From sluggish sales to an investigation into overstated performance, the boardwear division of Blacks Leisure has been causing many headaches for the leading British outdoor and boardwear retailer, which reported a tiny underlying profit for its full financial year ended on March 1.
The boardwear division carries all of the blame for the flat consolidated revenues reported by the group for the year. They landed at £294.4 million (€373.4m-$582.0m), down by 0.4 percent from the previous year, mixing a sales rise of 2.1 percent to £231.1 million (€293.1m-$456.8m) for outdoor stores with a sales decline of 11.8 percent to £66.6 million (€84.5m-$131.7m) for the boardwear division, which has been redefined to include Freespirit stores, not just the company’s wholesale and retail business with the O’Neill brand.
Boardwear sales suffered from the downpour last summer and low consumer confidence in the second half of the year. The division ended the year with a loss of £3.2 million (€4.1m-$6.3m) before exceptional charges, and without a managing director at Sandcity, the subsidiary dealing with O’Neill. Darren Spurling was suspended from the post and eventually dismissed due to reporting discrepancies spotted earlier this year. After an investigation, it transpired that the unit’s performance had been overstated and that working capital had to be adjusted by £2.4 million (€3.0m-$4.7m) worth of inventories and receivables.
On the other hand, the Blacks and Millets stores saw improved sales due to more adequate product ranges, especially for in-between seasons. Overall, the group’s outdoor division nearly tripled its operating profit excluding exceptional charges to £7.4 million (€9.4m-$14.6m), compared with £2.6 million for the previous financial year. Excluding the early weeks of heavy discounting, the gross margin of the division was roughly flat. The operating profit for the whole group, again before exceptional charges, increased from £1.6 million to £2.2 million (€2.8m-$4.3m).
Before tax and exceptional items, Blacks Leisure just about broke even with a profit of £0.3 million (€0.4m-$0.6m), but after a tax credit of £3.2 million and one-off charges of £9.6 million (€12.2m-$19.0m), the company ended up with a net loss of just over £6 million (€7.6m-$11.9m). Apart from the adjustments at Sandcity, additional exceptional charges of £5.4 million (€6.8m-$10.7m) were allocated for an increase in the company’s onerous lease provisions, and the remaining £1.8 million (€2.3m-$3.6m) for costs relating to organizational changes and layoffs. The price of Blacks shares declined sharply as the results were unveiled and the company halved its final dividend.
While acknowledging ongoing market pressure, the company’s new management, headed by Neil Gillis since last November, was particularly satisfied with improvements in stock and cost management. Inventory levels were reduced by £4.6 million (€5.8m-$9.1m) without any apparent effect on the availability of products in the stores. Due to tighter cost controls, the company reduced the weight of its store salaries and squeezed warehousing costs by about 15 percent. Blacks Leisure enjoyed a cash inflow of £5.8 million (€7.4m-$11.5m), compared with a cash outflow of £20.3 million the previous year.
However, the company stressed that more radical change was required. It already reduced the payroll by 59 employees at its Northampton head office last February, mostly in merchandising and human resources. A scheduling system was introduced in the stores to use staff more efficiently. Operational managers were recruited from companies like Marks & Spencer and Gap to improve window displays. They now feature both wet- and dry-weather clothes, and include more summer-oriented brands such as Roxy, Oakley and Animal.
For the next Fall season, the group has bought 15 percent fewer product lines from fewer suppliers. Trials carried out at several stores with the rationalized product offering have been positive. Very positive tests were carried out at two outdoor stores in London, on Kensington High Street and Holborn, introducing a more contemporary store format, with more emphasis on fashion products for everyday use. More tests will be carried out outside London in September before the new format is rolled out.
New rationalization moves have been set in motion in the past few weeks. As reported, the new management announced last March 1 that it will close about 45 loss-making stores, mostly within the Millets chain. It has announced the consolidation of its boardwear division, closing down the head office and warehouse of Sandcity in Washington, Tyne & Wear, to merge it with the central head office and warehouse of the group in Northampton. The retail part of the division consists of 44 Freespirit stores and 14 O’Neill stores.
So far in the new financial year the boardwear division has continued to struggle, while the outdoor business has been improving its operating profits. The group’s total sales were down by 5.2 percent for the 12 weeks to May 24, with a 4.1 percent drop in comparable store sales, but the sales results of the outdoor stores were described as satisfactory. The gross margin increased by 3.5 percentage points to 55.2 percent, but this is measured against a period of heavy discounting at the same time last year.
Analysts will be closely watching consumer response to the retailer’s new camping and summer ranges in the second quarter. The strength of the euro against the pound is playing strongly in favor of camping equipment sales, as many British consumers can no longer afford holidays in Europe and have decided to stay camping in Britain instead.
Separately, it was announced that Keith Fleming, finance director and deputy chief executive for nearly two years, is leaving Blacks. He will be replaced as finance director by Marc Lombardo, who is joining from Greene King Plc after other senior financial positions with Scottish & Newcastle and the Daily Mail. Fleming also served as an interim chief executive after the abrupt departure of Russell Hardy last year.
