The U.S. is Tough on Another Company: Globe’s Half Yearly Results

Globe published its results for the six months ended December 31st on February 21st and I missed it.  Better late than never I guess.

Happily for Globe, its largest market in Australasia was strong because revenues in Europe and North American (NA) were down pretty dramatically.  Total revenues fell 10.6% from $79.1 in the six months last year to $70.7 million Australian dollars in this year’s six months. (all dollar numbers are Australian).  Australasia revenue, representing 58.4% of total revenue, rose 15.5% from $35.7 to $41.3 million.

North American revenue fell 28.5% from $24.8 to $17.8 million.  Europe revenue was down 37.1% from $18.6 to $11.7 million.   The reduction in in revenue, they tell us, “…came largely from a decline in skateboard hardgoods in the North American and European businesses…The bulk of the decline occurred in the first quarter…with the rate of decline slowing significantly in Q2.”

I guess I’d ask if they were still declining, even at a slower rate.

“During the period, the North American division continued a process of restructure which has resulted in improved margins, lower cost base and an adjustment to brand mix in that division.”  No specifics are provided.  Note that the December 31 results do not include any impact from Globe’s investment in Salty Crew, which was effective January 1, 2017.

“In contrast the Australian business continued to be the stand-out performer…This growth came largely from the region’s streetwear and workwear divisions.”  One might conclude that the skateboard hardgoods business wasn’t all that great in Australia either.

I can’t figure out what the gross margin was or how it changed from the information given.  Employee benefit expense was down $70,000 to $10.6 million.  There was an 11% decline in selling, distribution and administrative expenses from $20.8 to $18.5 million.

Pretax income fell 25.4% from $3.77 to $2.81 million.  The tax liability declined by $551,000 and net income dropped 14% from 2.90 to $2.50 million.

By geographic segment, EBIT (earnings before interest and taxes) rose 21.5% in Australasia from $5.27 to $6.40 million.  In NA, the loss declined 32.3% from $2.39 to a loss of $1.62 million.  Europe saw its EBIT fall by 64.7% from $3.64 to $0.60 million.  Total EBIT fell 24.3% from $3.89 to $2.95 million.

The balance sheet from December 31, 2015 compared to this period is worthy of a little discussion.  Cash has grown from $7.3 to $13.7 million.  Cash flow from operating activities was a negative $6.9 million in last year’s six months.  This year, it was a positive $6.7 million.  Quite a turnaround.  I like cash.

Receivables are down 8.8% from $19.3 to $17.6 million, in line with the revenue decline.  Here’s my favorite; inventories are down 36.3% to $19.2 million compared to $30.2 million a year ago.  One wonders if they weren’t higher than they should have been a year ago.

They have no long-term debt.  Interest bearing liabilities declined from $5.28 to $4.59 million.  They reduced their trade and other payables from $24.1 to $18.6 million.  Equity rose from $32.9 to $34.9 million.

We only get information on Australian public companies every six months, and in this case, we didn’t get much.  The whole filing is only 17 pages long.  Despite that, I’ve got three conclusions.  First, they join a long list of companies struggling in the U.S.  Second, it feels like they did a great job managing their balance sheet as revenues declined though, as I said, I’m thinking inventory getting up to $30 million a year ago might have been a mistake.

Most importantly, they tell us that skate hardgoods were “largely” responsible for the revenue decline in NA and Europe.  But that the growth in Australia came “largely” from streetwear and workwear.  So not from skate hardgoods.  Maybe skate hard goods will stabilize or even turn around and take off.  But I’m wondering if the streetwear and workwear brands they are selling in Australia can be expanded to sell in Europe and NA.

That might come to be important for Globe.

Zumiez’s Annual Report and Some Questions I’d Ask if I were an Analyst.

I’m always grateful when a company has a short 10K and conference call.  I’m efficient at spotting the meat in a 10K, but it’s easier when it’s 77 pages, as Zumiez’s was, instead of 177 pages.  Though when it’s 177 pages, there’s usually some really interesting stuff.

Zumiez doesn’t need more than 77 pages.  They pursue the general strategy they’ve pursued since the company was founded, they make money, and their balance sheet is fine.  They are dealing with the same crappy retail and economic environment everybody else is, they are impacted by it, and they are cautious about the future.  Ho hum.`

Let’s look at the numbers. Then we’ll get to the fun stuff.  In the conference call, CEO Rick Brooks and CFO Chris Work say some eye-opening things the analysts don’t follow up on.  To be fair, had they asked the questions I wanted to ask, Rich and Chris probably would have politely declined to provide specific answers.  But I want to ask those questions.  They offer, I hope, some insights into Zumiez’s strategy and well as some ideas about the future of retail.  Let’s get the financial results out of the way.


Zumiez ended their fiscal year (January 28, 2017) with 685 stores; 603 in the U.S., 48 in Canada, 29 in Europe and 5 in Australia.  They acquired Fast Times, in Australia, in 2016.  No single third party brand accounted for more than 7.3% of their revenue during the year.  Private label was 20.2% of revenue.

During the year they opened 28 stores, acquired 5 (Australia) and closed 6 for a net increase of 27.  The net increase the previous two years was 55 and 52 stores respectively.  Store openings are slowing, as expected.  They project opening 18 stores in fiscal 2017. `

Fourth quarter revenue rose 8.7% from $242 million in last year’s fourth quarter in $264 million in this years.  That was the result of adding 33 stores and increasing comparable store sales by 5.1%.  Last year’s 4th quarter comparable store sales declined 9.5%.  North American sales rose 7.6% to $228 million.  Europe and Australia increased 17.1% to $35 million.

Gross margin rose during the quarter to 35.7%, up from 34.8% in last year’s quarter.  SG&A expense rose, but was down as a percent of revenue from 25.9% to 25.1%.  Net income rose 38.3% from $13.1 to $18.2 million.

Revenue for the year rose 4.0% from $804 to $836 million.  Comparative store sales fell 0.2%, after being down 5.3% in the previous year.  North American sales were up 3.5% to $754 million.  International increased 8.5% to $82.5 million.  International sales, then (excluding Canada), were 9.9% of revenues.

They acquired Fast Times August 31 (five stores), so it’s revenues were included for five months of the fiscal year.  They also opened six Blue Tomato stores.  Their European and Australian sales, then, increased $6.46 million from $76.04 million.  They don’t tell us what the currency impact was, or when they opened the Blue Tomato stores.  But I’m wondering if they continue to be satisfied with the Blue Tomato growth rate and how it compares with previous years.

The gross profit margin fell from 33.4% to 32.9% during the year despite the improvement in the fourth quarter, largely due to a deleveraging of occupancy costs (higher costs spread over revenue that didn’t grow as much).

SG&A expense rose from $222 to $235 million, or from 27.7% to 28.1% of revenue.  “The increase was primarily driven by 30 basis points from the deleveraging of store costs primarily related to wages and 30 basis point increase in corporate costs primarily related to wages partially offset by 20 basis point decrease in impairment of long-lived assets compared to fiscal 2015.”  Advertising expense was $10 million.

Net income for the year fell 10% from $28.8 to $25.9 million.  Diluted earnings per share were constant at $1.04 because they reduced the number of shares outstanding.  Lot of that going around.

I don’t have anything insightful to say about their balance sheet, which is in fine shape, so let’s move on to the fun stuff.

Questions I’d Have Liked to Ask

In his opening comments, CFO Chris Work says, “…we are continually evaluating our physical store presence to ensure that we have the right number of stores in the right locations within each trade area. As a result, in 2016 we closed six stores bringing our next store openings to 27 for the year.”

My question for Chris is, “How has implementing the trade area concept impacted the decision-making process for opening and closing stores?”  Their trade areas are about having the right number of stores in the right places and in the right configuration in each trade area to service customers given the whole omnichannel environment.

He goes on to note, “The majority of the capital spend [in fiscal 2017] will be dedicated to new store openings and planned remodels.”  I wanted to ask how remodels and new store configurations are changing because of their new systems and the impact of the omnichannel.

You want to ask the same thing when CEO Rick Brooks, in his opening comments, says, “Significant reducing our order to delivery time, and opening up our full inventory selection to all customers. We add our Stash loyalty program bringing up teams for our customers to have amazing experiences and further identify with the Zumiez brand and we’ve added several buying options for our customers including buy online, pick-up in store, reserve online and pay-in store, among others to allow customer to see their local stores inventories and buy whenever and however they choose.”

That must be effecting where they put stores, their size, and the configuration.

Next, in one of his signature long answers where he takes the question asked and tailors has answer to what the analyst should be asking, Rick notes that they launch a little over 100 brands a year.  Next, he says something important about their target customers.

“Our Zumiez’s customers are customers who has always been about expressing themselves more strongly in terms of their identity, who they are, and how they want to convey that to their peer group, in a more significant way than most of people in their peer group actually do.”

Well, sure, lots of us say that.  But if you’re constantly introducing new brands, perhaps you have a leg up.  I guess I believe Zumiez does that more than other retailers.  At least, I don’t see others talking about it as much.

Then Rick goes on to say, still responding to the same question, “…we have become the place that attracts brand that want to launch and we are really good at doing it, really good both on the in terms of what our product team does. We are good at making sure we don’t over distribute the brand, we keep it focused where it would be most successful and we are really good at maintaining price integrity for these young brands and their partners which is also super important for us, then of course our marketing teams can help leverage and grow these young brands too.”

Okay, so at this point I’m just churning with unasked questions.  Is Zumiez basically the back office for some of these brands?  Do they get the product made for them?  Do they help them do their accounting?

I’m wondering if Zumiez, seeing as many brands as it apparently does, shouldn’t have a subsidiary to make small investments in them.  If they are helping them make and get product, aren’t they already basically investing in them?

Most importantly, I want to ask Rick if this relationship with many new, small brands isn’t a competitive advantage that goes further than doing the same things your competitors do, only better?  Is it potentially a truly meaningful one?

Meanwhile, they are continuing to roll out their customer engagement suite, a new software program they worked with the vendor to develop.  That’s to be completed by the end of 2017 in the U.S.  They call it a “commerce engine.”

Rick says, “…we’re engaging at all sorts of new ways with the customer and our intent with this new engine, not only does it increase feature and function capabilities and we’ll give us again the platform to add a lot more feature and functions overtime. But it’s all of that how we can create a feedback loop to improve virtually every aspect of what we’re doing. I think we’re going to find ways to use this new data to improve assortments across the countries to further localize our assortment planning…I expect that as we kind of said in the comments, we expect to personalize a lot more of the customer experience because of the deep level of engagement and knowledge you’re going to have about this customer base.”

“…we know we can capture the data, we’ve proven that here over the first few months of using the system in our test stores that’s been in and we’re excited to get it going and get it rolled out because then we can really start again generating information that will feed virtually every aspect of our company operations in terms of better serving customers in local markets and the local traders.”

I want to ask about what information they expect to generate that they didn’t get before and what they expect to do with it.  Part of the answer would probably be, “We don’t know yet.”  That’s a fine answer.  They are hoping and expecting this system to show them patterns and relationships they haven’t noticed before- but they don’t yet know what they will be.  There is some risk there, but it’s my kind of risk.

It also sounds, based on comments in previous conference calls, that they might be taking a bit longer to get this rolled out then they originally expected.

Chris goes on to say, “…while I can report where the transaction actually occurred I cannot report where the transaction actually originated…” I’d love to ask if the new system will change that and, if so, what they believe the value will be.

Meanwhile, back on trade areas, Rick says, “Our ability to localize fulfillment is about trade area because that means we will be able to look at digital and physical demand and place products in a trade area in service of customers and again these are all big strides we have made over the last few years. And when you get into looking at traders, it is very, very interesting.”

No! Wait! You cannot stop with “very, very interesting” and just leave me hanging!  How do the customer engagement suite and concept of trade areas dovetail?  What are your expectations for reduction in required inventory?  How does this all impact how you work with the new brands?

You see my problem.  I haven’t even scratched the surface of questions I want to ask.

Zumiez has the same problems other retailers have, and their results demonstrate them.  They don’t expect the consolidation related issues to go away for “…another period of years…” as Rick puts it.  I agree with him.  But they are making money and their balance sheet is solid.  And they are doing a couple of potentially impactful things with their systems and work with new brands that can differentiate them in a maybe significant way.

How Was VF’s Year?

It’s accurate to say that VF ran into the same issues and economic dislocations as other brands and retailers.  During their fourth quarter, ended December 31, 2016, revenues fell 2.7% from $3.41 billion to $3.32 billion in the quarter ended December 31, 2015 (the prior calendar period- PCP).  Net income was also down from $312 to $264 million, or by 16.7%.

For the year, revenue was almost the same at just over $12 billion.  Net income fell 12.8% from $1.32 in 2016 to $1.07 billion in 2015 (also the PCP).  More details and nuance later.  I wanted you to have those numbers as we talk strategy.

VF’s Strengths and Strategies

Right from the start, I want you to focus on how VF competes.  Here’s what they say on page one of their 10K:

“VF’s diverse portfolio of more than 30 brands meets consumer needs across a broad spectrum of activities and lifestyles. Our ability to connect with consumers, as diverse as our brand portfolio, creates a unique platform for sustainable, long-term growth. Our long-term growth strategy is focused on four drivers:

  • Lead in innovation by delivering new products and experiences that consistently delight customers, to drive core growth and strong gross margins;
  • Connect with consumers by gaining a deep understanding of their behavior, values and preferences to inspire brand engagement and loyalty;
  • Serve consumers directly, reaching them across multiple channels — wherever and whenever they shop; and,
  • Expand geographically, taking advantage of VF’s scale within every region and channel in which we operate.

VF is diversified across brands, product categories, channels of distribution, geographies and consumer demographics.”

As you read those four bullet points, you might tend to think, “Well, sure.  Those are the same four things everybody wants to do.”  You’d be right.  Why can VF hope to do them better than other players?

  1. Size
  2. A strong balance sheet (bet you’re stunned to hear me say that).
  3. Diversification
  4. Flexibility (partly due to owning some of their factories, which produced 22% of their units in 2016).
  5. Rigorous management processes.
  6. A strong balance sheet (Oh-wait- Did I say that before? That’s okay).
  7. A certain level of caution in distribution.

Five is my opinion and not as directly supported by public information as the others are.  I also want to suggest there might be one more, though I’ve never heard them discuss it.

That one more is how their 30 plus brands interact with each other.  How do ideas, customer information, designs, materials, practices from one brand provide insights and ideas to other brands?  They’ve got their investor day coming up.  I’d encourage them to address that.

The Results for the Year

I’ve already given you the revenue and net income lines.  Other revenue related facts are that VF’s top ten customer generated 21% of revenue during the year and that direct to consumer revenues (stores and online) were 28% of revenue, up from 26% the previous year.  Ecommerce is 18% of the direct to consumer business, or $605 million.  That’s 5% of total revenue.  They expect direct to consumer to grow faster than the rest of VF.

They ended the year with 1,507 stores worldwide, 155 of which were opened in 2016.  600 of those stores are Vans, 200 The North Face, and 250 Timberland.  The stores opened in 2016 focused on those three brands.  They’ve got 80 VF outlet stores.  They expect to add 50 stores during 2017.

Gross margin rose from 48.2% to 48.4%.  Pricing gave them a 1.2% boost, but they lost 0.8% due to foreign exchange and 0.2% due to some restructuring costs.

SG&A expenses rose from $4.009 to $4.244 billion.  Advertising and promotional expenses were $674 million, or 6% of sales.  Many small brands would love to get that expense category down to 6%.

“This increase is primarily due to restructuring initiatives of $34.8 million, a pension settlement charge of $50.9 million, investments in our key growth priorities…and the benefit of a $16.6 million gain on the sale of a VF Outlet ® location in 2015.”

Revenues are constant and net income is down, but they are still investing in “…direct-to-consumer, product innovation, demand creation and technology initiatives…”  They are also making sure their pension plan is funded so it doesn’t come back and bite them in the buttocks in the future. There’s the benefit of a strong balance sheet again.

I’m going to give you all a break and not carry on about all the underfunded pension plans out there that are deluding themselves about their earnings assumptions over the next decade or so.  If you are counting on one, you might check out how secure it is.

Speaking of various charges, VF had a few others.

“As a result of management’s decision to merge the lucy ® brand into The North Face ® brand , VF recorded a $79.6 million noncash impairment charge to write-off the goodwill and intangible assets of the lucy ® reporting unit during the fourth quarter of 2016.”

There was also a $58.5 million charge for Nautica, “…writing the goodwill down to its estimated fair value.”  Reef took hits “…of $31.1 million and $5.6 million related to the goodwill and trademark, respectively.”

It’s nice to get a little information on Reef, even if it isn’t good news.  Here’s how VF describes the analysis that lead to the Reef write-down.

“Recent performance by the brand has been negatively impacted by isolated events such as an unseasonably cold spring in 2014, supplier issues in 2015 and bankruptcies of wholesale customers and an inconsistent retail environment in the U.S. in 2016. However, VF is optimistic about the brand because of the nature of past challenges and the expected success of new product offerings. Key assumptions developed by VF management and used in the quantitative analyses of the Reef ® reporting unit and trademark include:

  • Minimal revenue growth in the wholesale channel driven by door expansion with existing and new customers
  • Modest growth in the e-commerce business
  • Modest gross margin expansion based on updated strategies
  • Increased leverage of selling, general and administrative expenses on higher revenues
  • Market-based discount rates
  • Royalty rate based on active license agreements of the brand”

As always, and as with all companies, VF wants you to know the Lucy, Nautica and Reef charges are noncash.  However, that doesn’t mean they don’t imply a reduction in future cash flow and performance by the three brands.

Finally, speaking of one time charges, VF sold its contemporary brands coalition.  The deal closed on August 26 and generated an after-tax loss of $104.4 million.  Through the sale date, that coalition generated $188 million in revenue.  Ignoring that coalition, income from continuing operations fell from $1.71 to $1.42 billion.

VF’s operating margin fell 2.4% from 14.9% to 12.5%.  1.5% of that decline was the result of the various charges described above.

It’s not a big deal, but “Net interest expense increased $4.0 million to $85.6 million in 2016. The increase in net interest expense was primarily due to higher interest rates on short-term borrowings and an increase in long-term debt due to the issuance of €850 million euro-denominated 0.625% fixed-rate notes in September 2016.”

If rates continue to rise (don’t be deluded into believing that the Fed controls interest rates) it’s going to be interesting to watch companies that have borrowed lots and lots of cheap money scramble.  VF is not a company with a problem in this area but even for them, higher interest rates increase costs and reduce net income.  VF’s weighted average interest rate was 3.5% in both 2016 and 2015.

Not too much to discuss on the balance sheet.  It’s “fine.”  Cash provided by operations rose from $1.20 billion in the PCP to $1.48 billion in 2016.  The current ratio improved from 2.1 to 2.4.  Long term debt rose from $600 million (they borrowed 840 million Euros in Europe), from $1.4 to $2.0 billion, but used the money to reduce their short-term commercial paper borrowings from by over $400 million.  Equity declined from $5.4 to $4.9 billion and debt to total capital rose 25.6% to 31.9%.

Outdoor & Action Sports

The chart below shows revenue and operating profit for all of VF’s coalitions.  You will note the continued and increasing dominance of Outdoor & Action Sports in terms of both revenue and operating income.











“Global revenues for Outdoor & Action Sports increased 2% in 2016, reflecting strong growth in the direct-to-consumer channel, partially offset by weakness in the U.S. wholesale channel. Revenues in the Americas region were consistent with 2015, and revenues in the Asia Pacific region increased 4% in 2016 despite a 2% negative impact from foreign currency. European revenues increased 5% in 2016, representing operational growth of 4% and a favorable impact from foreign currency of 1%.”

“Global direct-to-consumer revenues for Outdoor & Action Sports grew 13% in 2016, driven by new store openings and an expanding e-commerce business. Wholesale revenues were down 4% in 2016, primarily due to retailer bankruptcies and reduced off-price shipments in the U.S., and a negative impact from foreign currency of 1%.”

Some themes are consistent across the industry; weak U.S. wholesale, the impact of bankruptcies, the impact of foreign currencies.

“Vans ® brand global revenues were up 6% in 2016, reflecting strong operational growth in the direct-to-consumer channel, partially offset by declines in the wholesale channel and a negative 1% impact from foreign currency.”

“Global revenues for The North Face ® brand decreased 2% in 2016 [7% during the 4th quarter], as strong operational growth in the direct-to-consumer channel was more than offset by declines in the wholesale channel in the U.S. and an unfavorable foreign currency impact of 1%. The wholesale revenue declines for The North Face ® brand were attributable to retailer bankruptcies and management’s proactive approach to managing inventory levels in the market by reducing off-price shipments in the U.S. during the fourth quarter. The combination of both factors negatively impacted revenue growth for the year by approximately 4%.”

“Global revenues for the Timberland ® brand were up 1% in 2016 driven by growth in the direct-to-consumer channel and international business, partially offset by weaker wholesale revenues in the U.S.”

The coalition’s 2% growth was a bit below what they projected last October.  However, “The shortfall was due in part to our strategic decision to ship less North Face product into the off-price channel in the Americas.”  That gives me warm fuzzy feelings.  I think judicious distribution management is a requirement of brand building these days.

CEO Steve Rendle, responding to an analyst asking about pulling back some distribution, addresses the issue this way.

“I guess, if you think about the distribution strategy, that’s an every season, every year opportunity for our businesses to look at the channel partners that they work with and how we are segmenting our products and really thinking about what partners to place our products in. I wouldn’t say, Jim, there’s anybody that we would back out of. I would say, each of our groups are focusing on their key partners, and that’s true for Vans, that’s at North Face, that’s at Timberland, SmartWool. And I think probably more attention is being put into the right assortment, the right levels at the right times of the year, so really leveraging that retail discipline and becoming more retail centric looking at the quality of flow and the frequency of new delivery. I think that’s more of our focus than pulling back on or limiting any of our partners.”

There’s a sort of warm fuzziness to the answer meant to reassure existing partners.  What you should take away, however, is the subtlety and complexity of addressing distribution these days.

It’s not that VF isn’t impacted by all the change, uncertainty, and softness of markets.  But for the reasons I’ve outlined, they (and some other companies) can muddle through while weaker competitors flounder and clear the playing field.  Consolidation- remember?

I’m sure VF management would have preferred I use a term other than “muddle through.”  But damned if that isn’t what we’re all doing.  The day after we get an idea what tomorrow might look like, it changes again.

Well, Zumiez’s 10K is out, I’ve got some ideas around Dick’s decision to reduce its number of brands, and the article I wrote on Intel’s garment printing system makes me want to speculate some more on the future of brick and mortar.  Oh- and I have some actual work I need to do.  Better get busy.

Billabong’s Six Month Report: The More Things Change, the More They Stay the Same

Six months ago, reporting on Billabong’s results for the whole year, I said this was a challenging turnaround, Billabong was doing things right, they were starting to see results, but the market was tough, and implementing their plan was taking longer and costing more (perhaps because it’s taking longer) than they’d initially expected.

That’s all still true for the six months ended December 31, 2016.

I’ll start with the numbers as reported (numbers in Australian dollars).

Read more

GoPro’s Year and Quarter: Doing the Right Things, But……..

Let’s just jump right to a comment CEO Nick Woodman made during the conference call.

“I would say that we are more focused on revenue and margin and less focused on volume on a unit basis.”

That sounds to me like GoPro is more interested in the higher end of the market.  And they should be. But if that’s their focus (I happen to think it should be, but dare I call it a niche?) is there enough revenue growth to satisfy the requirements of being a public company?

On to GoPro’s competitors.  Here’s how they describe them and GoPro’s advantage.

“We compete against established, well-known camera manufacturers such as Canon Inc., Fujifilm Corporation, Nikon Corporation, Olympus Corporation and Vivitar Corporation, as well as large, diversified electronics companies such as, Panasonic Corporation, Samsung Electronics Co. and Sony Corporation and specialty companies such as Garmin Ltd. We believe we compete favorably with these companies’ products. Our durable and versatile product design facilitates increased functionality and wearability and we offer a variety of mounts and other accessories that enable a wide range of consumer use cases that are difficult for other competing products to address. Further, we offer many professional-grade features within our good, better, best product offering at attractive consumer price points…”

Hefty group of competitors.  If I am reading between the lines correctly, GoPro is not, cannot and does not want to compete against low priced, less featured, products.  Good- because in my judgment, they can’t.

On to GoPro’s strategy.

“We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create and enjoy engaging personal content. When consumers use our products and services, those products and services enable compelling, authentic content that organically increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for our products.”

This isn’t just a technical, but a marketing strategy.  I think it can work.  It is working.  But how big is this market, this “virtuous cycle?”  I’ll ask again if it’s the basis for a public company?

GoPro points to five elements of its strategy.  The first is “Drive profitability through improved efficiency, lower costs and better execution.”  Nobody can argue with that, if only because everybody is doing it.  As you are no doubt aware, during 2016 GoPro implemented some restructuring, rationalization and layoffs as part of this process.  More coming in 2017.

Number two is “Make the smartphone central to the GoPro experience.”  This is necessary and I’m glad they saw it clearly.  Still, it feels more like a concession than a strategy.

I’ll come back to three.  Number four is “Grow our business internationally.”  Like everybody else, they’ve perceived limits in the U.S. market and see opportunities abroad.

Number five is “Expand the GoPro experience for advanced users.”

Now for number three.  “Market the improved GoPro experience to our extended community.”

Let’s spend a little time on numbers three and five.  GoPro’s strategy here sounds a bit like a core action sports strategy back in the good old days.  The advanced users give you credibility, excitement and commitment.  Dare I use the words, “vibe” or “core?”  They are the thought leaders in creatively using GoPro’s capabilities and building the community.

Based on that, we used to think, you could reach “the extended community.”  And you can- to a point.  Where is that point?  Well what do you know!  Here we are back at distribution again.  As I’ve said a few times, there comes a point in expanding distribution when they may know your brand, but they won’t know your story.  That’s probably the limit of your brand’s growth without long term damage to it.

That’s not a completely accurate analogy.  First, GoPro is hardware with real, distinctive features that evolve and improve.  More like the bicycle market than the snowboard market, where meaningful differences these days are kind of hard to find.  Second, distribution has evolved.  GoPro’s biggest customer is Best Buy (17% of revenues) and they do a bunch of business on Amazon (11%).  There’s nothing wrong with either of those.  They also mention Walmart and Target as significant customers, but each is less than 10% of revenues.  GoPro is in 45,000 retail outlets is over 100 countries.  Less than 10% of their revenue comes from

We know brands that were public, but got into various forms of trouble not least because they couldn’t meet Wall Street’s growth expectations without damaging their brand and market position because of how they expanded their distribution to grow revenue.  They ended up private and are better off for it.

GoPro’s basic challenge is conceptually simple.  Can they attract enough of their hoped for extended community to provide satisfactory top line growth?    Keep that in mind as we review the financial results.

By the Numbers

Revenue for the quarter ended December 31 grew 23.8% to $541 million from $437 million in the same quarter last year.  The gross profit margin rose from 29.4% to 39.2%.  I imagine much of that increase is explained by a 9% increase in average selling price.  Operating expenses rose from $170 to $239 million, or by 40.6%.  As a percentage of revenue, they rose from 38.9% to 44.2%.

There was a net loss of $116 million during the quarter, compared to a loss of $34 million in last year’s quarter.  However, that loss “…includes a charge of $102 million to account for a full valuation allowance on our U.S. deferred tax assets…” That’s $102 million they won’t be able to apply against future taxes on profits.

For the year, revenue fell 26.9% from $1.620 to $1.185 million.  Units shipped fell by 28%.  The decline reflected “…global channel unit sell-through that exceeded sell-in for the first three quarters of 2016 as we worked to reduce channel inventory in preparation for the launch of HERO5 in September 2016.”  They also had some manufacturing issues that left them undersupplied with HERO5s in the fourth quarter.  That lead to some partners cancelling promotional efforts and impacted demand.

Presently, almost all of GoPro’s revenues come from cameras and accessories.  I’ll be interested to see what kind of reception the Karma drone gets now that it’s back on the market.  They got no revenue from it during 2016.

The gross margin dropped from 41.6% to 39.0%.  Product costs rose because of new features.  I’m fine with a bit lower gross margin if they are selling higher priced products and generating more gross margin dollars.  They are now projecting their long-term gross margin to be 39% to 41%, down from 42% to 44%.

Research and development expense rose 48.3% from $242 to $359 million.  As a percentage of revenue, they doubled from 15% to 30%.  Their 10K has a section on intellectual property, where we learn they have 208 issued patents and 497 patent applications in the U.S.

Sales and marketing expense also grew rather handily from $269 to $369 million or by 37.2%.  As a percent of revenue, they rose from 17% to 31%.  General and administrative expenses, at $107 million, were constant.

There was a net loss of $419 million compared to a profit of $36 million the previous year.

Let’s think about those operating expenses.  Pretty large increases in R & D and sales and marketing expenses for a company that lost $419 million and had a 27% decline in revenues.  But they are consistent with the strategy they outline- especially the parts about marketing to advanced users and the extended community.  They must be cooler and have generally better product than their competitors.  Then they have to convince enough people who are getting by with their cell phones or a cheaper, less functional, camera that GoPro has something they need.

Their ability to continue this depends on their balance sheet and turning around the operating performance.  They are reducing operating expenses.  They’ve come out with a new camera (I’d include the software and call it a system) that they tell us is leading in market acceptance and features.  They seem to be getting better at transitioning from old product to new.  The fourth quarter of 2016 was the second highest quarter by revenue they’d ever had.

In summary, there is progress on the operating side.

Now, the balance sheet.  The current ratio at year end was 1.36, down from 2.82 at the end of the prior year.  That’s largely due to a 54% decline in cash and marketing securities.  Meanwhile, receivables grew from $146 to $165 12.9%) million even as sales declined.  But they factor some receivables, so it’s hard to know how to think about that.  Inventory fell 11.2% from $188 to $167 million.  They tell us in the conference call that inventory in their channels was down 15% compared to the end of 2015 and that “…the vast majority of the inventory in the channel…were our newer products.”

They have no long-term debt, but accounts payable and accrued liabilities ended the year at $416 million, up 47.5% from $282 million at the end of the prior year.  That suggests to me they are using their suppliers as a source of working capital, not that there’s necessarily anything wrong with that.  Done it myself a few times.

Equity fell 42.1% from $772 to $447 million.  Total liabilities to equity rose from 0.43 to 1.06.  GoPro had some expenses last year you can characterize as one time, though as you’ve heard me bitch and moan, lots of companies always seem to have new onetime expenses every year.

The point, however, is that they can’t continue this level of spending unless the operating performance recovers quickly and significantly.  Net cash provided by operating activities was a negative $108 million, compared to a positive $158 million last year.

I guess I’ll summarize with what I said in the middle of the article.  “GoPro’s basic challenge is conceptually simple.  Can they attract enough of their hoped for extended community to provide adequate growth?”

Here It Comes; 3D Printing for Apparel

It was, I think, a couple of years ago when I said, 3D printing of various products is on its way.  I suggested maybe getting a 3D printer for a few thousand bucks and experimenting with it.  Maybe print some key chains or stuff like that.  The responses were along the lines of “Oh, sure, someday.”

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Nordstrom is Struggling with the Same Issues All Retailers Have

Last week was spent in Arizona on an annual excursion with old friends playing golf.  In my case, bad golf.  There may also have been a cocktail or two involved.  Anyway, as I left, GoPro came out with its 10K annual report and, while I was gone, Billabong reported its half yearly numbers.  So I’m behind.

But before I dig into those many pages of small print, my research department has sent me an article on Nordstrom that is worth a few words.

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Trade Shows: Can’t Live with Them, Can’t Live Without Them

Life was simpler when I wrote my first article on trade shows in the mid-90s.  We went to trade shows because it was the only place to see, and to make, complete product presentations, and discover new, meaningful, features and products.  There were also a lot more specialty retailers.  The shows were the only place they and brands could efficiently connect and do business- by which I mean write orders.

All that’s changed.  It’s not that it doesn’t still go on, but it doesn’t have to happen at trade shows like it used to.  There are other choices caused by consolidation, the internet, and changing consumer behavior.

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Deckers’ Quarter: More Sanuk Travails and the Public Company Conundrum.

I’ve reviewed Deckers’ 10Q for the three months ended December 31, 2016 and their conference call.  The company earned $41 million on sales of $760 million in the quarter, which isn’t bad.  But that’s down from net income of $157 million on revenues of $796 million in the same quarter last year.

The problem?  I’m sure regular readers already know.  Yup, it’s mostly Sanuk again.  But’s let start at the company’s top line.

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An Analysis of Free Trade


I’ve been sitting on this for a while trying to figure out whether or not offer it up.  It’s certainly not action sports or active outdoor focused.  And, in our current environment, it’s inevitably going to be perceived as having a particular bias.  I’d say it reaches a solid conclusion based on the data it utilizes.  If that’s a bias, so be it.

It’s a defense of free trade from the Fabius Maximus web site which I follow and highly recommend.  It’s conclusion, however, is based on actual data; not anecdotal evidence, not a one minute story on the nightly news, and certainly not a tweet.

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