Marvel's 2000 Annual Report is now available, and there's information on a number of key questions for pop culture retailers. Here's our review and analysis of that information.
How important to Marvel are its comic direct sales through Diamond to pop culture stores?
The answer to this is really in two parts, because Marvel's direct sales are critical to its publishing, but publishing remains a small part of the overall picture for Marvel since it was folded into Toy Biz in 1998. As a percentage of single copy sales, Marvel's sales through the direct market have been an increasing percentage over the last three years, reaching 91% in 2000.
1998 1999 2000
Direct Sales 89% 90% 91%
Returnable Sales 11% 10% 9%
We calculated those numbers based on the percentages of publishing revenue (which also includes advertising and subscriptions) that Marvel attributed to its direct sales and returnable channels over that period. It's also worth noting that since its returnable sales include bookstore distribution as well as newsstand magazine distribution, Marvel's sales through the newsstand channel must be paltry. Perhaps our suggestion that Marvel bag its efforts to succeed on the newsstand (see 'Reactions to Marvel's No Overprint Policy') wasn't so radical after all.
Here are the over-all percentages of publishing revenue for the last three years:
1998 1999 2000
Direct Sales 81% 80% 77%
Returnable Sales 10% 9% 8%
Advertising 6% 9% 13%
Subscriptions 3% 2% 2%
As you can see, direct sales have been declining as a percentage of publishing revenues, reflecting an increase in the importance of advertising in recent years, but since Marvel's over-all publishing revenues were up in 2000 vs. 1999, we estimate that in addition to increasing the direct sales percentage of single copy sales in 2000, Marvel eked out a slight dollar gain in direct comic sales in 2000 as well. To give you some idea of scale, using the over-all sales numbers provided and the percentage breakdowns given, we calculate that Marvel's sales to Diamond were between $35 and $36 million in 2000. Note the caveat that to get some of the above numbers, we're calculating two-digit percentages of two-digit percentages, and there may be some rounding error from the dollars, which were not available in the report as raw numbers.
Publishing also went up as a percentage of Marvel's total revenues in 2000 vs. 1999. Here's how Marvel's sales break down into its three main segments:
Licensing 10% 8%
Publishing 13% 20%
Toys 77% 72%
This means that direct comic sales only account for about 15% of Marvel's total sales, although both the dollars and that percentage increased last year.
A couple of other tidbits from the report. Marvel did make an increased commitment to books last year, although it was barely measurable on the scale of its business. Finished products inventory for the publishing segment went from $0(!) at the end of 1999 to $298,000 at the end of 2000.
In perhaps the most telling narrative portion of the report, Marvel had an interesting explanation for the decline in periodical comics sales since 1995. 'Since 1995, the comics publishing business has declined, along with the number of retailers that carry comic books. A significant number of comic book specialty stores have left the business, primarily due to a decrease in speculative purchases of both comics and related collectibles (e.g., trading cards). A significant number of outlets that carried comics as a part of their magazine merchandise programs have dropped the product due to an overall reduction in comics readership. Management believes that this loss of readers was the direct result of a long-term, industry-wide decline in the readability and quality of comic book stories.'
Do pop culture stores account for a significant percentage of Toy Biz sales?
As we reported based on the preliminary information that Marvel released about a month ago, its toy sales tanked in 2000, contributing substantially to its massive losses of over $100 million (see 'Marvel's Bleak Financials'). As part of this process, the mix of its sales also changed. The report disclosed that the top five accounts for Toy Biz accounted for 60% of its sales in 2000, with the top three breaking down like this:
Toys R Us 26%
Wal Mart 15%
K Mart 8%
The other two chains in Toy Biz' top five customers were Target and Kay Bee. At first glance, it appears that independents might have picked up some significant Toy Biz share in 2000, since the share of the top five dropped from 70% of total toy sales to 60% in 2000. On closer inspection, the difference appears to have been picked up by international sales made from Hong Kong, which went from 15% to 28% of Toy Biz sales between 1999 and 2000. Adding the Hong Kong sales into the mix, the top five customers plus international sales end up totaling 88% of Toy Biz sales, meaning that pop culture stores must make up a very small percentage of total sales.
One other nugget from the Toy Biz portion of the Report -- approximately 75% of the company's toy sales were generated from products not based on the Marvel characters. That puts the company's sales of Marvel-based toys only slightly higher than its sales of comics.
Will Marvel continue to be a major supplier to pop culture stores?
After its horrendous losses in 2000, the biggest question for many pop culture retailers is whether Marvel is going to survive another year without finding itself in bankruptcy again. Such an event would be devastating. As Diamond COO Chuck Parker put it in his interview with ICv2 (see '20 Questions: Chuck Parker'), '...Marvel is a key player in our industry and if they were to stop publishing comics it would be very harmful for everybody.' It's definitely clear that if Marvel has another year in 2001 like it did in 2000, it will be very difficult to survive. Although over $50 million of its losses were non-cash (depreciation, amortization, interest paid in stock, etc.), its cash balances did drop over $40 million in 2000, leaving around $23 million at the end of the year. The company also has a $40 million credit line, but the covenants that must be met for the company to draw on that line are not disclosed and it's not clear that all of that will be available if Marvel continues to bleed as it has done recently.
The best news was probably Marvel's auditor's statement, which had no 'going concern' opinion. An auditor is required to disclose if it believes that there is a question as to whether the company will survive as a going concern in the coming year, and such a statement was not present in the auditor's report. Management also states that it believes that '...Cash on hand, cash flow from operations, borrowings available under the Citibank working capital facility and other sources of liquidity, will be sufficient for the company to conduct its business, meet debt service requirements, make capital expenditures and pay Administration expense claims.' The debt service comment is worth special note -- Marvel paid over $31 million in interest on its debt in 2000, and although declining interest rates will probably reduce that number somewhat in 2001 there will still be a massive nut that must be covered in addition to the cost of operations.
Although it will not affect cash, Marvel still may have some bad news left in its toy business. Marvel increased its inventory write-down on Toy Biz inventory by $3.8 million at the end of 2000, but if our calculations are correct, its toy inventory still went up by about 30 days of sales last year, not a good sign as its sales decline. With a book net worth of only about $31 million at the end of 2000, Marvel may be in dangerous territory if it takes substantial additional write-downs, continues to lose money, and has no additional capital infusions. Pop culture retailers should be rooting for Marvel to meet its goals in turning around Toy Biz this year so this crucial supplier to comic stores continues to produce the best-selling comics in the industry.