Springs Sees Late 2009 Daylight

Sales Slide, Trims Q3 Loss

Brent Felgner, Staff Staff, December 8, 2008

Ever the optimist, Josue Gomes da Silva makes the case that despite a snowballing economic crisis, broadly fluctuating currency exchanges and a home textiles marketplace losing doors by the hundreds, Springs Global Participações is on the right track to reposition its worldwide business.

"If there is one thing that Coteminas has always been good at and that Springs Global has proven to be good at, it is the ability on a disciplined basis, to reduce costs and become more competitive. Obviously, we need now to increase our sales," Gomes da Silva said in the quarterly conference call, as the company announced a reduced net loss.

Springs sales fell 32%, but the net loss was reduced 30.5% to R$56.8 million — approximately USD$38.8 million, based on an average exchange rate during the quarter. The net loss in last year's third quarter was R$81.7 million.

Quarterly sales of R$698.1 million — about USD$409.4 million — shrank from R$903 million during the same period last year.

(Third quarter net sales from continuing operations fell 21.6%, utilizing comparable 2007 Q3 net sales of R$890.4 million, which recognizes sold off and discontinued businesses.)

Gomes da Silva disclosed that Springs authorized an increase in the company's capital stock in November of R$200 million — about USD$76.4 million, based on Friday's exchange rate — with the issue of more than 57 million shares in a private placement priced at R$3.50 per share.

"We are very confident [in] our capital structure during the third quarter and during the fourth quarter," he said. "We are bringing it back to very strong levels with our rights offer, and we are raising cash and capital through our rights offer. That brings our capital structure to a level that is strong enough to get through this economic crisis in good shape."

He provided no additional information about the placement.

"If there was any doubt about the company's strategy to cut costs, I think they are proving even more needed now, given the economic environment we are in, and are showing up by the fact that operationally the company has been able to present some level of profitability — although a reduced level of profitability — before interest expenses," Gomes da Silva said. He was referring to a line in Springs' income statement that lists income before financial results: R$11.5 million earned before interest, exchange variations and taxes. That figure compares well to a loss in Q3 2007 of R$22.9 million, a R$34 million swing.

The company cited the U.S. economic slowdown and a 9.9% depreciation of the Brazilian real among the factors most influencing its results. It did not cite any remaining operational challenges in its own business, other than the need to build sales. Springs in the last two years has migrated direct manufacturing to Mexico and South America, with some limited outsourcing to Asia. Expansion of its Brazilian business helped tamp down some of the U.S. declines, the company said.

"As the new effort and the investment that we're making in our brands starts to reach the marketplace — and so far the impact to the retailers has been pretty positive, particularly with the relaunch of Springmaid — we believe that coupled with some recovery of the American economy by the end of 2009, the company will be in a very strong [position] to take advantage," Gomes da Silva said.

Springs made oblique references to the liquidation of Linens 'n Things and the bankruptcy filings of Mervyns and Boscov's. It will make adjustments to address those changes, "including further consolidation opportunities in manufacturing and warehousing in the United States," and reductions in SG&A expense.

Gross margins from continuing operations improved 420 basis points, to 12.7%, compared to 8.5% one year ago. The improvement reflects lower conversion costs associated with the move of manufacturing out of the U.S., and trimmed logistics costs. General and administrative expenses fell 32.4%, to R$38.3 million.

By business segment, sales fell 21.9% in fashion bedding; they decreased 25.9% in bath; declined 22.9% in utility bedding; and dropped 31.2% in the "Other" segment, including Springs Direct and Canadian sales. Intermediate products, which include yarn, greige and finished fabrics, grew 27.7% during the quarter.

For the nine-month period, net sales fell 32.8% to R$2.16 billion, compared to R$2.81 billion the year before. The net loss was cut to R$70.1 million for the nine months, compared to R$201.2 million in 2007.

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