Galyans Trading Company has been given a new honeymoon period as the markets appear to be taking a positive approach to new company CEO Ed Holman. GLYN shares jumped more than 32% for the week to close at $10.62 on Friday after Holman laid out a number of initiatives to help reverse the troubling trend of the last year. Perhaps the one key item that got analysts attention was Holmans focus on free cash flow when he said it was the “number one indicator of results and performance.
The former Bloomingdales exec, who came to the company last July as president and COO, took the chief executive reins just last month, replacing Bob Mang.
Holman is obviously a straight shooter and is focused on the operational effectiveness of the company, something the market sorely needed to hear. The retailer had seemed in the past to rely more heavily on the image of its brand in the market rather than the results in posted. Analysts that once gushed over the big-box “adventure” themed formats jumped ship over the last six months in large part to concerns over liquidity.
One of the most positive indicators for the market was the reduction in CapEx spending for the current year, which is projected to be approximately $40 million versus $77 million in 2003. The company said the reduction is primarily due to an increase in landlord contributions this year, with nine stores getting help in 2004 versus just six of nine stores in fiscal 2003. The other key to bringing down store opening expenses will be an increased focus on smaller format 65,000 square foot stores. Galyans will open three of the smaller stores this year, with the first opening last week in Madison, WI. The company opened just one 65,000 sf store last year in Peoria, IL.
Galyans plans to open a total of nine stores in fiscal 2004, with four in the first quarter, one in Q2 and the balance in the back half of the year. Only four of the stores are going into new markets as GLYN enters the Virginia Beach, Charlotte, Madison, and Birmingham markets this year. As we previously reported in SEW_0410, the company will slow growth after this year and is projecting somewhere between zero and nine stores for 2005. Holman sees taking a much more deliberate and opportunistic in their approach to opening stores, not necessarily a fixed planned number each year. Holman said the company would “do more research up-front in terms of customer demographic and psychographic”.
The other big plus here is that Galyans said it does not expect any increase in year-end 2004 debt levels versus year-end 2003, essentially becoming a “self-funding” operation this year.
One of the other key strategies will involve the reduction in store management in favor of more selling personnel on the floor.
The issue has been a key one as the large format stores often seemed empty when it came to sales help in key departments. Holman sees reducing the level of full-time employees to focus on floor personnel required in key areas during key selling periods and “flex our selling floors based on seasonal opportunities”.
Holman said the company plans to reduce the breadth of merchandise assortments through a SKU rationalization program and are in the process of “overhauling” SKU assortments and key outdoor categories. Holman said the process should “lessen the impact of markdowns” they will need to take in the future. Overall, SKU count is expected to be reduced by 10%, while replenishment SKUs are expected to increase to 35% to 40% of “active items”.
The new CEO said the company will “leverage” its strength in apparel while building on the elite athletic equipment business. They also see opportunities in Golf and Action Sports. He said they are going to “condense” Outdoor and “make it more productive” than it has been “historically”.
Galyans will get more promotional this year as well, but does not expect to abandon its Every Day Low Price positioning. Holman said they intend to “buy into promotions” to fuel sales activity. Advertising is only expected to increase “slightly” in 2004.
Holman did not attempt to paint a rosy picture, but instead focused on what the company felt it could or should do to right the ship. His delivery and vision appeared to overcome the negative look back as the fourth quarter delivered much of the same bad news as the balance of 2003.
Net income for the fourth quarter ended January fell 40.2% to $10.0 million, or 57 cents per diluted share, compared to $16.7 million, or 98 cents per diluted share, in the year-ago quarter. Diluted EPS fell 41.8%. Four cents of the decline was attributed to “additional year-end markdowns”.
Gross margins declined by 330 basis points to 30.3% of sales from 33.6% in the year-ago quarter. The gross profit line included a charge of $3.1 million, or 11 cents per diluted share, relating to markdowns in the outdoor and athletic equipment categories. The balance of the decline was a result of “higher promotional markdowns” in other categories and de-leveraging of buying and occupancy costs due to lower comp store sales. SG&A increased 260 basis points to 22.8% versus 20.2% in the year-ago period.
Net sales for Q4 rose 17.7% to $249.8 million, but same-store sales declined 4.5% for the quarter.
Inventory at year-end was down 12% on a per store and per gross square footage basis. Turn for the year was up 10 basis points to 2.9x.
Galyans said new store productivity was 73% for the year. The average transaction in 2003 was off 2.0% to $59.48 due to a 6.1% decline in units per transaction which was partially offset by a 4.3% rise in average unit selling price to $23.14 for the year.
>>> To be fair, the other key factor in the share price run-up last week may also be related to the amount of shares that had previously been sold short. By one analysts numbers, roughly 19% of GLYN shares were shorted as of mid-February. Investors may have moved quick last week to get out in positive territory
