Quiksilver’s Quarter and the Impact of New Management

Using Quik’s recent changes as an excuse, I wrote a week or so ago about the dynamics of organizational change in companies experiencing new business environments. You can see that article here. Now, Quik has come out with their 10Q for the quarter ended January 31, 2013 and held a conference call. A lot of what they said in the call resonates with the article I wrote and is worth exploring. First, though, let’s look at the numbers for the quarter. 

The Results
 
Revenues for the quarter were down 4% compared to the same quarter the previous year from $450 to $431 million. The Quiksilver and Roxy brands were each down 8% globally. DC was unchanged. Wholesale revenue was down 9% from $295 to $268 million. Retail fell 1% from $131 to $129 million. E-commerce rose 40% from $24 to $33 million.   
 
Revenue fell 9.3% in the Americas segment from $205 to $186 million. It was down for all three brands and in both wholesale and retail. The decline was due to:
 
“…a) lower sales to wholesale clearance customers, largely driven by the timing of shipments between the first and second quarters of fiscal 2013; b) lower net revenues in our Company-owned retail stores due to 17 store closures since the end of the first quarter of fiscal 2012; and c) increased markdown
allowances and sales discounts to wholesale customers to assist the sell-through of inventory in this channel.”
 
The comment about lower clearance sales being partly responsible for declining revenues is kind of intriguing. It’s a big enough number that they have to call it out?
 
EMEA (Europe, Middle East, Africa) rose 1.2% from $169 to $171 million “…with high-single digit percentage growth in DC net revenues and low single digit percentage growth in Roxy net revenues largely offset by a high-single digit percentage decline in Quiksilver net revenues. Growth in the e-commerce and retail channels within EMEA were largely offset by a decline in the wholesale channel.”   
 
APAC (Asia, Australia, New Zealand) fell 2.3% from $75 to $73 million “…with a high-single digit percentage decline in Roxy net revenues and a low-single digit percentage decline in Quiksilver net revenues largely offset by a low-teens percentage increase in DC net revenues. Wholesale channel net revenues decreased in the high-single digits on a percentage basis, while retail net revenues were flat and e-commerce net revenues grew substantially…”
 
The gross profit margin was up slightly from 50.7% to 51%. It was up from 42.8% to 43.4% in the Americas, down from 60.3% to 57.8% in EMEA, and up from 51.1% to 53.9% in APAC.
 
Selling, general and administrative expenses (sg&a) fell about $5 million from $230 to $225 million. There was one of those asset impairment charges for $3.2 million (none in the quarter last year). As a percentage of sales it grew from 51.2% to 52.3%.
 
The operating loss rose from $2.5 to $8.7 million (including that non cash asset impairment charge). In the Americas it worsened, growing from a loss of $1.6 million to one of $8.8 million. AMEA reported an operating profit of $1.41 million, down from $15.7 million. APAC’s operating result improved, rising from $901,000 to $2.1 million. 
 
Interest expense was more or less unchanged at $15 million. There was an exchange rate gain of $3.2 million compared to a loss last year of $1.85 million. That’s a $5 million positive turnaround.
 
The net loss grew by 46.4%, rising from $20.9 million to $30.6 million. Quik ended the quarter with 840 owned or licensed retail stores worldwide. Over 60% of revenue was generated outside of the U.S.
 
Overall, the balance sheet is not much changed from a year ago. You would like to see further improvement and debt reduction, but that’s not likely given the losses. I would note that trade receivables have risen 5.5% from $322 to $340 million while sales have declined and the time it takes them to collect their receivables has risen 13%. “The increase in DSO [days sales outstanding] was driven by the timing of customer payments, longer credit terms granted to certain wholesale customers, and the net revenue decrease during the first quarter of fiscal 2013.” None of that sounds exactly good.
 
Inventories were up $7 million to $419 million. Inventory days on hand rose 7%. “These increases were primarily due to the net revenue decline in the wholesale channel during the first quarter of fiscal 2013, resulting in higher ending inventories than planned. Inventory from prior seasons was 14% of total inventory at January 31, 2013 compared to 19% at January 31, 2012.”
 
Generally, you’d like to see inventory decline if sales are down all things being equal. Of course, they never are equal. Timing (inventory received the last day of the quarter instead of the first day of the next quarter) and inventory cost (which can make the value in inventory rise even when units aren’t up that much) can make significant differences. But they didn’t really offer an explanation, so it’s worth mentioning.
 
Comments from the Conference Call
 
When Quiksilver got through the Rossignol mess I said, “Good! Now they can finally focus on making and selling great product.” But I also wondered, and wrote, that given the distribution they already had in place, where was sales growth was going to come from? A lot of companies thought they’d see significant growth in Europe. But with at least Greece and Spain in depression, and weakness in most other countries, that doesn’t seem to be happening.
 
We also heard in various conference calls about marketing initiatives, Quiksilver Women’s, selling board shorts in vending machines at resorts, and other things. I liked some of these ideas, but I didn’t see them generating the revenue growth a public company needed.
 
Now new CEO Andrew Mooney has come along and, with regards to most of these initiatives said, “FAGETABOUTEM!” His key theme is focus; on “…strengthening our brands, expanding sales and driving operational efficiency…”
 
We will increase our focus, energies and resources on our 3 flagship brands of Quiksilver, Roxy and DC. Within these brands, we will further focus on critical product categories. To that end, we have clarified the brand positioning and gender focus of each brand, with Quiksilver being a male brand for surf and snow; Roxy, our flagship brand for women; and DC, refocus on skateboarding and snowboarding.”
 
None of this can happen overnight. SG&A reductions have already started, but there’s more to come and “…some of them will be actioned on this year, and others will be actioned on over the next 12, 18 and 24 months.” Apparently there are some contracts that will keep some from happening sooner. In terms of product lines, they “…can’t be significantly affected until fall of ’14.” CFO Richard Shields, talking about operational efficiencies, said, “…we’ll see some initial rewards from the work for the spring 2014 line come over. [What] I would just say is that the lion share of the opportunity, when I think about style rationalization, when I think demand aggregation, when I think about vendor consolidation, still remained to be done.” He expects this will not just decrease costs, but improve the gross margin.
 
CEO Mooney’s discussion of some of the already announced product line decisions is interesting.
 
“Within the 3 brands that we have, say, for example, in Roxy and in Quicksilver, we were doing skate products that were generating marginal revenue. And after all costs were attributed to those categories in terms of athlete endorsements, et cetera, et cetera, we were losing money on. Similarity in DC, we were in the surf category. So exiting surf in DC and skate in Roxy and Quicksilver was relatively a very, very easy decision to take, both strategically and financially.”
 
“When you go into categories like swimwear, it was impossible to tell the difference between a Quicksilver girls swimsuit and Roxy girls swimsuit because so we believe even within the wholesale channel, much of those sales were cannibalistic, plus again once you start loading the costs up to the subset of the business that was truly viewed as incremental, the profit was just not there. So it was a difficult decision to make emotionally because we had a lot of — we have 30-some people had given up to us doubling but the bottom line wasn’t there we really need to focus with a Quicksilver brand and the Roxy brand.”
 
He has more to say, but you get the picture. Isn’t it interesting how two different managements can have such different perspective and can reach such different decisions? I’d refer you again to my article I referenced in the first paragraph above and to Andy Mooney’s comment about the decision being difficult to make emotionally.  I would assume there were reasonably business differences on the potential of the initiatives and the investment required, but there were also issues of organizational momentum and personal relationships.
 
Okay, let’s move on to some related issues of distribution and product discussed in the conference call. Here’s CEO Mooney again:
 
“I think increasingly, the larger accounts, whether it’s JCPenney or Kohl’s, Famous Footwear, et cetera, I think increasingly, we’re going to have to move to fully segmented lines. We’re essentially unique to each account, custom-made for each account, which I think is becoming more the norm for the industry because in that way, we can make the best use of our resources to meet the expectations of both the consumer and the retail in that particular store, and the volume warrants that type of dedicated attention.”
 
Now, I need a lot more information, but it sounds like he’s saying they’ll do special makeup lines for each big account. Not unique, I’m sure and there’ll be overlap, but still. Damn, I’m usually not at a loss for words, but I don’t quite know what to say.
 
Here’s CEO Mooney talking about Quiksilver product:
 
“We believe really that our products are performance-oriented products. And I think that future lines will present themselves as much more bold and performance-oriented than the current line is, because that is — that’s really the origins of DC as a footwear company. And it’s an area where we can feel we can really excel in.”
 
One more quote from CEO Mooney, then I’ll have some comments.
 
“Today we launched the Diane von Furstenberg collection within Roxy, and it’s- we were very optimistic about the success of that collection and it’s exceeded—wildly exceeded our expectations so far, which kind of reiterates my earlier point about this very much being a product, this is a product driven business.”
 
Do they really believe that real, actual, performance oriented products are important to the customers at Kohl’s and JC Penney (excuse me, JCP)? Would those customers know a performance oriented product if they saw one? I don’t know exactly what a Diane von Furstenberg collection within Roxy means, but does the Roxy name require that? I thought we were refocusing on the three core brands here.
 
Much of what Andy Mooney is doing seems right to me. He’s getting rid of money losers, going to tighten up the supply chain, continuing to close losing retail stores, make the business global rather than regional, put in the systems he needs to do that (a process under way before he got there) and focus on the three core brands. In a lot of ways, it’s what Launa Inman is doing over at Billabong.
 
His bet is that the three brands can grow and remain credible, and in fact take market share in this economy, while remaining distinctive in very broad distribution. 
 
The problem I see is that he’s trying to do it as a public company. He’s going to be required to make some decisions for growth that I wonder if he’d make if Quiksilver were private. Unless he’s very, very careful, the requirements of brand building and growing revenues may not mesh up very well.

 

 

6 replies
  1. Glenn
    Glenn says:

    Well put Jeff. Thanks for pointing out the differences between stated ideas and the realities of being a public company. Nice point on Performance and JCP as well.
    I wish them luck but the best thing for Quik would be to buy themselves back and get away from Wall St. so they can make decisions that benefit the long term health of the company, not just the immediate stock price. Screw institutional / computerized investors.
    Get well soon (knee)
    Sincerely,
    Glenn

    • jeff
      jeff says:

      Hi Glenn,
      Spy would be better off private, Billabong would be better off private (maybe it will be soon) and so would Quik. But I doubt Andy Mooney was hired with that in mind. His bet is that he can get some growth out of Quik, DC, and Roxy by operating better and through “focus” which I guess means better marketing and brand management. We’ll see.

      Thanks,
      J.

  2. RB
    RB says:

    I was hoping to see more of a discussion here.

    It seems to me although Mooney is doing the right thing now, there is still $700+ Million in debt and (like with our government) cutting SG&A alone is not going to fix the company balance sheet or repair its health. They either have to have significant profitable growth or sell an asset. Seems if they were to sell DC, that might come close to covering the debt and then Mooneys job becomes making Quik & roxy profitable and healthy. Who knows…

    • jeff
      jeff says:

      Hi RB,
      Well I’d always like more of a discussion too, but it seems like a lot of the really interesting comments are sent to me privately, which is too bad because some smart people have some interesting things to say. The debt would be okay if they could grow the business and it’s profitability. I generally agree that Mooney is doing the right things tactically. Strategically, with the possible exception of DC, it’s hard for me to see where the growth is going to come from. I’ve been expressing that concern since they put the Rossignol mess behind them.

      Thanks for the comment,
      J.

  3. DREW
    DREW says:

    It seems to me that brand building and making quality, performance oriented products are pretty much one in the same in the “real” action sports industry. The people actually using performance oriented gear are the trend setters in their local demographics. These products market themselves to a large degree.

    The polar opposite “performance oriented” is “custom made for JC Penny.” It is quite clear that by “custom,” what these department stores really mean is “give us the cheapest, dullest product you can that still has a Quicksilver label on it.” These are the product lines that degrade the brand in the eyes of surfers and other athletes. These are the lines that will benefit from having the biggest names in action sports attached to them; in fact, the largest marketing budgets are needed to still effectively link these products to action sports in the minds of consumers.

    Quicksilver, in my opinion, has a decision to make. They cannot be a brand that sells performance gear to athletes at top dollar and a brand that sells “surf tees” to kids in the Midwest because its cool to have “California” written on your shirt.

    Being a public company, its fairly obvious to me which direction they should choose, or already have choosen. Degrade the brand, sell at volumes unattainable in skate shops, and make your money off of the people on the outside looking in at the action sports world.

    I hope Mooney realizes that any performance products in Quicksilver’s lineup are useful only to the extent they say: “hey, see, we still make surf products.” They are strictly to be used as marketing ploys. If he truly expects to drive sales off of the true, dedicated action sports athletes out there, then he is sorely mistaking.

    • jeff
      jeff says:

      Hi Drew,
      In this industry, it is management’s job to manage, or try to manage, exactly the conundrum you point out. As a public company especially, you have to reach outside of the core market (whatever that means exactly) to grow. To the extent you can market your product and manage your distribution so that it’s credible with both the core and the broader market, you can succeed. But I think there are limits to just how far you can push it, and we’re finding a lot of our brands are over that limit. The other thing I’ve said is that as you expand your distribution, you depend on customers who are less and less in touch with the core market. At that point you find yourself in the fashion business and competing with a whole new crop of brands- many of which know the fashion business better than you do and have a lot more resources. That’s a big change for a brand, but it happens slowly and insidiously.

      Thanks for the comment,

      J.

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