Is There Value in Reporting Comparable Store Sales? Zumiez’s Quarterly Results

A couple of years ago Zumiez stopped reporting comparable store sales changes and started reporting just comparable sales changes.  That is, they no longer told us how their brick and mortar stores were doing in isolation from ecommerce.

They were one of the leaders in making this change.  Now, it’s how most retailers report.  Their argument was that they needed to think of their market as one sales channel- the proverbial omnichannel.  It didn’t matter where the sale “happened” and they couldn’t always tell where it “happened” anyway.  If a customer first saw a product they purchased on their phone in the store, where’s the credit for the sale?

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How VF Keeps Doing It: Size, Flexibility, Diversification, Disciplined Management Processes, Balance Sheet

VF’s secret sauce isn’t secret.  It’s just hard to do.  Executing the strategy takes leadership, a quality team, organizational consensus, and a certain level of confidence and perhaps willingness to fail to take advantage of uncertain times.

You’ve probably realized that every company needs those things.  So let’s take a deep dive into how VF does what it does with less emphasis than usual on the nuts and bolts of the financials.  The results for the year were strong and some numbers will show up in this discourse.  Here’s a link to VF’s 10-K.  Not suggesting you get down into the footnotes but reviewing the first maybe 10 pages on their business and strategies might be useful.

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Emerald Exposition’s Results, SIA and the Trade Show Environment

Emerald and SIA are kind of, for now anyway, joined at the hip due to their ownership/continued involvement in the Snow Show.  They are both trying to respond to profound changes in the active outdoor market that are changing their business models.  I thought I might kill the proverbial two birds with one stone and see how they’re both doing and speculate on where that interrelationship might go.

Emerald went public on April 28, 2017 at $17.00 a share.  It reached a high of $24.45 on November 29, 2017 and since then has fallen to $12.34 as of 10:17 AM Pacific Time on May 24, 2019.  That’s a decline of 27.4 percent from it’s offering price and 49.5% from its high.

Emerald currently operates “…more than 55 trade shows as well as numerous other face-to-face events.”

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Hibbett Sports: Annual Results and Omni-Channel Progress After a Remarkably Late Start.

“At the end of the second quarter of Fiscal 2018, we successfully launched our e-commerce website,” Hibbett Sports (HS) tells us in their 10-K for the year ended February 2nd.  This isn’t news.  I wrote about it last October when I discussed their quarterly results.

If you’re not already familiar with HS, you might review that article before continuing.  My goal is to bring you up to date based on their full year results and new information in the 10-K.  Let’s start with this chart.  It shows HS’s annual results for the last five year.

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Recession as Part of Your Strategy: Zumiez’s Results for the Year Ended February 2nd

Let’s go right to something Zumiez CEO Rick Brooks says at the end of the conference call on their results.

“…our goals [is to] continue to grow the profitability of the business from [an] operating profit perspective.  Now of course if we have recession we’ll go backwards and we’ll see competitors go away across the globe and we expect coming out of the recession we’re going to emerge even stronger with a stronger share position in the marketplace which will allow us to drive operating margin higher again in that case.”

Rick is careful not to predict a recession, though I’ll bet he believes we will have one eventually.  That’s what I believe.  I’m pretty sure that’s what other executives at various companies believe.  Executives who share that belief are building their balance sheets, strengthening their brands, controlling distribution, and positioning themselves to manage expenses.  Like Rick, they expect a recession will hurt, but they expect it to hurt other more- to their benefit.

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Thanks to Their Australasia Segment, Globe Has a Solid Six Months

Globe reported growth in revenue and income for the six months ended December 31 though, as usual, they don’t give us much information on how they did it.  I’ll tell you what I can glean from the public documents.  All numbers in Australian dollars of course.

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“More of the Same” is Not the Way to Prosper When Change in Retail is Rampant: Big 5 Sporting Goods.

I don’t cover Big 5 every quarter.  However, their 10K for the year ended December 30, 2018 requires some discussion.  They seem to be flailing in the emerging retail environment and seem reluctant to respond to all the changes.  They are betting that their old strategy will continue to work.

It appears I’m not the only one who thinks that’s not the right approach.  Go take a look at a chart of their stock (symbol BGFV) since the start of 2017.  Let’s take a look at the numbers before discussing the strategy.

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Ho Hum. Another Solid Quarter: VF Corporation

You know, this is getting boring.  So boring, though in a good way, that I think I’ve just used the same title for two quarterly reviews.

For the quarter that ended December 31, VF revenues were up 8% to $3.9 billion compared to the same quarter the previous year.  They got to that amount from $3.649 billion in last year’s quarter with $313.7 million in growth of already owned brands, $57.6 million in acquisitions, and a decline of $23 million from sales of brands and $57.4 million from foreign currency.

The two charts below show the breakdown for this and last year’s quarters by market segment.  Here are things to think about as you review them.

Remember that the jeans segment, where revenues declined quarter over quarter, is disappearing from VF via being spun off as a separate public company.  VF doesn’t think jeans is a category which fits the positioning of its typical brand or has the growth potential it expects.  I think they’re right if only based on the segment’s performance.

You may also recall that they changed the segment some of their brands are in.  The most notable was moving Vans from outdoor to active.

Outdoor is described as including “Outdoor apparel, footwear and equipment.” Active is “Active apparel, footwear and accessories.” The work segment is “Work and work-inspired lifestyle apparel, footwear and occupational apparel.”

All three, you already know, include footwear and apparel.  Consider the supply chain and inventory management flexibility this gives VF (or any other company) that has a large number of contract and owned manufacturing plants. To take the simplest example, a Vans t-shirt may be exactly the same as a Dickies t-shirt as a North Face t-shirt except for the graphics.

I’m curious to know how much of the work segment is actually for work as opposed to “work-inspired” and where VF sees the growth opportunity.  I’m guessing in work-inspired but wonder if that’s a long-term trend VF can count on.

The chart below shows total segment revenue and operating profit for each of the two quarters.Note that operating profit is rising in all the segments except jeans, which is being spun off.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active revenues were up 16%, with Vans up 25%.  Management acknowledges in the conference call that a brand the size of Vans can’t grow this fast forever.  But they believe it can sustain low double-digit growth “…in line with their five-year commitment in fiscal 2020.”

Outdoor rose 11%, with The North Face up 14% for the quarter and Timberland flat.  Work was up just 2.24%.

The gross margin, at 51.9% rose by 0.4% “…driven by a mix-shift to higher margin businesses and increased pricing partially offset by costs related to the acquisition, integration and separation of businesses and certain increases in product costs.”  My belief is that jeans is not a higher margin business where you can increase prices.

“Selling, general and administrative expenses as a percentage of total revenues decreased 140 basis points…during the three…months ended December 2018…compared to the 2017 periods. The decrease…was due to leverage of operating expenses on higher revenues and was partially offset by expenses related to the acquisition, integration and separation of businesses.”

You will perhaps note that I’m not discussing which business were sold or bought and with what impact on financial results.  Nor am I talking specifically about the restructuring expenses they mention.  These comings and going and associated impacts are at a higher than normal level right now, but generally I see them as part of VF’s ongoing strategy, so I’m not trying to separate them from operating results.

Net income rose from a loss of $90 million in last year’s quarter to a profit of $464 million in this year’s.  However, the tax provision fell from $533 to $103 million (from a rate of 55.7% to 16.4%) as a result of the tax reform (if you insist on calling it that) bill.  Pretax income rose from $460.2 to $566.3 million.

Other interesting points:

Store count was unchanged from a year ago excluding the impact of acquisitions.

Wholesale business was up 7% organically including 35% in China and “high single digit growth” in the U.S.  However, taking out the Kontoors (the jeans spinoff) business that growth was “…at a low double-digit rate…” organically.

Dickies grew 6% with 20% growth in China.

VF has some projects going on (they especially mention The North Face) to refurbish and resell product.  We’ll see more of that from many brands.

What is it that VF is doing right?  First, it doesn’t hurt to be big.  Size gives you, these days, access to cheap capital.  It also means that you get, in the words of CFO Scott Roe, “…to maintain our level of investment as our revenue increases and we will start to leverage that inflection point hit this year.”  They can, that is, make their sales and marketing budget decline as a percent of revenues.

Second, they’ve managed to stay flexible even with their growth.  Third, their management processes and discipline seem rock solid.  If you’ve never seen it, go to this page then click on “Presentation” to download the PDF on their plans for Vans.  At least page through it.

Here’s what CEO Steve Rendle says in the conference call.  “What’s you’re seeing really is the result of two, three years of really intense work of cleaning up the marketplace, segmenting the customer base and now placing the appropriate products in each of their key retail partners, be it specialty to some of the large nationals. You’re seeing improvement in quality of products. So that is resulting in the velocity of sell-through that prompted that pull forward of the Q4 into Q3…”

VF sees their competitive advantage as their ability run their business better than the competition- partly because of their size.

What could go wrong?

Well, Timberland isn’t working out yet.  Vans, as they’ve acknowledged, can’t continue to grow 25% a quarter, their expectations for China may not pan out, the jeans business isn’t working out, it will be interesting to see if work continues as a fashion trend, and (a problem everybody has) we’ll see how well positioned their brands are when the inevitable recession hits.

For now, though, you just have to be mostly impressed with what they are accomplishing.

 

It Probably Wasn’t the Plan; Abercrombie & Fitch’s November 3rd Quarter.

Back in 2012 A&F had 946 U.S. stores.  They ended the most recent quarter with 684 (plus 195 international stores).  In the immortal words of Gary Schoenfeld in his first earnings conference call as CEO of Pac Sun however many years ago it was, “Nobody needs 900 Pac Sun stores.”

Nobody needed 946 A&F stores either.  Given how the retail market is changing, the 28% reduction was probably a great thing, if not part of the plan.  It’s even more interesting to note that 400 of the U.S. stores are Hollister and only 284 are A&F branded.  Those of you who have been around a while may remember, when Hollister opened (the first store was in 2000), that as an industry we were pretty dismissive of the concept.  Don’t know if that’s because we didn’t think it would work, were afraid of it, or wished we’d thought of it first.

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Popups, Extra Week, Higher Costs; Tilly’s Quarter

Tilly’s sales for the quarter ended October 28th were down 3.9%, or $6 million, to $146.8 million from last year’s quarter.  However, the decline was due to “…the calendar shift impact of the 53rd week in fiscal 2017’s retail calendar, which caused a portion of the high sales volume back-to-school season to shift into the second quarter this year versus the third quarter last year, reducing last year’s comparable net sales base for the third quarter by approximately $14 million. This calendar shift impact was partially offset by higher comparable store sales and net sales from seven net new stores totaling approximately $8 million.”

Keep that $14 million in mind as you think about the quarter over quarter comparison.  That decline for the quarter was partly offset by seven new stores and higher comparable store sales (4.3%-  includes e-commerce) totaling $8 million.

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