Quiksilver, Inc. beat earnings estimates for the fiscal third quarter ended July 31, posting diluted EPS of 32 cents for the period against analysts expectations for 29 cents a share, thanks in large part to a nice improvement in gross margin, continued sales strength, and the inclusion of the recently-acquired DC Shoes for the first time. While the company did not break out DC as a separate business, they did indicate that the skate shoe brand was responsible for roughly half, or $43 million, of the $86.4 million sales increase for Q3.

Excluding DC Shoes and the effect of FX rate fluctuations, we estimate total consolidated sales would have increased approximately 15% to $290 million for the third quarter.
The Americas saw consolidated revenues increase 36.8% to $187.9 million, with the Men’s business growing 41% to $102 million and Women’s increasing 34% to $83 million.

Hardgoods made up the balance of the business. Chairman and CEO Bob McKnight said that department stores are starting to see flattening performance with the urban brands, a new reality that is expected to create more open-to-buy for Quiksilver and others. McKnight also said September has been a bit of a surprise for retailers although it may not make up for the weaker August. The Americas represents about 60% of the annual DC business.

Gross margin in the Americas improved 220 basis points in the period to 40.1% of sales from 37.9% in Q3 last year, helped by a larger percentage of total sales resulting from owned-retail stores. Expenses also increased along with the owned-retail expansion as SG&A increased 10 basis points to 28.0% of sales. The resulting operating income jumped 65.1% to $22.6 million for the quarter from $13.7 million in Q3 last year.

Europe revenues were up 23.0% to $115 million, or a 17% gain when measured on a constant dollar basis. Men’s sales were up 24% to $86 million and Women’s increased 21% to $29 million. Gross margin improved 180 basis points to 50.4% of sales and SG&A increased 28 basis points to 38.9%, again to the addition of owned-retail. Operating income growth lagged the sales increase, rising 13.2% to $13.3 million for the period from $11.7 million in Q3 last year.

Quik is starting to integrate the DC Shoes distributors in-house, with France already completed and the U.K. expected by the end of the year.

Asia/Pacific revenues increased 67.4% to $33.1 million in period, or increased 56% when measured in Australian dollars. Gross margin jumped 380 basis points to 49.1% of sales and the region also saw a benefit to in the SG&A line, improving to 37.6% of sales on leveraging of expenses against the sales increase and the shift of some shared services functions from Australia to the U.S. Operating income increased 511% to $3.8 million versus just $624,000 in the year-ago period.

Excluding the effects of the FX rate fluctuations, inventories would have increased 5.0% at quarter-end. Inventories in the U.S. were relatively unchanged despite the inclusion of the DC Shoes inventory this year. The company attributes the decline in non-DC inventories to better sell-through at retail and better inventory management. Europe inventories were up 17% to $65 million at period-end and A/P inventories rose 22% to $19 million at the end of the quarter.