Quiksilver, Inc. ended its fiscal third quarter with a sales increase derived largely from the effects of shifting currency exchange rates, but the prospect of getting the Rossignol business off the books helped to buoy management’s outlook.  As detailed in last week’s issue of Sports Executive Weekly, Quiksilver received a binding offer of approximately €100 million for the Rossignol business from a former Rossi CEO with help from a PE firm. But getting rid of the business at that price will certainly put a hurt on Quiksilver’s books. 


On a conference call with analysts discussing the third quarter results, CFO Joe Scirocco commented that ZQK expects “to record a significant non-cash loss upon the final sale of Rossignol … because the sale price is below the projected carrying value of the working capital.  Our current estimate for the size of this non-cash charge is in a range between $150 million and $200 million.”


With the deal now looking very likely and expected to close in the fall, Quik moved the Rossi business into discontinued operations.  As such, ZQK reported a loss from discontinued operations of $30.2 million, an improvement from a loss of $43.6 million in fiscal Q3 last year.
DC remains the hottest brand in Quiksilver’s stable.


“DC is the strongest of the three brands,” said Marty Samuels, president of the Americas. “Their footwear business remains very, very strong. Theyre gaining a lot of traction in market share with their apparel [and] accessory business… Quiksilver has had a decent year. The men’s business in apparel is clearly not as difficult as the women’s business… Roxy has had some challenges this year.”  He indicated that Pacific Sunwear, their largest customer for Roxy, “has been going through a lot of strategic changes” that “have impacted most of their suppliers on the female side of the business…”


Looking at regional results, the Americas was the toughest region for Quiksilver as its core markets continue to battle against a difficult retail environment.  Scirocco said third quarter revenues in the Americas region declined when compared to the same quarter a year ago for two reasons, calling out retail comps in the region that were softer than expected and also a delay of one to two weeks in shipping some product from their new distribution center in Mira Loma, CA.


Gross margins for the Americas region decreased 50 basis points to 41.4% of regional net sales for the quarter, while SG&A expenses jumped 510 basis points to 32.9% of net sales. Management attributed the increase in expenses to the opening of new stores under its owned-retail expansion plan. As a result, regional operating income dropped 41.5% to $23.2 million from $39.6 million last year.


Approximately $28.6 million of Europe’s revenue increase for Q3 was attributable to the positive effect of changes in foreign currency exchange rates.  In Europe, Quiksilver and Roxy were said to be up low-singles for the year-to-date period, with DC leading the growth.  Constant-currency revenue growth in Europe was roughly 8% for the period, aided by some early deliveries previously expected to fall into the fourth quarter.


The shift forward in sales by a quarter was valued at approximately $10 million. Gross margins improved 380 basis points for the quarter to 59.7%, outpacing an 80 basis point rise in SG&A expenses to 42.0% of net sales. The region saw  a 49.8% jump in operating income to $40.9 million from $27.3 million for the year-ago quarter.


Asia/Pacific segment net revenues decreased slightly for the quarter, but excluding the effects of currency exchange rates, net sales would have declined approximately 14% for the quarter. A/P regional gross margins improved 660 basis points to 55.5% of net sales from 48.9% last year. However, the margins improvement was more than offset by a 730 basis point jump in SG&A expenses for the quarter to 47.9% of regional net sales.


Asia/Pacific regional operating income decreased 8.5% to $4.5 million from $4.9 million last year.


In the company’s owned-retail operations, CEO Bob McKnight commented that Quik experienced “negative comparable store results across our global business.”  However, “August was the best month weve had all year in our retail stores and we comped in both our full price and our outlet,” according to Samuels.


Looking ahead, management reaffirmed its current guidance of sales growth of approximately 10% to $2.25 billion and earnings per share of slightly below 90 cents for the fiscal year.