black diamond (bde) - valuex vail 2014
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Black Diamond EquipmentBDE
Van Wombwell, CFA
19 June 2014
WESTERN TANAGERASSET MANAGEMENT, LLC
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Disclaimer: this presents an opinion, not advice.
This presentation reflects the opinions and projections of Western Tanager Asset
Management, LLC (WTAM) as of the date of the publication and is subject tochange without notice at any time subsequent to the date of issue.
WTAM does not represent that any opinion or projection will be realized.
While the information presented is believed to be reliable, no representation or
warranty is made concerning the accuracy of any data presented.
All information provided in this presentation is for informational purposes onlyand should not be deemed as investment advice or a recommendation topurchase or sell any specific security.
WTAM has an economic interest in the price movement of the securities
discussed in this presentation, and WTAMs economic interest is subject tochange without notice.
This presentation may not be reproduced without prior written permission fromWTAM.
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This is what REAL trust in a brand looks like
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But, is it a value?
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Looking for growth, not portfolio rotation!
COMMON PROBLEM
In Mature Industries:
One segment grows, one declines Total = slow growth at best Profit trajectory is result of change in:
Tax rate Foreign exchange Structural changes
EXAMPLES
Launch Simply Orange to offsetdecline in Minute Maid.
Spirits: more brown, less white. Beer: one region up, one down Beer: less total beer, but more craft Non-alc: more still, less carbonated
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Why not look for a more compelling opportunity, a high probability pure play?
Growing business at a value/fair price.
'( )#*"
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Was there a financial crisis in here somewhere? All majorsuppliers and retailers have enjoyed continuous growth.
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Global Outdoor Retail market: ~ $25 billion, growing ~5%/yr
Revenue: $25 billion
growing about ~5%/yr, combination of volume & pricing is usually
positive, varies by category
Grew through the financial crisis
REI, largest retailer, 3yr CAGR = 7% REI revenue has doubled since 2005
Gross margins: average ~43%
Retail & Supplier margins are similarMajor Segments: Apparel, Accessories = 70%
Major Channels: Specialty & Chain = 80%
Internet is growing high single digits
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Three consumer megatrends are providing a steady tailwind.
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Health & Wellness Extreme Sports Social Media
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Growth = Innovation + Channel Shift + Geographic Expansion
STRATEGIES DRIVING THE INDUSTRY
1. Innovation/Technology:
Rapid change in fabrics, fit & features New sports = new categories being created
e.g. adventure racing, trail running, stand up paddle,
backcountry & side country skiing
2. Channel Shift: from Wholesale to Direct to Consumer
Owned/Branded stores eCommerce
3. Geographic Expansion
US companies expanding in Europe, Asia European brands coming to America
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Innovation in Features and Fit: from Integrated to Layering
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Innovation in Fabrics: leading outerwear fabric now comes inmany forms and price points: 2-Layer, 3-Layer, Pro, Lined, etc.
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Its all very Technical. Website info > retail clerk info.
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Innovation in Sports = new categories, gear, apparel
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Value Chain: Supplier revenue grows as channel mix shiftstoward Direct-to-Consumer (owned/branded stores, internet sales)
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More Revenue
Suppliers expect Direct-to-Consumer to increaseshare of Revenue by ~ 5% over next five years
Much more Gross Margin
Supplier gross profit per item sold can more thantriple when sold DTC vs via 3 rdParty distributor
Of course, there are additional costs Store Online sales & fulfillment
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Industry has attractive margins and low CapEx but can have highworking capital requirements; varies with business model.
Notes
REI: Nonprofit, presented as if for profit. CapEx two year avg. VFC: Rev, GM, OM for Outdoor & Action Sports; WC, Adv & Promo, CapEx total co. JAH: Rev, OM, CapEx for Outdoor Solutions; GM, WC, Avd & Promo for JAH. AMER: Rev, OM are for Winter & Outdoor; balance are total company. 16
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Retail: REI is the largest outdoor retail chain,can be ~ 10% of sales for any major supplier
Key Statistics
Founded: 1938Stores Today: 132
Employees: 11,000
Active Members: > 5 million
2013 Results
Sales, $million: $ 2,017
Percent of sales online: ~ 20%Gross margin 43 %
Operating margin 7.6 %
Revenue growth: 5 %
Same-store sales growth: 3 %
Gross PP&E: $ 956
Patronage Refunds: $ 98
New CEO and President: Jerry Stritzke
Retail Experience:
Coach: President and COO Victorias Secret Stores, Inc: COO
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Next Years catalog should be awesome.
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TNF continues to be a major growth engine for VF Corp.Note: In 2000, TNF looked a lot like BDE does today.
History of The North Face
1966: Founded, North Beach, SF, CA
Grateful Dead plays at first store opening1968: Technical mountaineering gear & apparel
1975: Innovative geodesic tent designs
1980s: Extreme Gear skiwear
1990s: Trekking and Trail Running shoes
2000: Acquired by VF Corp
$ 240 million in sales, losing money
2013: $ 2 billion in net sales
2013 Results
Sales, $million: $ 2,000
Operating margin 17 %
Revenue growth: 7 %
Direct-to-Consumer: ~ 23 %
Direct-to-Consumer growth: 13 %
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The North Face makes great products and has astrong financial plan
Growth Strategies
1. Invest in the Brand2. Grow Direct-to-Consumer3. Innovate: categories, products4. Geographic Expansion
Growth Targets, 2012 to 2017
Revenue CAGR = 12% Direct-to-Consumer = 27% (up from 22%)
Major Categories
Outdoor Action Sports Performance Athletic Youth
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But is the ubiquitous market leader losing some of its cool?Exhibit A: found spoof images on the internet.
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But is the ubiquitous market leader losing some of its cool?Exhibit B: crampons, or heels?
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Black Diamond Equipment
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History
Founded, as Chouinard Equipment 1957
Chouinard Equipment bankruptcy,
Metcalf leads acquisition of assets,
Renames Black Diamond &
moves to Salt Lake City, UT 1989
Black Diamond Europe established
Zurich, Switzerland 1996Black Diamond Asia established
Zhuhai, China 2006
Clarus Corp/Gregory reverse merger w/BD,
With over $200m NOL carryforwards 2010
BDE acquires POC and Pieps 2012
BDE launches Apparel initiative 2013BDE sells Gregory to Samsonite 2014
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BD is known, liked and respected in the industry
1. Enormous trust in the BD brand Consumers life depends on BD
products: climbing, skiing, etc
2. Highly-respected management, wellknown throughout the industry
Outdoor industry associations Land stewardship
3. Global operating platform Sufficient to double revenue with
minimal capital post-Gregory
4. Clean balance sheetRevenue: $ 203 m
Gross Margin: 38 %
Operating Margin: nil
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Management is experienced, sophisticated, highly invested
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Board BDE Ownership
Warren Kanders, Former Chairman, Armor Holdings 22.0 %
Executive Chairman
Robert Schiller, Former President, Armor Holdings 4.9 %
Executive Vice Chairman, Director
Peter Metcalf Black Diamond Founder 0.3 %
President, CEO, Director SLC Federal Reserve Director
Others: Michael Henning, Donald House, Nicholas Sokolow, Philip Duff 0.8 %
Management
CEO: Peter Metcalf, leader for ~ 30 years
CFO: Aaron Kuhne, promoted from within 0.1 %
Departmental Leads
Apparel Design: Hired from Patagonia, Arcteryx
Engineering, Merchandising: Hired from The North Face
Business Process: Hired from Arcteryx
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BDE Strategic Focus is now on the BD & POC brands, withmultiple very valuable initiatives underway
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BD Apparel is the biggest idea. Take the brand into the biggest,highest-margin category in the industry.
A few samples from the limited launch so far:
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POC will start with Road collection, then Mountain & Commuter
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Scenarios: what do you believe 2020 will look like?
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BDE is a very attractive firm in a very attractive industry
Risks & Catalysts Key Man Dilution Fashion Product liability
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Summary
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