SPY’s Year: Sales and Margin Up, Expenses Down
When I review SPY’s results, we get to see what a smaller specialty brand is doing. They would prefer, I imagine, that they weren’t public and that we didn’t get to look over their shoulder. But for the time being anyway, we do.
I suppose I need to confess that they are doing most of the things I think, and have written, that smaller specialty brands should do, so I’m likely to approve. Let’s see what those are.
I’m going to start with the cash flow and note that in the year ended December 31, 2013, they generated positive cash from operating activities of $683,000. Not a huge number, but last year they used $5.2 million in operations. To me, getting to positive operating cash flow is more important than making a profit for a company like SPY that’s recently out from under a few tough years.
Sales for the year were up $2.2 million or 6% to $37.8 million. All but $100,000 was SPY branded product. They sold $32.6 million of the total in the U.S. and Canada.
Gross profit margin increased to 50% from 46% the previous year because they sold higher margin product, made more product in China (instead of Italy) and earned higher margins on closeout product. They also said it was higher because they had “…lower overhead as a percentage of sales partially due to the consolidation of our European distribution center to North America.” I don’t really understand that last one because I don’t know how it impacts product cost.
Sales and marketing expense was down 18% from $13.8 to $11.3 million. Advertising was reduced from $819,000 to $394,000. That’s because, well, they spent less. They also reduced SG&A expense from $0.2 million to $6.1 million. They did that in spite of $0.1 million spent in relation to two board of director resignations and $0.3 million related to an officer resignation. Shipping and warehouse expense was also down $300,000.
So if you increase your sales, improve your gross margin and reduce your expense guess what happens? SPY had a positive income from operations of $399,000 compared to an operating loss of $5 million last year. We learn in the conference call that it’s the first operating profit since they went public in 2004.
They still had a bottom line loss of $2.86 million, down from a loss of $7.24 million last year. But that is almost completely the result of $2.97 million in interest expense, up from $2.39 million last year. This is because of the $21.5 million due to shareholder we see on the balance sheet, up from $19.1 million at the end of last year. There’s also a line of credit outstanding of $4 million due to an asset based lender.
If it wasn’t for the shareholder debt, the balance sheet would be okay, though I do note an increase in receivables of 16.6%, way in excess of sales growth. On the other hand, I love the 6.4% reduction in inventory even with the increase in sales. SPY has had some inventory problems in the past, and we can hope this reduction suggests that’s coming to an end.
Next, let’s talk about strategy and tie it to the financial results. Here’s where you can see the 10K if you want to follow along.
On page nine, talking about product development, they note, “Our products are designed for individuals who embrace the action sports, performance and lifestyle markets.” To me, that correctly sets some limitations on where their distribution can go, and is typical and appropriate for a niche brand.
In the conference call, management noted that they had run out of snow goggles by the end of 2013 and that it was their first year of running out of inventory. They also noted that they had strong orders for next season. The one questioner expressed some concern that, as a result, they might have left some sales on the table. CEO Michael Marckx allowed as how they probably had.
I was waiting and hoping he’d suggest to the questioner that running out of inventory had something to do with next season’s strong orders, but he didn’t.
SPY expects its revenues in 2014 to be in the $39 to $40 million range with a “modest improvement” in gross profit. I was also interested to learn that they will start paying interest on the shareholders debt in cash, rather than accruing it as more debt.
It is interesting what you can do with your expenses when you are a bit cautious with your distribution. I am reluctant to draw too straight a line between controlling distribution and reducing marketing expenses (and SG&A, and inventory, and reducing working capital investment) but I’m pretty sure there’s something to it. Retailers seem to favor product that sells through at full margin for some reason, and that makes business easier and more profitable for everybody.
I am pretty sure SPY has also benefitted from the brand refocusing and related company reorganization. As they describe it, “…to sustain the relevancy of our brand to our target market and beyond, we reorganized our entire company, realigned our branding efforts in order to better reflect the original intent of our brand, and have continued to make improvements since then.” Sharing a focus, direction, sense of purpose matters. Sorry if that sounds a little mystical, but I suspect it’s part of the reason they could increase sales and cut expenses.
SPY’s business strategies in some cases don’t sound much different from their much larger and better resourced competitors and that could be a problem. I also noticed there wasn’t a word about online or direct to consumer in the whole 10K, and that’s certainly different from most brands. Finally, if they haven’t already, they are going to run out of ways to cut expenses, and bottom line improvement this year may have to come from growing sales.
But for now, let’s just note the continued improvement and see what happens next.
Would the recent insider purchases be a hint that SPY is soon to be acquired? Much more attractive target now that it is proven to be a going concern. SPY is way too small to warrant being public.
Thanks
Mark
Hi Mark,
I don’t follow the stock closely (or own any of the companies I write about). I’ve got no reason to think they are, or are not, going to be acquired. I’d think the largest shareholder who’s put all the money in might want to see them grow a bit more and become profitable before he’d consider a sale, but that’s just my opinion. Remember, they are only a year into this strategy that seems to be working so far. Agree they should never have been public, but I’ve seen that mistake happen in this space before when people thought there was a lot more upside.
Thanks for the comment,
J.