Quiksilver Inc. Cuts Q4 Guidance on Weaker Golf Market; Action Sports Still Seen as Strong…

While many in the apparel industry are talking about a growing weakness in action sports lifestyle at retail, Quiksilver is seeing just the opposite. The company said that it just finished its strongest summer ever in terms of core retailers while chain, department store, and mall retailers also grew. One analyst pointed to PacSun’s recent comp-sales declines as a “canary in a coal mine” for the action sports industry, but judging by Quiksilver’s 20% organic growth and management’s comments on the health of the industry, it may be more of an isolated case than an early warning.

During a conference call with analysts, Quiksilver Chairman and CEO Bob McKnight commented on the matter. “We just don’t see the softness in surf & skate that we hear about at shows like MAGIC and from a couple of people,” he said. “Culturally, its those types of activities (surf & skate), that mentality, that is building momentum, garnering more people, younger, older, male, female, globally, everywhere.”

Quiksilver’s core business, the Quiksilver, Roxy, and DC brands, drove the majority of the sales increases for the quarter with strong growth among core retailers and owned-retail reporting healthy back-to-school results. The department store business showed slight overall increases with some regional weakness. On a category basis, results seem to be mixed between summer and winter products. Zip-front fleece was called out as a key product for the quarter, but so were walking shorts and board shorts. Both the boy’s and girl’s kids businesses out-performed other divisions.

D.C. saw considerable growth in footwear, driven by the vulcanized trend. While this is driving some price-points down, there is an increased interest in premium fabrications driving other price-points up for the brand. Accessories were also said to be exceeding expectations. Management still sees D.C. with the potential to become a $1 billion international brand with 30% apparel sales and 70% footwear.

Roxy has been growing with shorts, summer dresses, and fleece leading the way. In addition, the core Roxy footwear business has seen considerable success with the vulcanized footwear trend.

The addition of Rossignol and Cleveland Golf, as predicted, had a considerable negative impact on earnings during Quik’s fiscal third quarter. However, cost-saving initiatives and the addition of Rossignol apparel, which will be formally introduced in Park City this November, add a potential top- and bottom-line upside for the brand. Different segments of the apparel line will reportedly be using designs from Gucci and Bergerac.

Rossignol and Cleveland Golf contributed $76.8 million in sales during the quarter. Quiksilver did not provide year-on-year comparisons for these businesses, but they did state that mid-single-digit increases are expected for the whole year and the Rossignol brand should contribute 70% to 75% of the earnings growth for the year. However, the expected top-line growth for Rossignol in the fiscal fourth quarter will be generated almost entirely by earlier shipments than last year and Q4 sales increases may be offset by comparable declines in Q1 of fiscal 2007. First quarter 2007 profits are expected to be flat due to operational efficiencies already realized at Rossignol. Rossignol is expected to contribute roughly $450 million to the top-line for fiscal 2006.

The integration process between Rossignol and Quiksilver is progressing quite rapidly.

The company originally projected roughly $100 million in cost savings at Rossignol by the end of fiscal 2008. That time line has moved up an entire year, and management now expects those savings by the end of fiscal 2007. This will come through a percentage point improvement in margins and lower SG&A expenses.

Cleveland Golf has been lagging behind the other brands under Quiksilver’s umbrella, mainly due to a general slow-down in the golf industry and some highly promotional activity. Even though Cleveland is only contributing about $150 million in revenues for the year, the brand’s margin issues are impacting the bottom line. In fact, a three cent reduction in EPS guidance for the fourth quarter is entirely due to margin issues at Cleveland Golf.

Due to that softness at Cleveland, ZQK said that diluted earnings per share for Q4 are expected to be approximately 53 cents, compared to 56 cents reported earlier. Revenues are now expected to range from $745 million to $750 million during the fourth quarter, which would result in full year fiscal 2006 revenues approximating $2.33 billion. For fiscal 2006, the company expects to report diluted EPS of approximately 84 cents per share.

>>> It’s notable that while a number of vendors are reporting softness in golf, non-green-grass retailers are showing gains…