Interesting Stuff from Quiksilver’s 10K Annual Report

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.
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