The Buckle’s November 1st Quarter; Little Financial Change

For the quarter ended November 1, 2014, The Buckle’s revenues rose a little from $286.8 to $292.2 million. That’s a 1.9% increase over last year’s quarter.

The gross profit margin fell a little from 44% in last year’s quarter to 43.7%. In dollars it went up a little from $126.2 to $127.8 million.

Selling, General and Administrative expenses rose a little (1.7%) to $63.2 million. As a percentage of sales, selling expense stayed the same at 18.1% and general and administrative expense fell a little from 3.6% to 3.5%.

Operating income rose- you guessed it- a little, from $64.1 to $64.6 million.

Net income was up a really, really, really little (0.079%, or $32,000) to $40.6 million.

Well, these day holding your own isn’t the worst result we’re seeing among retailers in our industry.

The balance sheet is in good shape, with comparable store inventory down about 1.5% compared to a year ago. Net cash flow from operations was a positive $69.3 million in the three quarters of last fiscal year. It improved to $90.6 million this year. That’s more than a little. I like positive cash flow.

The company ended the quarter with 461 stores in 44 states, up from 452 stores in 42 states a year ago. So far this year, they’ve opened a net of 11 new stores and did what they call “substantial remodels” on 17. According to the conference call, plans presently call for 6 new stores next year and 10 of those substantial remodels. I’d love to hear something about the impact of the remodelings.

Comparable store sales were down 0.3% during the quarter. Online sales are not included in comparable store sales. They rose 3.7% during the quarter to $22.8 million compared to $22.0 million in last year’s quarter.

The conference call is short and not particularly intriguing either. Private label business, we hear, was 35% of revenues, the same as in last year’s quarter.

One analyst asked President and CEO Dennis Nelson “…about your philosophy on ecommerce versus stores.” I’d characterize his answer as noncommittal and understated.

“Well, we continue to look at new marketing and upgrading our staff and taking different approaches, so it is something we are not ignoring. We involve the merchandise teams continually more on that, so we would expect it to continue to have steady growth, and we have taken approach that it’s part of our business.”

While that isn’t the whole answer, you get the gist. Compare that to the soliloquy we’d get from Zumiez’s senior management in response to the same question. I’m not highlighting this as a problem. I doubt CEO Nelson’s answer encompasses his complete thinking about ecommerce. I hope not. But I do wish somebody had followed up and used the word “omnichannel” to see what response we’d gotten.

And that’s about it. I’d like to thank The Buckle for making this one easy for me, though I wouldn’t have minded a bit more information.

Net Income Down 17% But It’s All Part of the Plan? Tilly’s Quarter

In the quarter ended November 1, Tilly’s grew its sales 6.1% to $131.3 million compared to the same quarter last year. But net income fell 17% from $6.15 million in last year’s quarter to $5.11 million.

Meanwhile, in the conference call, President and CEO Daniel Griesemer’s first statement about the result is as follows:

“We’re pleased with the meaningful progress we are making on our initiatives to increase sales and profitability as our third quarter results exceeded expectations.”

I actually just went back and checked to make sure I was looking at the right conference call transcript and financial statement. I am. I know there’s a certain promotional aspect to conference calls- that you want to put your best foot forward and all that stuff. But don’t you need to oh, I don’t know, mention in passing that your profit fell when revenues and the gross margin were up?

Perhaps not if you’re Tilly’s. After all, when they took the company public it was done in such a way that the founders and owners still controlled the voting shares. Well, as I said when they went public, I admire them for going public but maintaining control, though I can’t figure out why people bought the stock under those circumstances.

I’m the first one to champion the idea that one quarter doesn’t matter in the scheme of things. But hey people at Tilly’s, you’re really making me dig to try and explain why in this case. They do, by the way, give me some possible reasons to think that. I’ll get to those.

The gross margin rose from 30.6% to 30.9%, due to an increase in product margin. SG & A expense rose from 15.5% from $27.7 to $32 million. As a percentage of revenue, they rose from 22.4% to 24.4%.

Selling expense as a percentage of sales rose from 15.4% to 17.3%. 1% of that increase was because “…store and field payroll, payroll benefits and related personnel costs increased at a higher rate than net sales primarily due to the addition of new stores…” There was a 0.9% increase “…related to increased marketing costs, supplies and other store support costs, primarily due to higher catalog and other marketing spend compared to last year.”

General and administrative expenses rose just 0.1% from 7.0% to 7.1%.

Operating income was down from $10.2 to $8.6 million, or by 15.7% “…primarily due to a decline in our comparable store sales and increased costs related to new stores growing at a faster rate than sales. Our comparable store sales decreased 1.2% for the thirteen weeks ended November 1, 2014, which followed a 1.9% decrease for the full fiscal year 2013 and compares to a 2.4% decrease in the third quarter of fiscal year 2013.”

Average sales per store during the quarter fell from $592,000 last year to $571,000. For three quarters, it was down from $1.777 to $1.623 million. They ended the quarter with 207 stores.  They had 99 stores at the beginning of fiscal 2009.

Tilly’s stores are located “…in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.” This feels like store location is strongly driven by how good a deal they can make on real estate. That may serve them well in coming years.

The balance sheet remains strong, with a solid current ratio and no long term debt. Cash flow from operations for the nine months was $21.1 million compared to $27.3 million in last year’s nine months.

CEO Dan Griesemer tells us in the conference call they are working to increase market share and improve profitability through “…increased product differentiation and innovation, a greater emphasis on our digital platform and evolving our real estate strategy.” Any retailer might say that. In fact, they mostly do. Tilly’s goes on to give us a little more information.

“In keeping with our history of offering our customer the most relevant assortment of action sports inspired merchandise, we introduce more products and brands that are new, unique or exclusive to Tilly’s. Our new brands, brand extensions, exclusives and collaborations continue to perform well and strengthen our confidence in this product strategy. We introduced new brand expansion including GoPro, Stance, Sector 9 and Full Tilt Dream. We delivered a number of exclusive products including collections from Hurley and LRG. We also introduced several new or exclusive collaborations including offerings from Volcom, Adidas and Vans.”

I don’t see how that differentiates them from what other retailers are doing, but having the right brands at the right time is obviously important. I also hate brands doing SMUs, but that just seems to be where we are in the market. If a brand does an SMU for Tilly’s just whose brand is it?

With regards to ecommerce, “…we launched a new state of the art responsive design e-commerce platform for desktop and mobile…The new platform offer significantly improved look and feel, navigation and performance and offers a much more compelling user experience… Given what we know about their shopping habit, we are now able to tailor our product, marketing and promotional activities based on user preferences as we believe will lead to improved sales and profitability.”

“We believe our new state of the art e-commerce platform dedicated e-commerce fulfillment center and omnichannel capabilities now put at significantly ahead of our peer set and position us well to take advantage of the extraordinary e-commerce opportunity we see ahead of us.”

Important, obviously, but what everybody else is trying to do. Is Tilly’s going to do it better? Don’t know.

In real estate, CEO Griesemer notes, “… our new stores opened this year are performing well and in line with the new store economic model and more stringent site selection process we outlined earlier in the year.” I don’t know what the specifics of that process are.

In the fourth quarter, Tilly’s “…expect to incur incremental marketing expenses in the fourth quarter based upon the continued strength in customer response to our marketing efforts to date.” Isn’t it wonderful to have a balance sheet and cash flow that allows you to do it!

In what was a pretty short conference call, a couple of analysts ask for some metrics around specific issues and were given none. It’s not like that never happens in a conference call, but I’m wondering if that doesn’t reflect the founder’s control of the voting stock.

Tilly’s has a strong balance sheet. Store growth has been pretty rapid, and may explain some of the higher expenses and lower profitability. I conjecture that real estate is a core competence for them and that may be particularly important over the next few years. Their other initiatives don’t seem different from other retailers. We’ll see if they can perform them better.

The stock opened at $18.80 the day Tilly’s went public on May 4, 2012. As I write this (December 15, 2014), it’s at $8.94. But it closed at $6.98 the day before earnings were announced, so I guess people liked what they heard.

You know, it took me a lot of work and reading between the lines to be able to conjecture on what might be going on here. Tilly’s is making money, and there are some possible reasons why the decline in profitability might make sense if you take a longer term perspective. But Tilly’s doesn’t do a very good job explaining that.

I wish they would, because then I wouldn’t be sitting here wondering what’s going on. I’m confused and don’t know what to think.

A Long Term Plan; Zumiez’s Quarter

Well, Zumiez had a pretty good quarter. Net sales rose 11.6% to $213.3 million from $191.1 million in last year’s quarter.   “The increase reflected the net addition of 54 stores…and a comparable sales increase of 3.7% for the three months ended November 1, 2014.” Those numbers include ecommerce sales, which rose 15.7% and represented 11.2% of net sales, up from 11.0% in last year’s quarter. Brick and mortar comparable store sales were up 2.2%.

European sales were $14.7 million, up 45.7% due largely to new store openings.

The gross profit margin was down a bit from 37% to 36.5% due to higher product costs. SG&A rose from $50.1 million to $52.9 million, but as a percentage of net revenue it declined from 26.2% to 24.8%.

Operating income rose from $20.7 to $25 million and net income was up 32.6% from $11.9 to $15.7 million. The balance sheet is solid and cash provided by operating activities was $34.4 million in the first nine months of the fiscal year. In last year’s first nine months it was $21.7 million.

They ended the quarter with 603 stores; 551 in the U.S., 35 in Canada and 16 in Europe.

You know, I don’t have much fun when things are going well. Not much to analyze. I’m kind of digging in the bottom of the barrel here, but there are a couple of things I’ll mention from the 10Q before I move on.

This is the first risk factor Zumiez lists: “Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in customer traffic in those malls could cause our sales to be less than expected.“

This issue isn’t unique to Zumiez, but malls are in for some hard times in coming years. Here’s an article I previously pointed you to on the subject. Indirectly, Zumiez addresses this in the conference call. I’ll point that out when we get to it.

Second, referring to Blue Tomato, Zumiez notes that “At November 1, 2014, we estimated we will not be obligated for future incentive payments.”   It’s not, according to Zumiez CEO Rick Brooks, that Blue Tomato isn’t doing well, though obviously they aren’t doing as well as they thought they might. It’s just that the European market is tough. Zumiez is “very encouraged” by what Blue Tomato is doing and thinks they have a big opportunity in Europe.

Here’s how CFO Chris Work describes the situation with Blue Tomato in the conference call: “So at the time of acquisition, it was on par from a profitability perspective with our U.S. business, and today it’s probably more a breakeven business excluding charges.“

I’d interpret that to mean that Blue Tomato is losing money right now under generally accepted accounting principles where you have to include those pesky charges.

Okay, let’s move on to my favorite statement of the conference call from Rick Brooks. This was Rick’s response to a question about what categories are performing and what new brands or products he saw coming around.

“The strength of our business, as I’ve said a number of times now, it’s always about diversity, diversity of brands, diversity of categories in our business because we serve the entire lifestyle for this consumer.”

I added the emphasis. “A number of times” is probably about 4,907 over the years he’s been CEO.

Let me give the answer I think Rick would have loved to give. “Look, we’ve been following the same strategy since we started the company. It’s not about a particular brand, or a particular trend or a particular product group. What matters is that we have the best trained and best connected to our customer base group of employees we can have so that whatever the trends, brands, or cycles (all of which will continue to come and go) are, we have maybe just a little better idea than our competitors what’s going on and can respond better or quicker. Consistent with whom we are as a brand, we want to identify and help the brands that can grow, support the trends those brands represent, and adroitly step aside when those trends change. “

“And stop asking me how many stores we’re going to have! I keep trying to explain that in the ecommerce/mobile world number of stores is just not as relevant as it was. What matters is connection and credibility with your customers. We’re still figuring out, like everybody else, what stores of what size and what layout you should have where. What we’re pretty sure of, however, is that number of stores is not as closely connected with revenue growth as it used to be.”

And just to finish up, here’s an actual quote from Rick, rather than one I’ve made up. “…our topline goals don’t change based upon whatever number of stores we have, but on how we optimize catching those shares, to optimize margins and optimize how we serve our customers.”

Let’s see, what else should you know. First, Zumiez doesn’t see an easy business environment in coming years. Rick says, “On a longer term view, I think our view is one of caution. I’m saying that the recovery has been slow and painful and I think from a planning perspective, we continue to think that’s – we’re going to continue to face kind of a slow bumpy volatile recovery for a period of years yet.”

Finally, getting back to the issues of the future of malls and the role of brick and mortar stores CEO Brooks notes that “We have opened a couple of suite stores and we continue to have a small portfolio of off-mall locations around different parts of the country.” So they’re thinking about it.

A consistent strategy, and recognition of how the market is changing should serve Zumiez well especially if it’s as tough as they (and I) think it’s going to be.

Press Releases from Altamont and Pete Fox on the Acquistion of Fox Head by Altamont

Here are the 2 presses releases from today on the deal.

Altamont Capital Partners Leads Majority Recapitalization of Fox Head, Inc.

Palo Alto, Calif., Dec. 10, 2014 – Altamont Capital Partners (Altamont) today announced it is leading a majority recapitalization of Fox Head, Inc. (Fox), the number one global motocross equipment, apparel and accessory brand. The current owners of the business, the founding Fox family, will continue to own a significant minority interest in the company. The transaction is expected to close in the next 7-10 days.

In addition to Altamont and the Fox family, the shareholder group participating in the deal includes Ricky Carmichael, the most successful motocross rider of all time and Fox athlete since 1988; Carey Hart, freestyle motocross legend and Fox athlete since 1997; and Hybrid Apparel, which will also become a strategic supply chain partner to the company. Fox will continue to operate as a private, independent company out of its headquarters in Irvine, California.

“With deep roots in motocross history, the Fox family has built a strong, authentic brand that consumers trust and respect, proven by decades of success,” said Keoni Schwartz, Co-Founder and Managing Director of Altamont Capital Partners. “Altamont is thrilled to have the opportunity to apply our expertise to help Fox continue to grow and reach its longer-term goals.”

The Fox brand was founded by Geoff Fox in 1974 as a distributor and manufacturer of high-performance motocross parts and within three years boasted  top-ranked professional motocross team. Hand-selected by Geoff Fox, the team’s apparel became increasingly popular with fans, leading to Fox’s emergence as a successful player in the U.S. motocross apparel industry. Fox is now the most recognized and best-selling brand of motocross apparel, boots and accessories in the world. The brand has since expanded its activities into MTB, BMX, surf and wakeboarding and has become an international leader in action sports.

“I have never been more optimistic about the future of the brand or the business,” said Geoff Fox, Founder of Fox Head, Inc. “We’re excited to work with Altamont as we prepare for a new chapter in our story. I’m confident that Altamont’s strategic advice and relevant experience guiding brands to reach their full potential will allow Fox to strengthen its business while preserving the integrity of the brand.”

Today Fox also announced changes to its management team, including the appointment of Pete Fox as the company’s Chief Creative Officer. Additionally, Nick Adcock, CEO, and Bill Bussiere, CFO, will leave the company to pursue other opportunities. Scott Olivet, who will be Executive Chairman on an ongoing basis, will become Interim CEO while executive searches are underway. Olivet has extensive experience in the action sports industries, having served as VP of Nike Subsidiaries, where he led the acquisitions of Hurley and Converse; as the CEO of Oakley Inc.; and as a current Director of Skullcandy. He is also an Operating Partner at Altamont Capital Partners and serves as Chairman of the Board of Dakine, Mervin, HUF and Brixton.

“I want to thank Nick Adcock and Bill Bussiere for their leadership, focus and accomplishments in helping to build a solid business. I wish them well on their next endeavor,” said Geoff Fox. “With Pete rejoining the team and a partnership with Altamont to support the ambitions of the business, Fox is poised for a very bright future.”

“The Fox team has done a tremendous job the last few years weathering a challenging market and positioning itself for the future,” said Scott Olivet. “The Fox brand is authentic and relevant across anumber of action sports so we are in the enviable position of being able to choose from a range of growth opportunities. But it’s clear that building on our leadership in motocross will always be our first priority. We will be focused on gaining leadership in product categories where we are not currently number one, increasing the pace of innovation for our consumers, and harnessing our innovation, technologies and athlete and brand stories to serve the market in a compelling way. I’m honored to be part of what Geoff, Greg, Pete, Josie, Anna and John Fox have built over 40 years and to help write the next chapter of success.”

About Altamont Capital Partners
Altamont Capital Partners is a private investment firm based in the San Francisco Bay Area with over $1 billion of capital under management. Altamont is focused on investing in middle market businesses where it can partner with leading management teams to help its portfolio companies reach their full potential. The firm’s principals have significant experience building business success stories across a range of industries including financial services, government services, consumer/retail, industrials and healthcare.

About Fox Head, Inc.
Founded in 1974, Fox Head Inc. is the leading designer, marketer and distributor of authentic motocross apparel and equipment for the world’s best riders. Fox is a privately held company with offices in Irvine, CA; Morgan Hill, CA; Calgary, Alberta, Canada; and Barcelona, Spain.
For more information, visit and follow @foxheadinc.
Brunswick Group on behalf of Altamont
(415) 671-7679

Fox Head Appoints Pete Fox as Chief Creative Officer

Irvine, Calif., Dec. 10, 2014 – Fox Head, Inc., the number one motocross equipment, apparel and accessory brand, today announced that Pete Fox will rejoin the company in the newly created role of Chief Creative Officer (CCO). Fox will report directly to Interim CEO Scott Olivet with his appointment being effective immediately.

Formerly the company’s President and CEO, Pete Fox is rejoining the business in an executive management capacity with responsibility for the creative direction of the brand. As CCO, he will directly manage the Design, Marketing and Sports Marketing teams. In addition to his new role at the company, Pete will be a substantial minority investor and will maintain his seat on the Board of Directors.

“I have always been passionate about developing high-performance products for our athletes and telling unique brand stories, and I couldn’t be more excited to have the opportunity to focus on it full time,” said Pete Fox. “I’m going to renew my efforts of 28 years to accelerate our innovation, focus our brand message and sharpen our storytelling. The newly created CCO position is an ideal fit and will allow me to have the greatest impact on the company. I look forward to working with Scott and the entire leadership team to take Fox to the next level of performance.”

Since joining the company full time in 1986 at the age of 18, Pete Fox has been integral to the brand vision, marketing and design innovation of Fox products, such as the 360 Racepant, V-Series of motocross helmets and the revolutionary Instinct boot. In addition, Pete directed all marketing campaigns and has recruited and worked closely with the biggest names in motocross – Rick Johnson, Doug Henry, Jeremy McGrath, Jeff Emig, Ricky Carmichael, James Stewart, Ryan Dungey, Chad Reed and Ken Roczen.

For more than 40 years, the world’s best riders have turned to Fox for cutting-edge MX performance gear.

“With our new partner’s long-term perspective and additional financial resources, we are going to maintain our focus on our athletes and core riders and significantly ramp up the pace of innovation,” continued Fox. “We have incredible insights into the needs of athletes across all product categories, including racewear, boots, helmets and body armor. Our customers and retailers are telling us they want more and they want it faster and we intend to deliver on this request.”
“Fox is at an exciting juncture in its history and is poised for growth,” said Executive Chairman and Interim CEO Scott Olivet. “Pete is passionate about the brand, our athletes, our customers and our employees. We are thrilled that he will be leading the company’s creative direction, focusing on innovation and creating a bigger brand voice. Over his long career with Fox, Pete has held many roles, including Creative Director, Co-President and CEO. During that time, he gained key insights into the needs of motocross riders, created invaluable relationships throughout the industry and developed an intimate knowledge of the brand. Pete is a truly creative mind who will add immediate value to product innovation and play an integral role forming the next phase in the company’s evolution.”

About Fox Head, Inc.
Founded in 1974, Fox Head Inc. is the leading designer, marketer and distributor of authentic motocross apparel and equipment for the world’s best riders. Fox is a privately held company with offices in Irvine, CA; Morgan Hill, CA; Calgary, Alberta, Canada; and Barcelona, Spain.
For more information, visit and follow @foxheadinc.
Brunswick Group on behalf of Altamont
(415) 671-7679


Altamont Capital Partners Acquires Fox Head

You may recall that back in September this article told us that Fox Head was for sale. Fox, as you know, sells action sports and motocross apparel and accessories. You probably also recall that former DC Shoes Global President Nick Adcock, who was on the board of directors at Fox, took over as CEO on February 18th, when he replaced founder Geoff Fox’s son Pete. According to the article, the company has revenues of $230 to $240 million but is not profitable.

Now, though we have no details, we learn that it’s been acquired by Altamont Capital Partners. This is interesting on a couple of levels.

First, Altamont now owns or at least has investments in Brixton, Dakine, Fox Head, HUF and Mervin Manufacturing. That is quite a gaggle of action sports/outdoor/street wear/fashion businesses. Are these just opportunistic buys or is there a plan here? That is, will each continue to run independently, or is there enough overlap in markets and manufacturing to justify some coordination? Maybe Altamont is looking to build the next VF. I hasten to add that’s complete speculation on my part. Still, it does feel like there’s been a recent focus on this market by Altamont.

Second, we know that at some point (I can’t find out when) Fox founder Geoff Fox made his son Pete CEO. We further know that on February 18, 2014, Pete Fox resigned and Nick Adcock became CEO. That must have been a hard conversation for Geoff Fox to have with his son, but he gets respect for doing it.

Seven months later, or maybe sooner for all we know, the company is for sale and it’s reported that it’s not profitable. Now the sale to Altamont has closed, or is about to.

Shop-Eat Surf reported that Fox “CFO Bill Bussiere has been named CFO for Billabong Americas, according to Billabong CEO Neil Fiske.” They also report that Nick Adcock is departing, but I don’t officially know that. It will be particularly interesting to see who the new CEO is.

Transworld Motocross said that Pete Fox was “…likely returning to head the brand.” We’ll see. As CEO, he has some responsibility for the company experiencing losses that apparently required its sale (regardless of whether it’s his “fault” or not). One wonders if Altamont will want him as CEO.

I’ve done some turnaround work with family owned and run businesses. My drop and cover reflex is kicking in on this one. I’d be intrigued to know who owned how much of the stock and when Geoff Fox decided selling made sense. And if I could get a peek at the balance sheet, I’d die a happy man.

Oh well, probably the best I can hope for is to corner one of the principals in a bar at a trade show. I’ll buy.


Retail Positioning and PacSun’s Quarter

For the quarter ended November 2nd, PacSun reported its 11th straight quarter of positive comparative store sales growth. They grew sales 4.7% to $212.4 million compared to $202.8 million in the same quarter last year. $7.1 million came from the increase in comparable store sales.

The gross profit margin rose from 25.2% to 26.7%. 1.1% of the 1.5% increase came from higher merchandise margins. CEO Gary Schoenfeld notes that they will have improved their gross margin by about 4% in the last three years if they make their fourth quarter guidance.

The operating loss improved from a loss of $1.795 million to one of $1.337 million.

Ecommerce represented 7% of total sales during the quarter, up 1% from last year’s quarter. Gary noted very specifically that they aren’t happy with PacSun’s ecommerce performance and had some catching up to do. He noted that during the turnaround they have been (reasonably I’d say) focused on the 600 stores that generate 93% of their revenue. Kind of a blinding glimpse of the obvious but worth saying.

Net income declined from a profit of $17.2 million to a loss of $469,000. BUT I have to remind you, as I do every quarter, that they have to report a noncash gain or loss on the derivative liability that results from the convertible preferred stock they issued to Golden Gate Capital as part of a $60 million term loan.

In last year’s quarter, PacSun reported a gain of $23.4 million on the derivative liability. This year, the reported gain was $4.9 million. That’s an $18 million difference. Except for that gain on the derivative, the numbers below operating income didn’t cumulatively change very much. As a result, the best place to see how they are doing is that operating line where they lost a little less money than they did in last year’s quarter even with the improvement in revenue and gross margin.

For the first nine months of the current fiscal year, they reported an operating loss of $7.7 million compared to $6.9 million in the previous nine month period.

On the balance sheet, total shareholders’ equity has fallen from $40.3 to $16.2 million, boosting total liabilities to equity from 7 times to 17.4 times. During the nine months of the year, cash used in operations was $4.28 million, an improvement from the $21.1 million during last year’s nine months.

I’ll briefly repeat what I’ve said before. Operationally and strategically, PacSun has done a lot of things right since Gary Schoenfeld took over as CEO. But for whatever reason, when he took over PacSun was no longer a place its target customers (now the 17 to 24 years olds, Gary reminds us in the conference call) wanted to shop.

The PacSun team is making the business run more efficiently; not easy, but you know how to go about it. But they also have to make that target customer want to shop at PacSun. It’s never easy to “know” how to do that, but when the economy is not as strong as it once was, the country’s over retailed, ecommerce is making so many things into commodities, and your target customer has trouble getting a job- especially one that pays well- it’s even tougher.

Those are issues all retailers in our space have in common. While PacSun is improving, I’d guess that those issues are slowing the rate of improvement. Meanwhile the balance sheet continues to deteriorate. I’m all for making an accounting profit, but what I’m really looking to see, as I do in any turnaround, is positive cash generation from operations.

They don’t have all the time in the world to do that. Partly, I assume, because they know that, on July 1 they extended the $29.8 million mortgage loan they received in August of 2010. It had been on a 25 year amortization schedule with the balance due September 1, 2017.

The new loan is for $28.2 million (note that’s more than the original loan) and is due July 1, 2021. The lender lent them half a million dollars “…to fund the payment of fees, commissions and expenses incurred by the Company…” to get the new loan done.

Then there’s the term loan from Golden Gate Capital. It has a bullet payment of $70.9 million due December 7, 2016. I would so not have chosen Pearl Harbor day. Anyway, cash on PacSun’s balance sheet at November 1, 2014 totaled $12.3 million. Let’s hope their strategy catches fire and they generate enough cash to make that payment. But I wouldn’t be surprised to see that loan restructured as well.

Finally, I’d note that there was some discussion about Brandy Melville, Kendall & Kylie, and the new Reed Space concept coming to some PacSun stores. When I first heard about the Kendall & Kylie partnership, I wrote that I wondered if this didn’t indicate a certain level of struggling by PacSun to figure out just what its niche was. I even thought it might be indicative of the beginning of the end for PacSun, as I was unsure they could compete is that fashion space.

I’ve decided I was too critical. What choice did they have after all? They weren’t going to be an action sports retailer. That market was no longer as distinctive as it once was and as the market has evolved it wasn’t a large enough niche for PacSun. Anyway, Zumiez kind of owned it in the mall.

They had to find a space in the fashion world with maybe an echo of action sports, a sprinkle of street wear, and perhaps a hint of outdoor and urban. But mostly, they had to listen to their customers tell them what brands to carry. That’s what most retailers do these days, I hope.

It’s not so much that I was wrong in the concern I expressed as I didn’t recognize PacSun’s limited options.

It’s not enough in this market, however, to just say “We’re a teen/young adult retailer.” That makes you the same as too many other retailers. PacSun tried to differentiate itself by emphasizing their California roots and sensibilities through their Golden State of Mind campaign. What that’s supposed to do is create an umbrella under which your customers can conceptualize what PacSun means to them. Feels like I haven’t seen it as much as when they announced it, but then I’m not part 0f the target market and, anyway, I don’t get out much.

Doing a lot of things right isn’t yet enough for PacSun’s turnaround. It feels like PacSun is still working to create a market position where it can defend and differentiate itself. It has to do this in an improving but still not strong economy that has been especially tough on its target customers. And its deteriorating balance sheet imposes certain constraints not just on what it can do but when it has to do it by.

All I want for Christmas is a positive operating cash flow from PacSun. I expect management would like to find that under the tree too.

The Elements of a Turnaround; Billabong’s Shareholder Meeting

Billabong Chairman Ian Pollard and CEO Neil Fiske both spoke at the Billabong shareholder meeting on November 21. Billabong, like Skullcandy, is an acknowledged turnaround in process. Both are using the fact that the public markets designate them as such to approach their turnarounds in what I consider to be the right way.

I would particularly highlight three components of that approach. The first is that they have balance sheets which, if not as strong as they might like (who’s ever is?) are strong enough that they support the turnaround and are no longer an everyday distraction. If you don’t have that balance sheet strength, it’s the most important thing in the world. When you have it, you have the luxury of not having to worry about it all the time. I won’t say you take it for granted.

Second, they say they are brand focused in everything they do. Building “…strong global brands” is how CEO Fiske put it. Good, because at some level a differentiable brand is all you can hope to have.

Third, they both acknowledge that this is going to take some time and that they aren’t going to take short term actions that damage their long term plans. As Chairman Pollard put it, “…do not expect to see us radically change direction in the interests of short-term performance.”

Over a year ago, while Billabong was in the midst of trying to make a deal and get its financial structure in order, I saw RVCA product, on two occasions, in a place where you would not want to see it. It’s gone now, hasn’t been there in months and months, and I am sure I won’t see it again.   But had I been running Billabong at that time and needed the cash flow, I would have made the same decision. And that sort of closes the circle with component number one- the requirement of balance sheet strength that enables you to pursue your brand strategy- and lets us move on from there.

Why does this take so long? Consider how Neil describes the process.

“First we laid out our detailed strategy.”

“Then we re-aligned the organization to that strategy.”

“We then assessed our gaps in talent and capability and brought in new leadership and skill sets across the organization.”

First you have to decide what to do, then you organize to do it, then you find the right people to execute it. There is a certain logic to the approach.  I imagine it wasn’t quite as linear as it sounds, especially once step one was completed, but it’s not complete yet.

So, far, there have been 65 new appointments of senior executives- some internal, some not. Of the senior management team of 10 executive, only CFO Pete Myers was in his current job 15 months ago.

That’s a lot of change, and new executives don’t just spring on board fully functional- especially when the organization is being shifted or created around them. Indeed, it can be a bit hard to hire them until you know exactly what you are going to ask them to do and who you want them to manage.

Chairman Pollard said, “Those appointees cannot effect major change until they fully understand and evaluate what specific change is required and how to execute most effectively on that.”

“For example, in areas like IT or supply chain, we cannot just shake-up our disparate global systems and processes within a matter of months with all the disruption, cost, distraction and execution risk that brings. Our approach is and will continue to be to do things once and do them right, even if that takes longer.”

So patience is the reasonable and requested order of the day.

We find out a bit about how various brands are doing in each region. “The Americas remain our biggest challenge and opportunity,” CEO Fiske tells us. He thinks it will continue to be weak through the first half of 2015, with the second showing “…the potential for some recovery…”  It’s hard to know how to interpret that phrase.

Canada is down 17% this year to date “…on a like for like basis.” That means ignoring West 49. Brazil is off 25% and they are resizing and restructuring that business. “…Element U.S. will remain weak for some time as we are completing a major overhaul of the team there under our new global brand leadership model.”

“Europe has turned around, we expect that region to be profitable this year, and it is showing steady improvement. In the U.S., Billabong is growing again and RVCA is re-accelerating, with both brands showing strong forward orders for spring.”

As you know, Billabong owns seven brands in addition to Billabong, Element and RVCA. I find it interesting that the only one we hear about is Tigerlily, which we’re told has grown 20% annually in Australia over the last three years.   I speculated in an earlier article that I thought we might see some additional brand sales because of Billabong’s decision to focus on its big three and because they are committed to funding investments with “…cost reduction, productivity gains, and global scale.” I still think such a sale might happen because of that focus. And they could make good use of the cash.

Neil recaps Billabong’s seven pillar strategy, reminding us that they revolve around brand, product, marketing, omni-channel, supply-chain, organization and financial discipline. If you want to see what Neil says, download and read his speech here. It’s the first item under “Recent News.”

Much of what he discusses are the same things other companies have been paying more attention to since 2008 or so; ecommerce, inventory management, rationalizing sourcing and logistics, being cautious where you spend money, etc.   There’s nothing particularly unique about the steps Billabong is taking, but it’s very important stuff not just in controlling expenses, but in building brands.

I particularly noted the efforts Billabong is making in managing its infrastructure. Here’s the slide they showed.

Billabong annual meeting 11-14













Slide’s a little hard to read.  Sorry.  You should come away from it realizing three things. First, that it was a bit of a mess and there’s a lot of money to be saved (though first they will have to spend some to make it happen). Second, that it’s going to take time. And third, that it has to happen if they are going to grow “strong, global brands.”  Operating well was always part of brand building, but in the days of the internet the two are even more closely related.

Baring an unexpected announcement, we’ll next hear from Billabong when they report their half year results this summer. I will look forward to learning how the turnaround is progressing.

Deckers Turns in an Impressive Quarter (Except for Sanuk)

Deckers, the owner of Sanuk, not to mention UGG and Teva, had a great quarter. Revenue rose 24.2% to $480.3 million from $386.7 million in last year’s quarter. The gross margin was up from 43.2% to 46.6%. The acquisition of their brand distributor in Germany and a decline in the cost of sheep skin had a lot to do with the gross margin increase. SG&A expense was up 36.5% from $120.4 to $164.3 million. Net income was up 23% to $40.7 million from $33.1 million.

Here, from the 10Q is a breakdown of revenue and operating income.

Decker1 9-30quarter













You’ll note right away that Sanuk’s wholesale business fell by 4.2% and that operating income for that wholesale business was down 16.8% from $3.66 to $2.68 million. But in the chart below, you’ll see that Sanuk’s total revenues were up 3.2% due to some growth in e-commerce and retail store sales. I’ve included Decker’s other brands and segments to give you a picture of the whole company, and so you see how dominant the UGG brand is.

Decker2 9-30 quarter



















You’ve probably noticed way before now- and it’s certainly not unique to Deckers- that international growth is higher than U.S. growth. I expect that to continue for many companies, though the increasing strength of the U.S. dollar may impact it. In case you haven’t noticed, we’re threatening to be in the middle of a currency war, though “a series of competitive devaluations” sounds much more benign.

What do you think your sales in Japan are going to look like when the Yen gets to 200 to the dollar?

Now, let’s focus on Sanuk’s wholesale decline for a minute. Inevitably, the decline in the number of specialty action sports retailers has impacted wholesale revenues of action sports based brands including, I suspect, Sanuk.

And I hypothesize that as you replace that revenue with revenue from larger retail chains, you’ll find your margin impacted. How do you manage that? By focusing on e-commerce and by becoming a retailer yourself. There’s plenty of both going on. Deckers opened one concept and one outlet Sanuk store in 2013.

Here’s what Deckers says about the decline in Sanuk’s wholesale revenues: “Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the weighted-average wholesale selling price per pair as well as a slight decrease in the volume of pairs sold. The decrease in average selling price was primarily due to a shift in product mix.”

They go on later: “The decrease in income from operations of Sanuk brand wholesale was primarily the result of a 7.1 percentage point decrease in gross margin as well as a decrease in net sales, partially offset by decreased operating expenses of approximately $500. The decrease in gross margin was primarily due to a decrease in margin on closeout sales as well as increased sales discounts.”

We also learn that Sanuk inventory was 39.2% higher than a year ago. Yikes! Remember, Sanuk’s revenues were only up 3.2%. Perhaps they shipped in some extra in case of a port strike, but that’s still a big increase.

Sanuk sold, then, fewer pairs at a lower price in its wholesale business, took a big margin hit due to discounts and closeouts, and appears to have a bit too much inventory; hence discounts and closeouts. That’s not good.

Deckers ended the quarter with 130 retail stores worldwide (45 are outlet stores) and expects to open an unspecified number of additional stores this year. As you may have noticed in the chart, they had an operating loss of $7.1 million on their retail stores, up from a loss of $2.3 million in last year’s quarter.

Deckers is one of the companies that is very actively engaged in figuring out the omnichannel. CEO Angel Martinez puts it this way:

“…the changes taking place in the retail environment are nothing short of dramatic. The consumer is now completely in charge and is dictating what distribution models will work and what models will fail at a rapid pace. The days of visiting the mall to peruse and shop have changed and are evolving. Now it’s all about building strong brands and creating access to product through integrated multi-channel distribution platforms that make it as convenient as possible for consumers to review and purchase the products they want. “

A great quarter for Deckers, but Sanuk still seems to be struggling, and is certainly not measuring up to the price Deckers paid, and is still paying, for the company. Nobody asked about that in the conference call. Probably because Sanuk was only 4% of Decker’s total revenues for the quarter.

Possible West Coast Port Strike or Slowdown.

I trust you’ve all been following this.  Some companies in their conference calls are acknowledging that they’ve brought in some inventory early in case things go south in the negotiations.  I would imagine that unions feel they have the most leverage  now during the holiday shopping season.  Most of you have product that arrives in West coast ports.  You might also note that automation is one thing they are negotiating over.

Hints of a New Business Model; Skullcandy’s Quarter

I love it when a plan starts to come together. Especially when it’s a plan I’ve endorsed and follows an approach I’ve been recommending for many companies since about 2008. As you know, I’ve been concerned that public companies have pressures on them to grow that make it hard to be brand builders because getting that growth can require you to distribute your product in ways that are bad for the brand. But often, the brand is all you’ve got, and you damage it at your peril.

The larger a public company is the more of an issue it becomes. Skull has the advantage of not being that large. It further benefitted, if you want to call it that, from being an acknowledged turnaround from which nobody had much in the way of immediate expectations. This left new CEO Hoby Darling, when he joined the company in March of 2013, free to clean up the distribution, reduce off price channel sales and focus on building the brand even though the immediate result was a big reduction in revenues.

I’m not claiming “Problem solved!”, but the results for the September 30 quarter are very positive.

Sales grew 16% from $50 million in last year’s quarter to $58.1 million. The gross margin rose from 44.9% to 45.3%. SG&A expenses were up about 3.7%, but operating income still rose from $514,000 to $3.58 million. Pretax income was up from $236,000 to $2.66 million in spite of $780,000 in additional other expenses that were foreign currency related.

Net income doubled from $1.08 to $2.15 million in spite of a tax bill that went from a benefit of $842,000 to an expense of $507,000 representing a total increase of $1.35 million.

So what’s the secret sauce? There isn’t one! I will remind you, as Hoby does every chance he gets, what Skullcandy’s five pillar strategy consists of. “…the pillars are: One, marketplace transform; two, create the innovation future; three, grow international to 50% of the business; four, expand and amplify known-for categories and partnerships; and five, team and operational excellence. “

Make good product, compete where you can identify an advantage, support your retailers, get the right people in the right jobs, run the business well, cherish the brand. Gee, it sounds way cooler when you call it five pillars and use lofty phrases like “marketplace transform.”

I’ll bet you that it isn’t just the analysts that hear this. Every employee probably hears it all the time and has been hearing it since he rolled it out shortly after taking the job. It’s Skullcandy’s mantra. It brings focus, direction, and efficiency to the company. Once you internalize it, you know what’s important and what’s not, and what to do and not do. Okay, I admit it’s not that simple, but I hope you see the advantage to any company.

I’m having a lot of fun talking about issues of strategy, but I need to give you a few more pieces of financial information. I’ll get back to strategy.

Skull’s domestic sales (just the U.S.) were $38.5 million, up 18.9% from $32.4 million in last year’s quarter. International sales rose 11.1% from $17.6 to $$19.5 million. International, then, represented 33.6% of total revenue for the quarter.

The table below from the 10Q shows gross profit and gross profit margin broken down by domestic and international and the change in each.










“Domestic net sales increased primarily due to sales of earbuds, wireless speakers and opening a new account.” I assume that new account in Walmart, which I’ll discuss below. “International net sales increased primarily due to increased sales in Canada, and to a lesser extent Mexico and China.” Europe is conspicuous by the absence of its mention.

Domestic operating profit improved from a loss of $2.47 million to a profit of $397,000. In international, it grew from $2.98 to $3.19 million. That’s about a 1% return domestically and 16.3% internationally. No wonder they want to increase international sales to 50% of the total. I should note, however, that I expect some further improvement in domestic operating profit as/if they make progress on their strategy. Hoby Darling notes in the conference call that they continue to “…edit accounts that don’t support Skullcandy’s premium yet accessible brand position.”

In addition, note that “The Domestic segment also includes the majority of general corporate overhead and related costs which are not allocated to the International segment. “ As a result, it’s not quite fair to compare domestic and international operating income percentages straight up.

The gross margin increased partly because of a shift to sales of higher margin products and also because of “…decreases in warranty expenses as a result of enhanced product quality.” The second is particularly good to see. It’s no secret that Skull had quality issues.

SG&A expense fell as a percentage of net sales from 43.8% to 39.2%, though in total dollars they increased by $824,000 with the first reason for the increase given as “…increase in marketing and demand creation efforts…” and the other being higher research and development expense. Both are consistent with the strategy.

Two other things for you to note:

“In the third quarter of 2014, the Company sold products to certain customers through consignment arrangements. The Company had approximately $1.0 million of inventory consigned to others included in inventories at September 30, 2014.” I generally hate consignment, because it implies some brand weakness if that’s the only way a company can get a retailer to take its product. But perhaps in the day of selling to huge retailers, it’s inevitable when you start up with one of those retailers, and I’m wondering if this isn’t part of the deal with Walmart.

There’s one customer that accounted for 17.4% of revenue and 17% of Skull’s receivables during and at the end of the quarter. I’m guessing Best Buy.

Okay, Walmart. I’ve been arguing that the days of easy distribution decisions were long over, and that each new retail channel had to be evaluated individually. I’ve also suggested that in the day of the omnichannel and mobile devices, where you sell may not matter as much; how you merchandise in the channels you choose and how you connect with your consumers is what counts. That seems to be how Skullcandy is thinking about Walmart. In the conference call, CEO Darling lists five questions they asked as they considered a relationship with Walmart. The questions are:

  • “…does our consumer shop there?”
  • “…does out competition sell there?”
  • “…can we segment our product line so that by adding Walmart, we aren’t cannibalizing sales of our existing retail partners?”
  • ”…can we reach a new consumer in a geography that has been underserved by Skullcandy?”
  • “…can we deliver good in-store experience and tell our brand story?”

They believe the answers to one, two, and four are yes. Three is so far so good. Five is something they are working on into next year.

My suggestion is that every company shamelessly steal these questions and use them in evaluating your own distribution decisions. One catch- you have to figure out with some rigor who your consumers are first.

Obviously, I’m pretty impressed with what Skullcandy is doing. But hey, it’s me and I have some longer term strategic issues which I’ve raised before.

First, consumer technology products have always, eventually, become a commodity. Skull thinks they can prevent that for their brand at least. They have to.

Second, the competitors are many and larger and better resourced than Skullcandy. Part of Skull’s plan is to compete with new and improved products and technology. We’ll see. Maybe it’s becoming about the smarts of the people you have and the connections with consumers as a source of new ideas rather than just the size of your budget.

Finally, if Skullcandy continues to improve, they may find themselves in the position where they have that age old conflict between curating the brand and growing revenues to the satisfaction of Wall Street. I suppose that’s a problem they’d like to have.

As you know, there’s a lot we don’t get told in 10Qs and conference calls. But I’m intrigued by Skullcandy because what I’m hearing, or think I’m hearing at least, is that they have wiped the slate clean and are building a brand for the online/internet/mobile/omnichannel/empowered consumer era. I don’t yet know the extent to which all these changes obviates some of the common business knowledge around distribution, marketing , merchandising, niche building and product development. I don’t think extrapolating the past into the future works as a predictive mechanism. What I think is that the reason Skullcandy may succeed is because they are embracing some of these changes. It can change the competitive equation.