Quiksilver Inc. Posts Steep Fiscal Q2 Loss on Asia Pacific Charges

But the action sport giant’s net loss swelled to $83.3 million, hurt by charges related to the natural disasters occurring in several of its Asia Pacific markets.

 

The impairment charges related to goodwill that was established between 2003 and 2005 when Quiksilver acquired its licensees in Japan and Australia, along with a retail chain.

On a conference call with analysts, company CFP/COO Joe Scirocco said the effects of the earthquake in Japan and its aftermath required the company to test for a possible impairment this quarter, instead of at year-end as usual. Also taking into account recent natural disasters in Australia and New Zealand, the quarter included a one-time, non-cash goodwill impairment charge of $74 million. It also provided valuation allowances against tax assets totaling $26 million.

The company noted that pro-forma adjusted EBITDA of $62.1 million was higher than the company’s expectations and was roughly the same as a year ago. Pro-forma income from continuing operations advanced 10.2 percent to $17.3 million, or 9 cents a share.

Fiscal second quarter revenues inched up 2.1 percent to $478.1 million.

By region, revenues in the Americas increased 5.5 percent during the quarter to $210.7 million. Operating earnings in the Americas region grew 51.6 percent to $18.0 million. Gross margins in the region improved to 49.1 percent of sales from 46.6 percent in Q2 last year.

The Americas sales increase was fueled largely by its retail business, which grew nearly 20 percent despite six fewer stores. Company-owned retail store comps were up 23 percent, while e-commerce grew 68 percent. Wholesale revenues in the Americas were on plan, and a couple of percentage points higher than last year.

“Our wholesale business in the Americas was up compared to last year, with DC providing the strongest growth,” explained company  Chairman, President and CEO Bob McKnight on the call. “And our business in both Brazil and Mexico was up nearly 20 percent in Q2, Quiksilver and DC both growing aggressively. Both of these are profitable markets for us that show even greater promise.”

Europe region revenues eased 0.9 percent to $206.9 million. In constant currency, European revenues decreased 4 percent. Operating earnings in the region grew 11.8 percent to $43.8 million. Gross margins improved 210 basis points to 62.0 percent of sales.

McKnight said Europe sales declined because of weaker sales in markets such as the U.K. and Spain. Sales were strong in Germany and Russia, and held steady in other markets. France is seeing improved sales trends with the aid of new retail concepts. McKnight said all three of its brands, Quiksilver, Roxy, and DC, “are doing well” in Europe with Fall/Winter season order books up across all brands.

Asia/Pacific region net revenues decreased 0.8 percent to $58.1 million. In constant currency, revenues decreased 12 percent. The Asia/Pacific region posted an operating loss of $81.1 million (after $74.1 million in asset impairments) versus a loss of $859,000 a year ago.

McKnight said the various natural disasters in the region came on top of already weak consumer spending.

“It’s a bit of a challenge to anticipate the timing of recovery in the region,” said McKnight. “However, we want to be clear that we remain optimistic, and have not reduced our outlook over a 5-year horizon.”

By brand, the Fall order book for the Quiksilver brand in the Americas and the corresponding Fall/Winter book in Europe are both up over last year, supporting the company’s plan to grow revenues for the brand in the second half of the fiscal year. Quiksilver’s global brand revenues grew again in Q2 and the brand took share in apparel and footwear.

Quiksilver saw strength in board shorts, walk shorts, wetsuits, hanging footwear, many items within the Quiksilver Waterman’s collection, as well as Amphibians, a walk short silhouette utilizing board short fabrication. McKnight said the new Quiksilver Girl brand received “great feedback” from its spring release.

At Roxy, Fall bookings in the U.S. are up mid-single-digits over last year, while the reaction to the new Winter 2011 range “has been very good.” Benefiting from its repositioning as the iconic California-inspired surf lifestyle brand, Roxy’s most popular sellers include beach pants, swimwear, sandals, beach dresses, casual footwear, and canvas bags. Said McKnight, “Business is coming back in our key markets of Florida, Hawaii, and Southern California.”

DC Shoes mid-single-digit growth in the quarter was on plan, and “strong forward orders in each of the regions around the world confirm DC’s expanding global traction,” said McKnight. The brand also continues to see “strong” sales at core skate and surf shops. DC’s Facebook page registered its 5 millionth fan during the quarter.

Overall gross margins expanded 160 basis points to a Q2 record 54.8 percent of revenues. The increase was fueled by a higher contribution from owned-retail stores in the U.S., less discounting at wholesale, growth in its high-margin e-commerce business, and better margins in Europe.

The company’s net debt at April 30 was reduced 19 percent to $594 million versus the 2010 quarter-end. Management reiterated that it remains on track to achieve its longer-term financial objectives of generating annual revenues between $2.5 billion and $3 billion, and at least $350 million of annual EBITDA in fiscal 2011.