Quiksilver, Inc. swung from a profit to a loss on a pro forma basis in the second quarter ended April 30 as gross margins contracted more than anticipated due to discounting and economic turmoil in Europe.



Sales grew 3 percent to $492.2 million, or 5 percent in currency-neutral (c-n) terms, compared to the year earlier quarter, reflecting solid growth in emerging markets, revenue growth and positive comparable store sales in each geographic region as well as continued strong growth in ZQK’s e-Commerce channel. Same store sales in company-owned retail stores grew 6 percent on a global basis.


The company reported a dramatically lower net loss as it comped against a major, one-time charge a year earlier. Net loss was $5.1 million, or 3 cents per share, compared to a net loss of $83.3 million, or 51 cents per share, in the second quarter of fiscal 2011, when the company took a $74.1 million non-cash goodwill impairment charge related to its businesses in Australia and Japan.


On a pro-forma basis, which excludes $2.1 million of net after-tax asset impairments and restructuring charges, ZQK reported a loss of $3.0 million, or 2 cents per share, compared to pro-forma income of $17.3 million, or 9 cents per share, in the second quarter of fiscal 2011. That decline was attributed to gross margin contraction.

“We entered Q2 knowing that a number of factors would negatively impact margins in the quarter,” said Quiksilver’s Chairman, CEO and President Robert B. McKnight, Jr. “As the quarter progressed, a few of those dynamics became more impactful than we expected. Importantly, some of those headwinds diminish as we move into the second half of our fiscal year.”



Revenues for the Quicksilver brand grew 4 percent c-n, fueled by strong sales of warmer weather goods, including board-shorts, amphibians, walk shorts, hats, and tank tops, as spring came early to much of the United States. Roxy continued to build momentum in the sportswear category through growth driven primarily by dresses, beach pants and light sweaters. Roxy footwear and the Roxy girl line also performed well in the quarter. DC had a particularly strong quarter in department stores and via its DTC online channel. Despite the disappointing winter, fall order books for both Quiksilver and Roxy are up in the United States from a year earlier. In Europe, the order books support what ZQK has ordered, but executives said the outlook remains uncertain.


“I think for the entire industry, the certainty of an order book in Europe is probably less certain than it has been in the past,” said Richard Shields, ZQK’s new CFO.

Net revenues in the Americas increased 5 percent during the second quarter of fiscal 2012 to $221.0 million, while European net revenues decreased 6 percent to $195.6 million, but increased modestly in c-n terms. Asia/Pacific net revenues increased 27 percent to $74.0 million, or 24 percent in c-n terms, as Japan rebounded strongly from a year ago, when sales dropped off in the wake of the tsunami and nuclear disaster. In Australia, ZQK’s retail business started to comp up, but the wholesale business remains flat. South Korea continued to exhibit very strong growth.



Revenues in the company’s Americas and Asia/Pacific regions grew in all three channels of distribution including wholesale, company-owned retail and E-Commerce. Strong online sales momentum continued. The company’s business in Brazil, where it upped its ownership of a joint venture to 80 percent May 1, continues to demonstrate strong growth and solid profitability while generating annual revenues of greater than $50 million. In Europe, the company has taken out credit insurance and is repatriating cash and Euros back to US dollars to minimize risk.

Gross margin in the second quarter fell 560 basis points to 49.2 percent compared to the second quarter of fiscal 2011 due principally to higher levels of discounting (200 b.p.), the timing of certain royalty payments (200 b.p), higher input costs, and the impact of foreign currency exchange rates. The company earned pro-forma Adjusted EBITDA of $39.4 million in the quarter compared to $62.1 million in the second quarter of fiscal 2011, with the decline largely driven by the contraction in gross margin. ZQK said gross margins should improve in the back half of the fiscal year as the company anniversaries higher input costs encountered in Q3 of 2011 and as it begins to deliver goods for the BTS season.

The company ended the quarter with $358.9 million in inventory, up 24.0 percent from Q2 2011 but down from Q1 2012. That represented 72.9 percent of the quarter’s sales as of April 30, up 1,200 b.p. from a year earlier. However, the percent of inventory left over from prior seasons held steady at 14 percent and was down from the first quarter of 2012. About 10 percent of the increase in inventory is attributable to higher input costs.



McKnight said he expects inventory levels to fall in the second half as the company wraps up clearance activities and enters the BTS season, when it will begin shipping DC products to JCPenney for the first time.