Quik’s Quarter Ended April 30, 2010- Sales Down, Profits Up.

As usual, we’re dealing with the numbers in the June 3 press release and the comments in the conference call rather than the actual quarterly filing with the Security and Exchange Commission that’s full of details. That just drives me crazy, and I want to explain why and what I think the result is in this case.

Quik’s press release headlines the 5% decline in revenue, the increase in pro-forma income from continuing operations from $0.05 to $0.11 cents per share, and the growth in income from continuing operations from four to six center per share.
So I read that and thought to myself, “Wow, pretty good pro-forma and continuing operations results. I wonder how much they earned.”
You know- earned. Like bottom line. Net profit after taxes. Income. The generally accepted accounting principles earnings number. The number that most people, including me, think has the most to do with stock performance over the long term.
I read the rest of the press release text. It’s not there. I listen to the whole conference call. Nope- nobody mentions it there either.   “Must really suck,” I think to myself.
It doesn’t sucks. But you have to look to the bottom of the Consolidated Statement of Operations in the press release to find it. And here it is. Net income attributable to Quiksilver, Inc. rose 235% from $2.813 million in the quarter ended April 30, 2009 to $9.424 million. It’s only 2.0% of sales, but it’s up from 0.57% of sales in the same quarter last year.
I know that EBITDA, proforma income, one-time items like Kelly Slater’s stock grants ($5.2 million), exchange rates, non cash charges, gains and losses on sales of assets, restructuring charges and the impact of discontinued operations all offer additional information and perspective. But when the “GAAP to Pro-Forma Reconciliation” table is a page long and the “Adjusted EBITDA and Pro-Forma Adjusted EBITDA Reconciliation” table (including a half page “Definition of Adjusted EBITDA” which even I couldn’t stand to read) is another page in a ten page press release, then I have to believe we might be missing the proverbial forest for the trees.
Especially when it’s mostly good news, as we’ll discuss below.
Press releases, unlike SEC filings, are a chance to put your best foot forward, and certainly I would want to do that. And there are certain legal requirements for what and how you say things. But sometimes these things feel like the priests exploring the mysteries of the temple in a language many of the parishioners can’t understand. To the extent that it’s aimed at Wall Street, the analysts and institutional investors, maybe that’s the way they want it and maybe it’s even appropriate. But when I see media outlets reporting this by basically parroting back what Quik says in the press release (because, I’m afraid, they don’t understand the details and implications themselves) I think there must be a better way.
Here’s the link to the whole press release including the financial statements if you want to take a closer look.  www.quiksilverinc.com/pr/0610/ZQK_Q2FY10_earnings_press_release_3jun10_Final.pdf

Sales fell 5.2% from $494.2 million in the quarter ended April 30, 2009 to $468.3 million in the April 30, 2010 quarter. The Americas segment represents 43% of total revenue and, at $200 million, was down 13.2%. Europe, at $209 million was down 1% and Asia/Pacific was up 12.1% to $58.6 million.  In constant currencies (ignoring exchange rate movement), Europe revenues were down 5% and Asia/Pacific down 17%.
My last quarterly analysis for Quik was called, “Great Tactics- What’s the Growth Strategy?” Guess I could have used that title again. The conference call talked again, without offering any specifics (which you wouldn’t expect), about great product and technology, and good reception for its product. But it noted that DC and Quik were flat while Roxy was down for the quarter. The juniors market, they said, continues to be a challenge for branded girls surf apparel. Roxy is about a $550 million business.
Part of the sales decline was due to their explicit decision to control inventory and we’ll see the positive results below.  But the question I thought screams to be asked at the conference call, but which is never asked (no priest wants to be excommunicated) is, “You’re doing a great job controlling expenses, reducing inventory, paying off debt, collecting your receivables better and sourcing and it’s dramatically improved your profitability. But expenses can’t go to zero and product will never be purchased for free. You may get some more improvements in these areas, but eventually, you’re going to have to grow sales to grow earnings. How and where do you see that happening?”
Quik has given a partial answer. They said they are very well positioned to take advantage of an improvement in the economy and a pickup in consumer spending.  I agree that they (and lots of other companies) are, but that improvement is out of our control. Quik also noted that they were upping their inventory purchases where they were confident there were additional sales opportunities.
Quik’s inventory fell by 26% from $308 in this quarter to $226 million in the same quarter the previous year. You see the impact of this in their gross margin percentage, which rose from 47.2% to 53.2%, a 12.7% improvement. Quik reported lower levels of discounting and clearance sales then they had expected across the whole company. Selling, general and administrative expense actually rose from $203 to $213 million, and from 40.9% to 45.5% of sales, but in spite of that operating income was up 17.4% from $30.5 to $35.9 million. Improving that gross margin is a powerful thing.
Interest expense, as expected due to last year’s new financing, was up compared to the same quarter last year from $13.5 to $21 million ($7 million was noncash). Instead of a $1.926 million foreign exchange loss, they reported a $4.614 million gain. The tax provision didn’t change much, and you already know what the bottom line was.
Over on the balance sheet, you can see a lot of improvement in addition to the inventory numbers already discussed. Overall, their total liabilities to equity fell from 3.44 times to 2.36 times, a big improvement. And current ratio (a measure of short term liquidity) doubled from 1.42 to 2.86 at least partly because of the restructuring that happened last year. Receivables were down 19% as reported (21% in constant currency) and the number of days it took them to collect those receivables fell from 70 to 60 days. The increase in the reserve for doubtful accounts from $36.7 to $52.2 million had something to do with that.
Accounts payable were down 19%. The line of credit outstanding fell from $224 million to $15 million and current portion of long term debt was down from $226 million to $45 million. Some of this was just transferring current liabilities to long term liabilities, but total liabilities were down $201 million reflecting debt repayment and good cash management.
Some years ago, I started telling people that a focus on gross margin dollars was a good idea. Two to three years ago, I began to suggest we needed to plan for lower sales increases and operate better to grow those gross margin dollars. I would guess that Quik’s management would agree with me. They are doing great work in balance sheet improvement. But the sales decline is troubling- especially if you look at the European and Asia/Pacific sales numbers in constant currency and consider the economic prognosis for those areas. Let’s hope their product development efforts support some sales increases in the near future.
The Press Release I Would Have Written    
“Quiksilver’s net income for the quarter ended April 30, 2010 rose 235% to $9.4 million compared to $2.8 million in the same quarter the previous year. This was achieved in conjunction with a 5.3% decline in net revenue that was accompanied by an increase in gross margin percentage from 47.2% to 53.2% and a managed reduction in total inventories of 26.4% from $308 million to $226 million. A $200 million reduction in total liabilities resulted in a total liabilities to equity ratio that improved from 3.44 to 2.36 times over the year. Receivables were reduced by 19% and were collected an average of 10 days faster than in the same quarter last year. The company is very well positioned to benefit from a continuing recovery in consumer spending.”
They can and should go ahead and here and add all the other stuff. It’s important for a complete understanding. But couldn’t they start with a short, simple, fairly easy to understand paragraph that doesn’t take the temple priests to interpret and tells everybody the good news?