Gaia Inc (GAIA) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the Gaiam First Quarter Earnings Release Conference Call. All lines would until the formal question and answer session. At that time instructions will be given. At the request of Gaiam today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce the management team on today's call, Mr. Jirka Rysavy, Chairman and Chief Executive Officer of Gaiam, Ms. Lynn Powers President and Ms. Janet Mathews, Chief Financial Officer. Now I'll turn the call over to your first speaker Ms. Janet Mathews, ma'am you may begin.

Thank you. Good afternoon everyone and welcome to Gaiam's first quarter 2004, earnings conference call. First for the legalities. The following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, matters discussed in this call are forward-looking statements and involve risks and uncertainties, including but not limited to general business conditions, the integration of acquisitions, timely development of new businesses, the impact of competition and other risk detailed from time to time in the company's SEC report. The company does not undertake any obligation to update forward-looking statements. I'd now like to turn the call over to Jirka Rysavy Chairman and Chief Executive Officer. Jirka?

All welcome on our quarterly update covering the results for the first quarter, which ended March 31,2004. In the first quarter, results were generally in line with our expectations. For the first quarter Gaiam revenue increased to $23.8m, from $23m, in quarter ended March 31,2003. Gaiam reported and operating loss of $329,000, in the quarter compared to of loss of $497,000 in quarter in previous year, and or net loss or $0.02, per share. Depreciation and amortization for the first quarter was $923,000. During the first Gaiam generated $2.7m in cash contribution from its operation, compared to $1.5m,in the first quarter of 2003. Generating cash was our main focus during our consolidation, and $2.7m in cash contribution was above our expectation. Gaiam also generated positive internal growth rate of 5% for the quarter, reverse into negative 14% in last year for fourth quarter, and it actually it was 22%, in 1Q last year. We don't expect such trend to continue into the second quarter and for us through the year. However second quarter is historically our slowest quarter and we do expect a second quarter loss. Third quarter, on our hands looks pretty good especially with our major expansion of our sellings based on target, which is our largest account. In the first quarter, Gaiam also generated free cash flow and ended the quarter with $11m in cash, which is up from $8.4m at the beginning of the quarter. Gaiam still has no debt and full availability on its $15m credit line. So now Janet will give you some more details on the numbers and then Lynn, business overview. Janet?

Thank you. You are going to let me provide some additional details. For the first quarter, sales were $23.8m, representing an increase of 3.5%, from prior year sales of $23m. The increase in revenue was due to revenue increases in the direct to consumer segment of $1.1m, or 10.2% for the quarter. Business segment revenues were $11.6m, for the three months ended March 31, 2004 compared to a $11.9m for the same period in 2003. While the business segment experienced negative growth of 2.7%, in 2004, this represents a significant improvement over 2003's results where negative growth in this segment was 32.6%. The company wide internal growth rate for the first quarter 2004 was 5%. Gross margins for the first quarter of 2004, was 53.3%, down from 53.6%, for the comparable prior year period. This is primarily attributable to a higher sales contribution from certain of Gaiam's lower margin divisions within the direct to consumer segment and was partially offset by improved gross margin in the business segment. The above operating expenses increased to $13m for the first quarter of 2004 as compared to $12.8m during the first quarter of 2003. As a percentage of sales, total operating expenses decreased to 110 basis points to 54.7% in the first quarter of 2004 compared to 55.8 in 2003 due to cost reduction programs initiated during 2003. Selling and operating expense increased to $11m from $10.6m in first quarter of 2003. The year-on-year expense increased as a result of higher sales volume and increased staffing expenditures to launch new sales initiatives in growth strategies in both our direct to consumer and business segments. News sales personnel are paid under a minimum guarantee arrangement while training, so their compensation will begin to fluctuate with performance in the second half of 2004.

General and administrative expense decreased to $2m from the first quarter of 2004 as compared to $2.3m in the comparable 2003 period. This expense reduction is generally attributable to cost savings generated by the consolidation of administrative services into Gaiam's Colorado headquarters and the resulting staffing reductions implemented during the first half of 2003. Operating losses decreased 34% to $329,000 for the three months ended March 31, 2004 from $497,000 for the comparable 2003 period. Operating margin in the first quarter with a negative 1.4% compared to a negative 2.2% in the prior year. Net loss for the first quarter of 2004 was $329,000 compared to a net loss of $353,000 during same period in 2003 or loss of $0.02 per share for both quarters. Depreciation and amortization for the first quarter of 2004 was $923,000. Cash generated by operations for the first quarter of 2004 increased $2.7m compared to $1.5m in the first quarter of 2003. Gaiam ended the quarter with $11m in cash from $8.4m at December 31, 2003. No debt and an unused credit line of $15m. Trade accounts receivable totaled $12m at March 31, 2004. DSO improved to an average of 54 days for the first quarter of 2004 as compared to an average of 71 days during the first quarter of 2003. Inventory at March 31, 2004 totaled $16.9m and inventory turns remained constant for the year-on-year period at 2.8 times. Before turning it over to Lynn for the business overview, I would like to announce our schedule for the next earnings call. The second quarter earnings will be announced on Monday, August 2, at 4:30 P.M Eastern Time or 2:30 P.M Mountain Time. Lynn

Thanks Jan. As Janet indicated our first quarter results were as anticipated. During the quarter we began to see the positive impact of our transitional plans as well as signs of a slow economic recovery, which resulted in improvement in our revenues. We realized year-over-year internal growth of 5%, the signs of improvement are encouraging but we do not expect to see a significant change in our economic environment until the third quarter of this year. The month of April was disappointing as we are among the many non-apparel retailers to experience slow down in sales. Our April slow down was also impacted by an unplanned delay on a major catalogue drop. We're continuing to monitor our sales initiatives for the quarter. However as we have indicated in the past, our revenues and profits are weighted heavily for last half of the year. Increase in revenue for first quarter was due to a 12.8 internal growth in our direct to consumer segment, which was offset slightly by a decrease in our business-to-business segment of 2.7%. In our direct business we discontinued a small catalogue, which accounted for around 3% of our sales in 2003. Overall, our sales to retailers declined 2.7% or 300,000 for the first quarter. Despite the slightly negative revenue comp in our business segment, our top 25 retail customers generated a 7.5% or a $500,000 increase over first quarter 2003, an indication that the general retail environment improved as well as the sell through on our products. As we continue to transition this channel towards building partnerships with key retailers, we expect to see managed growth with our top 25 accounts and less impact from discontinued businesses by third quarter. The discontinued businesses such as the licensing agreement with our third party audio distributor accounted for 300,000 in the first quarter of 2003 and the department store business and other retail channels were not continuing accounted for an additional $150,000. Included on our top 25 accounts we realized $1.4m in new business from the book store channel as compared to first quarter of 2003.

We continue to do well within our store-within-store presentation in Barnes and Noble and have begun to reset the Borders stores into a store-within-store format. Following a successful test of full lifestyle presentation at 50 Borders stores during 2003, we expanded our full lifestyle presentation into an additional 100 Borders stores during the first quarter. We're very excited about the opportunities that the bookstore channel offers us to reach mainstream consumers. Over the past six months, we've solidified our presence with the market leaders of this channel and look forward to continue the expansion of our full lifestyle store-within-store strategy. We'll continue to reset the balance of the Borders stores during the course of this year. Sales to mass merchants including Target were down $1.4m, due to the shipment of the $2.3m in late fourth quarter for the Target catalog. While this promotion gave Target incremental business, it also negatively affected the stock levels in reorder business with Target in first quarter. In early first quarter, we learned that we will receive an additional eight feet of shelf space in Target's 2004 wall planogram set, which will triple our existing space. As discussed last quarter, the new planogram will include the placements of our media in all 1,280 doors, strengthening the full lifestyle presentation that is offered to mainstream consumers in Target. This increase in space is based on Gaiam's performance in the Target stores during 2003. We do expect the revenue impact to be expanded it's space in Target to begin in late third quarter and continue for the balance of the year. We also anticipate that reorders from Target in second quarter will be below last year, as we prepare to reduce their current inventory on certain products in anticipation of the expansion into new products in third quarter.

This type of proactive planning is crucial to maintaining our successful partnership with Target and is one example of why Gaiam was presented with Target's 2003 Vendor of The Year Award in early first quarter. We are excited about the media and opportunity to expand our presence in the Target stores this fall and look forward to growing a mind-body fitness category with Target, through exclusive product rollouts, line extensions, improved motions in the foreseeable future. As discussed in previous quarter, we made several transitions in the distributor channel, mainly to the decision to take Bed, Bath and Beyond direct during 2003. As expected, the negative effects of this transition are mostly behind us, as we achieved 15% increase in sales to distributors in the first quarter compared to the prior year. We continue to monitor inventory levels with all of our distributors to prevent future overstock situations from occurring. Near the end of 2003, we implemented a transitional sales strategy with the Discovery Channel stores, in response to their decision to presume more private-labeled program on a large-scale basis. Our new strategy involves working with them to offer unique products to their stores, based on some of our best-selling catalog products. This allows Gaiam to test the retail worthiness of the successful catalog product, at the same time providing Discovery stores with some product differentiation. In the first quarter, we tested this strategy and sales to Discovery stores are finally up after quarters of declines in 2003. While this strategy is not aimed at generating significant volume, it is mutually beneficial to both the parties. The sporting goods channel was down approximately 21% or $178,000 in the first quarter as compared to last year. The entire amount of this drop is attributable to a lack of penetration into the post-merger Sports Authority. The Sports Authority revenues for 2003 are minimal after first quarter. Results from other sporting goods retailers remain very positive. During the first quarter, we opened Copeland Sports, a West Coast sporting goods retailer with approximately 40 locations, and we continue to test and expand full lifestyle presentations in retailers such as Dick's, Sport Chalet, and Dunham. Dick's Sporting Goods, which is currently our largest sporting goods customer had increased comps of 30% for first quarter and they are looking for us to expand our full lifestyle presentation into additional stores in 2004. We continue to introduce our products in traditional grocery channel, under the Healing Arts brand.

After 2003 launch of the Healing Arts brand in the King Soopers, a division of Kroger, we launched this product line into 240 Safeway grocery stores and approximately 15 Hannaford Brothers stores during first quarter. Initial results from both of these launches have been positive. Our recently hired National Sales Manager for Grocery and Natural Foods has utilized his extensive industry experience to gain entry into this new market and has established a well planned broker distributor business model to service new customers. The transition of our media library from VHS to DVD continues to be a focus as we had recognized that the market for VHS is rapidly changing. All of our best selling VHS programs have already been converted to DVD and we're working closely with our retailers to develop strategies for the full conversion to DVD. We expect the retail market to be fully transition to DVD by the end of 2004.

We began to launch our grass roots marketing efforts that we talked about on our last call with several initiatives. The first is an out and reach program to professionals including yoga and karate instructors, fitness clubs, chiropractors, and other wellness professionals. Included in this initiative is a reprice of our professionals' catalog set to launch in late second quarter, the formation of round tables in key cities comprised of influential professionals. We've also expanded our discussions with upscale hotels and spas including the Hamilton Chain and the W Hotels to see their catalogs and guest offerings with Gaiam products and program. Finally, we're actively seeking manufacturers throughout to launch our organic home and clothing lines to boutiques and specialty stores, consistent with our goal of creating demand at the grass roots level before launching these programs to department stores and mass merchants.

Our retail at present remains strong with over 30,500 retail doors and store-within-store penetration and over 3,750 doors. The store-within-store concept gives us great branding and exposure and has proven to offer retailers increased dollars per square foot. Standing sporting good retailers into the larger life style concept that we tested in Galyan's and Sport Chalet, and the target expansion will be the major focus for the remainder of the year. The direct segment experienced an increase in comp revenue for the first quarter of 12.8%. Margin for the catalogue division was strong, at over 63% for the first quarter, which is consistent with first quarter of 2003. Our fill rate remained just above 90% compared to 89% for fourth quarter of 2003. As noted in fourth quarter, we do not accurately predict the sales jump for several of our proprietary products and could not get back into stock prior to May. We've since forecasted sales for these products going forward and do not see the fill rate as an issue after first quarter. For the first quarter of 2004, our average order size was a $104 compared to $91 for the first quarter of 2003. Our Web site continues to deliver solid performance with approximately 4% comps over first quarter 2003.

Margin continues to remain strong at over 65%. We've achieved an overall 15% increase in Web marketing revenues from first quarter 2003. Affiliate programs grew over a 150 % dominating the success of the Web marketing programs. In the first quarter 2003, e-mail campaigns declined by 29%. We believe that the decrease in e-mail generated revenue is due to the increased number and complexity of stand filters. We'll continue to look for a new and innovative ways to increase revenues for monitoring costs in our Web business. Our renewable energy division, Gaiam Energy Tech continues to outperform the prior year. The division experienced a small margin decline to 30% due to the higher volume of residential filter sales that have slightly lower margin than a typical renewable product sale. In 2004, we've enhanced the overall look and feel of the Real Goods' consumer catalog in an effort to get back to the roots of the Real Goods' mission.

The newly revived summer 2004 catalog was in-house in late April. We look forward to monitoring the response to the enhanced catalog. The goal to solidify the interest from the existing Real Goods' consumers and to recapture some other consumers we've referred from some time.

In closing, we're pleased that we've reversed our negative growth and achieved our goal of a 5% internal growth. This 2003 behind us, we continue to focus on sales by channel, store-within-store penetration, product differentiation, operational efficiencies, and inventory and AR management. We're also continuing to concentrate on operating cash flow. There is some mission as to educate customers on the benefits of organic and mind-body and health products, giving them stronger reason to buy Gaiam's products. I would now like to open the call for questions, Michelle.

Thank you. If you would like to ask a question, please press star one on your touchtone phone. You'll be prompt to record your name. To withdraw your request, you may press star two. Once again to ask a question, please press star one. One moment please. Mark Rupe with Adams Harkness, you may ask your question.

Hello everyone. I have several questions here. First of which, your Target relationship, could you give us a quick background on when it started, how it's ramped, and then also if you are tripling your space there, I would assume that there will be a lot efficiency in addition to sales as well?

Well, we began doing business with Target in the media department, Mark way back in the year 2000. We put in our first small store, in store presentation; I believe that was in the spring of 2002 and then last year with Target, we had an overall 15% increase.

Where do you see the longer-term potential?

Obviously with receiving their vendor of the year award for 2003, and then increasing our floor space from 4 feet to 12 feet, we see that there is going to be a very positive impact on the company during late third quarter and fourth quarter.

Okay. As far as, you mentioned Dicks and Borders, Borders go into 100 stores in Q1, how many ultimately of the Border stores could you potentially get into?

We expect that we can probably get a full store and store presentation in almost all of the Borders stores by the end of this year.

And then the Dick store base out, I am not sure if you mentioned how many doors you had on that or not?

I think Dicks has a 160 doors.

Okay. And then the April catalog that was delayed the drop, is that out now?

Yes, it is.

And then lastly, is there any one particular product this year, in the industry or company related that's doing better than you thought or is expected to do better?

Right now, I think, the area that is doing better than we had anticipated is actually the launch into the grocery channel. As I mentioned, we are testing in 240 of the Safeway stores and 12 of the Hannaford and the test has been very positive and that's primarily media products.

Okay. Perfect, thank you.

Fay of Columbia Management, you may ask your question.

Hi. You said that your Internet online sales had a 4% increase and on gross margin. Is that correct?

Yes it is.

Okay. Why catching up the stronger growth out of that channel, it just seems like such a natural channel for you guys?

We had it actually, you know, last year even we had negative growth in whole business, Internet was actually doing pretty well. So, we kind of pushed it a lot last year, where this year we are little more focused on the business-to -business because we had a lot to catch up and mainly it's pretty much because the spin filters. We've used that before and I mean -- basically e-mail campaign were affected and they're not this year. So, that's pretty much if they would be in the same level last year, you would see much stronger numbers, but because of the a big part of the business, it kind of probably took it to the 4%, but we expect that that segment long-term profit growing about 15%.

I am sorry if I was a little late for the call, but you talk about any of the new product development efforts you are doing and how that's going?

I certainly can. We've had several new launches of media titles and those are going well. One of our new initiatives is our soft goods launch, which will be part of this Grass Roots initiative. All of our soft goods products are products that we tested in our direct business and the response has been incredible there, and that'll be our initiative going out to the boutiques and specialty stores in third and fourth quarter this year.

Okay. How many new titles did you launch and what areas were they in?

We launched five new titles primarily in Polaris and one in Yoga.

And last time we talked, you discussed it was a couple of months ago, lifestyle collection that you were going to test in the first quarter. Did you go through with that?

That's the soft goods.

Okay.

And that is currently, it has been tested in martial fields that was shipped in late March early April.

How far under plan are you in April?

We have the main of the question is to evaluate that drop of the catalog because the catalog drops later, so technically you gain it on another side but it's not exactly true because there are additional new drops of the

same catalog, so it shortens the life of that and we don't know exactly yet when it was dropped there was kind of delay to then it is very hard to say how much we are going to make up and how much we don't. So from that it's kind of hard to guess, but probably closer to 2m.

Okay and then what caused the delay - the catalog drop?

It was a delay in getting out from the .

It was effective in our fault, you cannot blame somebody else, it was our fault and it clearly will not repeat.

Great, thanks a lot.

Raj Kumar Private Investor, you may ask your question.

I was just wanting to talk about Wal-Mart and how has sales been in Wal-Mart?

Wal-Mart is - carries only on media and it's actually done through a distributor. So I can only tell you that the mass merchant channel was down $1.4m, I told u about that has the target in it.

I see, okay. But Wal-Mart is not taking any more DVD titles on the -?

Oh yes, they are still carrying media. That distributor was just down slightly.

Wal-Mart typically had increase the Strait for last year and so we actually see that relationship positive so Lynn is looking out on the number for the first quarter, she doesn't really have it here because it wasn't broken what we have here but Wal-Mart distributor is positive.

I see. Whether they are -- you said that relationship is very positive, so are you forcing them to take new products from here also, beside from just DVD's?

At this point and time we will only be working with media, with Wal-Mart under the Gaiam brand.

You don't want to give Gaiam brand to Wal-Mart, that's we already discussed it many times and we told this time we will not provide Wal-Mart with any Gaiam brand except when the media run basically, DVD are always launching all channels on the same brand. So effectively they are buying only on media historically there.

I see, in your -- regarding your Whole Foods Channel, is that business being growing on that side also, I know you said the grocery was pretty good, but just specifically Whole Foods?

Well, because Whole Foods is done through - part of Whole Foods is sent through the grocery distributor, you can't really break them out anymore, but I can tell you that entire channel is doing very well for us right now.

Last question is in regard to Leisure System International in UK, how is that been growing the sales on that side?

The sales for LSI were up right around 7% for the first quarter, it's a tough economic environment in the UK right now, many of their retailers are experiencing the difficulties that we saw in the United States, economic conditions in 2003.

Still finally we're ahead of positive comps actually through all the quarters.

That's crammed, and they were up in the first quarter, they are not growing rates, in turn they would have there was better economic conditions in the UK.

Are you introducing any in the UK, like you do here?

Yes, we are rolling out service and store presentations in the UK very similar to what we do in the United States and we are trying to leverage some of the relationships with US retailers that have distribution in the UK also, that's absolutely their focus for the next few quarters.

How many stores have you introduced so far in the UK for store-within-a-store presentations, do you have any numbers on those?

I don't have exact numbers, but I know Selfridges is the premier one that we've done that with.

How have been the Web sites - I know you have 4% growth in that Gaiam Web site, is that counting the Leisure Systems' Web site also or is that counted separately?

That is counted separately and their Web site accounts for very, very small percentage of their overall business.

And do you have any other plans for international expansion in other European countries or other countries?

Not immediate. We kind of very much take this English speaking for right now because we had so much opportunities when we redo our business segment in US, so its definitely our focus rather than going to other country, but long-term we definitely look at it.

Thank you very much for your time.

Ris with ABT, you may ask your question.

Hi, I'm just wondering you mentioned that you're expanding in the boarders your store and store displays and are there any other book store chains that you are going to be selling to --

We are actually in on, we have a store presentation in all of the Barnes & Noble stores.

Great. Okay.

Borders is our next expansion.

Borders and Barnes & Noble, no other bookstore chains yet.

Now with stores , we certainly do have our media and other booksellers.

Okay. And then what about expanding your product range in Borders and Barnes & Noble? Is that something that you will be doing any time soon?

Yes, that's exactly why we put in stores and store presentation so that we can expand our products presentation.

Actually, it is a pretty big expansion, I would say. for this is a big product item expansion in the stores.

I see. So you're going to have larger kiosk in Borders?

It depends on the size of the store. We work very closely with their store planning department and plan the key as based on the size and the square footage of the store.

Great. What other bookstore chains are you expanding to, you said, you know, you are not going to do any in store are for Borders and Barnes & Noble. What about the other bookstore chains that you provide just media products? What are the chins that you sell to or you expanding to?

Well, certainly, we have a nice presence with amazon.com and we've had goods involved in books, I believe we still have something involved in it this time.

I see. Okay and then, in regards to your soft goods testing Marshall Field, how is that going relaxation products, right?

It's mainly bedding a bath products and it's really too early to tell at this point,

I see. And do you have any other products that you would be expanding in Marshall Field or you going to stick it out and how this goes first?

Well, let's how this goes first.

Okay.

This is a huge expansion for us, as it is.

Okay. Somebody asked for this, what new media titles you had launched and you mentioned that four of them are parodies, only the one of them was yoga? So, is basically parodies still your strongest growing section when it comes to fitness?

That's correct, it is.

Right. And how is the --

Actually, we had - our last launch was via meditation, this is kind of coming back and we are already seeing yoga-type title, which we didn't . We will try to defocus from some of that and, so we have few other titles like massages and meditations.

I see. And are your yoga-related products still growing?

Yes, especially areas like yoga mats where we've had a lot of fashion influence with every prints or new colors. That area is still doing quite well for us.

Okay. And how is the - how does the growth of the parodies factor affecting your product mix?

Well, it just means that we are launching more media titles within that area.

Okay. Okay, well thank you very much for your time.

Okay.

Once again, to ask a question, please press star one. One moment please. At this time we have no further questions.

We would like to thank everybody and so, our next call will be August 2 at 2:30 Colorado and 4:30 New York. Thank you very much.