Quiksilver’s 10K: It’s Results for the Year and Some Issues of Strategy

If you haven’t noticed, I’ve been working to not just report the numbers (it’s hard to grab readers attention with the drama of a changing current ratio) but to draw some larger business lessons from company reports and make us all think about the issues. You can think I’m wrong, or you can think I’m right (I’m not always sure). I just ask that you pause and think. 

Quiksilver is giving us the chance to pause and think. I’ll get to the numbers of course, but let’s dive right into some more strategic issues, starting with this quote from their discussion of distribution channels in the 10K (which you can see here).
“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.”
No kidding. I suspect I’d define “careful selection” differently from Quik management, but then I don’t have to answer to the stock market. As I’ve said, it’s hard to be public and do the right thing for a brand in our space.
“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. Most of our wholesale accounts stand alone or are part of small chains.”
I’m all for communicating brand and culture. But outside of its own stores and certain core shops, it’s tough for any brand to do. Damned near impossible once your distribution gets past a certain point. Perhaps, I’ve argued, even a detriment as some of those further removed customers may know your brand, but not know or care about your story. And then, how are you competing? I’d also love to hear what Quik’s definition of a “small chain” is. 
Next, here are some comments CEO Andy Mooney made in the conference call. They are in the order I came to them.
“… retail brick-and-mortar sales were very steady and e-commerce sales continued to show robust double-digit gains. And…we continue to see very slow erosion in the specialty core surf and skate chain worldwide, offset by pretty robust growth in emerging markets, particularly for us, Russia, Brazil, Mexico and Southeast Asia, and even Japan this quarter.” 
Okay, here’s the next one.   “In the case of Quiksilver, we believe there’s opportunities to take share within the core channel, particularly when we see the current weakness of some of our competitors in the marketplace.”
Subject to definitional clarity, I’m wondering just how big the core market is. I’ve suggested it’s not really that large a market overall. I’d be curious what percentage of its total revenues Quik sees as coming from the core market. And if it’s “slowly eroding” how significant to revenue growth can taking share be? It was years ago I first pointed out that even robust growth in the core channel (if by “core” we mean specialty shops) doesn’t really move the revenue and profit needle much once a company is larger.
And third from CEO Mooney, talking about their Board Rider stores. “These are very exciting stores that have within them restaurants, bars, barbershops. We offer in those stores a broad range — array of our own products, but also other products that would be relevant to our consumer. So products like GoPro or mophie, the battery charge — battery packs for iPhone, headphones, that type of thing. We think that makes for an interesting environment for consumers that cut across all 3 brands. Those stores are performing very well for us. We’d like to experiment with a few of those stores here in North America in 2014…”
A couple of weeks ago, I wrote about Zumiez’s quarter and asked if it really mattered how we defined our industry or if maybe it was up to our customers to define us and our job was just to give them the product they wanted where and when they wanted it. It sounds like that’s how Andy Mooney looks at things given his description of the Board Rider stores. Interesting implications for branding however. Will any of these products carry a Quiksilver brand? How much and what kind of product can you carry before these stores no longer “communicate the brand and culture?”
And next: “Well, one of the things that we’ve been doing because we can is we’ve been doing product injections into our retail stores ahead of the calendar that’s required to introduce new product for the wholesale channel…So we’ve got some of the products, the newer products that we want to have in retail in the stores quicker. One of the other kind of really important changes that we’re going through, which again gives us the level of confidence that we can actually go deeper in SKU reductions is that, as an organization, historically, we have designed for wholesale, and retail has been an afterthought. Increasingly, what we’re seeing is, we’re going to design primarily for our own retail stores, our own website and our own key wholesale partners.”
I guess I just have to wonder what actual core retailers, which Quik says are a foundation of their business, think when they read this. I am not saying I wouldn’t do the same thing if I were in Andy Mooney’s place. But as a core retailer, it might make me think about my commitment to Quik’s brands. 
And finally, just to put the cherry on the whipped cream, Andy notes:
“I think our wholesale business is in transition, in that we’re seeing a rotation out of the small independent mom-and-pop operators in surf, skate and snow into other — in some cases, other wholesale players. That could be, in the case of Europe, it could be large multi-outdoor players like Decathlon or it could be pure play e-commerce players like Surfdome in their own stable in Europe, or Amazon, even here in the U.S., or eBay. There’s a lot of activity happening on web for pure-play retailers that clearly didn’t exist before. So you’ve got a rotation out. Definitely, the small independent operators are much more challenged than they’ve ever been, today. And we’re seeing, I’d say, some modest contraction in that channel, but it’s rotating into other channels.”
Once again, I think Andy’s perception may be accurate. But where does it leave Quiksilver (and other industry brands and retailers) who get their credibility and legitimacy from having their roots in a sport and lifestyle that, with revenue growth, is less important to a bigger percentage of their customers? How can Quik’s “…distribution channels serve as a base of legitimacy and long-term loyalty for our brands” under these circumstances? 
Now, here’s how Quik defines its strategy in the 10K:
“In our efforts to increase shareholder value, we have adopted three fundamental strategies: 1) strengthening our brands; 2) growing sales; and 3) driving operational efficiencies.”
Those strategies (if they are strategies, and I don’t think they are) offer no competitive advantage or point of differentiation. Everybody who owns a brand is striving to do those three things all the time. Always have been, always will. Granted, they’ve become more important since the economy went to hell. I suppose I expect too much from the information provided in a 10K.
We’ll move onto the numbers now.
The Numbers
Revenue for the year fell 6.8% from $1.942 billion to $1.811 billion “…due to the expected decrease in DC sales.” Argh. Some of you may remember that several years ago I expressed concern that Quik might push the DC brand too hard in a search for revenue. They did. It’s the public market pressure again. You’ll note some more indications of this below where I present more data on DC.
Wholesale fell from 74% to 71% of the total. Retail rose from 23% to 25% and ecommerce from 3% to 4%. Apparel was 62% of the total. Footwear and accessories were 25% and 13% of revenues from continuing operations respectively. The Quiksilver brand was 40% of revenues from continuing operations (unchanged from the previous year). DC represented 30%, down one percent and Roxy 28%, up 1%. Other brands were 2%.
The Quiksilver brand’s year over year revenue fell 8% as reported from $784 to $721 million. DC was down 9% from $588 to $542 million. Roxy fell 4% from $530 to $511 million. Total wholesale revenues were down 9% to $1.294 million. Retail was down 2% to $447 million and ecommerce rose 25% to $69 million.   
I’d note that revenues from continuing operations are surprisingly even over the quarters, with the 1st quarter being lowest at 23% of the total, and the 3rd and 4th highest at 26%. As a finance guy, I love that.
38% of this revenue was generated in the U.S. The next biggest single country is France at 12% with Australia/New Zealand coming in at 7% and Canada at 6%. Below is the table that shows net revenues and gross profit by operating segments. Note that revenues were down in all three segments for both the quarter and the year.
For the quarter ended October 31, the Quiksilver brand had flat revenues of $190 million. Roxy stayed the same at $137 million but DC was down $47 million to $139 million. That is a 25% decline. Wholesale revenue fell 12% to $353 million. Same store sales in company owned stores were flat and ecommerce revenues grew 22% to $16 million. The gross margin for the quarter rose 1.4% to 47%. It would have risen 1.9% except for $2 million in restructure related costs.    
The gross profit margin for the year was down from 48.5% to 48.2%. The decline was “…primarily due to increased discounting associated with DC brand net revenues within our wholesale channel. We entered fiscal 2013 with a higher level of DC inventory in the wholesale channel than we planned, which resulted in higher discounting to clear this product.”
SG&A expenses declined from $227 to $200 million. “The decrease in SG&A was primarily due to reduced employee compensation expenses and event related marketing expenses, partially offset by higher severance and early lease termination costs as well as increased e-commerce expenses associated with the expansion of our online business.” As a percentage of revenue, SG&A rose 1.7% from 45.7% to 47.4% “…primarily due to net revenue declines outpacing any SG&A reductions in fiscal 2013.”
Quik spent $93 million on promotion and advertising during the year, down from $118 million the prior year.
Asset impairment charges (noncash) were $1.7 million compared to $6.7 million last year. Interest expense rose from $15.3 to $20 million and the loss before taxes and discontinued operations (businesses they are selling) rose from $11.2 to $18.7 million.
And then, there was a provision for income taxes of $157.5 million compared to a benefit of $9.7 million the prior year. That left Quik with a net loss from continuing operations of $176.2 million compared to a loss of $1.5 million the previous year. After then taking into account the discontinued operations, we’ve got a net loss of $171 million compared to a profit of $4.4 million last year.
I usually stay away from income tax issues, but a charge of $157 million (it’s noncash) requires some respect and a little attention. Here’s how CFO Richard Shields explains it:
“The Q4 tax provision includes a noncash charge of $157 million related to taking allowances on the net operating loss carry forward deferred tax assets in France. We have NOLs of EUR 356 million in France, which were created in the Rossignol disposition in 2009. These deferred tax assets were carried on the balance sheet, tax effected, at $157 million. Based upon the cumulative losses we have incurred in France in recent years, we took valuation and reserves against those deferred tax assets. This does not preclude our future use of those NOLs, and those NOLs do not expire.”
I’m sure you all understand that as well as I do. My take is that they don’t expect French results to be good enough to let them utilize those assets in the near future, so they might as well write them off now while nobody is expecting much from them on the bottom line. I think that, having written them off, they will have more value if they can be used. One of you CPAs out there want to explain this to us on my web site?
The balance sheet requires a little attention. Trade accounts receivable are up like $1 million to $412 million, but with the sales decline, you might have liked to see them go down. I see their allowance for doubtful accounts has increased from $57.6 to $60.9 million. Deductions for bad debts were $2.38 million compared to $7.81 and $9.26 million respectively in the prior two years. The average number of days it took them to collect receivables rose from 85 days to 97 days or by 14%. We can’t tell if that’s because they extended longer terms or had trouble collecting.
Total inventories rose slightly from $327 to $338 million. Again, with a decline in sales, you’d like to see that fall. They tell us that, “As of October 31, 2013, aged inventory was approximately 6% of total inventory, a reduction of 100 basis points versus October 31, 2012,” and it was 15% lower than a year ago.   CFO Richard Shields tells us in the conference call that they added $8 million in U.S. retail inventories because they thought they were too thinly stocked.
It is, of course, good to see aged inventory falling. But what, exactly, does 6% represent? Is that a good number or a bad number? Is “aged inventory” anything older than three months or three years? Not knowing that, I have no idea how to react to that number. It wasn’t available during the conference call, so nobody could ask. I’ve emailed Quik to ask that question and will let you know if I get an answer.
By the way, the receivable and inventory numbers exclude the assets associated with the businesses being sold. Total assets fell from $1.72 to $1.62 billion, largely due to the write off of the tax assets.
Current liabilities are up from $357 to $367 million. However, long term debt, net of current portion, rose 12% from $721 million to $808 million. Mostly due to that increase, total liabilities increased from $1.116 billion to $1.233 billion.
As a result, stockholders’ equity fell 35.6% from $583 million to $370 million. Total liabilities to equity rose from 1.85 times to 3.18 times.
The Profit Improvement Plan     
You remember that last May, Quiksilver introduced its Profit Improvement Plan (PIP). Here’s how they describe it.
“Important elements of the PIP include:”
“• clarifying the positioning of our three core brands ( Quiksilver , Roxy and DC );
• divesting or exiting certain non-core brands;
• globalizing product design and merchandising;
• licensing of secondary or peripheral product categories;
• reprioritization of marketing investments to emphasize in-store and print marketing along with digital and social media;
• continued investment in emerging markets and e-commerce;
• improving sales execution;
• optimizing our supply chain;
• reducing product styles;
• centralizing global responsibility for key functions, including product design, supply chain, marketing, retail stores, licensing and administrative functions; and
• closing underperforming retail stores, reorganizing wholesale sales operations, implementing greater pricing disciplines, and improving product segmentation.”
CEO Mooney notes in the conference call that the fall and holiday SKU count is 47% lower than last year. That’s progress. Remember that licensing agreement like the one for children’s apparel and the sale of Mervin and other assets helps with the SKU reduction.  
I pretty much agree with all of this and wish Quiksilver, as a company, had started it sooner. I’m sure we all realize that some of these things make sense whether times are good or times are hard.
They go on to say:
“We expect that the PIP, when fully implemented by the end of fiscal 2016, will improve Adjusted EBITDA by approximately $150 million over fiscal 2012 Adjusted EBITDA, of which approximately one-half is expected to come from supply chain optimization and the rest is expected to be primarily comprised of corporate overhead reductions, licensing opportunities and improved pricing management, along with modest net revenue growth compared with fiscal 2012 results.”
I wish they’d tell us what “modest net revenue growth” means. I’m seeing in Quiksilver what we’re seeing in a lot of other companies- not just in our industry. Bottom line improvement is coming largely from expense reduction driven by layoffs and improved efficiency. Top line growth with a solid gross margin is harder to come by. Trouble is, you can’t cut expense and become more efficient forever.
The Retail Footprint
Quik ended the year with 631 owned retail stores. They had an additional 243 stores licensed to independent retailers around the world for a total of 874 retail locations. Here’s how the owned stores break down by type and location.
Quik closed 17 retail stores during the last quarter of the year. They see a chance to add “…a few more full-priced stores in developed markets…” and believe “…there’s tremendous opportunity to open stores in emerging markets.” They believe they’ve got a big opportunity in ecommerce, where they “…received 30 million visitors to our own branded sites last year.” But they “…only converted, on average, 1.5% to 2.0% of them.” Part of the PIP is the consolidation of their three independent ecommerce platforms. Good idea.
I applaud what Quik is going as part of its profit improvement plan. But I’m going to ask the same question I’ve been asking about Quik for years now. Where will revenue growth come from? Like most public companies with roots in traditional action sports, they are ultimately conflicted by the need to grow revenues but also to manage distribution carefully to differentiate products that don’t have meaningful competitive advantages. You can see that conflict highlighted in some of the quotes and the discussion at the start of this article.
Why might Quiksilver be more successful than its competitors? There are three possible reasons. Better management, better brands, and/or a stronger balance sheet. Actually, you need some of all three.



2 replies
  1. Bud Stratford
    Bud Stratford says:

    When I read these corporate breakdowns of our industry’s bigger players, I can’t help but to view these things from the customer’s perspectives, and laugh a little bit to myself. In this case, we have Quiksilver, Roxy, and DC.

    According to the piece, I am part of their target market. I do, after all, skate and snowboard… and they do say that their distribution channels include “surf shops, skateboard shops, snowboard shops, sporting goods stores, and our own proprietary retail concept stores”… ie, places where I’m likely to shop. I find it odd that he didn’t list “any darn where on the internet”, although I spend an awful lot of time these days shopping on the internet. Oh, well. I guess I don’t count. Nothing new there…

    Problem is, as a skater and a snowboarder (ie, “part of a shrinking core market”, apparently), I’ve never bought anything from Quiksilver (because it’s a lame old surf brand). Obviously being male, Roxy isn’t my bag; that’s “the girl brand”. And as far as DC goes, the last pair that I bought (at Marshall’s, if I’m not mistaken) were so darn uncomfortable that I threw them away, barely used, three days later… a total waste of money that I’m not inclined to repeat anytime soon. As a snowboarder, the only boards worth buying are Lib Tech… which was recently sold off by Quiksilver, yes…? So, the one thing that I was actually stoked on, and actually bought [a lot of] from Quiksilver, is no longer in their stable. Bummer.

    So, as a consumer… do I really care what the “story of the company” is, or even which distribution channels they may or may not utilize…? If I really want a Skunk Ape, then I’m gonna buy it wherever I can find it at the best price and least inconvenience. If it’s at my corner snowboard shop? Great! If it’s in a dark, cold corner of the internet somewhere? So be it. (Quik, note: My last $8000 to $10,000 of snowboard purchases were made online- no joke! Earmark that, Mr. Mooney…!)

    I think that I’m a pretty average customer. And the biggest challenge, is reaching me, informing me of what you have that’s worth buying, and motivating me to actually go buy it somewhere. Anywhere. And I don’t care enough about your brands to dedicate too much of my valuable time “researching your company’s story”. And I’m not inclined to leave the brands that I already love (and support), and giving your brands [another] try. Does that sound pretty “average consumer” to you, Jeff…?

    It makes me wonder why Mr. Mooney doesn’t spend much time on articulating how he’s gonna get me, Mr. Customer, to support any of his brands. And that fundamental question seems more important than any “Profit Improvement Plan”. Because it’s awfully hard to have profits, without customers. Isn’t it…?

    So, instead of babbling on about retail stores and communicating our brand’s culture and crap… and boy, there are whole paragraphs in this regarding different types of retail stores… why aren’t we talking about the customer…? If the stores are so important, I can only imagine how vastly powerful the shoppers are that actually go into those stores…

    Yet, we rarely discuss the customer anymore. And I think that’s a crying shame. What says you, Jeff…?

    • jeff
      jeff says:

      Hi Bud,
      You get the award for the longest comment so far. First you aren’t necessarily their target customer. At least you aren’t the place where they get most of their revenue, but they would love it if you loved them because that’s good for the brand.

      Actually, Mooney did talk about the internet, specifically mentioning Ebay and other fine core establishments. I quoted him on that in my article.

      There is no “average customer” these days. Every customer perceives themselves as different, which is why traditional marketing strategies are giving away to to internet strategies.

      I think when we talk about the market, or the distribution, or segmentation, we are talking about the customer, but as you make me think about it, we’re probably losing something by making it too damned business MBA like in the way we think about it. A customer is an individual who buys a specific product for a specific reason, and Quik, or any other company, needs to think about the specifics of that.

      Thanks for the comment,


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