Quiksilver Inc. reported a steep loss in its fiscal second quarter ended April 30 on a double-digit sales decline. But the big disappointment was ZQK management pulling its outlook for the year, largely due to ongoing challenges in the Americas.
Due to poor deliveries and ongoing changes in its distribution channel strategy to emphasize less discounting, Quiksilver said it no longer expects a profit turnaround in North America in its second half.
“Currency and execution issues, primarily in North America where much of the improvement was expected to come from, from the back end of the year, is putting pressure on our full-year EBITDA outlook,” said Pierre Agnes on his first conference call with analysts since taking over as CEO in March. “While we will improve our EBITDA from last year, on a constant currency basis, we are falling well short on our goals.”
On Tuesday following the release of the earnings report, shares of Quiksilver fell 39 cents, or 31 percent, to 85 cents on the New York Stock Exchange.
The loss in the quarter came to $37.6 million, or 22 cents a share, from a loss of $53.1 million, or 31 cents, a year ago. Revenues were down 16.1 percent to $333.1 million. Sales slid 2 percent on a currency-neutral basis, which management saw as a further sign of the stabilization its business already observed in the first quarter.
By region, Americas revenues fell 14.0 percent to $160 million and were down 4 percent on a currency-neutral continuing category basis. On a currency-neutral basis, sales increased 2 percent at wholesale and 3 percent at retail, but were down 30 percent in the e-commerce channel, due to the decision to limit discounting on its websites to support its wholesale business. Quiksilver Brand and Roxy sales were flat in the Americas, while DC was impacted by a decline in apparel sales.
EMEA revenues were down 22.7 percent to $116 million and gave back 3 percent on a currency-neutral basis. Strong growth in e-commerce was offset by a 7 percent decrease at wholesale. Retail comps eased 1 percent.
APAC revenues slid 6.7 percent to $56 million but grew 7 percent on a currency-neutral basis. Strong growth came in its APAC retail and e-commerce channels.
By channel, wholesale revenues slumped 19.6 percent to $230 million and were down 4 percent on a currency-neutral basis.
Retail sales were off 6.7 percent to $84 million but grew 6 percent on a currency-neutral basis. Same-store sales decreased 3 percent in the Americas and EMEA, while gaining 2 percent in the APAC region. E-commerce revenues fall 15.8 percent to $16 million and were down 6 percent on a currency-neutral basis.
By category, apparel and accessories revenues declined 18.0 percent to $232 million and were down 2 percent on a currency-neutral basis. Footwear revenues fell 11.4 percent to $101 million and were flat on a currency-neutral basis.
By brand, Quiksilver Brand revenues were down 16.8 percent to $139 million and gave back 1 percent on a currency-neutral basis. Roxy revenues dropped 12.5 percent to $105 million while adding 1 percent on a currency-neutral basis. DC revenues fell 21.4 percent to $81 million and sunk 9 percent on a currency-neutral basis.
Gross margins in the quarter decreased 180 basis points to 47.1 percent. The erosion reflected higher discounting and freight expenses due to late deliveries, and unfavorable currency exchange rates, mainly in Europe, partially offset by the favorable impact of a higher percentage of sales mix in direct-to-consumer (DTC) channels.
SG&A decreased 15.9 percent to $175 million, primarily driven by currency exchange rates, reduced bad debt and employee compensation expenses. Restructuring and special charges were $12 million in Q2, versus $6 million in expense in the prior-year period. Pro-forma adjusted EBITDA was $7 million compared with $13 million.
Elaborating on the challenges in the Americas region, Quiksilver management indicated that even though its fall order book is increasing in North America, supply issues are impacting the region’s sales and margin. In addition, DTC sales in North America are continuing to decline on a comparable basis, due to the decision to significantly reduce the number of promotions and discounts online.
“North America is currently underperforming. That's the bad news,” said Greg Healy, who became global president and president of the Americas in late May. “The positive news is that if we execute to our expectations, we believe our profitability can be significantly improved.”
To fix the Americas region, Healy, who formerly ran Quiksilver’s APAC region, appointed Andrew Bruenjes as CFO of the Americas. Bruenjes worked alongside Healy in the APAC region. Ted Li, formerly VP of North America for Oakley, will soon be joining Quiksilver as head of sales in the Americas. Healy added that the Americas region “will continue to look to add talent to augment the existing team accordingly.”
A particular focus will be on “sales quality,” and regaining “the trust and confidence of our core accounts.” Healy noted that key accounts have responded favorably to discussions in recent weeks about a renewed focus on product and service. Said Healy, “To be clear, our major accounts will also continue to play an important role in the future of our business here in North America; however, the core accounts service an important consumer base that is all about authenticity.”
Finally, Healy said the Americas region will continue to focus on operational efficiencies and reducing costs by transferring best practices globally to the region. Added Healy, “We identified the need for this in the sales administration and planning side of our business here, in particular. We believe that we will see upside in margins and more efficient business practices as a result.”
Agnes, who formerly ran the company’s European operations, added that while Quiksilver has made “some positive structural changes over the last two years, there are still some critical areas that need to be addressed.”
In particular, communications around the planning and production processes continue to create delivery problems, “mainly due to implementing so many major changes too fast.” Significant progress has been seen with the aid of new tools such as SAP and PLM but delivery improvements are not expected until Spring 2016 because of the product cycle calendar.
In the Americas, the company is taking its kids and youth Quiksilver Brand and DC apparel products from its licensing partners back to core distribution, and its own retail in the U.S. to “support the overall sales process, and our critical retailer relationships.”
Internally, Agnes cited a goal “to reestablish a team spirit, and an environment in which individual talents are motivated to work together. I'm confident to say that we have made really good progress on this.”
Finally, he said the “most critical area” to address remains profitability, with more steps being take to improve operations.
“In summary,,” concluded Agnes, “looking out to 2016, our main goals will be efficiency gains; on-time delivery and improved order book conversion; re-establishing relationships with partners, especially in the U.S.; focusing on great product development; and investing in our brands and people.”
