Growing Snowboard Brand Revenue; the Active Outdoor Market and Year Around Resorts

There has been much ringing of hands and gnashing of teeth around the subject of snowboard participation and what to do about it.  Studies have been done and programs implemented.  What has their impact been?  Hard to know, because we don’t know what things would look like if they hadn’t happened.

SIA reports there were 17.1 million snowboard visits to U.S. resorts during the 2004-05 season.  That number was 14.5 million in the 2014-15 season, down 15.2% over that period.  Participation during this period peaked during the 2009-10 and 2010-11 seasons at 18.9 million.

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My Farewell to PacSun as a Public Company

It was a couple of weeks ago that PacSun finally released its year end financials for January 30, 2016.  Arguably, nobody cares given the time that’s passed, the bankruptcy filing and the fact that they’ve now emerged from bankruptcy.

But a brief review of the numbers tells us something about how the company deteriorated to the point where a bankruptcy filing was the only real choice.  It’s also good information to have as we take a look at how they came out of bankruptcy.

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Robots Invade Retail

I’ve stolen that title from the article I want you to read.  It’s of particular interest to me because I live in the Northwest.  More precisely, in Bellevue across the lake from Seattle.  As an aside, the really good thing about living in the great state of Washington (regardless of your political affiliation) during this presidential election is that everybody knows the state will go for Clinton, so we are not being bombarded with Trump and Clinton ads that insult our intelligence.

Especially in the western part of the state, we are pretty liberal.  Over in Seattle, they’ve passed legislation that will gradually raise the minimum wage to $15.00 an hour and they are working on, or have just passed, legislation that will give workers certain rights in how they are scheduled.

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What All Retailers Are Doing: A Short Note on Tilly’s July 30 Quarter

Tilly’s has the same issues all retailers are facing, and their response isn’t really different.  But at least they grew their sales and net income a bit.

Revenue in the quarter ended July 30 rose 4.9% to $136.4 million from $130.0 million in last year’s quarter that ended August 1, 2015.  They also managed to increase their gross profit margin from 28.1% to 28.5%.  Product margin fell by 0.3% due to higher markdowns.  The increase in gross margin was due to a 0.7% “Decrease in distribution, buying and occupancy costs as a percentage of net sales primarily due to a lease assignment and certain other favorable lease negotiations.”

It sounds like the gross margin would not have risen without the lease assignment.  It was a one-time occurrence and was worth about $300,000.    I would be interested to hear what the gross margin on just brick and mortar was.

And while SG & A expenses rose a bit to $36.6 million, they fell as a percentage of revenue from 27.3% to 26.8%.  Net income rose from $560,000 to $1.43 million.

Comparable store sales rose 0.9% compared to a 0.5% increase in last year’s quarter.  That includes ecommerce sales.  In fact, brick and mortar comparable store sales were “slightly” negative and ecommerce grew at a double digit rate.  That makes sense as average net sales in each brick and mortar store fell from $540,000 to $533,000 and average net sales per square foot was down a bit from $71 to $70.

At the end of the quarter Tilly’s was operating 225 stores, up from 216 at the end of last year’s quarter.  CEO Ed Thomas notes in the conference call, “Regarding real estate, for the time being we remain focused on improving the performance of our existing stores rather than opening a significant number of new stores. We believe that remaining cautious about new store growth is prudent in the current retail environment. We are carefully evaluating each store opportunity with the objective of improving company profitability.”

Here’s another comment he made:

“We continue to bring in new brands with limited distribution and work with our existing branded partners to emphasize uniqueness to Tilly’s, which we know our customers expect from us. We continue to evaluate micro merchandising and product allocation practices in certain underperforming stores with the goal of improving our operating performance in these locations.”

That sounds a lot like what other retailers are saying.  It particularly reminds me of the Zumiez’s results I just reviewed.

In fact, a lot of what Tilly’s said reminded me of what other retailers are saying, and that’s a pretty good stopping point.  Caution in store openings, negotiations with landlords for better deals, growth of ecommerce, searching for distinctive brands, and careful inventory management are things all retailers are dealing with as they watch retail consolidation work its way through the economy.

Zumiez Quarter and Some Interesting Conference Call Comments

Zumiez is one of the public companies I follow that I hold up as doing most things right, but that doesn’t make them invulnerable to a tough economic environment.

Revenues for the quarter ended July 30 were down 0.86% from the same quarter ended last year on August 1.  They declined from $179.8 to $178.3 million.  The decline reflects an $8.7 million decline in comparable store sales (4.9%) offset by a net opening of 33 new stores.  North American sales rose 0.2%- about $0.4 million.  “…European sales decreased $1.2 million or 8.5% to $12.3 million.”

The gross profit margin fell from 32.1% to 30.8%.  Product margin rose by 0.3%, but deleveraging of store occupancy costs (spreading more costs across lower revenues) cost them 1.3%.

SG&A expenses rose 6.7% from $52.5 to $55.9 million.  As a percentage of sales they rose from 29.2% to 31.5%.  This isn’t necessarily a completely bad thing, assuming some of the additional spending addresses their long term strategy.  Some of it is also funding minimum wage increases.

That produced an operating loss of $1.1 million compared to an operating profit of $5.3 million in last year’s quarter.  Net income fell from a profit of $3.2 million to a loss of $838,000.  That includes an income tax expense of $1.98 in last year’s quarter compared to a tax benefit of $526,000 in this year’s.

I guess you can argue that the balance sheet, compared to a year ago, weakened a bit but not so that it matters.  Cash and marketable securities fell from $80.7 to $57.3 million.  During the year, they have bought $18.3 million of their own stock ($6.7 million in the just ended quarter).

Inventory rose slightly from $122 to $132 million.  The current ratio fell from 2.43 to 2.05.  Shareholders’ equity declined 8.2% from $305 to $280 million.

At July 30, Zumiez had 673 stores; 604 in the U.S., 44 in Canada and 25 in Europe.  They are looking at opening 29 new stores in 2016 including six in Canada and seven in Europe.

During the conference call, they announced the August 31st completion of the acquisition of Australian retailer Fast Times.  It operates five stores and a website.  They paid $5.5 million (Australian) plus $1.4 million in Zumiez’s stock (also valued in Australian dollars I assume).  In the 12 months ended June 30, Fast Times had revenue of AUD $9.2 million and had pretax margins of around 10%.

I assume the plan is to grow Fast Times stores in the same way we saw growth in European and Canadian stores once Zumiez got a foothold in those markets.  Another thing I find interesting is that Zumiez is now operating in four currencies.  It adds some complexity, but maybe also some opportunities as the Australian business grows.

Let’s start looking at strategy by recalling that Zumiez considers itself to have one distribution channel and doesn’t differentiate between online, mobile, and brick and mortar as they think about their market.   As a result, they divide their business up into something they call trade areas.

What’s a trade area?  I don’t think I’ve ever heard them define it publicly.  No doubt it has a geographic component, but I don’t think it’s that simple.  As I understand it (don’t want to be putting words in Zumiez’s mouth here), it is the “locus of connection” as defined by their customers and the way they choose to shop.  It’s a moving target.

Wow, that sounds great!  Unfortunately, I’m not completely sure what it means operationally, and I’m pretty sure Zumiez and other retailers are also still figuring it out.  Before I get too far into the clouds here, which is a pretty good way to put it, I’m going to let Zumiez’s CEO Rick Brooks help bring me back to earth.

“Our strategy for new store openings remains the same. We’re committed to opening only those stores that are required to best serve our customers in any given trade area. Accordingly, and as we begin to approach our target for total mall store count in North America, our new store openings have slowed. Our focus has shifted towards optimization of the store base as we leverage our integrated structural and technological platform to maximize the impact each store has on its respective geographic region.”

Okay, “optimization of the store base.”  What does that mean for these trade areas?  Do you need fewer stores?  For example, might you decide that a store with a $15 an hour minimum wage was too expensive to operate given that you have a store ten miles away where wages were $10 an hour and your customers were defining trade areas in such a way that they were willing to buy more on line?  Does good management of a trade area mean you can generate more revenue at lower cost with fewer brick and mortar stores?

I wrote this article on minimum wage a week or so ago based on a comment Zumiez made in their conference call.  I wanted to add that the additional company cost isn’t just the increase for those making less than minimum wage.  Remember the people already making the new minimum wage or more are going to ask why they can’t get an increase as well.  It’s a big number.  Please recognize that I’m not arguing for or against increases in the minimum wage.  I’m just pointing out, here and in the article, some possible impacts.

Next, let’s tie Zumiez’s idea of trade areas to the rollout of its new systems.  As they’ve announced, they are rolling out the new “structural and technological platform” referred to above.  They consider it an integral part of their strategy.  To call it a point of sale or accounting system would miss the point.

You know that Zumiez has worked towards “hyper-localized merchandised assortments” and fulfilling all their online orders through their stores.  Here’s how Rick describes the systems and their impact.

“Enhancements for making product delivery and our world class customer service are first and foremost aimed at augmenting our positioning and relevancy to our core customer base. Our efforts to-date are giving significantly faster delivery times for our online orders to our localized store fulfillment program. As we implement our customer engagements within North America, we’ll gain additional touch points for our customer, a faster, more integrated commerce platform and enhanced omni-channel functionality. This allowed us to further interact with our customers to facilitate alignment between our customers’ desires, our brand offerings and positioning.”

Zumiez considers itself a brand.  It does not want to be defined by the brands it carries.  It expects to sell brands at full price and margin.  This, according to Rick is “…representative of brand strength, our Zumiez brand strength, meaning that our consumer sees value on what we are doing and is willing to pay full price.”  It’s “…about having unique brands that are merchants in the marketplace, it reflects back to the comment we made about the strength of private label here performing well, and it also reflects back to the fact that we were down a little bit last year.”

They talk about brands emerging anywhere and how they “…quickly reach our niche consumers anywhere in the world through these mobile devices.”

“We want to be their local shop, but we want to be the local shop with global reach and global scale.”

How does this all come together?  First, Zumiez is going to be completely agnostic about brands.  They will carry those brands their customers want them to carry for as long as they can sell them for good margin.  That shouldn’t be a new concept for any retailer, but I expect the speed of brand turnover to generally accelerate.

Rick has spoken in past conference calls about long term trends that have allowed them, in the past, to sell of a lot of specific style or category of merchandise.  I wonder if he still expects those opportunities to return.  Zumiez is certainly organizing itself as if it doesn’t expect that.  Or perhaps it’s better to say they are organizing so it won’t matter if doesn’t happen.

Second, Zumiez doesn’t know what it’s going to find out when these new systems are all on line and generating data in ways they never been able to look at it before.  What will they learn?  What will they be able to do differently/better?  The consumer is in charge.  You’d better be able to react as quickly as they react and follow them to the new trends and brands before it changes again.  Your systems are no longer a cost center.  They are a critical element of your strategic advantage, if you can find one.

Third, notice the relationship between the brands that Zumiez carries and the strength of the Zumiez brand.  They are reinforcing each other.  This allows Zumiez to be successful in private label (and serve a customer looking for value and make a better margin) without damaging customer perception of the stores, as we’ve seen some other retailers do.  Zumiez mentions in the conference call that they did something like 300 events at stores and other place last year.

Fourth, the new systems, the data they generate, and the flexibility they provide will be the engine that drives the concept of the trade areas.  It will allow, as they said earlier, for “…optimization of the store base.”  But I think it’s a mistake to assume they are just talking about brick and mortar stores here.  It’s optimization of each trade area as they evolve, expand, correct, adjust.  This is all going to be continuously in motion.

Finally, Zumiez has been very specific about who their customers are and that they want to sell the right brands (as defined by those customers) at full price and margin.  This is very interesting to me.  You know I think there’s a conflict between being achieving the growth a public company requires and differentiating and supporting your brand.  It feels like Zumiez might be running up against this issue itself.  If I read between the lines, I almost hear them telling the analysts that the biggest opportunity is at the bottom line- not the top.

You know, I’m just giddy over what Zumiez is doing because it’s what I think I’d do and I can’t wait to see how it works out.  But we’re still an over retailed country and it’s becoming more costly to sell to a completely empowered consumer with less money to spend.  I know there will always be brick and mortar retail, but I don’t know the form it will take and how much we need.  Zumiez, and other established retailers, are stuck with a store base they can only change slowly and incrementally.  New retailers are often starting only online and going from there.

Where and how do you make brick and mortar an advantage?

A Lesson from a Related Industry

I love golf.  That’s because I have an uncanny ability to only remember the good shots and to believe, in spite of all evidence to the contrary, that there’s no reason I shouldn’t play well next time.  This, of course, is one popular definition of insanity- but perhaps I should move on.

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Minimum Raise Increases: They Do Have an Impact- and Not Just on the People Who Get Paid More

I was reading Zumiez’s 10-Q and conference call and came across a question from an analyst (Sharon Zackfia from William Blair) on labor scarcity and wage pressures.  Here’s what she asked:

“I guess I’m curious from a labor standpoint kind of as labor gets scarcer and scarcer and wages are going up, how — what if anything that you’ve been able to do at a store level to kind of optimize that labor better, given the compression in your seasons?”

Zumiez CEO Rick Brooks’ got me thinking and detoured me from my usual review of their results- which I’ll get to after this article.  Let me quote Rick at some length.

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

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

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

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SurfStitch Annual Results- Wow! And Not in a Good Way.

I’ve been encouraged by a couple of readers to pay attention to SurfStitch, which I haven’t typically covered.  But now I am.  Turns out, it’s way too interesting not to.

SurfStitch (SS for short) is an ecommerce retailer through the three sites,, and  It also has three sites it calls media platforms;, and  If you’re not familiar with them, it might be worth a couple of minutes to look at their sites before you continue reading.

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The Future Isn’t Here Yet: Billabong’s Results for the Year

Billabong published its results for the year ended June 30th last week.  The headline numbers (all numbers in Australian dollars) are revenue from continuing operations of $1.10 billion and a net loss after tax of $23.7 million.  The numbers for last year (pcp- prior calendar period) were revenue of $1.06 billion and a profit of $4.15 million.  Pretax loss actually declined from $20.2 to $15.9 million.  Those are the numbers from the consolidated income statement.

However, those summary numbers are not the whole story.  There are the usual discussions to be had and adjustments to be made (or not) with regards to taxes, exchange rates, discontinued and sold operations and the inclusion or exclusion of the “significant” items.  Before we have fun with all that, how about we take a moment and look at Billabong’s overall situation?  It’s kind of like I’m doing my conclusion first, but I think having this stuff in mind will help you understand Billabong’s challenges and opportunities when we start to get down into some of the weeds.

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