Quiksilver, Inc. just passed the $1 billion sales mark for the trailing twelve months and is already looking at a $3 billion business down the road as it continues to strengthen its control of its brands worldwide, takes aggressive steps to expand its owned-retail business, and establish a firm beachhead for the business in China and Southeast Asia.
Company chairman and CEO Bob McKnight said in a conference call with analysts that they believe the global mens business for Quiksilver “can be and should be a $1 billion business”. He also said the Roxy business can and should match that milestone figure. Fresh off of its recently-announced acquisition of DC Shoes, McKnight sees the “other brands” business exceeding $1 billion. He sees their current volume as “something of a new starting point” in their next phase of growth.
The company acquired its distribution in Switzerland and tapped a new president for its Japan business, hiring adidas veteran David Toda to run the business going forward. They also moved Carol Christopherson over to run the U.S. retail operation from her previous role as head of Roxy merchandising.
ZQK opened six new stores in their fiscal first quarter ended January 31 and added four more under license. They now operate 141 company-owned stores, 149 under license, and another 94 shops in license territories where they earn royalties. The company plans to add 30+ stores in 2004. Owned-retail represented 17% of total sales in Q1 versus 14% of revenues in Q1 LY.
Quiksilver has opened its first store in Mainland China in Shanghai under its new partnership with Glorious Sun and expects to soon open stores in Beijing and a flagship store in Hong Kong. ZQK said the urban Chinese market is very hungry for Western culture.
For the fiscal first quarter, sales of Mens product in the Americas was 15% to $55.9 million and the Womens business jumped 27% to $66.1 million. Gross margin for the region was up 210 basis points to 40.5% versus 38.4% in the year-ago period.
In Europe, where total sales were impacted by the weaker U.S. dollar, sales increased 16% when measured in the Euro currency. Mens sales in Europe were up 43% to $79.6 million when measured in the reporting dollar terms and the Womens business increased 24% to $26.6 million when measured in dollars. Gross margin here was up “about” 250 basis points in the quarter to 48.3%.
The company said the exchange rate benefit accounted for 13 percentage points of total sales increase for the quarter while increased owned-retail activity in both regions impacted gross margin to the positive along with the benefit of the weaker dollar in Europe.
Asia/Pacific GM was 47.5%, which the company said was “generally consistent” with past quarters.
Inventories, which were impacted by the weaker dollar this year and a shift in European and Japanese deliveries, were up 16% on a constant dollar basis and up just 9.0% when adjusting for the early deliveries. Inventory in the Americas was up 7.0% to $88 million and Europe inventories were up 40% to $73 million, or up 9.0% when adjusting for currency and early deliveries. Asia/Pacific inventories were up 80% to $18 million at quarter-end, or up 38% currency-adjusted.
Looking ahead, Quiksilver is raising its guidance for its fiscal Q2 and full year and now estimates EPS at 45 cents to 46 cents per share on sales of $295 million to $300 million. For the year, ZQK sees EPS of $1.22 to $1.25 on sales of $1.1 billion to $1.12 billion. All figures exclude the recently-announced acquisition of DC Shoes, which is expected to close “sometime in April”.
The DC Shoes deal that was announced earlier last week is expected to be “mildly accretive” to current fiscal year earnings, but should add approximately 6 cents per share for 2005, excluding any benefits from assumed synergies.
The total purchase price for the acquisition will consist of an initial payment of $56 million in cash and 1.6 million restricted ZQK shares and the assumption of approximately $10 million in debt. The sellers, which include founders Ken Block and Damon Way, among other parties, may also receive up to $57 million in additional earn-outs through 2007 for hitting “certain performance targets”.
DC had sales of about $100 million last year, with 75% of sales coming from footwear and the balance from t-shirts, hats and other accessories, an area that Quiksilver is anxious to help them grow. The same is true from DCs experience in footwear and Quiks limited experience in the category.
Although the footwear category is roughly 5%, or $50 million, of Quiks business, KcKnight readily admits that he is looking for the DC team to help in the category.
While not revealing exact growth rates, Quiksilver said that DC had doubled its sales of the last four years and currently does 60% of its business in the U.S. Europe represents 18% of sales and Asia/Pacific makes up the balance. The “Core” market is about 25% of the DC Shoes business with the balance coming from the Specialty channel. Quik said DC has “good margins” and they were “happy about the profitability”, but should run at “higher operating margins” under the ZQK umbrella.
The deal is apparently free and clear of any issue associated with the attempt by Billabong to acquire DC Shoes two year ago. The deal fell through amid wrangling over the status of one of the founders, Clayton Blehm, who eventually filed an age discrimination suit in December 2002 against DC and Billabong, asserting that he had been fired as part of the deal for Billabong to buy the company. (SEW_0250)
The suit was settled out of court last year with DC agreeing to pay damages and acquire Blehm's stock, according to a local paper.
DC Shoes is expected to remain in Vista, CA after the close of the deal.
>>> Quiksilver is also looking for a foothold in the urban market, where DC has been able to grab mindshare
