Quiksilver Director Resigns- and She Doesn’t Sound Happy.

Quik filed an 8K today announcing that a director, Elizabeth Dolan, had resigned from the board effective immediately. Here’s what she said in her resignation letter.

Dear fellow Quiksilver Directors:

It is with regret that I inform you that I am resigning from the Quiksilver board effective immediately.

I joined this board with a strong commitment to carrying out the full responsibilities of a Director. By excluding me from crucial board discussions and votes, I have been prevented from fulfilling this role. Indeed, your lack of trust in me has been made clear. On my end, this can’t be rebuilt.

With respect, I wish the best for the future of Quiksilver.

The terse, blunt language in her resignation seems to me to be a bit unusual for a resigning director. Here’s a description of Ms. Dolan’s background from Quik’s last proxy statement.

Elizabeth Dolan currently serves as Chief Marketing Officer of FOX International Channels (FIC), which includes global television channel brands such as FOX, National Geographic Channel and FOX Sports, where she oversees all brand development, consumer communications, new programming launches and trade marketing for more than 350 television channels in Asia, Latin America, Europe and Africa. Ms. Dolan joined FIC in January 2011. Prior to joining FIC, Ms. Dolan served as Chief Marketing Officer for OWN: The Oprah Winfrey Network from January 2009 to June 2010. From November 2003 until September 2008, Ms. Dolan was President of Mudbath Productions, which produced radio shows for the ABC Radio Networks. From September 1997 until November 2003, she operated a marketing consulting practice. Prior to that, from August 1988 to September 1997, Ms. Dolan held various positions with Nike, Inc., including serving as Corporate Vice President and VP of Global Marketing. Ms. Dolan earned a bachelor’s degree from Brown University in 1979. As a result of her extensive experience in the worldwide marketing of globally recognized brands, our board of directors believes that Ms. Dolan will bring important insights and guidance to board deliberations regarding our brand development and overall marketing strategies.

If you want to know more, check out her LinkedIn profile.

To be clear, I don’t know what happened, and have not met or talked to Ms. Dolan. But based on the description of her experience, she’s the kind of person I think I’d want around if I were dealing with some of Quik’s problems.

This almost feels like a continuation of the management transition that happened when Andy Mooney got fired.

I will be interested to see what Quik’s quarterly report looks like when we see it in a week or so.

The Surf Industry and Bob McKnight’s Conference Speech: Points of Contact

Most of you are probably aware that the Surf Industry Summit took place in Cabo starting about 10 days ago. The keynote speaker on the first night was Quiksilver founder and Chairman Bob McKnight. His speech was somewhat controversial. The text is available on Shop Eat, Surf, but only if you’re an Executive Member. I’m not, but some people sent me a PDF. I’ve read it a few times and listened it to, but was not at the conference. You should find a way to get yourselves a copy.

My goal is for this to be useful and professional. That doesn’t mean I won’t disagree with Bob on some points. I do and I will. But as always, my goal is a discussion that makes us think differently, and do better business. A quality disagreement is the best way to learn new things.

I’m going to use Bob as a bit of a stalking horse, responding to some of the issues he raises but doesn’t fully address if only because of the limited time available. But these, I think, are precisely the issues that future conferences should focus on. When it does, I might start coming to the conference again.

If they’ll have me.

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Changes at Quiksilver

I’m assuming you’ve all seen the Quiksilver press release. Andy Mooney “…is no longer with the company.” President Pierre Agnes, the President has been promoted to CEO. Bob McKnight has returned as Chairman of the Board and APAC region president Greg Healy is now President of Quik. Former CFO Richard Shields has resigned, but will be around as a consultant to help new CFO Thomas Chambolle, who was formerly Quik’s EMEA region CFO, transition to his new job.

Out with the new, in with the old I guess.

We can, and no doubt will, all have a wonderful timing speculating how this all came down and what’s next. But people, let’s focus! I want to ask the same old question I’ve been asking about Quiksilver for years now, way before we’d ever heard of Andy Mooney.

Where are the sales increases going to come from?

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Quiksilver’s Quarter: Right for its Brands, Hard for a Public Company?

At the risk of sounding like a broken record….oh, damn, do I need to explain that outdated cultural reference? You see, back in the day when there was something called a record…never mind.

Anyway, I’ve said this a lot. It can be hard to do the right thing for the brand and still meet the expectations for growth of a public company. But what it now sounds like is that Quiksilver management has figured out that if they don’t do right by their brands, they won’t have to worry about the public company issue.

Here’s how CEO Andy Mooney put it in the conference call:

“We listen to the issues that were important to a longtime course our partners and based on their feedback made several changes to better support their business. First we’re holding back and [not] opening additional owned and operated retail stores in the areas that could negatively affect their businesses. Second we’re substantially altering the form and substantially reducing the frequency of promotions in our branded Web sites. Going forward, we will conduct limited promotions solely in past season merchandise and entirely exclude technical products like wetsuits from any price promotion in our direct-to-consumer channels.”

“With the restructuring of the company essentially completes, I am looking forward to now spending time with core surfer skates specialty accounts around the globe and we continue to allocate the lion share of our company’s marketing resources to the specialty channel. In Q1 for example, we increased media spending by 40% in core surfers’ stake media as well as trade marketing in various forms.”

This is the first time I’ve heard Andy put this “thing of importance” as directly as he just did, and it’s about time. I think (and so do a lot of other people, if my conversations are any indication), that Quik has missed some opportunities in this area over the last year or so, and I’m really happy to apparently see them acknowledge and move to correct it.

Regular readers will know I expect this to not only improve brand equity but to help with gross margin and maybe eventually allow some reduction in advertising and promotion expenses, or at least make what they do more effective.

With that good news as background, let’s review the financial results for the quarter ended January 31. Before we jump into the explanations and adjustments, let’s look at the reported numbers.

Revenues were down 13.4% from $395 to $341 million. The gross profit margin fell from 50.8% to 49.7%. Below are revenues and gross margin broken down by segment.

Quik 1-31-14 10q #1 3-15









As you know, Quik licensed certain “peripheral” product categories in the Americas. There’s a chart on page 30 of the 10Q (here’s the link to the 10Q) that adjusts revenue for licensed product revenues as well as currency fluctuations.  Licensed revenue during the quarter was $11 million compared to $1 million in last year’s quarter. Currency adjustments had a particularly significant impact in EMEA (Europe) because of the strengthening of the dollar against the Euro. It reduced reported revenue from that segment by $20 million.

In the Americas, “Net revenues on a constant currency continuing category basis decreased by $13 million, or 8%, due to a reduction in apparel category net revenues of $13 million in the Americas wholesale channel. Americas wholesale apparel net revenues decreased across all three core brands, but more significantly in the DC and Roxy brands.”

Ignoring currency impacts (which I’m reluctant to do if you’re a dollar investor) EMEA revenues fell just $3 million. “Net revenue on a constant currency continuing category basis decreased by $3 million, or 2%, primarily due to a reduction in apparel net revenues of $11 million in the wholesale channel. EMEA wholesale apparel net revenues decreased across all three core brands, but more significantly in the Quiksilver and Roxy brands.” Russia was down 29% as reported, but up 13% on a constant currency basis. Nothing like collapsing oil prices and economic sanctions to do a currency in.

The Quiksilver brand revenue was $141 million. It fell $23 million or 14% as reported. Ignoring the impact of currency and licensed products, it was down $6 million, or 4%. Roxy revenue was $100 million. It was down $18 million or 15%. Ignoring currency and licensing, it fell $7 million, or 7%. DC was down $14 million or 14% as reported to $89 million. Ignoring the usual, it was down $3 million or 3%.

Reported wholesale revenues fell from $211 to $192 million. Retail was constant at $119 million. Ecommerce revenues rose from $22 to $27 million.

The overall decline in gross margin “…was primarily due to unfavorable foreign currency exchange rate impacts (approximately 130 basis points), increased discounting in the Americas and EMEA wholesale channels (approximately 70 basis points), and increased air freight and other distribution costs associated with the U.S. West Coast port dispute (approximately 20 basis points), partially offset by net revenue growth from our higher margin direct-to-consumer channels (approximately 110 basis points).”

Here’s how it changed by region as reported.

Quik 1-31-14 10q #2 3-15





Consistent with the revenue decline, SG&A fell from $204 to $171 million. As a percentage of revenue it was down from 51.6% of revenue to 50%. Remember that foreign expenses decline when the home currency appreciates. That impact was a positive $13 million for Quik during the quarter. Also, “Restructuring and special charges reflect a gain of $1 million versus a $6 million expense in the prior year period.”

Operating income improved from a loss of $4.03 million to a loss of $1.32 million. Below is operating income by region for the two periods. 2015 is on the left.

Quik 1-31-15 10q #3 3-15





The next line troubles me. Interest expense was $18.4 million, an improvement from the $19.4 million in last year’s quarter, but still a sizable amount. What happens to Quik and other companies when interest rates finally rise? It depends on each company’s debt structure.

Due to all that interest, the loss before taxes was $20.4 million, compared to $26.3 million in last year’s quarter. Tax benefits gets us to a loss from continuing operations of $18.3 million compared to a loss of $21.9 million in last year’s quarter.

As you are aware, Quik has sold a number of businesses over the last year or so. In last year’s quarter those sales generated income of $37.6 million. The number in this year’s quarter was down to $6.7 million.

Lacking that big pop from discontinued operations, net income fell from a positive $15.7 million last year to a loss of $11.6 million in this year’s quarter.

The balance sheet has weakened from a year ago. Equity is down from $380 million to $26.6 million as a result of operating losses and non-cash asset and goodwill write downs. Total liabilities have declined only 5.2% from $1.221 to $1.157 billion with total debt making up $803 million, down from $828 million a year ago.

I’m encouraged by Quik’s apparent decision to refocus on brand building and support of specialty retailers and what I take to be their acknowledgement that it requires some caution is distribution and discounting. But the issue then becomes where does revenue growth come from? I’ve been asking that question since they completed the Rhone financing.   As we’ve seen with other brands, getting your distribution and brand position right can cost you some sales in the short term.

In the 10-Q Quik notes they anticipate “Year-over-year net revenue comparisons continuing to be unfavorable due primarily to the impact of licensing and currency exchange rates. Within this trend, we expect the rate of year-over-year net revenue erosion to decrease in the North America and EMEA wholesale channels. Also, we expect continued net revenue growth in our emerging markets and our e-commerce channel.”

I hope at least part of that is due to their decision to support the specialty channel and that we see a positive impact on their income statement pretty quickly. At some point, a weak balance sheet doesn’t allow you to continue reporting losses.

Quiksilver’s 2014 Results; Still a Work in Progress. Work Faster.

Quik filed their 10K last week, but the holidays kept me from any serious analysis until now. The best thing I heard in the conference call was CEO Andy Mooney saying, “The organizational restructuring of the company is now complete and the management team focused singularly on execution.”   We’ve learned, as we’ve watched other industry companies go through turnarounds, that cleaning up and getting organized is incredibly distracting from just running the business well.

I’m going to start with a summary of the financials. The first thing that jumped out at me was the year over year decline in stockholders’ equity from $388 to $58 million. That’s not an unexpected result given the loss for the year of $309 million, up from a loss of $233 million the prior year. Total liabilities, however, fell only 2.8% to $1.2 billion. Long term debt (net of current portion) declined 1.9% to $793 million.

The net loss includes a one-time gain of $30 million on the sale of Mervin Manufacturing and Hawk.

Obviously, no matter how you like to calculate it, the debt to equity ratio went through the roof compared to a year ago. I’ve written before about the need to get the turnaround producing positive cash flow and profits before the balance sheet deteriorated too much further. I’m still thinking the same thing, only with more urgency.

Sales declined from $1.81 to $1.57 billion (13.3%). There are some things you need to be aware of around goodwill impairments and licensing revenues. But first, here are the summary numbers according to GAAP straight from the 10K, which you can review here if you want.  The numbers are in millions of dollars.  Let’s run through these numbers and I’ll add a little “color,” as they say in earnings conference calls.

quik from 2014 10k 1-15














As you see above, revenues fell in all three regions. EMEA is Europe; APAC is Australia and the Pacific. The gross profit margin (not in the table) in the Americas declined from 41.5% to 41.3%. In EMEA it was down from 56.7% to 55.6%. In APAC, it rose from 51% to 54.6%. Overall, the gross margin rose from 48.2% to 48.6%. The increase “…was primarily due to the segment and channel net revenue shifts toward our higher margin EMEA and APAC segments, and retail and e-commerce channels versus our Americas segment and wholesale channel.” Gross margin dollars, you will note, were down in all three segments, though only very slightly in APAC.

You may recall that Quik is being selectively more aggressive on pricing, particularly on board shorts. If, while doing that, they can still improve their gross margin, it suggests that other parts of their program must be having some success. The caveat is that I don’t know the extent or breadth of those price reductions.

Sales in the U.S. represented 35% of Quik’s total sales, down from 38% a year ago.  Total U.S. sales, according to my careful calculations, fell 20% from $688 million to $550 million. Wow. The wholesale segment in the U.S. seems to suck for Quik. Not just for Quik.

Worldwide, wholesale business fell from 71% to 67% of the total. Brick and mortar rose from 25% to 28% and ecommerce was up from 4% to 5%. Quik ended the year with 683 company owned stores worldwide including 147 factory outlets. 100 stores are in the Americas. EMEA and APAC have 296 and 287 stores respectively. Those numbers do not include 252 stores “…licensed to independent third parties in various countries.”

I’d be curious about the financial model for those licensed stores. Does Quik get a fee for the licensed name and then sell them product at the same prices as to other independent retailers? Are they involved in merchandising? Anybody want to put a comment on my web site about how that works? You might as well as long as you’re hear reading this anyway.

Quiksilver brand revenue fell 12.9% ($93 million) from $721 to $628 million. $17 million of the decline was due to “Our licensing of peripheral product categories…”

Roxy fell 6% from $511 to $480 million. No impact from licensing for Roxy.

DC revenues were down 21%, falling from $542 to $427 million. $10 million of the decline was due to licensing. We learn in the conference call that additional categories may be licensed in the future.

I have no doubt that licensing the peripheral product categories is a good financial decision. But not long after it happened, I walked into my local Fred Meyers for my groceries and saw in their ad, “Quiksilver Kids- 25% off!”  Anyway, I worked my way to the clothing section and there in fact was the Quik and DC kids merchandise with a big sale sign on it.

So, I know it’s just the kid stuff, and I know it was a good financial decision, and I know I lack objectivity about this. But, damn it, it’s still representing the Quiksilver brand and I hated seeing it there and I hated the thoughtlessness with which it was merchandised and I hated what it was surrounded by. Okay, they needed to do it, and it was somehow the “right” decision and all that and it still depresses me to think about it.

Let’s move on.

Take a look at the SG&A expenses in the chart. The biggest reduction was in corporate operations ($24 million of the total reduction of about $30 million). Actually, I guess that’s what you’d want to see- spend the money in the places that can drive sales and profits. That’s generally not the corporate offices.

As a percentage of sales, however, SG&A expense rose from 47.4% to 52.7%. Obviously, that can’t continue. They note in risk factors that “We may be unable to continue to reduce SG&A at the same pace.” No kidding. I suspect Quik isn’t finished taking costs out of their supply and logistics chain, but SG&A can’t go down forever.

Promotion and advertising expenses totaled $78 million for the year. In the two prior years, they were $93 and $118 million respectively.

Now we get to the asset impairment charge of $180 million in EMEA. Yes, it’s noncash. Yes, it’s “one time,” though there always seems to be a new one charge time in the following year (Not just talking about Quik). No, that doesn’t mean you can ignore it. It is an indication of a real decline in future cash flows and the value of those assets.

Finally, at the operating income line, we see worse performance and a loss in all three segments compared to the previous year. Just for fun, let’s take out the asset impairment charge in EMEA. If we did that, we’d see the operating profit of EMEA was $13.7 million; positive, but down from the previous year.

Okay, almost made it to strategy. Just a few more financial comments.

The allowance for doubtful accounts has increased from $57.6 million at the end of fiscal 2012 to $60.9 million at fiscal 2013 end and $64 million 2014 fiscal year end. This has happened while sales fell 20%. Not necessarily supposed to work that way.

Also looking at the balance sheet, the current ratio has fallen from 2.49 to 2.13, but that’s still okay. Trade receivables were down 22.4%- more than the decline in sales. The same is true with inventories. They were reduced by 22.3%. They reduced the average day’s sales outstanding by four days to 93 and inventory days on hand from 122 to 118. Good work. I will not be surprised to see further improvement in the inventory numbers.

Interest expense was $76 million, up from $71 million last year and $61 million the year before that. Most of their long term debt is fixed rate, but the rates are between 7.8% and 10%. The first maturity of this debt is December of 2017.

Quik’s three fundamental strategies are “1) strengthening our brands; 2) growing sales; and 3) driving operational efficiencies.”

Nothing surprising there. I’m guessing every company would like to do that. You can read the details on page one of the 10-K. I see some progress in numbers one and three. Obviously, given the financial results, we aren’t there on number two yet. However, CEO Mooney tells us, ”Looking at the year ahead, we are pleased with our order book for spring ‘15 as it represents the stabilization of the business beginning in Q2 providing a foundation for significant EBITDA growth in 2015 with top line and incremental EBITDA growth coming in 2016 and beyond.”

Basically, he’s calling the bottom. And none too soon I’d say given the balance sheet. CEO Mooney projects a 2015 revenue increase “…in the low single digit range normalized for categories transitioning to a licensed business model.” They expect “proforma adjusted EBITDA” (whatever that means) to be $80 to $90 million assuming current exchange rates. Nobody is projecting a profit, though they expect positive free cash flow in 2015.

They make this statement in the 10-K:

“We believe that the integrity and success of our brands is dependent, in part, upon our careful selection of appropriate retailers to support our brands in the wholesale sales channel. A foundation of our business is the distribution of our products through surf shops, skateboard shops, snowboard shops, sporting goods stores, and our own proprietary retail concept stores, where the environment communicates our brand and culture. Our distribution channels serve as a base of legitimacy and long-term loyalty for our brands. “

You won’t be surprised I agree with that statement though, bluntly, I don’t quite see Quiksilver as having completely taken that approach since Andy Mooney became CEO.  But I’m partly willing to give them a pass because of the turnaround they had to engineer and are still engineering. There are some comments in the conference call about a being less promotional on their web site to support the core business and you’re aware they pulled DC back in distribution partly to address these issues.

With regards to marketing, Andy notes, “On marketing we went a little bit darker [in] marketing candidly in the transition, but we will come back with the vengeance in the spring as we said 40% increase in media. That media will be spent almost solely in core skate, surf and snow magazines in both print and vertical specifically to drive that business in the key markets of North America, Europe and Australasia. We are also going to increase our marketing spending in terms of point-of-sale presentations within the core surfer retail accounts reinvesting in grassroots and activating marketing the athletes that are important to those accounts and the consumers who shop in those accounts…”

That seems like a step in the right direction.

Given where they’ve come from, I really don’t dispute most of the operational steps Quik has taken. I haven’t liked seeing them all, but I understand them. I’m guessing we’re mostly though with SG&A reductions, though I’m thinking there might be some more improvement in gross margin through more inventory and supplier rationalization. For me, it’s right now about timely sales increases that improve cash flow to manage, and ultimately improve, the balance sheet.  We seem to have arrived back to where public companies in this industry always get- can you build strong brands while growing revenue enough to make wall street happy?

Quiksilver Gets a Letter from an Unhappy Investor

A reader sent me an article I imagine most of you have already seen, though I haven’t seen it covered in industry media. It tells us that Ryan Drexler of Consac, an owner of 2 million Quiksilver shares, has sent a letter to Quik Chairman Bob McKnight and CEO Andy Mooney stating that the company’s turnaround strategy has failed and that they should look to sell the company. Here’s a link to one of the articles that was published. A simple Google search will lead you to others.

And look what I just found! If you go here and click on the small document in the center of the page, the actual letter will open as a PDF. God, I love the internet.

He says, in part, “The 11-point turnaround plan announced by Andrew Mooney 16 months ago has thus far failed to deliver the desired results and, based on the deterioration in the company’s core brands since that time, has in actuality had a profound detrimental effect on the financial position and operating performance of the company, in my opinion.”

Mr. Drexler is known in some circles as an activist investor, and this isn’t the first company with issues he’s approached this way. There is a certain rhythm/process/ that happens when an investor does this, and the letter reflects it. I am not prepared to say, as Mr. Drexler does, that Quiksilver’s turnaround plan has failed. But I will continue to say what I’ve been saying; there’s a certain conflict between being a public company and Quiksilver maximizing the value of its brands, and the company’s weakening balance sheet limits the time they have to reinvigorate those brands.

The performance of the stock, as Mr. Drexler points out, suggests that he isn’t the only one with concerns. I’ve also become aware that certain of Quicksilver’s European debt is trading at $0.60 on the dollars. Actually, that’s on the Euro. The CUSIP is Z4840DAB6 if you want to check yourself.

I don’t know what’s going to happen, and maybe this is the last we hear from Mr. Drexler. On the other hand, it may be the start of a process. Quiksilver is on a shortening financial leash. At one time, I thought the solution might be to take the company private by doing a tender for the shares, but I no longer think that can happens. Even if you paid $0.00 for the shares, you’d own a company losing money with $900 million in debt and be faced with the same problem current management has.

I guess Quik’s board will have to respond to Mr. Drexler and perhaps we’ll see that response. The company’s next quarterly results are due to be released in early December. I’ll probably have more to say about their options when I see those. I mostly like Quik’s strategy. But I‘m becoming worried that they don’t have the time or money to pull it off.

About a year ago, a reader reminded me, I wrote this article relating some of Quiksilver CEO Andy Mooney’s comments in a conference call to the broader market and conjecturing on what some of Quik’s challenges might be. I don’t think I’d looked at since I posted it (I tend to be really, really, tired of articles by the time they finally make it on my web site), but it seems to have held up pretty well.

Quik’s July 31 Quarter: Restructuring Results Slow to Appear.

You know, maybe it’s a delusion, but an awful lot of corporate reports for the companies I follow are starting to sound the same. I need to read something else. Most of them say some variation of we’re trying to figure out how to integrate brick and mortar with online, sales growth is hard to come by, we’re rationalizing expenses and improving efficiencies, we’re reducing SKUs, we’re improving systems to get the right inventory to the right place at the right time, we have some constraints caused by our balance sheet, the U.S. market is especially tough, we’re pinning our hopes on Asia/Pacific, we’re trying to improve product, we’re focused on building our brands and managing our distribution, and the market is very promotional.

I think that covers it, and now I have to somehow relate that introduction back to Quiksilver. I guess I can do that by saying they are dealing with most of these issues.

Sales for the quarter ended July 31, 2014 fell 18.9% from $488 million in last year’s quarter to $396 million. Sales declines in the Americas, EMEA and APAC respectively were 26.8%, 12.8% and 1.8%.

The gross profit margin was down from 49.1% to 47.8%. The Americas gross margin fell from 41.9% to 40.2%. In EMEA it went down from 58.4% to 55.6%. In APAC it rose from 51.4% to 56.8%. The decline in gross margin “…was primarily due to increased discounting in the wholesale channels of North America and Europe (320 basis points), partially offset by net revenue growth from our higher margin direct-to-consumer channels (160 basis points).”

SG&A expenses were down just 1% from $215 to $213 million, but as a percentage of sales they were up mightily, from 44% to 53.8%. They reduced athlete and event spending by $5 million, but had a gain on the sale of a building of $5 million. Employee compensation fell $4 million because they didn’t have the severance costs they had last year. They spent an additional $5 million on marketing other than athletes and events, had $3 million more in bad debt expense and $2 million in higher depreciation.

Operating profit went from a positive $23 million to a loss of $206 million. However, that includes noncash goodwill impairment related to European assets of $182 million. Remember, however, that even though it’s noncash, it’s indicative of lower expected future cash flows from the assets being written down.

Ignoring all the noncash charges in this year and last year’s quarter, operating income fell from a positive $25 million to a negative $24 million, so it’s hardly good news. Interest expense was about $19 million compared to $20 million last year. There was a bottom line net loss (including the write down) of $222 million compared to a profit of $1.8 million last year.

Here’s the chart from the 10-Q that lays it all out for you by segment. You can see the 10-Q here if you want, though I doubt anybody ever goes to look. The Americas segment is just what you’d think it is and most of its revenue comes from the U.S., Canada, Brazil and Mexica. EMEA is Europe, the Middle East and Africa, but mostly the revenue is from Great Britain, continental Europe, Russia and South Africa. APAC (Asia and the Pacific Rim) is mostly Australia, Japan, New Zealand, South Korea Taiwan and Indonesia. Notice how China does not make the top six yet.

























Quiksilver, by the way, ended the quarter with 658 company owned stores. They are on pace to open a net of 60 new stores by the end of this fiscal year.

Please note that APAC’s operating income rose $3 million on a small decline in sales. Ain’t nothing like raising that gross margin.

In the Americas, “This net revenue decrease was primarily due to lower net revenues from our DC brand in the wholesale channel of $47 million driven by reduced clearance sales, narrowed product distribution to mid-tier wholesale customers, and the licensing of DC children’s apparel. In addition, net revenues decreased in the Quiksilver and Roxy brands by $14 million and $7 million, respectively, in the wholesale channel due to licensing of Quiksilver children’s apparel, lower customer demand, and less effective order fulfillment compared to the prior year. Americas segment net revenues decreased 28% in the developed markets of North America, but increased 9% on a combined basis in the emerging markets of Brazil and Mexico.”

The licensed kids business was responsible for $11 million, or 16% of the decline in the North America wholesale business.

I want you to specifically note that they are pulling back DC’s distribution with the goal of strengthening the brand. It’s about time. In this case at least, they are giving up some sales in a good cause.

There isn’t much good news about revenues in AMEA. The decline is “…due to lower revenues in the wholesale channel across all three brands driven by lower customer demand as a result of poor prior season’s sell through, and less effective order fulfillment compared to the prior year. These decreases were partially offset by double-digit percentage growth in the e-commerce channel … ”

Lower demand, poor sell through, and troubles with order fulfillment is quite a triple whammy.

In APAC, wholesale revenues were down but that was offset by growth in retail and e-commerce.

Here’s revenue for the quarter by brand.








The decline in the Quiksilver brand “…was primarily due to reduced net revenues in the Americas and EMEA wholesale channels of approximately $14 million and $15 million, respectively. A portion of the decrease in Quiksilver brand net revenues ($6 million) was due to the licensing of children’s apparel.

The Roxy decline “…was primarily due to lower net revenues in the Americas and EMEA wholesale channels of approximately $7 million each, partially offset by increased revenues in the e-commerce and retail channels.” Roxy was not licensed for children’s apparel.

DC’s decrease in revenue “…was primarily driven by lower net revenues in the Americas and EMEA wholesale channels of $48 million and $10 million, respectively. The Americas net revenue decrease was driven by reduced clearance sales, narrowed product distribution to mid-tier wholesale customers, and the licensing of DC children’s apparel.” They also reported successfully launching DC’s offering in “accessibly priced canvas footwear market,” and expect a positive impact going forward.

So it seems we can conclude that wholesale in the Americas and EMEA kind of sucks. You can see the problem in this chart showing sales by channel.







I’d like to point out the relative contribution to revenue of wholesale compared to retail and e-commerce. There were gains totaling $7 million in retail and e-commerce and a decline of $100 million in wholesale. E-commerce revenues were down 9% in the Americas by the way. Global comparative store sales were up 1% during the quarter. So when Quik talks about retail and e-commerce offsetting wholesale, it’s not much of an offset overall.

Looking at the balance sheet, you’ve got a current ratio that improved from 1.73 a year ago to 2.46 as of July 31. Long term debt is up slightly from $808 to $812 million. Total liabilities to equity have vaulted from 2.97 to 10.6 times. Liabilities fell significantly from $1.64 to $1.2 billion, but equity was down from $553 to $114 million.

Quiksilver notes that they are updating their profit improvement plan “…based upon recent difficulties within the wholesale channels of our Americas and EMEA segments. As part of updating our PIP, we will establish additional SG&A reduction objectives and allocate capital to our emerging markets, e-commerce and retail channel growth plans.” So more expense cuts to come.

In a short section on page 29 of the 10-Q called “Known or Anticipated Trends,” Quik gives us a look at what the future looks like. Over the next few quarters they expect net revenue comparisons will be “unfavorable.” That means they will be lower when compared against the previous year’s quarter. For the year they expect them to be “unfavorable” in North America and Europe wholesale but favorable in emerging markets and e-commerce. Didn’t say anything about retail.

“Unfavorable” is such a benign sounding word for such an unfortunate result, speaking of benign words.

They also tell us that the adjusted EBITDA for the year that ends October 31 will be lower than for the previous year. I tend to believe that if the adjusted figure is worse, the as reported will be even worse. Maybe I should have said “unfavorable.”

There’s a lot going on. Some of the things I think Quik is doing right have caused what I hope are short term difficulties. Reducing DC’s distribution is absolutely critical to the brand’s success, but in the short term costs revenue. They’ve stopped or at least reduced discounting on their web sites. Again, a possible short term revenue hit, but good for the brands. Just as a guess, I expect core shops to like that.

In the conference call, CEO Andy Mooney announced, as part of their positive accomplishments, that “…we moved a large number of small independent accounts to a B@B service model.” I understand the financial rationale for doing that, but I have reason to believe you shouldn’t expect those accounts to see it as positive.

And literally as I write this, I got an email telling me that Quik is reorganizing its marketing function to help give it a better connection to the core.

They also decided not to order any products in quantities below production minimums because of the additional cost. That eliminated some orders, but helps gross margin. Some late deliveries were the result of changing from regional to global demand planning, but it’s a good thing to do anyway.

There was also some discussion about the previously announced program to selectively reduce prices. They don’t expect it to reduce margins given the other efforts they’ve taken to reduce SKUs and rationalize production.

Quik is making changes in every facet of their operations. That some of them didn’t quite go according to schedule isn’t a surprise. I just heard from a client that they’ve got a container held up in customs because of an “invasive moth.” God, you just can’t make this stuff up and to some extent it happens to every company every year.

But Quiksilver doesn’t have the luxury of time. Its brand building (rebuilding?) has to be successful sooner rather than later. Its balance sheet can’t continue to deteriorate, but it sounds like we can expect further losses in the next few quarters. For all the things I think they are doing right, there’s a time limit here that’s gotten shorter as a result of a couple of tough quarters.

Quiksilver’s Quarter: The Impact of Market Trends

In the quarter ended April 30, Quiksilver’s revenue fell 10.4% from $456 to $408 million. The net loss grew from $32.4 to $53.1 million. Discontinued product lines contributed $9 million to revenue in last year’s quarter, but none in this year’s. A year ago, they also owned Mervin and the Hawk brand. I’m a little surprised they didn’t mention how much revenue those brands contributed a year ago.

I’ll spare you a long quote from CEO Andy Mooney on the profit improvement plan (PIP), but basically he says, we’ve done what we said we’d do and we’ll do more. He notes they’ve cut brands and product lines, are rationalizing sponsored athletes and event participation, licensing peripheral products, closing losing stores, reducing headcount, managing expenses down, centralizing merchandising and design, cutting SKUs and factories, and reducing SG&A.
But then they announce that they are pushing back the PIP profit target for a year to the end of fiscal 2017. Why, if they are doing all this good stuff, is that necessary?

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Quiksilver’s Quarterly Results: Still a Work in Progress

It’s not usual that I’m happy to see a decline in year over year revenues during a quarter, but in the case of Quiksilver, I think I’ll make an exception. Their revenues for the quarter ended January 31 fell by 4.8% from $412 to $396 million. But at least some of that decline is from cleaning up distribution and I love that. In fact, I think it’s where Quiksilver needs to start. 

As most of you know, their earlier financial problems led them to push brands for revenue in ways that weren’t good for those brands even if it was what the company had to do. To build their brands now, they have to exercise some caution with distribution.
Here are their results by segment from the 10Q. EMEA is basically the European area and APAC is Asia and the Pacific.
Here’s the operating income for each region:
You can see that revenue was down in each segment, but so was SG&A expense. In constant currency, revenue fell 2%. Below are the revenue numbers by brand as reported in the 10Q.
They only discuss the individual brands’ performance by region in constant currency. Quiksilver and DC revenues were off in the high single digit percentage in the Americas. Roxy was up by a similar amount. “The net revenue decrease in the Americas wholesale channel was focused within North America where net revenues decreased by a high single-digit percentage due primarily to three factors: 1) lower sales of DC brand products of approximately $6 million as a result of improved management of channel inventory to better align sell-in with sell-through; 2) a reduction of net revenues of approximately $2 million as a result of the discontinuation of the Quiksilver women’s product line in fiscal 2013; and 3) a reduction in net revenues of approximately $2 million as a result of lower shipments into Venezuela due to the economic instability occurring there.” They note that the decrease in the Americas was focused in North America and expect continued “negative impact” on the North American wholesale business “in the near future.”
I love that DC fell because they were controlling distribution. Staying far, far away from Venezuela right now is a good idea.
In EMEA the Quiksilver brand was down a low double digit percentage. DC fell by high single digits and Roxy was flat. “The decrease in EMEA wholesale channel net revenues was primarily due to lower net revenues with clearance customers due to improved inventory management, and increased returns and markdowns to aid inventory sell-through versus the prior year period.”
In APAC “…segment net revenues increased across all three core brands (Quiksilver, Roxy and DC) and all three distribution channels (wholesale, retail and e-commerce). A significant portion of the net revenue increases was driven by promotional activity and clearance sales.” APAC revenues rose 11% in constant currency but were down 4% as reported, and they expect currency to continue to be an issue in that region “in the near future.”
As reported, here’s how Quiksilver did during the quarter by distribution channel.
Talking about the wholesale business, they note, “Our wholesale net revenues have declined for the last several quarters, particularly within the Americas and EMEA segments due to various economic and competitive challenges. We believe it is likely that such difficulties will continue in the near future, resulting in further net revenue declines within this channel.” Ecommerce revenues in the Americas were down slightly. CEO Andy Mooney noted in the conference call that they expect more fallout in the “smaller wholesale accounts.”   
Gross margin in the Americas rose from 42.8% to 43.4%. In EMEA it was up barely from 58.7% to 58.8%. In APAC, it fell from 54.0% to 52.7%. The overall gross profit margin remained the same at 50.9. 
Selling, general and administrative expense (SG&A) declined by 5.6% from $216 to $204 million. These expenses include $2.6 million this quarter and $3.1 million in last year’s quarter as part of the profit improvement plan (PIP). There’s another $2 million in expense during the quarter “…related to certain non-core brands that have been discontinued, but I don’t know if that’s part of SG&A or cost of goods sold. As a percentage of sales, SG&A declined from 52.5% to 51.9%.
They point out that, “Depending on the pacing and nature of further restructuring activities, we may not be able to maintain the same pace of SG&A savings in future quarters that we have achieved in recent quarters.” There’s no “may not” about it. A company’s ability to improve the bottom line through expense cuts doesn’t last forever. Employees won’t work for free and landlords will want their rent. 
Remember, the PIP is supposed to improve adjusted EBITDA by $150 million by the end of fiscal 2016. “Approximately one-half of this improvement is expected to come from supply chain optimization and the rest is expected to be primarily driven by corporate overhead reductions, licensing opportunities and improved pricing management, along with net revenue growth.” They aren’t specific about which part will provide how much. 
The operating loss fell from $9.7 to $4.8 million, but a chunk of that ($2.3 million) is because of a decline in the asset impairment charges from $3.2 million to $883,000. It’s good to see those noncash, but indicative of expected future cash flow, charges going away.
Interest expense rose from $15.5 to $19.4 million, and the loss from continuing operations after taxes declined from $31.2 to $22.7 million. However, they had a tax benefit of $4.4 million instead of a tax expense of $2.9 million, a $7.3 million improvement.
Net income went from a loss of $30.6 million to a profit of $14.9 million, but that’s only because they had a one-time $37.6 million gain from discontinued operations after taxes.
I’d characterize the balance sheet as weaker than a year ago. Equity has fallen from $590 to $380 million while total liabilities are up from $1.158 to $1.221 billion. Total borrowings rose over the year from $788 to $865 million. There’s a decline in inventory from $419 to $360 million, but it’s hard to evaluate that as some of the reduction came from the sale of assets or elimination of brands. CFO Shields tells us in the conference call that inventory days on hand decreased by 11 days. He also says, “The quality of our inventory improved as we continued to liquidate aged inventory.” Aged inventory as a percentage of total inventory was down. That, I suppose, is good, but some specifics would sure be nice. When will that excess aged inventory be gone and how much are we talking about?
Receivables are pretty much unchanged at $339 million. I might have expected some reduction there given the sales decline and asset sales.
Okay, having dragged you through the numbers, let’s have some fun and talk strategy. At various points in the 10Q and the conference call, we’re reminded that margins at wholesale were down, that the number of smaller wholesale accounts is shrinking and that they expect it to continue to shrink. That’s just a market reality faced by all brands. CEO Mooney notes, “The smaller accounts are absolutely important to us. I just think there’s going to be fewer of them." In the U.S., we learn, small wholesale retail accounts are just 19% of Quiksilver’s revenue. In Europe, it’s 40% to 45%.
If that channel is going to continue to shrink, Quik can’t rely on it for growth. What’s the solution? One answer, they believe, is more retail stores. They ended the year with 645 company owned stores and expect to open around 40 more this year.
A second thing they are doing is adding entry-level price point products for DC. I don’t know what kind of revenue that might generate.  I’m mostly just surprised they weren’t selling there before. So was Andy Mooney I think. He notes that DC has never participated in the “…$45 to $55 retail price segment for canvas vulcanized footwear…” Worldwide, he estimates the market is 120 million pairs. You can see why he’d like DC to get a piece of it. I can’t think of any reason they shouldn’t.
Third, we find out that Quiksilver has already reduced product SKUs by 40%, but that their own retail stores can still only showcase half the company’s products. He thinks they might be able to cuts SKUs by another 40%. Think of the magnitude of those cuts. It’s stunning that they could have had so many SKUs in the first place.
Cutting SKUs that much has huge implications for inventory investment and supply chain management. It will let them pull a chunk of working capital out of the company. But maybe more important is the impact on their competitive positioning when retailers have some chance to actually get theirs heads around a brand’s line and merchandise more of it well. As they cut SKUs and manage distribution better, there is an opportunity to differentiate the brands.
But my antenna really went up when Andy said early in his remarks, “…we also believe that we have opportunities to increase sales to the larger wholesale accounts in these markets by focusing on appropriately segmented product collections.”
Later, in response to an analyst question, he expanded on his thinking:
“…I think increasingly, the larger retailers aren’t really interested in what our line is. What they’re interested in is what their line is. Each of those retailers is increasingly looking for custom-design lines that appeal to both their unique consumer as they see it, and certainly their business objective.”
He goes on:
“Every retailer in the mall is looking down the mall to see what the competitor has from the same brand. And if they have something similar, they’re not particularly interested in carrying that brand. So that requires an organizational setup, people who are adept to doing footwear under [indiscernible] and that’s a particular breed of cat. You need a supply chain that can get both in printed goods and cut and sold goods to market on a quicker pace than you would do for the traditional channel.”
Okay readers, help me out here. I read that and hear “fast fashion in big chains.” I’m not prepared to characterize this as a good idea or a bad idea, but I do have questions. Just to be clear, I don’t have any problem with Quik’s brands being in large chains (the right one, merchandised correctly, with the right product). Everybody else is there and, as Andy Mooney says, this is where the market is going.
Question one is does Quik have the systems and infrastructure to pull this off? CEO Mooney says they do. The company will have to develop a new internal attitude about how they operate.
Question two: Does this imply selling to some different retailers than they are already selling to? If so, which ones?
Question three: What exactly does it mean to produce different products for different retailers? How different are the products? How many products how often? Is it for the whole line that the chain carries or just some coordinating product around the edges?
Question four: If retailers are interested in what their line is, not what your line is, what does that say about brand positioning? Do you just make what they want? I think this might say something important about how you compete. How much influence does a chain that places a big order have over the product you make before you aren’t managing your own brands anymore?
Question five: Who is Quik competing with in this market with these customers? What’s the value of their brand’s heritage in these circumstances?
I’ve wondered a few times now if distribution won’t begin to become less important as you allow consumers to connect with your brand whenever they want and however they want on whichever device they are using or in the store, where the devices are also used. I suspect that’s part of the answer to making this work.
At the end of the day, I’m on board with the operational steps Quik is taking to cut costs and improve efficiencies and expect it to have a positive impact on the bottom line. I think I mostly agree with their ideas about how the market is evolving. But figuring out how heritage brands fit in this market and grow in it is the challenge they have. 
Not for the last time, and not just for Quiksilver, I wish they were a private company.



Billabong and Quiksilver; Two Peas in a Pod

Billabong’s announcement last week that it was, among other things, conducting a strategic review of SurfStitch and Swell caused me to focus on the similarities of its situation to Quiksilver’s. It also made me realize that most of what has been discussed publically by both companies is what I’ll call mechanical issues. I want to remind you what those are and then move on to the way more important and difficult to manage strategic issue they both face but, understandably, don’t spend a lot of time talking about in public. 

We all know that both Billabong and Quiksilver got into trouble due to some acquisitions they paid too much for, their aggressive forays into retail and their tendency to allow units to operate independently, resulting in an unsustainable cost structure.
I think those things would have come back and bit them in the butt even if the economy hadn’t cratered, but the teeth marks wouldn’t have required as many stitches. With their balance sheets out of whack, both had to sell assets, raise expensive capital, change management, cut costs, push for revenue in ways they would (I hope) have preferred not to, rationalize their sourcing and reduce SKUs, consolidate and coordinate design and marketing, and revise and upgrade their information systems.
Now, I call those things mechanical. That’s not to suggest they were easy to do, or that exactly what to do was always obvious. But nobody doubted they had to happen (and outside stakeholders didn’t give them a choice anyway). That gives you the refreshing liberty to say, “Let’s get at it!” and start without too much analysis. There was, to use one of my favorite phrases, some low hanging fruit.
The process isn’t complete (it’s never really complete- it’s a long term way of thinking), but it’s well underway. Both companies will see significant improvement in their bottom lines as a result.
So let’s move on to the hard part. What brands should sell what product to which consumer? I’m sure I could figure out a more erudite way to say that, but why bother. They had to start to address the mechanical stuff before they could really focus on market segmentation (there- that’s a more erudite term) because some of it represented survival issues. It’s hard to care which way you’re rowing when there’s a big hole in the bottom of the boat.
Part of the process of keeping the boat floating through the restructuring was to press for sales in places and in ways they didn’t want to do. I assume it helped in the short run- perhaps not so much in the long run. Both companies have some recovering to do from distribution decisions they made while managing those short term survival issues.
In the long term, the ONLY THING THAT MATTERS competitively is their ability to figure out the market segmentation thing. The mechanical stuff is necessary but not sufficient. The what product to sell to which customer issue is existential. If they don’t do that well, they’ve got no business or at best a dramatically different business. “Dramatically different” is code for a brand that doesn’t do this well and finds itself milking its market credibility with cheaper product in broader distribution until there’s nothing left.
Both companies want to grow the top as well as the bottom line. (What?! Public companies focused on top line growth?!  Shocked! I’m shocked!) If they could, at least for a while, just worry about improving the bottom line (and the balance sheet) their jobs would be a whole lot easier. The mechanical issues, as I so blithely call them, are simpler to manage. And as I’ve written, market segmentation takes care of itself initially though distribution management which builds brand strength for future growth.
But you can’t do that for too long. You risk finding yourself stuck in a niche you can’t get out of. For some brands, that wouldn’t necessarily be a bad result. It’s difficult for Quik and Billabong because that market niche might tend to be a predominantly older customer group that has been loyal to the brand for a long time but will inevitably buy less.
Their challenge over the longer term is to continue to appeal to their traditional customer groups (if only for the cash flow) while also reaching the younger demographic they have to evolve towards. Not easy.
So that’s why I perked right up way back when Launa Inman became Billabong’s CEO and, in her initial presentation of her strategy, talked about the need to figure out what the brands stood for and how the customers and potential customers perceived them. Billabong proceeded to spend a lot of money on that issue. We never heard the results, but why would we? You can tell all your competitors that you’re cutting costs, improving systems, reducing SKUs and consolidating certain function. They’re doing it themselves and are probably wondering why you didn’t get on with it sooner. But I can’t think of any good reason (outside of a brain tumor or psychotic episode) why’d you’d share findings about what customers think of your brands, why they buy them, and how you’re planning to position those brands.
Part of that evaluation will determine product direction. It’s fair to say that when you’re trying to keep a company alive, you aren’t likely to take a lot of product risk if only because you can’t afford things that don’t work. But armed with their evaluations of who’s buying what product and why, I would expect to see both companies be more aggressive with product development and introductions. The consolidation of those functions from regional to worldwide should make that easier by making it more cost effective. It’s time to take some risks.         
Most of us think it’s important that Billabong and Quik do well because they are positioned to represent the surf industry in the broader market. It seems to be an industry article of faith, practically a mantra, but it has the ring of truth to it.
I’m not sure any more what “the surf industry” means. Don’t feel bad surf people. I feel the same way about other segments of action sports and, by the way, am not quite sure what exactly the action sports market is either.
But recognize that neither Billabong nor Quik is a pure surf company in the way they were years ago.   The “core” surf market is way too small to support much growth for either company. Anyway, that seahorse left the barn years ago when they both acquired non surf brands that represent significant percentages of total revenue.
I will always look at the numbers (I can’t help myself). But the numbers, by the time we see them, only tell you what has already happened. As I try and figure out how Quik and Billabong are going to do, I’ll be looking for clues to their product and market segmentations decisions, because at the end of the day, that’s mostly what’s going to matter. And not, you might consider, just for Quiksilver and Billabong.