Gaiam Inc. net revenue for the second quarter declined 10.1 percent to $50.7 million from $56.4 million recorded in the same quarter last year. The decrease in net revenue was primarily attributable to a sales decline resulting from the company’s previously disclosed plans to lower the direct response television business advertising spend which accounted for $5.3 million of the revenue decline, low in-stock levels at the company’s largest retail customer that were not completely resolved until late May, an ineffective third party fulfillment program with the company’s second largest retail customer that returned to a direct relationship in July, and the Borders bankruptcy. These were partially offset by positive comps in the company’s solar segment.
Gross profit decreased to $22.6 million, or 44.6 percent of net revenue, for the second quarter of 2011, from $28.9 million, or 51.3 percent of net revenue, during the comparable quarter last year. The change in gross profit margin primarily resulted from decreased revenues in the higher margin direct response television business and increased revenues in the lower margin solar segment. Excluding the solar segment, gross profit, as a percentage of net revenue, was 56.1 percent during the second quarter of 2011.
Selling and operating expenses decreased to $24.9 million, or 49.1 percent of net revenue, during the second quarter of 2011, from $27.0 million, or 47.9 percent of net revenue, during the same quarter last year. The decrease was primarily the result of reduced advertising spend for the direct response television business, partially offset by additional investments for the company’s digital infrastructure, including GaiamTV, and the launch and ongoing development of a beta retail store.
Corporate, general and administration expenses decreased slightly to $2.9 million, or 5.6 percent of net revenue, during the second quarter of 2011 from $3.0 million, or 5.4 percent of net revenue, during the same quarter last year.
Subsidiary’s acquisition-related costs of $2.0 million during the second quarter of 2011 represent transaction expenses incurred by the company’s solar subsidiary as a result of its acquisition of Alteris.
Including the impact of the solar subsidiary’s acquisition transaction costs, lost sales and increased distribution costs for the company’s second largest customer as the company reverts back to a direct selling relationship, and increased spending on digital and retail strategies, the loss from operations for the second quarter was $7.2 million compared to $1.1 million during the same quarter last year.
Net loss was $4.1 million, or 18 cents per share, during the quarter, compared to $0.5 million, or 2 cents per share, during the same quarter last year. For the six months ended June 30, 2011, the company’s $13.1 million net revenue decrease to $105.5 million primarily reflects a planned reduction in direct response television revenue of $13.0 million and the issues mention above relating to major retailers.
Driven by a strong operating cash flow of $5.9 million, a $4.1 million improvement over the same six months last year, the company’s cash position grew by $6.6 million during the second quarter and by $8.9 million during the first half of 2011, including an additional $2.2 million at Alteris. The company ended the second quarter with $37.7 million in cash and a working capital ratio of 2.5. Excluding the solar segment, the working capital ratio was 4.6.
On June 21st, the company’s majority owned, publicly-traded solar business subsidiary, Real Goods Solar, Inc., entered into a definitive merger agreement with Earth Friendly Energy Group Holdings, LLC d/b/a Alteris Renewables, Inc. (“Alteris”). Alteris sells, designs, installs, and supports renewable energy systems for solar and wind in the Northeast. By combining Real Goods Solar’s consumer brand with Alteris commercial engineering experience, financing solutions and east coast presence, Real Goods Solar is now well poised to capitalize on strong national solar installation growth opportunities on both coasts. The merger is subject to approval by Real Goods Solar’s shareholders and Gaiam intends to vote in favor of the merger. Upon formal shareholder approval of the Merger, Real Goods Solar will issue 8.7 million of its unregistered Class A common shares (subject to potential increase from an earn-out adjustment) to acquire all the equity in Alteris.
Real Goods Solar and Alteris have combined pro forma revenue for last twelve months of approximately $120 million and expect to report revenues of about $200 million during the twelve months following the merger.
For accounting purposes, Real Goods Solar started to consolidate Alteris as of June 22nd. Upon the issuance of the merger share consideration, Gaiam’s 10,000,000 shares of Real Goods Solar common stock will represent approximately 38 percent of the outstanding shares and 64 percent of the voting securities of Real Goods Solar. Because of its voting control, Gaiam continues to consolidate Real Goods Solar in its financial reporting. Gaiam intends to deconsolidate the subsidiary by converting its Real Goods Solar Class B common shares (which have ten votes per share) into Class A shares (which have one vote per share). Upon such conversion, which is expected to occur on or before December 31, 2011, Gaiam will account for its investment in Real Goods Solar under the equity method.
Recently, the company was selected by the Target Corporation to be one of only two exclusive distributors of independent media content for their entertainment department, which entails representing up to 14 studios. This marks a trend in retailing whereby mass merchants and national chains are exploring efficiencies by identifying companies with financial security, expertise and proven track records to help simplify their day to day business. The company will begin distribution of this content to Target on October 1st. This role is an expansion of the company’s successful existing relationship with Target as the sole manager of the retailer’s fitness/wellness category.
“We are proud to announce our expanding partnership with Target and look forward to working with many of the independent studios on a broader aggregation strategy in the transformation of the media market at retail, ” said Lynn Powers, CEO. “Our second quarter’s performance was hindered by infrequent charges such as merger transaction costs and other events that we have been able to since remedy, including the low in-stock levels at our largest retail customer and reverting our second largest retail customer back to a more profitable direct relationship with us. Our focus remains on revenue growth during the latter half of the year through several initiatives, including the Target consolidation. We are continuing to invest in and develop our digital infrastructure, build digital sales channels and partnerships, and we are poised to benefit from the redesign of our direct response television business to capitalize on synergies with our brand and retailer customer model. Among other long-term strategies, in the fall we will offer a new apparel product line in our direct to consumer businesses.”
