RETAILING REPORTER
Two years ago, Sam Baio faced a big crisis. He had to lower prices at his West 49 Inc. extreme-sports fashion business to get customers back into his stores, particularly those close to the U.S. border. The loonie was approaching parity with the greenback, and Canadian consumers were flocking across the border to snap up identical merchandise at lower prices.
Mr. Baio pressed suppliers to lower their rates. His prices began to fall, and now are up to 20 per cent less than in 2007. But he's not out of the woods yet. His bottom line has suffered, and stores sometimes run out of the bright-blue board shorts and yellow T-shirts coveted by teenage customers.
Today, his big test is the crucial back-to-school season. Unlike many retailers, who rely heavily on holiday sales, West 49 rings up almost as much business during the back-to-school period as at Christmas. His single biggest week of business of the year is the one before Labour Day. But already the season's $1-billion in Canadian apparel sales are forecast to drop 3.1 per cent in the downturn. And once again the loonie is on the rise.
This time, however, West 49's chief executive officer isn't waiting for a crisis to swing into action. He is counting on his suppliers - including high-profile, teen-magnet brands such as Quicksilver and Billabong - to continue helping him keep prices down. Such vendors benefit from aiding West 49 because it commands a leading share of the extreme-sports retailing sector, he says.
It's a lesson for all retailers in tough times: Working hand in hand with suppliers can build both their businesses.
"By working with vendors well ahead, they can help us get through this stuff," says the 56-year-old CEO, sporting the teen garb of khaki shorts, baseball cap and flip-flops at head office in Burlington, Ont.
"I think we have woken them up to currency issues in Canada. They're helping us with currency now, not just ignoring it ... Our vendors have learned that by partnering with us they can do more business. We've learned that by partnering with them, we can control our business much better."
Mr. Baio is also finding ways to keep West 49 shelves stocked with fresh inventory. He's purchasing products at cut rates from distressed retailers. He's getting foreign-made items into stores faster - and selling them faster - by tapping into his underused B.C. warehouse. And he's updating systems to keep better track of demand.
The changes are beginning to pay off. In West 49's most recent quarter, same-store sales rose 2.9 per cent from a year earlier. Gross margins jumped to 18.1 per cent of sales from 12.3 per cent. Business at border and non-border stores was essentially the same.
"[West 49's] No. 1 challenge is maintaining the success they have had with teenagers in the face of new competition, and making sure they can keep the style and offering affordable no matter what the economic conditions," says Mike D'Abramo, director of research at Youthology, a marketing and research firm.
Keeping product flowing, prices down and suppliers on side are paramount to West 49. "They have asked us for lower prices, as everybody has asked for lower prices," says Boyd van der Veen, a manager at Centre Skateboard Distribution Ltd., which supplies West 49 with such lines as Plan B and Fallen. "They feel the cross-border shopping affected their sales. To combat that we all had to sharpen our pencils."
Centre Skateboard shaved its wholesale prices by up to 10 per cent and saw its own margins shrink by about the same amount, he says. The supplier hasn't lost sales, but hasn't seen its usual gains either.
Mr. Baio founded West 49 in 1995 with just three stores in Ontario, and took it public almost a decade later. With more than 130 outlets today under seven banners, the retailer was buoyed by the growing popularity of extreme sports among suburban teenagers, and had virtually no competition in the malls. But by late 2005, West 49 had run into difficulties. It bought new chains to expand its territory, but became bogged down by antiquated supply systems and inefficient buying processes.
Mr. Baio came to realize his challenge: West 49 stocked up on inventory early in the season, only to discover that some merchandise sold out quickly while other products sat on the shelf and had to be cleared at a discount, pinching margins. But changing the purchasing was difficult because buying decisions were often made nine months in advance.
At the beginning of 2008, West 49 took an important step to become more nimble. It hired as a vice-president Peter Kershaw, whose expertise was hunting down good deals on pricey brands from other companies' excess merchandise. In the past year, he has picked up plenty of discounted stock from faltering businesses. Today he's buying about 20 per cent fewer products at the beginning of a season, and updating the stores regularly with new items to keep customers coming back. "There's a lot of opportunity with branded vendors now and we're capitalizing on that."
On the cost side, Mr. Baio is going beyond trimming head-office staff and closing weak stores. He's sheared transportation costs - and up to two weeks off deliveries - by having goods coming in to Vancouver from the Orient and the U.S. West Coast shipped to West 49's warehouse in Burnaby, B.C., and then to stores, rather than his distribution centre in Ontario.
"We're in a much better position to work through a recession," Mr. Baio says. "A vendor and a supplier have to work together and hold hands through times like these."
******
WHAT INVESTORS SHOULD KNOW
COMPANY PERFORMANCE
West 49 has a lot at stake in this back-to-school season. The quarter that includes the back-to-school period makes up 29 per cent of the company's annual sales; that's just a little less than the 31 per cent of the sales that it rings up in its fourth quarter, which includes the holiday season. Many other retailers rely much more heavily on Christmas sales for the bulk of their business.
STOCK PERFORMANCE
West 49's lightly traded shares are at just over half of their 52-week high, reached almost a year ago. "We expect West 49 will remain a 'show me' story for the foreseeable future," writes analyst Neil Linsdell at Versant partners. He raised his recommendation on the stock to "neutral" from a "sell" in June."
Aug. 18 close 33.5 cents
APPAREL SECTOR
Apparel sales make up about half of the annual $2-billion in sales of back-to-school products, but the business is expected to be challenged this season. Trendex North America has forecast that back-to-school apparel sales will drop 3.1 per cent. Fashion retailers sell discretionary products and penny-pinching consumers are still focused on buying just necessities.
CANADIAN CLOTHING AND ACCESSORIES RETAIL SALES: May, 2009 $1.928-billion
Marina Strauss
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
