While Quiksilver’s bottom line slipped into the red during the company’s fiscal third quarter ended July 31, it was actually able to make some considerable headway on the profitability of its equipment businesses – primarily Rossignol and Cleveland Golf.  In addition, it looks as though overall sales were better than initial forecasts and Quiksilver is making headway in cleaning up dated Rossignol inventories.


Overall sales were up on strong apparel and DC Shoes results. In addition, ZQK’s owned retail stores performed well throughout the quarter. The Roxy brand was also a solid sales driver during the quarter. Management said that sales during the month of July were somewhat slow at their owned-retail stores due to the shift of the back-to-school season into August and September.  As such, August comp store sales accelerated past the positive comps seen earlier in Q3.


Sales of Rossignol hardgoods were up in the quarter due to the inventory clearance activity.  This also had a negative impact on gross margins for the quarter.  On the bright side, the pre-season is also shaping up better than expected for Rossignol.  In March, ZQK management said that they expected Rossignol pre-season orders to be down in the 20% to 25% range. Now, they expect pre-season orders to be down only 18% due to increased market share.


In the Americas region, apparel brands had a “very strong quarter” driven by Quiksilver and DC. Owned-retail stores also contributed growth, with 26 new stores opened since the end of Q3 last year, including six new stores opened this past quarter.  Each of Quik’s brands grew during the period, with DC leading the pack. Gross margins in the Americas fell 150 basis points to 41.4% of sales, compared to 42.9% a year ago with SG&A expenses increasing 140 basis points to 32.4% of sales. This brought the region’s operating profit down 8% to $30.3 million compared to $32.9 million last year.


In Europe, apparel was also the primary growth driver. The total Quik business posted 8% sales growth in the region on a constant-dollar basis. Growth was led by DC and Roxy on the wholesale side, while higher retail store sales were driven by 41 new stores since last July. European gross margins remained relatively stable, with a slight 80 basis point decline to 57.4% of sales, but SG&A expenses increased 200 basis points to 57.4% of sales causing an operating loss of $10.7 million, a 141% expansion over last year’s loss of $4.4 million.


Asia-Pacific region only grew about 1% in constant currency terms. Management continues to believe that there is a great opportunity over the long-term in this region, although the business has been challenging in Australia and Japan.  The region saw GM decline 220 basis points to 47%, but SG&A expenses declined 240 basis points, improving the bottom line for the region.  Asia Pacific reported operating income increased 20.5% to $4.7 million.  


Overall gross margins were impacted primarily by the Rossignol and Cleveland Golf businesses, with currency exchange rates and increased sales to distributors at Rossignol impacting margins. Cleveland’s GM was reduced by inventory clearance.  SG&A expenses were higher due to a $13.2 million special charge related to a goodwill impairment charge associated with ZQK’s acquisition of the remaining interest of Cleveland Golf.  Excluding special charges, SG&A improved 70 basis points. Quiksilver slipped to a net loss for Q3, but excluding the impairment charges, operating income would have been approximately $19 million, and EPS would have been a positive two cents, in line with management’s expectations.


Quiksilver has been talking about “re-organizing” its hardgoods operations and has even mentioned the possibility of selling off Cleveland in the past. This move to gain 100% ownership is seen by some as a potential first step towards such a sale.


One interesting item of note on the balance sheet was the dramatic increase in accounts receivable. Management said that this was due to snow sports hardgoods accounts, which are requesting extended terms industry-wide due to the poor snow conditions in the eastern U.S. and Europe.


Looking ahead, management said that DC and owned-retail were the two biggest growth opportunities.  Management maintained their current outlook for the fourth quarter and full year. ZQK expects to achieve net income for the fiscal year of 53 cents per share on consolidated revenue of approximately $2.5 billion. Imbedded in the guidance was the expectation of a $100 million decline in winter hardgoods revenues and a $50 million pre-tax loss on Rossignol and Cleveland Golf.


ZQK announced last week that it will launch a new effort to land the Quiksilver brand with women and will focus on a consumer a bit older than the teen-focused Roxy brand (see story page 11).