SPY’s Quarter: More of the Same. That’s Good and Bad
To sum it all up, the good news is that sales for the quarter ended September 30.2013 rose 2.7% compared to the same quarter last year from $9.89 to $10.15 million and the net loss declined from $1.78 million to $302,000. The bad news continues to be the balance sheet, where the long term debt to stockholders is $20.86 million, up from $17.53 million a year ago. Here’s the link to the 10Q for those who might be interested, though I’m pretty sure most of you read my stuff specifically to avoid having to look at the 10Q.
I suppose I could stop here and have the shortest article ever. But there are a few financial points that need highlighting and a big strategic issue.
The sales amounts are pretty much all SPY branded product except for $100,000 in last year’s quarter. However they note that there was $600,000 in SPY sales this quarter “…which were considered to be closeouts, defined as (a) older styles not in the current product offering or (b) the sales of certain excess inventory of current products sold at reduced pricing levels.” The amount in last year’s quarter was $800,000 and it’s good to see it declining. It’s about 6% of sales. Apparently, they are still clearing up some inventory issues.
Sunglasses and optical were 56% of sales. Goggles were 43%. The numbers in last year’s quarter were 64% and 35% respectively. North American sales were 80% of the total compared to 84% last year.
The reduction in the net loss was driven by two things. First was a monster improvement in the gross profit margin from 43.5% to 48.5%.
“The increase in our gross profit as a percent of net sales during the three months ended September 30, 2013 compared to the same period in 2012 was primarily due to: (i) improved overall sales mix of our higher margin products; (ii) a higher percentage of lower cost inventory purchases from China; (iii) lower overhead as a percentage of sales partially due to the consolidation of our European distribution center to North America; and (iv) lower sales of closeout products at reduced price levels.”
I would be very interested to know what their margin was on the $600,000 in closeout sales.
The second was a 19% decline in operating expenses from $5.53 to $4.47 million resulting in an operating profit of $454,000 compared to an operating loss of $1.22 million a year ago. Most of this was the result of a $900,000 decline in sales and marketing expense to $3 million due to “…(i) a $0.3 million decrease in advertising, public relations, marketing events, and related marketing costs; (ii) a $0.6 million decrease in sales and marketing salary and travel related expenses primarily for reductions in headcount.”
I’d also note that cash provided by operations over the nine months of the year so far was a positive $2.49 million compared to a negative $4.13 million in last year’s first nine months. Keep in mind that the interest on the shareholder debt is not being paid in cash but being added to principal and that has something to do with the improvement.
Enough on the numbers. Let’s talk about the brand’s positioning. Here’s how they describe it in the 10Q:
“…the Company believes it has captured the imagination of the action sports market with authentic, distinctive, performance-driven products under the SPY ® brand. Today, the Company believes the SPY ® brand, symbolized by the distinct “cross” logo, is a well-recognized eyewear brand in its segment of the action sports industry, with a reputation for its high quality products, style and innovation.”
Fair enough. Now, here’s some branding discussion from the press release:
“We have a HAPPY disrespect for the usual way of looking (at life). This mindset helps drive us to design, market and distribute premium products for people who "live" to be outdoors, doing intense action sports, motorsports, snow sports, cycling and multi-sports-the things that make them HAPPY. We actively support the lifestyle subcultures that surround these pursuits, and as a result our products serve the broader fashion, music and entertainment markets of the youth culture.”
I think the happy disrespect approach is great as long as they can keep it up. It really can supply some differentiation. Irreverence works in this industry. But note that the second quote talks about the broader youth culture market, and the first does not.
Maybe I’m reading too much into this. It seems symptomatic of a problem I’ve been highlighting for a while. How does a company maintain its positioning in the historical action sports industry while expanding into the broader youth culture business? It’s proven to be difficult (Burton? Volcom? Skullcandy? Sanuk?).
Long term, SPY’s challenge is exactly to do that. I think it has to if it’s going to find enough growth and profitability to get out from under its debt to shareholders. Strategically, that’s what I’ll be watching for.
Please double check my calculation – sunglass and optical declined by 10% YOY for the Qtr? That seems significant…
Cheek Spread,
Okay, I checked. I didn’t say they declined by 10%. What I said was that the they represented 10% less of total sales, but goggles as a percent of sales were up. Not the same thing.
Thanks for the post.
J.