Springs Searches the Upmarket at Home

Brent Felgner, September 7, 2009

After seemingly endless quarters in painful transition from its U.S. base to South America, Springs Global Participações ceo Josue Gomes da Silva finally delivered on the promise: One way or another, come hell or high water, Springs would turn a profit.

It wasn't easy. In the face of continuing sales erosion, the slash-and-burn expense-control policies combined with the effective shutdown of U.S. production appeared to produce the long sough after result. But now that the company is marginally profitable, despite continuing declines in U.S. sales, there seems to be little else to cut.

"The transiton period is over. Just about everything has been transferred to Brazil, and we could be running at 100% now, but we can't do that because of the macro environment," offered Gustavo Kawassaki, investor relations director, in an interview with HTT.

During the just reported periods, the company reported a quarterly and first-half net profit of R$23.7 million compared to a loss of R$14.6 million during Q2 last year and a loss of R$13.3 million during 2008's first half. That roughly equates to a net profit of US$11.7 million, based on an average exchange rate of 2.0343 during the quarter.

But sales fell 14.3% during the second quarter, to R$722.8 million (US$355.3 million), compared with R$843.6 million in 2008. For the first six months of the year, sales dropped 14.2%, to R$1.429 billion (US$653.9 million, based on a six-month exchange rate average of 2.1855).

The sales declines reflect continued contractions in the North American marketplace, which could not be offset by price increases, depreciation of the Brazilian real and sales growth of 25% in Brazil and Argentina. Although not by name, the company again cited the impact of the liquidation of Linens 'n Things.

Overall, net sales in fashion bedding decreased 18.4%, and in bath by 19.5%.

Wishing and Hoping?

Springs has stated that much of its strategy at this juncture involves simply waiting out a turnaround in the macro economy to provide the bump in top line sales. But more than that, it has begun reemphasizing its brands, such as Wamsutta and, more significantly, set out on a course to obtain other high-profile branded licenses, such as the Cindy Crawford line it will shortly roll out into JCPenney stores. Gomes promises there will be more in short order; negotiations are currently underway to close several deals, which he declined to identify.

The United States represents the largest share of Springs' business. Despite that, its U.S. executive corps has undergone a sharp realignment in the last year that some say has made it leaner and meaner, while others point to the loss of decades of institutional memory.

"We know that we can achieve profitability in the U.S. business this year," Gomes said during the company's second-quarter conference call. "We know the direction is correct and we should be seeing positive results larger than this run in the quarters to come."

Looking Up

Beyond that, Springs is also in a quest to diversify its global business so that future regional economic slowdowns are less devastating to its bottom line. Gomes sees vast opportunities in his native Brazil and South America, along with Europe and Asia. That search has taken some interesting turns.

With little fanfare, Springs last May quietly purchased a 62% interest in high-end linens retailer MMartan Têxtil, a Brazil-based, 82-store chain with sales of roughly R$200 — about USD$106 million.

It seemed an anomaly at first. Why would Springs, a mass market producer, suddenly develop an interest in retail, particularly in a market segment it has no involvement with? From a sales and profit standpoint, MMartan seems to bring little to the party, barely making a dent in Springs' balance sheet with its 1,300- to 1,600-square-foot stores, mostly located in high-end malls.

Against an admittedly small base, sales have soared upwards of 25% in Brazil and Argentina in recent quarters, a point Gomes is quick to make when touting the developing strengths of those marketplaces.

"We think the growth potential of this chain is very, very big," Gomes said. Market entries are expected before the end of the year in Argentina.

Retail Lab

But according to Kawassaki, the value of the chain is not just about sales. The plan is to make it into a retail laboratory, while offering Springs entre into an entirely new market segment.

"MMartan has 82 stores today, and the plan for the end of 2010 is at least 40 to 50 stores," he said. "And let's say last year they closed the year with about R$200 million, so with 50 more stores we could get close to about R$350 million this year. Josue believes they can teach us a lot about how to improve our products. Its strategic purpose is to help us move up market.

"And as you know we've cut out costs very, very aggressively and that's what's keep us strong financially."

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