Globe’s Results for the Year; Good, but What’s Going on in North America?

I’m kind of late writing about this, but Quiksilver inconveniently filed for bankruptcy right before I went on vacation and I was focused there. The headline is that Globe improved its performance. However, there isn’t much to analyze. Basically they tell us, “We did good and think we can do better.”

Hope so. Anyway, here’s a brief presentation and discussion of the numbers. Just to remind you, Globe is Australian and all the numbers are in Australian dollars.

Revenue rose 32.7% from $104 to $138 million for the years ended June 30 2014 and 2015. Revenue from all their brands rose. Globe was up 24% and Dwindle 34%. 4Front was up 36%. That’s their licensing and distribution business for Australia and New Zealand. The brands they manage are Stussy, Obey, Vision Streetwear, and Komono. Hardcore, “…the largest distributor of leading brand skateboard products, both owned and third party international brands, in Australia and New Zealand,” rose 39%. Its brands include Girl, Lakai, Thrasher, Chocolate, Flip and others you would recognize.

Finally FXD, which sells “carefully designed and styled work wear,” was up more than 100%. This brand, I recall, is pretty new and I imagine that growth is from a small base.

How did they accomplish this growth? “Past diversification strategies and brand investments driving growth.” Well, that certainly explains it. You can see why this might be a short article.

Revenue in the Australasia segment rose 32.6% from $37.7 to $50 million. Sales in Australia rose 30.5% from $34.9 to $45.5 million. Clearly, most of the segment’s growth was in Australia, which represented 91% of segment revenue.

All the divisions reported growth in the segment. “Improvement in performance [was] due to strategic diversification of brands, categories and new distribution channels.” Moan. Come on guys. Give me something at least a little specific to work with here so I can explain your good results to people.

North American revenue was up 26.3% from $39.2 to $49.5 million, with U.S. revenues up 16.4% from $20.8 to $24.2 million. Hmmm. Wait a minute. Those segment numbers are from note three, paragraph b of their filed report. But the slides they provided as part of their presentation says North American net sales grew by 14% as does the discussion of the results in the financial filing. I don’t know- 26.3% seems better than 14%.

Somebody at Globe help me out. Is the 14% constant currency maybe? Or have I lost the ability to read or work my calculator? Anyway, I’m giving you the numbers as reported in that footnote. The increases I calculated from the financial report is the same for the other two segments as what’s reported in the presentation, so I’m thoroughly confused.

European revenues rose 41.5% from $26.6 to $37.6 million.

The Australasia segment EBITDA rose from $3.34 to $5.65 million. The North American loss worsened from $1.03 to $1.67 million. Losses aren’t supposed to rise when revenues goes up 26.3%. Or even 14%. Wonder what’s going on there. Europe’s EBITDA was up from $3.60 to $6.97 million. That’s quite an increase.

Let’s move a little further down the income statement. Globe’s income statement doesn’t show a gross profit line. But in a note they do show something called “Cost of sales.” I’m going to use that (perhaps not correctly) as what we’d call cost of goods sold to calculate a gross margin. When I do that, I get 46.1% in 2015 compared to 46.4% in 2014.

Net income in 2014 was a loss of $12.3 million. In 2015, Globe reported a profit of $3.72 million. There are a couple of items you need to be aware of in evaluating these comparative results.

Last year, there was a $17.1 million charge for impairment of assets. In 2015, there was no such charge. Due, I think, at least partly to that charge there was tax benefit in 2014 of $3.3 million where 2015 shows a tax expense of 1.7 million. That’s a $5 million difference.

If we look at the pretax numbers and take out the impairment charge, you’ll see that Globe would have earned $1.45 million last year compared to $5.42 this year on a pretax basis.

The balance sheet is pretty solid with no borrowings or long term debt. Equity grew consistent with the net income. The current ratio is solid.

As I’ve already complained, we’re not getting a lot of specifics. Basically, after some tough years, Globe is running its business better. As they put it, “This revenue and profitability improvement was a consequence of the recent investments and diversification into new markets and brands and as such, growth came from multiple brands, product categories and geographic regions.”

As usual, I’m pretty sure there was no magic bullet. Just hard work, some difficult lessons, and management discipline. North America still seems to have some issues with the loss increasing even with a solid sales increase.

Globe’s Half Year; The Plan Seems to be Coming Together

Back in 2002, Globe bought Kubic Marketing, the holding company for World Industries and Dwindle. It turned out that their timing couldn’t have been worse in terms of the skateboarding industry cycle. Just about the time they dug their way out of that glitch, the Great Recession hit and had the same kind of impact on Globe it had on other industry companies.

But for the six months ended December 31, 2014, Globe reported sales that rose 28.4% from $51.4 in the prior calendar period (pcp) to $66 million Australian dollars (all figures in Australian dollars). Net income was up from $818,000 to $1.58 million. They even reinstituted a dividend of three cents a share. That speaks well of cash flow.

Those results occurred while they increased SG&A and employee benefit expense by $6.7 million. Most of the increase was in SG&A.

The Globe brand, we learn in an investors’ presentation, rose 27% worldwide. Dwindle Distribution was up 16%, 4Front Distribution 22% and Hardcore Distribution 26%. They also started a new work wear brand called FXD.

Globe owns or distributes 25 brands. I suggest you go to their investor website here and download the investor presentation dated February 27th, 2015 to see which brands are sold by which distribution company. If you’ve been around the skate business even a little, you’ll recognize most of them.

Note that not all brands are sold worldwide.

North American sales rose 12% from $18.4 to $21.3 million. But earnings before interest and taxes (EBIT) in North America declined from a loss of $360,000 to a loss of $1.832 million. Neither the financial report nor the investor’s presentation explains what exactly happened in North America. They do say in the presentation that, “Segment result impacted by lower scale, margin pressures and introduction of new brands.”

I guess I know that “margin pressures” means gross margins were lower. “Introduction of new brands” might mean they spend a bunch of money on getting new brands started- specifically Fallen and Zero. No clue what “Segment results impacted by lower scale” means, especially as sales were overall up 12%. Maybe there’s a transcript that goes with the presentation, but it’s not on the web site.

They note that Dwindle hard goods and Globe apparel were up, but don’t say how much. I’m wondering how much growth there was in North America if we take out Fallen and Zero.

I’m also wondering how much sales grew in constant currency. Even at December 31, the Australian dollar was weaker against the U.S. dollar than in the pcp. In the presentation, they warn us that they “…expect the strengthening US dollar to have an impact on margins in Australia and Europe.”

Things were better in Europe. Net sales grew by 59% from $11.9 to $18.6 million. EBIT rose from $1.1 to $3.5 million.

In Australasia, sales rose by 23% to $26.3 million from $21.4 million in the pcp. EBIT was up 17.8% from $2.78 to $3.28 million.

The segment EBITs do not include certain corporate expenses and unallocated, unrealized foreign exchange losses that totaled $2.5 million in the most recent six months and $1.66 million in the pcp.

The balance sheet improved as equity grew by around one-third to $40.6 million. Current ratio at 1.88 was down a bit from 2.03 a year ago, but that’s fine. Receivables, inventory and payables have risen significantly, but it seems in line with the revenue growth.

The presentation notes that they have no borrowings, which is technically correct. But they are using a non-recourse receivables financing facility in North America in the amount of $2.5 million, up from $1.8 million in the pcp. Since it’s nonrecourse, it’s not debt but there is a cost to using it.

While Globe still has some work to do in North America, the overall result shows good progress. I just wish there was some more information on specific brand performance.

Globe’s Results for the Year: Poor Bottom Line, But Operating Progress

While I was buried under Billabong’s annual report, Globe also filed theirs for the year ended June 30. Globes proprietary brands, in case you don’t remember, include Globe, Callaz, Dwindle, Enjoi, Blind, Almost, Cliché, Darkstar, Tensor, Speed Demons, Dusters, and FXD. Its licensed brands include Stussy and Vision Streetwear.

For the year, Globe’s revenues rose 24% from $84.1 million to $104 million (all numbers in Australian dollars). In spite of the sales gain, they reported a loss that more than doubled, rising from $6 to $12.3 million. However, the operating loss showed a much better result.
The cause of the bottom line loss was a $17.1 million noncash impairment charge by which they wrote down the value of the Globe brand on their balance sheet to $0.00. After tax, the charge was $12.8 million. Without this charge, Globe would have reported net income of $0.5 million compared to a loss of $5.2 million the previous year.
As regular readers know, I feel strongly both ways about these kinds of write downs. On the one hand, they are noncash, and there is a rigorous, required process you have to go through to determine the write down which doesn’t necessarily relate to actual brand value. That’s obviously true since they’ve written the Globe brand down to nothing, but it’s selling product and has value.
On the other hand, they’ve got to do it because the expected future cash flows from the brand aren’t as promising as they once thought they were. It’s not, therefore, something you can just ignore.
My ambivalence is apparently shared by Globe’s Board of Directors. They say, on the one hand, that the charge is not “…reflective of the directors’ long term view of the potential of the Globe brand.”
On the other hand, they say, “The impairment charge is largely a result of the significant changes that have impacted the action sports industry, and its key brands, over the past few years. This has been driven by a range of factors including difficult broader economic conditions, challenges for the Action Sports retail account base and the saturation of some of the more iconic action sports brands. As a result, the performance of the Globe brand has been affected and the market for buying and selling brands in the industry has declined. “
So if it’s worth more than nothing, it’s sure as hell not worth as much as it used to be. I wonder what the directors’ definition of “long term” is.
Ignoring the $17.1 million charge, Globe management tells us the company’s “…sales and profitability improvement came from multiple sources across the consolidated entity as a consequence of the investment and diversification into new markets and brands over recent years.” They’re right as far as I can tell.
The Australian segment revenues were up 42.3% from $26.6 to $37.9 million. That’s growth of $11.30 million. However, revenues in the country of Australia grew $12.1 million, so revenue in the rest of the segment declined.  The overall segment growth “…was driven by the 4-Front street wear division, due mainly to the introduction of Stussy, and the continued growth of F.X.D., the Group’s proprietary work-wear brand.”
Revenue in Europe rose 46.7% as “…the Globe brand continued to grow across all categories of footwear, apparel and skate hard goods…”
At $39.5 million, revenue in North America was basically the same as the previous year. “In North America, despite growth in skate hardgoods and Globe apparel, sales were down by 9% for the full year in constant currency, following last year’s restructure which resulted in certain operations being discontinued within the Dwindle division.”
However, revenue from the United States fell 15% from $24.5 to $20.8 million.
The EBITDA loss in North America improved from $3.1 million in 2013 to a loss of $1.03 million in 2014. Australia’s EBITDA improved from $1.4 to $3.3 million. In Europe, it rose from a loss of $7,000 last year to an EBITDA profit of $3.6 million this year. 
For the whole company, segment EBITDA improved from a loss of $1.8 million to a profit of $5.9 million. After corporate expenses, the overall company EBITDA improved from a loss of $4.7 million to a profit of $2.4 million.   
Globe’s operating improvement was also driven by an increase in the gross margin from 44.1% to 46.4%. Selling and administrative expenses rose from $26.4 to $28.5 million. As a percentage of revenue they declined from 31.3% to 27.5%. We get no discussion of either the gross margin or the specifics of the expenses.
The balance sheet has arguably weakened a bit, with the current ratio declining from 2.33 to 1.89. Total liabilities to equity rose from 0.51 to 0.91. Cash has increased, and growth in receivables and inventory of 18.5% and 23.8%, respectively, seem in line with sales growth. On the liability side, I would note that trade and other payables rose 47.7% from $13.5 to $20 million and there’s $1.5 in borrowing where there was none last year.
My sense is that there are some significant changes in revenue by brand going on at Globe. I can’t really get a handle on it from the very limited information in the filed report. Whatever’s going on, revenue and gross margin are both up nicely. The intangible write down killed the bottom line, and it looks like the U.S. market is a challenge (not just for Globe). But overall, there are some positive things happening, though profitability has to improve.



Globe’s Annual Results

Globe reported a loss for the year ended June 30 of $6 million compared to a profit of $62,000 in the prior calendar period (pcp). That’s in Australian dollars, as are all the numbers in this article. Total revenues rose 2% from $83 to $84.1 million. The Globe brand was up 10%, but Dwindle fell 15%. Cost of sales rose from $45 to $47 million, with the gross margin falling from 45.9% to 44.1%. 

Employee benefit expense rose from $14 to $15.4 million, or by 10%. Sales and administrative expense was up 11% from $23.7 to $26.4 million. The loss before tax was $6.9 million compared to a pretax profit of $702,000 the prior year. They had a tax benefit of $990,000 compared to a tax expense last year of $640,000.
EBITDA, they tell us, was a loss of $4.7 million. They don’t seem to have included last year’s EBITDA, but by my calculation, it was a loss of $389,000.
So it wasn’t a great year compared to last year. What happened? They tell us they had one time costs of $4.25 million. These were composed of:
The restructuring costs related mostly to North America. There was an inventory charge of $600,000 and a charge for reduction of riders and employees of $500,000.
Those of you read my rant on Billabong’s showing its results without a whole laundry list of “significant costs” as they called them to show try and show a better operating performance probably already know what I think of this. There are reasons to present proforma results, but what I see here are a whole bunch of expenses incurred “in the ordinary course of business” as the saying goes. I’ll bet this isn’t the first time Globe has had to increase its doubtful accounts provision, had a late product shipment, or had set up costs of a new brand. Might not be the last either.
Any company can give us a proforma income statement at any time for any reason, but it seems like it only happens when there are big numbers they want to highlight so we’ll ignore them, if that makes any sense.
Let’s take a look at Globe’s results by segment. In Australasia, revenues rose from $25 million to $26.6 million, but EBITDA fell from $2.15 to $1.42 million. Revenues in Australia were up from $22 to $22.8 million. North American revenues were down from $41.8 to $39.3 million in spite of 14% growth in Globe brand revenues due to the decline in Dwindle. Its EBITDA crashed from a positive $1.71 million to a loss of $3.18 million. Revenues in the United States fell from $26.2 to $24.5 million. European revenues rose from $16.2 to $18.1 million due mostly to the Globe brand. EBITDA in that segment fell from $973,000 to a loss of $7,000.
If the balance sheet has weakened a little, it’s still okay. The current ratio fell from 2.88 to 2.33, and total liabilities to equity rose from 0.39 to 0.51.   But the longer term trend is worrisome. Contributed capital of $144 million has been reduced by losses of $96 million to $39 million. The company’s operations used $2.4 million in cash compared to generating $282,000 in the pcp. Cash fell from $10.2 to $6.4 million. Trade receivables rose from $9.4 to $10 million even after taking a doubtful accounts provision of $1.7 million ($911,000 in the pcp). Of course, there was a small sales increase which might result in higher receivables.
Inventories also rose from $14.5 to $17.7 million after provisions for write downs of $902,000 and $1.78 million respectively. Some of the growth may be due to new brands they are licensing and distributing in Australia and New Zealand as well as to the new brands they have started.
The statutory annual report Globe files is pretty short, and we don’t really find out much about their issues and opportunities. Partly, of course, that’s because their CEO is Matt Hill and two of their three directors are Peter Hill and Stephen Hill. Of the 41,463,818 ordinary shares outstanding at June 30, people named Hill owned 28.4 million of those shares, or 68.5%. I remember when Globe went public I wrote that I admired the Hills for getting the deal done and wondered why others invested.
Globe’s problems are pretty clear. They are a small company in two industries that are very competitive right now; skateboarding and shoes. We’ll find out in six months if any of their strategic initiatives help them turn things around.



Globe’s Six Month Results; Sales Rise, Profit Falls

Globe filed its financial results for the six months ended December 31, 2012 on February 28th.  There’s not a lot of information, but I thought it was worth a brief look.

The headline is that sales rose 3.8% from $42.3 million to $43.9 million. Those numbers are in Australian Dollars as are all the numbers in this report. Net profit, however, fell from $761,000 to $148,000.
Revenues in the Australasia segment rose from $13.6 to $16.3 million, or by 19.9%. In North America, revenue was down from $21.4 to $19.6 million (8.4%). In Europe, there was an 8.5% growth in revenue from $7.6 to $8.3 million. Revenue growth everywhere but North America then, but North America is 44% of revenues.
EBITDA (earnings before interest, taxes, depreciation and amortization) rose handily in Australasia from $1.53 to $2.34 million, or 53%. North America EBITDA took it on the chin, falling from a positive $1.32 million to a loss of $284,000. In Europe, it fell 45% from $448,000 to $247,000. Total EBITDA fell from $1.5 million to $892,000 or by 41%. However, there’s a clarification you need to hear.
The report states, “The Segment Result (EBITDA) in the half year ended 31 December 2011 includes other income of $1.1m, of which $1.0m relates to the net proceeds from the settlement of a legal case during that half year.” They note that if you ignore that (though I’ve always had a hard time ignoring a million bucks) EBITDA really rose from $0.5 to $0.9 million “…driven by net sales growth and stabilizing growth margins.” I note they didn’t say improving gross margins.
They go on to say, “This increase in net sales is driven by the continued growth in Globe branded net sales across the world, as well as growth from new initiatives in Australia, including the streetwear division (4Front) and a new workwear brand that was launched during the half year, F.X.D.”
In the press release, CEO Matt Hill says, ““It is pleasing to deliver branded sales growth despite continued macro-economic uncertainty and the well-publicised challenges in our global retail account base. We anticipated these trends would persist, and strategically invested in the diversification of our brand and category mix to minimise the effect of those trends on the group. However, while these investments are starting to pay-off, we are not immune to the impact on our traditional, core business and continue to develop strategies to ensure our business as a whole remains relevant and buoyant.”
It sounds like the two new initiatives are generating sales in Australia only, and we don’t know how much. The comment about “continued growth in Globe branded net sales across the world seems to fly in the face of what I assume is a decline in North America, but it’s hard to tell. Their web site shows 12 brands, so maybe they are just referring to the Globe brand and not to Globe the company. Again, I can’t tell.
Here’s the link where you can see their report, the press release and some other documents as well.
Technically, I suppose you can argue that the balance sheet is a bit weaker, but not really enough to matter. Current ratio is down from 2.95 to 2.67 but is still very solid. Total debt to equity is up slightly from 0.37 to 0.45, but that’s not much of a change. The thing I tend to focus on is the negative $89.7 million number shown as retained profits/(losses) over the life of the corporation.
Cash generated by operating activities went from a negative $1.24 million in last year’s six months to a positive $173,000 for the six months ended December 31, 2012. That’s good to see. Basically, last year they got less from customers then they paid to suppliers and this year they turned that around.
Globe’s board has just three directors; Paul Isherwood, Peter Hill and Stephen Hill. Paul is the single outside director and, as of February 25th, owned 900,000 share of the company or 2.17%. Peter and Stephen Hill each own about 12.4 million shares, or 30% each. CEO Matt Hill, who is not on the board, owns 3.5 million shares, or 8.5%. The Hills are the founders of the company.
Globe had an unsolicited take-over offer from a company called Mariner. It also had to hold a special meeting as required by Australian law after at least 25% of shareholders voted down the company’s report on executive pay for two years running. That meeting was held February 13th.
As you can imagine, with people named Hill controlling almost 69% of the voting stock, the take-over offer was rejected, and the board of directors was not replaced. It appears there is some dissatisfaction with the company, and given the composition of the board of directors and its results, that’s hardly a surprise. If I were a shareholder, I’d certainly want a couple of additional outside directors on the board.
There are a lot of questions I’d love to ask about which brands are doing how well where. We don’t get that information but, to be fair, we don’t always get it from other companies either. I can imagine I see some improvement here if only because sales grew, but I am given pause by the lack of specificity in the comments and the small profit.



Globe’s Results for the Year

I’m kind of late getting this done. The June 30 fiscal year results were released at the end of August. But we only see Australian company results twice a year, so it still seems worthwhile. Happily for me, there’s not that much information in the report so it shouldn’t take long. The “Review of Operations” for the whole year is four short paragraphs- less than half a page. I guess not much happened.  You can see Globe’s whole report here.  It’s the fourth item down on the page. 

To summarize, Globe’s revenues fell 6.1% from $88.5 million to $83.1 million in the pcp (prior calendar period- the previous full year in this case. And all numbers are in Australian dollars). Earnings before interest, tax, depreciation and amortization (EBITDA) were down 41.3% from $2.93 million to $1.72 million. Net income fell 94% from $1.089 million to $62,000. However, those numbers include $1.0 million from settlement of a lawsuit. Without that, Globe’s EBITDA would have been $72,000 and it would have had a bottom line loss.
Australasia revenues were $25 million, up 4.3% from $24 million in the pcp. In North America, revenues of $41.8 million declined 15.2% from $49.3 million in the pcp. The press release refers to North American revenues being down “…in single digit percentage terms…” but I keep coming up with 15.2%. Maybe that’s a constant currency number, though it’s not clear.
Revenue from Europe rose 7.7% from $15 million to $16.2 million. In Australia (as opposed to the Australasia segment) we see revenues up 6.4% from $21.2 million to $22.5 million. With revenues up $1.0 million for the whole segment, we can see that all the growth in that segment came in Australia itself.
Revenues in the United States fell 17.1% from $31.6 million to $26.2 million. In other foreign countries (which I assume means everywhere but the U.S. and Australia) revenues were down 3.5% from $35.5 million to $34.3 million.
The sales decline was blamed mostly on the strength of the Australian dollars. We’re told they were basically flat in constant currency.
Globe doesn’t provide the gross profit number we’re use to see in the U.S. But there is a cost of sales figure, which I imagine is a reasonable proxy. If we use it to calculate a gross merchandise margin, we see it’s basically unchanged, falling just 0.1% over the year from 45.4% to 45.3%. But the press release says, “Reduced gross margins, which are largely responsible for this decline in profitability, resulted from a combination of sales mix, competitive market pressures and an increase in cost of goods.”
They don’t tell us exactly what the gross margin decline was, but it’s pretty clear that what we in the U.S. call ‘cost of goods sold” isn’t the same as “cost of sales” in Australia. Wish I spoke better Australian accounting. Yet you would think an “increase in the cost of goods” would show up in the “cost of sales” as a percentage of merchandise sales. I’ve got some Australian readers. Can one of you tell me the definition of “cost of sales” in Australia?
There’s no long term debt on the balance sheet, and the usual ratios are fine. Cash is at $10.2 million down from $12.3 million in the pcp. I would note a 2.2% increase in total receivables to $12.5 million. However, trade receivables rose 11.1% from $8.4 million to $9.4 million. Receivables were down in the Australasia segment even with the revenue increase. But in North America, where revenues fell 15.2%, receivables rose 37% from $2.8 million to $3.85 million. Yikes. That seems to imply something not specifically too good.
There was a 14.8% increase in inventory to $14.5 million. They note that there some footwear shipments that arrived in the first quarter of the current year that had been expected to arrive before June 30. Don’t know how big those shipments were, but obviously they would have pushed the year end up inventory up even further.
In general, you’d prefer to see receivables and inventory decline when sales decline. It would be interesting to see how much of the inventory growth was in units as opposed to being caused by the higher cost of goods they refer to.
The last balance sheet thing I’d mention, under “Other Financial Assets” is an amount of $1.35 million called “Investments in other entities (available for sale).” No big deal, but I wonder what it is because that’s what I do.
Well, there was a bit more information in the report than I thought on first read. But we don’t get any sense at all about what they might be planning to do to reverse some of the trends they highlight in the press release. And the sales decline in North America coupled with the increase in receivables is troubling. I guess, unfortunately, it will be six months before we find out how things have evolved. Make that four and a half months, as I’ll try to be more diligent in writing about it. 



Globe’s Half Yearly Results

Globe actually released these back in February. As far as I can tell everybody, including me, missed them. There’s never a lot of information in these Australian six month results. Still, I thought a brief look might be in order. You can download the report yourself if you want to see it.

Globe’s revenues fell 8% from $46.4 million Australian Dollars (all numbers in Australian Dollars) in the six month ended December 31, 2010 to $42.7 million for the six months ended December 31, 2011. Earnings before interest, tax, depreciation and amortization (EBITDA) fell from $1.9 million to $1.5 million and net profit was down from $924,000 to $761,000.
Those numbers include, “…net $1.0 million in other income relating to proceeds from the settlement of a legal case.” Obviously without those proceeds EBITDA is a million bucks lower and net income is down net of the tax affect by something less than a million.
The company reduced its selling, distribution and administrative expenses by 7.1% to $11.9 million. 
They note that the decline in sales was “…largely due to the strengthening of the Australian Dollar.” In constant currency, sales were flat. The further note that, “The underlying profitability of the group versus the prior corresponding period is most significantly affected by downward pressure on gross margins as a consequence of changes in the sales mix.” I can’t tell what the actual gross margins were and there’s no information on the specifics of the change in the sales mix. 
They do provide us with some information by geographic region. Europe was the best performing segment, with revenues rising 9.4% from $6.96 million to $7.6 million. North America fell 17.6% from $25.9 million to $21.4 million. Australasia revenues rose 2% from $13.4 million to $13.6 million. Those are as reported numbers- not constant currency.
I tracked down the balance sheet from December 31, 2010 to compare it to the December 31, 2011 one. Cash has declined from $12.4 million to $8.9 million. Receivables rose 2.3% 17.7% from $13.2 million to $13.5 million. Inventories were up at well, rising from $12.4 million to $14.6 million.
There’s no discussion of any of those items, but with sales down you’d generally like to see receivables and inventory falling as well. The inventory increase is pretty significant, but of course there may be some timing issues or other stuff we don’t know about.
Globe has no long term debt, and its current liabilities have fallen from a year ago by 10.2% to $12.7 million. Almost all of that is due to the decline in trade and other current payables, which I like to see.
The current ratio has improved a bit to 2.95 times from a year ago and total liabilities to equity is only 0.37, slightly better than the 0.39 of a year ago.
For the second half, CEO Matt Hill says, “…we anticipate continued stability for the Group and expect profitability to be largely consistent with the first half, excluding the settlement proceeds.” They expect some of their longer term product and sales investments to start to pay off in the 2013 financial year.
Well, that’s all I’ve got because that’s all they gave me to work with. Globe (and lots of other companies) needs Europe to not head south economically. Equally important to Globe, they need to recreate some sales momentum in the North American market.       



Globe’s Annual Report; Making a Profit Under Tough Conditions

Globe’s annual report for the year ended June 30 showed up on their web site a couple of days ago. It doesn’t contain much in the way of a detailed analysis of results, but I’ll give you what’s there.   All the numbers are in Australian dollars.  You can read it yourself if you want to.

As reported, sales were down 3.5% from $91.7 million to $88.5 million. Net profit declined from $1.31 million to $1.09 million. Globe’s tax rate fell from 59.4% to 38.7%, keeping the profit decline from being higher.

At June 30, one Australian dollar was about $1.06 U. S.
In constant currency, ignoring changes in the exchange rate that is, sales rose 5%. In local currencies, North America and Europe were up 6% and 12% respectively. Australian sales fell 2% “…due to weak trading conditions in the retail sector throughout the year.”
Globe’s gross profit margin declined from 47.5% to 45.9%. Earnings before interest, taxes, depreciation and amortization (EBITDA) fell 47% from $5.5 to $2.9 million.  $735,000 of that decline resulted from an increase in corporate expenses not allocated to the geographic segments.   
As reported, sales in all three reporting segments fell during the year. In the Australian segment, they were down from $24.4 million to $24 million. North America went from $50.8 million to $49.3 million. Europe’s numbers dropped from $16.5 million to $15.0 million. The United States, by itself, fell from $34 million to $31.6 million.
Over on the balance sheet, current assets are down consistent with the fall in sales. Receivables fell by 13% to $12.2 million. Past due receivables rose a bit from $2.59 to $2.72 million. None of that is more than 91 days past due in either year. More than half is past due only zero to thirty days. In other words, past due doesn’t mean it won’t be collected though no doubt there will be a few problems accounts. There always are. 
Inventory rose by 12.7%. While you’d like not to see that with sales falling, we’ve got to remember that higher product costs translates to more dollars in inventory even if the number of units should be the same. Current liabilities were also down. The company has no long term debt and I guess no bank debt of any kind. The current ratio remains more or less unchanged from last year at 3.0. Total debt to equity is also more or less the same at about 35%.
Total equity fell from $51.1 million to $46.9 million. Total contributed equity is $144.2 million, but accrued losses of $86.8 million over the life of the company reduce the total equity number.      
The strong Australian dollar meant that sales in the U.S. and Europe translated into fewer Australian dollars. Globe had the same problem with higher product costs from China that everybody has. That explained a chunk of the gross margin percentage decline. And the Australian economy took it’s time about going into recession but once it started did a fine job of it.
Lower sales and profits, of course, are lower sales and profits no matter what the reasons are, and it doesn’t look like Globe is expecting much improvement next year. “All things being equal, the performance of the business [for fiscal 2012] is expected to be approximately in line with the 2011 financial year.”



Globe Makes a Profit. It’s Good to Make a Profit, But There Are Some Unanswered Questions

Initially, I was relieved. There was no conference call to listen to and try to take notes faster than they could talk. The press release was one page. The Appendix 4E was only 60 pages and the Investor Presentation power point didn’t really add anything to it. I thought I’d get off easy on this one.

Turns out it’s a lot easier to do an analysis when you have more solid information to analyze. Globe, however, doesn’t feel any need to provide a whole lot of information beyond what’s required by law. They’ve only got about 2,200 shareholders, of which 1,400 hold what we in the U.S. call restricted stock. That is, they can’t just go out and sell it on the market. The stock doesn’t trade much, the analysts aren’t following the company closely, and the Hill brothers control about 66% of total shares outstanding. As a result, their board of directors, Globe tells me, has decided there’s no reason to supply additional, detailed information on strategy, brand performance and future outlook that might help competitors.

I’ll give you what I’ve got, then I’ve got some questions and issues to raise. All the numbers are in Australian Dollars. Before I start, I’ll remind you that the brands the company sells, besides Globe, include Gallaz and, as part of Dwindle Distribution, Tensor, Blind, Enjoi, Darkstar, Cliché, Speed Demons, Almost, and Blind. You can see the whole report here if you want;
The Financial Statements
Revenue for the year ended June 30, 2010 fell 22% from $117.6 million to $91.7 million. Net sales (excluding revenues, such as royalties, not received from selling product) were down 23% to $90.5 million from $116.9 million. The press release notes that in constant currency and after closing 12 retail stores in Australia over the last two year, the decline in revenue was 9%. The retail closing leaves Globe with just three flagship stores. 
Gross profit fell from $53.3 to $42 million. The gross profit margin rose from 45.6% to 46.4%. Employee benefits expense was reduced from $18.6 million to $13 million, or by 30%. Selling and administrative expenses dropped 37% from $39.8 to $25.1 million. Income tax expense was down by about a million bucks. Net income “before significant items” improved by $4.608 million, from a loss of $2.397 million to a profit of $2.211 million. Net income (including those items) was $1.3 million compared to a loss of $8.9 million the prior year. The major significant items are a cash charge for restructuring of $3.155 million and a non-cash reduction in tax assets of $4.666 million in the year ended June 30, 2009.
Total of these significant items was an expense of $6.471 million for 2009 but only $897,000 for 2010. These items represent a big chunk of the total profit turnaround
Globe reports its revenues by three segments; Australasia, North America, and Europe.   Revenues from these three segments were down, respectively, 29.6%, 13.3%, and 32.1% for the year ended June 30, 2010 compared to the prior year. About half the decline in Australia was the result of the retail store closings. Sales in Australasia were $24.4 million. In North America, they were$50.8 million. The number for Europe was $16.5 million. Sales in Australia, of course, are not impacted by currency fluctuations (except that product cost may decline if it’s bought in another currency when the Australian dollar strengthens).
The current ratio on the balance sheet improved very slightly from 2.92 to 3.09, and total debt to equity fell a bit (a good thing) from 0.36 to 0.34. Inventory fell 19.6%, which you’d expect given the sales decline. I might have expected even a bit more. Trade and other payables fell hardly at all, from $12.4 to $12.3 million. Given the 37% drop in selling and administrative expenses I might have expected this to decline. One explanation for it not declining might be that they are paying more slowly. Might also just be a timing issue and mean nothing. Globe management tells me it’s just timing.
Receivables fell only 6.5% to $14 million. I would have expected more of a decline again because of the lower sales. With product sales down 23%, that small receivables decline seems a bit odd.    Hmmm.   Guess it’s time to dig into the details
Adventures in Footnote Land
Ah, here’s some information. Footnote 10. It seems that trade receivables were down 27.4% (after provision for doubtful accounts), but that “Other Receivables” rose 94% from $2.616 to $5.078 million. Note c to note 10 tells us that, “This amount includes $4.5 million (2009: $2.2 million) relating to amounts recoverable under trade receivables factoring arrangements– refer to Note 26 for further information.”
Off we go Note 26 for that sure to be enlightening “further information.” Here’s the part of that note that’s relevant to the Other Receivables. “Other receivables include sundry other receivables and amounts due from factors. All balances are current and are not considered to be impaired.”
Okay, this slog for information just won’t end. We have to delve deeper into Note 26 (which runs for five pages) where we learn that Globe has factoring facilities in place in both Australia and North America.   In North America, the credit risk on the “the majority” of the receivables sold pass to the factor. No idea if that’s 51% or 98%. So Globe’s risk is largely that the North American factor won’t pay. 
But then here’s the last sentence describing the North American arrangement:
“These arrangements have been amended during the year. Under the terms of the revised agreements, the basic level of funding does not change, but the consolidated entity retains title to trade receivables and therefore has minimal exposure to the factor.”
Okay, I’m begging for mercy and have pleaded with Globe to explain this to me. It turns out that CIT is Globe’s factor. As you recall, CIT ran into some difficulties last year. There was concern (not just on Globe’s part) that CIT might go belly up and leave Globe not owning its receivables and not being able to get the money from CIT when it was collected. This would have, well, sucked. So Globe (and other companies) negotiated a change in their agreement under which the credit risk passed to CIT, but Globe owned the receivables until they were paid, thereby protecting Globe from a possible CIT bankruptcy.
I really wish they’d just said that. I take some comfort from the fact that Globe’s CFO has apparently had to sit down with board members and go over this footnote with them as well. I’m not the only one who’s been confused. Regardless of where the risk is or who owns the receivables, they have dropped over the year, according to Globe, from $18 million to $13.9 million, a decline of almost 23% and in line with the fall in sales.
Now, what do we know about the quality of these receivables? Not all that much. There’s a little table (in the endless footnote 26 of course) that shows “…trade receivables considered past due but not impaired…” Not impaired means they expect to collect them and haven’t reserved for them. That number has declined over the year from $3.23 to $2.59 million. For the year just ended, they show nothing “Past due greater than 91 days.” But if the terms of the sale were 90 days, then nothing would show up past due until the 91st day. Lacking information on what the original sales terms were, this chart isn’t very helpful.
We do see, however, that during 2010, Globe recognized an impairment loss of only $104,000. The previous year it was $1.627 million. Trade receivables past due and impaired were $2.077 million at the end of this year compared to $3.416 million at the end of the previous year. The impairment allowance (reserve) has fallen from $2.972 million to $1.793 million. That represents 20% of trade receivables at the end of 2009 and 18% at the end of 2010. On the one hand, I look at that and say, “That must be more than enough.” On the other hand, an 18% impairment allowance seems to suggest an awfully high level of possible problem receivables.    
I’m sure you’re kind of over Australian accounting for and presentation of receivables. Me too.
What’s the Future Look Like?
I have no idea. There’s not a word on how any individual brand did. Under “Future Developments and Results,” all they say is:
“No further commentary on future developments and expected results is included in this report as the directors are of the opinion that such commentary would likely result in unreasonable prejudice to the consolidated entity.”
Initially, this had me kind of shocked. But it turns out it’s just standard legal Australian for “We don’t have to tell you anything else and we’re not going to because it would just help competitors.” Billabong has pretty much the same wording, but they include it with a short discussion of their expectations for the coming year, so it’s not shocking. I guess everybody in Australia takes it for granted, but I almost fell over the first time I read it. Just a reminder that speaking the same language isn’t any guarantee of smooth communications.
It’s true that Globe went from a loss to a small profit, and that’s a good result. But, by way of summary, let’s look at how they did it. First, product sales were down 23% for the year. Tough economy, store closings, and exchange rate issues acknowledged, that can’t imply anything good for market share and brand positioning. They slashed selling and administrative expenses 37% from 33.9% of sales to 26.4% of sales. Employee benefit expense was down 30%. They acknowledge that they were being a little less than rigorous in their expense control previously, and told me that the current level of expenses was appropriate for projected revenue levels.  Those are big reductions, and I wonder if they can be maintained.
Lots of companies have told me the same kinds of things as they’ve adjusted to the recession. I should note that the Australian economy has, until now, been spared much of the recessionary problems of the rest of the world, but that seems to be changing. We’ll see how Globe reacts.
Globe didn’t have $3.2 million in restructuring expenses that they had last year. The impairment charge for receivables was about $1.5 million less than last year.
I’m left here with a lot of “I don’t knows” and “They didn’t say.” From my description of their shareholders at the start of this article, I can see why they don’t feel a need to provide more information. But I think they do themselves a disservice. My experience is that the assumptions made in the absence of real information are always worse than the truth. I was clearly guilty of thinking like that in my first reading of their report.
At the end of the day, you can only improve your bottom line by so much through cutting expenses. Finally, you have to sell more at better margins. Globe has chosen not to explain how they are going to do that. 



Globe Annual Report and the Pacific Brands Deal

Being traded on the Australian Stock Exchange, Globe doesn’t have to file the usual reports with the Securities and Exchange Commission here in the U.S. But they did file an annual report (109 pages, but happily for me full of pretty pictures and big type) and, in conjunction with the announcement of the pending sale of its Australian and New Zealand street wear apparel division to Pacific Brands for a maximum of $42 million Australian Dollars, it was worth taking a look at.

By the way, all the numbers in here are in Australian Dollars. Currently, an Australian Dollar will get you about $0.76. Do your own math. Oh, and just so I don’t have to say it continually, Globe’s fiscal year ended June 30, 2006. The annual report was released October 13th.
The first thing I want to say is that I like these guys. I mean, thanks to them, I now know how to bounce quarters into a glass. You know who you are. Maybe more importantly is that I love any management that starts off its annual report directly and honestly with the Chairman and CEO saying, (I’m paraphrasing here) the first quarter in North America really sucked, but the brands are in better shape and we’ve got our financial and management ducks in order, but we didn’t make as much money this year as we’d hoped. All you can ask of any management is competence, honesty and integrity.
Sales fell in 2006 from $204.5 to $197.3 million. Net Income dropped from $3.3532 to $0.471 million. There’s no way to make that look like a good result. However, the improvement they talk about in the annual report is better seen in the cash flow. There we see that in 2005, operations used $7.381 million in cash. In 2006, operations generated $2.780 million. And that is almost entirely the result of increased receipts from customers. That’s a good thing, and suggests they are doing all the appropriate management things that a company has to do when things aren’t going its way- controlling inventory, collecting receivables, being tough on spending. Let’s see if the balance sheet bears that out.
Inventories and receivables both down a bit. Good. Payables down almost $10 million. Great. Current ratio went up from 2.43 to 2.83, a 16.5% improvement. That’s a strong current ratio. My only caveat is that a current ratio is as of a moment in time (June 30 in this case) and seasonality, to the extent Globe has it, can wreck havoc with that. As a former President of a couple of snowboard only brands, I am justifiably paranoid about that.
Meanwhile, back on the cash flow, I see that Cash Used in Financing Activities fell from $11.1 to $0.3 million. Of course, $8.3 million of those savings came from not paying dividends in 2006 that they paid in 2005 and I suppose the people who use to get those dividends aren’t that thrilled, but I imagine it was the right thing to do.
The bottom line is that while they used $22.2 million in cash in 2005, they used only $3.0 million in 2006. The conclusion? They responded appropriately to their business conditions, but now they have to improve their bottom line by selling more at better margins.
There’s a limit to how much you can accomplish that by controlling spending. So they are taking the strategic step of making the apparel sale to Pacific Brands. The brands being sold “…include Mooks, M-ONE-11 and Australia and New Zealand licensed brands together with eight concept retail stores in Melbourne and Sydney and two Direct Factory Outlets stores,” according to the Melbourne newspaper The Age. The same article says these assets represent about 35% of Globe International’s group revenue.
Certainly, this sale gives Globe some additional resources to use in focusing on its core brands. Apparently, it’s the result of the strategic review that Globe announced it would be conducting last February.

The interesting thing to me is that this leaves Globe with a bigger percentage of its revenues in skate hard goods- a tough market for anybody. Hopefully, the tighter focus and proceeds of the asset sale will help them improve their performance there.