The C&J Clark group continued its internationalization in the financial year ended last Jan. 31, as the share taken up by the U.K. and Ireland in its turnover shrank further to 43 percent. While the total number of pairs sold rose by 5.9 percent to 52.2 million, the group's revenues grew by 9.1 percent to £1,398.1 million (€1,738.5m-$2,211.5m). They rose by 3.3 percent in the U.K. and Ireland, by 11.5 percent in North America, and by 19.6 percent in the rest of the world.

The group sold 28.9 million pairs of shoes in the U.K., 2.3 million pairs in the rest of Europe, 20.0 million pairs in North America and 1.0 million pairs in the rest of the world, according to its recently released annual report.

Operating profits before exceptional item increased by 4.4 percent to £115.8 million (€144.0m-$183.2m), in spite of an increase of more than £100 million (€124.4m-$158. 2m) in product costs and a 19.7 percent boost in global marketing expenditures to £61.9 million (€77.0m-$98.0m). Higher raw material costs and rising wages in China and Vietnam resulted in increases in product costs of 15 percent for Clarks Companies North America and 23 percent for the British parent company, Clarks International, because of the devaluation of the British pound against the U.S. dollar.

Clarks Consolidated Income Statement

(Million £, Year ended Jan. 31)

 

2012

2011

%
Change

UK

601.3

582.3

3.3

North America

536.5

481.3

11.5

Europe

161.8

148.4

9.0

Rest of the World

98.5

69.3

42.1

TOTAL FOOTWEAR

1,398.10

1281.3

9.1

Cost of Sales

736.2

641.4

14.8

Distribution Costs

346.8

321.9

7.7

Administrative Costs

199.3

207.1

-3.8

Exceptional Items

0.2

5.1

-96.1

Net interest

9.4

7.2

30.6

Pre-Tax

106.1

108.7

-2.4

Tax

28.6

31.6

-9.5

NET

77.5

77.1

0.5

Earnings/Ordinary Share (pence)

130.5

129.6

0.7

Pre-tax earnings declined by 2.4 percent to £106.8 million (€132.8m-$168.9m), but a drop in the U.K. corporate tax allowed Clarks to post a net profit of £77.5 million (€96.3m-$122.6m), marginally higher than in the previous financial year. With net debt of only £9.5 million (€11.8m-$15.0m) at year-end, the balance sheet remained quite strong.

One big problem was the profitability of Clarks International, the subsidiary of the group that manages all its operations outside North America. After several years of consistent growth, its operating profit fell by 16.5 percent to £77.7 million (€96.6m-$122.907m) in the year ended last January, mainly because of the rising sourcing costs. It dropped in spite of an overall increase in sales of 8.4 percent to £873.6 million (€1,086.3m-$1,381.9m).

In the U.K. and Ireland, where the bulk of Clarks' business goes through its own stores, sales went up by 4.4 percent on a same-store basis, comfortably ahead of the 1.4 percent increase estimated for the total retail sector in the U.K. Still, much of the progress was the result of heavy stock clearance activity, which contributed to pushing down gross profit margins by 6 percentage points, resulting in an indicated operating profit of only about £3.5 million (€4.4m-$5.5m). Wholesale deliveries in the U.K. and Ireland fell by 5.2 percent in volume, but in spite of a stable turnover of £53.4 million (€66.4m-$84.5m) in terms of value, the gross profit declined by 14.2 percent.

The company's e-commerce activities were a notable exception. Clarks' online sales in the U.K. and Ireland grew by 39.3 percent in volume and by 42.7 percent in value, reaching a level of £45.9 million (€57.1m-$72.6m) and delivering an operating profit of £14.1 million (€17.5m-$22.3m). Clarks set up virtual stores last year for the German and French markets, and while the company failed to reach the desired volumes, the experiment taught some lessons and generated a small profit. Similar websites are being opened in Spain and the Netherlands during the first half of the new financial year.

All in all, the group's operations outside the established markets of the U.K., Ireland and North America achieved record growth rates in volume and value, delivering a 26.4 percent increase in revenues to £263.1 million (€327.2m-$416.2m). This was partly due to an increase of about £3 (€3.70-$4.40) in average selling prices per pair, but this did not prevent a drop of about 4.4 percentage points in the gross margin to 48.0 percent. Nevertheless, controllable operating profits improved in this segment by 16.0 percent to £74.2 million (€92.3m-$117.4m).

Profits declined by 4.7 percent in the European markets outside the U.K. and Ireland, but all the other major regional groupings showed progress. Profits grew by more than 70 percent in the China region, which also includes Hong Kong and South Korea, as the number of pairs sold rose by 26.6 percent. Sales and profits rose even in Japan, helped in part by the strong yen.

Clarks' joint venture in India, Clarks Future Footwear, started off with an operating loss on sales of £3.1 million (€3.9m-$4.9m) for the first 10 months of trading, and the company feels that it will take at least two more years to reach break-even results. In the course of last year, the joint venture opened 15 stores and 28 shop-in-shops in India, in addition to more than 30 wholesale distribution points.

Outside the U.K. and Ireland, Clarks' European sales rose by 5.5 percent in volume and by 9.8 percent in value. Clarks saw continued progress in Northern Europe, and its pairage grew by 27.3 percent in the developing markets of Central and Eastern Europe. However, the brand was confronted with economic challenges in several southern European markets, especially in Spain where its sales fell by 10.2 percent in volume and by 6.7 percent in value.

In North America, the group's sales rose by more than 8 percent in volume, and turnover reached a record of $839.0 million. At $84.1 million, the operating profit of Clarks North America fell only 1.1 percent short of the previous year's record level, because of the higher product costs and investments of $7 million in its first national consumer-oriented advertising campaign. The company also invested heavily last year in SAP technology and in a new distribution center in the U.S. The two projects should go live in October of this year and in the spring of 2013, respectively.

Clarks' wholesale revenues grew by 12.6 percent in the U.S. and Canada to $486.0 million. Sales through the group's own stores, including the Bostonian chain, went up by 13.5 percent to $337.1 million. Same-store sales increased in the region by 6.7 percent, well ahead of the 3.6 percent increase measured by FDRA for American shoe retail chains. The company launched its e-commerce operations in the region last year. They immediately yielded an operating profit of $3.7 million on sales of $11.1 million, attracting some 7 million visitors with a conversion rate of 1.7 percent.

Encouraged by the good results of its new C7 store format, Clarks spent 25.3 percent more than in the previous year on new stores and the renovation of existing stores on both sides of the Atlantic Ocean. It also exited unprofitable store locations, and this program will continue. The company is investing in in-store technology and further developing its multi-channel retail model, notably by adding an online retailing business for its children's shoes in the U.K., which has drawn some criticism.

The company's chief executive, Melissa Potter, confirmed in the company's annual report a vision that Clarks should become “the leading everyday global footwear brand.” She sees opportunities for further international development by improving service to key accounts and leading independent retailers, by adding shop-in-shops, and by enhancing data connectivity.

Clarks opened 79 new franchised stores in international markets last year and wants to grow the pace to 100 openings per year. The company plans to open more than 130 new directly owned stores in the U.S. and Canada by 2016, but it is also evaluating the possibility of introducing a store franchising program there.

As of last Jan. 31, there were 1,156 stores operating around the world within the group, up from 1,077 one year earlier. While the total number of owned stores went up to 747 from 734, the number of so-called “international Clarks shops,” which are run by partners outside the U.K., increased to 298 from 231. The number of stores operating in the U.K. declined to 584 from 588, but with franchised stores remaining at a level of 111 units.

As we have already reported, the group is setting up a new regional business structure as part of its globalization program, notably by dividing Europe into different regional entities. Called “Clarks Global,” the program is designed to introduce more consistent functional operations and processes. The first phase of this program absorbed investments of £4.7 million (€5.8m-$7.4m) in the past year.

To help Clarks in its international brand-building efforts, the company saw Stella David join its board of directors on March 1. She acted as global chief marketing officer at Bacardi and is now chief executive of William Grant & Sons, one of the largest distillers in Scotland with annual sales of around £1 billion (€1,243.5m-$1,581.8m). Both companies belong to her family.

Potter concluded her report by expressing guarded optimism about further improvements in sales and profits for this year. Forward orders for spring/summer 2012 have shown strong growth trends in many international markets, but some softness in Spain and other European markets. In North America orders are slightly down in volume but higher in value. Retail sales have fallen behind expectations in the U.K. during the first few weeks of the new financial year, but Potter said there were positive early signs of a strong transition to full-price sales for Clarks' spring/summer collection.