SPY’s March 31 Quarter: Really Good News

This is a little weird for me, but I’m not going to start with the numbers. Rather, I want to start with some of CEO Michael Marckx’s comments in the conference call. 

I may not have these quotes exactly right because I can’t type as fast as he talks. He said things like:
·         “Super service is at the heart of the company’s culture.” “How can we make people happy?”  
·         “The mission and vision are universally understood in the company.”
·         “Improved product mix with higher quality and prices.”
·         “Reinvigorated brand profile.”
·         “An organization that is firing on all cylinders.”
This is backed up by the numbers, and it’s a transformation process SPY has described and pursued over some quarters now. They’ve been consistent in their approach and goals.
Basically, they are doing a lot more with less and I think it’s because, “The mission and vision are universally understood in the company.” That’s not voodoo. It’s common sense. When you are running a business there are endless invitations to be distracted. That will never go away, but when there is consensus on mission and vision, you have a shield to reduce the impact. Ideas and opportunities either fit the mission and vision or they do not. Okay, it’s not always that clear cut, but the consensus motivates everybody to focus on the right stuff and to not waste time and resources. Everybody in the organization is empowered to say, “Nope, doesn’t fit. We’re not going that way.” Think of the improvement in organizational efficiency created by that common knowledge and consensus.
The other thing I like, of course, is that SPY’s strategy is pretty consistent with the one I’ve been proselytizing about recently. It’s where you focus on gross margin dollars and cautious distribution as part of your strategy to create brand distinctiveness and recognize the tie in between marketing and operations. To make a long story short, I think it’s a way for some brands and retailers to improve their operating income line with less risk.
SPY’s revenues rose 10.6% to $9 million from $8.1 million in the same quarter the previous year. But SPY branded products were up 14% or $1.1 million and represent essentially all sales in this year’s March 31 quarter. Remember in last year’s quarter they were still getting rid of their discontinued licensed product inventory and sold $300,000 of it. That’s all gone.
We should take a moment and pause to recognize that as far as I can tell SPY is officially no longer dealing with any of the self-inflicted problems it had over the last six plus years. Being out from under all that is one of the things that makes their strategy viable. Gee, I had a lot of fun writing about that stuff and am kind of going to miss it.
The gross profit percentage was 51% compared with 47% for last year’s quarter. Apparently the leading cause of that increase is that they are no longer selling the closeout licensed products which had a lousy margin. However, they also note that they are getting lower costs from more Chinese made product, that their international business is more cost efficient, and that they are selling higher margin products “…due to increased levels of sales to specialized core accounts and optical channels.”
Selling and marketing expense fell 21% or $800,000 to $2.9 million. They restructured and cut stuff. But they also had to spend $100,000 more in sales incentives and commissions. You know, I always loved signing big commission checks. The bigger the better, because that meant the company was doing better.
Okay, so they cut marketing costs by $600,000, but increased SPY branded sales by 14%. That’s pretty good. I guess some of those marketing costs weren’t quite as necessary as everybody thought. There’s a lesson there somewhere.
I want to hypothesize that if they didn’t have an organization with consensus on vision and mission they couldn’t have gotten that increase while making the cuts. I think their brand positioning and distribution strategy allowed them to accomplish more with less. Think about that.
General and administrative expense was down $600,000 or 28% to $1.4 million. There were some headcount reductions, but also less in legal, professional services and general corporate matters. I suspect some of that decline is the result of getting past old problems.
Overall, operating expenses fell from $5.95 million to $4.57 million, a 23.2% decline. That left us (drumroll please) with an operating profit of $29,000 compared to an operating loss of $2.16 million a year ago.
Interest expense rose from $0.4 million to $0.8 million. Some of that is non-cash. We’ll get to the balance sheet in a minute. There was still a net loss of $721,000 but that compares to a loss of $2.6 million in the same quarter last year. Net cash provided by operations was $1.55 million compared to operations using $363,000 of cash last year.
On the balance sheet, cash is up from $416,000 a year ago to $1.4 million. Receivables are unchanged. Inventories have fallen from $6.3 million to $5.9 million. All that’s good. The continuing problem of course is the notes payable to shareholders of $19.6 million and the negative equity of $14.3 million. A year ago, those numbers were $13.7 million and negative $9.8 million respectively. As I think everybody knows, if it wasn’t for shareholders with deep pockets, SPY would have closed or been sold long ago. It looks, however, like those shareholder contributions might be coming to an end.
I don’t really have any criticism of SPY operationally. It appears that they’ve got some well positioned, distinctive product offerings, a focused organization, financial discipline and (which I really love) an awareness of the connection between how you operate and how your offerings are received.
I love it when a plan comes together.