Jeff Harbaugh & Associates

Update on Billabong: The TPG Offer

jeff — Mon, 20 Feb 2012 18:47:18 +0000

This is kind of fun. As you’re aware, TPG Capital offered to buy all of Billabong for $3 a share before the Nixon deal and other steps were announced. Billabong said no because the deal was contingent on too many things and they needed an immediate, certain solution to their short term balance sheet issue. But now, even with the Nixon deal happening, TPG still wants to buy them for $3.00 a share. What can we learn from that?

First, I guess we can conclude that TPG approves of the actions Billabong management has taken. And apparently they agree with Billabong management that the earnings lost from the sale of half of Nixon will be made up for by store closings and expense reductions being undertaken.

Or maybe the $3.00 a share was a lowball offer made on the assumption that Billabong needed to make a deal (which they did).

In what I published about Billabong yesterday, I said okay, great, they’ve solved their short term balance sheet problem, but we are left knowing almost nothing about how Billabong management views the prospects for their longer term vertical retail strategy. I guess we’re about to find something out.

If Billabong’s board of directors were to conclude that it’s in the shareholders’ best interest to sell the company for $3 a share (Or $4?) we’d have to conclude they aren’t all that confident in the strategy and their ability to implement it either because of anticipated economic conditions or because their balance sheet, even with the fix of a few days ago, won’t be strong enough.

Then there’s the issue of the whole competitive environment in the surf/action sports/youth culture market. I’m actually working on a longer think piece on this. My basic question (perhaps a bit exaggerated for impact) is with everybody trying to respond to weak consumer demand by selling everything they can everywhere (perhaps the wrong approach?) is there enough brand distinctiveness left to make a plaid shirt from a cool brand worth $20 more than the same plaid shirt bought at Target?

I remember when the skate hard goods industry was somehow caught by surprise as more and more skaters decided that a $30 deck was just as good as a $55 deck as they were essentially identical in construction and were going to wear out anyway.

Just because there’s an offer from TPG doesn’t mean there will be a deal. It is a very preliminary offer with a lot of work to be done. One thing that might be a stopper is the condition that the tax liability associated with the Nixon transaction not be higher than $10 million. Billabong has estimated that, at worst, it might be $45 million. I doubt they’d be willing to guarantee the $10 million number.

Somebody (thanks Somebody) sent me this article which discusses the deal in some detail. It’s worth a read. I’ll be watching with you to see how this all plays out.

Billabong’s Announcement: Short Term Solution, Longer Term Question.

jeff — Mon, 20 Feb 2012 01:04:23 +0000

With last Thursday’s announcement, Billabong has moved to address its balance sheet issues. But, to paraphrase one of the analysts in the conference call, "This is all well and good, but how do we know we won’t be discussing the same issue a year from now?"

Let’s look at the steps Billabong took and its half yearly numbers. Then we’ll talk about Billabong’s longer term strategy and see if there’s an answer to the analyst’s concern in there somewhere..

How Did We Get Here?

Billabong is suffering from a strong Australian dollar, a weak world economy that hasn’t recovered as quickly as they expected, an aggressive, opportunistic retail strategy, and having paid what looks in the ever perfect hindsight to be a bit much for some of their acquisitions. Of course, if the economy wasn’t so weak and the Australian dollar so strong, the last two might not be such an issue. But we are where we are.

Billabong announced back on December 11 that its “…sales growth trend has deteriorated significantly…” in November and the first part of December. They indicated they were concerned about their level of debt and violating their loan covenants. I wrote about that in some detail here. Last Thursday, before their announcement, I described briefly what I thought their choices were.

What Have They Done?

First, they sold 48.5% of Nixon to Trilantic Capital Partners (TCP). They are keeping 48.5% themselves. Nixon management will own the other 3%. They expect to raise US$285 million, all of which will be used to pay down debt. That solves the immediate balance sheet issue, reducing net debt at December 31 from $527 million Australian dollars to $259 million Australian dollars on a proforma basis.

Because Billabong now owns less than half of Nixon, Nixon will no longer be consolidated on Billabong’s financial statements. That is, its assets, liabilities, revenues and expenses will no longer flow through them and Billabong won’t be responsible. I think what will happen (at least it’s what would happen here) is that Billabong’s share of Nixon’s income will be included on Billabong’s income statement under “Other Income.”

Nixon product will continue to be sold in Billabong owned retail. Billabong has signed a long term supply agreement with Nixon (no details available) to insure that. The TCP group may be really nice people, but I’m guessing they’d like Nixon to make as much money as possible. So I assume that the prices at which they sell Nixon product to Billabong will be consistent with prices to other retailers. Billabong, under those circumstances, will just get a normal retail margin on their sale of Nixon product.

Most intriguing to me is what TCP’s plans for Nixon might be. There were some comments in the public material and the conference call about Nixon already being distributed outside of Billabong’s traditional channels. The release says, “Nixon will be a stand-alone business focused on continued growth into areas such as Billabong’s core action sports channels, as well as high-end department stores, quality electronics stores and other channels.”

Hmmm. Does that sound to anybody besides me a bit like the Skullcandy strategy? Nixon is doing headphones already. It occurs to me that Billabong might not have been able to finance Nixon’s growth opportunities. Untying Nixon from Billabong may benefit it.

Billabong bought Nixon for $55 million in 2006 plus a deferred payment of US$76 million. The transaction values Nixon at around US$464 million so Billabong will report a one-time gain on the transaction (size unknown) at the end of their fiscal year.

Second, they are going to close between 100 and 150 of the 677 company owned stores by June 30, 3013. They think that once this process is complete, they will have reduced rent expense by $20 to $30 million Australian dollars and will increase EBITDA by $5 to $10 million Australian dollars in the year ending June 30, 2013. They noted that they had closed 30 stores in the last six months.

Third, they’ve got a program to reduce annual costs by $30 million Australian dollars. These cuts will be across the board. There will be about 400 full time jobs lost including 80 in Australia. I’d be interested to know how many of the 400 will be the result of closing stores.

Finally, Billabong is going to reduce its dividend payments.

The net of all this, according to Billabong management, is that the loss of Nixon’s earnings “…will be more than offset…” by Billabong’s share of profits from the Nixon joint venture along with the other expense reductions.

The Six Months Results

Here are the income statement numbers in Australian dollars for the six months ended December 31, 2011.

Sales rose 1.5% to $850 million dollars compared to the prior calendar period. Constant currency revenues were up 6.3%, but down 2% excluding the impact of acquisitions. Over two years, Billabong has seen the translated value of its profits from Europe decline by 40% because of the decline in the value of the Euro against the Australian dollar.

The cost of goods sold stayed almost constant at $455 million, but the gross profit margin fell from 54.4% to 53.4%. Selling, general and administrative expenses were up 10.4% to $316 million. Other expenses and finance costs were more or less the same. There was a $15 million impairment charge for Billabong’s South African operations.

Profit for the six months fell to $16 million from $57 million in the same six months the previous year.

What happened? CEO Derek O’Neill, in his presentation, sites four challenges. First, sales were lower than expected in November and early December in Europe and Australia. Second, they couldn’t recover all their higher product costs in a “…highly price sensitive retail environment.”

Third, there was a lot of discounting going on at both wholesale and retail in Australia and Europe. It wasn’t as bad in the U.S., but it was still there. Fourth, add on to that aggressive clearance of inventory, which obviously kills your margins, and you can see why it wasn’t a great six months.

You can see in their balance sheet some of the issues I’ve discussed above. Inventories have risen $56 million from a year ago even though sales aren’t up significantly and accounts for the whole rise in current assets. Trade and other payables have risen $40 million over a year ago and accounts for the whole rise in current liabilities. Long term borrowings rose from $570 million to $701 million, reflecting a decline in deferred payments (partly for acquisitions) from $188 million to $86 million. The interest coverage ratio has fallen from 8.8 to 4.2 times.

Tactics and Strategy

We’ve reviewed Billabong’s half year results, seen how they got themselves in a bit of a hole, and outlined the tactics they’ve used to resolve their immediate balance sheet issues. Given their circumstances and the choices they had, what they are doing seems appropriate to me.

But it doesn’t address that inconvenient analyst question: “How do we know we won’t be here a year from now discussing the same thing?”

Billabong’s strategy, we all know, has been to expand their owned retail to increase penetration of their brand portfolio and benefit from the vertical margin. Pretty simple to state. I thought it was a good strategy when they started it though, as I wrote at the time, I was unsure about the West 49 deal. But the devil’s in the details. Let me quote what I wrote last Thursday.

“How much of your owned brands can you put in a retailer before it’s perceived as a Billabong store regardless of the name on the front? How do you handle the other brands those owned stores carry when you’re trying to make room for your own higher margins brands? How do they feel, as one of those non-owned brands, about being in those stores and the way their brand may be merchandised? I am sure Billabong management spent, and is spending, time on those issues every day.”

That, to me, is the heart of the strategic issue and we came away from the public documents and conference call with basically no insight into how the implementation of this central, long term strategy is going. That analyst’s question kind of implied it, but the answer wasn’t very helpful. To be fair, I can’t really expect Billabong management to just drop their drawers for their competitors in an open forum, but it is still the central issue given that direct to consumer now accounts for 49% of Billabong’s revenues.

One paragraph of one slide from CEO O’Neill’s presentation gave us a bit of information. We learned that Billabong family brand share is now about 37% in West 49 stores compared to 15% at the time of acquisition. It was 32% at June 30, 2011.

The owned brand share is 38% in the acquired SDS banner, and close to 50% in the acquired Rush store. We don’t have any information as to what it was when the deals closed.

That’s it. That’s all I know for sure about the major strategic bet that Billabong has placed. How far can we expect those percentages to rise? Any perceived blowback from consumers yet? How have other brands reacted? Did Billabong just get ahead of itself in an economic environment it misjudged and commit a one-time balance sheet faux pas? Or is the strategy dependent on improved economic growth? If so, and we don’t get that growth, what happens?

I don’t expect to ever get quality answers to those questions unless I fly to Australia and drag those guys into a bar. In the meantime, I invite you all to review at Billabong’s investor site the documents I’ve referred to in this article, and see if you can figure the answers out.

Billabong’s Upcoming Half Year Report and Their Choices

jeff — Thu, 16 Feb 2012 19:21:56 +0000

Sometime late afternoon West Coast time, Billabong is going to release their half yearly numbers and have a conference call on those results. In the meantime, as most of you may know, trading on their stock has been suspended pending an announcement. That announcement may have something to do with this article stating that Billabong has received a US $820 million takeover offer from TPG Capital.

All I know is what’s in the article. But I thought in light of the pending news and possible acquisition of Billabong, it might be useful to review their choices before the announcement.

Back in December, when Billabong announced that they had some issues and were pursuing a review of their options, I did a pretty detailed analysis about what was going on. You can read that here. We haven’t seen a complete balance sheet, so we don’t know the extent of the problem. But when you’re dealing with issues of capital adequacy, there are only so many things you can do. In no particular order, here they are.

You can raise some expensive money along the lines of what Quiksilver did with Rhone.

You can sell the company as the article referenced above suggests might happen.

The trouble with both these choices, of course, is you don’t get a very good price. But then you may not have a choice.

You can cut expenses across the board to improve cash flow. What we don’t know, since we don’t know the exact size of the problem, is whether this could have enough impact quickly enough. My guess is no. And of course, this has an adverse effect on the company’s ability to pursue its strategy.

You could sell a brand. But Billabong’s whole strategy is focused on putting those brands into their growing retail channels. So every brand less it has makes that strategy a bit less valid.

Maybe it could take one of those strong brands it owns public to raise capital. That way they wouldn’t lose control of the brand. But as I am sure you all know it’s a tough time to take a company public. Somebody suggested that alternative to me. Wish I’d thought of it myself.

In a few hours, we’ll be able to put some numbers on the problem size, and maybe the solutions will have been announced. But let’s review quickly, in the interest of making the article I’ll write when the report and conference call happen shorter than a novel, how they got here.

First of all, the Australian dollar got strong, and the worldwide economy weakened, with the Australian economy being the last to follow others into recession. You can’t blame Billabong for that, but they have to manage the consequences.

Second, they chose to purchase West 49 because, well, it was available and consistent with their strategy. Had it not appeared on their radar screen, I don’t think they would have been pursuing an acquisition of that size with its issues. And, as I’ve written, I think those issues turned out to be worse that Billabong management expected.

Third (and this is true for most of us) there was an expectation of more of a global recovery than happened. One consequence is that the acquisitions they have made start to look expensive in light of our current economic reality. That is, the prices are harder to justify because the future cash flows don’t look as strong. This impacts the company’s value as Billabong looks for solutions to its debt/cash flow problem.

And finally there’s the issue of whether or not the strategy of putting owned brands into an expanded, owned, retail base made sense. I thought it did (though I wasn’t particularly happy about the implied impact on specialty retailers).

But, as I discussed a long time ago, the devil of that strategy’s implementation was in the details. How much of your owned brands can you put in a retailer before it’s perceived as a Billabong store regardless of the name on the front? How do you handle the other brands those owned stores carry when you’re trying to make room for your own higher margins brands? How do they feel, as one of those non-owned brands, about being in those stores and the way your brand may be merchandised? I am sure Billabong management spent, and is spending, time on those issues every day.

If the economy hadn’t gone quite so far south or had recovered a bit quicker and the Australian dollar wasn’t through the moon would things be okay? That would depend on facts I don’t have. When we get Billabong’s numbers, we aren’t going to be able to conclude that the strategy was “good” or “bad.” All we’ll know and I guess we know it right now, is that they ran out of time to pursue it as their balance sheet weakened.

I’ll be all over Billabong’s report the minute it comes out, but I do like to read stuff slowly and take some time to think about it, so be patient with me.

Notes on SIA’s Denver Show and Thoughts on the Trade Show Slog

jeff — Wed, 01 Feb 2012 21:36:51 +0000

It was nice to walk to the Snow Show the second day when it was actually snowing. I think I’m completely acclimated to Denver, though I do miss playing blackjack with friends. And I still get confused when one of the people who works at the convention center says, "How are you today, sir? Have a nice day and enjoy the show." They actually seem to mean it. After so many years in Las Vegas, you can understand why I’d be startled.

Inside the convention center, the thing I heard most often was "I’ve got to leave for ISPO tomorrow." This was typically spoken by somebody with a resigned tone to their voice and slumped shoulders. It often included phrases like "Six shows down, two to go!" or "I don’t remember what my children look like."

The more things change, the more they stay the same. I wrote about the trade show schedule back in 2002 and much of the article has held up pretty well. People complain about the trade shows and the schedule, but they all go. I’ll get back to that after mentioning a related issue.

Trade Shows and Outerwear

The related issue is that there seem to be mighty few snowboard industry companies that aren’t making snowboard outerwear. Seems like all the hard goods companies are making apparel and many of the apparel companies are making hard goods. I suppose the logic of becoming a full line company is irresistible. "Well, we’re already selling them product X, so as long as we’re in front of them, and it’s consistent with our image as a snowboard company, we might as well sell them product Y."

Retailers, of course, already can’t/don’t/won’t carry more than a fraction of a large brand’s line, and I doubt that a brand expanding its product line will change that. Lacking some market growth, it’s just more good quality product that lacks fundamental product differentiation chasing the same customers. The scramble for market share and a source of growth continues. It’s not that there’s no innovation in the snow industry, but whatever advantage it confers doesn’t last long, as innovations are copied across the industry in about one season.

Who might be the winners of the rush to do outerwear? I think it might be companies like Arbor and Never Summer who, I’m pretty certain, won’t be doing outerwear. I’m only half kidding when I suggest that companies like those may find their market positions strengthened and better defined as a result of all the other companies doing full snow product lines. Maybe I’m not kidding at all.

Let’s get back to trade shows. So you’ve expanded your product line. You’d probably like to sell some of this new product. This might require some new customers unless your existing ones are extraordinarily cooperative. How do you find those new customers if, as I’m suggesting, your existing retailers may not automatically just order your new stuff and throw out your competitors?

Maybe by attending some new trade shows? If, for example, you’re in the snowboard business and make outerwear, going to Outdoor Retailer probably makes sense. Lots of people seemed to think so at any rate. But there’s diminishing return from going to more and more shows given the inevitable overlap in customers. We also need to remember that larger brands especially are seeing customers more and more outside of the trade show environment.

Where going to all the related trade shows can probably makes sense is when you’re a new brand- especially one not limited to the snowboard or winter sports business. The sock brand Stance comes to mind as a company that could benefit from extra trade shows. John, Ryan, hope you’re having a good time in Munich, or wherever the hell you are now. More coffee, less beer!

To summarize what I might have said in the last four or five paragraphs, the decision to expand a product line, with particular focus in this case on outerwear in the snowboard industry, is made at least partly with the expectation of expanding your market beyond the core snowboard niche. Especially as a larger company, and even more as a public company, you know (at least I hope you know) that the growth you can reasonably expect in the snowboard market probably doesn’t justify the effort and expense of creating and marketing an outerwear line. So you’re off to various other trade shows that have retailers who, to a greater or lesser degree, overlap snowboarding and you’ll look for some growth there.

And those dynamics are at least partly the reason why we’re so willing to go to so many shows.

Things I Noticed at SIA

I guess I’ve talked enough about everybody making outerwear, so let’s move on.

I loved the 686 concept car, though I was disappointed to learn it’s probably not street legal. Oh well, I guess I’ll have to look for another ride.

There was some talk about booths getting bigger again. Mostly from people like me who remember the two story Morrow booth with the helicopter on top at the absolute peak of the snowboard madness in probably 1995. The concern is that we’re getting profligate in spending on booths again.

I had a different take. While there did seem to be some size expansion, I saw a lot of less expensive soft sided booths and many of the booths reused the same components and materials they had used in previous years. Still, if one of you guys wants to put a main battle tank or maybe a small, temperature controlled, enclosed hill where you make artificial snow in your booth that would be okay with me.

The Mervin Manufacturing surf boards. Behind Mike Olson’s always smiling, happy go lucky, endlessly positive, demeanor is a guy who’s always smiling, happy go lucky, and endlessly positive. However, he’s also a guy who knows a thing or two about materials and manufacturing. He’s been working on surfboards for a long time, and if he’s ready to sell these I’m pretty sure it makes good business sense. This is going to be fun to watch. I hope the guys at Quiksilver, who owns Mervin, are as excited as I am.

I really liked the Recon system that installs in specially adapted goggles made by goggle brands. They have a built in computer that connects to GPS and shows you where you are on the mountain, how fast you’re going, and how high you jumped. It also gives you access to your phone, music and other functions. You wear a little control module on your wrist, but view it through a small screen below your right eye in the goggles. It does not interfere with your view.

It looks like it will take a bit of training to use it well, and some people may just not want to be quite that connected while on the mountain. But it also makes sense for other markets, and I suspect in some form it’s a piece of the future.

Then of course there was seeing former and long time- very, very long time- Burton senior executive Clark Gundlach over at the Quiksilver booth where he’s now in charge of the company’s snowboard program. Of course I knew the change had happened, but it still felt almost odd to see him there. Proof, I guess, that nothing is forever. Probably felt a bit odd for Clark too.

But when you think about it though, who else was Quik going to hire if they are serious about building their snowboard business? You can kind of imagine the conversation at Quiksilver. “Hey, we need an executive who has mountains of experience in all aspects of building a successful snowboard program in a large company environment. Let’s make a list of possible candidates.” Short list.

We came to the SIA show this year disappointed in the snow, though we got a storm the previous week and things seem to be picking up. SIA reported that sales through December were $2.2 billion, just 2% below last year’s record sales. Unit sales fell 10%, showing some discounting, and specialty store inventories were, inevitably, up 16%. Still, that’s not as bad as I feared it might be, and it’s definitely recoverable with improved snow conditions.

I want to point out that it would be a lot worse and not necessarily recoverable if, as an industry, we weren’t doing a much better job controlling our inventories. Keep up the good work.

Well, I’m home with no more trade shows on my horizon. The kids didn’t miss me because one’s away at college and the other is living on his own and has A REAL JOB! My wife claims to miss me, but it may because I do most of the cooking. The cats definitely miss me.

Hope you all have a good trade show season.

Interesting Stuff from Quiksilver’s 10K Annual Report

jeff — Tue, 24 Jan 2012 20:32:57 +0000

Back in December, Quiksilver released its annual and quarterly earnings and held a conference call. I did the best analysis I could, but bitched and moaned because I didn’t have the complete 10K or the balance sheet. You can see that analysis here. Last week, the company issued its 10K. I’m not going to redo the analysis I did, but there’s a few pieces of interesting additional information I thought you’d want to see.

The Balance Sheet

To put it most simply, the October 31, 2011 balance sheet is almost unchanged from a year ago. The current ratio at 2.62 times is pretty much the same as last year. Total liabilities to equity have risen slightly from 1.74 to 1.83. Long-term debt, excluding the current portion, rose from $701 million to $725 million “…to fund higher working capital levels…” Total equity is up only a couple of million to $623 million.

I had hoped, but not really expected, to see some further balance sheet improvement. Maybe that wasn’t realistic given the economy. But let me remind you that a couple of years ago debt was $1 billion and Quiksilver faced a short term liquidity crisis with principal payments that it, well, couldn’t make. The Rhone deal, and the restructuring of their European bank lines, leaves Quiksilver with a very manageable $11 million in principal payments through the end of 2013. There’s $35 million due in 2014 and $400 million due the next year.

Trade receivables rose 8% to $397 million, consistent with sales growth. I think that was in the press release. I pointed out only because I noted that Quik mentioned it was doing some consignment sales in Asia. This is hardly unique to Quiksilver (and not just in Asia.). But in general terms, if consignments and other forms of non-sales sales become more common, one has to wonder how to think about the receivables numbers. As far as I know, consignment sales remain in inventory, and don’t show up as receivables.

New Risk Factor

I haven’t compared all of last year’s risk factors with this year’s, but I did notice one addition. They’ve added, “If our goodwill becomes impaired, we may be required to record a significant charge to our earnings.”

Now, I don’t take these factors all that seriously, because I know the lawyers want to put in anything that could conceivably go wrong. But this one, I thought, was instructive. Lots of companies have impairment charges; especially in a slow economy. When they tell you about them, they always point out that they are non-cash, which is true. But, as I’ve written before, and not just when I’ve been talking about Quiksilver, these charges represent an anticipated future reduction in cash flow and/or a decline in value. That’s why the impairment charges are required.

When I see Quiksilver add this risk factor, I don’t see an imminent problem. I think, rather, that it was an appropriate factor to add and that there must be a reason they chose to add it. I wouldn’t be surprised if we saw it in other company’s filings.

Some Sales and Retail Numbers

At the end of their fiscal year, Quik had 770 stores and was selling in over 90 countries. 547 of those stores are owned and 223 licensed. Of the owned stores 109 are outlet stores, which is more than I had thought. Here’s a breakdown of the kind of stores they are and where they are located. Note that about 57% are in Europe.

The Quiksilver brand represented 41% of revenues for the year. Roxy was 27% and DC 28%. The Hawk plus the Lib Technologies and Gnu brands together totaled 4%. Apparel is 61% of total revenue, down from 64% the previous year. Footwear, at 23%, was up from 21%. Accessories and related products represented 16% of revenue, a 1% increase from the prior year. The United States represented 35% of total revenues. The chart below shows the complete breakdown of revenues by geographic region.

This next chart shows their distribution channels. I wish we have some information on what kind of retailers they put in which category. I wonder how they characterize outlet stores?

Random, Interesting Facts

At the end of the paragraph discussing the gross profit results in the fiscal year that just ended, Quik made the following comment:

“In fiscal 2012, our cost of goods sold is expected to increase by 75 to 100 basis points as a percentage of revenues as a result of the lower value of the euro in comparison to rates that prevailed in fiscal 2011. Our gross profit margin in fiscal 2012 may also be negatively impacted by increased raw materials and labor costs.”

They also noted a backlog of $480 million at the end of November, 2011 compared to $478 million a year before.

Quiksilver spent $124.3 million on advertising and promotion in the year ended October 31, 2011. $24 million of that amount was athlete sponsorships.

Okay, that’s kind of it. No grand conclusion here and no changed opinion from what I wrote based on the press release and conference call.

The release comes out, the conference call is held, and everybody sort of forgets there’s more information to come. Hope you find it useful.

It’s Tradeshow’s Season. I Started with Agenda, But I’m also Thinking About SIA.

jeff — Fri, 13 Jan 2012 20:32:41 +0000

Among the things I liked at Agenda, the one I liked the most was Shmooza Palooza, the jobs fair jointly sponsored by Agenda and Malakye.com. 500 people preregistered for it and it was busy every time I looked in. It’s great to sell a few more T-shirts or another snowboard, but it’s even better to help somebody put food on the table. The guy who probably didn’t get a job at this job fair is the one who told one of the recruiters he had gotten a college scholarship and taken the money to use for a surf trip. It’s somehow troubling he apparently thought that would make him sound credible.

On a personal note, I have a kid who graduated from college last spring and has an actual job with benefits and 401(k) plan. Most of his peers are not so fortunate and I think he knows how lucky he is. My wife and I feel like we won the lottery.

The other things I liked at Agenda included flying into a small airport, $100 hotels, and the food trucks. It was a pleasure to get good food at a fair price instead of bad food at an expensive price. I also liked having the booth numbers at the top of the booths where they were easy to see, though I understand this isn’t new. And as always, I liked seeing some new brands, or at least brands I haven’t seen before. I hope they do well.

I didn’t like it when people referred to Agenda as the "new ASR," because I remember what happened to the old ASR. I had written before, when ASR first closed, about the pressure Agenda, or any other trade show, might come under as it succeeded and grew. That analysis, I think, is still valid. But Agenda has done at least two things that should mitigate those pressures to some extent. First, they got the hell out of San Diego to the more attractive cost structure of Long Beach. Second, they are keeping the feel of the show more or less the same as it grows by keeping most booth sizes the same. Or at least keeping them from getting too big.

Yes, I know a few brands had larger booths. I noticed it too. But I don’t think that’s different from how it was in San Diego. It’s just that a new location makes you see perceive things differently even if they ain’t.

The new location makes it difficult to compare last year’s Agenda this with year’s. But then I’ve always been cautious about reaching conclusions based on how busy a given booth was at the moment I walked by or how crowded the aisles felt. The question is do brands and retailers feel like the show is a good place to get business done, and nobody at Agenda complained to me about that.

Next, I’m off to the SIA snow show in Denver. Nothing could improve that show more than a lot of snow during the next 10 days. Last year, as you know, was an epic snow year. I never expect two great years in a row, but I was really hoping that this year would at least be okay. Last year’s great show, coupled with the residual fear from the recession, meant that retailers have been cautious on their inventory and most of the old stuff was gone. There wasn’t much left over product at deep discounts, and customers learned they had to buy quickly and at full price to get what they wanted. The result was a great year not just for sales but for profits as well.

Though it hasn’t always been the snow industry’s mindset, you really can sell less and earn more, and I was hoping for another year to cement that kind of thinking.

What I’ve heard so far is that brands, in general, didn’t over produce and retailers didn’t over order due to over enthusiasm from last year. That’s good. We should never let ourselves be deluded into believing we’re great managers and sales people just because it snows.

Still, it appears likely that we’re going to get to Denver with some of the dreaded inventory overhang in the one season snow business. Hmmm. Maybe an overhang is a non-alcohol induced hangover.

My guess it won’t be as bad as it has been in past years because there won’t be as much product to deal with, and discounting didn’t start in August. Yet, inevitably, brands will want to get paid on time, won’t want to offer discounts, and won’t want to take product back. Retailers will want to delay payment, get discounts, and send back product.

I’d note that retailers, generally, haven’t panicked. From what I can tell, there’s been more resistance to discounting early and often than in prior years. No doubt it’s partly because there’s less inventory, but I also trust it’s because we’ve learned a few things.

There have been some instances recently where brands (not just in snow) didn’t necessarily replace their whole product line every year. Certain pieces got carried over. I guess it’s mostly in apparel, but I’m wondering if it might not work with select hard goods.

Let’s start by acknowledging that there are no bad hard goods out there anymore. Everything’s durable, functional, and more or less good looking. And hopefully, you’ll also agree with the following:

· Though the economy appears to be improving a bit, sales increases are still not easy to come by and generating additional gross margin is important in increasing profits.

· Inventory scarcity improves product perception and makes consumers less price sensitive. It also reduces working capital investment, which we finance oriented people like.

What I’m asking/hoping is that the tension between brands and retailers not be allowed to turn back into the zero sum kind of game it’s been in some past years. Can some product that sold well this year and is maybe in short supply be kept in the line for next year? Can retailers and brands share the burden of a poor snow season such that product doesn’t turns up at the wrong time, in the wrong place, and at the wrong price? At least not too much.

I get to look at this from the 10,000 foot level and don’t have to worry about keeping a factory busy or generating enough cash to pay the bills (though I have had to do that with snowboard brands. I mostly didn’t enjoy it). Except in the very short run, we are all better served by holding prices where reasonably possible and keeping product scarce. Please remember that when all those meetings start in Denver. Let’s build on what we’ve started.

Follow-up on my Last Article; the Nau Example

jeff — Mon, 09 Jan 2012 19:29:33 +0000

My last article, “Do Retailers Really Need to Carry All That Inventory?” garnered quite a response. One of those responses was a link to an article about a brand called Nau. Their web site is here. The link to the article is here. The article was written back in 2007 and the brand is still around and, judging from the list of stores where they are available, successful.

Here’s how the article starts:

“Meet Nau, the ultimate over-the-top, high-concept business. It makes striking, enviro-friendly clothing. It gives away 5% to charity. Can it save the world–and give us the perfect twill capri?”

They are distributed through what I’d characterize as high end specialty shops but, according to the article, also had four of their own stores (and sell on line). Here’s a description of those stores from the article:

“It starts with a retail concept that combines the efficiencies of the Web with the intimacy of the boutique. Called a "Web front," the Nau store integrates technology in a striking gallery-like setting. The central mechanism is a self-serve kiosk that transfers the online shopping experience to a touch screen and encourages customers to have their purchases sent home, with the incentive of a 10% discount and free shipping.”

“The advantage: If customers use the store as a fitting room and push purchases to the Web, Nau can build smaller stores (2,200 to 2,400 square feet compared to the traditional outdoor specialty store’s 4,000-plus square feet), reduce in-store inventory dramatically, and slash operating expenses. Plus, it consumes less energy and materials.”

Essentially, this is what I was suggesting in my article. Nau had the advantage of starting from scratch, so they didn’t have to change their store size and redo the whole store which, I acknowledge in my article, has some costs and takes some time. Anyway, the point is that here’s a brand that was trying to do more or less what I suggested with their retail stores. How has that worked out?

When I couldn’t find the store addresses on the web site, I called the company and found that all the stores had been closed.

A lot has changed in five years. Smaller retailers are going to have to find a more efficient way to integrate on line with brick and mortar. But here’s at least one example where it appears not to have worked out.

Do Retailers Really Need to Carry All That Inventory?

jeff — Sat, 31 Dec 2011 19:27:54 +0000

I suppose that seems like a stupid question. But having just been through another Christmas shopping (and return) season, I’m not so sure it is. I’ve shopped on line. I’ve been to too many malls too often (I confess it- I hate shopping). In those malls I saw way too much product on sale at way larger discounts than I like to see before Christmas.

As an aside, I’m wondering if the increased holiday sales being trumpeted by the media were at prices which will generate bottom line profit which, I take as a matter of faith, is still the idea.

I’ve made an effort this week, as I usually do this time of year, to catch up on my reading. Some of that reading included retail trends, pop up stores, inventory management, Sears closing 100 plus stores, and various other mostly business and action sports related topics. It all got me thinking about the retail environment.

Inventory is where retailers tie up most of their working capital. Retailers (and brands) have made heroic efforts to control inventory in recent years, but I think there might be still an opportunity for improvement by following the ongoing process of integration between brick and mortar and online retailing. I want to talk about that and ask what you think.

The Online Experience

I’m not going to tell you anything here you don’t know, but I want to build a (hopefully) logical argument. Consumers like online shopping because it’s efficient, it allows ease of comparison, it may be cheaper, and you don’t have to leave the comfort of your desk chair.

They dislike it because they can’t physically interact with the product (which is more or less important depending on the product), and they don’t get it the moment they buy it. They may also miss the personal interaction with a sales person. Or not.

The improved functionality of web sites and the development of logistics to get products to the customer (and back from them if necessary) faster and easier has accentuated the reasons for the consumer to shop on line, and reduced the reasons not to. You need look no further than the growth in online sales in a soft economy to know that’s true.

Brands and retailers (remember it’s getting harder and harder to differentiate between the two) see a role for web sites and social media in brand building. The competitive environment requires them to be on line and sell there either independently or in coordination with retailers.

Building, maintaining and keeping fresh a quality web site with ecommerce capabilities cost a bunch of money. The expense is not just in designing and creating it, but in keeping it up. Servicing online customers generates additional expense.

See- I told you I wasn’t going to tell you anything you didn’t already know. Let’s continue.

Is the brand building from being online worth it? That is, does it generate enough new customers, or increased sales to existing customers, to pay for all the incremental expense? Being the way I am, I guess I’d ask if it generated enough gross profit dollars.

Maybe you sell to new customers who are too far away to get to your store. Maybe your online communications program increases traffic and/or the average sale. Maybe, as a brand, you sell products in your line that retailers didn’t typically have room to carry and consumers didn’t previously know much about. Maybe a lot of things. Or maybe not.

So, competitive pressures require you to be online. Being online in a competitive way is expensive. You have to earn enough incremental gross profit to at least pay for the cost of being online. Cannibalizing brick and mortar sales for online won’t do it. If you accept those points, then you have to agree that total sales, including online, have to rise enough to pay for the online expense or overall industry profit will fall.

Let’s say that again in a slightly different way. With the existence of online retail, in the absence of any change in the brick and mortal expense structure, sales have to rise just to break even because of the additional expense of being online. And not, I’d estimate, by a trivial amount.

But consumers don’t automatically and graciously just spend more just because we’ve boosted our expense structure. What might we do about that structure?

A Lesson from the Airport

Last time I was at the airport (not over the holidays happily), I was struck by how the airlines have learned to use online to manage their business “in their store” so to speak. Pretty much everything happens at the monitor unless you’re changing your flight, checking baggage, or have some other variety of crises. You can do most of it at home, or you can wait and do it at the airport. At the airport or at home is pretty much the same for the airline and its passengers. They’ve gone a long way towards integrating brick and mortar, if I can call it that, and online. And they’ve done it in a way that the passengers seem to like. Although now, instead of standing in line at the airline counter, we stand in line to get through security. Oh well.

How does this translate to our retail business?

Taking Trends the Next Step

Retailers are already giving consumers the online or in store choice. They are dealing with the brands they carry (when the brand and the retailer are not one and the same) through not only the traditional model of purchasing inventory but of taking it on consignment or even having the brand run its own store in their existing store. My point (and once again, you already know this) is that the traditional model of see it, order it, receive it, sell it, pay for it is evolving.

In general terms, what I’m seeing is independent retailers take less and less inventory risk. The brands may not like this but have been dragged towards supporting it. Bluntly, they can’t afford to sell product to retailers who can be hard pressed to pay them, may dispose of the merchandise at prices and through channels the brand would prefer they didn’t use, and can’t really merchandise the complete line the way the brand wants.

We’ve got retailers becoming brands and brands becoming retailers. Zumiez, to use one example, thinks of itself as a brand. And go look at a Buckles someday. I’ve got to write about that.

We’ve got the merging of online with brick and mortar and the rapid growth of online sales. Through pop up stores, renting space in existing retailers, consignment and other gyrations we’ve got inventory risk migrating to brands. The relationship between brands and retailers is more codependent than it used to be. Brands want to capture the higher retail margins, and have the ability to better control and accelerate the process of creating and getting product into stores. Retailers are selling their own brands.

We tend to look at these developments as independent events. I don’t think they are. How might they be addressed in a positive, structured way?

Here’s a Wild Idea

What if a brick and mortar retailer cut the inventory it kept in half? Maybe by two thirds. Like the airlines, they let their customer decide whether they want to “check in” at home or at the airport (the store) and handle various purchases or changes at either place. The customer can come into the store, see the product and decide what they want to buy, but it gets shipped that day to their home (or they can come back to the store and pick it up).

Yeah, yeah, I know, I’m crazy. And the world is flat and real estate prices only go up. Maybe I am crazy. That’s why I’m asking you.

Maybe for the first time a retailer, due to the much lower inventory I’m proposing, is able (and can afford) to display most of a brand’s line rather than just the pieces they bought because they thought that was what would sell and it was all they had room for. The quality of the presentation, and the customer experience, might increase significantly. Part of the reason brands want to get into the retail business is so their brands can be controlled and presented the way they want.

The customer would come to the store either because they want help and like the in store experience (which I’m suggesting would improve), or because it’s a product they don’t want to buy without seeing and touching it. But they wouldn’t necessarily walk out with it. The very broad but not deep inventory would mean that the product would not necessarily be available for the customer to take home. The customer, after having had the opportunity to look at the biggest selection of a particular product they’ve ever seen, would make a selection and have the clerk swipe their card and tell them, “It will ship to your home tonight.”

The biggest objection, I suppose, is that customers who come into stores want to take the product with them. But we know that more and more customers are making the decision to wait a few days for their product. We also know that they are coming into stores to evaluate products then going home and ordering on line. And there is some benefit to not having to carry the product around with you.

Another interesting problem would be for the retailer to determine (in consultation with the brands it carries) exactly what to carry in inventory and how to price it. Do you charge some percentage more for product people walk out with? Which products will people be most determined to take with them? How do inventories get replenished under this situation of in store scarcity? Will you need to replace the product on the floor because people are playing with it so much? The gross margin return on inventory investment approach I’ve discussed before might be a tool that could add some value in figuring some of this out.

What I’m proposing is an approach to brick and mortar retailing where the role of online and the melding of brands with retailers is recognized. The retailer would tie up a bunch less working capital in inventory. The quality of their merchandising could improve and I think the customer would have a better experience. Thinking globally for a minute, this might also play to the U.S.’s competitive strengths in logistics and distribution.

Brands would take less collection risk and would be better presented at retail. They’d have more inventory risk but, as I said, that seems to be where we’re heading anyway.

I don’t want to trivialize what I’m suggesting. There would have to be some interesting negotiations between brands and retailers to sort out a lot of details. Retailers would have to invest in some new fixtures and other merchandising expense. In addition, I imagine there’d be some in store technology costs. Hopefully this is more than made up for by a massively lower inventory investment.

I’m suggesting this brick and mortar low inventory internet fulfillment approach because that’s where I see the trends taking us anyway. I figure you might as well ride the wave rather than have it break on your head and drive you into the sand. If the trends I’ve highlighted are valid, I’m not sure there’s much of a choice.

Billabong Reports Deteriorating Sales Growth Trend; The Strategy or the Economy?

jeff — Wed, 21 Dec 2011 00:45:33 +0000

Billabong’s announcement about sales trends since the end of October and the actions it’s taking may portend issues for other companies as well as for Billabong. Let’s take a look at what they announced, what actions they are taking, how they found themselves in this position, and how it relates to the global economic environment.

Here’s what they said (you can go here to read the announcement and the transcript of the conference call):

“Following receipt and finalization of management accounts reflecting actual trading results for the month of November and receipt of preliminary retail sales data for company owned stores for the period ended 11 December, the sales growth trend has deteriorated significantly in this critical retail period.”

They report that constant currency sales revenue growth for the three months ended September 30 was 24.7%. For the four months through October 31 it was 17.2% and for the five months ended November 30, 11.7%. If you exclude acquisitions, the numbers were 6.2%, 2.8% and 0.4%. Remember these are constant currency numbers. I don’t know what the “as reported” numbers will look like.

For a single month, and then two months, to pull the numbers down this hard means that things went south pretty quickly, and apparently so far they aren’t looking good in December. Remember that a lot of business is done during the holiday season, so these percentage declines translate into a whole lot more dollars than they would at other times of the year.

“Based on preliminary sales data to 11 December and assuming a continuation of current trends, it is now anticipated that sales revenue for the six months to 31 December will be approximately 5% higher than the pcp [prior calendar period] in constant currency terms (down approximately 3% adjusting for the impact of acquisitions).”

They say this “…reflects the European sovereign debt issues and the ensuing fears of global recession which are impacting consumer confidence and spending patterns significantly.” You can read their description of conditions in each region in the announcement. Weather has made a difference in both Europe and Australia. Billabong reports seeing “very low” sell through at retail, and poor reorders. CEO Derek O’Neill notes that reorders “…must be at reduced prices due to large amounts of unsold inventory washing through the marketplace therefore impacting gross margins.”

Basically, Europe is the toughest market followed by Australia and then the U.S. But whatever strength there was in the U.S. apparently dissipated in the first two weeks of December “…on growing global concerns about Europe. Challenging trading conditions remain in Canada, in both wholesale and retail.”

In discussing the U.S., CEO O’Neill refers to some weakness from PacSun orders related to their accelerated store closing. He estimated Billabong had lost a “couple of million’ in business over the last four weeks as a result. I had highlighted this issue when I reviewed PacSun’s results. I’m sure other brands will experience similar impacts consistent with their exposure to PacSun.

The good news is that Asia continues to perform well and Japan has rebounded. They also note that they have a “low double digit forward order book for late Spring and Summer in the USA in the wholesale business.” They had noted, however, that some orders (not just in the U.S.) had slipped from first half to the second half, and I wonder how that might impact those comparisons.

The result of all this is that Billabong expects their EBITDA for the six months ending December 31 to be between $70 and $75 million Australian dollars compared to $94.6 million in the same period the prior year.

Remember, so far the other public companies have reported just their end of quarter results- typically for October 31. None have felt an obligation to stand up and announce that conditions have gotten tough since then. But they report earnings every quarter where Billabong reports only every six months. I suppose these conditions could be unique to Billabong, but that seems improbable. It’s my belief that the on again, off again meetings about European sovereign debt and the growing realization that nothing has actually been done to solve the issue is creating a global caution among consumers.

What’s Billabong Doing?

I have the sense from the conference call that Billabong was a bit caught by surprise by the extent of the decline, but they seem to be acting decisively. The first thing they are doing is working to move inventory. This is in contrast to the position they took when the financial crisis hit in 2008. At that time, they indicated they were more concerned with holding margins and brand position than with losing some sales. They choose to be less promotional than others as a matter of brand positioning. Not so much this time I guess.

They are also undertaking a complete operational review to see where they can take costs out of the company. I expect that will reverberate through all their brands and locations.

Next, and most intriguing, a “strategic capital structure review” is under way with Goldman Sachs, the company’s advisor. What they indicated was that nothing was off the table, but raising more equity was pretty much the last choice. That makes sense when you note that their stock closed today (Tuesday) at AUD $1.77.

So that means that besides reducing expenses there’s at least the possibility of selling a brand, accelerating the closing of underperforming stores, maybe raising some kind of convertible debt, or, I guess, even selling the company.

They are doing this because their balance sheet position may require it, especially if business conditions deteriorate further. They noted that they were not in violation of any of their banking covenants as of December 19, but would not speculate on where their debt coverage ratio would be at the end of December. CEO O’Neill said the poor business conditions were “…expected to result in a deteriorating leverage position [at December 31].” Here’s how CFO Craig White puts it:

“The fact is that we’ve gone from a position where I could say that we were comfortably within covenants to a position that’s less comfortable, but I’m not going to speculate on where we’ll end up at the end of December. There’s a lot of things that can move around in that time.”

It’s reasonable of them to say that they don’t know yet where they will be at the end of December. December, as they point out, is a big month. But they are concerned enough that they’ve got Goldman Sachs looking at their choices. How did they get to this position?

Good Strategy, Bad Timing?

During the conference call, CEO O’Neill continued to support the company’s overall strategy of retail growth. He discussed the systems they have in place to manage it, and the progress they are making of getting better product to market faster in a more coordinated, efficient way. The more or less unspoken question during the call was “Hey, if this strategy is so hot, how come you got Goldman Sachs helping you figure out how to strengthen your balance sheet?!”

It’s not a bad question. As you recall, the West 49 acquisition was a big one. And it came along not necessarily at the time Billabong wanted it to. But there it was looking too good to pass up and fitting the company’s strategic criteria. You may remember they borrowed a bunch of money to pay for it, and I noted at the time it was a good thing they’d raised some capital earlier when they could even though they didn’t need it or the deal probably couldn’t have happened.

The other thing I emphasized was that buying a turnaround, which West 49 clearly was, was a whole different story from buying a solid brand or retail chain with a history of profitable growth and strong management in place. If they’d asked me at the time (they didn’t) I would have told them that whenever I’ve walked into a turnaround, it’s always been worse than I expected before I got there.

In a stronger economy, that might be an inconvenience. In a lousy one, it’s a problem. I’m not suggesting that the West 49 deal is the basis of all Billabong’s issues. The economy would still suck even without it. But if they didn’t have the debt they used to pay for the company, and hadn’t had to invest management time and some money into integrating and cleaning it up and stocking it with more of their owned brands, maybe they wouldn’t need Goldman Sachs to help them work through their potential balance sheet issues.

This is a tough situation that’s come on Billabong pretty suddenly. There were some concerns over the inventory and balance sheet at the last review but clearly they’ve accelerated due to deteriorating business conditions. There appears to be a not trivial chance that Billabong will violate some of its bank covenants at the end of the year.

The thing is, if it’s a small violation and you can see how it’s going to work its way out over a quarter or two, you don’t necessarily need Goldman Sachs to help fix the problem. What I might do (what I have done) is go to the bank and have a conversation about a soft quarter, and cash flow, and how it’s just a temporary thing, and about how I’m going to fix it, and couldn’t they see their way clear to waive the covenant for may six months, and yes, of course I’d be thrilled to pay them a fee to do that. Grovel, grovel, grovel.

Banks are a little more gun shy than they use to be (10 years too late may I point out), so maybe it’s not that simple. I still think the Billabong strategy makes sense as long as they exercise some caution as to how much of their owned brands end up in their owned stores. I also continue to think that tough times create opportunities, but only for those with strong balance sheets. Billabong apparently needs to shore their balance sheet up. We’ll find out in February if not before by how much and what they do.

Quik’s October 31st Quarter and Full Year

jeff — Sat, 17 Dec 2011 00:04:17 +0000

I’m going to work without my usual net of an SEC filing this time. That’s because year-end 10Ks always take a long time to come out, and I don’t want to wait that long to look at Quik’s results. I’ll review the 10K when it does show up. Right now, we’ll go with the press release and conference call transcript.

Not to be old fashioned here, but I think I’ll avoid proforma adjusted EBITDA numbers and start with the good old fashioned generally accepted accounting principles numbers. I’ll discuss some of the adjustments Quik takes into account in coming up with their presentation.

The Quarter’s Income Statement

Quik’s revenues for the quarter rose 10.1% to $545 million from $495 million the same quarter the previous year. Ecommerce revenues grew 69% globally, but they don’t tell us what that means in dollars.

The gross profit margin fell from 53.5% to 51.9% largely, as reported in the conference call, due to the cost and price increases all industry companies experienced. Selling, general and administrative expenses rose from $222 million to $248 million. As a percentage of sales, they were up from 44.9% to 45.4%. A chunk of the increase was the cost of the Quik Pro NYC, which we’ve learned today won’t be held next year.

The asset impairment charge for the quarter was $11.8 million, up from $8.4 million last year. These, as you probably know and which companies always like to point out to us, are noncash charges associated with changes in long term asset values.

Operating income fell by 31% from $34.3 million to $23.7 million. That is earnings before, interest, taxes, foreign currency loss and discontinued operations. Let’s look at some of those items.

Interest expense in the quarter fell $50.6 million to $14.1 million. I think that decline is the result of Rhone converting its debt into equity and some of the restructuring and debt repayment Quik has done over the last year. This is why I really like to have the SEC filing in my hand. It would allow me to be more specific.

That’s a hell of a decline in interest expense. But as a shareholder you need to remember that the Rhone conversion that’s largely responsible for the decline resulted in a lot more shares being outstanding, so the value of each share declined, all other things being equal.

Foreign currency loss was about $5.8 million compared to $463 million in the same quarter last year. That leaves us with pretax income of $3.9 million compared to a pretax loss of $16.7 million in last year’s quarter.

Due to a settlement mostly with the French tax authorities that I guess goes back to the Rossignol deal and Quik’s losses on that deal, there is a one-time $64 million non-cash income tax benefit in this quarter compared to a charge of $5.2 million last year. This leaves Quik with a reported net income for the quarter of $68 million compared to a loss of $22 million in the quarter last year.

How do we think about this?

Well, every year companies have “one-time events.” So I tend to have a hard time ignoring them on the grounds that they won’t recur, because something always happens to generate a new “one-time event.” But in the case of this French tax credit, it’s so enormous and out of the ordinary we’ve got to ignore it as we consider how Quik is operating. That’s what Quik does in presenting its proforma results.

The Complete Year

For the year, sales rose 6.3% to $1.95 billion. The gross profit margin was down only very slightly from 52.6% to 52.4%. Operating income fell by 66% from $123 million to $41.5 million. Most of that decline is the result of the asset impairment charges (Non-cash!) that rose from $11.6 million last year to $86.4 million. Interest expense fell from $114 million to $74 million. The net loss for the year rose from $6.3 million to $17.9 million.

I should point out (I have before) that these non-cash charges reflect an expected decline in the future cash flow of the assets being written down. That may be non-cash, but it’s hardly irrelevant.

The Americas generated $61 million in operating income for the whole year, up 7% from $57 million the previous year. Europe’s operating income grew from $94 million to $112 million. Asia/Pacific went from an operating profit of $11.8 to a loss of $84 for the year.

The Quik brand, we’re told, grew 5% during the year to $806 million. Roxy was down 2% to $519 million, but it improved each quarter, growing 10% in the final quarter compared to the same quarter the previous year. One of the analysts noted that Roxy’s revenues were down around $250 million from its peak in 2008. DC was up 15% to $545 million.

You know what I just realized? There’s no complete balance sheet provided in the press release. Gimme my SEC filing! What they tell us in the conference call is that receivables at $397 million are 6% higher than a year ago in constant currency. Inventory of $347 million was up 26% in constant currency, with much of the increase due to the early receipt of goods. Ten to fifteen percent of the increase is the result of higher cost of goods. Prior season’s goods represent only 5% of inventory. Cash on hand was $110 million.

Lacking the complete presentation we won’t see until the 10K, I’ve got no opinion on their balance sheet position.

Details by Region

With the broad income statements discussed, let’s look at some of the quarterly detail in the documents.

Americas revenue was up 12.7% to $250 million for the quarter. Same store sales were up 16%. Europe was up 11.5% to $213 million (6% in constant currency). Same store retail sales turned positive for the first time in 6 quarters in Europe. Asia/Pacific rose only 1.9% (down 7% in constant currency) to $82 million. The recession in Australia and strong Aussie dollar are making that a tough market. Japanese revenues at $25 million for the quarter are nearly back to the pre-tsunami levels.

The gross profit margin in the Americas fell from 48.1% to 47.1%. Europe was down from 60.2% to 57.2% and Asia/Pacific fell from 54.7% to 52.6%. As I’ve noted before, margins are a lot more attractive outside of the Americas. I wonder if the U.S. margin is much different from what’s reported for the Americas as a whole.

Operating income in the Americas fell 27% from $12.7 million to $9.3 million. Europe’s operating income jumped 50% from $20.9 million to $30.3 million. Asia/Pacific had an operating loss of $3 million after a profit of $8.6 million in the same quarter the previous year.

Opportunities

The company’s goal is to get to $3 billion in revenues in five years. They think the Quiksilver Girls and Women’s business have a $100 million opportunity in the next five years. They also expect growth in ecommerce of a similar amount. In DC, especially outside of the United States, they think there’s a half billion dollar opportunity. And they see a couple of hundred million dollar of revenue from emerging markets.

I would have been happier if we’d gotten some more specifics about some of their initiatives in the conference call. I probably expect too much from that forum.

It looks to me like growth will be limited in the United States (and margins are lower). Europe generated 71% of Quik’s operating earnings excluding corporate expenses in the fourth quarter. For the year, as you can see in the numbers above, Quik wouldn’t have had any operating earnings without Europe. But Europe is poised for a recession.

When we ask how Quik is doing in general, I have to go back to the operating income that declined 31% for the quarter and 66% for the year. I guess I should point out that the stock market, in its collective wisdom, doesn’t, at least with immediacy, think much of my point of view. Quik’s stock closed up 12.7% today (the day after the announcement) at $3.46 on volume that was almost three times its 90 day average. They must like that proforma, adjusted, EBITDA stuff.