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WELCOME TO EARTHWEAR CLOTHIERS Company History and OperationsEarthWear Clothiers was founded in Europolis, by Tor Engan and Calvin Rogers in 1993, to make high-quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and whitewater kayaking. Over the years, the company's product lines have grown to include casual clothing, accessories, shoes, and soft luggage. EarthWear offers its products through three retailing options: catalogues, retail outlets, and its website. EarthWear went public on the Euro Stock Exchange (ESE) in 2002 and is listed on the NASDAQ (USA) from 2007. The company has been audited by Willis & Adams International since 1993. The company strives to provide excellent, high-quality products at reasonable prices. EarthWear has a commitment to excellence in customer service and an unconditional guarantee. The company is also conscious of its environmental responsibilities. All company facilities are insulated, recycle and conserve power. The company continuously monitors the environmental impact of its products. The company believes that many of its customers share this concern for the environment. The company offers its products principally through regular mailings of its monthly catalogues. EarthWear has seven outlet stores in the USA, six in Germany and France, five in the UK, two in Denmark, Sweden and Japan. The company also offers its products over the Internet. During 2009, the Company expanded its global presence by launching sites in Belgium, Finland, Hungary, Ireland, Italy, Norway, Poland, Singapore, Slovenia and Spain. Currently, revenue from catalogue sales, retail outlets and the website are 74 per cent, 5 per cent and 21 per cent respectively. Management expects that Internet sales will grow significantly in the future, perhaps replacing catalogues as the major source of sales. Company Growth Strategy EarthWear’s growth strategy has three elements. First, the company attempts to increase sales by expanding its customer base and by increasing sales to existing customers through improved product offerings. Second, the company seeks to generate additional sales by targeted mailings of special issues of its catalogues and by offering its products through its website. Third, the company is pursuing additional opportunities to expand its merchandising skills internationally. Catalogs And Sales Operations During 2013 the company mailed 12 issues of its regular monthly catalogue with an average of 75 pages per issue. Worldwide, the company mailed approximately 160 million full-price catalogues. EarthWear views each catalogue issue as a unique opportunity to communicate with its customers. Products are described in visual and editorial detail, and the company uses such techniques as background stories and distinctive covers to stimulate the readers’ interest. Each issue of the regular catalogue offers certain basic product lines for men and women. The regular catalogue also offers seasonal merchandise. In addition, EarthWear mails two end-of-season clearance catalogues. The company mails its catalogues to prospective customers who are identified based on lists of magazine subscribers and lists of households meeting certain demographic criteria. In addition, the company identifies prospective new customers through its national advertising campaign. In 2001 the company introduced its first business specialty catalogue, which offered its products to groups and companies for corporate incentive programmes. EarthWear’s embroidery capabilities allow for the design and monogram of unique logos or emblems for groups and companies. In 2013 the company mailed five issues of its corporate sales catalogues. The international business segment includes operations in seven countries, and various Internet sites. Catalogues mailed in those countries are written in the local languages and denominated in local currencies. EarthWear has launched local websites in each of these countries in their respective languages and currencies. Customer Database A principal factor in the company’s success has been the development of its own list of active customers. At the end of 2013 the company’s mailing list consisted of about 21.1 million persons, approximately 7 million of whom were viewed as customers because they had made at least one purchase from the company within the last 24 months. The company routinely updates and refines the database before mailing catalogues to monitor customer interest as reflected in criteria such as the regency, frequency, amount and product type of purchases. EarthWear believes that its customer database has desirable demographic characteristics and is well suited to the products offered in the company’s catalogues. A survey conducted by the company in seven countries during 2012 indicated that approximately 50 per cent of its customers were in the 35–54 age group and had median incomes of €62,000. The company advertises to build its reputation and to attract new customers. In 2013 this advertising campaign appeared in about 70 international and national magazines and publications, as well as on nine national television networks. EarthWear also advertises on a number of Internet search engines and websites. Product Development EarthWear concentrates on clothing and other products that are aimed at customers interested in outdoor activities. The company products are styled and quality crafted to meet the changing tastes of the company’s customers rather than to mimic the changing fads of the fashion world. At the same time, the company seeks to maintain customer interest by developing new products, improving existing core products, and reinforcing its value positioning. The company continues to incorporate innovations in fabric, construction, and detail that add value and excitement and differentiate EarthWear from the competition. In order to ensure that products are manufactured to the company’s quality standards at reasonable prices, product managers, designers and quality assurance specialists develop the company’s own products. EarthWear deals directly with its suppliers and seeks to avoid intermediaries. All goods are produced by independent manufacturers except for most of its soft luggage, which is assembled at the company’s facilities. During 2013 the company purchased merchandise from approximately 300 domestic and foreign manufacturers. In 2013, one manufacturer and one intermediary accounted for about 14 and 29 per cent of the company’s received merchandise, respectively. In 2013 about 80 per cent of the company’s merchandise was imported, mainly from Asia, (Bangladesh, China, India, Indonesia and Malaysia). The company will continue to take advantage of worldwide sourcing without sacrificing customer service or quality standards. Order Entry, Fulfillment and Delivery EarthWear has toll-free telephone numbers that customers can call 24 hours a day, seven days a week to place orders or to request a catalogue. Approximately 90 per cent of catalogue orders are placed by telephone. Telephone calls are answered by the company’s well-trained sales representatives, who utilize online computer terminals to enter customer orders and to retrieve information about product characteristics and availability. The company’s main international telephone centre is located in Mumbai, India. Other telephone centres are located in Boise, USA; London, England; Tokyo, Japan; and Mannheim, Germany. The company’s order entry and fulfilment system permits shipment of in-stock orders on the following day, but orders requiring monogramming or inseaming typically require one or two extra days. The company’s sales representatives enter orders into an online order entry and inventory control system. Customers using the company’s Internet site see colour photos of the products, their availability and prices. When ordering a product over the Internet, the customer completes a computer screen that requests information on product code, size, colour and so on. When the customer finishes shopping for products, he or she enters delivery and credit card information into a computer-based form. Orders are generally shipped by United Parcel Service (UPS) or comparable services at various tiered rates that depend on the total monetary value of each customer’s order. Other expedited delivery services are available at additional charge. Merchandise Liquidation Liquidations (sales of overstock and end-of-season merchandise at reduced prices) were approximately 12 per cent, 11 per cent and 8 per cent of net sales in 2013, 2012 and 2011, respectively. Most liquidation sales were made through catalogues and other print media. The balance was sold principally through the company’s outlet retail stores. Competition The company’s principal competitors are retail stores, including specialty shops, department stores and other catalogue companies. The company may also face increased competition from other retailers as the number of television shopping channels and the variety of merchandise offered over the Internet increase. The apparel retail business in general is intensely competitive. EarthWear competes principally on the basis of merchandise value (quality and price), its established customer list, and customer service, including fast order fulfilment and its unqualified guarantee. Trademarks The company uses the trademarks of ‘EarthWear’ and ‘EWC’ on products and catalogues. Seasonality Of Business The company’s business is highly seasonal. Historically, a disproportionate amount of the company’s net sales and most of its profits have been realized during the fourth quarter. If the company’s sales were materially different from seasonal norms during the fourth quarter, the company’s annual operating results could be materially affected. Accordingly, results for the individual quarters do not necessarily indicate results to be expected for the entire year. In 2013, 37 per cent of the company’s total revenue came in the fourth quarter. Employees The company believes that its skilled and dedicated workforce is one of its key resources. The majority of employees are covered by collective bargaining agreements, and the company considers its employee relations to be excellent. As a result of the highly seasonal nature of the company’s business, the size of the company’s workforce varies, ranging from approximately 3,500 to 5,300 individuals in 2013. During the peak winter season of 2013 approximately 2,700 of the company’s 5,300 employees were temporary employees. Executive Officers of the Company Tor Engan, 65, is chairman of the board and former chief executive officer. Mr Engan was one of the two original founders of EarthWear. He stepped down as chief executive officer in December 2006. Calvin J. Rogers, 57, is president and chief executive officer of the company. Mr Rogers was one of the two original founders of the company. He assumed his present position in December 2006. Stefan Anderson, 56, is executive vice president and chief operating officer. Mr Anderson joined the company as chief operating officer in June 2001. He was promoted to vice president in October 2004. Mr Anderson was previously employed by Eddie Bauer in various capacities. Linda S. McDaniel, 45, is senior vice president of sales. She joined the company in July 2003. Ms McDaniel served as divisional vice president, merchandising, with Patagonia between 1998 and 2001. Ms McDaniel was the president and chief executive officer for Mountain Goat Sports from 2001 until 2003. She has been serving as a director of the company since November 2004. James C. (‘JC’) Watts, 45, is senior vice president and chief financial officer. Mr Watts joined the company in May 2005, assuming his current position. He was previously employed by Artic Department Stores. Mary Ellen Tornesello, 47, is senior vice president of operations. Ms Tornesello joined the company in 2000 as operations manager. She served as vice president of operations from 2001 until 2003, at which time she assumed her present position. Market information The shares of the company are listed and traded on the Euro Stock Exchange (ESE) and on NASDAQ. The high and low prices of the company’s common shares for 2013 were €52.50 and €21.75 per share. The closing price of the company’s shares on 31 December 2013 was €40.25 per share.Shareholders As of 31 December 2013, the number of shareholders of record of common stock of the company was 2,120.Independent Auditors The company has been audited by Willis & Adams International since establishment in 1993.Financial Reporting Framework EarthWear prepares consolidated financial statements reports in accordance with the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). Consolidated Statements of Comprehensive Income
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Consolidated Statements of Financial Position
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Consolidated Statements of Changes in Equity
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Consolidated Statements of Cash Flow
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Five-Year Consolidated Financial Summary
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Footnotes
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Management’s Discussion and Analysis: Results of Operations for 2013 Compared to 2012 Total Revenue Increased by 3.2 Per Cent Total revenue for the year just ended was €950.5 million, compared with €857.9 million in the prior year, an increase of 3.2 per cent. Seasonally strong sales resulted in a higher level of back orders during the fourth quarter and a first-time fulfilment rate of 85 per cent for the year as a whole, slightly below the prior year’s rate. Overall merchandise sales growth was primarily attributable to changes in circulation, which included adding back our end-of-year catalogue and our January full-price catalogue, shifting the timing of our autumn/winter mailings, increased page circulation and improved merchandise selection and creative presentations. Profit for The Year Decreased Profit for the year 2013 was €22.5 million, down 27.8 per cent from the €31.2 million earned in 2012. Diluted earnings per share for the year just ended were €1.14, compared with €1.56 per share for the prior year. The diluted weighted average number of common shares outstanding was 19.8 million for 2013 and 20.1 million for 2012. Gross Profit Margin Gross profit for the year just ended was €404 million, or 42.5 per cent of total revenue, compared with €385 million, or 44.9 per cent of total revenue, for the prior year. Liquidations were about 11 per cent of net merchandise sales in 2013, compared with 12 per cent in the prior year. In 2013, the cost of inventory purchases was down 2.0 per cent, compared with deflation of 2.7 per cent in 2012. This reduction was a result of improved sourcing. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses increased 9.2 per cent to €364 million in 2013, compared with €334 million in the prior year. As a percentage of sales, SG&A was 38.3 per cent in 2013 and 39.1 per cent in the prior year. The absolute increase in the SG&A ratio was the result of higher sales, higher catalogue costs associated with increased page circulation, as well as higher information services expenses as we continue to invest in the Internet and upgrade systems capabilities. The cost of producing and mailing catalogues represented about 39 per cent and 38 per cent of total SG&A in 2013 and 2012, respectively. Credit Lines and Capital Expenditures Interest expense on lines of credit was down in 2013 due to lower average borrowing levels. Interest expense decreased to €1.0 million in 2013, compared to €1.2 million in 2012. We spent €29 million in cash on capital expenditures, which included €20 million for computer hardware and software. In addition, the company acquired a new aeroplane by exchanging two of its own aircraft in 2013. Also, we purchased about €18 million in treasury shares. No long-term debt was outstanding at year-end 2013. Depreciation and amortization expense was €15.2 million, up 13.1 per cent from the prior year, mainly due to computer software. Rental expense was €10.4 million, up 3.4 per cent from 2012, primarily due to additional computer hardware.The Independent Auditor’s Report can be downloaded here: Independent Auditor''s Report
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