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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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.

Revenues Flat, But Strong Bottom Line Performance; Globes Half Year Results

Globe’s report for the six months ended 31 December 2017, as usual, gives us very little information.  The only 17 page report makes just one incomplete mentions of their brands and tells us exactly nothing about how any of them are doing individually.

Perhaps I’ll start by reminding you of their brands.  They own are Globe, Salty Crew (50% I think), FXD, Dwindle, Enjoi, Blind, Darkstar, Almost, Tensor, Dusters and Sample.  Their third party brands, which means they distribute them, are Stussy, Obey, M/SF/T, Xlarge, Andale, Kryptonics and Hardcore.

Total revenue, compared to the same six months the previous year, fell by 0.71% from $70.7 to $70.2 million (all numbers are in Australian dollars).    Pretax income, on the other hand, rose 24.1% from $2.81 to $3.49 million.  How’d they do that?

“This growth in profitability was due mainly to an increase in gross margins across the board. The gross margin improvement came from a combination of factors including brand mix, customer mix, sourcing improvements and foreign exchange impacts. While overall costs were largely flat compared to the same period last year, there has been a reallocation of costs towards emerging and growth brands, to drive the growth in those brands over the coming years.”

Revenues from the Australasia segment fell from $41.3 to $38.3 million.  However, the segment earnings before interest and taxes (EBIT) was up just a bit from $4.95 to $5.06 million.  In North America, revenue rose 13.4% from $17.75 to $20.13 million.  The EBIT loss improved, declining 41% from a loss of $2.15 million to a loss of $1.27 million.  In Europe, revenues were little changes, rising from $11.68 to $11.76 million.  However, EBIT fell from $284,000 to $83,000.

From a bottom line perspective, then, Australasia is carrying the load.  North America is losing money and Europe is barely above breakeven.

I don’t know what the change in gross margin was.  Of the factors they point to as responsible for the improvement, I’d be curios how much foreign exchange accounted for.  But fundamentally, they leave us with a picture of a company that’s managing its brands, distribution and customers consistent with a competitive environment where revenue growth is harder to come by.  I’d call that being in touch with reality.  Globe has tended to be that way.

Changes in the balance sheet, which is strong, are consistent with management’s description in the quote above of what led to the gross margin increase.  With revenue more or less constant, we see an 8.6% decline in inventory from $19.2 million a year ago to $17.6 million at 31 December 2017.  I also note that a current interest bearing liability of $4.59 million last year is down to zero this year while cash and cash equivalents is basically unchanged.

Based on the very limited information in the report, Globe is positioned to do well if its competitors struggle for whatever reason.

Not Too Bad, But Not Too Good. And Generally Uninformative. Globe’s Annual Results

Globe is no more immune to economic conditions than any other company.  But what I’ve always liked about them is they seem to be in touch with reality and have a positive attitude about it.  They haven’t always been right (me neither) but they’re not slow to realize when something should change and in making it happen.  Their results for the year ended June 30, 2017 demonstrate that.

As usual, we don’t get very much useful information in their statutory report, and nothing by brand, but I’ll give you what I’ve got.

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The U.S. is Tough on Another Company: Globe’s Half Yearly Results

Globe published its results for the six months ended December 31st on February 21st and I missed it.  Better late than never I guess.

Happily for Globe, its largest market in Australasia was strong because revenues in Europe and North American (NA) were down pretty dramatically.  Total revenues fell 10.6% from $79.1 in the six months last year to $70.7 million Australian dollars in this year’s six months. (all dollar numbers are Australian).  Australasia revenue, representing 58.4% of total revenue, rose 15.5% from $35.7 to $41.3 million.

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Globe Reports Annual Results. How Was the Second Half of the Year?

Well, how nice to be reporting the results of an Australian company that’s making money.  Life was not as good for Globe in the second half of the year as in the first.  Still, it feels like they are doing most things right.

I suppose I should confess that they sent me a copy of their book called Unemployable, which is a history of the company.  It’s nearly 700 pages long and a large format book.  You would not want to drop it on your foot.  I read most of it.  Thank god it’s full of all those pretty pictures or I’d still be reading.

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Globe’s Half Year Results- Serious Improvement, But It’s Hard to Figure Out Just What They Did Better

This is going to be a short article. On February 23rd, Globe reported solid improvement for the half year ended December 31, 2015. But I don’t have much to tell you in terms of what they did better or how because it wasn’t in the public information. Let’s go with what we’ve got. The numbers are in Australian dollars.

Revenue rose 19.5% to $78.8 million from $66.0 million in last year’s six months (the prior calendar period- PCP). There’s no cost of goods sold provided as there would be in the U.S.

Okay, I think maybe I’ve figured it out with a little help from people who understand the presentation of Australian financial statements better than I do.

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Globe’s Results for the Year; Good, but What’s Going on in North America?

I’m kind of late writing about this, but Quiksilver inconveniently filed for bankruptcy right before I went on vacation and I was focused there. The headline is that Globe improved its performance. However, there isn’t much to analyze. Basically they tell us, “We did good and think we can do better.”

Hope so. Anyway, here’s a brief presentation and discussion of the numbers. Just to remind you, Globe is Australian and all the numbers are in Australian dollars.

Revenue rose 32.7% from $104 to $138 million for the years ended June 30 2014 and 2015. Revenue from all their brands rose. Globe was up 24% and Dwindle 34%. 4Front was up 36%. That’s their licensing and distribution business for Australia and New Zealand. The brands they manage are Stussy, Obey, Vision Streetwear, and Komono. Hardcore, “…the largest distributor of leading brand skateboard products, both owned and third party international brands, in Australia and New Zealand,” rose 39%. Its brands include Girl, Lakai, Thrasher, Chocolate, Flip and others you would recognize.

Finally FXD, which sells “carefully designed and styled work wear,” was up more than 100%. This brand, I recall, is pretty new and I imagine that growth is from a small base.

How did they accomplish this growth? “Past diversification strategies and brand investments driving growth.” Well, that certainly explains it. You can see why this might be a short article.

Revenue in the Australasia segment rose 32.6% from $37.7 to $50 million. Sales in Australia rose 30.5% from $34.9 to $45.5 million. Clearly, most of the segment’s growth was in Australia, which represented 91% of segment revenue.

All the divisions reported growth in the segment. “Improvement in performance [was] due to strategic diversification of brands, categories and new distribution channels.” Moan. Come on guys. Give me something at least a little specific to work with here so I can explain your good results to people.

North American revenue was up 26.3% from $39.2 to $49.5 million, with U.S. revenues up 16.4% from $20.8 to $24.2 million. Hmmm. Wait a minute. Those segment numbers are from note three, paragraph b of their filed report. But the slides they provided as part of their presentation says North American net sales grew by 14% as does the discussion of the results in the financial filing. I don’t know- 26.3% seems better than 14%.

Somebody at Globe help me out. Is the 14% constant currency maybe? Or have I lost the ability to read or work my calculator? Anyway, I’m giving you the numbers as reported in that footnote. The increases I calculated from the financial report is the same for the other two segments as what’s reported in the presentation, so I’m thoroughly confused.

European revenues rose 41.5% from $26.6 to $37.6 million.

The Australasia segment EBITDA rose from $3.34 to $5.65 million. The North American loss worsened from $1.03 to $1.67 million. Losses aren’t supposed to rise when revenues goes up 26.3%. Or even 14%. Wonder what’s going on there. Europe’s EBITDA was up from $3.60 to $6.97 million. That’s quite an increase.

Let’s move a little further down the income statement. Globe’s income statement doesn’t show a gross profit line. But in a note they do show something called “Cost of sales.” I’m going to use that (perhaps not correctly) as what we’d call cost of goods sold to calculate a gross margin. When I do that, I get 46.1% in 2015 compared to 46.4% in 2014.

Net income in 2014 was a loss of $12.3 million. In 2015, Globe reported a profit of $3.72 million. There are a couple of items you need to be aware of in evaluating these comparative results.

Last year, there was a $17.1 million charge for impairment of assets. In 2015, there was no such charge. Due, I think, at least partly to that charge there was tax benefit in 2014 of $3.3 million where 2015 shows a tax expense of 1.7 million. That’s a $5 million difference.

If we look at the pretax numbers and take out the impairment charge, you’ll see that Globe would have earned $1.45 million last year compared to $5.42 this year on a pretax basis.

The balance sheet is pretty solid with no borrowings or long term debt. Equity grew consistent with the net income. The current ratio is solid.

As I’ve already complained, we’re not getting a lot of specifics. Basically, after some tough years, Globe is running its business better. As they put it, “This revenue and profitability improvement was a consequence of the recent investments and diversification into new markets and brands and as such, growth came from multiple brands, product categories and geographic regions.”

As usual, I’m pretty sure there was no magic bullet. Just hard work, some difficult lessons, and management discipline. North America still seems to have some issues with the loss increasing even with a solid sales increase.

Globe’s Half Year; The Plan Seems to be Coming Together

Back in 2002, Globe bought Kubic Marketing, the holding company for World Industries and Dwindle. It turned out that their timing couldn’t have been worse in terms of the skateboarding industry cycle. Just about the time they dug their way out of that glitch, the Great Recession hit and had the same kind of impact on Globe it had on other industry companies.

But for the six months ended December 31, 2014, Globe reported sales that rose 28.4% from $51.4 in the prior calendar period (pcp) to $66 million Australian dollars (all figures in Australian dollars). Net income was up from $818,000 to $1.58 million. They even reinstituted a dividend of three cents a share. That speaks well of cash flow.

Those results occurred while they increased SG&A and employee benefit expense by $6.7 million. Most of the increase was in SG&A.

The Globe brand, we learn in an investors’ presentation, rose 27% worldwide. Dwindle Distribution was up 16%, 4Front Distribution 22% and Hardcore Distribution 26%. They also started a new work wear brand called FXD.

Globe owns or distributes 25 brands. I suggest you go to their investor website here and download the investor presentation dated February 27th, 2015 to see which brands are sold by which distribution company. If you’ve been around the skate business even a little, you’ll recognize most of them.

Note that not all brands are sold worldwide.

North American sales rose 12% from $18.4 to $21.3 million. But earnings before interest and taxes (EBIT) in North America declined from a loss of $360,000 to a loss of $1.832 million. Neither the financial report nor the investor’s presentation explains what exactly happened in North America. They do say in the presentation that, “Segment result impacted by lower scale, margin pressures and introduction of new brands.”

I guess I know that “margin pressures” means gross margins were lower. “Introduction of new brands” might mean they spend a bunch of money on getting new brands started- specifically Fallen and Zero. No clue what “Segment results impacted by lower scale” means, especially as sales were overall up 12%. Maybe there’s a transcript that goes with the presentation, but it’s not on the web site.

They note that Dwindle hard goods and Globe apparel were up, but don’t say how much. I’m wondering how much growth there was in North America if we take out Fallen and Zero.

I’m also wondering how much sales grew in constant currency. Even at December 31, the Australian dollar was weaker against the U.S. dollar than in the pcp. In the presentation, they warn us that they “…expect the strengthening US dollar to have an impact on margins in Australia and Europe.”

Things were better in Europe. Net sales grew by 59% from $11.9 to $18.6 million. EBIT rose from $1.1 to $3.5 million.

In Australasia, sales rose by 23% to $26.3 million from $21.4 million in the pcp. EBIT was up 17.8% from $2.78 to $3.28 million.

The segment EBITs do not include certain corporate expenses and unallocated, unrealized foreign exchange losses that totaled $2.5 million in the most recent six months and $1.66 million in the pcp.

The balance sheet improved as equity grew by around one-third to $40.6 million. Current ratio at 1.88 was down a bit from 2.03 a year ago, but that’s fine. Receivables, inventory and payables have risen significantly, but it seems in line with the revenue growth.

The presentation notes that they have no borrowings, which is technically correct. But they are using a non-recourse receivables financing facility in North America in the amount of $2.5 million, up from $1.8 million in the pcp. Since it’s nonrecourse, it’s not debt but there is a cost to using it.

While Globe still has some work to do in North America, the overall result shows good progress. I just wish there was some more information on specific brand performance.

Globe’s Results for the Year: Poor Bottom Line, But Operating Progress

While I was buried under Billabong’s annual report, Globe also filed theirs for the year ended June 30. Globes proprietary brands, in case you don’t remember, include Globe, Callaz, Dwindle, Enjoi, Blind, Almost, Cliché, Darkstar, Tensor, Speed Demons, Dusters, and FXD. Its licensed brands include Stussy and Vision Streetwear.

For the year, Globe’s revenues rose 24% from $84.1 million to $104 million (all numbers in Australian dollars). In spite of the sales gain, they reported a loss that more than doubled, rising from $6 to $12.3 million. However, the operating loss showed a much better result.
The cause of the bottom line loss was a $17.1 million noncash impairment charge by which they wrote down the value of the Globe brand on their balance sheet to $0.00. After tax, the charge was $12.8 million. Without this charge, Globe would have reported net income of $0.5 million compared to a loss of $5.2 million the previous year.
As regular readers know, I feel strongly both ways about these kinds of write downs. On the one hand, they are noncash, and there is a rigorous, required process you have to go through to determine the write down which doesn’t necessarily relate to actual brand value. That’s obviously true since they’ve written the Globe brand down to nothing, but it’s selling product and has value.
On the other hand, they’ve got to do it because the expected future cash flows from the brand aren’t as promising as they once thought they were. It’s not, therefore, something you can just ignore.
My ambivalence is apparently shared by Globe’s Board of Directors. They say, on the one hand, that the charge is not “…reflective of the directors’ long term view of the potential of the Globe brand.”
On the other hand, they say, “The impairment charge is largely a result of the significant changes that have impacted the action sports industry, and its key brands, over the past few years. This has been driven by a range of factors including difficult broader economic conditions, challenges for the Action Sports retail account base and the saturation of some of the more iconic action sports brands. As a result, the performance of the Globe brand has been affected and the market for buying and selling brands in the industry has declined. “
So if it’s worth more than nothing, it’s sure as hell not worth as much as it used to be. I wonder what the directors’ definition of “long term” is.
Ignoring the $17.1 million charge, Globe management tells us the company’s “…sales and profitability improvement came from multiple sources across the consolidated entity as a consequence of the investment and diversification into new markets and brands over recent years.” They’re right as far as I can tell.
The Australian segment revenues were up 42.3% from $26.6 to $37.9 million. That’s growth of $11.30 million. However, revenues in the country of Australia grew $12.1 million, so revenue in the rest of the segment declined.  The overall segment growth “…was driven by the 4-Front street wear division, due mainly to the introduction of Stussy, and the continued growth of F.X.D., the Group’s proprietary work-wear brand.”
Revenue in Europe rose 46.7% as “…the Globe brand continued to grow across all categories of footwear, apparel and skate hard goods…”
At $39.5 million, revenue in North America was basically the same as the previous year. “In North America, despite growth in skate hardgoods and Globe apparel, sales were down by 9% for the full year in constant currency, following last year’s restructure which resulted in certain operations being discontinued within the Dwindle division.”
However, revenue from the United States fell 15% from $24.5 to $20.8 million.
The EBITDA loss in North America improved from $3.1 million in 2013 to a loss of $1.03 million in 2014. Australia’s EBITDA improved from $1.4 to $3.3 million. In Europe, it rose from a loss of $7,000 last year to an EBITDA profit of $3.6 million this year. 
For the whole company, segment EBITDA improved from a loss of $1.8 million to a profit of $5.9 million. After corporate expenses, the overall company EBITDA improved from a loss of $4.7 million to a profit of $2.4 million.   
Globe’s operating improvement was also driven by an increase in the gross margin from 44.1% to 46.4%. Selling and administrative expenses rose from $26.4 to $28.5 million. As a percentage of revenue they declined from 31.3% to 27.5%. We get no discussion of either the gross margin or the specifics of the expenses.
The balance sheet has arguably weakened a bit, with the current ratio declining from 2.33 to 1.89. Total liabilities to equity rose from 0.51 to 0.91. Cash has increased, and growth in receivables and inventory of 18.5% and 23.8%, respectively, seem in line with sales growth. On the liability side, I would note that trade and other payables rose 47.7% from $13.5 to $20 million and there’s $1.5 in borrowing where there was none last year.
My sense is that there are some significant changes in revenue by brand going on at Globe. I can’t really get a handle on it from the very limited information in the filed report. Whatever’s going on, revenue and gross margin are both up nicely. The intangible write down killed the bottom line, and it looks like the U.S. market is a challenge (not just for Globe). But overall, there are some positive things happening, though profitability has to improve.