A number of industry companies provided a peak at their European strategies last week while at the Piper Jaffray Conference in London just as third quarter earnings season kicks off in earnest. Participating companies included some of the hottest brands in the U.S., but most are also looking at Europe for much of their growth over the next few years.
One company that participated in the conference, but has not revealed any expansion plans for the U.K. or the Continent is Genesco, which focused on their expansion plans in the domestic market and hinted at additional acquisitions. GCO said they are in the second year of a five year plan to reach $2 billion in sales, while achieving operating margins in the 9% to 10% range from its current 7% level, and earnings growth of 15% to 20% annually.
GCO sees 2,400 total stores by 2010. Journeys will see 60 new stores this year and Journeys Kidz will add another 25 doors this year. Hat World is still projected to reach 900 doors in North America. Management announced that they had opened a Kids Lids store in Indianapolis, Ind., with plans to open three more this year. In total, the company plans to open 100 doors at the headwear specialty retail chain this year.
Currently, Hat World is generating $640 per square foot, easily outpacing the balance of the companys retail portfolio. Journeys is generating $465/sf, while Journeys Kidz delivers $457 per square foot. The Underground Station chain cannot quite live up to those rates, but does sell through at a rate of $416 per square foot. Talking about market opportunities, President and CEO Hal Pennington commented, “We are very open to and are aggressively considering acquisitions.”
Quiksilver sees itself in the third stage of its development, with the additions of Rossignol, Cleveland Golf, Lange, and Look, their continued geographic expansion, and adding alpine equipment to their outdoor portfolio. The company sees their market share at about 18% in what they call the Water segment, represented by Quiksilver and Roxy, and a 5% share in the Skate/Street market where DC Shoes plays. ZQK management sees their Golf share at about 1%, represented by Cleveland and Fidra, and their Snow Sports share at about 5% of the market.
Looking ahead, the company expects the Quiksilver business to produce about $750 million in revenues for the current fiscal year and growing 6% to 10% annually to achieve $900 million to $1 billion in sales in the next two to four years. The Roxy business is forecast to be about $640 million in fiscal 2006, then growing 8% to 12% over the next two to four years to a range of $800 million to $900 million. DC Shoes is expected to come in at roughly $230 million in fiscal 2006, reflecting a 35% increase in revenues for the year. DC is expected to grow 15% to 20% over the next two to four years for a range of $350 million to $450 million in sales. Rossignol, including the Dynastar, Lange, and Look brands, should come in at about $470 million for the current fiscal year and is expected to grow 5% to 10% over the next two to four years to a range of $550 million to $650 million in revenues. Cleveland Golf is seen as a $160 million business in fiscal 2006 and is expected to grow 5% to 10% over the next three to four years to reach $190 million to $220 million.
ZQK has been able to find expense savings and eliminate redundancies in the Rossignol deal, especially on the distribution side of the business. They now have three DCs compared to the 17 in place when the company acquired the business. Management said the restructuring of Rossignol was ahead of schedule, including the closure of a ski production facility in France to focus on wood core production in Spain and injection molding technology at another factory in France. To help out with the union issues in France, Quik will consolidate European distribution there, adding about 125 lower-paying jobs that will partially offset the loss of 285 higher-paying factory jobs.
The shifts in the industrial side of the business are expected to deliver about $20 million in savings a year. Total operating costs are expected to be reduced by about $45 million a year when including $5 million in savings in marketing expenditures. This should help Rossignol increase its operating margin to a range of 13% to 14% from its projected 6% for this fiscal year. Growth in apparel is expected to help achieve these margins. Rossignol apparel is seen at about $50 million this year, and growing to $100 million by its third season and $150 million in its fifth season in 2010.
The Rossignol apparel business is expected to deliver results at roughly the same level as Quiksilver Europe, or a GM of about 50% and operating margins in the 15% neighborhood.
Overall, the company has 42% of its business in specialty stores, another 40% in owned-retail, and 8% in department stores. No single customer represents more than 4% of sales. Quiksilver had 457 stores in operation at the end of July, including 253 company-owned stores and another 204 licensed shops. The company expects to expand retail
square footage by 10% a year going forward.
Crocs, Inc. kicked off its first Europe conference by making perhaps the biggest understatement of the year when President and CEO Ron Snyder said they had a “fairly impressive story” to tell. He then went on to say that analysts expect them to rack up $90 million in revenues in the current quarter, which is just a tad more than the million bucks they did in total revenues in 2003. Snyder sees opportunity in the broad demographics of the consumer they serve as well as the brands comfort positioning which sees it taking share from a broad spectrum of footwear, from flip-flops to work/duty shoes.
The companys growth takes them into more than 14,000 retail doors in 60 countries today, with about 9,000 doors in the U.S. alone. The brand is now directly distributed in Europe, Japan, Hong Kong, Taiwan, Singapore, Australia, and New Zealand, with dedicated distributors in smaller countries or regions.
As an indicator of how much potential they see internationally, Snyder indicated that their two initial styles, the Beach and the Cayman, represent about 85% to 90% of international sales, but now only represent about 50% of their more mature U.S. business. The two styles deliver about a third of Internet sales, which makes up 4% of total sales, with the balance from all other styles.
International was expected to represent 12% to 15% of the business this year, but was roughly a third of total sales in Q2 and is trending above that for third quarter. Canada and Israel are about 60% of the International number, with $28 million coming out of Canada in Q2.
CROX also believes it has plenty of room to grow in the U.S. as well, exemplified by their penetration today of just a third of Hibbett doors, a metric that will go to all doors going forward, as well as heavier penetration of the brand on the coasts. New licensing deals with Disney and 80 NCAA schools should also fuel growth. Sporting goods, footwear stores, and department stores represent about 70% of total sales today.
Crocs are now manufactured in seven plants around the world, with two-thirds of the production coming out of Asia. They have capacity for about three million pairs a month and are yielding about 90% of that number today. They see 3.5 million pairs by year-end and four million by spring.
First half gross margins were pegged at 54% of sales, but the company is guiding to 56% for the third quarter. Operating margins are running at 26% of sales and CROX sees this in the 26% to 28% range going forward.
Under Armour is now boasting about 9,000 doors worldwide, with 7,000 of those stores in the U.S. That leaves a lot of opportunity for growth in the international market as the performance apparel concept gains momentum worldwide. UARM is employing many of the same tactics in Europe that made the brand so successful in the U.S.
In the U.S., the company sees their market share in cleated product at about 22% for this year and is getting a lot of attention because they helped increase average selling prices by 15% to 20% at retail.
In Europe, the company is focusing primarily on the U.K., the Benelux region, and Germany. Key retail partners include the Intersport and Sport 2000 buying groups and JJB Sports in the U.K., where a 20 store test last year has evolved into a 150 store program with fixturing and shop-in-shops. UARM will start to ship to all 35 Karstadt Sport stores in Germany in January and will have a presence in the 65 sporting goods shops in the Karstadt department stores. UARM will surpass the 500 door goal they set for Europe this year.
On the manufacturing front, Under Armour makes 35% of its product in Asia and about 62% in Mexico and Central and South America, with the balance in the U.S.
Deckers wanted to impress upon the international market that the Teva brand is no longer just a sandal line anymore. More than 70% of Spring 07 styles are new products as the brand strives to position itself as a footwear brand. Roughly 30% of sales are Teva, with about two-thirds coming from UGG and the balance from the Simple brand. Deckers over-invested in Teva this year, allocating roughly half of the $4.5 million increase in marketing spend this year to the Teva business.
Growth for the UGG brand is expected to come from increased domestic penetration outside of California, expansion of the international business, diversifying the product line, and selectively pursuing additional licensing opportunities. Europe is an obvious target for the brand since half of all distribution was coming out of Benelux, while Germany and France remained under-represented. Japan is only a small business right now and UGG is basically non-existent in China.
For this year, Deckers expects full year EPS in the $2.39 to $2.45 per share range on overall revenues in the $272 million to $278 million range. Teva is trending flat to slightly down, UGG sales increasing, and Simple posting double-digit growth. Gross margins have historically come in at around 42% of sales, but GM is running at about 44% year-to-date. This range, along with operating expenses in the mid-20s, is expected to keep operating margins in the 17% to 18% range going forward.
Deckers sees hitting about $600 million in sales over the next four to six years, which will require UGG and Teva to double current revenues and growing Simple to $75 million. International is expected to reach 30% of total business over the period.
>>> Striking while the iron is hot; brands with momentum in the U.S. no longer have to compromise their U.S. distribution strategies, instead focusing on taking the blueprint oversees
