“Morning Boys.  How’s the Water?”

A few days ago, I posted an article called “Maybe There’s More to This Than Just Trying to Meet Demand.” Among other things, I ask you to take a little time and a deep breath and think about what the future looked like.  Towards the end I repeated a Mark Twain reputed quote; “It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”

A day or two later Sam Rines, the Chief Economist of Avalon Advisors published one of his occasional notes with a few charts asking, “What if a vaccine does not alter the overall trajectory of the economy?”

Here’s a link to that note.  Talk about hiding in plain sight and things you know that just ain’t so.  Remember, we were in a recession before the pandemic.  The Great Recession took us years and years to get over.  So somehow, we’re going to get a vaccine, which we have to assume works and enough people take, and suddenly the economy is going to be okay.  Better?  Hell yes.

But the virus may have scrambled the economy in ways we don’t completely know yet, so why are we imagining that resolving the pandemic means suddenly the economy will be strong?  Could it just sort of limp back into the recession we were already experiencing but be further beat up by a gigantic pandemic hangover?

How did I manage to confuse my personal pandemic recovery, where I can go to a bar, take my wife to dinner, have friends and family over and maybe even consider a vacation, with the economy recovering?

What does it mean if they are two separate issues?  Think about it.

Two young fish, out on a morning swim, bump into an older fish. He says: ‘Morning boys, how’s the water?’ The younger fish nod in appreciation and swim on. A few minutes later, one looks to the other and says: ‘What the hell is water?

We’re all swimming in that water, but sometimes it’s hard to notice it.


Maybe There’s More to This Than Just Trying to Meet Demand

Recently, somebody sent me a link to the split board binding company SPARK R&D.  Their home page has the title “Production and Inventory Notes,”  where they explain how explosive demand and having to stop and restart production (all virus related) has lead to a shortage of their products and how they are working to meet demand.

I know a lot of you feel SPARK’s pain.  Plenty of brands first reduced orders then had to increase them and have struggled to get enough of the right product in the right place at the right time.  I want to ask if that’s all you’re thinking about.  Perhaps it shouldn’t be.

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Sweatpants, Women Only, Vermont Resorts, Cities Like Skateparks? Four Articles Worth a Few Minutes

NOTE: I recognize there are paywalls and not all of you can read these.  Often though, you can get a few free articles every month.

About four weeks ago I got a new shoulder so I’ve been quiet for a while. This had been coming on for decades. It’s healing fine but leaves me with only one arm to type with. Happily, I’m discovered dictating in Word. We’ll see how that works.

This shoulder is what made me give up snowboarding about five years ago. We’ll see if things change next season.

Meanwhile, there’s a lot going on, and with the drugs out of my system I’m hoping to address them coherently.

I’m going to start with some articles I’ve discovered.  Between the virus, the weather here in the Northwest, and my shoulder I’ve had lots of time to read.

From the New York Times Magazine last August comes “Sweatpants Forever,” by Irina Aleksander.  “Even before the pandemic, the whole fashion industry had started to unravel. What happens now that no one has a reason to dress up?”

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Fashion in Games, 3D Printing (kind of), and Some Historical Perspective

I should really be analyzing Kathmandu and the BOA deal.  I will- I’m actually ready to start writing about Kathmandu- but wanted to take a short detour.

I’ve come across three articles I recommend you read. The first two are from The Robin Report and the third by a geopolitical analyst by the name of George Friedman.  He’s the guy who founded the Stratfor Group.  I’ll get to why I think you should read it.

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Zumiez’s Quarterly Results:  Interesting Things They Say, But Don’t Quite Say

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.

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Globe’s Year- And I Tease Out the Six-Month Numbers

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.






“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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Some Interesting Things You Might Have Missed

Emerald Raised the Money

As I reported in June, Emerald Expositions was raising $400 million through a convertible, preferred stock offering.  Part of it was an offering to its stockholders with its majority owner, Onex, agreeing to take whatever part of the offering those smaller shareholders did not purchase.

I was skeptical in the article that shareholders other than Onex would participate in the offering.  Now we know.  In an 8-K filed on August 13th, Emerald tells us they “…sold a total of 71,446,346 shares of Series A Preferred Stock pursuant to the Investment Agreement and the rights offering, of which Onex purchased a total of 69,718,919 shares, including the shares purchased pursuant to the Backstop Sale.”  The deal is done.

Millennials Buying Old Houses

And why would you care?  Take a look at this article about them buying old, cheap, beat up houses that need a lot of work.  Any of you who have been through a significant remodel, especially with an old house (I’ve done both) are smiling, looking at the pictures of the houses in the article and thinking, “They have no idea what they’ve gotten themselves into.”  I can’t help flashing back to the 1986 Tom Hanks movie, “The Money Pit.

The point is they are going to make choices leaving them with less money and time for the things we’d like them to buy and do.  I’m not saying this is a problem you have to react to right now.  However, the evolution of generations through phases of life is a constant.  In the same way winter resorts are having to figure out what to do as the baby boomers aren’t going big anymore, we’re going to have to consider the changing needs and priorities of the millennials.

How Much Does It All Cost?

Robin Lewis wrote this excellent article on subscription models.  As a lead in, he quotes this first line from one of his earlier articles, ““Bring it to me, just for me, new, now & more often,” and I found myself thinking, “How much does this all cost?”

But that was the wrong question.  What I want to know is how your cost structure is going to evolve.  Forget the hopefully short-term costs associated with Covid 19.  When the working vaccine has been distributed (sooner rather than later would be nice), when social distancing and cleaning inefficiencies go away, when the supply chains are less disrupted where are you going to be spending money?

Consistent with Robin’s quote above, I expect you to be spending it on being flexible- in acquiring product, in moving it around, in getting it to and from the customer, in changing it based on customer expectations in collecting and managing data.  Other costs, such as advertising and promotion, I expect to decline.  You will also have had general and administrative costs decline as you resolve the issue of merging ecommerce and brick and mortar expenses in such a way that they are supportive rather than competitive.

If you don’t do that, well, you won’t have to worry about any other issues.  Ever.

While expenses may rise, I’m thinking that margins will rise as product quality is emphasized and as the overwhelming number of brands and retailers declines.  Completing that process probably requires a normalization of interest rates that is not in our immediate future.

That pandemic accelerated decline in the number of brands and retailers may start to restrain consumer dominance and return some balance to the relationship between consumer and brand/retailer.  At this point that’s sheer speculations on my part.





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.