Zumiez, the baby daddy of mall-based action sports retailers (Pac Sun = mommy), announced that it’s in hot-and-heavy negotiations to purchase Active Rideshops for a low-low price not to exceed $7.2 million, but probably closer to $5 million according to my math. (read on to find out why)

Awhile back, I posted about the initial bankruptcy filings, and we received some great comments from people “in the know” about how this could have happened to the Starbucks of skateboarding.  Now, we have access to the public records explaining what went wrong, and — surprise, surprise – overexpansion did them in.

Bankruptcy documents being the treasure trove of information that they are, we now know that Active grossed more than $60 million annually in its heyday.  We also know that their revenue stayed surprisingly flat even as their store count doubled.  That’s not wholly unusual; however, you’d typically expect to see some kind of an uptick in revenue while net income stayed flat or likely decreased as the stores struggled to gain market share and turn a profit.

So, what’s done is almost done, and they’ll now likely be purchased for bro-shaped pennies on the dollar by the American Eagle of action sports retail.

Boring Financial Stuff
Let’s break down the financials real quick.  There are a couple common ways of valuing a retail biz, the most popular of which being the income/revenue multiplier method.  Unfortunately, businesses in bankruptcy with a reportedly shady history and ballooning overhead costs need not apply.

That leaves the asset approach.  Court documents say that the assets are worth approximately $5.2 million on Active’s books. Then, Zumiez has agreed to pay $100K per store for what I’m guessing is for a combo of territorial rights and drawing power.  At face value, that’s 20 stores for $2 million (they’re dropping one store), making the total purchase price $7.2 million.

However, most of Active’s inventory is already outdated and the rest isn’t getting any younger, so reduce that to around $2.5-3 million, or 70-75% off retail (assuming typical 50% markup).   By that math, they’ll get 20 stores, a 103,000 sq. ft. warehouse, and a boatload of inventory for around $5 million – not a bad day at the office, eh?  Even when you add in the $1.3 million in gift card liabilities, I wouldn’t kick it out of bed.

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Fun Skeptical Part
We know that they were both shady (didn’t pay their pro roster) and greedy (doubled store count to 20 in 1 year), so how do we think the fat-cat owners made out?  I’m guessing pretty well.   Remember, there are ways of masking personal expenses (cars, etc.) as business expenses, and the other expenses pushing you into the red could also include your outrageous $1 million/year salary.  I have no proof of either, but journalistic integrity is overrated.

via David Mongan, 20 May 2009 1:00pm | 2 |