Quiksilver’s Focus Goes From Balance Sheet to Income Statement; Their Quarterly and Annual Results

Quiksilver continued to improve its balance sheet over the year and quarter, and this conference call is the first in a while where I’ve gotten a sense of where some growth might really come from. We’ll talk about that. 

But first, I thought some of you might actually want to know how much Quiksilver earned for the quarter and year ended October 31, 2010. Amazingly enough, if all you did was read the three pages of text in the press release and listen to the conference call, you wouldn’t know. You could finally see the actual, bottom line number on the financial statement on page four of the release.

For the quarter, Quik lost $22.1 million on revenues of $495.1 million. In the same quarter the previous year, they reported a loss of $1.78 million on revenues of $538.7 million. For the fiscal year, they lost $9.68 million on revenue of $1.837 billion. For the previous year, they had a loss of $192 million on revenue of $1.978 billion.
 
There. That wasn’t so hard. It’s not operating income. It’s not EBITDA. It’s not proforma. It’s not in constant currency. It’s just the bottom line results according to good old fashioned Generally Accepted Accounting Principles. A lot of really smart people worked really hard to give us GAAP. Couldn’t we just start with that and then provide the explanations and adjustments?
 
And we do need some of those explanations. We want to know that $119 million of last year’s loss was due to the Rossignol debacle and there’s value in being able to compare the company’s results without that impact by looking at continuing operations. But I wouldn’t want to act like that didn’t happen or that it somehow wasn’t a real loss.
 
Our industry’s popular press essentially reproduced the press release. The exception was Boardistan, who actually showed the quarterly loss in their headline.
 
On To the Numbers
 
With my rant now completed, let’s look a little harder at some of the numbers. Gross margin percentage in the quarter rose nicely from 47.6% to 53.5% compared to the same quarter last year on the decline in revenue noted above. With some help from a 3.6% reduction in selling, general and administrative expenses, this allowed them to increase their operating income from $15.1 to $34.3 million. But interest expense, not unexpectedly, jumped from $20.9 to $50.6 million. All but $16 million of that was the write down of debt issuance costs that had been capitalized and that went away when they paid off debt. The loss from continuing operations grew from $13.8 to $22 million.
 
The year ended October 31 looked a lot like the quarter. The gross profit percentage rose from 47.8% to 52.6% on the sales decline shown above. Selling, general and administrative expense fell 2.3%. Operating income was up 80% to $123.5 million. As in the quarter, interest expense rose as expected from $63.9 to $114 million, more than offsetting a reduction in income taxes from $66.7 to $23.4 million. The continuing operations result improved from a loss of $70.3 million to a loss of $8.1 million.
 
Quik’s reported business segments are the Americas, Europe, and Asia/Pacific. In the quarter, sales fell in all three, but the gross margin percentage was up in all, though gross profit dollars rose only in the Americas. All the gross profit increase, obviously, came from the Americas though it has the lowest gross margin percentage of the three segments at 48.1%. Gross profit percentage was 60.2% in Europe and 54.8% for Asia/Pacific. 
 
The big turnaround in operating income for the quarter was in the Americas, where it went from a loss of $9.3 million to a profit of $12.7 million. Europe’s operating income was up about $4 million to $20.9 million. Asia’s actually fell from $14.5 million to $8.6 million. I imagine Quik’s management would get positively giddy if they could get their Americas gross margins up to those of the other segments.
 
For the year, sales fell in the Americas and Europe and rose slightly in Asia/Pacific. Gross margin percentages were also up in all three segments, reaching 46.3% in the Americas, 59.8% in Europe, and 54.2% in Asia/Pacific. The Americas represented 46% of total revenue. Europe is 40% and Asia/Pacific 14%.
 
The trend in operating income for the year was much the same as in the quarter. The Americas went from a $25.3 million loss to a $56.9 million profit. Europe fell a bit from $104 to $94 million and Asia/Pacific was down from a profit of $23.2 million to a profit of $11.8 million.
 
The Quiksilver brand’s revenues were about $770 million during the year. Roxy and DC were each about $500 million in revenue for the year. DC is the brand where they see the most growth potential; especially outside of the Americas. They note that the juniors market is still impacted by fast fashion price point driven goods. As they put it, “Declines in the Roxy business are moderating, and it appears they will reach the bottom in fiscal 2011.”
 
The balance sheet, well, there is no balance sheet and I feel more ranting coming on. There are some balance sheet numbers (and to be fair, it’s most of the important ones) but we won’t see the complete balance sheet until the annual report. I’m actually writing this now rather than when that report comes out because at the end of the year, the SEC gives companies a lot longer to file.
 
Receivables, compared to a year ago, have fallen 14.5% to $368.4 million. They note in the conference call that days sales outstanding fell 5 days to 63 days. Inventories are essentially the same at $268 million, and they note in the conference call that it’s about where they expected inventories to be. I guess I would have expected some reduction with sales down, but given the increase in gross margin it’s hard to argue that inventories aren’t under control. Lines of credit and long term debt are down from $1.04 billion a year ago to $729 million. The debt reduction reduces their annual interest expense by $26 million. 
 
Sorry to disappoint those of you were looking forward to my scintillating discussion of the “GAAP to Pro-Forma Reconciliation” or the “Adjusted EBITDA and Pro-Forma Adjusted EBITDA Reconciliation” or even the ever popular “Supplemental Exchange Rate Information,” but I think I’ll move on to the conference call. You can view the complete press release here.     
 
Strategies for Growth
 
 CEO Bob McKnight said, “Our overriding strategic objective is to retain and remain the world’s number one action sports lifestyle company centered on boardriding. And boardriding for us has a broader connotation than just surfing, skating and snowboarding. It also includes the closely related interest of our growing global demographic. BMX, rally, moto, bike, hike, climb, paddle, mix martial arts, and many other growing action sports and activities.”
 
He identified four “primary initiatives” they would use to implement this objective. The first was to “…focus our energy and resources primarily on our three major brands.” Second is to “…focus on strategic core marketing initiatives and core athletes.”
 
The third is to “…expand through product line extensions, geographical reach, and further channel development.” This includes the Quiksilver Girls line, launching in spring. They also plan to expand DC into “…surf, snow, BMX, rally and moto.” They “… also believe we have a huge opportunity in mountain resorts and colder weather markets within the Americas and Asia-Pacific to replicate the success of our European winter outerwear business.” The geographic expansion will be where they already have a presence, but have underinvested in the past.
 
The fourth primary initiative “…is the development of incubator brand concepts that can potentially represent opportunities consistent with our culture and areas of expertise.” I don’t know quite what that means but he mentions Lib Tech and Gnu as examples, and that must have Mike and Pete reaching for their favorite adult beverage.
 
As is the case for every company of any size that wants to grow, the devil’s in the details. How do you focus on your three major brands and remain centered on boardriding but grow moto, bike, climb, paddle, mixed martial arts and others? How big a part of your business can those become before you’re no longer centered on boardriding? If you want to grow Lib Tech and Gnu “…consistent with our culture and areas of expertise,” that might be interpreted as putting some serious limits on their growth.
 
Quik’s ecommerce business is about $25 million, and they think it has the potential to be 10% of their business. They closed the year with 540 stores. They believe DC has the potential to be a billion dollar brand.
 
For 2011, they are looking for “…modest sort of growth” overall for the company. They’ve got cost pressures they estimate at five to ten percent, and expect to implement some selective price increases. They expect an overall gross margin for the year consistent with 2010. The price increase and some cost initiatives, along with favorable currency rates in some countries outside of the U.S., should allow them to achieve this in spite of costs going up.
 
What do they expect in terms of sales for 2011? “Quiksilver kind of low-single digit expectations for fiscal ’11; Roxy, down mid-singles, and DC, up somewhere in the high-single to low-double digit range. In terms of what we are expecting in regionally, much of the growth is focused on the Americas region in 2011. We are launching the Quiksilver Girls collection beginning on 2/25. Our first delivery is coming out.”   
 
It’s nice to see Quik more or less out from under their liquidity and debt problems and focused on brand building and the future. I can see that they have some possibilities for growth, but none of them feel easy and it sounds like real impact will be felt after 2011. I guess that’s just business for all of us these days.