Hamilton Beach 2007 Annual Report Download - page 33

[29]
2007 Results
Kitchen Collection (“KC”) had a challenging year in 2007.
Higher gasoline prices and consumer concern over the economy
and the housing market adversely affected both customer
visits and spending in 2007, particularly during the important
fourth-quarter holiday gift-giving season. In addition, KC spent
much of the year integrating operations, replenishing product
inventory and restoring customer loyalty at its Le Gourmet
Chef® stores (“LGC stores”), a chain of kitchenware and gourmet
food stores acquired out of bankruptcy in August 2006.
Revenues increased 23 percent in 2007 primarily because
of the acquisition of the LGC stores. Sales gains were
partially offset by the effect of closures
of unprofitable stores as the number
of Kitchen Collection® stores (“KC
stores”) decreased to 198 in 2007 from
203 in 2006. The number of LGC stores
also decreased to 74 in 2007 from 77
in 2006, in line with expectations at
the time of the acquisition.
KC generated a net loss of
$0.9 million in 2007 compared with
net income of $3.7 million in 2006,
primarily because KC recognized an
additional eight months of seasonal
operating losses during 2007 for the Le Gourmet Chef (“LGC”)
business of approximately $7.0 million, or $4.3 million net of
taxes of $2.7 million, as a result of owning LGC for a full year in
2007 compared with only the four most profitable months in
2006. Lower-than-expected retail sales, as well as store inventory
fulfillment difficulties at LGC’s third-party warehouse
operations, also contributed to the current year net loss. As a
result, return on equity(1) declined to negative 6.0 percent in
2007 from 28.2 percent in 2006, and return on total capital
employed (“ROTCE”) declined to 0.6 percent in 2007 from
18.3 percent in 2006. (See reconciliations of non-GAAP
ROTCE on page 43.)
During 2007, KC generated a negative cash flow before
financing activities of $14.8 million compared with cash flow
before financing activities of $1.1 million for 2006. The change
in cash flow before financing resulted primarily from a decrease
in net income and a decrease in accounts payable between years
as a result of the timing of payments.
Vision and Goals
KC’s vision is to be the leading specialty retailer of
kitchen, home entertaining and gourmet food products in
outlet malls and other retail channels
for consumers seeking a large
selection of unique, high-quality
products at an exceptional value.
KC’s goals are to earn a minimum
operating profit margin of 5 percent
and to generate substantial cash flow
before financing activities.
Industry Trends
The retail environment continues
to be extremely competitive.
Widespread Chinese sourcing allows
many retailers to offer value-priced kitchen products. Labor
and rent costs are rising, and transportation costs are increasing
due to higher fuel prices. To succeed in kitchenware retailing,
costs must be kept to a minimum.
KC believes there is excellent growth potential in
kitchenware retailing, but only through offering unique, high-
quality products at prices affordable to most consumers. While
a number of very low-end and very high-end kitchenware
retailers participate in the marketplace, there is still an excellent
opportunity for stores offering mid-priced, high-quality
Nearly 300 Kitchen
Collection® and Le Gourmet
Chef® stores bring the best
products, at a great value,
to cooking and food
enthusiasts across the U.S.
(1) Return on Equity = The respective year’s net income divided by that year’s average equity (a five-point average of equity at December 31 of the previous year and each of the
respective year’s quarter ends).
Left: The Kitchen Collection® store in Ellenton, Florida, features higher-margin, brand-name kitchen gadgets, small electric appliances and a variety of other kitchen- and
housewares-related products.
03
04
05
06
07
0 50 100 150 200 250 300
Number of Stores
180
188
195
280*
03
04
05
06
07
Revenues
(In millions)
$0 $25 $50 $75 $125$100 $150 $175 $200 $225
03
04
05
06
07
Average Sales Transaction
$18.29
$18.58
$19.10
$20.46*
$16 $17 $18 $19 $20 $21
272*$20.78*
$110.2
$112.3
$116.9
$170.7*
$210.0*
*Includes acquisition of the Le Gourmet Chef®stores in August 2006.