risk-reward profile is favourable IMO, page-3

Mike Sonards track record (Globe 2003) can’t be ignored. He turned a 60m loss to a 7m net profit in a situation very similar to Surfstitch. Worth reading are both the Globe International 2003 and 2004 annual reports. A summary snippet below. Links here 2003 and 2004

Globe Annual Report 2004
“Over the last year, we have completed a major review of all our operations, significantly cut our cost base, continued investing in product development and marketing, and developed new brands that will help drive growth into the future.

The Group result before interest, tax and depreciation and amortization (EBITDA) was $19.8 million, a significant improvement on the previous year’s loss of $3.0 million. Net profit after tax was $7.1 million, an excellent recovery from last year’s loss of $59.7 million.”

Also worth a read is Sonard’s CEO Report (2003) on pages 9 and 10. I expect the Surfstitch CEO Report on August 30 to almost mirror the below

“outlook for the next twelve months is positive, though challenging. The great strength that Globe has is the absolute determination of the Globe team to rebuild the value of this business through the delivery of great product and exceptional service to our account base across all territories.”

In my opinion Surfstitch has been hit by a tsunami of bad news caused by woeful mismanagement and an impatience for growth beyond company maturity. The job cuts recently announced in the U.S are in customer service suggesting the company is looking to reduce operating costs. This mirrors Sonard's first 12 months at Globe.

Is it a bargain at 20c? That’s a tough question to answer before the Annual Report on August 30th but for some it will be worth the risk. Come the 30th the question might not be “is this a bargain at 20c” but rather “is this a bargain at 35c”. My personal view is that Surfstitch represents good long-term value and I’m interested to see where the company is 12 months from now. I’m happy to hold my investment in SRF until then. Surfstitch is a jigsaw puzzle, they have all the pieces but they just can't to put it together. Can the new CEO (Sonard) and Chairmen (Sam Weiss) change that?

Area’s that peak my interest:

Garage Entertainment (purchased 2015) has more* content online than Netflix Australia (3000 titles vs 2165). This week the annual price for access to Garage dropped 50% from $60 to $25 a year with a strategic push to promote the new price on the Surfstitch website and social media channels. Surfstitch may be looking to grow the customer base for Garage and establish it as the worlds largest online streaming site for extreme sport content. (* based on advertised figures)

E-commerce is still very much in it’s infancy and Surfstitch, as an online platform, has grown within scale while maintaining a solid revenue base.  Surfstitch developed their platform when customer expectations for online shopping were much lower and now they have the opportunity to capitalise on a robust e-commerce system and industry leading customer service. They have the ability to grow quickly and limit the opportunity for others to enter the market. A competitor now would need to provided an online shopping experience that matches, or exceeds, what Surfstitch has established.

Looking at Surfstitch as a product aggregator more than an online store. It’s a bit like Nike selling Nike shoes via their online shop, but if a customer wants Adidas shorts and Jag jeans then they need to sign up to three different stores and pay three times for shipping. One stop, online stores that have an aggregation of brands provide a significant advantage over single brand stores for the reasons of  product variety, shopping convenience and store branding.

While Surfstitch has formed strategic relationships with high profile brands such as Nike and Hurley (among 600 others) they have just this week launched their own clothing label “Swell” in Australia. The price point is about 15% less then comparable products from 3rd party brands so it will be interesting to see how this pans out. The acquisition of hardware brands SoftTech and FCS should provide good margins on high turnover hardware, possible better margins than clothing.

I like the idea that a surfer (or parent) can buy their first surfboard (SoftTech beginner board) at age 8–10 and that this may start a lifetime relationship with SRF.  Surfboards, wetsuits, skateboards, clothing, video streaming, magazine, news, reviews and surf weather forecasting all owned by one company. It's a unique situation and one that offers significant room for growth. I can imagine the term "Lifetime Customer" being used when selling the growth prospects of Surfstitch longer-term.