Quik’s October 31st Quarter and Full Year

I’m going to work without my usual net of an SEC filing this time. That’s because year-end 10Ks always take a long time to come out, and I don’t want to wait that long to look at Quik’s results. I’ll review the 10K when it does show up. Right now, we’ll go with the press release and conference call transcript.

Not to be old fashioned here, but I think I’ll avoid proforma adjusted EBITDA numbers and start with the good old fashioned generally accepted accounting principles numbers. I’ll discuss some of the adjustments Quik takes into account in coming up with their presentation.

The Quarter’s Income Statement
 
Quik’s revenues for the quarter rose 10.1% to $545 million from $495 million the same quarter the previous year. Ecommerce revenues grew 69% globally, but they don’t tell us what that means in dollars.
 
The gross profit margin fell from 53.5% to 51.9% largely, as reported in the conference call, due to the cost and price increases all industry companies experienced. Selling, general and administrative expenses rose from $222 million to $248 million. As a percentage of sales, they were up from 44.9% to 45.4%. A chunk of the increase was the cost of the Quik Pro NYC, which we’ve learned today won’t be held next year.
 
The asset impairment charge for the quarter was $11.8 million, up from $8.4 million last year. These, as you probably know and which companies always like to point out to us, are noncash charges associated with changes in long term asset values. 
 
Operating income fell by 31% from $34.3 million to $23.7 million. That is earnings before, interest, taxes, foreign currency loss and discontinued operations. Let’s look at some of those items.
 
Interest expense in the quarter fell $50.6 million to $14.1 million. I think that decline is the result of Rhone converting its debt into equity and some of the restructuring and debt repayment Quik has done over the last year. This is why I really like to have the SEC filing in my hand. It would allow me to be more specific.
 
That’s a hell of a decline in interest expense. But as a shareholder you need to remember that the Rhone conversion that’s largely responsible for the decline resulted in a lot more shares being outstanding, so the value of each share declined, all other things being equal.
 
Foreign currency loss was about $5.8 million compared to $463 million in the same quarter last year. That leaves us with pretax income of $3.9 million compared to a pretax loss of $16.7 million in last year’s quarter.
 
Due to a settlement mostly with the French tax authorities that I guess goes back to the Rossignol deal and Quik’s losses on that deal, there is a one-time $64 million non-cash income tax benefit in this quarter compared to a charge of $5.2 million last year. This leaves Quik with a reported net income for the quarter of $68 million compared to a loss of $22 million in the quarter last year.
 
How do we think about this?
 
Well, every year companies have “one-time events.” So I tend to have a hard time ignoring them on the grounds that they won’t recur, because something always happens to generate a new “one-time event.” But in the case of this French tax credit, it’s so enormous and out of the ordinary we’ve got to ignore it as we consider how Quik is operating. That’s what Quik does in presenting its proforma results.
 
The Complete Year
 
For the year, sales rose 6.3% to $1.95 billion. The gross profit margin was down only very slightly from 52.6% to 52.4%. Operating income fell by 66% from $123 million to $41.5 million. Most of that decline is the result of the asset impairment charges (Non-cash!) that rose from $11.6 million last year to $86.4 million. Interest expense fell from $114 million to $74 million. The net loss for the year rose from $6.3 million to $17.9 million.
 
I should point out (I have before) that these non-cash charges reflect an expected decline in the future cash flow of the assets being written down. That may be non-cash, but it’s hardly irrelevant.
 
The Americas generated $61 million in operating income for the whole year, up 7% from $57 million the previous year. Europe’s operating income grew from $94 million to $112 million. Asia/Pacific went from an operating profit of $11.8 to a loss of $84 for the year.
 
The Quik brand, we’re told, grew 5% during the year to $806 million. Roxy was down 2% to $519 million, but it improved each quarter, growing 10% in the final quarter compared to the same quarter the previous year. One of the analysts noted that Roxy’s revenues were down around $250 million from its peak in 2008. DC was up 15% to $545 million.
 
You know what I just realized? There’s no complete balance sheet provided in the press release. Gimme my SEC filing! What they tell us in the conference call is that receivables at $397 million are 6% higher than a year ago in constant currency. Inventory of $347 million was up 26% in constant currency, with much of the increase due to the early receipt of goods. Ten to fifteen percent of the increase is the result of higher cost of goods. Prior season’s goods represent only 5% of inventory. Cash on hand was $110 million. 
 
Lacking the complete presentation we won’t see until the 10K, I’ve got no opinion on their balance sheet position.   
      
Details by Region
 
With the broad income statements discussed, let’s look at some of the quarterly detail in the documents.
 
Americas revenue was up 12.7% to $250 million for the quarter. Same store sales were up 16%.   Europe was up 11.5% to $213 million (6% in constant currency). Same store retail sales turned positive for the first time in 6 quarters in Europe. Asia/Pacific rose only 1.9% (down 7% in constant currency) to $82 million. The recession in Australia and strong Aussie dollar are making that a tough market. Japanese revenues at $25 million for the quarter are nearly back to the pre-tsunami levels.
 
The gross profit margin in the Americas fell from 48.1% to 47.1%. Europe was down from 60.2% to 57.2% and Asia/Pacific fell from 54.7% to 52.6%. As I’ve noted before, margins are a lot more attractive outside of the Americas. I wonder if the U.S. margin is much different from what’s reported for the Americas as a whole.
 
Operating income in the Americas fell 27% from $12.7 million to $9.3 million. Europe’s operating income jumped 50% from $20.9 million to $30.3 million. Asia/Pacific had an operating loss of $3 million after a profit of $8.6 million in the same quarter the previous year. 
 
Opportunities
 
The company’s goal is to get to $3 billion in revenues in five years. They think the Quiksilver Girls and Women’s business have a $100 million opportunity in the next five years. They also expect growth in ecommerce of a similar amount. In DC, especially outside of the United States, they think there’s a half billion dollar opportunity. And they see a couple of hundred million dollar of revenue from emerging markets.
 
I would have been happier if we’d gotten some more specifics about some of their initiatives in the conference call. I probably expect too much from that forum.
 
It looks to me like growth will be limited in the United States (and margins are lower). Europe generated 71% of Quik’s operating earnings excluding corporate expenses in the fourth quarter. For the year, as you can see in the numbers above, Quik wouldn’t have had any operating earnings without Europe. But Europe is poised for a recession.     
  
When we ask how Quik is doing in general, I have to go back to the operating income that declined 31% for the quarter and 66% for the year. I guess I should point out that the stock market, in its collective wisdom, doesn’t, at least with immediacy, think much of my point of view. Quik’s stock closed up 12.7% today (the day after the announcement) at $3.46 on volume that was almost three times its 90 day average. They must like that proforma, adjusted, EBITDA stuff.