In a show of omnichannel might, Recreational Equipment Inc. grew sales and profits at their fastest pace in years in fiscal 2014.
REI reported sales of $2.2 billion for the 53-week period ended Jan 3, 2015, a 9.9 increase from the fiscal year ended Dec. 28, 2013 and the largest such increase since fiscal 2010. Comparable store sales, including online sales, increased by 4.2 percent on top of a 2.9 percent gain in fiscal 2013. Net income increased 132.2 percent, the fastest pace in at least six years.
Delivering experiences online retailers can't match
While the growth was aided by an extra 53rd week of sales and the opening of seven new stores compared with fiscal 2013, REI called out double digit revenue growth at its REI Outdoor School, REI Adventures and a successful launch of its new house brand as contributors to the growth.
Founded in 2005, REI Outdoor School offers classes and outings tailored to each store's local community. While the majority of classes are still offered as free in-store clinics, the business grew its revenue 28 percent in fiscal 2014, indicating it is having success persuading people to pay for more in depth instruction and/or local adventures. The majority of paid classes cost less than $100 and include the cost of most, essential gear, such as tents, sleeping pads, cooking equipment, backpacks and bikes.
In May, for instance, REI members can sign up for a Colorado 14er Training Hike in Boulder, CO for $85, a Wilderness Survival class in near Seattle for $65 or a Gourmet Camp Cooking class at San Elijo State Beach near San Diego for $175. Non-REI members pay $20 more.
REI Outdoor School enrolled about 150,000 people in 2013, which means it is probably not generating a significant percentage of revenue. Paid classes, however, do address several trends in the market place. First, they put outdoor adventures within reach of consumers who may be reluctant or unable to invest hundreds of dollars in gear without knowing whether they will participate regularly in an activity. Qualitative consumer research sponsored by Outdoor Industry Association has consistently shown 20-somethings find gear costs a barrier to entry – an observation that helps explain the growth of bike, car and even home sharing services such as Zagster, Zipcar and Airbnb. Perhaps more importantly, local classes and outings leverage REI's 138 bricks-and-mortar stores to deliver a local brand experience no online retailer can match.
Sales at REI Adventures, which provides adventure travel tours to destinations worldwide, grew 19.4 percent in fiscal 2014.
“Our momentum reflects the appeal of life outdoors,” said REI President and CEO Jerry Stritzke. “We have focused hard on giving our members great gear and expertise. Our stores and digital business are doing well, demand for experiences and adventures is up and we are saying a big thank you by investing more in the work our non-profit partners do for our members and the outdoor community.”
Growing scale lifts operating margins, philanthropic giving
REI's gross margins reached 43.3 percent, up 20 basis points from 43.1 percent in fiscal 2013, according to its audited income statement. Payroll related expense rose 7.5 percent, but fell 40 basis points to 19.1 percent of sales.
Occupancy, general and administration costs rose 2.8 percent, but still declined to 16.0 percent of sales compared with 17.1 percent in fiscal 2013. Advertising expense increased 10.3 percent to $77.1 million, but remained flat at 3.5 percent of sales. Operating income increased 40.2 percent to $181.9 million, or 8.2 percent of revenue, up 180 basis points due primarily to non-payroll expense efficiencies. That compares with fiscal 2014 operating margins of 11.6 percent at Dick's Sporting Goods, 8.8 percent at Zumiez Inc. and 2.0 percent at Amazon.
REI will pay out $168 million in annual dividends to co-op members. In good years like 2014, members earn a rebate of about 10 percent on all full-price REI purchases, plus rebates on purchases made using their REI-branded Visa card. REI dividend notices, which began arriving in member's mail boxes over the weekend, drive much of REI's store traffic in April.
As a cooperative, REI pays taxes only on income not distributed to members. For fiscal 2014, income taxes totaled $27.1 million, for an effective tax rate of 38.1 percent, compared with $10.0 million and an effective tax rate of 34.5 percent in fiscal 2013. Net income after dividends and taxes reached $44.2 million, up $25.2 million, or 132.2 percent from fiscal 2013.
REI ended the period with inventory valued at $409.2 million, up $59.4 million, or 17.0 percent from the end of fiscal 2013.
This spring, REI opened news stores in Alpharetta, GA and Princeton, New Jersey, and relocated its Dallas store. This fall it plans to open its first stores in Delaware and Iowa as well as its sixth store in the Los Angeles area. It has also announced plans to open its fifth flagship store in Washington DC and a sixth store in Virginia in 2016.
In 2014, 945,000 new members joined the co-op, taking active membership to a high of 5.5 million.
The company said it plans to double its philanthropic giving this year to nearly $8 million, including $5.9 million it will invest with non-profit partners. The remainder will consist of large, one-time grants from The REI Foundation, which focuses on helping diverse audiences and young people enjoy the outdoors. For instance, the Foundation will release the first tranche of a multi-year $1.5 million grant to help Outdoor Industries Women's Coalition enhance a mentoring programs for female leaders and entrepreneurs. REI said 25 CEOs have pledged support for the initiative, up from 13 in late January, and that additional grants will be announced in the coming weeks.
More exclusives
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This 650-fill-power down vest for women was among the items |
Even as REI Foundation seeks to make outdoor recreation more inclusive, REI plans to offer more exclusive merchandize to reduce competition from online discounters. The retailer will achieve this both by expanding its own in-house brands and by partnering with vendors to create exclusivity. Sales of a limited collection of lightweight, colorful down jackets and vests launched by the new REI Co-op brand surpassed $1 million within 20 days of their launch last fall. REI launched the sub-brand in a bid to offer high quality outdoor products at an affordable price and said last week it will expand the collection this fall. An REI spokeswoman declined to say whether it would expand beyond apparel.
REI is simultaneously working with top vendors to develop exclusive products, known in industry parlance as “special markup units,” or SMUs. A performance sports themed catalog REI mailed to members in the Southeast in mid-February advertised certain models of running shoes from Hoka One One, The North Face and Salomon as “Handpicked/Only at REI.”
In late February, REI became the exclusive U.S. dealer for the high-end German mountain bike brand Ghost. REI Outdoor School simultaneously launched a new set of mountain biking classes offering intensive skills training for $45 ($65 for non REI members) and an instructor certification course from International Mountain Bicycling Association ($482/$502).
In addition to providing participants with world-class instruction, the classes “offer complimentary access to highly-rated gear, such as high-performance GHOST-brand mountain bikes that are now available exclusively at REI.com,” REI announced Feb. 26. “Nearly 37,000 people participated in REI Outdoor School cycling classes in 2014, and the co-op is projecting an increase in the coming year.”
