Quiksilver’s January 31 Quarter- Sales and Loss Both Grow

Let’s start with the summary numbers. Sales rose 5.4% to $450 million. The gross profit margin fell from 52.4% to 50.7%. Quik reported an operating loss of $2.5 million compared to operating income of $13 million in the same quarter the previous year.

The net loss grew from $15 million to $21 million. Taxes were $4 million higher, but interest expense fell 48% from $29 million to $15 million.

Okay, so why did it work out this way? We’ll start by looking at results in the three operating segments; Americas, Europe, and Asia/Pacific. You can see Quik’s 10Q filing here.
Income Statement Analysis
Revenues were up in all three segments. The Americas rose 6% to $205 million. Europe was up 2.2% to $169 million (4% in constant currency), and Asia/Pacific grew 11.3% to $75 million (8% in constant currency).
As you already read, overall gross profit margin fell by 1.7%. The decline was from 46.4% to 42.8% in the Americas and from 54.7% to 51.1% in Asia/Pacific. It rose from 58.9% to 60.3% in Europe.
Based strictly on grow margin, sales outside of the Americas look most attractive, but let’s take a look at the selling, general and administrative expenses as a percent of sales. In the Americas, it was 43.6%, up from 42.8% in the same quarter last year. In Europe it rose from 48.7% to 51%. In Asia, it fell from 52% to 49.9%. So while the gross margins may be better outside of the Americas, at the moment the cost of doing business is higher. 
Quik reported an operating loss in the Americas of $1.6 million compared to an operating profit of $6.5 million in the same quarter last year. The European operating income fell slightly from $16.9 million to $15.7 million. The Asia/Pacific operating loss rose from $12.1 to $17.5 million.
Those are the income statement numbers. Let’s see if, as the analysts put it, we can add a little “color” to those numbers.
The 10Q reports that, “The increase [in revenues] in the Americas came primarily from Quiksilver and Roxy brand revenues, partially offset by a decrease in DC brand revenues.” It goes on to note that, “The decrease in DC brand revenues was primarily from the footwear product category and, to a lesser extent, the apparel and accessories product categories.” So DC was down across the board in the Americas, but Quik still expects DC to be its highest growing brand on a percentage basis worldwide for the fiscal year.
I also want to point out that the Americas include Canada and Central and South America. We don’t know how DC (or any other brand) is doing just in the U.S.
In the conference call, CFO Joe Scirocco said they expected growth in all brands for all regions in the fiscal year. The Quiksilver brand is expected to grow in the high single digits, he indicated. Roxy should be up in the mid-single digits and DC in the mid-teens.
On the gross margin side, one analyst reminded CFO Scirocco that the company’s prior gross profit margin projection was for a decline of between three quarters and one percent for this year and asked if that would change because of their inventory position (I’ll get to that). CFO Scirocco said, “…as a result of excess winter goods, let’s think about 50 to 100 basis points of additional contraction on gross margin for the year.” He also said they do expect profit growth, but didn’t say how much.     
The 4% constant currency growth in European revenues “…was primarily the result of strong growth in DC brand revenues, partially offset by modest declines in our Quiksilver and, to a lesser extent, Roxy brand revenues.” Remember that as reported on the financial statement the growth was 2%.
The 8% constant currency growth in Asia/Pacific (11% as reported), “…came primarily from strong growth in Quiksilver and DC brand revenues, partially offset by a slight decline in our Roxy brand revenues.”
Here’s how they talk about the change in the gross margin in the three regions:
“The decrease in the Americas segment gross profit margin was primarily the result of higher input costs and, to a lesser extent, higher levels of markdowns in our company-owned retail stores and price adjustments in the wholesale channel. Our European segment gross profit margin increased primarily as a result of a higher percentage of retail sales, including e-commerce, versus wholesale sales compared to the prior year. In our Asia/Pacific segment, the gross profit margin decrease was primarily due to additional clearance business in Australia.”
Higher costs, markdowns, and a promotional environment seem to be common themes for both brands and retailers.
Same store company owned retail grew by 11% in the Americas. It was 9% in Europe and 3% in Asia/Pacific. E-Commerce revenues were around $30 million in 2011, and they are projecting it to more than double in fiscal 2012. They closed “a lot” of underperforming stores and I guess that would tend to improve the comparable store performance. In the U.S. they closed 15 stores in 2011 and opened “a handful.” They expect to close eight to twelve in 2012. 
In the U.S. market, we’re told, retail is 17% of total sales. It’s 26% in Europe and 35% to 40% in Asia/Pacific. 
The Balance Sheet
Quiksilver provides balance sheets in their 10Q for January 31, 2012 and October 31, 2011- the end of the prior quarter. Some of you know that I think it’s more valuable to compare the current balance sheet with one from a year ago, and that’s what I’ll do here.
At first look there’s not much change. At 2.53 the current ratio is almost identical to a year ago and total liabilities to equity at 1.90 is up just very slightly from 1.82 a year ago. Cash and cash equivalents, however, is down from $177 million a year ago to $94 million. Inventory rose 33% to $412 million which seems a bit much given the sales increase.
Interestingly, in the conference call they talk about the change in inventory compared to a year ago even though the 10Q doesn’t include the balance sheet from a year ago. CFO Scirocco reasonably points to product cost increases as part of the reason the inventory is higher and mentions specifically increases of 10% to 15%. He goes on, “Also, as we said last quarter, we wanted to protect our supply and make sure that we were in stock to meet new orders.” He thinks it would have all worked out fine if winter had started on time.
He estimates they have what he calls excess inventory of $30 to $35 million and expects to sell it through “…normal clearance channels during the course of the fiscal year…”
There’s nothing exciting to report in the current liabilities. Long term debt is up about $32 million to $729 million from a year ago, and total liabilities rose 2.7% to $1.13 billion. Equity was down a bit from a year ago, but not enough to worry about. Overall the balance sheet hasn’t improved, but neither has it gotten worse in any meaningful way, though I’d like them to work through that extra inventory.
Two Interesting Things
Okay, I have no idea what to think about the fact that Quiksilver is marketing boardshorts “…that represent NFL and NBA teams with authentic team colors and logos.” CEO McKnight trumpets the fact that the NFL picked Quiksilver “Because we’re the best of breed.” I believe that.
What I’m not quite so sure of is whether these various brand extensions we’re seeing (and not just from Quiksilver to put it mildly) will ultimately be good for brands and their market position. I don’t know enough to be critical in this particular case, but let’s say I have a concern.
I noted in an earlier article after the SIA show that everybody who made hard goods was making apparel and everybody who made apparel was making hard goods and I wondered if the brands who resisted that trend might find themselves better positioned. Not every brand extension you are capable of doing is a good idea no matter what your hunger for sales growth is.
Then there’s the “adjusted EBITDA,” that Quik uses and you’ll notice I haven’t mentioned until now. Quik says (in footnote one on page 23), “We use Adjusted EBITDA … as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of noncash stock-based compensation expense.”
There’s some truth to that.
But later in the footnote they go on to say, “Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments.”
There’s some truth to that too. Which truth is true? Probably both, and yet there’s a seeming contradiction between them. Just saying.
I like most of Quik’s initiatives and I know that strategies take not months or quarters to evolve and succeed, but often years. I’m patient, but I’d sure like to see that bottom line turn positive. I imagine they would too.



6 replies
  1. Glenn
    Glenn says:

    Another interesting evaluation Jeff. Would you clarify one sentence though?

    “Same store company owned retail grew by 11% in the Americas. It was 9% in Europe and 3% in the Americas. ”

    You used Americas twice, left out AsiaPac.

    Thanks buddy,

    • jeff
      jeff says:

      Shit. I screwed up. The second “Americas” should be Asia/Pacific. I’m scurrying off to fix it. Thanks for pointing it out.

  2. Chuck
    Chuck says:

    On the NFL/NBA thing, I do not really care, but a friend of mine in the action sports marketing world said his 15 year old son walked out of Tilly’s in disgust when he saw the trunks. This is a guy who would drop over $2,000 a year on Quik.

    • jeff
      jeff says:

      Hi Chuck,
      I guess Quik better hope there aren’t too many of those out there. That’s precisely the risk you take when you try any product extension.


  3. will
    will says:

    I often wonder how much Block’s operating budget is eating into DC’s bottom line with his love for car racing…

    • jeff
      jeff says:

      Hi Will,
      I don’t know what that budget might be. Nor do I have any idea if it is or is not money well spent. Is there some business point you wanted to make here?

      Thanks for the comment.

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