4 to $11.6 million. However, it would still have fallen by $1.5 million if the tax provision had been unchanged.
 
Fourth quarter sales fell from $140.7 to $139.9 million. Operating income took a big hit, falling from $14.8 to $8.4 million during the quarter. 
 
The balance sheet is solid and I’d note particularly a minor decline in inventories even as Tilly’s increased its store count by 10%. They note in the conference call that inventory on a square foot basis was down 13.5% over a year ago. That is such an improvement that combined with the markdown expense described above I think they were probably over inventoried before. Cash generated by operations rose a bit from $41.7 to $43.8 million.
 
Now we get to the sameness part. They list four growth strategies; 1) Expand our store base, 2) Drive comparable store sales, 3) Grow our e-commerce platform and 4) Increase our operating margins.
 
In the first place, I don’t see those as strategies, but as metrics against which you measure your strategy. Essentially, however, there isn’t a retailer in our space that isn’t trying to accomplish those same four things and they are certainly not points of differentiation for Tilly’s (or for any other retailer).
 
Their strengths they list as; 1) Destination retailer with broad relevant assortment, 2) Dynamic merchandise model, 3) Flexible real estate strategy across real estate venues and geographies, 4) Multipronged marketing approach, 5) Sophisticated systems and distribution/fulfillment infrastructure to support growth and 6) Experienced management team.
 
Once again, you can see that these are things a lot of larger industry retailers might, and do, claim as strengths. As to whether Tilly’s, or another retailer, is meaningfully better at any of these than the competition, I have no idea. They talk about these in some detail in their 10K (which you can see here). I recommend you take a minute to read pages 3-6 and see if you feel differently about this than I do.
 
They sum it up like this on page 6:
 
“We seek to be viewed by our customers as the destination for West Coast and action sports inspired apparel, footwear and accessories. We believe we offer an unparalleled selection of relevant brands, styles, colors, sizes and price points to ensure we have what our customers want every time they visit our stores. Our extensive selection of third-party and proprietary merchandise allows us to identify and address trends more quickly, offer a greater range of price points and manage our inventories more dynamically. We offer a balanced mix of merchandise across the guys and juniors categories, with additional merchandise in the boys, girls, footwear and accessories categories. We believe this category mix contributes to our broad demographic appeal.”
 
I think we can all imagine other retailers, and brands with significant retail components, saying something similar. Tilly’s own brands, by the way, were 28% of revenues, down from 30% the prior year. Their largest brand accounted for just 4% of sales during the year.
 
Tilly’s President and CEO Daniel Griesemer, consistent with what they say in the 10K, describes how they are trying to improve their performance and notes, “We have reduced our expectations for annual net store growth in the near-term to low double digits compared to our prior targets of mid-teen growth.” He thinks e-commerce can represent a larger percentage of their total revenues. “We just recognized that given all of the initiatives we have in place, our customers engagement and activity online and in mobile really indicates that there is a significantly greater opportunity than just 15% that we recognized that also as we continue to grow out store footprint.” 
 
The more interesting issue, which I’ve raised before, is how you expand e-commerce revenues without cannibalizing brick and mortar and, maybe even more importantly, how you get mobile influenced brick and mortar sales. That’s not just interesting for Tilly’s.
 
Like others, Tilly’s is pursuing an omni-channel strategy and tell us they “…recently completed the implementation of our fully integrated digital platform” with the goal of “…giving our customers seamless access and increased ease of shopping.” 
 
He also expects new stores to be about 10% smaller. I see that as tied to the e-commerce strategy. They are also going to focus on outlet stores, and expects 30% of new stores this year to be outlet.
 
The issue of the outlet stores was one that attracted a lot of analyst attention. They were particularly unsure how that related to Tilly’s differentiated merchandising strategy. CEO Griesemer said Tilly’s was “…increasing the number of brands and increasing the number of products that are new or unique or exclusive…And then we’re using both our digital capability and our catalog capability and in-store capability to communicate that newness more effectively. That includes newness and exclusivity from very large and well-established brands…like Volcom and RVCA and Nike and all kinds. So I’m not just referring to adding on a few small new brands, it’s really across the board.”
 
Now, I don’t completely know what “newness” means in this context, and I wasn’t the only one uncertain. The next question was:
 
“So talking about having more differentiated exclusive merchandise in the stores and then talking about outlet strategy seem to be a bit diametrically opposed. So if you could talk about, when you’re thinking about the Volcom and some on of the world? And how you’re going to get more exclusive product from them? How are you sourcing and what kind of product will be expected to be seeing in the outlets? And are your channel partners, your brand partners comfortable with the idea of you pursuing both strategies?”
 
Mr. Griesemer’s answer was as follows:
 
“They are and they really are diametrically opposed that and they’re not really related. We’ve got a real great team of merchants that are driving the most relevant product for this action sports inspired customer across the broad range of brands and our own private label product in the full-line stores, which remains huge, the majority of the business. And we are launching an outlet specific format that gets us access to true outlet venues. And so that product will be uniquely sourced from our brands and from our own private label product.”
 
“It’s special purchases and things that are relevant and appropriate for the season and for the price point strategy and really don’t get in the way of the full price execution that we have in the majority of the stores.”
 
Another analyst didn’t find that answer completely satisfying (neither did I) and asked if there would be overlap between the products and brands in the outlet and full priced stores. The answer was yes.
 
We’re all sitting here in an economy where there are way too many retailers and our target consumers have a higher unemployment rate than the overall economy and less disposable income than they used to have. Meanwhile, our products are over distributed and differentiation is hard to come by.
 
We’ll be looking at some more retailers and will find they all have similar issues. Tilly’s can do everything well and find it still isn’t really differentiated from its competitors. A tough retail market and lack of a real competitive advantage is a hard place for any retailer to be.

 

 

The Economy, Value of Brands, and Relationship between Brick and Mortar and Online

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I went to the Snowboard Industry Conference. I had fun. I learned stuff. I talked to people. I drank beer. I made a speech. Uh, I made the speech before I drank the beer just to be clear.

During that speech there were three pieces of information I want to pass on to you. It’s not that the rest of the speech wasn’t worthy of your consideration, but these are the three things from it that I really want you to think about because they apply to the whole industry- not just snowboarding. All have been stolen from other sources to which I give full credit.
The Value of Brand Heritage?
The question mark is intentional. The people at Trendwatching.com create a free, more or less monthly, publication on brands and trends. You should sign up for it. It makes you think. Anyway, in one they sent me a couple of months ago, they said the following:
“The reality for many brands is that the needs and wants of the new consumer often don’t align with the narrative that they’ve labored to build. For rising numbers of consumers, brand heritage and story has become at best irrelevant, and at worst an active barrier: one which prevents brands they might engage with from offering a product or service that’s right for them, today.”
 
I added the red. I think you’d agree with me that it’s a pretty significant statement. I’ve written that some older brands may have the issue of aging out, where they keep their traditional customers (who tend to start buying less as they age) but have trouble attracting new, younger customers. I’ve also said that as distribution expands, you may have trouble attracting customers in that broader distribution because they may know your brand, but not your story.
The issue if you’re a heritage brand is that you need both the existing customers and the new ones. Trendwatching.com talked about heritage brands doing unexpected things that were contrary to what their traditional brand positioning would call for. “Unthinkable” is the word they use. One example I remember is the venerable champagne brand Moet Chandon selling small bottles of their champagne in vending machines.
Conventional branding wisdom would say, “Don’t do that! You’ll confuse your customers and damage your market position.” Heritage brands don’t want to damage their market positions (no kidding) but they do have to change it. Because if all they have is the customers they grew up with, someday they won’t have any customers left.
I may have said a time or two, “The biggest risk is not taking any risk at all,” and that applies here. Follow the Trendwatching.com logic. What I think they are saying is that stepping outside of your brand’s comfort zone and doing some things unexpected and taking some apparently inappropriate actions for your traditional market position has the potential to attract those new customers you have to find. But if done well, it won’t be noticed by your traditional customers. Maybe that’s wrong. Maybe it will be noticed, but they won’t care. The goal is to have the best of both worlds.
I can’t do this justice in 500 words. Here’s the link to the Trendwatching.com report.
Lessons from Walmart
Probably not where you were expecting me to get my inspiration from. Let’s start with a quote from Mr. Gibu Thomas, SVP for Mobile and Digital at Walmart.
“With mobile, we can make a small store feel like a big store and a big store feel like the Internet. We can combine the breadth of online and the immediacy of offline to create an experience that means we can be a one-stop shop for you.”
 
In this interview in the Atlantic, he talks about how online and brick and mortar are being made to work together. Basically, what he says is selling stuff online is fine and dandy.   But what’s a lot more important are mobile influenced offline (brick and mortar) sales. He thinks that by 2016, ecommerce sales will be about $345 billion in the U.S. and that online sales through mobile devices will be 10% of that. But he thinks that mobile influenced offline sales will be (drum roll please) $700 billion. He notes that two years ago, less than 10% of the traffic at Walmart.com came from mobile devices. This last holiday season, it was more than half.
In my presentation, I concluded that how mobile influences brick and mortar sales may be more important than what you sell online. Think about that. Online and mobile doesn’t preclude or replace brick and mortar. It enables it. I’ve mentioned this article before. Go read it if you haven’t already.
One thing I thought about was the impact on specialty retailers. One of the implications is that there won’t be any reason to have a store where one third of the square footage is devoted to back stock. Inventory will move between stores and/or the customer’s home as they demand. The trouble, of course, is that there’s no benefit to be had if you’re just one or two stores. I’m wondering if that isn’t becoming another advantage of larger retailers, making the financial model of core stores more difficult.
Government Numbers
And finally, from the Bureau of Labor Statistics, I want to bring you the unemployment rate for 16-19 year olds as of February: 21.4%. For 20 to 24 year olds, it was “only” 12.7%. And I’ve reviewed a study showing that in 2000 45% of teens age 16-19 had jobs of some sort. At the end of 2011, when the study ended, that number was down to 26%. Perhaps it’s improved since then.
There’s not much you can do about that (well, maybe hire some kids) but clearly many of our target customers have less money to spend than they used to. That exacerbates our already over branded and over retailed situation. As always, the flexible, open minded companies with the strong balance sheets will be the ones who do well. Go read some of the stuff I’ve pointed you to and consider taking some risks.  You might be surprised how well they work out.

 

PacSun’s Annual Report and Quarter: Improvement, But More Needed

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PacSun’s 2013 fiscal year ended February 1, 2014, and that’s the year we’re discussing here. You can review the 10K yourself here. I’d like to start with CEO Gary Schoenfeld’s mention in the conference call of the “…four key pillars of our overall strategy.” They are, he says: 

“…our commitment to showcasing distinct brand identities derived from the best of brands that are inspired by the streets, the beaches, the skate parks, music, art, and culture that lives across the state of California. Second is to be a leader in anticipating and recognizing the fashion trends that emerges from our backyard and translate them to the marketplace with the expediency that today’s digital world now requires.”
 
“Third is to bring the creativity, diversity and optimism that is quintessentially California to every consumer touch point through our Golden State of Mind platform. Fourth is to continue to build the top talent organization across the country that similarly thrives on creativity, fashion, and a relentless desire to be the best.”
 
I’m in favor of all of those but especially like number three- the Golden State of Mind- because it’s the only one of the four that might offer a point of differentiation from other retailers. The other three are what all retailers in this space are trying to achieve. Maybe PacSun will do them better than their competitors.
 
PacSun ended its fiscal year with 618 stores. It increased its sales for the year from $785 to $798 million. That’s up from $759 million and $756 million in the two years before that. The fact that there was one less week in fiscal 2013 compared to fiscal 2012 meant that they had $8 million less in revenue than they would otherwise have had.
 
Remember that over recent years their sales results were achieved while closing nearly three hundred stores. They closed 30 during the just completed fiscal year. At the end of the 2009 fiscal year they had 894 stores. They think they will close another 10-20 during this fiscal year. 
 
Comparable store sales were up 2% as they were the prior year and accounted for almost all of the sales increase. That number includes PacSun’s internet sales, which were 7% of total sales during each of the last two years. Men’s apparel fell from 48% to 46% of revenues. Women’s rose from 37% to 39% and footwear and accessories remained at 15%. As for most retailers, the denim category is tough. It fell from 17% to 13% of revenues during the year.
 
Nike, including Hurley, represented 10% of revenues during the year. More interesting to me was that their proprietary brands represented 49% of total net sales, up from 47% the previous year. There was a time some years ago when I would have said (did say) that was too big a percentage to get from their own brands. But times change, and some brands don’t have the pull they used to have with PacSun’s target customers. In addition, as PacSun notes, proprietary brands allow them to offer better value to the customers who are looking for that (there’s a lot of that going around), manage their inventory better and respond to fashion trends more promptly. And hopefully PacSun makes a few more points of margin.
 
The gross profit margin at 25% was the same as the prior year. SG&A expense as a percentage of sales fell from 29.9% to 27.7%. In dollars it fell from $235 to $221 million. Most of the decrease in SG&A was the result of lower depreciation and a decline in payroll and payroll related expenses.
 
The operating loss improved from $38.4 to $21.4 million. The net loss was $48.7 million compared to $52.1 million last year. I should point out that they booked a loss on their derivative liability of $10.6 million compared to almost nothing last year.
 
Sales for the fourth quarter were $218.6 million with a net loss of $22.5 million. In last year’s fourth quarter, sales were $222.9 million and the loss was $19.9 million. Remember that fourth quarter ended February 1.
 
The balance sheet continues to deteriorate, which is what can happen when you lose money. Total equity fell from $64.4 to $18.1 million. As a result, total liabilities to equity increased dramatically from 1.88 to 14 times. The current ratio declined from 1.37 to 1.14. Cash at year end fell from $48.7 to $27.8 million and we see on the cash flow that operations used $7.7 million in cash compared to generating $6.4 million the prior year.
 
I’m not prepared to blame all of PacSun’s problems on the economy but, like many retailers, their numbers have yet to recover from the economy cratering in 2007-8. Economic conditions still aren’t favorable, especially for the target customers of PacSun and similar retailers.
 
CEO Schoenfeld, responding to an analyst question talked about “…the reality of PacSun being I think pretty unique from just about any other retailer in the mall today.” I hope it’s true, because that kind of distinctiveness is what they need. Unfortunately, the analyst didn’t follow up and ask him to clarify that comment.
 
As I’ve said before, the balance sheet places some urgency under PacSun’s need to at least cut their losses significantly and pretty quickly. I agree with most of what they are doing but what they really need is for the youth employment situation to improve. I would not be surprised to see some kind of new financing arrangement in the fairly near future unless PacSun’s results improve dramatically.  

 

 

Intrawest’s First Quarterly Report

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Intrawest recently filed their first public report since going public. You’ll remember that they did an initial public offering (IPO) as a way to restructure their balance sheet after the real estate market for mountain properties collapsed. I wrote about that here and here. Fortress was the company that owned most of Intrawest’s debt. Now that the debt has been converted to equity as part of the IPO, “Fortress beneficially owns 60.1% of the voting and economic equity interests of the company.” 

The company’s second quarter ended December 31, 2013. They acknowledged being late getting this report done due to the pressures of the public offering. I’m going to briefly review the numbers they reported, but remember that these numbers are before the conversion of their debt to equity and completion of the IPO that happened in the first quarter of 2014.
 
Revenue for the quarter fell slightly from $104.3 to $102.1 million. Operating expenses dropped from $109 to $106.7 million. Operating income improved slightly from a loss of $19.6 million to a loss of $18.6 million. They recorded a net loss of $122.2 million compared to a loss of $109.4 million in last year’s quarter. Last year’s quarter included interest expense of $89.6 million compared to $70 million for the quarter ended December 31, 2013. As I discussed in my earlier articles most of that interest expense goes away once the IPO is done because the debt becomes equity.
 
Let me also show you some other income statement numbers below operating income.
 
 
The numbers are in thousands of dollars. The first column is the 2012 quarter and the second for 2013. I’m pretty sure those are all related to restructuring the company and have damned little to do with running a winter resort. But you can see they generate some significant distortions in the income statements and in the year over year comparison.
 
I don’t spend much time discussing the balance sheets of winter resorts. It’s more about cash flow than the balance sheet at a particular point in time. For example, only on winter resort balance sheets have I seen negative current ratios that don’t seem to bother anybody. Hell, they don’t even bother me much anymore. What they do (and what I’d do) is borrow on their lines of credit when they need to pay expenses not covered by cash flow. No reason to incur interest expense until you have to.
 
Revenue from Intrawest’s Mountain segment was $76 million during the quarter, up from $72 million in the same quarter last year. “The Mountain segment includes the operations of the Company’s mountain resorts and related ancillary activities, comprising Steamboat, Winter Park, Tremblant, Stratton, Snowshoe, as well as a 50% interest in Blue Mountain.”
 
Here’s some further information on the Mountain segment. ETP is effective ticket price. RevPar is revenue per available room, and ADR is average daily room rate. They note that the decline in ETP was due to selling more season passes, so that decline is kind of in a good cause. It’s nice to get money up front. They got one-third of their list revenue from season passes or frequency products in fiscal 2013 and the percentage is increasing. 
 
 
The Adventure segment revenue fell from $13.1 to $11.5 million. The Adventure segment comprises CMH, which provides heliskiing, mountaineering and hiking adventures, and ancillary aviation services, which include fire suppression, maintenance and repair of aircraft.”
 
“The Real Estate segment includes a vacation club business, management of condominium hotel properties, real estate management, including marketing and sales activities, as well as ongoing real estate development activities.” Its revenue fell from $17.1 to $13.9 million.”
 
They also provide what they call “adjusted EBITDA” for each segment. Here are those numbers below the revenue per segment.
 
 
I’m not going to spend much time analyzing this report. There’s a lot of noise in the numbers caused by the restructuring and IPO. The key fact is that starting with the June 30 quarter, we’ll start to see how Intrawest can do financially without all the interest and some associated expenses and managerially without the distractions associated with having your balance sheet upside down and having to do an IPO you didn’t really want to do.