Interesting Stuff from Quiksilver’s 10K Annual Report

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Back in December, Quiksilver released its annual and quarterly earnings and held a conference call. I did the best analysis I could, but bitched and moaned because I didn’t have the complete 10K or the balance sheet. You can see that analysis here. Last week, the company issued its 10K. I’m not going to redo the analysis I did, but there’s a few pieces of interesting additional information I thought you’d want to see.

The Balance Sheet

To put it most simply, the October 31, 2011 balance sheet is almost unchanged from a year ago. The current ratio at 2.62 times is pretty much the same as last year. Total liabilities to equity have risen slightly from 1.74 to 1.83. Long-term debt, excluding the current portion, rose from $701 million to $725 million “…to fund higher working capital levels…” Total equity is up only a couple of million to $623 million.

I had hoped, but not really expected, to see some further balance sheet improvement. Maybe that wasn’t realistic given the economy. But let me remind you that a couple of years ago debt was $1 billion and Quiksilver faced a short term liquidity crisis with principal payments that it, well, couldn’t make. The Rhone deal, and the restructuring of their European bank lines, leaves Quiksilver with a very manageable $11 million in principal payments through the end of 2013. There’s $35 million due in 2014 and $400 million due the next year.
 
Trade receivables rose 8% to $397 million, consistent with sales growth. I think that was in the press release. I pointed out only because I noted that Quik mentioned it was doing some consignment sales in Asia. This is hardly unique to Quiksilver (and not just in Asia.). But in general terms, if consignments and other forms of non-sales sales become more common, one has to wonder how to think about the receivables numbers. As far as I know, consignment sales remain in inventory, and don’t show up as receivables.
 
New Risk Factor
 
I haven’t compared all of last year’s risk factors with this year’s, but I did notice one addition. They’ve added, “If our goodwill becomes impaired, we may be required to record a significant charge to our earnings.”
 
Now, I don’t take these factors all that seriously, because I know the lawyers want to put in anything that could conceivably go wrong. But this one, I thought, was instructive. Lots of companies have impairment charges; especially in a slow economy.  When they tell you about them, they always point out that they are non-cash, which is true. But, as I’ve written before, and not just when I’ve been talking about Quiksilver, these charges represent an anticipated future reduction in cash flow and/or a decline in value. That’s why the impairment charges are required.
 
When I see Quiksilver add this risk factor, I don’t see an imminent problem. I think, rather, that it was an appropriate factor to add and that there must be a reason they chose to add it. I wouldn’t be surprised if we saw it in other company’s filings.
 
Some Sales and Retail Numbers
 
At the end of their fiscal year, Quik had 770 stores and was selling in over 90 countries. 547 of those stores are owned and 223 licensed. Of the owned stores 109 are outlet stores, which is more than I had thought. Here’s a breakdown of the kind of stores they are and where they are located. Note that about 57% are in Europe.
 
The Quiksilver brand represented 41% of revenues for the year. Roxy was 27% and DC 28%. The Hawk plus the Lib Technologies and Gnu brands together totaled 4%. Apparel is 61% of total revenue, down from 64% the previous year. Footwear, at 23%, was up from 21%. Accessories and related products represented 16% of revenue, a 1% increase from the prior year. The United States represented 35% of total revenues. The chart below shows the complete breakdown of revenues by geographic region.
 
 
This next chart shows their distribution channels. I wish we have some information on what kind of retailers they put in which category. I wonder how they characterize outlet stores?
 
 
Random, Interesting Facts
 
At the end of the paragraph discussing the gross profit results in the fiscal year that just ended, Quik made the following comment:
 
“In fiscal 2012, our cost of goods sold is expected to increase by 75 to 100 basis points as a percentage of revenues as a result of the lower value of the euro in comparison to rates that prevailed in fiscal 2011. Our gross profit margin in fiscal 2012 may also be negatively impacted by increased raw materials and labor costs.”
 
They also noted a backlog of $480 million at the end of November, 2011 compared to $478 million a year before.
 
Quiksilver spent $124.3 million on advertising and promotion in the year ended October 31, 2011. $24 million of that amount was athlete sponsorships.
 
Okay, that’s kind of it. No grand conclusion here and no changed opinion from what I wrote based on the press release and conference call.
 
The release comes out, the conference call is held, and everybody sort of forgets there’s more information to come. Hope you find it useful.

It’s Tradeshow’s Season. I Started with Agenda, But I’m also Thinking About SIA.

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Among the things I liked at Agenda, the one I liked the most was Shmooza Palooza, the jobs fair jointly sponsored by Agenda and Malakye.com. 500 people preregistered for it and it was busy every time I looked in. It’s great to sell a few more T-shirts or another snowboard, but it’s even better to help somebody put food on the table. The guy who probably didn’t get a job at this job fair is the one who told one of the recruiters he had gotten a college scholarship and taken the money to use for a surf trip. It’s somehow troubling he apparently thought that would make him sound credible.

On a personal note, I have a kid who graduated from college last spring and has an actual job with benefits and 401(k) plan. Most of his peers are not so fortunate and I think he knows how lucky he is. My wife and I feel like we won the lottery.

The other things I liked at Agenda included flying into a small airport, $100 hotels, and the food trucks. It was a pleasure to get good food at a fair price instead of bad food at an expensive price. I also liked having the booth numbers at the top of the booths where they were easy to see, though I understand this isn’t new. And as always, I liked seeing some new brands, or at least brands I haven’t seen before. I hope they do well.
 
I didn’t like it when people referred to Agenda as the "new ASR," because I remember what happened to the old ASR. I had written before, when ASR first closed, about the pressure Agenda, or any other trade show, might come under as it succeeded and grew. That analysis, I think, is still valid. But Agenda has done at least two things that should mitigate those pressures to some extent. First, they got the hell out of San Diego to the more attractive cost structure of Long Beach. Second, they are keeping the feel of the show more or less the same as it grows by keeping most booth sizes the same. Or at least keeping them from getting too big.
 
Yes, I know a few brands had larger booths. I noticed it too. But I don’t think that’s different from how it was in San Diego. It’s just that a new location makes you see perceive things differently even if they ain’t.
 
The new location makes it difficult to compare last year’s Agenda this with year’s. But then I’ve always been cautious about reaching conclusions based on how busy a given booth was at the moment I walked by or how crowded the aisles felt. The question is do brands and retailers feel like the show is a good place to get business done, and nobody at Agenda complained to me about that.
 
Next, I’m off to the SIA snow show in Denver. Nothing could improve that show more than a lot of snow during the next 10 days. Last year, as you know, was an epic snow year.  I never expect two great years in a row, but I was really hoping that this year would at least be okay.  Last year’s great show, coupled with the residual fear from the recession, meant that retailers have been cautious on their inventory and most of the old stuff was gone. There wasn’t much left over product at deep discounts, and customers learned they had to buy quickly and at full price to get what they wanted. The result was a great year not just for sales but for profits as well.
 
Though it hasn’t always been the snow industry’s mindset, you really can sell less and earn more, and I was hoping for another year to cement that kind of thinking.
 
What I’ve heard so far is that brands, in general, didn’t over produce and retailers didn’t over order due to over enthusiasm from last year. That’s good. We should never let ourselves be deluded into believing we’re great managers and sales people just because it snows.
 
Still, it appears likely that we’re going to get to Denver with some of the dreaded inventory overhang in the one season snow business. Hmmm. Maybe an overhang is a non-alcohol induced hangover.
 
My guess it won’t be as bad as it has been in past years because there won’t be as much product to deal with, and discounting didn’t start in August. Yet, inevitably, brands will want to get paid on time, won’t want to offer discounts, and won’t want to take product back. Retailers will want to delay payment, get discounts, and send back product.
 
I’d note that retailers, generally, haven’t panicked. From what I can tell, there’s been more resistance to discounting early and often than in prior years. No doubt it’s partly because there’s less inventory, but I also trust it’s because we’ve learned a few things. 
 
There have been some instances recently where brands (not just in snow) didn’t necessarily replace their whole product line every year. Certain pieces got carried over. I guess it’s mostly in apparel, but I’m wondering if it might not work with select hard goods.
 
Let’s start by acknowledging that there are no bad hard goods out there anymore. Everything’s durable, functional, and more or less good looking. And hopefully, you’ll also agree with the following:
 
·         Though the economy appears to be improving a bit, sales increases are still not easy to come by and generating additional gross margin is important in increasing profits.
 
·         Inventory scarcity improves product perception and makes consumers less price sensitive. It also reduces working capital investment, which we finance oriented people like.
 
What I’m asking/hoping is that the tension between brands and retailers not be allowed to turn back into the zero sum kind of game it’s been in some past years. Can some product that sold well this year and is maybe in short supply be kept in the line for next year?  Can retailers and brands share the burden of a poor snow season such that product doesn’t turns up at the wrong time, in the wrong place, and at the wrong price? At least not too much.
 
I get to look at this from the 10,000 foot level and don’t have to worry about keeping a factory busy or generating enough cash to pay the bills (though I have had to do that with snowboard brands. I mostly didn’t enjoy it). Except in the very short run, we are all better served by holding prices where reasonably possible and keeping product scarce. Please remember that when all those meetings start in Denver.  Let’s build on what we’ve started.

 

 

Follow-up on my Last Article; the Nau Example

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My last article, “Do Retailers Really Need to Carry All That Inventory?”  garnered quite a response. One of those responses was a link to an article about a brand called Nau. Their web site is here. The link to the article is here.   The article was written back in 2007 and the brand is still around and, judging from the list of stores where they are available, successful.

Here’s how the article starts:

“Meet Nau, the ultimate over-the-top, high-concept business. It makes striking, enviro-friendly clothing. It gives away 5% to charity. Can it save the world–and give us the perfect twill capri?”
 
They are distributed through what I’d characterize as high end specialty shops but, according to the article, also had four of their own stores (and sell on line). Here’s a description of those stores from the article:
 
“It starts with a retail concept that combines the efficiencies of the Web with the intimacy of the boutique. Called a "Web front," the Nau store integrates technology in a striking gallery-like setting. The central mechanism is a self-serve kiosk that transfers the online shopping experience to a touch screen and encourages customers to have their purchases sent home, with the incentive of a 10% discount and free shipping.”
 
“The advantage: If customers use the store as a fitting room and push purchases to the Web, Nau can build smaller stores (2,200 to 2,400 square feet compared to the traditional outdoor specialty store’s 4,000-plus square feet), reduce in-store inventory dramatically, and slash operating expenses. Plus, it consumes less energy and materials.”
 
Essentially, this is what I was suggesting in my article. Nau had the advantage of starting from scratch, so they didn’t have to change their store size and redo the whole store which, I acknowledge in my article, has some costs and takes some time. Anyway, the point is that here’s a brand that was trying to do more or less what I suggested with their retail stores. How has that worked out?
 
When I couldn’t find the store addresses on the web site, I called the company and found that all the stores had been closed.
 
A lot has changed in five years. Smaller retailers are going to have to find a more efficient way to integrate on line with brick and mortar. But here’s at least one example where it appears not to have worked out.