Berrics Consumer Report

You know, I always assumed/took for granted that skateboards you bought at Walmart or other large discount chains were not too good. I have to admit though that sometimes I thought to myself that maybe they weren’t a bad idea for a first deck if somebody was starting out.

To be clear, I’m way too old to fall on concrete or asphalt, so I didn’t test that hypothesis myself. Happily, The Berrics Consumer Report has.

I can’t help but remind you that it’s basically one guy testing a couple of boards and that he’s doing things some skaters never do.  But the results seem so compelling that even I, who believe in large sample sizes, statistical validation, comparisons against a norm, and all sort of statistical stuff took notice.

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Kering’s Annual Report and Some Thoughts on Volcom’s Role.

Kering, the owner of Volcom and Electric, presented its annual results for 2014 last week and held the usual conference call. As regular readers know, I was impressed at the job Volcom did selling itself to Kering (then PPR) both in terms of the price they achieved and their timing. The deal happened almost four years ago.

Following the acquisition, I chronicled (as best I could given the limited information Kering provided on the separate performance of Volcom and Electric) what I’d call some apparent difficulties with integration and performance by the brands that I thought didn’t live up to Kering’s expectations given the price they paid ($607 million). It felt a little like Deckers’ purchase of Sanuk.

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The Abercrombie & Fitch Story. What Went Wrong?

You have heard me say from time to time that companies get into trouble due to denial and perseverance in a period of change. I’ve also noted that it’s typically not the founder or executive who’s been in charge for a long time who can fix the problems.

Their perception of the organization, relationships with the people (employees and other stakeholders) and, ultimately, responsibility for the problems, or at least for not addressing them effectively, makes it difficult for them act as a change agent. Often even recognizing, until things get really tough, the need for the change is hard. The arrogance that successful entrepreneurs justifiably have (or they would never have succeeded in the first place) can get in the way as well.

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Deckers Has a Pretty Good Quarter. Sanuk, Not So Much.

The overall numbers for Deckers for the quarter look pretty good. But some of the comments left me a bit perplexed. Meanwhile, Sanuk is still not performing the way Deckers must have expected when they bought it.

Overall Results

In the quarter ended December 31, Deckers’ revenue rose 6.6% from $736 to $785 million. The gross profit margin rose from 51.1% to 52.9%. Part of the increase was due to their acquiring their German distributor. Net income was up 11.2% from $141 to $157 million. It would have been stronger, but revenue came in 3% below expectations.

CEO Angel Martinez explained the revenue miss in the conference call.

“As temperatures turned colder across the U.S. with the exception of the West Coast, which has remained unseasonably warm, demand for our weather collections spiked. We experienced strong gains in technical boots, fashion waterproof boots and boots with rain application. In total, sales of our weather offerings grew over 70%.”

“In many instances, demand for casual and weather boots [due to early cold weather] exceeded our inventory investments . As a result, we believe we missed nearly $7 million to $10 million in sales from domestic wholesale reorders as we were unable to fulfill 100% of the demand for these collections. We also believe that we missed approximately $2 million in online sales due to sellout of weather and casual boot product.”

“This shift to expanded categories has highlighted the need to further improve our ability to plan and manage our product and inventory strategy against these consumer purchasing trends. This also requires some adjustments in our product and marketing strategies at both wholesale and in our DTC channels, which we are currently implementing.”

This is a little confusing to me. If they were projecting revenues 3% higher, I would have expected them to have the required inventory on hand. But above he’s saying they missed $9-$12 million in revenue because they didn’t have inventory. Is that on top of the 3% miss?

At some level, this is a great problem to have as a CEO. Sure, we can all stand to work on improving our flexibility in getting the right product to the right market at the right time and to respond more quickly to changing market conditions. But I doubt either Mr. Martinez or any of Deckers’ other executives are going to get any better at predicting the weather.

Meanwhile, the gross margin rose and, as I’ve argued a bunch of times before, I bet a little scarcity wasn’t completely a bad thing for the brand. I might even connect some of the gross margin improvement with the scarcity. We do learn that, “…closeout sales decreased as a percentage of overall sales and had higher margins compared with the same period last year.”

But then he goes on and confuses me some more.

“Classics had a very good second quarter, both from a sell-in and sell-through perspective, which created some bullish expectations among our retailers and internally for the third quarter. This was the main driver behind our decision to raise guidance on our last earnings call. Unfortunately, most of November, with the exception of Black Friday and Cyber Monday weekend, was below plan, which we believe was a result of mild temperatures in certain markets and weak store traffic trends across the industry. Sales trends accelerated as the quarter progressed. However, it wasn’t enough to offset the slow start, which eventually led to some cancellations primarily in our domestic wholesale channels in December.”

You can, I think, see my confusion. On the one hand, Deckers missed some sales because of cold weather. On the other hand, they missed some because of warm weather. And all in the same quarter. I guess they are talking about different geographic markets and products, but a little clarity would be nice.

The UGG brand is branching out. You might check out their web site and note the UGG branded products under categories such as loungewear, handbags and home.

$402 million of the quarter’s revenue, or 51%, came from the UGG wholesale business. But that was up only half a percent from last year’s quarter. Total wholesale business for the quarter was $445 million, up from $441 million in last year’s quarter.

But revenues from ecommerce rose 25.2% from $117.3 to $146.9 million. And retail store revenue was up 8.3% from $178 to $193 million, though comparative store sales declined in the high single digits. They are working on improving store performance, but in the meantime have “…decided to moderate and assess the pace of new store openings.”  They ended the quarter with 138 stores worldwide.


Sanuk’s total revenue for the quarter came in at $20.5 million, down 7.9% from $22.2 million in last year’s quarter. Sales for nine months rose 6.7% to $75.4 million from $70.7 million in the same nine months last year. Happily for Deckers, Sanuk’s revenue represents just 2.26% of the quarter’s total.

Its wholesale revenue for the quarter fell 11.1%, from $19.97 to $17.76 million. For nine months, wholesale revenues have risen slightly from $64.4 to $66 million.

“Wholesale net sales of our Sanuk brand decreased primarily [for the quarter] due to a decrease in the weighted-average wholesale selling price per pair as well as a decrease in the volume of pairs sold.” Volume and price both down. Not so good.

Sanuk’s operating profit from wholesale revenues for the quarter fell from $1.085 million to a loss of $282,000. For the nine months period, it’s down 17.1% from $11.2 to $9.3 million.

The last piece of the earn out for Sanuk has to be paid by Deckers based on 2015 results and equals 40% of the total gross profit Sanuk earns in calendar year 2015. As of December 31, Deckers is estimating that amount to be $27.7 million. That’s down from $30 million at the end of March, 2014. If you knew what Sanuk’s gross profit was, you could pretty much calculate Sanuk’s projected sales this year, though that calculation is complicated by the fact that the estimated earn out is discounted at 7% to allow for the time value of money.

Oh hell, I can’t resist, but I’m going to ignore the 7% discount rate. If GP is Sanuk’s total projected gross profit for 2015, then .4 x GP = the earn out, or $27.7 million. Dividing both sides of the equation by 0.4, we see that total projected gross profit for Sanuk in 2015 is $69.25 million.

We know that Sanuk did $102 million in all of 2013. In nine months of fiscal 2015, it’s had revenue of $75 million (Deckers changed its fiscal year to March 31 last year).  In the first calendar quarter of 2014, Sanuk’s revenues were $30.7 million. If it did the same in this quarter, total Sanuk revenues for the fiscal year ending March 31, 2015 would be $105.7 million.

And just to finish up this little exercise in speculative financial analysis, if sales did come in at $105.7 million and gross profit were $69.25 million, the Sanuk gross margin would be 66%. Wow.

But how can that be with a $660,000 operating loss for the quarter on Sanuk’s wholesale business when ecommerce and brick and mortar sales of the brand total only $2.7 million? Perhaps the quarter isn’t indicative of business for the year.

Okay, I have got to stop this. But this is what happens when I get curious about something and there’s no information provided; I try to figure it out from what I’ve got.   See, the 10Q shows business segment assets for the Sanuk wholesale business of $208.8 million. The similar number for UGG wholesale is $334.9 million, or about 1.6 times Sanuk. But UGG’s wholesale revenues were 22.6 times greater than Sanuk’s during the quarter.

This is the best I can do with what I’ve got, but it doesn’t completely make sense to me. Perhaps some of you wise people out there can help me out?

Based on Sanuk’s performance since the acquisition, it’s pretty clear they overpaid for the brand and I wonder if that might have to be acknowledged by one of those noncash write downs of intangible assets.  We’ll see.

Anyway, Deckers has a strong balance sheet, they grew revenue and profit, and I’m intrigued by some of the brand extensions they are doing with UGG. We’ll see how that works out as we follow Sanuk.

Mobile! Mobile! Mobile!

In some recent speeches and articles, I’ve been highlighting the growing importance of mobile to brands and retailers. I thought I’d been pretty aggressive in suggesting how important it has become (and is increasingly becoming), but I think I’ve probably been understating the case.

Now, I’ve stumbled (thank you fabled research department) on an article/presentation from Internet Retailer that not only highlights just how important mobile has become, but that asks some questions around what to do about it I probably would never have thought of. Actually, I know I would never have thought of them.

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Intrawest’s Quarter; Business as Usual. Mostly In a Good Way

You may recall that Intrawest got in an avalanche of unmanageable debt when the Great Recession took down the resort real estate market.  They solved the problems of an unpayable interest bill by getting their primary debt holder to convert a big chunk of its debt to equity and taking Intrawest public. I wrote about their predicament before they went public.

Intrawest, to refresh your memories, owns and operates Steamboat, Winter Park, Mont Tremblant, Stratton Mountain, Snowshoe and Blue Mountain. Let’s start with their income statement for the quarter ended December 31. This is prepared according to generally accepted accounting principles- just the way I like it. You can review the entire 10Q here if you want. Unless otherwise noted, all the numbers in this article are in thousands of U. S. dollars.

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Tradeshows, Millennials and Other Hopefully Related Topics

SIA’s show in Denver last week was the third trade show I’ve been to this year (the only three I’ve been to, and that’s quite enough) where the millennial generation was discussed and analyzed and their importance acknowledged.

You should know I was one of the people discussing them at a speech I made in Denver. In my defense, I acknowledged that while I was willing to offer some conjecture as to their circumstances, motivations, importance and impact, I really didn’t have much of a clue about what a group of 18 to 34 years olds wanted or thought.

This was driven home too me when I had lunch with a client. He’s 32, and described reading about how some 18 year olds were using certain apps and/or social media. He said he had no idea what they were talking about. What, then, is my chance of “getting it.” Or yours if you’re even within a decade or two of my age.

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The Evolution Of Marketing & The Future Retail Model

Recently, some companies have said some intriguing things about the omnichannel and the relationship between brick and mortar and online (for the record, when I say “online” I’m including mobile devices). I’ve also read some interesting things about generational behavior that made me think about the future of brands and retail structure.

It’s no surprise that buying patterns are different for the millennials (born 1982-2000) than they are for the baby boomer (born 1946-1964). Millennials have faced (and will continue to face) different and more difficult economic circumstances than boomers. And of course, they take technology for granted. They shop differently, have different priorities, and are less likely to be brand loyal.

I’ve written about brands that were originally focused on the boomers aging out, and the complexity around maintaining the loyalty of your original customer base while trying to appeal to younger customers. The first thing to note is that right now, boomers spend way more than the millennials. But, for obvious reasons, that’s going to change. If you’re a company that likes customers with money to spend, it’s hard, right now, to ignore the boomers.

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Trade Shows, My Mother, and Generational Cycles; Ideas About Your Customer

Okay, I’m back from Agenda and Surf Expo. I feel bad I didn’t go to the Zumiez 100K event even though it’s not, exactly, a trade show.  I’ll make it to Denver for SIA, but am not going to OR, though I should. They wanted me to pay to get in, but in the best industry tradition, I found a company already attending that would get me a badge.

Still, I just decided there wasn’t time. I had some god awful viral infection that lasted from Christmas Eve to sometime at Agenda and I’ve got clients that won’t pay me unless I do some stuff for them.

Unfortunately, I’ve never found a client who will pay me for doing nothing. Oh well.

I made a presentation at Surf Expo, and will make a related one at SIA, that actually related my mother to generational cycles and am going to try my hardest to relate that to trade shows. I think I can do it by talking about what drives long term buying habits, something we should all be interested in.

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Mobile- That’s What Matters

Last week at Surf Expo, I  made a speech where one of the things I highlighted was the importance of mobile.  I said, “How mobile influences brick-and-mortar sales is more important than what you sell online.”  I get back home and, low and behold, come across a presentation on just how dominant mobile is becoming worldwide.

It kind of looks like I may have understated the case for mobile in my presentation.  This isn’t specific to our industry, but if you take maybe 10 minutes to go through and reflect on the slides, you’ll see what I mean.  I guess I’d summarize and interpret the slides in the presentation as saying, “If you’re selling anything, anywhere, to anybody you have to be prepared to reach them on mobile devices as a condition of having a chance to compete for their business.”  Most of you are selling something somewhere to somebody.  If you’re not, you’ve got me intrigued and I’d like to hear from you.

This isn’t just in the so called developed world.  It’s everywhere and will become more so with time.

You know, in over 20 years of involvement in this industry, it seems like I’ve watched everything that started as a potential competitive advantage turn into a requirement just to be in business.  I suppose that’s because internet/mobile has given every customer access to nearly perfect information.  That customer’s perception of the brand/product can no longer be shaped by a company’s advertising and promotion to the extent it once was.  What, then, is the role and value of a brand?

Oh well.  Here’s the link to the presentation.