Quik’s April 30 Quarter: Adjusted EBITDA Falls 39%

Quik had a 3% sales increase in the quarter, growing to $492 million from $478 million in the same quarter last year but, as I define and discuss below, their adjusted EBITDA fell by 39%.

 The gross margin percentage fell from 54.8% to 49.2%. That rather significant decline, they say in the 10Q, “…was primarily the result of higher levels of clearance business, the timing of certain royalties, higher input costs and the impact of fluctuations in foreign currency exchange rates.” The higher level of clearance represented 36% of the decline, we learn in the conference call.

In constant currency (ignoring the impact of foreign currency fluctuations), the wholesale business was up 2%, retail revenues increased 9%, and ecommerce was up 131%. Also in constant currency, Quiksilver brand revenues rose 4%. Roxy was up 5% and DC, 13%. As reported, Quiksilver brand revenues were $209 million, up 1%. Roxy revenues were up 3% as reported to $135 million, and DC had revenues of $131 million, up 11%.

According to GAAP (Generally Accepted Accounting Principles) Quik had a net loss in the quarter of $5.1 million compared to a loss of $83.3 million in the same quarter the previous year. The loss in the quarter last year included an asset impairment charge of $74.6 million for goodwill in the Asia/Pacific segment. The asset impairment charge in this year’s quarter was $415,000. Those are both non-cash charges and don’t have anything to do with how much product they sold at what prices and margins.
The net loss in last year’s quarter also included an income tax provision of $39.7 million “… to establish a valuation allowance against deferred tax assets in our Asia/Pacific segment. As a result of this valuation allowance and the valuation allowance previously established in the United States, no tax benefits were recognized for losses in those tax jurisdictions.”
My eyes glaze over when it comes to accounting for income taxes, but I think that relates the big asset impairment charge. The tax provision in this year’s quarter was $7.2 million.
If you ignore the asset impairment charges, then Quik had pretax income in last year’s quarter of $32.6 million. The comparable number for this year’s quarter is a loss of $4 million.
On page 28 of their 10Q, (see the whole 10Q here) Quik reports their adjusted EBITDA. That’s earnings before interest, taxes depreciation, amortization, asset impairment, and non-cash stock based compensation expense. In last year’s quarter that number was $62.1 million. In this year’s April 30 quarter, it had fallen to $37.6 million.
As reported, revenues were up in the Americas from $211 million to $221 million. Gross profit percent fell from 49.1% to 44.2% and total gross profit was down from $104 million to $98 million. 
Europe’s sales fell 5.5% from $207 million to $196 million as reported. In constant currency, they remained more or less the same. Gross profit fell 15% from $128 million to $109 million. The gross margin was down from 62% to 55.7%.
CFO Richard Shields made an interesting comment about their financial strategy in Europe during the conference call. He said, “We’re trying to make sure that we repatriate cash in Europe back to U.S. dollars so we’re not at risk there.”
Let me loosely translate that for you a bit. He’s saying that if he wakes up one morning (it would probably be a Monday) and the Euro has gone to hell and capital controls are in place and the capital markets have frozen up again because Greece has left the Euro zone or some Spanish banks have collapsed or whatever, he doesn’t want to be stuck with money he can’t get out of Europe that’s going to be worth half of what it was in U.S. dollars when he can finally get it. I hope you’re all thinking about that.
Asia/Pacific sales rose from $58 million to $74 million, or by 27.3% as reported. It was a 24% increase in constant currency. Note that this improvement was “…primarily driven by improved performance in Japan, where net revenues in the three months ended April 30, 2011 were significantly impacted by the earthquake and related tsunamis in the region.”
So they’re saying that the growth only looks good because of the natural disaster in Japan last year and that there wasn’t much growth in the rest of the region.
Gross profit in the Asia/Pacific segment rose 16.5% from $30.9 million to $36 million. The gross margin fell from 53.1% to 48.6%.
Operating income fell in all three segments. In the Americas, it was down from $17.9 million to $8.9 million. In Europe, it declined from $43.8 million to $25.9 million. Asia/Pacific fell from a loss of $81.1 million to a loss of $4 million, but remember the $74.6 asset impairment charge in the quarter last year.
As you think about how Quik did this quarter compared to last year, you need to  isolate the funky tax charge, the asset impairment and the Japanese earthquake/tsunami in last year’s quarter. If you do that, it’s hard to see progress in the income statement.
On the balance sheet, equity has risen from a year ago to $591 million from $535 million. The current ratio is a healthy 2.61 times, very slightly down from a year ago. Total liabilities have barely changed, so the total liabilities to capital ratio has improved with the increase in equity.
In the current assets, cash has fallen from $139 million to $79 million. And inventory rose 24% from $290 million to $359 million. That’s a bigger increase than you’d like to see given the associated sales increase. However, Quik notes that, “The increase in consolidated inventories was primarily the result of higher input costs and the early receipt of goods in comparison to the prior year. “ They think that higher product costs were responsible for 10% to 15% of the inventory increase.
Accounts receivable rose 8.5% from a year ago. They were up 17% in the Americas (with only a 4.7% sales increase), down 3% in Europe, and increased 22% in the Asia/Pacific segment due mostly, I assume, to the recovery in Japan. In constant currency, they were up 15% overall. 
So those are the numbers and they reflect not only Quik’s difficulty in finding places to grow (I’ve mentioned that before), but just how hard the whole economic environment is for everybody.
In the conference call CEO Bob McKnight mentions product for NFL teams as being shipped. He also says, “NBA board shorts will follow with some teams introduced this summer…” There will also be National Hockey League product, and they are “…expanding the program into Australian football leagues.”
They also talk about taking DC into JC Penney for back to school, and CFO Richard Shields says, “So DC continues to expand distribution as [there is] demand in a lot of channels where we don’t currently sell. And our overall global segmentation strategy, I think, positions us well to succeed in those channels. So we are going to continue to roll out distribution globally.”
And here, I guess, we get to the crux of the matter. What is Quik’s global segmentation strategy exactly? When I first heard about Quik’s selling NFL board shorts, I said something like, “You know just because you can sell something somewhere doesn’t mean you should. Not all product extensions are good.” I recognize the need, especially as a public company, to grow. But in the conference call discussion about growing sales, there’s a sense of selling a brand somewhere because you can and you haven’t yet. I hope Quik is careful with that. I hope all brands are.
Quiksilver’s operating performance declined rather precipitously from the same quarter a year ago even with the recovery in the Asia/Pacific segment. I still think it’s better to focus on generating more gross margin dollars with strong, brand supporting, sell through and clean inventories than it is to struggle for that incremental sale, but then I don’t have to meet with the analysts every quarter. 



2 replies
  1. My Old Sandals Stink!
    My Old Sandals Stink! says:

    They’re done, next stop Wall Mart. S*#t they’re already deep into Costco. Like I said the last time, every brand has a life and death, I think we are seeing the early (or many not be so early) stages of this brands ultimate demise. You can stuff the market with goods (3% sales increase) but if there is not “real” demand, it comes back and you have high inventory levels, high close-out levels, low margins and lower EBITDA. Sound about right? The only way out maybe to take the company private, re-set the meter, clean up the account list and start over with controlled selling, higher margins and an improved profit picture. But you and I know that’s not going to happen, but it might with Billabong! But that’s another story!

    • jeff
      jeff says:

      Hi John,
      I’m guessing Billabong might have more value if the brands were sold off individually. In fact, at the current stock price, I can guarantee you there are people out there looking at the cost of a tender offer versus the value of the brands. As Gordon Merchant has already said just some weeks ago that he wouldn’t take $4.00 a share, it’s hard to see him now agreeing to a buck fifty or something without the lawsuits flying. Or maybe they are already flying.

      As to Quik, if my analysis were as succinct at yours, my articles would be a lot shorter and easier to write (and read I suppose). I think you’re absolutely right in that there is a conflict between the brand (brands I guess I mean) being public and doing the stuff it needs to do. I don’t see growth opportunities that are consistent with a strong brand positioning. I’m not sure retrenching is an option for a public company.

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