Some Comments on Quiksilver’s Quarterly Report

Quik came out with its quarterly results last week and filed the 10Q with SEC all at the same time so I’ve got that and the conference call to work with. I know Volcom and Zumiez have also released their results for the quarter and year, but so far they haven’t filed their 10Ks for me to peruse. When they do that, I’ll give you a report. I don’t like delaying, but I just don’t know how to do a good job without those documents. Hope you understand.

This is really the first report from Quik in a long while where we don’t have to adjust for discontinued operations as Rossignol has worked its way off the financial statements. That’s great to see.

For the three months ended January 31, 2011, Quik reported a loss of $16.3 million compared to a loss of $5.4 million during the same quarter the prior year. Sales fell 1.45% from $432.7 million to $426.5 million. Sales in Asia/Pacific were essentially the same from one quarter to the other and rose $6.8 million in the Americas. But European sales fell 7.1% from $177.8 million to $165.2 million.
 
In the Americas, the 4% growth was driven by mid-teen growth in Quik’s retail business. Wholesale revenues were “essentially unchanged.” That means all the Americas growth came from retail which they say grew in the “mid-teens.” Let’s call that 15%. It follows that the Americas quarter over quarter sales growth of $6.83 million represents something like 15% growth in retail. To use a little simple algebra, if 0.15x = $6.829 million and we solve for x, we find that retail sales during the quarter were around $45 million, or about 23% of the total.
        
We don’t get any specific sales numbers by brand. Quiksilver was flat in constant currency. They expect it will grow in the second half of the year. They note that there was “very strong demand” for their winter sports and technical snowboard apparel. But we don’t know how many dollars that involves.
 
Roxy does about $525 million in annual revenues. CEO McKnight characterizes that business as “stabilizing.” Its revenues were down 10% to 15%. They think they see girls getting tired of the “cheap quality” that fast fashion has provided.
 
Management is positively giddy about the DC brand and its prospects. It grew 15% to 20% in the quarter. Bob McKnight says DC is “…dedicated to being the most sought after skate-driven action sports brand in the world.” He then goes on to discuss DC and Ken Block’s Gymkhana franchise and being the exclusive shoe sponsor of the Monster Energy AMA Supercross series.
 
Maybe I’m too old to be cool enough to understand the relationship between skate and motocross. Quik bought a great brand in DC and has managed its growth impressively. I just hope, with the Roxy and Quiksilver brands not growing as well right now, that they don’t expect more from DC than it can deliver. Their goal is to double DC’s revenues in five years. 
 
Gross profit as a percentage of sales rose from 51.3% to 52.4%. CEO Bob McKnight indicated the increase was the result of “…improvements in our U.S. retail stores and lower levels of discounting in the wholesale channel.” It’s not clear if he means to say those are things the company can take credit for.
 
In the Americas, gross margin was up from 43.3% to 46.2%. In Europe, it rose from 56.6% to 58.9%. It fell in Asia/Pacific from 55.3% to 54.7%.
 
All things being equal, I’m guessing that the Americas are Quik’s third choice for where they’d like to sell stuff. Look at the gross margin differences. Enthusiasm for international business and its growth opportunities come across in the reports and conference calls of Quik and a lot of other companies as well. And not just in our industry. I suppose that’s the inevitable result of real incomes dropping in this country.
 
Quik, like Billabong, is referring to 2011 as a transition year, where they are investing in certain initiatives that aren’t expected to produce significant results until 2012. You see this in selling, general and administrative expenses that rose 3.58% to $210.4 million. As a percent of sales, they rose from 46.9% to 49.3%.
 
Interest expense rose from $21.9 million to $29 million. But that included a $13.7 million non-cash charge for writing off “…deferred debt issuance costs associated with our European term loans that were paid off during the quarter…” Basically, those costs have to be put on the books as an asset like a building and written off over the life of the loan just as a building is depreciated. But when the loan goes away, the remaining value has to be written off. They note that their total interest expense was $6.6 million lower than it would otherwise have been due the reduction in their total debt over the last year.
 
Their 10Q presents balance sheets for January 31, 2011 and October 31, 2010. As usual, I chased down the one from January 31 of the previous year so we’d have a more valid comparison and I’m referring to the year over year changes below. Interestingly, they refer to the year over year change in the conference call as they discuss the balance sheet, so it would be logical for them to include it in the filing.
 
Over the year, the current ratio has improved from 2.24 to 2.56. Total liabilities to equity has also improved, falling from 2.91 to 1.82. Long term debt was down 18.8% to $697 million and stockholders’ equity rose from $456 million to $602 million. The rise in equity is largely the result of Rhone debt being converted to equity. Quik has had losses over the last year which obviously reduced equity.   Inventories are up about 2.8%. Days sales outstanding (how long it takes to collect receivables) declined by six days compared to last year from 64 to 58 days. That’s good work. Being tougher on extending credit and collecting is not unique to Quiksilver in this environment. 
 
In discussing their hedging activities and foreign exchange management, Quik makes a comment I want you to read. Not because it says anything about Quik, but because it teaches us something about how we got into our current economic problems in the first place. Here’s the comment from the 10Q.
 
“The Company enters into forward exchange and other derivative contracts with major banks and is exposed to exchange rate losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.”
 
Okay, but what if these banks (the counterparties, to use a phrase you may remember) can’t “fully satisfy their obligations?” I remember when that’s exactly what happened. Don’t you? The institutions that couldn’t “fully satisfy their obligations” included AIG, Lehman Brothers, Merrill Lynch, and a host of others.
 
Quik’s derivative numbers are small and it’s in no way an issue for them. But isn’t it amazing how quickly we forget? People are trusting Moody’s and S&P bond ratings again. They were the ones who rated subprime stuff triple A. It’s inability to remember even the recent past, I suppose, and the fact that greed is eternal that guarantees it will happen again.
 
Okay, off the soapbox.
 
Quik expects its gross margin to be the same this year as last year. They have raised some prices selectively. They see cost increases averaging 5% to 10% with some as high as 15%. The question, as CFO Joe Scirocco points out, is how the consumer will react to the higher prices. I’d say that’s on everybody’s mind.
 
Right now, DC is providing a lot of Quik’s growth momentum, and I hope they don’t push the brand too hard. As they indicated, 2011 is a transition year for Quiksilver. We’ll find out in 2012 how some of their marketing initiatives and the launching of the Quiksilver women’s line went. If DC can keep growing, Roxy can stop shrinking and start growing, the Quiksilver can get just a bit more momentum, and some of these marketing bets pay off, the company will be doing fine.  

 

 

3 replies
  1. Christopher Scott
    Christopher Scott says:

    I love Quik, and they have done a great job growing DC. I would agree with your assessment as well. Pushing DC into Moto seems to be an aggressive brand extension, which usually doesn’t work. Al Ries has made a career preaching this point. His examples of failed line extension include the biggest names in consumer goods; Coke, Pepsi, GM, and the research goes back 40 years. It would be a shame for an endemic powerhouse like Quik to lose all the ground gained with DC just for a couple percentage points. I wish Quiksilver the best with DC shoes and hope they pull it off.

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