SPAR Group, Inc. (NASDAQ:SGRP)
Q4 2015 Earnings Conference Call
March 31, 2016 10:00 AM ET
Dave Mossberg - IR
Jill Blanchard - CEO
Jim Segreto - CFO
My name is Dave Mossberg, Investor Relations representative for SPAR Group. On this recording, we will be discussing SPAR Group’s Fourth Quarter and 2015 Year-End Financial Results. Joining me to provide comments will be Ms. Jill Blanchard, Chief Executive Officer and President and Mr. Jim Segreto, our Chief Financial Officer.
Before we begin, I’m going to review the company’s Safe Harbor statement. Investors should remember that the statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events. As such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and other similar expressions as they relate to SPAR Group are such forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by SPAR Group at this time. In addition, other risks are more fully described in SPAR Group’s public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov.
With that, I would like to turn the call over to Jill Blanchard, CEO and President. Jill?
Thanks Dave. Welcome to the call and thank you for your interest in SPAR Group. We have mixed financial results for fourth quarter and 2015 financial performance. We continue to face the headwinds of unfavorable foreign exchange rate. However know that out the effects of FX we have positive comparisons in our international operations with growth from Mexico, China and South Africa offset by weakness in Australia.
Our domestic business struggled down 6% for the year. Growth from new as well as existing customers was below our expectations and was not enough to offset the loss of a large customer due to industry consolidation as well as inconsistent business trends in one of our smaller business unit. We have also scaled back on investment in our domestic growth initiatives which slowed the pace a bit of new business growth and we will cover more on this topic later. While our performance has been inconsistent across markets and business units, we are having success in adding new global customers, also new initiatives were able to generate new business in late 2015, which we expect to be incremental to revenue in the current year.
Our nearer term results are likely to continue to be inconsistent, until we can roll our strategic initiatives across our entire footprint and overall I am encouraged that we have puts in place the right strategic initiatives that will allow for more consistent financial performance. Before I get into more detail on our strategies and plan I’m going to turn the call over to our CFO Jim Segreto and he will provide greater detail on our financial results and I’ll be back with more detail. Jim?
Thank you, Jill. I will now give a quick overview of our fourth quarter and total year financial results for 2015. Revenue for the quarter was 32.3 million, an increase of 0.7%. Adjusting for foreign currency translation revenue would have been a positive 11.6%, compared to the same period in 2014. Revenue for the year was $119.3 million, a decrease of 2.2% compared to last year. Adjusting for foreign currency translation revenue actually increased 6.1% year-over-year.
Breaking down revenue by geography, our domestic revenue was down 2.8% for the quarter and 6% for the year, the decrease in domestic revenue is primarily related to our decision to take our foot off of the accelerator in terms of investment in domestic business development. We were concern with domestic profitability levels in 2015 and focused on stabilizing profitability, but not so far that we won’t be able to resume growth in our domestic business going forward.
I should emphasize here that we are maintaining existing customer relationships and our strategies are delivering success in adding new customers. As profitability improved, we expect to step-up investments in growth. Our domestic revenue is also affected by underperformance in two of our smaller business units both of which we have discussed in previous quarters. One of these business units was adversely affected by a late 2014 competitive acquisition of one it’s larger U.S. customers and through the process of being acquired is no longer doing business with SPAR.
The other underperforming domestic business unit did recover in Q4, but not enough to offset weaknesses from earlier in the year. This business is less than 10% of our domestic revenue but can be very -- fairly volatile and during 2015, it was exceptionally so. On a brighter note, international revenue increased 2.6% for the quarter and 0.1% for the year. Adjusting for foreign currency translation, our international sales performance would have shown a 19.3% increased for the quarter and 13.6% increased for the year.
Excluding the currency effect, annual revenue comparisons were primarily affected by incremental revenue from our second acquisition in China and continued solid performance from South Africa and Mexico partially offset by lower revenue in other areas of the world. Moving onto profitability, our gross margin performance for the year was stable 24.5% of sales, which is relatively flat with the prior year in both domestic and international businesses. For the quarter we did see a 220 basis point decrease in gross margin, which is led by decrease in our domestic business. This was primarily indicative of the mix of business performed during the quarter. Going forward, we expect annual gross margins to be consistent with those levels achieved in the past couple of years.
We maintained operating profit of 3.3 million for the year and we were able to offset weaknesses in the domestic profits with 37% growth from our international business. International operating profit benefited from increased volume growth as well as the positive effect of foreign exchange on expenses. We kept tight control of costs and late in the year we put in place some cost savings initiatives in our domestic operation that we expect, we’ll cut a million dollars in expense during 2016.
As mentioned earlier, we expect these cost savings to stabilize profits from our domestic business, but also allow for some resumed growth. Net income comparisons for the fourth quarter end year are made difficult as last year’s fourth quarter net income included a positive contribution of $1.9 million from a valuation adjustment to deferred tax assets. Net income for the fourth quarter was $1 million or $0.05 per diluted share. Excluding the tax valuation adjustment net income was $800,000 or $0.04 per diluted share during the fourth quarter of 2014. Net income for 2015 was $892,000 or $0.04 per diluted share excluding the tax valuation adjustment last year’s net income would have been $1.4 million or $0.06 per diluted share.
Moving onto the balance sheet and cash flow. Cash flow from operations for the year was positive $4.9 million, we use approximately 250,000 to reduce debt and spent approximately 1.6 million for CapEx. Our cash receivable balance at the end of the year was $23.2 million, which equates to 71-day sales outstanding, which is in line with our historical trend. Total debt was 6.2 million versus 6.5 million at the end of 2014 and cash was 5.7 million, compared to 4.4 million at the beginning of the year.
Overall, our balance sheet remain strong with plenty of excess liquidity. Besides our cash balances, we have consistent have had more than 2 million available on our domestic credit facility providing sufficient capital to meet our anticipated organic growth plans.
I would now like to turn the floor back over to Jill.
Thanks Jim. Before we go into a review of our strategies. I to spend a few minutes going over some industry trends that we think are going to provide attractive secular growth opportunities for our business. It’s important to know that despite the growth of online retail physical stores will continue to be an important part of overall retail sales. According to 2015 Frost & Sullivan study, physical stores were 95% of almost $12 trillion in global retail sales in 2015.
And by 2025, they are expected to be 81% of $23 trillion in global retail sales, which translates almost $7.5 trillion and dollar of growth over the next 10 years and that’s $3.7 trillion more growth than online sales are expected to experience over that same time period. So no wonder that online retailers like Amazon are opening up physical stores. While physical stores are going to continue to be the vast majority of retail sales in order to succeed retailers manufacturers will may to adapt to the way consumer shopping is changing.
Even though digital devices influence 8 in 10 purchases, according to a 2015 MasterCard Omni-shopper and new shopper study 98% of those purchases happen in stores. But consumers are demanding more interact with knowledgeable sales associates when they’re in those stores. According to 2014 study from Tulip Retail about 7 in 10 people, who don’t find the sales associate helpful, will not make that purchase, conversely 9 in 10, who do, we’ll make that purchase and 97% will buy as much or more than planned.
Those shows the important of bringing [ph] up in-store sales associates to service customers. Yet according to 2015 study from EKN Research about 70% of in-store labor time is spend on operational task versus sales and customer service and majority of the operational tasks are merchandising. So this trend bode well for merchandising service providers to take those operational tasks of the shareholder of manufacturers and retailers. So that they can concentrate on sales and it also creates a great opportunity for SPAR Group. We are well positioned to help with retailers and manufacturers plan and execute successful omni-channel strategy that include in-store sale, in-store pick-up of online sales and ship fulfillment of online sales.
By outsourcing in-store operational tasks to us, we can help retailers and manufacturers address the key challenge of managing in-store of labor. While increasing efficiency and productivity in order to maintain cost competitiveness. And at the same time, we can help them improve their on-shelf product availability and improve in-store customer engagement both of which are critical to capturing incremental sales.
Also we continue to seek more ways to solve there in short challenges, three things like sales versus service, new store set and remodel services, installation and maintenance and digital and mobile in-store equipment and displays, omni-channel inventory management and much more. So now let me talk a little bit more about our strategic progress. Our strategies are focused on becoming of more of strategic partner with our customers and not being limited to being a transactional vender. By focusing on delivering greater value to our customers, not only will we garner more sales, but those sales will be more profitable and sustainable. To accomplish this goal, we need to constantly improve our value proposition and make adjustments to how we are going to market.
We are positioning ourselves as an industry thought leader and have sponsored a retail labor study from an independent research firm, EKN Research. Not surprisingly, the study pointed out that omni-channel need are the number one in-store labor challenge for both the retailers and manufacturers with 70% of retailers, 50% in manufacturers ranking it as number one. They need to increase efficiency and productivity is like the consensus number two challenge. The study also pointed out the 68% of respondent agree that their current labor model isn’t working.
To protect against being seen as a commoditized service chosen mostly on price, we are changing our value position with customers and prospects by demonstrating how we can deliver strategic solution to their business needs by leveraging our global retail experience in science and technology. This is a shift in the way our customers view merchandising services in general, but as we have demonstrated our customers are embracing helping them become a strong partner in designing and executing a successful omni-channel strategy.
For example, we are currently working with a large global client on an idea that would use in-store beacon technology to interact with their customers at point and purchase and positively influence sales. A few years ago, we rarely had to seat at the table on these types of discussions. To be seen as a strategic partner, we are also transitioning our go-to-market strategy. We have made modest investments in our sales and marketing to reach out to more senior level contacts, we have more influence over larger portions of their sales and marketing, plans and budgets.
A good recent example of this is a large retailer who is seeking a way track and monitor all their in-store of vendor activity. We are working with them to build an application that will provide this information and much more, increasing their ability to optimize vendor management and improve security. Another key to improving our value proposition is to continue to invest in technology that increases efficiency and productivity.
Our SPARtrac retail operations system provides differentiation for us and increased value to our customers. SPARtrac makes it exponentially more efficient to manage the merchandizing process, because unlike most other systems that manage only a handful of tests, SPARtrac can manages hundreds from recruiting and assigning merchandisers to tracking and reporting and regulation of issue. SPARtrac has many other advantages over competitive systems and we continue to develop more.
We are incubating new technologies in our industry with some key global customers that will allow them to engage directly with their consumers, track in-store vendor activity, cost effectively target and addresses in-store issues and significantly improve the accuracy and effectiveness of in-store compliance. We’ve even taken the concept of crowd sourcing to the next level for retail merchandising by introducing a new service called crowd merchandising. Cloud merchandising combines the best of both world. First it has the cost effective scale of crowds of shoppers armed with a smartphone app into a large number of stores at a short amount of time to collect some basic audit data.
And it combines this with the quality of sending skilled merchandising specialist into only those stores that need it based on the audited data received back. It increases the affordable rates for our clients in situations where our stocks and compliance are critical over a short time period, for things like a new product introduction and timely release and promotions. It’s imperative that we continue to support and develop this part of our business as our industry evolves with new technology and as manufacturers and retailers look for more ways to optimize merchandising efforts in their stores.
I am confident that our strategic initiatives will improve our ability to retain as well as add new customer relationships and will provide for greater consistency in financial performance and long-term profitable growth. In the near-term though, our results are likely to be inconsistent until we can adopt these initiatives across our entire footprint, which is going to take time and investments.
For the near-term, we’ll focus our efforts on our top domestic customers and selected international market that are underperforming as they provide the biggest opportunity for improvement. Also we are deploying a more focused sales strategy, focused on niches in the marketplace where we can excel and targeting specific industry growth categories and channel.
As Jim said, we continue to maintain a tight control of our cost and expect to save over $1 million in operating expenses during 2016 due to costs cutting and efficiency efforts. We are making progress with our strategic plan and although it appears that our performance maybe inconsistent for the short-term I am confident that we have the right plan in place and that we’ll exit transitional period poised for profitable growth in greater return for our shareholders.
On behalf of the entire team here at SPAR Group, we would like to thank you for listening.
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