Speaking of Technology……

We all give lip service to the speed of technological change. I imagine most of you have heard that the first driverless 18 wheel trucks are on the highways in Nevada. For the time being, they’ve got a driver accompanying them, but I don’t expect that to last. Here’s a link to the story in case you haven’t seen it.

“Wow, isn’t that interesting!” we say and go right back to what we were doing. But sometimes this change gets a little closer to home.

Exhibit A is the Lily Camera. The camera is built into a drone that follows a signal from a small device you wear on your wrist. You can apparently give it positioning instructions. I’m not quite clear on how it avoids obstructions as it follows you. The flight time is limited to 20 minutes right now. Battery technology seems to be holding lots of innovations back.

Here’s a link to the camera in action. It is very cool. I trust that GoPro is not only aware of this, but is all over the technology. It won’t ship until next February with a price of $499.00. I imagine that price will drop over time. The web site is www.lily.camera but there’s not much to see there yet.

I don’t see the evolution of this technology ending well for the people who film our athletes in action any more than it will end well for long haul truck drivers.

Skullcandy’s March 31st Quarter; Confronting the New Retail Environment

I’ve been writing, talking and thinking a lot lately about the evolution of the retail market; about HOW YOU SELL STUFF TO PEOPLE and WHY THEY BUY IT.

Skullcandy CEO Hoby Darling has a plan, and he sure talks pretty about how the company is making it happen. I recommend you read his opening statement in the recent conference call. As he does on every call, he reviews his five strategies. They are, as a reminder,

“…one, marketplace transform; two, create the innovation future; three, grow international to 50% of our business; four, expand and amplify known for categories and partnerships; and five, team and operational excellence.”

Skull is a public company or I probably wouldn’t be writing this. As such, it needs quarterly growth and, as I’ve written, there can be a conflict between getting that growth and differentiating your brand if your brand’s distinctiveness is based mostly on marketing.

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SPY’s March 31 Quarter; Curious About the Inventory

I have admired SPY for the organizational, strategic positioning, and expense control changes they’ve implemented in the last couple of years. But there’s a limit to how far you can reduce expenses. After that, SPY has to find ways to increase sales or its gross margin to find a way out from under its $21.5 million in shareholder debt.

That number, by the way, is actually down a few thousand from the end of last year’s quarter.   Good to see it no longer increasing.

Sales revenue was more or less constant, declining from $9.192 million in last year’s quarter to $9.131 million this year. The decline was “…principally attributable to lower sales of our sunglasses which decreased by 6.2% or $0.5 million during the three months ended March 31, 2015…The decrease was partially offset by an increase in sales of our goggle and prescription frame product lines, which increased by 44.1% and 9.4%, respectively or $0.4 million and $0.1 million, respectively, during the three months ended March 31, 2015…” Sunglasses are a tough market.

Sunglasses were 74.9% of total revenue, down from 79.4% in last year’s quarter. North American revenue was 86.5% of total revenue. Sales also included about $600,000 in closeouts, up from $400,000 in last year’s quarter.

The gross profit margin rose from 52.0% to 54.8%. That’s quite jump. It was the result of “…(i) increased efficiencies in product development and manufacturing that reduced the cost of our products; (ii) reduced air freight-in charges for new products.” Remember they’ve moved a lot of their sunglass production from Italy to China.

Sales and marketing expenses rose from $2.9 to $3.2 million “…primarily due to increases in marketing events, tradeshows and promotions.” I’m glad to see that increase. It sounds like they are spending it on the right things.

Income from operations improved from $84,000 to $193,000. Interest expense was down from $757,000 to $488,000 but remember the shareholder who owns most of the debt cut the interest rate last year and that largely explains the decline. The net loss declined from $742,000 to $409,000.

I do have a question or two about the balance sheet and cash flow. Cash provided by operations was $2.1 million ($2.28 million in last year’s quarter). Looking at the balance sheets for December 31, 2014 and March 31, 2015, we see a decline in receivables from $7.17 to $5.39 million. Inventory fell 13.1% from $7.7 to $6.69 million. They note in the 10-Q that, “During the three months ended March 31, 2015, the Company had positive cash flow from operations principally due to timing of inventory purchases and higher collections on accounts receivable.”

Last year, they said they had positive cash flow “…principally as a result of a significant reduction in operating expenses and increases in gross profit.”

So last year it was because they operated better. This year, as I read what they say, it was due to what sound like timing differences. People paid earlier than expected and inventory that was set to arrive didn’t. Cash flow from improved operations is lasting. Cash flows from timing differences reverse themselves in subsequent quarters.

Complicating this is that last year’s sales for the quarter were about the same as this year. But last year’s quarter ended with inventory of $4.34 million, where inventory this year was $6.69 million.

Their wording confuses me. Do they mean they would have had much lower or even negative cash flow if it wasn’t for the timing of inventory purchases and higher receivables collections?

Second, if the timing of inventory purchases helped cash flow that means to me that they didn’t have to pay for some inventory they thought they were going to have to pay for during that quarter. But their inventory at March 31, 2015 is already 54% higher than a year ago. And I guess that the inventory that they didn’t get in the first quarter will show up in the second. What are they going to do with it all?

My hope is that the explanation involves new orders and increasing sales. Maybe we’ll get better insight next quarter.

An Interesting Point of View on the Future of Retail

Once again, my research department has come through. They’ve presented me with a paper from PwC and Kantar Retail that talks in some detail about where they see retail going between 2013 and 2020. It’s a little dated, but still very relevant. If you’re already seen it, never mind.

I suppose one of the reasons I like it so much is that they say a lot of the things I’ve been saying, but they’ve taken 44 pages to say it with more analysis and explanation than I ever have time for.

Here’s a quote from their summary, but you really need to read the whole thing to understand what they mean.

“Success will likely be shaped by several factors, weaved together in a flexible, scalable, and agile model. The winning retailers will have a superior understanding of their consumer, considering income and demographic fragmentation, as well as behaviors, and will have the inert ability to analyze shopper data and extract valuable information. They will leverage technology shifts to their advantage and turn business intelligence and data into actionable insight to grow and benefit the business. They will integrate these insights into the demand chain and into enhanced customer service models. They will have an enhanced understanding of market fragments and patterns of growth and will be able to operate and manage “glocally”- on a global scale with attention to local needs. Leading retailers will address the challenges to their economic models and adapt their frame of mind on store formats, employment models and return on investment. The successful 2020 retailer will also build a true omnichannel operation that allows customers to interface through any channel of their preference on a 24/7 basis, anywhere at any time.”

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What it Takes to Succeed in Retail; Some Ideas from The Buckle’s 10-K

The Buckle’s results for the year ended January 31st are certainly not news at this point, but I do think they have a few things to tell us about retail. There are some commonalities emerging among retailers in the active outdoor/fashion retailers that I want to highlight.

The Buckle is a retailer I think does a good job. I’ve been particularly impressed with their ability to integrate owned with purchased brands and the way they merchandise them together. Just to review briefly they had, at year end, 460 stores in 44 states. For the year they had revenue of $1.153 billion, up just slightly from $1.128 billion the previous year. Their gross margin didn’t change much and gross profit was up just a bit from $499 to $507 million.

Expenses rose a similar amount with the result that both operating and net income were more or less unchanged. Net income of $162.6 million was the same as last year. They haven’t managed an increase in comparable store sales for the last two years. No balance sheet issues to discuss.

That’s the shortest financial review I’ve ever done, probably to the relief of some of you.

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Volcom/Electric’s 2014 and First Quarter 2015 Results; Plus Some Interesting Market Data

Kering, as you know, owns Volcom and Electric. Because the two brands represent a very small piece of Kering’s annual revenue, we don’t get much information on them. But I’ll give you what we’ve got and I also want to point you to some market data Kering provides in one of its documents.

Let’s start with the whole 2014 year. Kering’s 2014 revenues were EUR 10.038 billion. 68% of that revenue came from its luxury division with brands like Gucci. The remaining 32% is from its sports and lifestyle division (S & L) which includes Puma as well as Volcom and Electric.

Of total S & L revenue of EUR 3.245 billion, Puma accounted for EUR 2.990 billion, or 92% of the total. Volcom and Electric’s combined 2014 revenue was EUR 255 million and they earned an operating profit of EUR 10 million, or 3.92% of revenue. We aren’t told what the bottom line net income or loss after any allocations and taxes might be, and that’s normal. In the prior year, Volcom/Electric had revenue of EUR 245 million and an operating profit of EUR 9 million.

I want to share with you a document on Kering’s web site and some data it includes. If you go to this link, you’ll see a list of documents. Currently, the sixth one down in the list is the 2014 Reference Document. It has all sorts of information on Kering and its brands, and you can download it as a PDF.

Pages 44 through 46 is their Worldwide Sports & Lifestyle Market Overview. It contains some data on that market from a 2013 study conducted by NPD.   Let’s see if I can give you a link to their web site.  Here it is, I think. I get asked for solid market data pretty often and don’t usually have it. So you might check out the Kering’s market overview and see what NPD has to offer. I don’t know anything about NPD, and am just supplying you with the link.

Back to Kering’s 2014 Reference Document. Pages 54 and 55 provide a narrative of what went on at Volcom and Electric in 2014. Here’s part of what they say about Volcom.

“2014 was another difficult year for the action sports industry, however for Volcom it was an inflection point. Efforts made around the strengthening of products and marketing, adding top talent across the company, and implementing a global organization structure has led to improved revenue momentum in all regions. Volcom has experienced positive sell-through in wholesale distribution and has continued to gain market share in core retail accounts. Volcom also drove significant operational improvements through streamlining business operations, implementing a PLM (Product Lifecycle Management) system, and tightening SKU counts to improve product performance. Volcom expanded the reach of its e-commerce platform by launching sites in Europe and Australia. Branded retail was also a key focus for Volcom, with five net store openings particularly in France and the United States during the year.”

Talking about Electric, here’s what they say about the competitive environment.

“Competition in the action sports eyewear market (the main category at Electric) is characterized by two main ideas. First, both young and established endemic action Sport competitors are vying for a decreasing retail footprint of core shops along with non-endemic global brands. Second, many of the brands that are entering the market target lower margins and price points.”

It’s not like we didn’t know that, but it’s kind of sobering to see it acknowledged like that. I suggest you go read the full discussion for both brands. It’s not very long.

We aren’t given much on the first quarter either in the press release or conference call. Volcom and Electric were down 5%.  This was due to “weakness across certain U.S. wholesale accounts” as well as some delivery issues. I think, but am not sure, they are referring to the West Coast port slowdown.

That’s it. Hope you go take a look at the Reference Document.

The Amer Sports Sale of Bonfire and Nikita

I thought I’d wait until I commented because I was hoping for some more details from Amer Sports. I asked them, but all I got was the comment you’ve seen from their interim report published on April 23rd.

“In March, Amer Sports divested Nikita and Bonfire brands to CRN Pte Ltd. The combined net sales of Nikita and Bonfire in 2014 was EUR 9.8 million. The divestment has no material impact on Amer Sports’ financial results.”

CRN is apparently a Singapore company, but a cursory internet search didn’t lead me any further information.

So why did they sell? Amer Sports 2014 revenues totaled EUR 2.229 billion. Nikita and Bonfire together, during the same period, had revenue of EUR 9.8 million. That’s less than one half of one percent of the total. O.44% to be exact.

Remember that Amer also owns Salomon. Salomon already owned Bonfire before Amer bought it. Nikita was acquired by Amer in 2011.

A reader of mine saved me some trouble and found the quote below from Amer when they bought Nikita.

“Amer sports acquired Nikita ehf, a snowboarding inspired action sports apparel brand which focuses on female consumers, on December 16, 2011. Annual net sales of Nikita is approximately Euro 8 million. Total purchase consideration was Euro 6.5 million, out of which Euro 1.6 million was allocated to Nikita’s trademark and Euro 3.3 million to goodwill. The acquisition of Nikita enables Amer sports to enter and invest into new business category where it had no strong presence in the past. As Nikita’s closing accounts at the date of the business combination have not been completed, the purchase price allocation is a draft and it will be finalized in 2012.”

You may recall that Nikita original tag line was “Street clothing for girls who ride.” I thought that was simply the best brand defining slogan I’d ever seen. I said that in one of my articles years ago. Then, having positioned the brand so well in the female riders market, they decided to make male clothing.

I guess that didn’t work out so well.

But what’s particularly interesting, as I’m sure you’ve noticed, is that Nikita was doing EUR 8 million at the time it was bought by Amer, but both Bonfire and Nikita had consolidated revenues of EUR 9.8 million in 2014. That implies quite a decline in either one or both brands.

I’m guessing Amer bought Nikita to be complimentary to Bonfire. But after investing some money and effort and not seeing results, they decided it wasn’t worth the trouble. I think they’re right.

Bonfire and Nikita are two brands I like and both have, or at least once had, solid market niches. I’d be curious to know just what happened and whether it was market or organization related.

The Sneaker Resale Market: Should Nike Maximize Its Profit?

We are all aware that Nike releases smaller quantities of limited production sneakers that are sold at pretty typical retail prices then resold for big markups. The interesting question is why Nike doesn’t price them higher and take at least some of that retail profit for themselves.

The guy profiled in this article called You See Sneakers, These Guys See Hundreds of Millions in Resale Profit , along with the woman who wrote it, offer a pretty good description of this market and some insight into why Nike manages it the way they do.

When you read the article, you’ll see that even for Nike, there’s a bunch of money being potentially left on the table. They are apparently thinking about how to capture some of it.

With revenues approaching $30 billion, Nike is hardly under distributed. Yet somehow, the brand still has some credibility even in our little corner of the retail world- though perhaps not as much as it did.

I’ve been writing that distribution has become hard- that is, each decision to widen distribution has to be taken individually after some consideration. It’s no longer just a matter of core or noncore like it was those many years ago. I’ve also suggested that perhaps distribution is not as important as it used to be, that merchandising matters more.

At some level, those two ideas might be construed as contradictory. But in this mad, mad, mad, market we’ve got today I’d suggest they are both correct and Nike’s management of its limited distribution sneakers may be an example of that. Perhaps Nike’s strategy of limited distribution for certain products reinforces the brand cache in broader distribution. They must believe that, or they wouldn’t be doing it.

Granted, you probably don’t have contracts with Michael Jordan, Kobe Bryant, Kevin Durant or LeBron James. Still, I wonder if there aren’t some lessons here about where distribution and merchandising intersect. Go read the article.

What’s It Like Out There in the Real Skateboarding World?

The Board Press published a really good interview with Ultimate Distribution founder Kevin Harris. It’s his description of what he learned visiting 55 skate shops in Western Canada. I didn’t know there were 55 skate shops in Western Canada.

Kevin’s description of what he learned reminds us, or at least reminds me, is how important it is to get the hell out of your office and visit shops (and, I’d add, skate parks). This is where the real business of skateboarding happens and where you can really discern the trends.

Here’s the link to the article. I’m going to go read it again. Then I’m going to get my ass out from behind my desk and go visiting.


Abercrombie & Fitch at the Beginning of a Restructuring. A Look at Their Results and Plans.

Well, as you know, A&F is having some troubles. You may recall that they fired their long time CEO late last year and have retained seven new board of director members and two new brand presidents, all with significant retail experience. They are in the process of finding a new CEO. If you want to refresh your memory as to what got them to that point, here’s a link through my web site that tells the whole story.

The good news, I suppose, is that A&F is still profitable and has a balance sheet that supports their change efforts, unlike some other companies I’ve written about. Let’s take a look at just what their challenge is and then review the numbers.

Directly from the 10K (which you can see here) are their descriptions of their three brands.

“Abercrombie & Fitch. Abercrombie & Fitch stands for effortless American style. Since 1892, the brand has been known for its attention to detail with designs that embody simplicity and casual luxury. Rooted in a heritage of quality craftsmanship, Abercrombie & Fitch continues to bring its customers iconic, modern classics with an aspirational look, feel, and attitude.”

“Abercrombie kids. Abercrombie kids stands for American style with a fun, youthful attitude. Known for its made-to-play durability, comfort and on-trend designs, Abercrombie kids makes cool, classic clothing that kids truly want to wear.”

“Hollister. Hollister is the fantasy of Southern California. Inspired by beautiful beaches, open blue skies, and sunshine, Hollister lives the dream of an endless summer. Hollister’s laidback lifestyle makes every design effortlessly cool and totally accessible. Hollister brings Southern California to the world.”

I’ll leave it to you to decide if those are reasonable brand positioning statements in our current market for a large public retailer. Hollister, as you’ll see below, is their largest brand. Their Hollister positioning statement sounds a bit like PacSun’s “Golden State of Mind” concept, but the brand is way more surf specific.

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