Advantage Big Guys with Solid Processes and Cash Flow: VF’s Quarter

Before I dive too deep into the financial weeds, let’s look at VF’s overall strategy as explained by CEO Steve Rendle and Chief Financial Officer Scott Roe in their conference call discussing the results for the quarter ended June 30, 2017.

Strategy Stuff

Steve: “…while we expect the retail landscape to remain uncertain, we will invest against our largest growth opportunities to create momentum rather than wait for it.”

They have the cash flow and balance sheet to do this.

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Deckers Under Pressure from Outside Investor

Marcato Capital Management has taken what is now a 6% position in Deckers’ common stock.  That Marcato was buying Deckers’ shares first became public knowledge towards the end of May.  Partly in response to this and, apparently, to growing unhappiness on the part of other large shareholders, Deckers has undertaken a strategic review process to determine what should happen to the company.

Recently, Marcato sent Deckers’ Board of Director a letter saying that if the review process didn’t lead to an attractive sale of the company, “…we will be prepared to seek significant Board change at the Company’s next annual meeting by nominating a slate of director candidates to replace the entire Board.”

Here’s a link to the letter in its entirety.  It’s pretty damning of Deckers’ management and board and, if the letter is accurate, they aren’t the only ones unhappy.  I can see why they might be concerned that Angel Martinez, the former CEO and still Chairman of Deckers, is running for Mayor of Santa Barbara rather than focusing on the company.

I guess I see this as the final denouement in the purchase and destruction of the Sanuk brand.  That might not have been the only problem Deckers has, but it’s certainly a major and public symptom of what went wrong.

If I were to read between the lines of the Marcato letter, what I hear them saying is, “Look, UGG is a great brand with real potential, but your attempts to make the company into a big footwear player by buying all these smaller brands has fallen flat on its face.  It’s cost you a pile of money, time, and focus.  Get rid of them or sell the company or we’ll come in and do it for you.”

I will be interested in watching how this moves forward.

Retailers and Landlords. Can’t Live With Each Other, Can’t Live Without

At this point, it’s common knowledge that diminishing mall traffic is leading retailers to close stores and/or renegotiate leases with landlords.  There are also some store openings going on as retailers, hopefully, find locations and configurations better suited to the fast changing brick and mortar and e-commerce world.

But relationships between retailers and landlords are not quite as cut and dried as, “Give me a lower rent or I’ll leave.”

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More Retail Perspective; Zumiez’s Quarterly Report

The conference calls get shorter and shorter as Wall Street and its analysts decide the retail sector just isn’t worth their attention.  I don’t and won’t invest in anything I write about but damn, this feels like one piece of putting in a bottom in the retail sector.  Maybe it will take the recession to finish the process.

Zumiez had a quarter which I’ll describe as uninspiring.  Like every other industry retailer, they find themselves in circumstances of declining mall traffic, sluggish demand and an uncertain future that changes faster than you can react to it.

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A Discussion of Retail Prompted by Deckers’ 10-K

When I report on a public company’s results, it’s always important to review the numbers. But the more I do that the more I realize my focus needs to be on how companies are trying to transition to the new retail environment in circumstances of high uncertainty. That is, they must transition to something they can’t solidly identify yet. That’s awkward.

Deckers ended their March 31st fiscal year with 160 retail stores worldwide. 96 of them were what they call concept stores and the remainder outlet stores. “During fiscal year 2017,” they report in the 10-K, “we opened 17 new stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 stores.” Over the next two years, we learn in the conference call from President Dave Powers, “In regards to our global retail fleet, as we look out over next two years, we are planning to reduce our global company own brick-and-mortar footprint back 30 to 40 stores.”

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More of the Same: Tilly’s April 29th Quarter

These quarterly reports from retailers are getting kind of repetitive.  It’s not just Tilly’s; they are all controlling inventory, slowing store openings (or closing stores), negotiating with landlords, trying to reduce operating expenses, doing omnichannel things and being generally grateful for anything that improves traffic and generates some incremental sales.

Tilly’s conference call printed out to just seven pages, with questions from three analysts.  It’s just remarkable how Wall Street is losing interest in retail.  Someday, this will translate into a huge buying opportunity in retail in general- kind of like Mexico right after Trump got elected.

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“Sacrifice a Little Growth…for Quality.” VF’s March 31st Quarter

Well, there you have it.  At some level, it is that simple.   But let me complete CFO Scott Roe’s comment in the conference call.  “…we are sharply focused on fundamentals and willing to sacrifice a little growth in the near term for quality. Our efforts are clearly paying off in the gross margin line. And we believe our decisions will improve the long-term health of both our brands and the marketplace.”

They improved their gross margin 1.3% (remember that’s a mixed retail and wholesale gross margin and, unfortunately, they don’t break it down between the two).  Distribution matters these days in brand building, and you can afford to give up some sales if you increase your gross margin that much.  In fact, I’d suggest you get that margin increase precisely because you made some distribution decisions that improved the “quality” of your sales.  Scott notes later, referring to off price business, that they’ve “…already cleaned a lot of that up.”

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Zumiez’s New Concept Store

Zumiez has been telling us for some time now, correctly I think, that they are approaching the number of Zumiez stores the U.S. market can support.  They ended their January 31 year with 603 U.S. stores.  No doubt they will continue to selectively open (and close) stores and there is certainly no exact number of stores this market will support.  However, I’m guessing that the number has declined due to a weak economy, an over retailed market, and Zumiez’s omnichannel influenced “trade area” strategy.

That strategy focuses on having the right number of stores in each geographic area given ecommerce and the way Zumiez’s customers are choosing to shop.  Its focus is maximizing revenue in each area.  Its premise is that opening more stores isn’t the only, or even the best, way to do that.

But Zumiez is a public company.  Growth matters, though CEO Rick Brooks (along with some other CEOs) is trying to get the Wall Street community to focus a bit more on the bottom line rather than the top.

I guess after the initial shock you get when something new and different happens, I wasn’t that surprised to see Zumiez’s new concept store WAYWARD open in this Bellevue, Washington mall two stores down from the Zumiez store.  Here’s a picture of the entrance.

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An Intriguing Transaction: GoPro Wants to Sell Some Debt.

GoPro’s press release of yesterday had the following title: “GoPro to Offer $150 Million of Convertible Senior Notes due 2022.”  Well, okay, they’ve run through a lot of cash lately.  That they might want to raise some makes sense.  We don’t yet know anything about the terms.  “The interest rate, conversion rate, offering price and other terms are to be determined upon pricing of the notes,” the press release says.

Here’s the link to the press release.  I’m hoping one of you who has more experience with this kind of deal might call me or post a comment on my web site explaining it.

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It’s Not All About the Omnichannel? Could That Be Okay? The Buckle’s Annual Report

The way The Buckle 10K and conference call come across, you can’t quite decide, at first read, if they’ve made a specific decision to focus on brick and mortar or if they are just way, way behind in online.  I think it’s the former given how they describe their business and how they compete.

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