Quiksilver Hits Second Quarter Targets. but Q2 Hurt by Rossignol Effect…

While Quiksilver took a big hit to its bottom line due to the seasonality of the Rossignol business, the company managed to impress analysts by achieving results in-line with its guidance for the quarter for both revenues and earnings. Sales results were up in every region of the world except Asia Pacific, where Quiksilver is battling a very tough retail environment. Overall sales of Quiksilver’s core businesses, excluding the $86.2 million contributed by Rossignol and Cleveland Golf, were relatively flat, increasing only 0.9%. However, the numbers are impacted negatively by currency fluctuations and discontinued businesses. On a like-for-like business basis, revenues actually increased 9% for the period. More specifically, Quik’s decisions to cancel its private label swimwear business and to license the Hawk brand to Kohl’s have reduced revenues by roughly 4%. In addition, the shift in the value of the Euro and other foreign currencies relative to the Dollar decreased the top-line by another 4%.

In the Americas, men’s sales increased 3% on a reported basis. After adjusting for the Tony Hawk-Kohl’s deal, revenues increased 6%. Women’s apparel sales decreased 1% as reported, but this was due to the private label swimwear discontinuation. The Roxy and Raven brands collectively reported 13% revenue growth in the Americas. Equipment revenues in the Americas were $50 million, primarily driven by sales of Cleveland Golf. DC shoes were called out as particularly strong, with apparel sales increasing to 25% of the total brand. Management said that in some retail locations, particularly the SoHo DC flagship store, DC apparel sales have reached 50% of sales. Management said that the environment for DC, Roxy, and Quiksilver was good in the Americas.

In Europe, sales increased 23% on a reported basis while constant dollar sales increased 33% for the period. Men’s sales in the region were up 12% in constant dollars, while women’s sales were up 15%. Equipment sales added $33 million to the top-line in Europe, primarily driven by wintersports sales. Great Britain was the slowest country in Europe, while France was said to be “coming back.”

Asia Pacific revenues slipped 4% to $48 million, missing internal projections, but were down 6% on a constant dollar basis. Apparel sales fell 12% to $44 million, while equipment sales added $4 million. Management said that solving the economic problems in Asia Pacific is the “one million dollar question.” In order to offset the slow down in Australia, the company will be focusing on improving product offering in Australia and building the business in Japan.

Gross margins increased due to a 2 percentage point boost to apparel margins as well as better margins associated with Quik’s retail stores. SG&A expenses increased nearly ten full percentage points during the quarter due to the newly acquired Rossignol business. Quik emphasized the fact that much of Rossignol’s SG&A expense do not fluctuate with its revenues, and the negative leverage currently on the business will reverse itself in Q4 of this year and Q1 of next. Inventory increases were primarily due to opening an additional 20 retail locations and distribution agreements in Japan, Belgium and South Africa.

The integration between Rossignol and Quiksilver is apparently progressing ahead of schedule. Quik opened its Park City mountain headquarters last week and has successfully streamlined Rossignol’s European distribution centers. Quiksilver reduced the number of DC’s in Europe from 17 to three, and this number will soon be two.

The company expects roughly $10 million in cost savings from operations in 2007 and $10 million in 2008, with $5 million in marketing expense savings. Head count across the entire organization was reduced by roughly 10%, or 300 people. The biggest piece of the integration completed this year was the consolidation of back offices in Europe, which is complete. Currently the only delay in operations integration has been due to French labor laws slowing the consolidation of Rossignol’s factories.

Quik management expects Rossignol’s Q4 revenues will increase by 25% due to earlier shipments to retailers. This could possibly impact Q1 of next year, but it is still too early to predict sales levels. Current pre-season WinterSports bookings are “100% in line” with Quiksilver’s plans. The new Roxy brand of skis sold through “very well” and current bookings are double last year’s sales.
Management reiterated guidance. with 2006 annual revenue seen between $2.25 billion and $2.27 billion. Diluted earnings per share will be 87 cents to 88 cents before stock compensation expense and the related tax effect. Stock compensation expense is expected to reduce fiscal 2006 annual diluted earnings per share by 11 cents. Quik expects Q3 revenues to be $485 million to $490 million with seven cents diluted EPS. Q4 revenues will be $710 million to $715 million with diluted EPS ranging from 56 cents to 57 cents.