Good News And Bad News; Ride Reports Third Quarter and Preseason Orders.

            It must suck to be the only public, pure snowboard company left standing. All the other snowboard brands are suffering from some of the same industry issues as Ride, but they can equivocate about it with impunity.

            But Ride’s management wouldn’t want to do that anyway. Like the title says, there’s good news and bad news. The good news is the improvement in the income statement and the preseason orders (up 26 percent). The bad news is a weak balance sheet and a capital structure that needs, well, restructuring.
            The income-statement result and preseason-order growth is all the more impressive given the balance sheet Ride has had to work with and the constraints placed on what the company can do. A weak balance sheet means the CEO spends all his time managing cash, assuaging banks, and trying to raise capital. Who knows what Ride—or any other snowboard brand for that matter—could accomplish if the management team could actually focus on running the business?
The Income Statement
            Sales for the nine months ending March 31, 1999 are up 14.2 percent to 38.1-million dollars over the same period last year. Ride’s loss for those nine months was 1.389-million dollars compared to 14.645-million dollars last year. The improvement isn’t as spectacular as it seems at first glance. Last year, the company took an 8.6-million-dollar write-down for impairment of goodwill. In other words, given market conditions at the time of the write down, it had some assets that were worth a lot less than what Ride paid for them.
            Nine-month selling, general, and administrative expenses have been more than cut in half, but that includes the 8.6-million-dollar write-down. If you take that out of the equation, the expense reduction is still 19.7 percent—which is pretty impressive. According to Ride, and excluding the impact of the 8.6-million-dollar write-down, the expense reduction “ … was primarily due to staff reductions and lower executive salaries.”
            Gross margin over nine months was up to 27.4 percent, an increase of 1.3 percent. May not sound like much, but 1.3 percent of Ride’s nine-month sales is half-a-million bucks, which would buy a lot of beer at Vegas. Perhaps you recall, many years ago, when having your own factory was the Holy Grail of the snowboard industry because “it would let you have a really great gross margin.” Numbers like 45 percent were once thrown around. Too bad everybody had the same idea.
The Balance Sheet
            Ride’s receivables at March 31 were 6.5-million dollars net of a bad-debt allowance of 750,000 dollars. That would be bad if those receivables represented uncollected accounts from last season. But according to Ride President Robert Marcovitch, those receivables represent early 1999 sales of last season’s product that will be collected this fall.
            The 10Q confirms this, stating, “The company made the decision to move our closeout inventory at prices lower than would normally be the case in order to gain quick sales and hence borrowing availability.” Translation, we needed the cash!
            If it isn’t getting paid until fall, how does that get the company any cash? The bank line from CIT allows Ride to borrow a percentage of eligible inventory and receivables. Ignoring the issue of what’s “eligible” and what’s not, the percentages for Ride are 55 and 85 percent respectively. Let’s say you’ve got a million bucks in inventory. You can borrow 55 percent of that, or 550,000 dollars assuming it’s all eligible. If you’ve got a million in receivables, you can borrow 85 percent or 850,000 dollars. Because I went to business school, I know that 850,000 dollars is better than 550,000 dollars, so Ride sold at lower prices to create receivables. 
            Inventory of 7.3-million dollars on March 31 gives you pause for a moment. But the footnotes in the 10Q tell us that 2.5-million dollars of that is raw materials and work in progress. That will turn into next season’s product. The remainder is finished-goods inventory. According to Marcovitch, almost all of the finished goods are product for the coming season. Not only do we know from this that the inventory is good, but it suggests that however tight cash is, Ride is finding enough dollars to run its factory efficiently. That is, it’s getting materials from suppliers and not having to start and stop the plant because of material or cash shortages. The major liquid assets then—inventory and receivables—are more or less worth what the balance sheet says they are. And, in the normal course of business, when Ride ships that inventory to customers it will turn into receivables (and, hopefully, someday cash), that will be worth substantially more than the current inventory value.
            Meanwhile, down on the liability side of the balance sheet, we find current liabilities of 15.1-million dollars broken down as follows:
            Accounts Payable: 4,247,000 dollars.
            Accrued Expenses: 2,383,000 dollars.
            Short-term Borrowings: 8,484,000 dollars.
            The short-term borrowings include three million dollars owed to U.S. bank and a note for 1,725,000 dollars payable to Advantage Fund II, Ltd. The remainder is owed to CIT Group/Credit Finance, Inc. under Rides’ revolving line of credit. Accounts payable and accrued expenses are moneys owed to the phone company, materials suppliers, insurance agents, employees, and everybody else Ride needs to get goods and services from to operate its business. Ride’s current ratio (its current assets divided by current liabilities) is 0.98. The current ratio is a standard financial measure of a company’s ability to meet its ongoing operating expenses. The lower
the number gets, the tougher things are. You can’t continue to operate with a current ratio under 1.0 for too long.
            Let’s put that in a little perspective. In a highly seasonal business, in the part of the season where the cash is drying up (like the end of March for example) no snowboard company has a great-looking balance sheet and is rushing to pay all its bills. Nevertheless, Ride’s current ratio is symptomatic of the need for a balance sheet restructuring and additional working capital.
Preseason Orders
            Up 26 percent to 43-million dollars. Wow. Any other snowboard company that had a bigger increase, step up and claim it. I won’t be holding my breath. The only category that’s down is “OEM, wakeboards, and other.” That’s only down, according to the press release, because it chooses not to accept certain OEM orders, which is probably a correct strategic move.
            What I like even better are the categories the increases came in. Boards are up nineteen percent. However, boots, bindings, and apparel and accessories (excluding SMP) are up 38, 33, and 58 percent respectively. That is, higher margin products represent an increasing percentage of total sales, which should bring the whole margin up.
            Some of these sales may get shipped before June 30. But just for fun, let’s say Ride sells that 43-million dollars, and nothing more, in the nine months of their next fiscal year. Let’s assume the company’s gross margin stays the same. Its gross profit will be 11.78-million dollars.
With the preferred stock dividend eliminated, that increase in gross profit by itself will bring Ride to break-even. A restructuring should reduce the company’s interest expense from 798,000 dollars, if only because Ride is paying punitive interest rates right now. Margins should go up a point or two just based on the change in the product mix. Obviously, the quarter ending June 30 isn’t a strong one, but for the twelve months ending June 30, 2000 Ride ought to earn a few bucks just from what’s in place right now. That is, if Ride management can get the restructuring done.
            The U.S. Bank facility is a term loan for three million dollars that is due and payable August 31, 1999. That loan, according to the 10Q, “ … is secured by promissory notes from Global Sports, Inc. in the original aggregate amount of 1.8-million dollars. Additionally, the facility is secured by the personal guarantee of one of the Company’s outside directors, including certain real-estate property owned by the director.”
The note for 1.725-million dollars, also according to the 10Q, “ … has a term due date of June 30, 1999 which date is automatically extended to September 30, 1999 in the event the company has executed a letter of intent for a transaction which would raise capital sufficient to fully redeem the note.”  The note’s interest rate is ten percent, but it has a default rate of
eighteen percent. The CIT line of credit expires August 30, 1999.
            So, there are a lot of critical deadlines coming up, and the 10Q is replete with the usual statements companies in these circumstances make about dire consequences if Ride can’t meet some of these deadlines.
            My guess is that there will be a successful restructuring. The improvement in operating performance and increase in preseason orders makes me believe that. Its likely shareholders will be hit by additional dilution as a result of the restructuring. Concern over that dilution is probably the reason the stock price didn’t go up significantly in the wake of Ride’s healthy preseason order numbers.
            Ride has hired Ladenburg Thalman & Co. “ … as its financial advisor to provide advice regarding potential strategic alternatives available to the company,” says the 10Q. Negotiations are ongoing.
The Bottom Line
            If Ride had paid maybe two-million less for its factory, not hired quite so many people so quickly, and had paid some of them less, and not built the Taj Mahal in Preston, Washington, I suspect the managers at Ride would be smiling and looking forward to closing out their fiscal year June 30 with a twelve-month profit. But that’s not how it happened, and Ride was hardly the only snowboard company seduced by perceived endless growth.
            Ride’s market position seems sound and the product line complete and well received. Management and employees are industry experienced.          I still have some trouble with the financial burden of owning a factory, but Ride management has made its a marketing asset. So, strategically the brand seems positioned to succeed. By the time you read this, we’ll probably know if Ride’s managers pulled off the financial restructuring that will allow them to do it.