Galyan's financial picture not pretty: CEO remains optimistic

Galyan's Sports & Outdoor (Nasdaq: GLYN), a 44-store chain in 20 states, reported during a morning conference call on March 18 that the company's profits plunged 40 percent in the fourth quarter. Net income was $9.99 million in Q4 of 2002, compared to $16.7 million in Q4 of 2003.
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Galyan's Sports & Outdoor (Nasdaq: GLYN), a 44-store chain in 20 states, reported during a morning conference call on March 18 that the company's profits plunged 40 percent in the fourth quarter. Net income was $9.99 million in Q4 of 2002, compared to $16.7 million in Q4 of 2003.

While Q4 net sales for Galyan's rose from $212.2 million in 2002 to $249.8 million in 2003, same-store sales (meaning stores that have been open for at least a year) declined 4.5 percent. Net sales for the year rose 15.6 percent to $690.7 million, from $597.7 million, while same store sales dropped 5.8 percent, but the company's gross margin slid from 30.4 percent in 2002 to 27.6 percent in 2003.

Worse, company CEO Edward Holman reported that the company was only managing a turn rate of 2.9 percent and that even though sales were higher, gross margins for the year dipped from 30.5 percent to 27.6 percent. Almost as bad is the fact that Galyan's managed to garner a per customer sales number of only $59.48 for the year.

The company blamed both markdowns to jettison aged inventory and weak store sales in the outdoor equipment, casual apparel and accessories categories as reasons for the less than stellar performance numbers.

Holman, a former Bloomingdale's executive who assumed the CEO title less than a month ago following the sudden resignation of Bob Mang, remained upbeat during the conference call, while allowing that Galyan's had been growing too quickly.

During the course of the conference call, Holman outlined a number of key items on his company to-do list for this year:

>> SKU optimization. That will cut 10 percent from current inventory levels and reduce shelf space for products in poor performing categories such as outdoor. Galyan's buyers will work more closely with vendors to improve efficiency of the supply chain to ensure the company has an in-stock position on key items of inventory at all times.

>> Personnel redeployment. Already, managerial positions have been eliminated in stores and at headquarters to put a greater focus on having more selling staff on the floor. Holman was not specific about how many managers were "redeployed" from salaried to hourly positions.

>> Marketing increases. More marketing and promotion for area stores would have a goal to improve brand awareness and to help move the promotion calendar beyond being simply an announcement for clearance events as it has been in the past.

>> More controlled growth. While Holman said the company would continue with the already agreed-to expansion of nine new stores this year (two have already opened), the company will significantly scale back growth in 2005 to focus on backfilling markets in which the company is well-established.

>> Store size. The concept of smaller stores is to be explored and launched, including three stores this year at only 65,000 square feet, compared to the gargantuan average store size ranging from 80,000 to 100,000 square feet.

Still, many outdoor industry vendors see nothing but red warning flags flying despite Holman's assurances. Dozens of emails and calls to the SNEWS® headquarters over the last month, all from significant vendors still supplying Galyan's, imply that the retailer has been less than cooperative to deal with.

The calls and emails detail numerous allegations including: Regularly losing invoices and requesting new ones be sent sufficiently often to suggest a pattern of delaying payments, excessive charge-backs for lost packing slips (as much as $200 for each occurrence), credits taken without reasons given or documentation as support, discounts taken that are not offered or claiming a vendor's pricing on an invoice is incorrect when it is not. One vendor even told us that its CFO was notified late last year that Galyan's was placing payables on hold for a month while the company reorganized the AP software.

Calls placed to both Holman and to Galyan's CFO Ed Wozniak seeking comment went unreturned by deadline.

Surprisingly, despite poor performance numbers contained in the financial report, investors apparently saw sufficient potential in the stock as Galyan's shares closed at $9.97 on Thursday, up 15 percent -- still well below the reported 52-week high.

SNEWS® View: As troubling as the Galyan's financial picture appears to be, this industry needs Galyan's to survive. We just hope the company can do it without burning vendors in the process of reorganizing. The worst thing that could happen would be for Galyan's to suddenly disappear from the landscape -- a very unlikely scenario in our view. If that did occur, manufacturers would be left holding tons of inventory with no one to take it, which would lead to market oversaturation, dumping and discounting, and everyone would suffer in the short term.

But enough of the speculation. Here are the facts. Galyan's is managing only a 2.9 inventory turn rate, while their competitors enjoy a more efficient and profitable turn rate of 4. Galyan's has to up the turn rate or it will continue to slide into a sludge of its own creating.

Same store sales numbers in 2003 were abysmal! Consider that during essentially the same time frame, Dick's reported same store sales increases of 4.6 percent and Sport Chalet enjoyed same store sales increases of 2.9 percent. Financial analysts tell us that it is very, very unusual for a company to consistently report same store sales declines while opening so many new stores -- nine last year, and nine slated for this year.

Galyan's continues to play the private label game with a number of products, including casual apparel, but the trouble is, the company is not yet big enough to support or leverage that kind of play. Ex CEO Mang admitted as much back in 2003 stating that while private label represented nearly 15 percent in sales for the apparel segment, it would be very, very difficult to realize the margins required to be considered successful until Galyan's eclipsed a billion dollars in sales.

Then there is Galyan's continued shift from being a specialty chain filled with specialty stores each staffed with experts to what the company had long decried as something undesirable -- being simply a chain sporting goods retailer that has no really significant point of differentiation from any other large sporting goods retailer. Outdoor goods now make up less than 50 percent of the product mix, and that is likely to continue spiraling downward.

Denny Feldman's departure in October of last year (he was Galyan's senior vice president and GMM for Outdoor) to Dick's underscored the fundamental shift going on inside of Galyan's. His position was not replaced, and the company continues to more heavily weight itself with a bats, balls and athletic/lifestyle apparel look than outdoor. A quote by Holman in the March 3 Indianapolis Star Tribune further cements Galyan's market direction: "I left (Bloomingdale's) only because I think Galyan's has a niche in the sporting goods business that nobody can touch." Naturally, we would imagine that both Bass Pro Shop, which recently announced plans to open a 280,000-square-foot store just across the river from Galyan's Louisville, Ky., store, and Dick's, which is opening a number of stores in Galyan's home of Indianapolis, would disagree.

Dick's, likely Galyan's most significant competitor, continues to march inexorably onward, like Hannibal's armies into Italy. No doubt Holman hopes that Galyan's can withstand the onslaught, just as Rome eventually turned back Hannibal long ago. But to do that, Galyan's needs to find an identity its customers can relate to -- and it will take a lot more than simply changing its name from Galyan's Trading Company to Galyan's Sport & Outdoor as it recently did. One online contributor to a chat room summed up Galyan's challenge most appropriately: "The point is Galyan's used to be a unique store and now it reminds me more of Banana Republic with a climbing wall. Personally, I don't mind paying a premium for high-end merchandise and great service. So, now I go to REI."

Can Holman turn Galyan's around? We suspect yes, but he has his work really cut out for him. While he's at it, we suggest ensuring the relationship with all vendors is shored up because without products on the shelves, ya ain't selling much at all.

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