Spy’s Expense Cuts

Spy announced on August 27 that they were reducing their North American and European employment by 20 positions, going to a distribution model in Europe (they had been direct previously), and spending less on marketing. They think these changes will cost them  $1.2 million in the quarter ($1.0 million in cash) during their 3rd quarter, but that they “…could result in annual operating cost savings of up to $6.0 million in 2013.”
 
Back on July 2nd, Spy filed an 8K announcing, among other things that they expected to raise some form of equity capital by August 31st. There has been no announcement that any equity has been raised.
 
When I wrote about Spy’s June 30 quarter, I pointed out that their majority shareholder had increased the line of credit to the company to $10 million (and that Spy owed him $15 million). I said (and had said before) that Spy’s brand focus was correct. I also said, “As long as Costa Brava is willing to fund them, they can continue to pursue their strategy.”
 
I feel strongly both ways about what Spy is doing. On the one hand, the balance sheet and cash run rate certainly seems to require expense reduction. On the other hand, their strategy has been to invest in the brand to get revenues to a level that could support the required marketing effort. For all the progress Spy has made in increasing brand sales, it looks like somebody think it hasn’t happened fast enough to justify the continuing required cash investment.
 
They don’t give a breakdown of exactly where the personnel and expense reductions happened. I’d be very interested to know that so I could better judge if this was a tactical decision to increase the U.S. focus or a more fundamental strategic decisions by funding source Costa Brava that that they couldn’t just keep pouring cash in.
 
What we do know from their 10Q is that in the quarter ended June 30, North American sales were $8.73 million and international only $740,000. You wonder how much expense there could be in Europe given the level of revenues there.  
 
Going from a direct to a distribution model in Europe does indeed reduce expenses. But it also reduces revenues since you aren’t going to be selling direct and your distributors will want to make a few Euros too. They didn’t indicate how much that reduction might be. Depends, I suppose, on the distributors and how quickly they can be up and running. 
 
I’ll look forward to their filling us in on how that transition is going. For all I know, this is a really positive development, but they haven’t supplied us with enough details to know that.

 

 

5 replies
  1. Bob Hall
    Bob Hall says:

    Let’s smell the coffee, folks. The sunglass biz is all about Q1 and Q2 — it’s seasonal! 740K in Q2 for Europe is tantamount to NOT being in business on the Continent. Whoever SPY employed there has been on borrowed time. This leaky ship has been set up for a sale, with the sign in the front lawn for a long time now. Smith is the better buy…well managed, bigger footprint. SPY?…don’t hold your breath.

    • jeff
      jeff says:

      Hi Bob,
      One of the things I struggle with is when to say stuff that seems obvious to me, but that I don’t “know” to be true based on the actual information I have. This is one of those times. So my job is to give the best facts I can, ask some questions, and let readers reach their own conclusions or, as in your case, drawn the line for people. $740K is basically not being in business in Europe and one wonders how they could ever have been anything but distributed.

      Thanks,
      J.

  2. Paul Armstrong
    Paul Armstrong says:

    The biggest challenge for Spy is that there is not an open distribution channel for their primary product, sunglasses, which make up like 85% of their sales. They are in all the major action sports retailers and that is just not enough sales for a public action sports firm.

    Their competitors own all the premium sunglass retailers. Luxotticca owns 3,000 doors ( sunglass hut, lenscrafters ,other badged sunglass stores) plus they own many top brands like Rayban, Oakley, Arnette and Persol and many women’s fashion brands that fill their own stores. Why would Luxottica buy other brands at wholesale ( 40-50 margin) when they make up 75% of margin with their brands?

    • jeff
      jeff says:

      Hi Paul,
      That is just a really excellent observation and I’m pissed at myself for not pointing it out first. If you’re right, it’s a rather strategically shattering conclusion. I’d also note that it would mean their only chance might be in Europe if conditions are different there, but they aren’t really focusing there.

      Thanks for the comment.

      J.

Trackbacks & Pingbacks

  1. […] is Jeff Harbaugh, but that hasn’t stopped him from discussing what he think about it on his Market Watch website. I feel strongly both ways about what Spy is doing. On the one hand, the balance sheet and […]

Comments are closed.