Quiksilver reported a very solid fiscal third quarter with sales climbing in the low double digits and income outpacing sales by more than a two to one margin. The company stated that its back to school business has been solid in its core market and doing well in the youth chain stores, but business is “mixed” in the department store channel.

Quik’s retail division continues to be solid overall with a growing store count. Seven company-owned shops and nine license shops were opened during the quarter while four shops were closed. As of July 31, Quik operates 186 company-owned shops with 70 in the Americas, 92 in Europe and 24 in Asia-Pacific. In addition to that there are 190 license shops, 18 in the Americas, 145 in Europe and 27 in Asia-Pacific.

On a regional basis, The Americas division saw sales increase 4%, with men's sales up 5% to $107 million and women's sales up 5% to $88 million. The growth in Quik’s company-owned retail business continues to help the Americas margin, but that was offset by lower margins on the in-season business. GM was flat at 40.1% and operating income inched up 1.3% to $22.9 million.

Total European sales for the quarter increased 16% with European men's sales increasing 20% to 103 million and European women's sales climbing 4% to $30 million. In Europe, the overall environment was said to be “tough, generally speaking.” The company sees softness in some areas of the UK, particularly London, but European business was otherwise said to be “good.” On a constant dollar basis, European sales increased 14% for the period. Gross margin improved 460 basis points to 55.0% of sales. The growth in company-owned retail is also helping European margin. Operating profits jumped 43.6% to $19.1 million.

In spite of an operating loss posted in the Asia-Pacific division, Quik said that the region is benefiting from the diversity of its model. The tough retail environment in Australia is offset by buoyant retail conditions in Japan and very strong conditions in Indonesia. Total sales in the Asia-Pacific division were $43 million, up 30% from last year and 21% on a constant dollar basis. ZQK narrowed its Q3 loss by nearly 21% to $6.5 million.

The majority of the quarterly conference call revolved around the recent Rossignol acquisition and the resulting integration efforts. Quiksilver CEO, Bob Mcknight told analysts and the media that the acquisition will “transform our company.”

Quiksilver president Bernard Mariette summarized the vision behind the integration, stating that Rossignol can benefit from much the same model that has fueled Quiksulver growth since its inception as a technical surf brand. He said they expect to evolve Rossignol as well from its current position as a leading hard line ski equipment manufacturer to the leading mountain lifestyle brand.

Quiksilver’s first order of business is to improve the profitability of Rossignol’s snowboard business which represents about 6% of revenues in Rossignol's fiscal 2005. During the year, the operating loss in the snowboard division globally was about €6 million ($7.5 mm). Through a combination of better sourcing and operating efficiencies, ZQK management believes they can bring the profitability of this business to “acceptable” levels.

The company has already launched the Roxy line of Alpine products — a full line of ski boots, bindings and poles. The Roxy skis are being designed and manufactured in collaboration with Dynastar, while the boots are being designed by Lange’s R&D center in Italy. Delivery is expected to begin in October and November.

Given the product development cycle, it will take some time to properly re-launch Rossignol's apparel business. The company doesn’t expect this to be felt until fiscal 2007. Rossignol currently has “mid single digit” operating margins, but management feels that once the apparel business is brought up to speed, this can increase to the double digits.

Quiksilver also unveiled plans for a new headquarters for its mountain sports brands in Park City, Utah. The facility will house the U.S. headquarters for Rossignol and Dynastar, which are currently located in Burlington, Vermont, as well as Lange, Look, the new Roxy ski business, Lib Technologies, Gnu and the Bent Metal snowboard brands.

Quiksilver, Inc. 
Fiscal Third Quarter Results
(in $ millions) 2005 2004 Change
Total Sales $373.8 $337.9 10.6%
Americas $196.3 $187.9 4.5%
Europe $133.6 $115.4 15.7%
Asia Pacific $43.1 $33.1 30.3%
Gross Margin 46.8% 44.5% +230 bps
SG&A % 35.7% 35.2% +60 bps
Net Income $24.6  $19.5  +26.2%
Diluted EPS 20¢ 16¢ +25.0%
Acct Rec @ Qtr-end $428.3  $281.3  +52.3%
Inven @ Qtr-end $25.2  $22.3  +13.0%