Investor Conferences Give First Peak into second Quarter Progress…

As fears of recession and mounting raw material, transportation and labor costs continue to capture headlines across the business landscape, investors and analysts looking for a leg up got some first-hand insight into the current business environment at retail as attendees at Piper Jaffray’s 28th Annual Consumer Conference in New York City early last week which featured speakers from a number of vendors and retailers serving the active sports lifestyle market. 


Quiksilver, Inc. used its podium time to discuss the dynamics at play between its three core brands of Quiksilver, Roxy and DC as well as to talk a bit about the owned-retail business it has been in for the past 15 years. Things are pretty much moving along as usual for the Quiksilver brand, though the company’s extension into women’s is just now hitting shelves. 

 

Management also expects gains from Quiksilver footwear. At Roxy, footwear has grown to become a $90 million business, accounting for approximately 12% of the brands overall sales. That number would peg overall Roxy sales at roughly $750 million.

 

Management also noted that denim and accessories have become staples in the Roxy line, while they were very pleased with the performance of newer categories like cosmetics and after-performance wear.  DC, meanwhile, continues to be the company’s fastest-growing core apparel and footwear brand, with sales tripling to approximately $300 million from the $100 million level when it was acquired in 2004. 

 

DC remains the smallest and least penetrated brand for ZQK. DC store growth continues to expand rapidly in the specialty footwear, specialty fashion, urban street, and department-store channels. It also has growing presence in Europe and other international regions, which now represent more than 30% of worldwide sales.


On the owned-retail front, the company now has over 400 stores in operation accounting for approximately 20% of total apparel and footwear sales for fiscal 2007, or roughly $410 million.


Looking ahead, management felt that gross margins could expand in the 150 basis points to 200 basis points range for the back half, but that SG&A expenses will also grow at a comparable rate. For fiscal 2009, sales are expected to grow slowly, if at all.

 

Volcom concentrated on the international business and its recent acquisition of Electric Eyewear during its presentation. Management reported that first-quarter revenue in Europe was $25.2 million, comparing against roughly $17.5 million in sales for the company’s distributor in the region last year. Management also reported that the region enjoys a high gross margin rate with first-quarter GM pegged at 58.3% of sales. Operating income was $9 million for Q1.


Looking ahead, the company hinted at similar deals to the one in Europe, where Volcom took over distribution, occurring in Japan and Australia next.


For the Electric Eyewear business, management expects the newly acquired company to be EPS accretive in 2008. Electric has been in operation for eight years and reported 2007 revenues of $23.5 million. The main growth driver that Volcom sees for Electric is in softgoods.

 

VLCM management stressed a need to teach the apparel manufacturing calendar to the Electric team as sunglasses tend to be more of a fill-in and less of a quarterly plan business. Volcom expects Electric softgoods to be a “good potential growth area probably beginning with the spring '09 season.”


For the first quarter, Electric had revenues of $6.2 million in revenue with margins at the same rate as Europe, 58.3%. Electric saw operating income of $400,000, including non-cash acquisition related charge of $600,000.


The company talked about its owned-retail strategy, noting that they currently have eight domestic doors open. Most recently, the company opened a new store in SoHo in New York City, with plans to open two more doors this year. Internationally, the company operates a store in Hossegor, France as well as six other stores through work with its licensees and distributors.

 

Zumiez plans to open 57 stores in 2008 in 23 states, including three new states. The company reported that it is in a way, benefiting from the tough times at the mall as for the first time in more than a decade, they’ve actually seen landlords go backwards on rent they were getting previously. Overall, management feels the chain can grow to 800 stores with a five to seven-year growth window in front of them.


For the last fiscal year, sales outpaced footprint growth, growing 29% as square footage grew 24%. The company has seen its operating margin grow to 10.2% of sales from 8% of sales in 2001, with expectations that a low-teens margin is possible as the company’s square footage grows.  Average store volume is about $1.425 million with operating contribution in “the high-teen range.”  Generally, new stores will do somewhere between 60% to 70% of mature store volumes and then they ramp up to mature stores over a period of three years.


Footwear is expected to lead category growth for the near future as the business had grown at a slower rate than others, leading to easier comps. Management also expects to benefit from PacSun’s departure from the business.


Inventory was said to be down about 7% on a per square foot basis at quarter-end.


Pacific Sunwear reported that it will be re-entering the footwear it exited in April – sort of.  The retailer has continued carrying flip-flops and sandals, which management said is a highly profitable business, but will add back in about a dozen young men's sneaker styles to 200 of its top performing stores in August.  The program was described as “very edited, very targeted to a specific go-forward customer” and will include Nike 6.0, DC and Vans.  Just when Zumiez and Journeys starting seeing some upside…

 

The junior apparel business grew by 20% on a same-store basis, or approximately $76 million to account for roughly 46% of overall net sales. Private label product accounted for 42% of juniors apparel sales.

In young men’s apparel, private label accounted for approximately 25% of sales. The overall apparel business grew by 14% to account for 71% of overall sales.


By the end of this past year, PSUN had 138 stores open in some form of its new refresh program, representing 17% of the total chain. The company expects for just under 20% of stores to have the refresh by the end of this year.

The company’s PacSun.com business grew by 48% in the previous fiscal year to $30 million.


For 2008, apparel is anticipated to drive at least 80% of total sales with an even split between young men’s and juniors. Proprietary brands in juniors will be from 50% to 60%, perhaps up to 70% of sales, with young men’s at approximately 30%.


At Warnaco Group, excitement over the record-breaking Fast Skin Laser Racer swimsuit from Speedo resulted in last Monday being the biggest e-commerce day on in the brand's history.


“We will certainly dominate in the competitive arena over the next 90 days,” said Joe Gromek, Warnaco Group president and CEO. The Olympic Trials will be held in Nebraska beginning on the 29th of June, and the Fast Skin Laser Racer has broken 38 of 40 world records in six to seven week period of time, he noted.  Speedo recently mailed out 330,000 copies of the mailer featuring Olympic-logo product to capitalize on the Olympic fever.


Speedo claims a 65% market share in competitive swimsuits,  but a third of Speedo's business is in accessories, including a $40-million goggle business. Speedo has 13,000 points of distribution in the U.S. and the Caribbean, as well as a team dealer network of about 150 serving swim clubs, swim teams and schools in the U.S.


Still, Gromek said the Speedo team continues to focus on margin improvement.  “About six months ago, we exited owned manufacturing so we no longer have an own physical manufacturing. We have an outsourced model and this certainly should improve our margins over time,” said Gromek.

 

Iconix Brand Group said OP's launch about two months ago in 1,000 Wal-Mart stores is off to a strong start. Neil Cole, chairman, president and CEO, said Iconix acquired OP,  which had been doing between $25 to $30 million in better stores, for about $50 million  He expects that in '09, OP will do close to $1 billion in retail revenues through Wal-Mart to reach over $20 million to $25 million in licensing revenues. 

 

Internationally, OP is being launched in all doors in Wal-Mart Canada in June, and a launch date is being set for Mexico. It's also bringing OP to China and India through Wal-Mart.


Sales for Starter and Danskin are expected to more than double with Wal-Mart in 2009.  For Starter,  Iconix is also working on bringing on some “major celebrities” and competing for the “best athletes” in the world.


Cole said Wal-Mart's new apparel team “really believes in brands, and they're going to be getting rid of some of what I consider quasi-brands and converting them all to major national brands. So we have been working very closely with them. I personally have been in Bentonville eight times over the last ten weeks.”


Apparently, Iconix is just getting started in this channel.  “We do believe that our present business here on down the road will more than double or triple over the next two and three years,” added Cole.
>>> These deals are raising eyebrows.  Other competing vendors that spoke with SEW expect that sooner rather than later OP will be the #1 brand of action sports apparel sold at retail.

 

Perry Ellis International expects its swim platform to grow by 8% to 10% this year. Swim grew 15% in Q1, primarily driven by Nike's business both on the men's as well as women's suit separates.  Oscar Feldenkreis, president and COO, said Nike swim should surpass about $50 million in revenues for this fiscal year.  Nike is shipping pre-Olympic products to the stores now.  Nike Swim is also adding cover-ups to the ladies' swim business, which could amount to an additional 20% of growth for the division. 

 
In the action sports and boys' business, the Gotcha launch in 100 Kohl's stores has been “very successful,” and Perry Ellis will be expanding to an additional 300 doors for Spring 2009. Redsand continues to be one of the top sellers at regional department stores such as Belk's, and has increased penetration in Macy's West's. Original Penguin boys will start shipping this month at major specialty retailers and luxury stores such as Barney's, Bloomingdale's, Fred Segal and Nordstrom's.


The golf business, which is driven by performance knitwear, continues to exceed internal plans. Golf grew in Q1 by 50%, driven by the PGA Tour and Grand Slam brands at JC Penney and Kohl's, which respectively had 8% to 12% sell-through on a weekly basis in Q1. 

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Investor Conferences Give First Peak into Second Quarter Progress…

As fears of recession and mounting raw material, transportation and labor costs continue to capture headlines across the business landscape, investors and analysts looking for a leg up got some first-hand insight into the current business environment at retail as attendees at Piper Jaffray’s 28th Annual Consumer Conference in New York City early last week featured speakers from a number of vendors and retailers serving the active sports lifestyle market.

 

Cabela’s Inc. President and CEO Dennis Highby highlighted the company’s multi-channel retailing strategy. The company has been growing its multi-channel customers – or the number who shop at a store, online or via the mail – at a 63% compounded annual growth rate (CAGR). CAB estimates its direct business, which mails 140 million catalogues a year, is fives times greater than the next largest competitor. Online sales are growing at a 29% CAGR.  He said “every square inch of the catalog is measured for profitability.” 

 

While acknowledging that rising gas prices were hurting consumers, the company has so far managed to mitigate the impact on its distribution costs by renegotiating with its freight carriers. Regarding rising postal and paper costs, Cabela’s is redesigning its catalogues “to make them more efficient” and is looking at leveraging the Internet.

 

Highby said he was confident the retailer would continue to harvest economic incentives to build stores even as it moves to smaller markets with a 90,000 sf version of its floorplan.  New Cabela’s stores, which average $332/sf, usually become profitable in their first year, he said.

 

Quiksilver, Inc. used its podium time to discuss the dynamics at play between its three core brands of Quiksilver, Roxy and DC as well as to talk a bit about the owned-retail business it has been in for the past 15 years. Things are pretty much moving along as usual for the Quiksilver brand, though the company’s extension into women’s is just now hitting shelves.  Management also expects gains from Quiksilver footwear.

 
At Roxy, footwear has grown to become a $90 million business, accounting for approximately 12% of the brands overall sales. That number would peg overall Roxy sales at roughly $750 million.  DC, meanwhile, continues to be the company’s fastest growing core apparel and footwear brand, with sales tripling to approximately $300 million from the $100 million level they were at when it was acquired in 2004. 
On the owned-retail front, the company now has over 400 stores in operation accounting for approximately 20% of total apparel and footwear sales for fiscal 2007, or roughly $410 million.


Looking ahead, management felt that gross margins could expand in the 150 basis points to 200 basis points range for the back half, but that SG&A expenses will also grow at a comparable rate. For fiscal 2009, sales are expected to grow slowly, if at all.

 

At Columbia Sportswear, COO Brian Timm focused on the company’s efforts to restore top-line growth to double-digits after having to scale back its guidance on sales growth to 2% following a disappointing first quarter. He said Mountain Hardwear was on track to become a $100 million brand this year, which was the goal when COLM acquired it for $35 million in 2003.


COLM is pursuing licensing opportunities for Pacific Trail, a lower-end brand it bought out of bankruptcy from London Fog that has under-performed in value channels. Timm said it had presented COLM management with its biggest challenge.

 
COLM’s strategy to reach consumers more directly through advertising and new outlet and “first-line” stores will continue pressuring margins in the short term, Timm said. Despite some apprehension about opening outlet stores in the South, stores in Cabazon, CA (east of Los Angeles) and Orlando are producing some of the company’s best results. Timm attributed that to foreign tourists flocking to the United States to take advantage of the devalued dollar.

 
Volcom concentrated on the international business and its recent acquisition of Electric Eyewear during its presentation. Management reported that first quarter revenue in Europe was $25.2 million, comparing against roughly $17.5 million in sales for the company’s distributor in the region last year. Management also reported that the region enjoys a high gross margin rate with first quarter GM pegged at 58.3% of sales. Operating income was $9 million for the quarter. Looking ahead, the company hinted at similar deals to the one in Europe, where Volcom took over distribution, occurring in Japan and Australia next.


For the Electric Eyewear business, management expects the newly acquired company to be EPS accretive in 2008. Electric has been in operation for eight years and reported 2007 revenues of $23.5 million. For the first quarter, Electric had revenues of $6.2 million with margins at the same rate as Europe, 58.3%. Electric saw operating income of $400,000, including a $600,000 non-cash acquisition related charge.
The company talked about its owned-retail strategy, noting that they currently have 8 domestic doors open. Most recently, the company opened a new store in SoHo in New York City, with plans to open two more doors this year. Internationally, the company operates a store in Hossegor, France. 

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