I imagine it’s happened to all of us. You need to paint (or if you’re lucky, have
painted) a wall/room/house. You go into
the store to pick “the right” paint color and are confronted with literally an infinite
number of choices- because they can match any color you want. As if the paint chips by themselves weren’t
more than you could possibly parse.
Home you go with a big bunch of small chips. After some agonization, you come back and
maybe (at a paint specialty store) get some large chips. Then on the next visit, you get some small
sample paint jars and slap them on the wall.
By this time, any thoughts you may have had about being daring and, for
example, having a bright accent wall has been bludgeoned out of you. You just want to get “the right” color.
I spend way too much time choosing and about 14 nano seconds
after the project is complete, it’s fine and I never think about it again. I may not have gotten “the right” color but I
sure spent a lot of time doing it.
Some new paint companies are trying to help me. They offer curated palettes of between 50 and
150 colors. One of the company names is
actually Curator.
It was a decade or two ago when I suggested that snowboard
companies should stop picking their SKUs based on what their competitors were
doing. What mattered was what your customer
wanted. More SKUs wasn’t automatically
better.
True- following your competitors’ lead was easy, but it was lazy. It didn’t answer the question, who are my
customers and what do they want? Mostly,
I think we’ve figured that out. Many of
you, I know, have cut your SKU count. It’s
good for inventory management, cost of goods sold, branding and holding
margins. May not help your top line, but
it will sure help the bottom line.
Have you cut it enough?
If a paint company believes they can compete with just fifty colors against Benjamin Moore’s 3,500, well, maybe they are on to something. When you read this article think about how they’ve tried to have colors with a common theme that fit together. Looks to me like a lot of their colors work with each other. These companies are betting that the customer will have a better shopping experience with fewer choices with a product I’d have previously characterized as a commodity.
Can you make your brand special by offering fewer
choices? Perhaps a lot fewer. You can if you improve their shopping
experience.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-12-12 12:35:292019-12-12 12:40:20What We Can Learn from New Paint Companies?
Emerald didn’t report a great September 30 quarter. However, there are some mitigating factors. I’ll discuss those results and the factors
below.
Before digging into
the numbers, let’s focus on issues of strategy and tactics. Emerald’s previous CEO was resigned about a
year ago. It happened suddenly and, to
the outside world at least, unexpectedly.
I wondered why but never was able to find out.
Now, I might have a glimmer. Sally Shankland has been President and CEO since June 2019. She used a presentation during the conference call to describe her actions since becoming CEO and the company’s new strategy. If you go to this link, scroll down a bit, and on the right, under “Third Quarter 2019 Earnings Call” click on “Earnings Presentation” you can see it for yourself. I recommend reviewing the slides.
If you do that, you’ll notice three major things.
First, there is what the presentation described as a “New
Management Team.” Everybody isn’t new,
but there are at least three senior executive hires since Ms. Shankland came on
board.
Second, take a look at the strength/weaknesses slide from
the presentation below. There is more
detail on each point in the presentation.
I can’t speak to the B to B trade show market outside of the
active outdoor industry, but certainly the at least temporary cancellation of
Interbike, the decision to consolidate two OR shows into the single end of
January show in Denver with the Snow Show and what I see as the general industry
desire to spend less money on trade shows suggest the first strength can be
questioned in our industry.
I have no idea as to the dedication and passion of the
employees. However, my experience in
turnarounds (of which Emerald is surely one) makes me certain, given the
weaknesses slide (more on that in a minute), that the employees must be happy
and relieved to have new leaders acknowledging and addressing the weaknesses
that I guarantee the employees all knew about.
Those weaknesses on the right side of the slide are, I
agree, fixable. But as a group they are
pretty staggering. The list runs the
gamut of operations. Maybe 10 years ago
when trade shows were “had to go to” events and when Emerald wasn’t a public
company you could get away with this.
But not now and I’m glad to see them getting on with it.
One of the outcomes of addressing these issues is the introduction
of value pricing. As COO Brian Field
puts it, “…this is research
and analysis of live event pricing and promotion based on customers’ perceived
values of available locations and packages.”
They’ve already begun the value pricing process at six shows including OR
and Surf Expo. They believe it can
increase show revenue by four to eight percent.
For value pricing
to work, the shows have to provide clear value.
They are working to use what they describe as their “unlinked and
underutilized” customer information. The
idea is that “Bringing these types of data together allows for refinement in
messaging, segmentation strategy and customer insights,” says COO Fields.
First, they have
to identify the data. Then they have to develop
the best ways to sort and access it.
Then they have to look for insights.
But booth revenues are two thirds of total revenue. CEO Shankland says she could “…see us in a
place where our booth revenue is 50% of our total revenue. And the other half
comes from conferences, from education, from sponsorships, from content
marketing, from a whole list of things that we can be doing given the fact that
we have a digital presence that we’re not offering today.”
Well, the digital
presence not being offered is a little scary.
But the real challenge is to take the insights they develop from their (long
overdue) data mining and create value customers will pay for when the trend in
our industry trade shows is to pay less.
The third thing I noticed, in both the presentation and the
conference call, is what’s summarized in the last strength as “Opportunities to
supplement organic growth with tuck-in M&A.” CEO Shankland puts it this way. “…we plan to
continue to pursue M&A opportunities that make sense for us, which means
where they meaningfully strengthen the existing business that we already own or
where we bring considerable value to the acquisition that dramatically enhances
the acquisitions growth trajectory. We will apply an even higher level of
discipline and rigor to this process than we have in the past.”
When Emerald went public (May 2017) they presented the
opportunity as a chance through acquisitions to roll up an industry with many
small players. It was portrayed as a
major focus. Now it’s not. That’s a good decision- especially if they
can grow “non-booth revenue streams” as they are trying to do. Trade shows and conference events represented
83% of revenues in the nine months ended September 30.
Being public and having access to capital markets might make
sense if you’re busily rolling up small players in a consolidating
industry. If that isn’t the strategy anymore
and you’re focused on operating better and generating non-booth revenues then
perhaps you’d be better off as a private company.
Let’s spend a little time on the numbers.
Emerald currently operates 55 trade shows in additional to
other conferences. Remember when looking
at their balance sheet that they receive a bunch of cash for shows in advance
of the event. They carry it as deferred
revenue ($149.2 million at September 30) and don’t record it as income until the
event is completed. Most of you reading
this, including me unfortunately, don’t get cash for your product before you
provide it.
Revenue was $75.6 million for the quarter, down $26.7% from $103.1
million in the same quarter last year. The
reduction “…partly reflected a net $13.3 million reduction from several show
scheduling differences in the third quarter of 2019, most notably Outdoor Retailer
Summer Market, which staged in the second quarter of 2019 versus the third
quarter of 2018. In addition, revenues for the quarter were further reduced by $7.1
million as our Surf Expo and ISS Orlando shows were forced to cancel due to the
impact of Hurricane Dorian. We recorded the associated $6.1 million insurance
settlement…as other income in the quarter. Further, acquisitions made in 2018
contributed $1.9 million of incremental revenue in the third quarter of 2019,
while 2018 third quarter revenues included $5.3 million from discontinued
events, primarily our Interbike show, which did not stage in 2019.”
They tell us that including these adjustments, organic
revenue was down $3.7 million, or 4.4%.
Cost of revenue fell by $1.3 million compared to last year’s
quarter to $24.6 million. SG&S
expense rose 13.5% to $33.7 million. “The
increase in selling, general and administrative expenses for the third quarter
of 2019 reflected approximately $1.6 million in incremental costs from the 2018
Acquisitions and $1.2 million in higher non-recurring other items, offset by
$0.6 million of lower costs attributable to show scheduling differences and
$0.9 million in reduced costs related to discontinued events. The remaining
$2.7 million increase in 2019 partly reflected additional senior management
costs and incremental investment initiatives.”
There were also asset impairment charges of $26.3 million. There were none in last year’s quarter. “The impairment charges were due to a decline
in fair value compared to the carrying value of goodwill, certain trade names
and certain customer-related intangible assets, which were primarily driven by
changes to future forecasted performance and decline in our stock price, which
management deemed a triggering event and requiring quantitative analysis.”
Yes, it’s a noncash charge.
But you can see it implies a decline in future performance so it’s very
real.
Pretax income was a loss of $23.3 million, compared to a
pretax profit of $28.8 million in last year’s quarter. For the nine months ending the same date,
pretax income was $28.5 million, down from $86.7 million in last year’s nine
months.
Sounds like the new management team is doing the right
things and is fundamentally changing the business model. I haven’t been following Emerald Exposition every
quarter, but I think I’ll start. This
should be intriguing.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-11-19 16:33:522019-11-19 16:33:55How’s the Trade Show Business? Emerald Exposition’s Quarterly Results
On October 31, I posted an article called “What’s Wrong with Capitalism?” After a couple of paragraphs of me ranting and raving there was a link to an article that described what Ben Hunt calls the “financialization of Texas Instruments. It was disturbing to a few people I heard from and, I hope, to some others I didn’t hear from.
In the spirit of continue to disturb you in a good cause, here’s
another article you should read called, perhaps not surprisingly, “The Disaster
of Negative Interest Rates” published by the Mises Institute.
If you’ve never heard of the Mises Institute, named after the economist Ludwig von Mises, you might consider adding their web site to your favorites or even signing up for their free occasional emails. This is another of my attempts to get you information you really need but won’t find if you rely on mainstream media.
The point of the article is not
just that negative interest rates are a business and economic disaster if
maintained too long, but that they threaten the structure and functioning of
our republic. Here’s the link
to the article.
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At its September 29 quarter end, Big 5 had 433 stores down from 436 a year ago. Big 5 “…provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. Our product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, winter and summer recreation and roller sports.”
Almost 55% of their revenue for the quarter came from hard
goods. 27.5% was from footwear and 17.1%
from apparel.
I’ve been in maybe a half dozen of their stores, most
recently within a couple of weeks. As
you can see from their product description above, they carry a very diversified
product mix. I wouldn’t say it’s well
merchandised and I certainly think of them as competing on price.
As I’ve said in prior reviews of their results, that’s not a
compelling source of competitive advantage in our current environment.
Revenue for the quarter was essentially constant at $266
million. But they grew the gross margin
from 31.0% in last year’s quarter to 32.3% in this year’s. They reduced SG&A expense from 29.2% of
revenue to 28.9%. The result was
operating income that rose 89% from $4.8 to $9.1 million. Net income more than doubled from $3.1 to
$6.4 million in spite of a tax bill that rose from $0.84 to $2.0 million.
The stock market of course loved that, but I want to dig a
little deeper into how they did it.
While total revenues didn’t rise significantly, same store
sales were up 0.3% compared to a 2.0% decline in last year’s quarter. They note that “Sales from e-commerce in the
third quarter of fiscal 2019 and 2018 were not material.” That’s kind of a concerning statement.
The improvement in the gross margin had three main components. First was a 0.98% increase in merchandise
margins. “The increase primarily
reflects a shift in sales mix towards higher-margin products and a decrease in
promotional activities.”
Second was a reduction of 0.78%, or $2.1 million, in
distribution expense. “The decrease
primarily reflected a reduced provision for costs capitalized into inventory
compared with the third quarter of last year.”
Sounds like a one-time thing.
Third was a $0.6 million increase in store occupancy
expense.
From the conference call: “Multiple factors contributed to
the margin gains, including the benefit of a product mix shift, reflecting
reduced sales of lower margin firearms and ammunition products and increased
sales of higher margin opportunistic buys. Additionally, and quite significantly,
our margins benefited from a favorable response to our strategic efforts to
optimize our pricing and promotion.”
I wonder if those “high margin opportunistic buys” are a
repeatable, intentional part of their strategy and would love to hear more
about how, exactly, they are optimizing their pricing and promotion.
The $0.8 million reduction in SG&A expense resulted from
three factors. First was a $0.9 million
reduction “…due mainly to lower newspaper advertising.” Most of us are familiar with those ubiquitous
Big 5 advertising inserts. If they are
reducing them, I wonder what they are replacing them with. There’s no mention of a social media
strategy.
Second, store related expenses were down $0.7 million “…due
primarily to reductions in certain employee benefit-related expenses such as health
and welfare expense, partially offset by increased employee labor expense.” The increased labor costs were the result of
minimum wage increases.
Finally, administrative expenses increased by $0.7
million.
The balance sheet hasn’t changed much since last year,
except that the current balance sheet reflects the new accounting standards for
reporting operating leases. Cash
provided by operations improved from a negative $8.1 million in the nine months
ending last September 30, 2018 to a positive $13.7 million for the nine months
ended September 29, 2019. I also want to
highlight the nine months capital spending decline from $8.4 million to $6.1
million.
So here we are with a solid quarter from Big 5 as measured
by the bottom line. I’ve been
encouraging a bottom line rather than top line focus for years now. This strong bottom line improvement, however,
seems caused by one-time events and expense cuts that can’t be continually
duplicated. I am not as optimistic as
the people who drove up the stock when the earnings were announced.
We still seem to have a brick and mortar retailer that’s
competing based on abroad product offering and price, and its online performance
isn’t significant they say. There was no
discussion of strategy in the 10Q or on the conference call- at least partly
because no analysts took part in the call to ask questions.
Based on the information Big 5 is providing in its public documents,
I don’t understand their strategy for success.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-11-05 15:30:382019-11-05 15:34:38Big 5 Sporting Goods. What Should We Think About Their Solid Quarter?
Well, uh, nothing actually. Okay, not nothing. Some things- sure. There’s no perfect system. But the real problem is that what we actually have is less and less like real capitalism. Adam Smith’s invisible hand and Schumpeter’s idea of creative destruction have both taken it on the chin. Quantitative easing, low to negative interest rates, too much debt, and the growth of oligopolies and perverse management incentives are knocking capitalism for a loop.
Follow this link to Epsilon Theory and read Ben Hunt’s article,
“Yeah It’s Still Water.” Please take
the time to understand his analysis of what Texas Instruments has done with its
cash flow in recent years. Recognize
that this is going on all across the public company space in our industry as
well as others.
When you’re done, you might consider signing up for Epsilon
Theory’s free weekly emails or putting the web site in your favorites for
occasional consideration.
If Texas Instrument had taken all that cash flow and put it
into competitive enhancements rather than share buybacks and management
compensation, what might they have accomplished? Our GDP as a country only
grows because more people are working (population growth) or they are each making
more for each unit of labor (productivity growth). With population really only growing due to
immigration we are dependent on productivity growth. Unfortunately, stock buy backs, dividends and
management compensation don’t contribute anything to it.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-10-31 13:12:452019-11-07 11:23:48What's Wrong with Capitalism?
I admit it. Before this deal, I’d never head of Kathmandu, a public company headquartered in New Zealand. If you haven’t either, you can visit their consumer facing web site or their investors web site where you can pour over all the deal related documents I’ve looked at. Mostly, though, I think you’re happy to leave that chore to me.
Kathmandu “…is a designer, marketer, retailer and wholesaler of clothing, footwear and equipment for travel and adventure. It operates in New Zealand, Australia, United Kingdom and United States of America,” as described in their public filing for the fiscal year ended July 31, 2019. Below are some summary numbers for its last two full years.
This is interesting. It seems to indicate that most retailers are being left behind. You might want to click through to Capgemini and sign up for some of their research. Anyway, here’s the link.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-10-05 09:34:262019-10-05 09:34:26Machine Learning Dominates AI Use for Retailers
I never learned why SPY went public in the first place all those years ago. I imagine it was because a group of people who may not quite have understood the industry saw potential fast growth and a chance to make a lot of money. Those were different times. I have some experience with that way of thinking from the snowboard industry.
The benefit to me, and to you, was in being able to follow a smaller niche player with a solid brand and see how they could compete among the big players in an industry where meaningful product differentiation wasn’t easy to come by.
Zumiez had a great quarter ended August 3 (remember I don’t write until I have received and digested the 10-Q). They did it with sales that rose just 4.3% from $219.0 in last year’s quarter to $228.4 million in this year’s. But they also increased their gross margin from 33.1% in the same quarter last year to 33.8% in this year’s quarter. And their selling, general and administrative expenses as a percent of revenue declined from 30% to 28.7%.
The bottom line was a net income that more than doubled from $4.38 to $9.03 million. They’ve got an imminently solid balance sheet. Combined with improved margins and reduced expenses over a modest revenue increase and you end up with a great bottom line.
More on that later. You’re probably wondering what I mean by an agnostic moat. If not, I wasted a lot of time coming up with that title.
Globe filed its annual report for the year ended June 30, 2019 pretty much concurrently with the announcement that it had sold Dwindle to Highline Industries Corporation. Skatewire reported that the purchase price was $1.5 million, but what the annual report says is that the carrying value of the assets was $1.5 million. I haven’t seen the purchase reported anywhere. The transaction will close and be accounted for in the first half of Globe’s current fiscal year. If you haven’t, you might also read the interview with Bod Boyle and Steve Lake on Shop Eat Surf about the deal.
According to Globe’s annual report, “The transaction includes the brands, working capital, domain names, social media accounts and the personnel attached to the Dwindle business.” Maybe they shouldn’t have worded it so it sounds like they sold the employees.
http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif00jeffhttp://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gifjeff2019-09-02 08:14:522019-09-02 08:14:52Globe Sells Dwindle and Files Its Annual Report