What I Saw at Agenda

The first thing that happened when I walked in the door was I got lost. They’d reorganized a bit and it took me a minute to get oriented. My problem- not Agenda’s. When I saw they had finally opened up the Berrics and included it in the flow of the show I was happy and more than willing to be slightly disoriented for a minute. Excuse me for pointing out I suggested doing that a couple of years ago.

I was also glad to see that they had mostly kept the booths small. There was the inevitable expansion of a few of the larger brands, but as long as we can stay away from two stories, I’m happy. I think most brands have figured out it’s your consumer, not your competitors, you need to impress. It’s a very democratic show. That’s a good thing.

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Reading Between the Lines: Zumiez’s May 2nd Quarter

It seems a hard time to be retailer in our space- at least that’s my general perception as I pour through conference calls and SEC filings. It’s not that Zumiez had a bad quarter. Both sales and earnings rose. But it wasn’t up to their standards or what they expect, as they make clear.

I’ll get to the numbers, but first I’d like to mention a few things they discuss in the 10-Q and conference call that highlight the issues all retailers are dealing with these days.

Zumiez ended the quarter with 616 stores; 557 in the U.S., 37 in Canada and 22 in Europe (under the Blue Tomato name). They are planning to open 57 more in fiscal 2015. There will also be some remodels and relocations of existing stores. 51 of the new stores will be in the U.S., six in Europe and I guess that means ten in Canada. I think they will end the year with something like 608 stores in the U.S.

They think they have lots of room to expand in Europe. Shall we think of Canada, as the conventional wisdom usually does, as 10% of the U.S. market, suggesting they might grow to perhaps 60 or a few more there?

In the past, they’ve talked about their limit for U.S. stores being around 700 as I recall. Might have been lower. They are starting to approach that. What happens then? Is that still a valid number?

Let me start by quoting CEO Rick Brooks from the conference call.

“We continue to see untapped potential in our North American markets and our goal is to maximize the long-term productivity of the entire portfolio by optimizing our physical store presence in each market as part of our omni-channel platform.”

“Our omni-channel strategy continues to drive expansion and enhancement of our digital infrastructure and shopping experience. With these investments, we’re able to better offer customers a consistent and genuine interaction with our brand regardless of the channel by which they’re engaging with us. We believe expansion in e-commerce works in tandem with expansion of our brick and mortar stores both domestically and aboard.”

And here’s what he says when talking about Europe. “We believe that our omni-channel strategy is going to win. Gerfried [Blue Tomato CEO and founder Gerfried Schuler] has been a big adopter of our omni-channel strategy. They are product lagging us in terms of some of our omni-channel efforts, just because of scale you have to have the physical scale to really rollout omni-channel initiatives. So Gerfried is as appropriate as rolling out the initiatives as they’re building marketplaces on that front.”

There are two things you should notice. The first is the unresolved issue of how many stores of what type you need where in the age of the omnichannel.   Can Zumiez still utilize 700 U.S. stores in the day of electronic commerce? Maybe they need more smaller ones? Or fewer but larger ones? That’s a question for every retailer. The question for Zumiez is what happens to store openings as they approach a possible limit in the U.S. Does the omnichannel let them continue to grow even with limited store openings? Or will store growth in Europe and to a lesser extent Canada replace that?

Second, note the comment about Blue Tomato in Europe not being big enough to take advantage of all the omnichannel things Zumiez is doing. For better or worse, the omnichannel strategy favors big players.

Okay, on to the next conundrum. Rick mentions, in discussing some difficulties they’ve had in the shoe category that they don’t and won’t carry basketball shoes, but that those shoes are very popular right now.

But he also talks about giving the customer what they want, when they want it, the way they want it. “…we don’t care what we’re selling, we just want to sell what customers want and our job is positioning inventory properly to do that.”

You can see an apparent conflict which I’ve sort of set up as a stalking horse. “Well Rick, if you basically follow your customers and give them what they want and they want basketball shoes….”

If I were Zumiez, I wouldn’t carry basketball shoes either.

We who were once unequivocally the clearly defined action sports industry finds that we have more or less migrated, kind of, to the less clearly defined active outdoor space with a lot more products and competitors. It used to be a whole lot easier to know which brands to carry.

Figuring that out is now a prime management function (or should be) at every retailer. Zumiez manages this in two ways. First, they are always searching for and supporting new brands. Second, they rely on their active outdoor oriented employees to spot trends and brands that might work for Zumiez. Getting enough of those people, we’re frequently told, is a constraint on their growth. That’s the case in Europe right now.

On to the third issue. In response to an analyst questions and talking about the general business environment Rick Brooks says, “ … we’re still in this kind of recovery, this bumpy recovery mode from the great recession and in these low volume periods is I think there the trends are — the lack of trend is more pronounced and that’s really what drives weaker traffic.”

He included the lack of trend issue when he earlier talked about foreign exchange and the West Coast port slowdown as having impacted the business. What concerned me, and where Rick and I might disagree, is that he talked about the lack of a trend and the bumpy recovery like he saw them as tactical short term issues- or at least that’s how it sounded to me. I see them as potentially long term and strategic.

An economy can only grow when either population or productivity grows, and we’re not doing very well in either category. I hope that lack of a fashion trend that motivates buying is a short term issue, but I have a concern that it might be a longer term trend resulting from our slow recovery and the particular difficulties it has visited on our target customers.

That’s an issue for brands and retailers alike- not just for Zumiez. I think you need to plan for an extended period of slow growth and a customer who’s tighter with their money.

Let’s move on to the numbers.

Zumiez’s sales rose 9% from $162.9 million in last year’s quarter to $177.6 million this year. North American sales were up $10.6 million or 7% to $161.2 million. European sales rose $4.1 million or 33.6% to $16.4 million. Comparative store sales rose 3% including ecommerce.

The gross profit margin rose from 31.0% to 31.8% mostly due to an increase in product margin. SG&A was up from $46.8 to $52.4 million or from 28.7% of revenues to 29.5%. Net income rose by 11% from $2.5 to $2.8 million.

The balance sheet was fine. There’s not a whole lot to discuss with regards to the specifics of the financials.

Feels like Zumiez’s issues are the same as those of other retailers and the key ones are long term and persistent.  I’d feel better if that was more directly acknowledged in the conference call, but I can’t really expect that. It continually amazes me that the analysts don’t ask about things that seem obvious to me. Perhaps that’s not appropriate etiquette in that forum or they get asked later in private conversations.

Zumiez has a head start over most of the industry with regards to the omnichannel. And their action sport/active outdoor employees will help them turn in the right direction. But it’s a hard time to be a retailer.

Terrain, Lifts, and Gravity: Advantages in Summer Activities; Thoughts on survival and what used to be the off season for winter resorts.

Summer has been a hot topic in resort circles for years. I’ve run a couple of snowboard companies so understand what extreme, snow dependent, seasonality means. I’ve visited resorts, written about resorts, but never worked for one. SAM, I think, thought I was the right balance of insider and outsider for this assignment.

At the beginning, this was supposed to be a straight forward article on summer business. I started with the simple idea that summer provides welcome cash flow in the off season. I figured out pretty quickly that summer activities at winter resorts is no longer an isolated topic, but part of the broader (and changing) circumstances winter resorts are facing.

That is, summer operations should be considered as one of the factors that will affect resorts’ success in the future. For some, summer ops could provide a bit of off-season cash flow; for others, it could become a major revenue source. I think there’s a group that’s going to need it to survive.

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Quiksilver’s April 30 Quarter; Where is Sales Growth Going to Come From?

Quiksilver reported a loss of $37.6 million for the April 30 quarter compared to $60.9 million in last year’s quarter. Last year’s quarter included a loss of $23 million loss on discontinued operations. Ignoring that, the net losses are almost identical.  Net revenue fell 16.1% from $397 to $333 million. The revenue results by operating segments are below.Quik 4-30 10q #1







As reported, the decline was 14% in the Americas, 23.2% in EMEA, and 5.77% in APAC.

The Quiksilver brand revenues fell 17% from $167 to $139 million. Roxy was down 13% from $120 to $105 million and DC dropped 21% (Yikes!) from $103 to $81 million. Across all three brands, currency was responsible for $44 million of the decline. We don’t get any discussion about how each brand is doing in various markets.

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Abercrombie & Fitch’s May 2nd Quarter: Another Turnaround in Progress

I guess what I’d like to do is start with the list from their 10-Q of where the company will be focusing their turnaround efforts.

“• Putting the customer at the center of everything we do

  • Defining a clear positioning for our brands in a rapidly changing and highly competitive marketplace
  • Delivering a compelling and differentiated product assortment
  • Optimizing our brand reach domestically and internationally
  • Continuing to improve our efficiency, pare under-performing assets, and reduce expense
  • Ensuring we are organized to succeed”

All good, essential, stuff. The conference call describes precisely how they are doing this in more detail. As you read it, you think, “Yeah, no kidding. Why didn’t you all this before?” This takes us back to their “resigning” of their long time CEO at the start of this year. Here’s the article I pointed you to previously that explains how that came about.

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PacSun’s Quarterly Results: More of the Same

There wasn’t that much to say in either the 10-Q for May 2nd or the conference call. Bottom line is we’re all kind of hanging out waiting to see if PacSun can get further traction with its strategy before the continuing losses take too big a toll on the balance sheet and some more dramatic action is required.

Sales fell 2.7% from $171million in last year’s quarter to $167 million in this year’s. The west coast port slowdown had some impact there.

“For the first quarter of fiscal 2015, comparable store net sales decreased 2%, average sales transactions increased 13% and total transactions decreased 13%, as compared to the same period a year ago. E-commerce net sales decreased 3% for the first quarter of fiscal 2015 compared to fiscal 2014. Excluding the impact of e-commerce net sales, comparable retail store net sales for the first quarter of fiscal 2015 decreased 2% compared to fiscal 2014.”

The gross margin improved slightly from 26.1% to 26.8%. The merchandise margin rose form 54.3% to 55.6%. SG&A expenses were pretty much unchanged at $52.1 million, though as a percentage of sales they rose from 30.4% to 31.3%.

The operating loss, at $7.5 million was just slightly higher than the $7.4 million of the previous year. The net loss declined from $10 million to $2.6 million, but that’s due to the noncash gain on their derivative liability rising from $1.2 million $9.1 million. That moves around ever quarter.

PacSun ended the quarter with 605 stores, down from 618 a year ago. They expect to open 10 new ones during the balance of the year and close between 10 and 20. In discussing stores, CEO Gary Schoenfeld noted in the conference call that opening those 10 new stores is, “…the first for us in many years. I would add to that last week’s meeting with key landlords at ICSC [ph] in Las Vegas. The renewed enthusiasm for PacSun was quite different from years past and much of this year’s new store openings will be funded with TI dollars from landlords.”

I wonder how much of that enthusiasm is based on there being a lot of retail space available.

On the balance sheet, shareholders’ equity was a negative $12.7 million compared to $8.1 million a year ago. Cash fell by $4.7 million to $15.2 million and inventory was pretty much stable at $95.4 million. Current liabilities fell by about $5 million to $121.5 million. Long term liabilities rose around $8 million to $147.7 million in spite of the derivative liability falling by $10 million.

The 10Q disclosed that in the second quarter (the quarter we’re in now) PacSun “…borrowed $15 million on the Wells Credit Facility primarily for the purposes of financing inventory purchases in advance of the peak back-to-school selling season. The Company expects to repay such borrowings during the third quarter of fiscal 2015.” That borrowing does not show up on the most recent balance sheet.

PacSun also has a term loan with the principal plus accrued interest due on December 7, 2016. The principal balance due on that date is $75.6 million. I have a hard time imaging circumstances under which PacSun can make that payment and expect the debt to be restructured or refinanced.

CEO Schoenfeld tell us in the conference call that the goal is to establish “…PacSun as the number one specialty retailer on the most relevant Men’s and Women’s brands for 17 to 24 year old guys and girls.”

Among the strategies are “…not to let us [PacSun] fall back into that private label abyss that the company entered into many years ago.”

It was noted above that total transactions fell 13%, but the size of the average transaction was up 13%. Now, keep in mind that those don’t necessarily balance each other out, but in response to a question about it, Gary said, “…I think the bigger thing is more coveted products and brands that are going out with higher AURs [average unit retail]…”

You know I’m a big fan of retailers carrying “coveted” brands and products.

I think, and have said before, that the PacSun team has done most things right since Gary Schoenfeld became CEO. However, the positioning goal is a tough one given PacSun’s roots as a surf retailer, the economy, and generally difficult retail conditions.   They are taking PacSun into a difficult competitive space and, though I think it’s probably where they had to go, they don’t have endless time to translate it into profitability.

Deckers’ Annual Report: Can Niche Brands Become Global Lifestyle Brands?

Deckers (owner of Sanuk) has gone and changed their year end from December 31st to March 31st. So the recently released 10K reports on the year that ended March 31st, 2015 compares it to the year ended December 31st, 2013 as well as reporting on the quarter that ended March 31st 2015. I’ll compare the two annual results, each of which covers 12 months.

As usual, we’ll focus mostly on what’s going on with Sanuk. Here’s the link to the 10-K if you want to peruse it yourself.

Deckers’ revenues rose 16.7% from $1.557 billion in the year ended December 31st 2013 to $1.817 billion in the year ended March 31, 2015. Their five largest customers were 22.2% of worldwide sales and none were 10%. They ended the year with 142 stores (mostly in the U.S. and China) up from 113 in the previously reported year.

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Quiksilver Director Resigns- and She Doesn’t Sound Happy.

Quik filed an 8K today announcing that a director, Elizabeth Dolan, had resigned from the board effective immediately. Here’s what she said in her resignation letter.

Dear fellow Quiksilver Directors:

It is with regret that I inform you that I am resigning from the Quiksilver board effective immediately.

I joined this board with a strong commitment to carrying out the full responsibilities of a Director. By excluding me from crucial board discussions and votes, I have been prevented from fulfilling this role. Indeed, your lack of trust in me has been made clear. On my end, this can’t be rebuilt.

With respect, I wish the best for the future of Quiksilver.

The terse, blunt language in her resignation seems to me to be a bit unusual for a resigning director. Here’s a description of Ms. Dolan’s background from Quik’s last proxy statement.

Elizabeth Dolan currently serves as Chief Marketing Officer of FOX International Channels (FIC), which includes global television channel brands such as FOX, National Geographic Channel and FOX Sports, where she oversees all brand development, consumer communications, new programming launches and trade marketing for more than 350 television channels in Asia, Latin America, Europe and Africa. Ms. Dolan joined FIC in January 2011. Prior to joining FIC, Ms. Dolan served as Chief Marketing Officer for OWN: The Oprah Winfrey Network from January 2009 to June 2010. From November 2003 until September 2008, Ms. Dolan was President of Mudbath Productions, which produced radio shows for the ABC Radio Networks. From September 1997 until November 2003, she operated a marketing consulting practice. Prior to that, from August 1988 to September 1997, Ms. Dolan held various positions with Nike, Inc., including serving as Corporate Vice President and VP of Global Marketing. Ms. Dolan earned a bachelor’s degree from Brown University in 1979. As a result of her extensive experience in the worldwide marketing of globally recognized brands, our board of directors believes that Ms. Dolan will bring important insights and guidance to board deliberations regarding our brand development and overall marketing strategies.

If you want to know more, check out her LinkedIn profile.

To be clear, I don’t know what happened, and have not met or talked to Ms. Dolan. But based on the description of her experience, she’s the kind of person I think I’d want around if I were dealing with some of Quik’s problems.

This almost feels like a continuation of the management transition that happened when Andy Mooney got fired.

I will be interested to see what Quik’s quarterly report looks like when we see it in a week or so.

Why It Pays to be a Jerk

A gentleman named Jerry Useem wrote an article with this title for the June 2015 issue of The Atlantic. You can read the whole article here. It reviews research on how behavior in the work place impacts your success or failure.

I would urge you to read the whole thing, but I particularly want to highlight his short discussion of high end brands getting sold at retail. Here’s his whole quote on the subject. I’ve highlighted the paragraph I found most interesting.

 Darren Dahl had never set foot in the Hermès store in downtown Vancouver when, one afternoon, he sauntered in. Clad in jeans and a T-shirt—looking “kind of ratty,” he confesses—he had not planned on a shopping excursion. The saleswoman behind the counter looked up from some paperwork and, as Dahl remembers it, “literally shook her head in disapproval.”

 What a jerk, Dahl thought. He reacted by leaving the store—after buying $220 worth of grapefruit cologne. Two bottles of it.

 “I couldn’t believe I had spent so much money,” says Dahl, who should have known better: he is a professor of marketing and behavioral science at the University of British Columbia. Before long, he had devised a study that asked, was it just him? Or could rudeness cause other people to open their wallets too?

 The answer was a qualified yes. When it came to “aspirational” brands like Gucci, Burberry, and Louis Vuitton, participants were willing to pay more in a scenario in which they felt rejected. But the qualifications were major. A customer had to feel a longing for the brand, and if the salesperson did not look the image the brand was trying to project, condescension backfired. For mass-market retailers like the Gap, American Eagle, and H&M, rejection backfired regardless.

 Finally, the effect seemed to be limited to a single encounter. When Dahl and his colleagues followed up with the buyers, he found evidence of a boomerang effect much like the one he had felt a few minutes after his purchase: the buyers were less favorably disposed toward the brand than they had been at the outset. (And come to think of it, Dahl says, he hasn’t been back to Hermès since.)

 An awful lot of our customers are aspirational, or at least we characterize them that way. Most brands depend on them. In the history of snow, skate and surf, there have been times when we exuded an exclusive image and suggested to potential customers that if they were lucky, we might let them join the tribe. Apparently, playing on that kind of insecurity, if it’s right to characterize it that way, doesn’t work for long. And, if you relieve this research, it doesn’t work at all once a product is in broader distribution.

Put another way, can you have an aspirational brand in broad distribution? Do successful aspirational brands have to be higher priced? Is how closely a brand is associated with a particular activity correlated with where and to whom it can be sold?

I haven’t seen the whole research study, but there’s clearly some food for thought here.