http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif 0 0 jeff http://www.jeffharbaugh.com/wp-content/uploads/2014/08/logo_color_640.gif jeff2012-09-03 21:10:522014-09-25 13:37:59Spy’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.