“Our Fortress Balance Sheet:” VF’s June 30 Quarter

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.

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Having Your Stores Open When Others Don’t.  Is it a Long-Term Advantage?  Big 5’s June 28 Quarter

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.

Being Essential

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.

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Why is Hibbett Sports Doing so Well This 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.

Emerald Raising $400 Million and OR Goes Digital.

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.

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Speaking of Things That Might Change:  Trade Shows and Emerald Expositions

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.

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Kathmandu Releases First Numbers Including Rip Curl

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?

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Zumiez Reports Its Year and Quarter- But Let’s Try a Different Approach for Different Times.

Zumiez reported their results for the year and quarter ended February 1st on March 12th.  Great quarter and year.  But about a week after their fiscal year ended, the impact of the pandemic on the economy became apparent.  For all retailers who sell directly to the consumer, in our industry or not, the world is changing.

After I read the 10-K and conference call transcript, I asked myself if anybody cared, for any industry company, about financial statements that became potentially irrelevant financial history in ten days’ time?

While I was thinking about it, Zumiez announced the closing of all its stores and then, on April 2nd, a series of personnel and financial actions in response to the economic downturn (that’s way too benign a term).  That convinced me I was right- nobody was likely to care about ancient history.  You can read the two press releases on their investors’ web site.

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Fewer Brands Simplifies Management but Means Bigger Bet on Each Brand: VF Corporation’s Quarter

VF continues to manage its brand portfolio consistent with its strategic imperatives.  Before moving onto the financials, we’ll take a look at their decision to divest their occupational work brands.  It’s consistent with other brand decisions they’ve made.

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Ski INC. 2020; My Second Ever Book Review

It took two guys like author Chris Diamond and his editor Andy Bigford to make this book as valuable as it is.  Their combined 88 or so years in the industry means they have the knowledge, perspective and access to write this book, and the book takes full advantage.  When Chris says “ski” he means ski, snowboard, etc. through the whole book. 

It’s both a strategic evaluation and a history of the ski/snowboard/mountain resort business.  Like most of you, I was aware of the events and transactions Chris describes.  But having them laid out chronologically and the competitive impact and interrelationships evaluated was great.  It caused useful thinking. 

What does Chris conclude?  The subtitle of the book is a good place to start.

“Alterra counters Vail Resorts; mega-passes transform the landscape; the industry responds and flourishes.  For skiing? A North American Renaissance.”

“My premise in this book,” he says, “is that the Epic revolution, as others have followed Vail Resorts’ lead has initiated a renaissance in skiing.  For decades, the media focused on the high cost of skiing, but now the standard refrain is “what a deal” the new passes are.  Total skier visits can be expected to grow coast-to-coast, and not just at the mega resorts.  This energy will eventually expand the number of total participants, if that hasn’t happened already.”

“It is my view that these recent changes have rescued skiing from the trend of becoming, in effect, a rich person’s sport.”

Isn’t it interesting how consolidation has, so far, turned out to be a good thing?  Or at least a necessary thing.  In doing turnaround work I quickly learned that doing “more of the same” isn’t the path to success.  I’d come around to the idea that some consolidation was necessary and appropriate for the industry, but that it would lead to a “renaissance?”  Not sure I’m that far along in my thinking, though I can see how I might have to get there in the not too distant future.

What’s Chris’s business proposition?  He states it pretty clearly using Holiday Valley’s strategy as an example.

  • Make great snow [technology continues to make that easier].
  • Take care of your guests.
  • Know your markets.
  • Maximize summer opportunities [So you’re not a one season business].

That’s from his chapter on small to midsized areas but, you know, all pretty good business advice for any resort. Early on in this chapter I considered skimming it.  Glad I didn’t.  Aside from turning out to be really interesting, it highlighted some consistent themes over the history of the industry

1.            How important commitment, passion and optimism have been (are, I’d say).

2.            The role, for better or worse, of real estate.

3.            The bad things that happen when commitment, passion and optimism obscure the importance of good financial management and a solid balance sheet.   

When you think about it, what’s going on is that the survivors of the consolidation are doing better business.  Well, that’s what happens in a consolidation.  Like, for example, retail.  Adapt or die.  Know your market and take care of your guests (customers).  What an original idea!

It’s true that many small hills have gone away and, as Chris acknowledges, they were great places to learn.  But they only existed when times were easier and the industry was growing madly and they floundered (Chris describes plenty of this) when times got hard and the environment changed, but they wouldn’t or couldn’t change with it. 

Now, as Chris also describes, some of these places are being resurrected by communities, local governments, and investors/skiers who have resources (including for the significant capital improvements required) and are prepared to run the places with best industry practices.

The story for the industry is not fundamentally different from other consolidating industries.  A revolution?  Nah.  Too fraught a term for me.  Let’s say that the pressures of a changing competitive environment have finally, after many years, reached a tipping point where it was, for the individual players, adapt or die.

Chris’ hypothesis is that the mega passes, along with cheaper lodging (VRBO, etc.) are bringing affordable skiing to more people as long as you’re willing to plan in advance.  The mega passes have become the brand, and customers are planning and plotting to get the best deal.  The resorts, meanwhile, are using dynamic pricing, buddy passes, and other permutations of pass terms to give their customers choices and control – what customers want in most industries these days- and influence their behaviors.  Chris and I agree that this process is just beginning and that the ultimate result will be that few people will be walking up to the window and buying day passes.

But what, you say, about all those hills that have closed, mostly to never reopen again?  Where will we get new participants?  Yeah- problem even with all the positive changes Chris outlines.

He reports that retention has increased from 15% to 19% over the many years during which we’ve been trying to move the needle.  He also reminds us of all the improvements in equipment, process and teaching technique for teaching beginners that have evolved.

Perhaps most importantly, he makes it clear that the larger, consolidating, remaining resorts know that developing new, committed skiers is imperative.  Their acquisition of and relations with other resorts as well as the structure of their pricing and pass products are focused on the issue. 

And perhaps, since we’re trying to change human behavior and tried to do it through the Great Recession, we shouldn’t be too hard on ourselves.  I’m not sure 15% to 19% over a decade or more is so bad.  With the changes going on now, I can even imagine it accelerating. 

So, everything is fine, right?  It’s conceivable that Chris as a consummate industry insider might be on the optimistic side, but he does point out some issues.

To paraphrase, he says the industry will be fine if we don’t have a recession.  I’d change that to “until we have.”  The business cycle has not been rescinded and we won’t have any more fun in a recession than other industries. 

He also notes our inability to crack the diversity puzzle.  I’ll just include myself on the list of people who don’t have a solution.

Climate change.  Yes of course, though it’s amazing that this industry still has people resisting the idea.  Tactically, we are relying on improved and increased snowmaking and warm weather activities to deal with this.  The big players are counting on geographical diversification.  Strategically, the industry is active in sustainability and confronting climate change.

He also discusses issues with demographics; an aging base and drop off in snowboarding.  He spends just a paragraph on issues of income, and I think more time might have been warranted.  Skiing may be getting less expensive, but it’s never going to get cheap.  What I know about the stagnation or even decline in real middle class and below incomes over several decades gives me pause.  Skiing may be “cheaper” but if taking advantage of that requires a $500 or higher outlay months before you hit the slopes (plus equipment, lodging, transportation, food, apparel even if they are all cheaper), does it matter?  Economics limits our customer base.

The answer?  Snowmaking, good management, and summer activities generating year around cash flow.  It doesn’t hurt if some of your competitors have gone out of business.  You need to read this book.  The integrated strategic perspective is very important as you consider what your industry business should be doing.

I’ve never met Chris.  I think I might have met Andy.  If you guys are going to be wandering around Denver in a couple of weeks, I’d love to talk with you.  Among the things I’d like to ask is if the numbers exist yet to evaluate the extent of the decline in cost to go skiing. 

Tilly’s: A Solid Quarter. What Did They Do Right?

In its 10Q and conference call, Tilly’s is kind of tentative in explaining what they are doing right.  Let’s go through the numbers and review a few conference call comments to see if we can tease out an explanation.

Revenue for the quarter ended November 2 rose 5.4% from $146.8 million in the prior year’s quarter (PYQ) to $154.8 million in this year’s.  E-commerce revenues were 16.9% of the PYQ’s revenues ($21.2 million) and 17.2% ($22.7 million) in this year’s quarter.  Revenue from proprietary brands were 25% of total revenues in the current quarter, the same percent as in the PYQ.  Below is a table showing revenue by category for 13 and 39 weeks.

Comparable store sales rose 3.1% compared to 4.3% in the PYQ.  That includes e-commerce sales, which means we don’t have an important metric of how their brick and mortar is performing. 

The gross margin rose from 29.7% to 30.5%.  They had a 0.8% improvement in the merchandise margin.

SG&A expense rose 6.9% to $39.5 million.  The most significant increase was $1.0 million for e-commerce marketing and fulfillment. 

Pretax income was up 17.7% from $7.32 million in the PYQ to $8.62 In this year’s quarter.  Just to give you some perspective, pretax income for the first nine months of the fiscal year went from $22.0 to $22.3 million, an increase of 1.4%.

The balance sheet remains solid with lots of cash and no long-term debt.  Equity declined from $183 million a year ago to $181 million, but this has to do with accounting for operating leases- something they didn’t have to do a year ago.  They note that the $5.2 million increase in cash provided by operating activities was “…primarily due to lower inventory.”  That’s a good thing.

Tilly’s starts its narrative by describing itself as “…a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and operated 232 stores, including one RSQ-branded pop-up store, in 33 states as of November 2, 2019. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. Customers may also shop online, where we feature the same assortment of products as carried in our brick-and mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.”

Really nothing insightful or distinctive there.  They seem to put stores almost anywhere, and I’ve always thought them as being particularly focused on their real estate- perhaps a source of competitive advantage.  You can see that in the way they talk about the retail market and their brick and mortar strategy.

In describing the industry they say, “The retail industry has experienced a general downward trend in customer traffic to physical stores for an extended period of time. Conversely, online shopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue.”

Then they go on, “We continue to believe we have a meaningful number of opportunities to open profitable, new stores in the future. We believe we are under-represented nationally in terms of the number of stores in key population centers relative to many of our larger teen specialty apparel competitors who have a much greater number of stores than we do. We expect to finish fiscal 2019 ending February 1, 2020 with 14 new store openings. In fiscal 2020 ending January 30, 2021, we anticipate opening up to 15 additional new stores. We will continue to focus new store openings within existing markets and certain new markets where we believe our brand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.”

They tell us they aren’t committed to closing any stores in in 2020.  “Yet some may likely occur as we work our way through our continuous lease renewal negotiations.”  Once again, there’s that real estate focus, though all retailers are looking for better lease deals these days.

They acknowledge the e-commerce trend, then, but are focused on new brick and mortar.  Perhaps it’s because Tilly’s is so good at picking real estate.  Partly, it’s because they only have 232 stores.  They think new stores can enhance their brand recognition.  There are hints of an undescribed strategy here, though I can’t figure out what they are doing that might give them better brand recognition than their competitors.

Towards the end of the conference call CFO Michael Henry talk about the relationship between brick and mortar and e-commerce in a way that gives some insight into their strategic thinking.  “SG&A leverage,” he says, “is going to have a lot to do with how sales are balanced between stores and e-commerce.” He explains that growing e-commerce sales generates a lot of costs (they mentioned $1 million in the quarter we’re discussing here) while improving comparable brick and mortar sales generate a real opportunity to leverage SG&A expense.  That is, higher sales in a store don’t mean you have to pay more rent and other expenses.  Remember brick and mortar is still around 85% of their business.

They’ve got to have improvement in both e-commerce and brick and mortar, CFO Henry explains, “Because as you’ve seen in recent quarters when it’s only e-comm those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along with the e-comm business.”  Did you hear that?  E-commerce sales are more expensive than brick and mortar I think he said.

So, what is Tilly’s doing right?  First, they seem to be pretty good at managing their real estate and picking locations.  Second, they believe they have some room to expand brick and mortar because they don’t have that many stores yet.  Third they recognize, hopefully like all other retailers, the interaction between online and brick and mortar.  E-commerce is critical for brand positioning and customer interaction- omnichannel and all that stuff.  But it’s especially valuable if helps to improve brick and mortar comparable store sales and you can spread some of both e-commerce and brick and mortar SG&A across the store base, improving the bottom line.

Tilly’s isn’t the only big retailer in our space that understands this.  We’ll figure out which ones don’t when they go away.