Quik Grows its Sales and Profits; I Thought I Heard a New Attitude

At the start of the quarterly conference call, Quiksilver founder and CEO Bob McKnight always makes a short speech highlighting the good things that are going on. After Rossignol, and through the balance sheet restructuring, they felt a bit like pep talks. He would highlight in a pretty nonspecific ways some things that were going well, and often they seemed like small things. It felt like he was offering reassurance where he could.

Suddenly that’s changed. Call me crazy and hell, maybe I’m imagining this, but his speech for the July 31 quarter didn’t sound like, “It’s going to get better.” It was more like, “It is better.” That was great to hear.

Reported sales were up 14% to $503 million from $441 million in the same quarter last year. They were up 11% in the Americas to $260.2 million, 16% in Europe to $176.4 million, and 20% in Asia/Pacific to $65.5 million. The percentages in constant currency were, respectively, 11%, 2%, and (3%). Quik’s largest customer accounts for about 3% of revenue. Comparative sales for company owned retail was up 21% in the quarter. Ecommerce business rose 65%, and they expect it will represent $25 million in revenue by year end. Overall for the quarter, “…Roxy was down just slightly in the quarter as a brand. Quik was up low single digits, and DC was way up. It’s in the range of 15% to 20% higher.”
I’ve previously expressed some concern that Quik might put too much pressure on DC for growth. I’ll look forward to seeing some revenue growth from Roxy and Quik and their new collections.  
The new Quiksilver Girls line and Quiksilver Women’s business are expected to generate revenues of $15 million. The Waterman collection, and its European equivalent, is now a $35 million business.  Quik needs some serious growth here.
One of the things that really caught my attention in CEO McKnight’s talk was the strategy for certain Roxy product to provide better quality and value at a higher price. Aside from generally just liking the strategy as a point of differentiation, it seemed positive, proactive, and confident.    
The growth in the Americas came “primarily” from the DC brand. The DC growth came “primarily” from footwear. The Quiksilver’s brand Americas growth was mostly in accessories and Roxy’s growth was from footwear and accessories. Roxy apparel declined.
In Europe in constant currency, DC and Quiksilver revenues rose, but Roxy was down. The 3% constant currency decline in Asia/Pacific came from the Quiksilver and Roxy brands, offset by strong growth in DC.
Gross margin percent fell from 52.3% to 50.7%. In the Americas, it fell from 46.7% to 44.2% mostly because of higher cost of goods, but also due to some mark downs. European gross margin fell from 60.6% to 60.3%. In Asia/Pacific it was down from 52.7% to 52.4%. I note again the attractiveness of sales outside of the Americas.
Selling, general and administrative expense jumped 14.5% to $221 million. It remained relatively constant as a percent of sales.
Operating income actually fell a bit from $35.4 million to $33.9 million even though they had no asset impairment charge this quarter compared to a charge of $3.2 million last year. It was down in the Americas from $27.7 million to $27.1 million. In Europe it rose 34.7% from $15.6 million to $21.0 million. Asia/Pacific, even with that big gross margin percent, reported an operating loss of $2.0 million up from $1.6 million in the quarter last year. For the whole company, operating income was 6.7% of sales compared to 7.8% in the quarter last year.
Interest expense fell from $20.6 million to $15.7 million due to reduction in their total debt. Net income rose from $8.6 million to $10.4 million.
The balance sheet has improved from a year ago, with the current ration rising from 2.26 to 2.45 and total liabilities to equity down from 2.45 to 2.14. Receivables are up consistent with sales. Days sales outstanding remained at about 65 from a year ago. In constant currency, inventory rose 24% compared to a year ago. This was required to support higher revenue levels. There were also some early receipts of fall season inventory.
I expect to see continuous, gradual, balance sheet improvement as long as the economy doesn’t worsen. And I’d like to see some growth out of the Quiksilver and Roxy brands. But you know what? If we could see those two brands grow slowly but be managed to generate a lot of gross profit dollars, if DC continued to grow but at a moderating pace, and some of the new initiatives began to generate some significant revenues I think we’d have a financial model that might make a lot of sense at the bottom line given the projected economy.