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.