Consolidation and Finding New Participants; Vail Buys Peak Resorts

It was July 22nd when Vail announced it had reached an agreement to purchase Peak Resorts for $11.00 a share or a total of $264 million.  Peak Resorts, traded publicly under the symbol SKIS, closed at $5.19 on July 19.  Hard to say “no” when somebody offers you more than double your stock price.  Vail will also assume or refinance Peak’s debt, which totaled around $230 million on April 30.

Vail operates 20 mountain resorts in the west (I guess Australia is “west.”).  Peak has 17 ski areas in the northeastern U.S.  Vail also has 240 retail locations.

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Hibbett Sports Says Some Interesting Things: Can They Catch Up in Ecommerce?

In its conference call and 10Q filing for its May 4th quarter, Hibbett said some interesting things about what it’s doing.  Let’s take a brief look at Hibbett and its numbers then talk about how Hibbett is trying to adjust to the changing retail world after its very late start.

Hibbett describes itself as “…a leading athletic-inspired fashion retailer primarily located in small and mid-sized communities across the country.”  As of May 4, it had 1,144 stores in 35 states, “…composed of 985 Hibbett Sports stores, 141 City Gear stores and 18 Sports Additions athletic shoe stores.”

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And Now for Something Completely Different; Some Recommended Reading with Perspective on U.S. Economic and Financial Conditions

In 5,000 years of recorded history, there isn’t another known instance of negative interest rates.  Now we’ve got about $13 trillion of securities with negative interest rates around the world.  So far, that hasn’t happened in the United States, but don’t assume it won’t when we finally get a recession.

Money is a commodity.  It has a price just like oil, gold, wheat or any other commodity.  When the market isn’t allowed to set the price, bad things happen- misallocation of capital basically.  You know this if you’ve tried to save money and found that the only way to get a return above inflation is to make investments you’d really prefer not to make (How many of you remember 6% CDs?).

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Is There Value in Reporting Comparable Store Sales? Zumiez’s Quarterly Results

A couple of years ago Zumiez stopped reporting comparable store sales changes and started reporting just comparable sales changes.  That is, they no longer told us how their brick and mortar stores were doing in isolation from ecommerce.

They were one of the leaders in making this change.  Now, it’s how most retailers report.  Their argument was that they needed to think of their market as one sales channel- the proverbial omnichannel.  It didn’t matter where the sale “happened” and they couldn’t always tell where it “happened” anyway.  If a customer first saw a product they purchased on their phone in the store, where’s the credit for the sale?

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How VF Keeps Doing It: Size, Flexibility, Diversification, Disciplined Management Processes, Balance Sheet

VF’s secret sauce isn’t secret.  It’s just hard to do.  Executing the strategy takes leadership, a quality team, organizational consensus, and a certain level of confidence and perhaps willingness to fail to take advantage of uncertain times.

You’ve probably realized that every company needs those things.  So let’s take a deep dive into how VF does what it does with less emphasis than usual on the nuts and bolts of the financials.  The results for the year were strong and some numbers will show up in this discourse.  Here’s a link to VF’s 10-K.  Not suggesting you get down into the footnotes but reviewing the first maybe 10 pages on their business and strategies might be useful.

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Emerald Exposition’s Results, SIA and the Trade Show Environment

Emerald and SIA are kind of, for now anyway, joined at the hip due to their ownership/continued involvement in the Snow Show.  They are both trying to respond to profound changes in the active outdoor market that are changing their business models.  I thought I might kill the proverbial two birds with one stone and see how they’re both doing and speculate on where that interrelationship might go.

Emerald went public on April 28, 2017 at $17.00 a share.  It reached a high of $24.45 on November 29, 2017 and since then has fallen to $12.34 as of 10:17 AM Pacific Time on May 24, 2019.  That’s a decline of 27.4 percent from it’s offering price and 49.5% from its high.

Emerald currently operates “…more than 55 trade shows as well as numerous other face-to-face events.”

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Increasing Snowsports Participation: Are We Asking the Right Questions?

For years bordering on decades, we’ve wrung our hands over the issue of increasing participation.  There’ve been programs and research and money spent. Maybe without those programs things would be worse.  But so far, they don’t seem to have moved the needle the way we want.

We’ve got financial, demographic, and climatic factors in the way of a long-term increase in participation.  In the aftermath of a great season, it’s hard to ask anything besides, “How can we increase participation?”  That sounds to me like the goal- not a helpful question.  Helpful questions address issues impeding achievement of the goal and frame the problem to allow the issues to be addressed.  I want to ask what I think some of those questions are.  I hope you find the exercise helpful and that you might respond by asking some questions I’m missing.

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Hibbett Sports: Annual Results and Omni-Channel Progress After a Remarkably Late Start.

“At the end of the second quarter of Fiscal 2018, we successfully launched our e-commerce website,” Hibbett Sports (HS) tells us in their 10-K for the year ended February 2nd.  This isn’t news.  I wrote about it last October when I discussed their quarterly results.

If you’re not already familiar with HS, you might review that article before continuing.  My goal is to bring you up to date based on their full year results and new information in the 10-K.  Let’s start with this chart.  It shows HS’s annual results for the last five year.

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Volcom Sold by Kering to Authentic Brands Group, Kind Of.

The title of the press release is “Authentic Brands Group Acquires Volcom.”  Well, not exactly.  The Authentic Brands Group (ABG) press release goes on:

“…ABG has taken a minority stake in Liberated Brands, the newly-formed operating company for Volcom. Todd Hymel and Volcom’s current management team have taken the majority stake in Liberated Brands and will maintain the Volcom operations based in the U.S., France, Australia and Japan with continued oversight of the brand’s product development, athlete marketing and its retail and wholesale businesses worldwide. ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Details are lacking, but here’s how I’d describe the transaction from the little I know.  The Volcom management, lead by Todd Hymel, wanted to buy Volcom from Kering.  Okay, let’s stop for a little history and a few numbers.

It was on June 24, 2011 that Kering (then known as PPR) completed the acquisition of Volcom.  The purchase price was $607.5 million.

December 31, 2010 is the last of the full year financials we have for Volcom as an independent public company.  In that year, it had revenue of $323 million, operating income of $30.4 million, and net income of $22.3 million.  PPR, then, paid 20 times operating income.  Big number, as I think we all thought at the time.

We also have a final 10Q for the quarter ending March 31, 2011.  The balance shows cash of $90 million, no long-term debt, and a current ratio of 7.3.  So a rock-solid balance sheet.

I wrote at the time that Volcom did a great job selling from a position of strength rather than when then needed to find a buyer.  Here’s part of what I said.

Over the last year, and maybe more, we’ve noticed that Volcom has had some issues with too much inventory and has had to discount to move it. We see the receivables increase and the allowance for bad debt that’s more than 10% of receivables. We note their comments (like other companies) about issues with rising costs and deliveries.

I’ve written about what a great job Volcom has done in defining and owning their market space, but how it can be hard for a company to grow out of a market position it is so closely identified with. Related to that I’ve noted some of the apparent challenges the brand has had in the department stores.

Volcom’s management didn’t need to sell the company. But if I and others have noticed some of these issues, you know Volcom’s spent a whole lot of time figuring out how to manage them. Apparently, the conversation with PPR took place over a year. With its balance sheet strong, and the brand’s integrity intact, I suspect Volcom looked at the strategic issues I’ve highlighted above and decided it was a good time to negotiate from a position of strength. That’s how you’re supposed to handle the market issues that lead to consolidation.

The limited information we got about Volcom from Kering told us Volcom wasn’t performing even close to a way that could justify the purchase price.  Kering’s decision a year ago to sell it confirms that.  Here’s what a Fashion United article from April 2 said.  “Volcom’s results, impacted by headwinds, still account for a considerable portion of the turnover. In 2017, its turnover was 230 million euros, down 3.2% at constant currencies, compared to 242 million euros in the prior year. Its operating income was stable.”  230 million euros is about $258 million at current exchange rates, well off the $323 million of 2010.

I imagine part of the issue was that Kering didn’t understand what they’d bought and how to manage it.  Sounds a bit like Deckers’ acquisition of Sanuk.  The other piece was that Volcom had a market position it proved hard to expand without damaging the brand.

Okay, back to the present.  Todd and his team set up Liberated Brands to be the operating company for Volcom.   ABG has a minority stake in Liberated- that’s up to 49%.

Kering, we know, spent a year looking for a buyer but ended up selling it to the management group.  My experience is that management groups don’t typically pay the highest prices, if only because they don’t have a lot of money to pay.  And they are hell to negotiate with because they know everything about the brand and it’s prospects.

But we have no details.  Pretty sure Kering got less than the $607.5 million they paid.  A lot less.  Maybe the minority interest that ABG purchased covered it.  Perhaps Kering took back a note for part of the price or kept a piece of equity themselves.  I would expect the Volcom team put up some money but have no idea how much it might have been (or not been).  Many structures are possible.

Regular readers know I’ve been saying for years (decades?) that many brands that were public or part of a public company were better off private. They can focus on the bottom line and brand positioning rather than on revenue growth.  Often, their potential depends on just how used, screwed and abused they were while public.

From the quote in the press release, the Volcom management team is going to “…maintain the Volcom operations…with continued oversight of the brand’s product development, athlete marketing and it’s retail and wholesale business worldwide.”

Meanwhile, “ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Okay, it’s time for a visit to ABG’s web site.  Scroll down that page a bit than look at the number of brands/stores/partners they have.  You’ll see where it says, “We are brand owners, curators, guardians.”  Next, take a look at What We Do to get a sense of the brands they are involved with.

Next, let’s move on to Our Business where you can see the kind of relationships they have with brands.  Finally, check out Who We Are, where you’ll see a group of very experienced executives lead by Founder, Chairman and CEO Jamie Salter.

I know nobody better than Jamie at management of distribution and making money out of brands that have lost some part of their luster.  When it comes to brand management, he’s always been able to get blood from a stone, and I think I’ll just leave that one lying there.

Let’s assume for a minute that I’m right in thinking the Volcom brand might have suffered some damage as part of Kering.  Typically, part of the solution for the buying group, as long as there’s brand credibility left, would be to pull back distribution as part of reestablishing the brand.  ABG plans, as you see in the quote, to place some of its brands into Volcom retail channels.  Pretty clearly, some to many of those brands don’t belong with Volcom.  That will be especially true if part of Volcom’s new strategy is a pullback in distribution.

As this all evolves, it will be interesting to see the extent to which Volcom and ABG management are aligned.  You can see how the expectations of Volcom management might be in conflict with ABG.

Recession as Part of Your Strategy: Zumiez’s Results for the Year Ended February 2nd

Let’s go right to something Zumiez CEO Rick Brooks says at the end of the conference call on their results.

“…our goals [is to] continue to grow the profitability of the business from [an] operating profit perspective.  Now of course if we have recession we’ll go backwards and we’ll see competitors go away across the globe and we expect coming out of the recession we’re going to emerge even stronger with a stronger share position in the marketplace which will allow us to drive operating margin higher again in that case.”

Rick is careful not to predict a recession, though I’ll bet he believes we will have one eventually.  That’s what I believe.  I’m pretty sure that’s what other executives at various companies believe.  Executives who share that belief are building their balance sheets, strengthening their brands, controlling distribution, and positioning themselves to manage expenses.  Like Rick, they expect a recession will hurt, but they expect it to hurt other more- to their benefit.

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