Globe Makes a Profit. It’s Good to Make a Profit, But There Are Some Unanswered Questions

Initially, I was relieved. There was no conference call to listen to and try to take notes faster than they could talk. The press release was one page. The Appendix 4E was only 60 pages and the Investor Presentation power point didn’t really add anything to it. I thought I’d get off easy on this one.

Turns out it’s a lot easier to do an analysis when you have more solid information to analyze. Globe, however, doesn’t feel any need to provide a whole lot of information beyond what’s required by law. They’ve only got about 2,200 shareholders, of which 1,400 hold what we in the U.S. call restricted stock. That is, they can’t just go out and sell it on the market. The stock doesn’t trade much, the analysts aren’t following the company closely, and the Hill brothers control about 66% of total shares outstanding. As a result, their board of directors, Globe tells me, has decided there’s no reason to supply additional, detailed information on strategy, brand performance and future outlook that might help competitors.

I’ll give you what I’ve got, then I’ve got some questions and issues to raise. All the numbers are in Australian Dollars. Before I start, I’ll remind you that the brands the company sells, besides Globe, include Gallaz and, as part of Dwindle Distribution, Tensor, Blind, Enjoi, Darkstar, Cliché, Speed Demons, Almost, and Blind. You can see the whole report here if you want; http://www.globecorporate.com/files/announcements/APP_4E-26Aug-FINAL.pdf
 
The Financial Statements
 
Revenue for the year ended June 30, 2010 fell 22% from $117.6 million to $91.7 million. Net sales (excluding revenues, such as royalties, not received from selling product) were down 23% to $90.5 million from $116.9 million. The press release notes that in constant currency and after closing 12 retail stores in Australia over the last two year, the decline in revenue was 9%. The retail closing leaves Globe with just three flagship stores. 
 
Gross profit fell from $53.3 to $42 million. The gross profit margin rose from 45.6% to 46.4%. Employee benefits expense was reduced from $18.6 million to $13 million, or by 30%. Selling and administrative expenses dropped 37% from $39.8 to $25.1 million. Income tax expense was down by about a million bucks. Net income “before significant items” improved by $4.608 million, from a loss of $2.397 million to a profit of $2.211 million. Net income (including those items) was $1.3 million compared to a loss of $8.9 million the prior year. The major significant items are a cash charge for restructuring of $3.155 million and a non-cash reduction in tax assets of $4.666 million in the year ended June 30, 2009.
 
Total of these significant items was an expense of $6.471 million for 2009 but only $897,000 for 2010. These items represent a big chunk of the total profit turnaround
 
Globe reports its revenues by three segments; Australasia, North America, and Europe.   Revenues from these three segments were down, respectively, 29.6%, 13.3%, and 32.1% for the year ended June 30, 2010 compared to the prior year. About half the decline in Australia was the result of the retail store closings. Sales in Australasia were $24.4 million. In North America, they were$50.8 million. The number for Europe was $16.5 million. Sales in Australia, of course, are not impacted by currency fluctuations (except that product cost may decline if it’s bought in another currency when the Australian dollar strengthens).
 
The current ratio on the balance sheet improved very slightly from 2.92 to 3.09, and total debt to equity fell a bit (a good thing) from 0.36 to 0.34. Inventory fell 19.6%, which you’d expect given the sales decline. I might have expected even a bit more. Trade and other payables fell hardly at all, from $12.4 to $12.3 million. Given the 37% drop in selling and administrative expenses I might have expected this to decline. One explanation for it not declining might be that they are paying more slowly. Might also just be a timing issue and mean nothing. Globe management tells me it’s just timing.
 
Receivables fell only 6.5% to $14 million. I would have expected more of a decline again because of the lower sales. With product sales down 23%, that small receivables decline seems a bit odd.    Hmmm.   Guess it’s time to dig into the details
 
Adventures in Footnote Land
 
Ah, here’s some information. Footnote 10. It seems that trade receivables were down 27.4% (after provision for doubtful accounts), but that “Other Receivables” rose 94% from $2.616 to $5.078 million. Note c to note 10 tells us that, “This amount includes $4.5 million (2009: $2.2 million) relating to amounts recoverable under trade receivables factoring arrangements– refer to Note 26 for further information.”
 
Off we go Note 26 for that sure to be enlightening “further information.” Here’s the part of that note that’s relevant to the Other Receivables. “Other receivables include sundry other receivables and amounts due from factors. All balances are current and are not considered to be impaired.”
 
Okay, this slog for information just won’t end. We have to delve deeper into Note 26 (which runs for five pages) where we learn that Globe has factoring facilities in place in both Australia and North America.   In North America, the credit risk on the “the majority” of the receivables sold pass to the factor. No idea if that’s 51% or 98%. So Globe’s risk is largely that the North American factor won’t pay. 
But then here’s the last sentence describing the North American arrangement:
 
“These arrangements have been amended during the year. Under the terms of the revised agreements, the basic level of funding does not change, but the consolidated entity retains title to trade receivables and therefore has minimal exposure to the factor.”
 
Okay, I’m begging for mercy and have pleaded with Globe to explain this to me. It turns out that CIT is Globe’s factor. As you recall, CIT ran into some difficulties last year. There was concern (not just on Globe’s part) that CIT might go belly up and leave Globe not owning its receivables and not being able to get the money from CIT when it was collected. This would have, well, sucked. So Globe (and other companies) negotiated a change in their agreement under which the credit risk passed to CIT, but Globe owned the receivables until they were paid, thereby protecting Globe from a possible CIT bankruptcy.
 
I really wish they’d just said that. I take some comfort from the fact that Globe’s CFO has apparently had to sit down with board members and go over this footnote with them as well. I’m not the only one who’s been confused. Regardless of where the risk is or who owns the receivables, they have dropped over the year, according to Globe, from $18 million to $13.9 million, a decline of almost 23% and in line with the fall in sales.
   
Now, what do we know about the quality of these receivables? Not all that much. There’s a little table (in the endless footnote 26 of course) that shows “…trade receivables considered past due but not impaired…” Not impaired means they expect to collect them and haven’t reserved for them. That number has declined over the year from $3.23 to $2.59 million. For the year just ended, they show nothing “Past due greater than 91 days.” But if the terms of the sale were 90 days, then nothing would show up past due until the 91st day. Lacking information on what the original sales terms were, this chart isn’t very helpful.
    
We do see, however, that during 2010, Globe recognized an impairment loss of only $104,000. The previous year it was $1.627 million. Trade receivables past due and impaired were $2.077 million at the end of this year compared to $3.416 million at the end of the previous year. The impairment allowance (reserve) has fallen from $2.972 million to $1.793 million. That represents 20% of trade receivables at the end of 2009 and 18% at the end of 2010. On the one hand, I look at that and say, “That must be more than enough.” On the other hand, an 18% impairment allowance seems to suggest an awfully high level of possible problem receivables.    
 
I’m sure you’re kind of over Australian accounting for and presentation of receivables. Me too.
 
What’s the Future Look Like?
 
I have no idea. There’s not a word on how any individual brand did. Under “Future Developments and Results,” all they say is:
“No further commentary on future developments and expected results is included in this report as the directors are of the opinion that such commentary would likely result in unreasonable prejudice to the consolidated entity.”
 
Initially, this had me kind of shocked. But it turns out it’s just standard legal Australian for “We don’t have to tell you anything else and we’re not going to because it would just help competitors.” Billabong has pretty much the same wording, but they include it with a short discussion of their expectations for the coming year, so it’s not shocking. I guess everybody in Australia takes it for granted, but I almost fell over the first time I read it. Just a reminder that speaking the same language isn’t any guarantee of smooth communications.
 
It’s true that Globe went from a loss to a small profit, and that’s a good result. But, by way of summary, let’s look at how they did it. First, product sales were down 23% for the year. Tough economy, store closings, and exchange rate issues acknowledged, that can’t imply anything good for market share and brand positioning. They slashed selling and administrative expenses 37% from 33.9% of sales to 26.4% of sales. Employee benefit expense was down 30%. They acknowledge that they were being a little less than rigorous in their expense control previously, and told me that the current level of expenses was appropriate for projected revenue levels.  Those are big reductions, and I wonder if they can be maintained.
 
Lots of companies have told me the same kinds of things as they’ve adjusted to the recession. I should note that the Australian economy has, until now, been spared much of the recessionary problems of the rest of the world, but that seems to be changing. We’ll see how Globe reacts.
 
Globe didn’t have $3.2 million in restructuring expenses that they had last year. The impairment charge for receivables was about $1.5 million less than last year.
 
I’m left here with a lot of “I don’t knows” and “They didn’t say.” From my description of their shareholders at the start of this article, I can see why they don’t feel a need to provide more information. But I think they do themselves a disservice. My experience is that the assumptions made in the absence of real information are always worse than the truth. I was clearly guilty of thinking like that in my first reading of their report.
 
At the end of the day, you can only improve your bottom line by so much through cutting expenses. Finally, you have to sell more at better margins. Globe has chosen not to explain how they are going to do that. 

 

 

2 replies
  1. Marie
    Marie says:

    Jeff,

    I love the way you can turn a phrase:

    Initially, this had me kind of shocked. But it turns out it’s just standard legal Australian for “We don’t have to tell you anything else and we’re not going to because it would just help competitors.”

    Let’s scare up some business soon!

    Best,

    Marie

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