The Story of Sitka’s Near-Failure and Its Road to Recovery

When a credit union called Sitka’s loan in 2015, the west coast clothing and lifestyle brand came close to shutting down forever. But its CEO Rene Gauthier didn’t want to give up on the company he co-founded. Against the odds — and despite advice to close shop — Sitka is on a tenuous path to recovery.

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Photograph by Dean Azim.

You could say Sitka’s financial breakdown began in mid-2014 when, over three days, a dozen Sitka staff locked themselves in a room for some bona fide soul-searching.

“We wanted to find out what our purpose was. In the process we realized our product didn’t align with the vision and values of our employees,” recalls Rene Gauthier, co-founder, co-owner and CEO of Sitka, the internationally known Victoria clothing and outdoor-product retailer.

And so began the plan to live up to Sitka’s vision as a company that sells ethically made, responsible, long-lasting products that reflect the wild and pure Pacific Northwest.

Little did Gauthier and former partner and co-founder Andrew Paine know that their decision to chop Sitka’s manufacturing contracts with Asian companies and grow sales with Canadian-made goods would have major implications.

“We put some lines in the sand and said we’d move all production back to Canada by the fall of 2016,” Gauthier, 36, recalls, adding that they completed the move by the spring of 2015. As well, another line drawn included that the clothing would be made of 100-per-cent organic cotton and natural fibres.

“We dove into that, but we underestimated what happens when you change your supply chain. We went all in. It was extremely hard to find Canadian products,” recalls Gauthier.

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Once upon a time, the needle trade flourished in Montreal, Toronto and Winnipeg (the latter, incidentally, where Gauthier grew up). But by 2014, finding quality Canadian manufacturers proved difficult and time consuming. As well, Canadian products cost more to buy, which led to slimmer profit margins for Sitka.

Marketed as a West Coast company, Sitka sold Asian-made goods to Canadian, U.S., European and Asian boutiques and outdoor-goods stores.

“The problem became, we couldn’t meet the needs of our retailers,” says Gauthier. “We couldn’t find Canadian manufacturers.

As well, making clothing responsibly is more expensive, explains Gauthier.

“You can make clothing using 21st-century slave labour in foreign countries — with no care for the impact the production has on people and environment — for much cheaper. And we know this because we’ve been part of this ‘status quo’ … but when you make products the way we do now, there’s a much higher cost.”

Another factor is that retail prices are typically double the wholesale prices, says Gauthier, so to keep their product costs as reasonable as possible for their end customers, Sitka decided to cut out its wholesale division.

“By doing this, it meant we could still sell a sweatshirt for $150 instead of $300 to the end customer.”

The problem was that in 2014, half of Sitka’s roughly $4-million in annual sales came from its wholesale arm. Soon, half of Sitka’s revenue evaporated, but expenses stayed the same.

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A tactical error worsened Sitka’s cash-flow problems. “We made this change in the middle of our growth plan,” Gauthier admits. He and Paine were planning to open stores in Western Canada and U.S. west coast states. They had lined up expansion financing from investors and got a loan from Island Savings Credit Union. But the credit union only supplied a portion of the loan, Paine says.

That meant Sitka didn’t have enough money to purchase goods in time for seasonal sales.

“You can’t sell bikinis in the winter,” Paine says. “We were left with excess old stock.” And without sales revenue, there was no money for new products.

By late 2015, the pair realized they wouldn’t be able to make loan payments. The credit union called the loan; Sitka couldn’t repay it and, as Gauthier says, the situation began to snowball. “Things got very crunchy. There were some super-tense days.”

Adding to the pressure was that at the end of 2015, Paine stepped aside.

“I’d been doing the same thing for 13, 14 years. I decided I wanted a change,” Paine, 37, says. He took his childhood passion for making fishing tackles and, with his wife Nancy, started AP Tackleworks, a Victoria-based lure company. Paine remains a Sitka shareholder.

In November 2015, Sitka filed a repayment plan. The court and creditors agreed with the proposal, which would help Sitka avoid bankruptcy. Total debt was $3.5 million to secured and unsecured creditors, according to Sitka’s trustee. Secured creditors were owed $2.9 million, unsecured creditors, $517,329, and there were shareholder loans.

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Brock Smith knows Sitka’s story well. A marketing and entrepreneurship professor at UVic’s Gustavson School of Business, Smith taught Gauthier and Paine, both of whom are UVic grads. He recalls reading the marketing plan for Sitka back in the early 2000s.

“They have what it takes to come back. Their fundamentals are strong,” he says. “What they had was an ill-fated expansion.”

The number-one reason businesses fail, Smith says, is because they don’t have enough operational cash flow. In Sitka’s case, it tried to finance its expansion without enough working capital. The Sitka spiral downward began when it used cash on hand to finance operations and growth.

“Their experience flags the caution for small business. Expansion is tricky. You need to think of strategy, think through appropriate expansion. Sitka could have had a less-ambitious strategy. They could have held off,” Smith says. Making it worse, he says, was that lenders like the credit union are very risk averse and typically don’t provide additional fundings.

As Gauthier looks back, he says, “Something happens when a loan gets called. You do all you can. You look under every rock.”

Adds Paine, “You get really lean.”

One of the Vancouver stores was closed and, nearer to home, they realized that the large Yates Street store, selling a substantial amount of non-Sitka brands, wasn’t necessary.

“We closed Yates and opened Government Street, next to Trounce Alley, the next day,” Gauthier says.

The new location opened in December 2015, just in time for Christmas shoppers, who were welcomed to a store stocked with Sitka merchandise.

“There’s much higher foot traffic. It’s cheaper rent and a tighter space,” Paine says.

Sitka also laid off staff. At its height, Sitka employed 50 people, and during early restructuring, 10 employees. Today, there’s roughly 20 staff.

“It was crazy hard. Many of my best pals were employees. We had conversations where I said, ‘I can’t pay you this week,’” Gauthier recalls.

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But by late July 2017, the debt to secured creditors was paid, plus nearly half of the debt Sitka had agreed to pay to unsecured creditors, Gauthier says. He anticipates Sitka, with help from Victoria resident Mark Gittins and other investors, will be out of the woods sometime in 2018, with the debt eliminated.

“It seems to be going really well,” Paine says. “We definitely feel confident in our plan.”

While the once towering Sitka was chopped down in size, deep roots remain. “I had a lot of advice to end it. I told myself, ‘I’ll show you,’” recalls Gauthier. “That gave me extra motivation not to quit. I don’t know how to give up.

“It seems in those dark times, I’d see a sign from the universe,” he says. It could’ve been someone wearing a T-shirt with the iconic Sitka trees or spotting one of the just-as-iconic surfboards.

Through his never-say-die attitude, Gauthier’s come to realizations. “I feel like in the last two years, I actually learned about business. Fail fast is huge,” he says.

After launching Sitka, the company enjoyed almost 100-per-cent growth each year over the first dozen years. As trailblazers who had tasted financial success, the partners had no reason to think their expansion plans and bid to sell all-Canadian goods could possibly fail.

“When I started, I was a 20-year-old. It was all going my way,” Gauthier recalls.

But, as Smith says, what “fail fast” actually means is fail early while the business is still small and losses won’t be crushing. “The issue with early success is you develop shortcuts that allow you to make decisions quickly,” he says. Sometimes those snap decisions are based on biases and past instances where things worked well. But quick choices can be faulty. “Success can make you complacent and you don’t do your homework,” Smith warns.

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Today, a Sitka tagline is, “Leave it better than you found it.” While proud that Sitka’s living up to its goal of selling Can-made goods, even adding a kids’ line earlier this year, Gauthier admits the situation is not “sweet and rosy” because financial challenges remain.

But as an entrepreneur who tumbled from his delectable perch, Gauthier says he has found joy in running a business that can honestly say it represents the values it advertises, unlike copycat companies that sell products made far away yet tout the Pacific Northwest lifestyle.

“Why the heck be just a clothing company? We can do better. We can educate people about their choices. Over the last couple years, we were walking a fine line. Would we make it or not make it? Through it all, we stayed true to our values.”

 This article is from the October/November 2017 issue.