Somebody Wants to Buy Amer Sports

Back on September 11, due to some speculation in the media, Amer Sports confirmed that it had “…received a non-binding preliminary indication of interest…from a consortium comprising ANTA Sports Products Limited and the Asian private equity firm FountainVest Partners…” to buy all of Amer Sports’ shares at a cash price of forty Euros per share.

Here’s a link to the Amer Sports web site.  The brands the company owns include, among others, Salomon, Arc’teryx, Armada and Atomic.

ANTA describes itself as follows:

“Established in 1994 and listed on the Main Board of Hong Kong Stock Exchange in 2007, ANTA Sports Products Limited (stock code: 2020.HK) is the leading sportswear companies in China. Up to Nov. 2016,ANTA’s market value was summed up to USD 7.39 Billion.”

“For many years, we have been principally engaged in the design, development, manufacturing and marketing of ANTA sportswear series to provide professional sporting goods to the mass market.”

“In recent years, we have started moving full steam ahead with the strategy of “Single-focus, Multi-brand, and Omni-channel” to deepen our footprint in the sportswear market.”

The ANTA web site can be found here.   They are a public Chinese company with reported 2017 revenue of 16.7 billion renminbi (about US$ 2.4 billion at the current exchange rate).

ANTA’s purchasing partner FountainVest “…FountainVest is a leading private equity firm investing in companies that benefit from China’s growth, now managing total assets over US$4.5 billion…Our investment strategy has consistently focused on businesses that benefit from the secular growing needs and rising aspirations of the expanding Chinese middle class. While we are a generalist fund that invests across sectors, we have strong experience in areas of healthcare, consumer retail, media & entertainment and lifestyle. Our deal types are both control and growth capital oriented, with us having a high operational focus and a dedicated portfolio management team.”

And here is their web site if you want more information.

On October 11 Amer Sports, by press release, confirmed that there have been discussions between Amer Sports and the potential buyer “…to ascertain whether there is a basis to commence a more formal process to facilitate a possible recommended transaction.”  You can find the press releases here if you’re interested.

We are a long way from a deal, but they’re talking.  As of the end of June, Amer Sports had 116,517,285 shares outstanding.  The stock price closed at 33.89 Euros on October 12.  A purchase price of 40 Euros would represent a premium of 18% and an enterprises value of 4.66 billion Euros.    The stock price has risen from around 29 Euros since the September 11 announcement, with most of the increase coming at the time of the announcement.  It will get closer to 40 Euros if the market comes to believes a deal is more likely to happen.

A quick look at ANTA’s balance sheet leads me to believe they don’t have the financial capacity to pull off the deal alone, hence the involvement of FountainVest.

I don’t have any staggering insights on this transaction, but I hadn’t seen it mentioned and thought you’d be interested in knowing about it.  We are in an industry where it’s good to be big.

Hibbett Sports, Inc: “At the end of the second quarter of Fiscal 2018, we successfully launched our e-commerce website.” Wait- What? That Can’t Be Right.

From time to time, just for fun, I review public filings of companies I haven’t written about.  Hibbett Sports, with 1059 stores in 35 states at the end of their August 4th quarter, is one of those companies.  The quote in the title got my attention, to put it mildly.

It’s not quite as bad as it sounds, because their fiscal 2018 2nd quarter was a year ago.  Here’s a link to their web site.   Everybody, even Hibbett management, will concede they are way behind the internet/e-commerce/omnichannel curve.  How might this have happened and what are they doing about it?

Here’s how they describe themselves.

Hibbett Sports, Inc. is a leading athletic-inspired fashion retailer primarily located in small and mid-sized communities across the country. Founded in 1945, Hibbett stores have a history of convenient locations, personalized customer service and access to apparel, equipment and coveted footwear from top brands like Nike, Under Armour and Adidas…As of August 4, 2018, we operated a total of 1,059 retail stores in 35 states…

The Hibbett Sports store is our primary retail format and is an approximately 5,000 square foot store located primarily in strip centers which are usually near a major chain retailer such as a Wal-Mart store. Our Hibbett Sports store base consisted of 820 stores located in strip centers, 27 free-standing stores and 212 enclosed mall locations as of August 4, 2018.

Our primary strategy is to provide underserved markets a broad assortment of quality brand name footwear, apparel, accessories and athletic equipment at competitive prices in a conveniently located full-service environment. At the end of the second quarter of Fiscal 2018, we successfully launched our ecommerce website. We will continue to grow our online business aggressively, while continuing to enhance our stores to improve the overall customer experience. We believe that the breadth and depth of our brand name merchandise consistently exceeds the product selection carried by most of our competitors, particularly in our smaller markets. Many of these brand name products are highly technical and require expert sales assistance. We continuously educate our sales staff on new products and trends through coordinated efforts with our vendors.

There are a few phrases in that lengthy quote I’ll come back to.

  • “…located in small and mid-sized communities…”
  • “…provide underserved markets a broad assortment of quality brand name footwear, apparel, accessories and athletic equipment at competitive prices in a conveniently located full-service environment.”
  • “…the breadth and depth of our brand name merchandise consistently exceeds the product selection carried by most of our competitors, particularly in our smaller markets”
  • “Many of these brand name products are highly technical and require expert sales assistance…”

First, let’s look at their numbers to provide an introduction to Hibbett.  Below is a chart from their most recent 10-K that gives summary income statement numbers for the last three years.

 

 

 

 

 

 

The most recent fiscal year ended February 2, 2018.  As you see, sales and comparable store sales haven’t performed well, and net income is down a bunch.  Note that the most recent year was a 53-week year, which adds a week’s worth of revenue ($16.9 million) compared to the prior two 52 week years.

Here’s the breakdown of their revenue.  They are increasingly footwear focused.

 

 

 

 

Below is a breakdown their store locations as of February 2nd.  Texas and Georgia have the most stores.  There are only 6 in California and none up here in the Northwest.  The Northeast is also underrepresented.  At the end of their February 1, 2014 fiscal year, they had 927 stores.  At the end of their most current fiscal year, the number had risen 16.4% to 1,079.

 

 

 

 

 

 

 

 

The balance sheet at August 4, 2018 was pretty solid.  $120 million in cash, inventory down 10.1% compared to a year ago even with quarter over quarter sales growth of 12.3%.  Solid current ratio, no long-term debt.  For the 26 weeks ended August 4, cash provided by operations was $62.5 million, up from $57.2 million in the same period the previous year.

Now that we’ve been introduced to Hibbett properly, Let’s get back to the phrases I pulled from the quote and try to figure out why Hibbett is so far behind the curb in e-commerce.  They know they are, and their first listed risk factor is, “If we are unable to successfully maintain a relevant omni-channel experience for our customers, we may not be able to compete effectively and our sales and profitability may be adversely affected.”  That’s from their 10-K from last February.  It ought to say “implement” instead of “maintain.”

SGB Executive had an interesting interview with Hibbett management focusing on their e-commerce efforts.  You can read it here.  Hibbett has just launched “buy online, pick up in store” as part of their omnichannel efforts.

How does a large retailer get so far behind on something this fundamental?

Profitability and a strong balance sheet can have something to do with it.  It reduces the sense of urgency, I guess.  As you know, my point of view is that being profitable and having a great balance sheet are requirements for addressing the changing retail environment- not a reason to avoid it.

Perhaps that their stores are in smaller, under served communities has something to do with how they thought about e-commerce.  I can understand that, but the definition of “under served” has changed in the days of the internet, Amazon, and endless places to get information on and buy anything.

I also question whether the “breadth and depth” of their merchandise is better than that of their competitors in the modern retail environment.  I guess that depends on how they define their “competitors.”

Overall, their description of their business and competitive positioning with particular focus on smaller, underserved markets was valid- even insightful- in the brick and mortar environment of some years ago.  That customers belonging to their loyalty program generate 60% of their transactions says to me it’s still important.

They are running as hard as they can to catch up with the online world but have a way to go.  E-commerce sales represented 8% of revenue in the most recent quarter, and “the bulk” of their online orders are fulfilled from stores.  I don’t know how much “the bulk” is.

Apparently, they used their web site to get rid of clearance product.  That’s partly responsible for the decline in inventory.  Hopefully, they’re through that problem and have realized that using their web site for too many closeouts can have a negative impact on the Hibbett brand.  Management also talks in the conference call about e-commerce sales separately from brick and mortar.  Encouraged by the analysts they talk about a $70 million in revenue breakeven for e-commerce.

The best retailers resist distinguishing between e-commerce and brick and mortar revenues, recognizing that there’s only one revenue stream.  With total revenue declining in the last complete year, it’s kind of pyric victory for Hibbett to talk about a break even in e-commerce.  An online sale that comes at the expense of a brick and mortar sale doesn’t help you.  As most players have figured out, you end up with the same revenue but more cost.

Hibbett seems to be making some technical progress, though they’ve got a ways to go.  Perhaps more importantly, it sounds like they require an attitude adjustment.    I’ll feel way better about Hibbett once management sounds focused on how the integration of online and brick and mortar into a single revenue stream meeting customer requirements.  Until then, I’m going to think of their e-commerce efforts as reactive and defensive.

Vans Investor Day: Can They Really Do This-$3 Billion to $5 billion in Five Years? Maybe They Can.

On September 12, VF’s management team made a lengthy presentation to the investment community outlining Van’s expected future growth. In the accompanying press release they stated, “Over the next five years, the Vans® brand expects diversified and balanced growth across all product categories, channels of distribution and geographies, driven by disciplined execution and investment to continue to fuel growth.”

They expect to grow footwear “…at a five-year compounded annual growth rate (CAGR) between 10 percent and 12 percent.”  The CAGR for apparel and accessories is projected to be between 13% and 15%.  Direct to consumer is expected to be between 13% and 16% including digital growth of 30% to 35%.

Wow.  Just “WOW!”

Just so you know, I’m working from the presentation slides, press release, and some miscellaneous comments I found.  I couldn’t listen to it live and so far, there’s no transcript available, though the press release says it will eventually be.

Certainly, VF has done a fantastic job with Vans since acquiring it in 2004, growing it, we’re told, at a 17% compounded annual rate until it’s reached $3 billion in revenue.  VF President and CEO Steve Rendle says, “I am confident in the Vans team’s ability to deliver on a bold $5 billion revenue target which will be a key driver of VF’s plan to deliver superior total return to shareholders over the next five years.”  (I added the emphasis).

In writing about VF and Vans, I’ve made three main points.

First, that I have tremendous respect for VF’s systems and procedures, discipline, and portfolio management talents.

Second, echoing CEO Rendle, VF has a dependence on Vans for its overall corporate results.

Third, that I’ve never seen a brand that could grow forever without hitting some form of roadblock.

Will Vans, at least for five more years, be the exception to the rule?  In the immortal words of Rocky Rococo, “Maybe yes, maybe no.”  Let’s look at both cases.

Maybe No

The case for “no” isn’t hard to state.  Vans make’s shoes, apparel and accessories that aren’t functionally different from other brand’s shoes, apparel and accessories.  Differentiation is based largely on marketing (though that means something different from what it used to mean).  The products are already widely distributed (JC Penney, Kohls, Sears.com, Walmart for example) in a market where creating differentiation from functionally identical products has required some caution in distribution bordering, at times, on scarcity.

Where is all this new revenue going to come from?  Who are the new customers? In the presentation David Gold, Vans Vice President for Business Strategy tells us that Vans has only 6% of a $41 billion market opportunity.  For apparel it’s 1% of a $46 billion opportunity.

Vans describes itself as a skateboard-based brand.  “Skateboarding is a core differentiator for Vans,” they say.  Just to go old school for a minute, we’re seen an awful lot of brands in our industry get into trouble when they tried too hard to expand beyond their core.  In the past, I’ve written about, nay warned, to be cautious in expanding beyond the point where your potential new customers can identify with the brand because your brand strength is your main point of differentiation.

Vans sounds like they are extrapolating from the past into the future- perhaps an over simplification.  There’s no discussion in the slides of, for example, the possibility (near certainty?) of a recession in the next five years or of some other unexpected geopolitical or financial inconvenience.  And the idea that the growth will happen across all product categories, channels and geographies with nary a negative surprise does not reflect my business experience.

The presentation (download it here) is full of warm and fuzzy affirmations.  Here’s one: “VANS REMAINS AUTHENTIC TO OUR CORE CONSUMERS AND WELCOMING TO ALL.”  Can they do that?  Is it really a source of growth of the magnitude they project?  I’ve just been writing above (and in many articles over the years) about how destructive to brands that approach can be.  Go page through the presentation and see for yourself.  Are they/will they/can they all be true?  I don’t know.  When we get to the “Maybe Yes” discussion below, I’ll tell you why they might be.

The presentation is like a list of all the things all brands and retailers need to do.  I’d say it’s an accurate list.  Vans sustainable competitive advantage, then, is in its ability to do more of these things better than everybody else with more flexibility, and to develop more actionable insights.  Are they really able to execute that much better than their competitors?

The “Maybe No” case is simple to sum up.  Despite the superlative job VF has done in managing the Vans brand, where are they going to find the additional customers and revenue in an already over supplied market facing a probable recession with product that’s not fundamentally different from their competitors without damaging the brand?  Is doing the same stuff everybody else needs to do only better the source of a sustainable competitive advantage?

Maybe Yes

Let’s start by addressing the recession issue.  It’s not that a recession wouldn’t impact Vans and VF.  It will impact everybody.  But somewhere in the depth of VF (And, I can tell you, in other companies) there is recognition that the next recession will probably be the way the retail consolidation plays out.  I know things are looking better at retail right now, and let’s hope it continues.  Longer term (I’m always looking longer term) the consumer’s ability to demand more for less, the cost of providing what they demand, the continuing evolution of ecommerce, and the advantages of being a large brand or retailer suggest consolidation isn’t over.  VF and Vans will be a winner in that scenario.

Size matters.  As I’ve written about our market in general there is an advantage to being large and having a strong balance sheet.

Vans and VF have those advantages and discuss them in the presentation.  In a slide titled “Power of VF” they point to the leverage the size and sophistication of VF gives Vans.  These include:

  • Deep and complex consumer research
  • Expert-led innovation
  • Geographically diverse, efficient supply chain
  • International and DTC platforms
  • Access to capital

I suspect some of those advantages will decline over time.  Right now, they are significant.

The most interesting part of the “Maybe Yes” case is the implication that distribution doesn’t matter the way is used to.  I scoffed at brands a few years ago that said, “Don’t worry- we’re going to be in Walmart but it won’t hurt our brand.”

Vans will be thoughtful about distribution.  More importantly, they are saying that their research, resources, flexibility, brand power, speed of reaction and process of connecting to the carefully segmented consumer through surprises and experiences obviates some of the traditional concerns about distribution.  They believe they can do these things better than most of their competitors.  If so, brand perception and attractiveness will be determined more by Vans actions and less by brick and mortar retailers (Except of course for Vans own retail stores).

Finally, they’ve got the Vans brand to work with.  It’s powerful, established, and a broad range of customers feel connected to it.  Not a bad place to start.

Those are the “yes” and “no” cases in simplified form.  Vans is well into an experiment to see if a truly “omnichannel” approach to branding and customer engagement change some of the rules for growing a brand.  Because Vans is so critical to VF’s overall performance, they need to make it happen.

Zumiez’s Strong Quarter; Stores, Stash, Expansion, Strategies, Shrinkage, Wayward, the Numbers

That’s a lot to cover.  I had some hope this would be short.  Let’s start with strategy and quote CEO Rick Brooks from the conference call.

“Our top and bottom line results…are a direct result of our relentless commitment to winning with today’s empowered consumer. Our success continues to be driven by the strength of our diverse and differentiated assortments that are presented through a seamless shopping experience across all consumer touch points, accompanied by the world class customer service that our teams continue to deliver globally.”

“With the increasingly blurred lines between retail channels, we’ve moved toward a channel-less world in which the empowered consumer isn’t focused on going into a store or buying online but rather transacting with a trusted retailer. With the barriers between the physical and digital worlds coming down and the increased speed at which individuals communicate, trend cycles are rotating faster than ever before. The same holds true for the pace at which demand for emerging brands can go from local to global in nature. In this type of environment where consumers can access so much information, a new level of transparency in retail is being created that is driving out inefficiencies within the market and forcing consolidation in the industry.”

It’s conceptually that simple, but really complicated to do, requiring a long-term perspective, flexibility in thinking and structure, a different attitude towards risk, and a strong balance sheet.  What, exactly, is the formula for management structure and discipline on the one hand, but raging flexibility on the other?

The bottom line, as you see in the quote, is that Rick thinks many of Zumiez’s competitors can’t do it.  Is just operating at the level required by the new environment now a long term strategic advantage?

Rick also commented about trends rotating faster than ever.  A couple of years ago, Rick was expressing the belief that longer trends would return.  It looks like he’s changed his thinking as the competitive environment required.

Okay, on to Wayward.  There’s no mention of the Wayward stores Zumiez has opened.  There are only two, they haven’t been open long, and the numbers are obviously not significant.  But I liked the concept and am kind of curious.

At the end of the quarter on August 4, Zumiez had 611 stores in the U.S., 50 in Canada (Room for more growth there? I’d guess not much), 35 in Europe- Blue Tomato, and 7 in Australia- Fast Times.  They expect to open 13 stores this fiscal year including five in the U.S., seven in Europe, and one in Australia.  I want to put that in context of their comment on expansion in the 10Q.

“We plan to continue to open new stores in the Canadian, European, and Australian markets. We may continue to expand internationally in other markets, either organically, or through additional acquisitions.”

That’s part of a risk factor telling us that theirs plans for international factors could be, well, risky.  Zumiez has acknowledged that they were running out of room for new stores in the U.S.  However, their concept of “trade areas” and a channel-less world coupled with ongoing industry consolidation makes me wonder if they can’t grow revenues in the U.S. without more stores.  I am certain they are wondering too.  There’s no reason that concept would only apply to the U.S.

CFO Chris Work reminds us in the conference call that Zumiez is doing almost 100% of their ecommerce fulfillment in their stores.  It sounds like they are doing it without much added expense.  In a previous call (but only one I think) Rick told us how in store fulfillment was allowing Zumiez to spread the cost of these sales over the existing expense structure.  That is very powerful.  I’m surprised nobody is pushing for more details.

In recent quarters, Zumiez has noted an issue they are having with shrinkage.  Chris says it cost them about $5.4 million in 2017, and they are continuing to work on it.  I wanted to raise it in conjunction with in store fulfillment because I have the sense the two happened around the same time.  I know correlation doesn’t prove causality, but I’m intrigued.  I almost hope it’s somehow related to that.  Zumiez decades long process of hiring, supporting, training, and advancing people who are part of Zumiez’s customer base has been key to their success.  I would think/hope it would mitigate against shrinkage.  If suddenly it’s not, I’d be concerned.  Shrinkage in the quarter was 0.3% lower than in last year’s quarter.

Last, but not least, their loyalty program called Stash.  What I wanted you to think about is that loyalty programs become more valuable as the quality of your algorithms and customer data rises.

Finally, we get to the numbers.  Revenues in the quarter rose 13.9% to $219 million, up from $192 million in the same quarter last year.  U.S. revenues rose 14.2% from $165 to $189 million.  In Canada, the increase was from $11.3 to $12.5 million.  Europe rose 14.8% from $11.3 to $16.1 million.  Australia rose from $1.687 million to $1.787 million, or by 5.5%.  Overall, U.S. revenue represented 86.15% of the total, up from 85.94 in last year’s quarter.  I imagine the U.S. percentage might be lower if not for the strong U.S. dollar.

“The [revenue] increase primarily reflected an increase in comparable sales of $12.8 million, an increase of $9.9 million due to the calendar shift to include an additional week of back-to-school season, and the net addition of 11 stores (made up of 10 new stores in North America, 5 new stores in Europe and 1 new store in Australia partially offset by 5 store closures in North America) subsequent to July 29, 2017.”

Comparable store sales rose 6.3%.

The gross margin rose from 31.1% to 33.1%.  “The increase was primarily driven by 160 basis point leveraging of our store occupancy costs, 30 basis point increase in product margin and 30 basis points in lower shrinkage of inventory partially offset by 30 basis points in higher shipping costs.”  Note the impact of leveraging occupancy costs and refer to the discussion of in store ecommerce fulfillment.

SG&A expenses as a percent of net sales decreased 150 basis points for the three months ended August 4, 2018 to 30.0%.  “The decrease was primarily driven by 140 basis points from the leveraging of our store costs and 40 basis points decrease due to the timing of annual training events partially offset by a 40 basis point increase related to the accrual of annual incentive compensation.”

There’s that improvement due to leveraging store costs again.  I’m growing very fond of in store ecommerce fulfillment.

Net income rose from a loss of $608,000 to a profit of $4.38 million.  That’s usually what happens when you increase revenue and gross margin while reducing expense as a percent of revenue.

The balance sheet remains strong with more cash and no long-term debt.  Cash provided by operating activities was $15.5 million for six months, up from $3.77 million in the same six months last year.  I’m wondering why they’ve got $5.6 million in short term debt on the balance sheet given all the cash they’ve got.  Maybe it’s a non-U.S. thing.

Good quarter.  As usual, there are interesting things to think about in the 10Q and conference call if you read carefully.  I look forward to their next quarter.

“A Destination Retailer.” Tilly’s August 4 Quarter

In its 10-Q Tilly’s describes itself as “…a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle.”

We all know what a destination retailer is; a store that customers go out of their way to shop in.  I think Tilly’s has to be a destination retailer because of where they locate their stores; “…in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.”  If you are a destination retailer, you can be a bit more agnostic about locations.  You can put them where it makes  sense from a cost of operation perspective.  As they put it in a recent 8-K filing, “We have a flexible real estate strategy across real estate venues and geographies.”

Tilly’s “…operated 226 stores, including three RSQ-branded pop-up stores, in 31 states as of August 4, 2018 …Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.”

I want to note the use of pop-up stores.  These are not just tents which are there for a day or a week.  They average 2,600 square feet.  Tilly’s standard stores average 7.600 square feet.

I expect these are short term (months?) leases from owners happy to have somebody paying them some money.  I expect to see more of this- not just from Tilly’s.

The question is how you become a destination retailer if you carry many to most of the same brands your competitors carry.  Look at the brands they carry here.

From the same 8-K mentioned above, here’s how Tilly’s describes their efforts to differentiate their stores and be a destination retailer.

“We believe our experiential marketing efforts in our stores foster an environment that is vibrant, stimulating and authentic, serving as an extension to our customers’ individuality and passion for an active, connected lifestyle. We accomplish this by blending the most relevant brands and styles with music videos, product-related visuals and a dedicated team of passionate store associates. We continuously think of fun, creative ways to drive consumers to our stores, including augmented and virtual reality experiences, various social events, and partnerships with some of our vendors, all of which are posted on various social media platforms, further driving brand awareness. Additionally, in order to improve the look and feel of our stores, we have remodeled or refreshed nearly 90% of our stores in the last three years.”

Decide for yourself whether Tilly’s is a destination retailer.  The point I want to make is that being a destination retailer combined with skill and agility in managing your store portfolio is a very positive combination, as each of those characteristics enables the other.

Tilly’s had some problems during its fiscal 2012 through 2015 years.  Things started to improve after they brought in Ed Thomas as CEO in October of 2015.  If you read in that 8-K what they believe their strength are, you won’t find much different from what other successful brands and retailers are doing.  The question, as usual, is whether you have the balance sheet and management team to do these “things of importance” better than the competition.

Tilly’s has a solid balance sheet, allowing them to think long term, react to bumps in the road, and deal, or even prosper, in an economic downturn which, I guess, will eventually happen.  In the first six months of their fiscal year, cash generated from operations was $22.0 million, up from $2.87 million in the first six months of last fiscal year.

Revenues for the quarter ended August 4, 2018 were $157.4 million, up 13.4% from $138.8 million in the same quarter last year.  E-commerce revenues rose from $16.6 to $19.7 million, or by 18.7% and represented 12.5% of total revenues, up from 12.1% in last year’s quarter.  Comparable store sales, including e-commerce, were up 4.4% compared to an increase of 2.1% in last year’s quarter.

Of the $18.6 million increase in revenue, $12.3 million was the result of the quarter having a 53rd week.  It happens every few years.

The gross profit margin rose from 29.5% to 31.8%.  Product margins were flat.

SG&A expense as a percent of revenue fell from 30.4% to 23.9%.  In dollars it declined from $42.2 to $37.6 million.  This was the result of a reduction in legal expense of $7.6 million compared to last year’s quarter.

Operating income improved dramatically from a loss of $1.2 million to a profit of $12.5 million.  However, “Of this $15.4 million improvement in year-over-year operating income, approximately $7.6 million was attributable to the aggregate year-over-year impact of the legal matter noted above, approximately $5.2 million was attributable to the retail calendar shift impact noted earlier, and approximately $2.6 million was attributable to increased comparable store net sales results.”

Net income improved from a loss of $596,000 to a profit of $9.7 million, but don’t forget the impact of the factors mentioned in the paragraph above.

Tilly’s is doing a lot of what I think are the right things. We’ll see if they can continue to do them better than some of their competition.

Globe Had a Good Year- But It’s Hard to Tell How They Did It

I like Globe.  They’ve always had a good attitude, have been able to spot opportunities, and have acknowledged and moved to correct mistakes when they happened.  They are, as a result, a company I want to write about because I think we might all learn something.

Unfortunately, their required statutory report for the year ended June 30, 2018 is somewhere between not much and no help.  How can a 60-page report not even list the brands they own and tell us at least a bit about how they are doing?

The answer is that Globe is closely held by the Hills, has few shareholders, isn’t closely followed by the analysts and, last but certainly not least, is operating under Australian accounting rules.  I may not like the paucity of information, but in their place, I’d do the same thing.  Let’s see if I can glean a bit of useful data from what they do tell us.  Remember, all numbers are in Australian dollars.  One Australian dollar will cost you around 72 U.S. cents.

Revenue rose $7.2 million (5.16%) from $140.5 to $147.7 million.  All the growth happened in the second half of the year.

Revenues in Australasia rose 1.75% from $77.1 to $78.4 million.  EBITDA grew from $12.2 to $14.6 million, or by 19.7%.  The rise in EBITDA, we are told, was mostly driven by “…sales and profit growth in the workwear division.”

North American revenues were up 10.5% from $42.0 to $46.4 million.  EBITDA in that segment went from a loss of $1.25 million to a profit of $1.56 million.  “This turn-around was a result of the restructuring that was completed during the 2017 financial year, as well as an 11% increase in revenues driven by new apparel initiatives.”

Europe revenues rose from $21.4 to $22.9 million, or by 7.0%.  It’s EBITDA was $636,000, up 0.8% from $631,000.  All they tell us is that “The European business reported modest growth in sales and profitability.”  Well, that’s helpful.

What I hear is that workwear and apparel are responsible for most of the revenue growth.  Does that imply some stagnation in some of the hard goods driven brands?  How are shoes doing?

The gross margin rose 1.4% “…driven by sales mix and favorable foreign exchange impacts.”  Using Globe’s “Revenue from operations” number and what they call “Cost of sales” in Note 4, I calculate a gross margin as having risen from 45.8% to 47.8%.

I am sure they are right and that I don’t understand what “Cost of sales” includes.  But the calculation I did gives a better result than what they report.  Obviously, cost of sales can include more costs than the expenses included in gross margin, but if that was true then wouldn’t my calculated “gross margin” be less than what they reported?

Moan.  I need a footnote to the footnote.

Selling and administrative expenses rose 7.9% from $36.6 million last year to $39.5 in the most recent year.  Employee benefits expense was down very slightly to $21.4 million.  Net income rose 66.1% from $5.08 to $8.4 million.  There’s no discussion of the changes. The balance sheet is solid.

I want to thank Globe for providing a report that made it impossible for me to spend much time analyzing it.  I confess I don’t entirely miss having Billabong’s public filings to try to figure out every six months.

Globe seems to be a company changing its focus to apparel and workwear.  Not a surprise given the current state of growth opportunities in hard goods. They are managing the transition while keeping the balance sheet strong and earning more money.  There is something about their culture that makes them early recognizers of market changes and willing to act on that knowledge.

Deckers Has Strong Quarter- Sanuk Feels Like an Afterthought

With its restructuring expenses largely behind it ($55.3 million since February 2016) and net sales up 19.5% for the quarter ended June 30 compared to the same quarter last year, Deckers reported a good result.  Sanuk continues to be the laggard, and I still won’t be surprised to see Deckers management sell the brand, though for orders of magnitude less than they paid for it.

Revenue rose to $251 million from $210 million in last year’s quarter.  The chart below compares revenues for both quarters and shows the percentage change for each brand.  Also included is the breakdown between international and U.S. revenues.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note the continued dominance of the UGG brand and the revenue growth of all the brands except Sanuk, which was down 6.6%.  They report in the 10-Q that “Wholesale net sales of our Sanuk brand decreased due to a lower volume of pairs sold primarily driven by lower performance in the US surf specialty channel and lower international sales in connection with our strategic focus on US markets for this brand.”

The gross profit margin rose from 43.2% to 45.9%.  The increase “…primarily driven by favorable foreign currency exchange rate fluctuations, improved full-price selling compared to the prior period, and lower input costs as we execute our supply chain initiatives as part of our operating profit improvement plan.”

SG&A expenses fell from 70% to 61.6% of revenue while growing in dollars from $147 to $154 million.  The pretax loss declined 30.9% from $56.6 to $39.1 million.  The net loss fell from $42.1 to $30.4 million, or by 27.8%.  Note that about $10 million of revenue was shipped early and had been expected to be part of the current quarter.  The question is whether that means the current quarter’s revenue will be $10 million below what it would otherwise have been.  There were also “certain operating expenses” shifted to the current quarter.  They don’t say how much.

Remember that corporate tax rates are lower this year.  As with other companies, this is Deckers’ weakest quarter.

Below is a table showing the operating income by brand and the change from last year’s quarter.  Note that all the brands are up except poor Sanuk.  Deckers also has some work to do on its direct to consumer business and has been busily rationalizing its brick and mortar footprint, and this may lead to some further charges.

“At June 30, 2018, we had a total of 160 retail stores worldwide, which includes 93 concept stores and 67 outlet stores. During the three months ended June 30, 2018, we opened one and closed six concept stores… Management continues to target an overall reduction in our worldwide retail store count.”

 

 

 

 

 

 

 

 

They make a comment that Sanuk’s lower operating profit was the result of lower sales offset by higher gross margins.  Hopefully, that’s in indication of distribution getting cleaner.

The balance sheet is solid, and I’d note a small inventory decrease from $442 to $436 million even with the sales increase.  I love the turnaround in cash from operations.  It was a negative $7.35 million in last year’s quarter.  It’s a positive $8.07 million in this year’s.

Deckers has improved their spending efficiency, and the benefits will continue to grow into fiscal 2020.  They’ve improved their distribution.  CEO Dave Powers says, “We have closed a few hundred doors over the last 18 months, and are really focusing on the top 15 strategic accounts that are driving the majority of the volume.  We’ll continue to do that.  And I think naturally there’ll be some accounts that will close on their own, just continuing through the marketplace disruption that’s happening out there…”

There’s a lot of that kind of distribution consolidation going on.  Advantage, big players.

Deckers is continuing to rationalize its brick and mortar business.  I’d feel better if I heard them talk more about how they are tying it to ecommerce.

Higher sales with a higher gross margin, improved distribution, and lower SG&A as a percent of revenues is a good thing.  Sanuk is a bit of a fly in the ointment and I wonder if its potential justifies it being part of a public company.

Strategy, Housekeeping and the Numbers: VF’s June 30 quarter.

It’s interesting to review this recently released 10-Q, as it discusses VF before the recent announcement that they will spin off the jeans business as a separate public company.  With hindsight, you can see how their strategy would lead to that decision.  I’ll also outline the company’s change in their business segments and, of course, review the numbers.  Let’s get started.

Strategy

Here’s what CEO Steve Rendle says in the conference call.

“…we all see that the U.S consumer continues to be open to and motivated to interact with powerful brands, brands that they connect with, brands that provide products and experiences that are relevant to who they are. I don’t think we’re sitting here saying that this is easy…but we — what we’re seeing is that we have a clarity of focus on what our brands stand for, that we’re bringing the best product. And more importantly, big learnings over the last couple of years is really elevating the brand experience in connecting more emotionally with our consumers. We are able to stay at the forefront of the decisions that they have and where they choose to spend their time and money. We see the same to be true in Europe, and we see the same being very true in Asia and I think as we really focus our attention against those key drivers and platforms within our portfolio, we will continue to see our opportunity to connect and maintain those long-term loyal relationships.”

I’d say that’s not the jeans business he’s describing.  Like I said, hind sight is wonderful.

Steve is the second industry CEO I know of who’s trying to help the analysts focus on asking the important questions.  I was hoping for follow up questions about systems and the different quality of information, changes in how and how fast they make decisions, their view of risk taking and how better/different customer information is leading to changes in logistics and inventory management.  Oh well.

Later, talking specifically about Vans, CEO Rendle makes some related comments.

“The strength and understanding of the consumer, that the team has gained through our consumer insights and brand building focus, they just have gotten stronger and stronger, more focused on who they are and more importantly who they are not. We are in exceptional moment where we’re seeing distorted growth. Some of that could very much be some trend, level of trend. But honestly, the way we look at it, we are resetting the rightful level of penetration that this brand has with the consumer and within the wholesale channel and as you — as we do our channel checks, you can see the brand has just taken a larger footprint both on the footwear wall, the tables in the footwear section, but we’re also now starting to place really relevant assortments of apparel. So that the better this brand begins to understand…its consumer, the more thoughtful we can be on placing the right products at the right time. The disciplined franchise management, channel management segmentation just gets stronger and stronger and it really is disciplined of how that team operates… This isn’t an exceptional moment of time that likely has a downward cycle in the back and this is just a reset of its rightful position as one of the top footwear brands in that active lifestyle component of the consumer’s choice.”

You can see Steve alluding to using the same tools/approach for Vans he discussed in the first quote.  No surprise there.  He also talks about Van’s current growth as “exceptional” and “distorted.”  They’re using that as an opportunity for “resetting” the brands penetration and positioning.  They are being thoughtful and purposeful in how they distribute the brand.  Good.

They see a particular opportunity in Vans’ apparel.  It sounds like some cautious management of the brand even as it grows is creating, as they see it, the opportunity for apparel.  What I think I hear, and what I imagine they’d like Wall Street to pick up on, is that even if (when?) revenue growth does slow, they could continue to grow the bottom line.

But he doesn’t see that this time of “exceptional” growth as one that will have a “downward cycle in the back.”

Well, that’s walking a fine line.  I have endless respect for what VF has accomplished with Vans.  If he means the brand isn’t in danger of the kind of blowup we’ve seen in other industry brands, I can buy that giving their management process for the brand as they describe it.  But there’s an implication that any kind of turn down isn’t going to happen.  That would be somewhere between unusual and unprecedented.  Even Nike had its hard times.  I continue to believe there’s a limit to one brand’s market share.

If they are saying that by careful distribution, positioning of the brand, and paying attention to the consumer, they can manage and minimize a downturn when it comes, I’d think that right.  They may be well positioned to benefit from the inevitable recession.

Vans is taking advantage of its exceptional revenue growth to position the brand for success even when that revenue growth is not quite so exceptional.  Good plan.

Housekeeping

VF has changed its reportable segments, joining other companies who have stopped referring specifically to action sports.  The new segments are:

  • Outdoor, which includes The North Face, Timberland, Smartwool, Icebreaker and Altra.
  • Active, which includes Vans, Kipling, Napapijri, JanSport, Reef, Eastpak and Eagle Creek.
  • Work, which includes Dickies, Bulwark, Red Kap, Timberland PRO, Wrangler RIGGS, Walls, Terra, Kodiak and Horace Small.
  • Jeans, which includes Wrangler, Lee and Rock and Republic.

As we know, those four segments will become three after the spinoff of the jeans business.

CFO Scott Roe tells us why they made the change.  “Our Outdoor Action Sports business has become so large that we felt it was good for you the readers to have one click down one more level of visibility rather than having one giant segment, especially given some of the different financial characteristics of the two as you can see, right. And really that’s the driver in the guidance is companies with like characteristics are grouped together and it’s really no more or less than that.”

Makes sense to me.

The Numbers

Net revenues rose 22.9% from $2.269 billion in last year’s June 30 quarter to $2.278 billion in this year’s.  The table below shows revenue and operating profit by segment.  You can see that the active segment, where Vans lives, is still the largest segment, though not as large as before the change described above.  Vans was up 35% for the quarter, speaking of unsustainable trends.  The big jump in work came from the Dickie’s acquisition.  The North Face revenues rose by 8% and Timberland was down 1% despite a 4% boost from foreign currency.

 

 

 

 

 

 

 

 

 

11% of the 22.9% revenue growth came from acquisitions, and 3% from favorable foreign exchange trends.  Direct to consumer revenues rose 22% and were 31% of total revenues.  Acquisitions accounted for 6% of that growth and foreign exchange 2%.  Ecommerce rose 54% including 4% from foreign currency and 21% from acquisitions.

International revenues represented 38% of quarterly revenues and rose 27%.  5% of the increase was from foreign currency and 13% from acquisitions.

56.6% of revenue growth in the quarter came from acquisitions and foreign currency.  The table below shows the sources of revenue and operating for both quarters by segment.  This is worth spending a minute on.

 

 

 

 

 

 

 

 

The gross margin rose from 49.6% in last year’s quarter to 50.3% in this year’s.  “Gross margin was favorably impacted by a mix shift to higher margin businesses, increases in pricing and foreign currency changes, partially offset by lower margins attributable to acquired businesses, acquisition and integration costs and certain increases in product costs.”

SG&A expenses as a percentage of revenue declined from 42.6% to 42% due to spreading these expenses over a bigger revenue base.

Net income rose 45.6% from $109.9 to $160.4 million.

One other financial comment that may be of interest to some of you.  VF has a defined benefit pension plan, which is becoming something of a rarity in this country.  Looking at Note 10 in the 10-Q on that plan, I saw that the discount rate they are using to determine pension obligations was about 4.25%.  “So What?  How else are you going to bore us today, Jeff?”

I just wanted to congratulate VF on having a reasonable discount rate.  The lower the rate, the more it costs them to fund the plan.  In the public sector, discount rates of 7 or 7.5% are more common, because, I guess, the politicians know they won’t be around to deal with the blow back when the impact of the underfunding hits (as is starting to happen now).  Unless “This time is different,” the business cycle suggests that the markets are not going to support those higher returns over the next decade or so.  Honestly, I’m afraid 4.5% may prove to be too high.

Anyway, it’s good to see VF in touch with reality on this one.

CEO Rendle had this comment about how VF was becoming more “retail centric.”

“…you’re seeing greater attention to thinking and acting like a retailer, focusing on sell-through and getting our very best products on the floor at the beginning of the season, working dynamically to make sure those products are selling through and just keep the offer fresh, balanced with better and better marketing.”

I circled the term when I read the conference call and wrote “inevitable!” above it.  It struck me that the need to become retail centric had started to appear perhaps 20 years ago, even if we didn’t identify it as such then.  Basically, the requirement to address a customer who shopped a new way and had different priorities and sources of information made it necessary for brands to move in that direction and, finally, to become retailers.  The ones who manage that well will be successful.

VF to Spin Off Denim Business as Separate Public Company

Yesterday, VF Corporation, owner of Vans, Reef, The North Face and a lot of other brands announced that it was spinning off its jean business (it owns Lee and Wranglers) into a separate public company with 100% of shares to be distributed to existing VF shareholders.  It also announced that VF would be moving its headquarters to Denver.

The stock market, which never likes surprises it doesn’t understand, took the stock down 3.3%.  It’s back up 1.55% so far this morning (Tuesday).

To give you perspective, VF’s total revenues for the year ended December 31, 2017 were $11.8 billion.  Of that total, the jeans wear segment contributed $2.65 billion, or 14.0% of the total.  The company’s total operating profit during the year was $1.91 billion and jeans contributed $421.9 million, down from $491.1 million the previous year and $535.4 million the year before that.  Revenues in jeans have been down as well.

Why Are They Doing This?

If I were to sum up the press release, presentation and conference call, I’d say that the jeans business is great at generating cash flow, but not so great at generating growth.  So, it holds back the overall results of VF.  They didn’t exactly put it that way.  They said that:

  • Jean and the rest of VF now have “diverging path to long term value creation.”
  • “The separation will provide greater strategic focus, operating model alignment, and greater management capacity to invest in new growth vectors and capabilities to accelerate growth.”
  • “The separation creates an opportunity to unlock long term value creation through streamlined operations, scale and cost efficiencies and the flexibility to pursue and invest in strategic priorities and growth initiatives not easily accessible inside the VF portfolio today.”
  • They will be separate companies with “…a separate management team focused actively on its own unique opportunities.”

VF, as you know, has always trumpeted the synergies and efficiencies between its businesses, but we learn in the conference call that the synergies between jeans and the other business are less clear than they used to be and that the jeans business is more independent than the rest of the portfolio.

This, then, as they describe it is good for shareholders, good for the jeans business and good for VF.  Everybody should be happy.

Why Not Just Sell the Jeans Business?

Good question.  They’ve sold, as well as bought, businesses before after all.  It’s kind of what they do.  The answer they gave is that they’ve held the jeans business so long that it’s fully depreciated.  A sale would result in a big reported profit and tax hit.

Fair enough, but the devil is in the details and it’s a long-term capital gain (I assume- I’m not a tax guy).  Whatever the tax hit would be, let’s phrase the decision to spin it off, instead of selling it, differently.  Would it be unreasonable to say, ‘It’s a declining business and we didn’t think we could sell it for enough to justify the tax hit.’

From the language they used in the conference call, it sounds like they didn’t shop it before deciding to spin it off.  That suggests that they were quite certain that it couldn’t possibly be worth the price they needed to get.  They did acknowledge that if a potential buyer came along they were obligated to consider an offer.

A Complicated Deal

This deal is going to take one to two years to get completely done.  There are a lot of moving parts.  Assets to be allocated between VF and the new company (which doesn’t have a name yet), people to be moved, supply contracts to be managed, debtholders to be satisfied, real estate to be bought and sold or leased.  If the presentation and conference call were a little short on specifics, I’m giving VF a break on that one.  They have a responsibility to announce the deal, but the early stage, given the scale and timeline, makes it reasonable that specifics were largely unavailable.

There’s not yet a proforma balance sheet for either company after the transaction is done.  We did learn that, “There’s no change to VF’s capital structure or capital allocation priorities as a result of this separation.”  They also told us that the new company, whatever its name is, would have around $1 billion of new debt and leverage at the time of separation of around three times debt to EBITDA.  They assured us the new company would pay that down to close to two times within “a couple of years.”  Some or all of that new debt comes back to VF as cash and will replace the lost EBITDA from the jeans business.

They were not specific about how that will work.  You can understand why I’d really, really, really, like to be looking at a proforma balance sheet to figure this out.  They also noted that the costs of doing the deal weren’t quantified yet.

I’m cautious in my conclusions because of the lack of solid information.  Certainly the jeans business qualifies as the kind of business VF has divested before.  Strategically, I understand why they’d want to move on from jeans.  Perhaps they waited this long because of the size of the business and the fact that it was a foundational and critical piece of VF back when it was known as Vanity Fair.  As they acknowledge, they used to need it for its cash flow.  Now they don’t.

Some of the advertised benefits of the spin off are a bit too touchy feely for me.  That doesn’t mean they aren’t real, but it’s very hard to evaluate them.  I guess I’ve always thought of VF as a company where businesses could realize those benefits from inside the company anyway.

We’ll all know more in the months to come as the process moves forward and solid information is released.  This is a public offering and there will be a prospectus and a road show.  In the meantime, whatever the benefits of the spinoff are or are not, VF is getting rid of a business that’s declining and doesn’t meet its growth/specialty criteria.

A Look at Zumiez’s April 29 Quarter: I Take the Lazy Approach

I see no reason to spend time explaining what’s going on at Zumiez when CEO Rick Brooks has done me the favor of laying it out in his introductory conference call remarks.  Read them, then I’ll offer short discussions.

“Our top priority is to stay consistent and relevant with our customers in order to expand our market share…”

“We believe there are increasingly blurred lines between retail channels. Our focus is firmly on embracing today’s empowered customer and winning them over for authentic culture and brand. We believe empowered consumer lives in a channel-less world and is not focused on going into a physical store or buying online but rather transacting with a retailer they know and trust.”

“In this channel-less world, we believe that trend cycles are shifting at a faster rate than ever before. New brands emerge that can quickly move from locally recognized brands to global brands. We believe there is a level of customer transparency in retail that is driving out inefficiencies within the market and forcing consolidation in the industry.”

“We’ve established a strategic presence in six countries across three continents, with a digital presence that allows us to reach even further. This scale allows us to work together with our brand partners to serve our customers globally. These include existing emerging local brands, both domestically and internationally in their evolution to global brands.”

In past analyses, I’ve talked specifically about what Zumiez is doing as far as I can tell from public information.  Regular readers know what I’m referring to but let me pull a few words out of Rick’s mouth where I suggest you focus.  I’ve highlighted those words above.

Okay, the first one. They think they can expand market share even though store openings are declining.  They ended the quarter with 700 stores worldwide.  Since the end of last year’s quarter, they added a net of 5 stores in the U.S., 6 in Europe and one in Australia.  At 50 stores, I expect Canada is pretty much done building out.  13 total openings are expected this year.

They think they can increase share because of their Trade Area concept, their systematic approach for identifying and introducing new brands, the integration of all their revenue streams, and the constantly improving quality of their data.  A trade area has a geographic concept, but it’s more than that.  Exactly how they will function and what they will turn out to be even Zumiez isn’t clear on yet.  They are clear it will evolve.

Second, focus on the words “authentic culture and brand.”  Notice they didn’t say surfing, or skateboarding, or action sports or anything like that?  No activity mentioned.  If you are tied to a single activity, it’s going to be hard to increase your market share unless you are small.  But figuring out culture is hard and ever changing- and not in your control.

The third bold underlined phrase, talking about customer transparency etc. isn’t a surprise to anybody.  I hope.  Your customer is in control.  Product cycles are shorter.  Your speed of reaction is everything- follow your customer, I’ve said, but not too far and not blindly.  Your customer connections and data systems are critical- not just to follow them but to manage your costs as they ask for more quality and continual newness at lower prices.

Zumiez believes that if they get culture and brand right, they will be able to “…serve our customers globally.”  So far, the acquisition of Blue Tomato in Europe, for which they paid a lot of money, isn’t quite working out as it’s losing money.  Strategically, I expect they are looking to role out world wide the process they have in the U.S. for identifying new brands and Blue Tomato is important to that end.  They introduced about 150 new ones during the last complete year.  I’ll be interested to see the extent to which they can identify and bring brands from one geography to another.

For that to work, Zumiez has to have a target customer that embraces a “culture” that crosses national cultural lines.  No small challenge, but the only way Zumiez will get a chance to serve its customer globally with the efficiency it has to realize.  One of Zumiez’s big legs up is that its 40-year-old internal culture is consistent with that.

It would have been easy to write several thousand words on each of the four conference calls quotes.  But let’s leave it at this before moving on the numbers.  If anything I wrote was a surprise you are a candidate to be involved in the forced consolidation of the industry Rick is referring to, and to help Zumiez increase its market share.

Zumiez’s revenues for the quarter rose 13.8% from $181 in last year’s quarter to $206 million.  82.7% of revenue was from the U. S., up from 85.1% in last year’s quarter.  “The increase primarily reflected the increase in comparable sales of $15.2 million [8.3%] and the net addition of 12 stores…By region, North America sales increased $18.7 million or 11.5% and other international sales (which consists of Europe and Australia sales) increased $6.4 million or 34.3% for the three months ended May 5, 2018 compared to the three months ended April 29, 2017.”

The gross profit margin rose from 28.7% to 30.3%.  “The increase was primarily driven by a 160-basis point increase due to the leveraging of our store occupancy costs.”

SG&A expenses were up from $58.3 to $64.3 million but fell 1.1% as a percentage of revenues.  “The decrease was primarily driven by 160 basis points from the leveraging of our store costs partially offset by a 30 basis points increase in corporate costs and 30 basis points increase due to the timing of annual training events.”

Please pay close attention to both those mentions of “leveraging” costs.  It happens when you open more stores, but in this case, it also has something to do with Zumiez thinking of it’s online and brick and mortar revenues as one revenue stream and managing ecommerce through it’s stores.  That is the future.

The pretax loss improved from $6.6 million in last year’s quarter to a loss of $1.9 million in this year’s quarter.

The balance sheet is stronger than a year ago.  Besides losing money in Europe, the only financial issue I might raise is a continuing problem with inventory shrinkage.  It’s at about 1%.  They’ve been talking about it for some quarters now.  I wonder if it doesn’t relate to the system changeover and the movement of responsibility for ecommerce relationships into the stores.

When I do these analyses, my goal is always to make you think.  Zumiez had a strong quarter.  What I really want you to focus on is their decision to ride the whirlwind.  At the most fundamental level, the organization collectively said, “I’ve got no clue as to how this is all going to work out, but we’d better get out in front of it even if there’s a bit of chaos.”

They did, and there is, but what was the choice.  What’s your choice?