I’m sure you’ll all be stunned to learn that VF’s financial results for its December quarter were impacted by the pandemic. We’ll take a brief look at the numbers, but I won’t review VF’s virus related adjustments. They are broadly the same as what other companies did.
Well sure, we’ll spend some time on the numbers. You can see the impact of the pandemic for both better and worse. More importantly, their data systems, the trade areas, the way they treat brick and mortar and online as one sales channel and their culture are coming together in unprecedented economic and competitive conditions we are all facing, allowing Zumiez to accelerate a strategy that was already in place.
Rahm Emanuel is credited with being the first to say, “Never let a good crisis go to waste.” It’s not just politicians who do that. Bluntly, when times are tough and there’s “no choice” resistance to change declines.
Zumiez reported a solid August 3rd quarter, and their balance sheet remains rock solid. They had to deal with the same pandemic issues as everybody else, and their responses were similar. But what we are reminded of in the 10Q and the conference call, like for the 50th time, is Zumiez’s is confidence in their culture, their balance sheet, that ecommerce and brick and mortar as one channel, and that their data systems and trade area concept coupled with instore ecommerce fulfillment offers them an advantage as retail changes.
The faster things change, the bigger the advantage may be. First the numbers. Then a little deeper dive into some of the things they don’t quite say but are maybe implying that you should think about.
The headline is that given the pandemic, Globe had a reasonable result for the year ended June 30, 2020 and ended with a strong balance. In the press release, they say their performance held up “adequately.” That’s a fine word to describe it.
Australian accounting rules only require six months statements, rather than the quarterly ones we see from U.S. companies. When they come out with the year end statement, there’s no requirement that they include the second half of the year separately, and they don’t.
Unfortunately, that leaves me having to find those numbers the hard way, which I’ve done. They are in the chart below.
Pretax income for the year ended June 30, 2020 fell 17.3% compared to the prior fiscal year from $7.776 to $6.433 million. However, the 2020 result included a profit of $3.632 million from the sale of the Dwindle brand trademarks. Interestingly, the transactions costs associated with doing the deal were $1.631 million.
Globe also received some money from Australian government stimulus programs including one called JobKeeper. They don’t tell us the amount. I think we can assume it was received in the second half of the year. The program has been extended to March 28, 2021 so more payments may be received.
If we remove the one-time profit from the Dwindle sale, pretax profit was $2.801 million, a 64.0% decline from the previous year. If we knew what payments they received from the government, we’d have a better idea of operating results.
Despite the decline in income, revenue for the year fell only 5%, as you can see in the chart above- largely the result of the sale of the Dwindle brands. Globe sold Dwindle- a decision I’ve always thought a good one-to focus on what it calls its strategic growth brands. These brands- “…FXD, Impala, Salty Crew and Globe Skateboards all recorded sales growth compared to the prior comparative period.”
Gross margin fell by just 0.3% helped, I imagine, by the sale of Dwindle.
Globe suffered from, and reacted to, the pandemic much like other industry companies. In the six-month ended June 30, Globe had a pretax profit of $2.677 million, down 21.7% from the prior year’s six month. Revenue fell 9%. You can see they reduced expenses and purchased less inventory. Here’s what they tell us about how they managed when the virus hit during the second half of the year.
“There were a number of negative impacts on the business as a result of lockdowns which resulted in restrictions on the supply chain, operations, wholesale customers and end consumers. However, partially offsetting these negative impacts, there were also a number of positive factors that affected profitability. This included savings from short-term salary reductions, including at the executive level; discretionary and renegotiated cost savings; government stimulus received (including JobKeeper in Australia); rent relief from landlords; and sales growth in certain categories that continued to sell well online throughout Q4.”
For the year, Australasia revenues fell from $81.977 to $79.333 million, or by 3.23%. EBIT was down 15.5% declining from $13.176 to $$11.134 million. “The decline in Australian revenues was driven by its licensed Streetwear division, which was the Australian business unit that was hardest-hit by COVID-19.”
The North American segment reported a year over year revenue decline of 12.6% from $53.479 to $46.768 million. EBIT improved, rising from a loss of $144,000 to a profit of $2.656 million. This reflects the positive impact of the Dwindle sale.
In Europe, revenue rose from $23.656 to $25.598 million- 8.2%. But EBIT fell 80.8% from $1.094 million to $210,000. “…the earnings were lower as a result of extra costs to grow these brands in their earlier stages of development and a decline in gross profit margins, mainly due to the stronger USD.”
I’ve already noted that the balance sheet remains strong. They ended the year with cash of $26 million, up from $9.5 million at the end of the previous year. Even as I’ve grumbled about the paucity of information in their reports, I’ve always recognized that Globe was pretty damned good at recognizing inflection points and making required changes. Doesn’t look like this year, and half year, was any different.
That’s how CEO Steve Rendle describes it in the quarter’s conference call. We’ll quickly review the numbers, but in this maximum pandemic quarter, it’s not so much about the income statement as the strategy and management response. We’ll let VF’s management explain to us what they did and how they were prepared.
It’s the financial statements we’re seeing and will see in the next month or so that will begin to help us decide who might be long term winners and speculate on why. I emphasize “speculate” because it’s too soon to reach conclusions. But I begin to think that keeping the new customers you got when competitors were closed or went out of business will be an indicator of success.
In the quarter that ended June 28th, Big 5 Sporting Goods had revenue of $228 million, down just 5.4% from $241 million in last year’s quarter. Gross margin rose from 30.34% to 31.67% while SG&A expense declined by 10.2% to $58.3 million from $73.1 million in last year’s quarter.
On July 20, Hibbett Sports released a press release and held a conference call to update it’s expected quarterly results. For their quarter ending July 31st, they forecast comparable stores sales to increase more than 70%. First half comparable store sales are expected to be up 20%.
It’s great to have an industry retailer reporting those kinds of results. It’s also good to ask how they did it and whether or not it can continue.
The first thing to know is that Hibbett kept its stores open when the virus hit “…where local authorities and our landlords deemed it prudent,” says President and CEO Mike Longo. They have been able to open nearly all their stores, the press release tells us.
Take a look at this link to see how they managed their stores for safety while keeping them open. It seems pretty comprehensive. The only thing I was surprised not to see was a requirement for customers to wear masks.
Hibbett also notes that they have “…nearly 1,100 points of distribution in mid-tier population centers. Only 20% of our stores are located in enclosed malls,” and that they are “…a small box retailer with fewer people concentrated in stores at any given time.” I can see why that helped them decide to stay open.
I wonder if they had any outbreaks of the virus in any of their stores.
They don’t discuss how they communicated with their employees, what the process and timeline for making the changes that allowed them to remain open was, and what the employees’ response was like. Probably glad to have their jobs and not quite aware (like all of us a couple of months ago) just how serious the virus was. It would be important to hear how that all got managed in detail. It might say something about Hibbett’s ability to respond quickly in a time when that’s a critical skill.
CEO Longo states at the start of the press release, “Our resilient business model and dedicated team members are delivering on our commitment of superior customer service with a compelling merchandise assortment.”
He continues, “We believe our sales have been positively impacted by multiple factors, including pent-up consumer demand, temporary and permanent store closures by our competitors, and stimulus money. These circumstances yielded increased traffic to our stores and website and the opportunity for new customers to experience our trademark service. We expect that we will be able to retain many of these customers in the future.”
When they break down the 70% increase in comparable store sales, we learn it’s 60% brick and mortar and 200% digital. Hibbett is touting their digital capabilities- which is interesting since in October, 2018 I wrote an article with the title “Hibbett Sports Inc: ‘At the end of the 2nd quarter of Fiscal 2018, we successfully launched our e-commerce website.’ Wait- What? That Can’t Be Right.” It appears there has been some pretty significant progress in less than two years after an extremely late start. I guess I’d better follow them more closely.
On the one hand, Hibbett is crediting their “resilient business model” with their success. On the other, they acknowledge that the sales increases were favorably impacted by pent up demand, closing of competitors stores, and stimulus money. There’s also an implication in their discussion of inventory they were able to get. Perhaps other retailers initially cancelling their orders allowed Hibbett to find what they needed to support their increased sales. Perhaps at better margins?
Did Hibbett make an inspired management decision to stay open? Did they manage it superbly? Or were they the beneficiary of some one-time events during a period of reduced competition? I don’t know because I have no knowledge of their management process.
Here’s how we’re going to know. In the press release they tell us, “We expect that over 25% of brick and mortar sales will be comprised of new customers and estimate that approximately 40% of our digital sales will also be attributed to new customers.” The extent to which they retain those new customers will tell us a lot about whether Hibbett management is smart or lucky. My sense it is takes some of both.
It’s almost a controlled laboratory experiment in the ability of a retailer carrying the same brands at more or less the same cost as many of its competitors to retain the loyalty of new customers. It also may tell us something about how online and brick and mortar support, or don’t support, each other. Other retailers with stores closed had big increases in digital. Will new digital customers prove sticky when stores were not open?
Hibbett makes it clear in the conference call they know it’s both an opportunity and a challenge to retain these customers.
I’m not even sure how loyal customers are to brands anymore, much less to particular retailers. I’m intrigued to watch this evolve.
On June 10 Emerald, the publicly traded company that runs trade shows including Surf Expo and Outdoor Retailer and owns Shop Eat Surf announced they were going to issue $400 million in convertible preferred stock.
Like every company in our industry, Emerald is impacted by the pandemic, and is seeing already existing trends in its trade show business accelerated. I discussed that in April in this article and won’t repeat everything here. I’m going to quote parts of the filing and press release describing the deal and comment on each quote.
When we do get through the virus and at least some of the economic disruption, I’m wondering what the trade show environment might look like. It had already been changing and it seems pretty clear those changes are going to accelerate.
Kathmandu released its number for the six months ended January 31 and I’ve finally gotten through the statements. Maybe the first thing you should do is go read what I wrote when Kathmandu acquired Rip Curl on October 31, 2019. Here’s the link. I thought the deal could work, but I was concerned by the lack of solid financial information and wasn’t quite sure the integration was likely to go as smoothly as they projected. Then the virus hit.
Like I did with Zumiez, I want to focus on the world as it now exists- Not so much on the results for the six months Kathmandu is reporting. What does that mean exactly?
Market Watch updates
- On the Surface, It’s All About the COVID. But Not Really: VF’s QuarterFebruary 11, 2021 - 1:59 PM
- The Long Term, Historical Context for Running Your Business- This Time Is Not Different. Probably.January 17, 2021 - 11:02 AM
- Zumiez’s Quarter: It’s Not the Numbers, It’s the StrategyDecember 24, 2020 - 12:58 PM
- Whose Customer Am I Anyway? Amazon is a Utility- Not a RetailerDecember 13, 2020 - 12:09 PM
- Abercrombie & Fitch (Hollister)
- Amer Sports
- Big 5
- Classic Market Watch
- Deckers (Sanuk)
- Dick's Sporting Goods
- Emerald Expositions
- Finance and Accounting
- Fox Head
- General Management
- Genesco (Journey's)
- Hibbett Sports
- Industry Evolution
- Jarden (K2, Ride)
- Kering (Volcom)
- Market Watch Column
- Mervin Manufacturing
- North Face
- Pacific Sunwear (PacSun)
- Reading List
- Sales and Marketing
- Sport Chalet
- The Sports Authority
- Trade Shows
- Vail Resorts
- VF Corp. (Vans, Reef, North Face)