Friday, August 1, 2014

Deeper Look into GW 2014 Report

It is really hard to understand what is going on in GW sales and profits due to their structuring without knowing two things that GW does not reveal.  GW splits its company into a production side and a sales side.  Production designs and makes the products and they sells them to the Sales side.  The Sales side then either sells them directly at GW stores and webstore or sells them to independent trade stores.  When the sales team sells the product at retail they get the full list price but when they sell into the trade channel you only get a partial amount of the list price since there is a trade account discount so the store can still make a profit.

Now if you look at the two different sales channels in revenue, you are going to put artificial advantage on the direct retail model since each unit sold there generates more revenue.  Trade discounts vary but for GW, I would estimate that it ranges from 40-50% on average.  I have had retailers sell me stuff at 40% that was fresh ordered so I know they were getting better than 40% discount from GW.  When you determine the profits they also have the advantage when you look after subtracting what production charges for the product.  If you are getting the set at 40% list from production then selling it at 50% to a independent you have to sell 6 times the number of kits that the retail side needs to sell to get the same amount of income after subtracting off the cost of goods. Now retail has many additional costs when actually determining profits, but such a six fold advantage in that number might distort your view of the two channels.

Now to really look at this you have to know what the trade discount is on average (by revenue) and what the production and supply discount is.  GW has been nice enough to provide the trade and direct breakdown this year again which allows these values to be estimated.  If you assume that the average trade discount is 50% you find you need a product and supply discount of 37.5% which is 3/8 ths to get the intergroup sales number to match.  If you assume the intergroup cost is 40% list you get an average trade discount of 44.6%.  These values seem reasonable and they both generate between 50-55% of all unit sales actually going through trade.  Which makes trade seem more important than the less than 40% of sales when you look at revenue.  Especially if you remember that producing the kits gets generally twice the profits assigned to it than selling the kits.

If you take these numbers back to last year since they are not likely to change significantly, what is revealed is a large drop in trade sales in revenue on the order of 25 percent.  That is a huge sales drop.  That might not be accurate as GW might have changed the rate that production gets paid from the sales team.  It would have needed to be 42.5% last year and 40% this year.  This would definitely hide weakness in the sales channels by essentially forcing it on production.  I already found that GW placed 4M pounds of the exceptional costs associated with their restructuring of the management into the Production and Supply even though it was probably mostly a sales channel issue.  The profits associated with production and supply did drop by 9 M or about 30% and production and supply income from the sales division was down 15%.

So I guess the take home is either that the GW is trying to hide how poorly their sales division is doing at being profitable (68% drop in profits from sales division) or they had a huge drop in trade sales(25%) that they did not acknowledge in the report.

No comments:

Post a Comment