Once again, Quiksilver Inc. can’t seem to catch that wave.
The surf apparel giant reported that it narrowed its pro-forma loss from continuing operations in its first quarter ended Jan. 31, to $16 million, or 10 cents per share, compared with a loss of $26 million, or 16 cents, a year ago. The improvement, however, was largely the result of income tax benefits recognized in continuing operations related to the sale of the Mervin and Hawk businesses. It also fell short analyst’s consensus estimate of a loss of 7 cents a share.
Perhaps more troubling, revenues were down 4.7 percent to $392.6 million, again missing the Street’s consensus estimate of $407.6 million. Sales were down 2 percent on a currency-neutral (C-N) basis. By brand on a C-N basis, Roxy’s revenues grew 5 percent to $117 million but Quiksilver Brand decreased 6 percent to $163 million and DC was down 4 percent to $102 million.
On the conference call with analysts, Andy Mooney, president and CEO, noted that first quarter pro forma adjusted EBITDA increased by $3 million over the prior year first quarter, representing its third consecutive quarter of adjusted EBITDA growth. Cost reduction initiatives under its Profit Improvement Plan supported the progress.
At the same time, top-line growth continues to be challenged by the ongoing squeeze on smaller surf shops. The revenue decline reflected reduced wholesale channel sales, most notably in the developed markets of North America and Europe.
“Our smaller wholesale accounts in North America and Europe faced, and we expect will continue to face, competitive challenges from larger traditional competitors, as well as online competitors,” said Mooney. “We expect to see some continued fallout in these smaller wholesale accounts.”
Mooney still cited opportunities for Quiksilver to increase sales to its larger wholesale accounts in those markets by focusing on its segmented product collections. Also positive is the continued strength seen in emerging markets and direct-to-consumer (DTC) channels.
By channel on a C-N basis, Wholesale revenues decreased 7 percent to $239 million. In both the Americas and EMEA, Quiksilver Brand and DC declined on a C-N basis in wholesale channels while Roxy improved. APAC wholesale channel revenues increased in Quiksilver, Roxy and DC brands.
Retail revenues on a C-N basis increased 4 percent to $131 million. Same-store sales company-owned retail stores increased 2 percent. Comps were positive in its Americas and EMEA regions and flat in the APAC region. Comps were positive in both its full price and factory outlook locations.
Company-owned retail stores totaled 645 at the end of the first quarter compared with 615 a year earlier. Most of the new stores were located in its Asia-Pacific region. Costs were also controlled to help “meaningfully” improve the retail segment’s operating margin.
E-commerce revenues grew 16 percent to $23 million, driven mostly by strong growth in the EMEA and APAC online sales. Americas online sales were basically flat. Significant investments were made in its Americas website infrastructure that is expected to boost revenues. An upgrade to the Americas website is expected later this year. E-commerce contributed “meaningfully” to operating margins in the quarter.
By region:
Americas net revenues decreased 5.5 percent to $173 million, and were down 3 percent in constant currencies;
EMEA net revenues decreased 4.5 percent to $149 million, and were down 6 percent in constant currencies;
APAC net revenues decreased 4 percent to $70 million from $73 million, but were up 11 percent in constant currencies;
Revenues from emerging markets increased 32 percent with good growth in Brazil, Russia, Mexico, and Indonesia and all three brands showing increases. Richard Shields, Quiksilver’s CFO, said e-commerce in emerging markets continues to see “strong revenue growth,” and sees opportunities to expand its retail count, both from company-owned stores and licensed stores. SMU programs with larger accounts are being planned.
Gross margin companywide was consistent with the first quarter of last year at 50.9 percent. Modest improvements in gross margins in the Americas and EMEA segments were offset by increased promotional activity in the APAC segment.
SG&A expense decreased $12 million to $204 million, or 51.9 percent of sales, from $216 million, or 52.4 percent, primarily due to reduced employee compensation expenses, including incentive compensation, and reduced athlete and event spending. Pro-forma Adjusted EBITDA increased to $16 million from $12 million.
Net loss from continuing operations attributable to Quiksilver improved to $22 million, or 13 cents per share, from $32 million, or 19 cents, primarily attributable to income tax benefits of $10 million recognized in continuing operations related to the sale of the Mervin and Hawk businesses, which are not expected to be recurring.
Beyond selling its Mervin Manufacturing and Hawk businesses, Quiksilver is also pursuing the divestiture of its Surfdome business.
Updating the company’s Profit Improvement Plan, Mooney said the company’s headcount was further reduced, primarily in the Americas and EMEA, led to severance of $3 million in Q1. Indirect procurement efforts also led to “substantial cost reductions.” Expenses tied to athlete and event sponsorships were also reduced.
Around supply chain optimization, merchandising and design functions were further aligned with production and sourcing, leading to a further reduction in vendor roster and style counts, a refining of its product development calendar, and inventory efficiencies. From a systems perspective, the first phase of the global demand planning system went live and progress was made implementing SAP modules related to sourcing operation.
A detailed plan for improving efficiency and reducing costs and distribution and logistics was also developed.
“As we've said before, optimizing our global supply chain will positively impact our gross margins as well as operating margins,” said Mooney. “We view efforts in this area as the largest opportunity for improvement, and continue to allocate resources to these initiatives.”
From a revenue perspective, investments were made in high-growth emerging markets, specifically Brazil, Russia, Mexico, and Indonesia; as well as its e-commerce platform.
Mooney also said Quiksilver continues to restructure its wholesale sales force in the Americas and are developing a detailed plan to reorganize the field structure in Europe.
“We also continue to focus our product assortment which will include the addition of entry-level place point products for DC Shoes,” said Mooney. “Lastly we're excited about the upcoming marketing launch for the AG 47 line for Quiksilver. Additionally, we selected a global advertising agency, initiated SMU programs with key national accounts in the Americans and EMEA, and developed special programs for our cathedral core accounts.”
Inventory decreased $42 million versus last January, and inventory days on hand decreased 11 days.
Regarding liquidity, Quiksilver ended Q1 with $92 million available to draw on its credit facilities in addition to $131 million in cash and $56 million available for EMEA letters of credit.
“Our bond indentures include some restrictions regarding the use of proceeds from divestitures, so $61 million of the cash generated from the sale of Mervin and Hawk is reflected as restricted cash,” said Shields. “We can use these funds for capital expenditures and other investments in our business and expect to have moved through these restrictions in the upcoming year.”
Asked about a potential second-half turnaround, Mooney said its direct-to-consumer and emerging markets business is expected to see “continued strength,” although headwinds are expected to continue in the smaller account base wholesale markets, particularly in North America and EMEA.
“There the data that we've got on our current position suggests that we're either holding market share, or in the case of Roxy, I would say growing market share, again as evidenced by our performance even this quarter,” said Mooney. “But we're continuing to see kind of systemic contraction within that channel.”
Mooney also said Quiksilver is increasingly working on an SMU basis with its larger wholesale accounts and “it's much faster turn, and much closer to the market” but showing strength.
Mooney said Quiksilver still expects to meet its conservative top line revenue growth of 2.5 percent CAGR under its original Profit Improvement Plan, with growth arriving in the second half of 2104. Said Mooney, “The mix we believe will be slightly different from what we modeled, and that will be stronger in the D-to-C business, and stronger in our emerging market business, and a little weaker in our smaller account wholesale business and the developed markets.”
