Quiksilver Inc. grew it profits on a pro forma basis in the fiscal third quarter ended July 31 by slashings costs in the face of declining sales. The action sports company closed stores, cut payroll, sponsored fewer athletes and events and cut spending on travel and entertainment to maintain margins in the face of declining sales of its two largest action sports brands
The owner of the Quiksilver, DC and Roxy action sports brands reported net revenues declined 3 percent to $496 million, including a foreign currency loss of $4.1 million versus foreign currency gains of $2.2 million in the third quarter of 2012. Net income plummeted 84.6 percent to $2 million in the fiscal third quarter of 2012 as the company took $9 million in restructuring charges. On a pro-forma basis, which excludes the after-tax impact of restructuring charges, non-cash asset impairments and non-cash interest charges, net income increased 5.9 percent to $18 million, versus $17 million in the year earlier quarter. Pro-forma Adjusted EBITDA increased 7.7 percent, or $4 million, to $56 million.
“We continued to right-size our organization worldwide,” said Andy Mooney, president and chief executive officer of Quiksilver, Inc., who was brought on from Disney to turnaround the global action sports company in January, 2013. “We completed assembling our senior management team, refinanced debt to extend maturities and increase liquidity, reduced headcount, narrowed our athletes and events roster, began re-engineering supply chain processes and continued to close underperforming retail stores.”
Broken out by brand, Quiksilver revenues declined 10 percent in currency-neutral (c-n) terms to $172 million, largely due to product and channel decisions, including the discontinuation of the Quiksilver women's line, lower production of customer-specific styles, lower sales to wholesale clearance accounts, and decisions to curtail some royalty business. DC revenues declined 1 percent to $166 million as the brand continued to work with key accounts to clear channel inventory. Revenues increased 1 percent at Roxy to $130 million, including an 11 percent gain in the wholesale channel.
On a channel basis, wholesale revenues declined 6 percent to $345 million, while retail revenues increased 1 percent to $120 million. Third quarter same-store sales in company-owned retail stores increased 2 percent on a global basis. The company ended the quarter with 562 company-owned retail stores. E-commerce revenues grew 33 percent to $31 million.
Americas net revenues decreased 6 percent to $268 million. Growth resumed in EMEA, where net revenues increased 6 percent (3 percent c-n) to $164 million as the company’s direct-to-consumer business outperformed the wholesale channel, where declines in the Quiksilver brands offset double-digit growth in DC sales. Russia, UK and Germany all had solid revenue increases, while France and Spain each posted single-digit percentage decreases. APAC net revenues decreased 12 percent (-1 c-n) to $63 million, with sales increasing everywhere except Australia. Emerging markets revenues rose 33 percent to $31 million.
Gross margin held steady at 49.4, down 10 basis points (bps) from a year earlier as declines on DC brand sales in the Americas wholesale channel were largely offset by gross margin improvement in the EMEA wholesale channel and wholesale margin improvements at Quiksilver and Roxy.
SG&A declined by $9 million, or 4.0 percent to $217 million, or 43.6 percent of revenues, down 40 bps from the third quarter of 2012. Included in SG&A is $13 million of restructuring and special charges related to severance and closure of underperforming retail stores. Q3 severance costs totaled $12 million, and severance was recorded in all three regions.
Non-cash asset impairments were $2.2 million compared with $0.1 million. Foreign currency loss was $4.1 million versus foreign currency gain of $2.2 million. The company ended the quarter with inventories valued at $399.2 million, up 2.1 percent from a year earlier with prior season's inventory representing just 9 percent of aggregate stocks, down from 16 percent at the end of Q3 last year. In the Americas, prior season inventories we down to less than 5 percent.
Mooney said the declines at DC were isolate primarily to footwear, where a shift away from multicolored women’s high tops hurt sales. “That trend has evaporated as quickly as it came, as these things tend to do,” he explained. The other factor was that men’s product was not well segmented across various distribution channels. Sales of apparel and accessories, such as hats and wallets, remained robust.
At Roxy, growth is coming from core customers rather than the brand’s new outdoor fitness line, which was launched in the United States in the Spring 2012 and will be introduced in Europe next spring.
Despite reports of declining comp store sales by other teen and action sports retailers, Mooney said ZQK is seeing healthy consumer demand in its own retail stores at normal retail margins.
In the European Union, meanwhile, the business continues to shift from mom and pop operators to larger, big-box formats like the Decathlon and Intersport and online retailers. Business is growing in Germany, but declining in Spain, Italy and France.
“We are experiencing solid growth in e-com. We are comping solidly in our owned retail stores, and we are seeing growth in the bigger box formats,” Mooney said. “We wish there were more surfers in Germany than there are in Spain. But we will take any good news that comes out of that market right now.”
Mooney said he is not as optimistic as some that the independent channel will recover as it has after past recessions because of mounting pressure from online retailers.
“I think the growth in e-com is inexorable, both for our own branded channels, and the e-commerce arms of other larger, well-capitalized, multi-country players like El Corte Ingles or Decathlon, Intersport, as well as pure-play e-com retailers in Europe,” he said. “Which for us is somewhat of a blessing, because it is actually less expensive for us to service e-com retailers, pure-play e-com retailers, than it is to service remote onesy, twosy sort of specialty shops, particularly ones that by definition are kind of undercapitalized, have problems paying their bills, et cetera, et cetera.”
ZQK affirmed earnings guidance issued in early June, which call for pro forma adjusted EBITDA in the second half to exceed the $91 million generated in the second half of fiscal 2012. But Mooney, whose turnaround plan focusing on cutting costs rather than growing sales, said the revenue outlook remains choppy until the third fiscal quarter of 2014. That’s when products now being developed by his new management team will hit stores.
In the current fiscal fourth quarter, ZQK anticipates sales of the DC brand will decrease by approximately 15 percent from fiscal third quarter levels compared to the increase of $20 million seen in the fourth quarter of fiscal 2012.
“Much of that $20-million growth from DC was in the North America wholesale channel, which, in retrospect, was likely too much volume for that channel to absorb,” said CFO Richard Shields. “We expect continued discounting on DC footwear product in the back-to-school and holiday seasons.”
