C&J Clark (Clarks) performed well in Europe and Asia during the first six months of its financial year, ended July 31, but this was offset by a competitive environment for the group in the U.S. and a disruption in deliveries caused by workers' demonstrations in Vietnam in May. The group's total turnover declined by 2.2 percent to £679.8 million (€849.5m-$1,066.2m) during the period, down by 0.7 percent at constant currency exchange rates.

Margins improved, however, especially in Europe. Overall, the operating profit of the group increased by 4.7 percent to £37.7 million (€47.1m-$59.1m), with an improvement of 8.8 percent in local currencies. Net earnings went up by 5.9 percent to £25.0 million (€31.2m-$39.2m).

Clarks Consolidated Income Statement

(Million £, Six months ended July 31)

 

2014

2013

%
Change

UK & ROI

Revenues

287.9

279.0

3.2

Operating profit

36.1

30.9

16.8

Operating Margin

12.5%

11.1%

1.4pp

North America

Revenues

255.1

291.7

-12.5

Operating profit

31.0

37.0

-16.2

Operating Margin

12.2%

12.7%

-0.5pp

Europe

Revenues

75.8

67.0

13.1

Operating profit

17.6

14.5

21.4

Operating Margin

23.2%

21.6%

1.6pp

Asia-Pacific

Revenues

61.0

57.0

7.0

Operating profit

16.4

17.3

-5.2

Operating Margin

26.9%

30.4%

-3.5pp

The disruption in Vietnam affected the manufacturing of Clarks Originals and men's Gore-Tex waterproof footwear at the Genfort factory, which resulted in the loss of £12.7 million worth of unfulfilled wholesale orders, particularly in Europe. If these two production lines had worked normally, Clarks would have reported a 1.1 percent increase in turnover. The company quickly switched to other sources. Most of the costs related to this problem are going to be covered by an estimated refund of £7.3 million (€9.12m-$11.45m) by an insurance company, which has already been included into the accounts as a credit.

Clarks reported an increase in its overall sales in the U.K. and Ireland to £287.9 million (€359.8m-$451.5m) for the six-month period, with a 3.4 percent improvement in average selling prices and an increase in “achieved” margins to 52.9 percent of sales from 53.4 percent in the corresponding period a year ago. The company says it benefited from efforts to limit promotional activity, to develop collections that appeal to specific consumer targets and to enhance the premium component of the product mix.

Sales at the group's own stores in the U.K. and Ireland rose by only 0.4 percent on a comparable store basis, below the 5.0 percent rise in the footwear market measured by the British Retail Consortium. Higher sales increases were generated by e-commerce, up by 10.1 percent, and by wholesale deliveries, up by 9.6 percent in volume and by 12.5 percent in value.

The profitability of Clarks' British and Irish stores improved by more than 6 percent. Stronger profit gains of 22.1 percent, 26.1 percent and 13.1 percent were obtained - respectively - by Clarks' e-commerce operations, its factory outlets and its wholesale business in the U.K. and Ireland. The region contributed an operating profit of £36.1 million (€45.1m-$56.2m) in the first half, up from £30.9 million in the year-ago period.

In the rest of Europe, Clarks booked a 21.4 percent increase in “controllable profits” to £17.6 million (€22.0m-$27.0m), resulting in a higher margin of 44.0 percent, as revenues increased by 15.3 percent in value to £75.8 million (€94.7m-$118.9m) and by 13.1 percent in volume. Re-orders were up by more than 30 percent for the spring/summer season.

Clarks mentioned especially strong growth in France, Benelux, the Nordics and in Central and Eastern Europe. It noted a gradual recovery in confidence by retail clients and consumers on the Continent.

In Asia-Pacific, volumes were 10.2 percent higher than a year ago, led by a 20.4 percent jump in China, which accounted for 43 percent of the regional total. Volumes fell by 23.0 percent in Japan. Sales increased by 14.5 percent in India, where Clarks hopes to reach the breakeven level this year in spite of the devaluation of the rupee. All in all, sales increased by 6.5 percent to £61.0 million (€76.2m-$95.7m) in the Asia-Pacific region, but operating profits declined to £16.4 million (€20.5m-$25.7m).

The sore point was the Americas, where operating profits before exceptional items declined by 16.2 percent to £31.0 million (€38.7m-$48.2m) on 16.2 percent lower revenues of £255.1 million (€318.8m-$400.1m). Clarks says it met “extremely challenging conditions” at its retail stores in the region, due to a poor start of the spring season, less store traffic and aggressive price competition.

The retail channel's profitability fell by more than 78 percent in the Americas in the first half as comparative sales dropped by 8.5 percent at full-price stores and 11.3 percent at factory outlets, leading to a 2.6 percent decline in retail turnover in spite of a small rise of 0.6 percent in average selling prices.

At the wholesale level, the group's net turnover was essentially flat in the Americas at £151.4 million (€189.2m-$237.5m), as a 3.5 percent drop in deliveries was compensated by a 3.2 percent increase in average selling prices. Margins of 30.8 percent were slightly below last year, the wholesale channel's profitability went up by 1.9 percent, with a 5.5 percent increase per pair shipped.

The Americas is also the region where the group is making its biggest investments and expecting the biggest progress with the start-up of a new distribution center in the U.S. It will be followed by the implementation of a new e-commerce platform in the Americas early next year, which will be then rolled out in the U.K., Ireland and the rest of Europe later in 2015. Clarks has extended its SAP platform to the Chinese and Japanese markets.

After these investments in infrastructure, the focus of the group will increasingly shift toward brand-building, product development and store refurbishments, the management indicated in its first-half financial report.

The management is anticipating that Clarks' operating income this year will be at least comparable with that of last year, judging from current autumn/winter orders, which are particularly strong everywhere except in the Americas. The back-to-school selling season in the U.K. set new records.

The company appointed a new president for the Americas last July, Geralyn Breig. It has also created a new role of chief brand officer to coordinate the group's marketing and product teams. Ken Dobinson, chief commercial officer of the group, has been given stronger accountability to set annual and seasonal objectives.