Hamilton Beach 2007 Annual Report Download - page 37

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expansion of a traditional mall store format represents the
most promising driver of future growth. This belief was a key
driver in KC’s interest in the LGC acquisition, and the company
sees high-growth potential for the LGC store format in
traditional malls. While KC developed and tested several
formats of its own for use in this segment, the LGC store
format – with its higher-end offerings, gourmet foods, home
entertaining products and gifts – is excellently suited for
traditional malls and represented a quicker way for the
company to enter this channel. With the addition of the LGC
concept, the company had 18 permanent LGC traditional
mall stores at the end of 2007 in a potential market of
more than 500 traditional malls
nationwide. Recently, the company
embarked on a new effort to further
improve performance at the LGC mall
stores in order to prepare for future
growth. However, KC has no plans to
open additional traditional mall stores
until the company is confident
potential store profitability can meet
the company’s objectives and an
attractive consumer spending
environment exists.
The company operated 28
seasonal KC stores in traditional malls in November and
December 2007, compared with 23 seasonal stores in 2006.
These profitable stores utilize short-term leases and a quick-to-
set-up temporary store format to take advantage of the holiday
gift-giving season. This program, which can be expanded
modestly, is expected to continue to add revenues and
profitability in coming years.
Internet format initiative. The company believes that
a retail website is an important element of multi-channel
marketing and continues to make improvements to the
Kitchen Collection® and Le Gourmet Chef® websites,
www.kitchencollection.com and www.legourmetchef.com. As
marketing activities increase, such as direct e-mail campaigns
and Web partner programs, sales and profits from both the
KC and LGC websites are expected to grow.
Outlook for 2008 and Beyond
2008 is expected to be another challenging year for KC.
Both KC stores and LGC stores will face uncertain consumer
traffic and spending, especially if gasoline prices remain high.
In addition, weak and uncertain credit markets and concerns
regarding a potential economic recession are likely to continue
to influence retail spending in 2008.
Although the company expected it would not match its
2006 performance in 2007, KC’s net loss of $0.9 million in 2007
fell well below expectations. In 2008, KC is cautiously optimistic
that its programs will improve its financial performance,
resulting in modest increases in revenues and improvements in
operations, primarily in the second half of the year. With the
exception of the warehouse operations, most synergies from
the LGC acquisition have been realized. Therefore, the
company plans to focus efforts on key improvement
programs, especially enhancing the
merchandise mix, optimizing store
selling space and maintaining
disciplined cost controls. Continued
profit improvement is expected in
2009 and succeeding years.
KC’s operating profit margin
was 0.2 percent in 2007, well below
the 4.0 percent operating profit
margin of 2006 and significantly
below the company’s objective of
earning a minimum operating profit
margin of 5 percent. For reasons
explained previously, this operating profit margin objective
could be challenging to achieve in the next few years. However,
with improved consumer traffic at outlet malls, the full
realization of the potential of the LGC acquisition and,
eventually, an increase in the number of stores, KC hopes to
reach its operating profit margin target by 2012. While KC did
not generate positive cash flow before financing activities in
2007, it is the company’s objective to do so in 2008.
In closing, I want to thank all of our employees for their
hard work, exceptional effort and dedication during a very
challenging year. I look forward to working with my entire
team to meet the challenges of 2008 and beyond.
With a cooling in
retail traffic at outlet
malls, high-end,
higher-margin cookware
is attractive to KC,
as well as to its customers.
Randolph J. Gawelek
President and Chief Executive Officer
The Kitchen Collection, Inc.
Left: The Le Gourmet Chef® store in Ellenton, Florida, features higher-margin, brand-name kitchenware and gourmet foods.