Quiksilver chairman and CEO Bob McKnight said they had “one of the best quarters we have ever had” when it reported results for its fiscal third quarter. The company said it expects to meet analyst expectations for the balance of the year and surpass the billion dollar sales mark next year, but the street was less enthusiastic, pushing ZQK shares down 3.7% for the week to close at $17.30 on Friday.
Analysts may be looking at growing inventory stocks at the surf/youth lifestyle vendor, but the company made moves to explain away a surprisingly large increase that was up almost 71%. The inventory increase at the end of the quarter was due to a number of factors and McKnight was adamant that they were “not a problem”, and were “very manageable” and would “not impact guidance”.
The addition of Asia Pacific to the mix this year was one component for the increase and accounted for about $16 million of the almost $67 million increase. The weaker dollar impacted the inventory numbers for Europe, with $6 million of the $16 million gain there attributed to the exchange rate. The company also pointed to $8 million in additional goods in transit this year and that the actual increase in Europe was actually only 4.0% with these factors figured into the equation.
In the Americas, $10 million of the $34 million increase in inventory was due to an early receipt of goods and about $5 million due to inventory destined for the outlet stores that went to the licensee last year. They also said the increase could be attributed to a “tougher Spring” and the resulting Summer and Fall cancels.
In the end, inventories are up 45% on a constant dollar basis and ZQK sees about $7 million in inventory that they deem excess goods, while they feel they missed a number of at-once sales opportunities last year due to leaner inventories.
The plan is to liquidate the goods first through its current retail account base, then through its own outlet stores and finally through the off-price market through PacSun Outlets, Nordstrom Rack and Marmaxx/Ross. The company sees “minimal impact” on margins, expecting the lack of Quik and Roxy off-price opportunities in the recent past will lead to better pricing.
Mitch Kummetz, stock analyst for DA Davidson in Portland, Ore., said that ZQK had a “decent quarter”, but that Q2 “was better”. He agreed with some of the company explanations for the increase, but still said it will “raise a few red flags.”
Quiksilvers 43.7% revenue growth in the quarter ended July 31, 2003 was aided a bit by the weaker dollar and some movement in order flow from Q4. The gain in Europe would have been just 16% in Euros versus the reported 41% increase. The Europe Mens business grew 49% to $71.6 million and Womens increased 20% to $22.3 million.
The Americas saw sales increase 28%, with Mens growing 18% to $72.2 million and Womens jumping 44% to $62.4 million. Asia Pacific was characterized as “slightly ahead of plan” at $19.8 million.
Management said the company shipped fall earlier this year than LY and that some Q4 swim orders were also pulled into the quarter. The pull-forwards accounted for about $10 million in Q3, with about 80% coming from the earlier fall deliveries.
Net income for Q3 was up more than 35% for the company and diluted earnings per share of 21 cents beat the street estimates by two cents. The profit increase was driven by a nice jump in gross margin that was aided by a lower cost of goods in Europe due to the weaker dollar, the outlet business acquired from a licensee and increased sales at the company-owned Boardriders Clubs shops.
Excluding the newly added Asia/Pacific division, and in constant dollars, overall Holiday bookings increased 11% over the previous year. Holiday bookings in the Americas were up 9%, with a 7.0% increase in the Mens business and a 12% in Womens orders. In Europe, Mens bookings were up 13% and Womens was up 17% for a total increase of 14% for Holiday.
The company looks to meet the he consensus estimates of 28 cents diluted EPS on sales of $245 million to $250 million for Q4 and $1.01 diluted EPS for the year on sales of $949 million to $954 million.
For 2004, ZQK is “comfortable” with estimates of $1.17 diluted EPS on sales of $1.03 bn to $1.05 bn and sees revenues continuing to grow in the low double-digit range for the near future.
>>> Keep an eye on that Womens business as growth continues to outpace Mens in the U.S…
