Quiksilver’s Recovery Continues in Fiscal First Quarter

Sales were better than the mid-single-digit decline the action sports giant had forecast during its fourth quarter conference call and were up modestly from last year in constant currencies, driven by higher-than-expected sales in the Americas and Europe.

 

“This marks the first time in the last nine quarters that we have grown revenues in constant currency, and demonstrates that previous revenue declines are abating,” said Bob McKnight, Quiksilver chairman, CEO and president, on a conference call with analysts.

The net loss widened to $16.3 million, or 10 cents per share, from a loss of $5.4 million, or 4 cents, for the first quarter of 2010. Excluding charges related to the write-off of deferred debt issuance costs from previous financings, the pro-forma loss from continuing operations was $7.7 million, or 5 cents a share, against a loss of $2.5 million, or 2 cents, in the year-ago period. The steeper loss reflects planned investments, including the launch of the Quiksilver girls line.

In the Americas, sales grew 3.7% to $193.8 million, fueled by mid-teens growth in the owned-retail business. Operating income in the region climbed 39.1% to $6.5 million from $4.7 million.
“The work we have done to improve the retail store operations over the past 18 months is bearing fruit,” said McKnight of the performance in the Americas. “The progress we have made is reflected by our solid double-digit positive comps in the quarter.”
Wholesale revenues in the Americas were a little ahead of plan and essentially unchanged from last year. In wholesale, the outerwear and cold weather apparel and accessories were sold out for the season, and the Canadian business was strong for its three brands. Quiksilver also continues to see strong growth in Latin America. Said McKnight, “Looking forward when we finalize our order books for next fall, we expect to see growth in each of our brands compared to last year.”

In constant-currencies, European segment revenues increased 1% despite challenging economies and adverse weather. In U.S. dollars, European revenues decreased 7.1% to $165.2 million while operating income slid 8.5% to $16.9 million.

“DC had a terrific quarter in Europe, as we continued the momentum of expanding the brands overseas,” said Joe Scirocco, company CFO and COO. “Our wholesale business outpaced our retail business in Europe during the quarter, as unfavorable weather conditions during peak shopping periods disrupted typical holiday shopping patterns for some consumers, and in fact, caused us so close some stores in the days leading up to Christmas.”

McKnight said France, its largest European market, was up over last year. Germany, Austria and Switzerland together have now grown to over €70 million in annual revenues, now representing its third largest trading area in Europe, with Quiksilver, Roxy, and DC “all growing strongly in those countries.” McKnight described the company's business in Czech Republic as “terrific” while Russia is performing “extremely well” at both wholesale and retail. Winter books in Europe are up over last year for all three of its brands.

In constant currency, Asia/Pacific segment revenues decreased 8% and in line with plan. The decline reflects weakness throughout the region, particularly in Australia and New Zealand. In U.S. dollars, sales were essentially flat at $67.0 million versus $67.1 million.

Said McKnight, ” Recent extreme weather conditions have not made it any easier on the already challenging environment, but we are maintaining clean inventories throughout the region, additionally our business in Indonesia, China, Taiwan, and South Korea are all doing well, while our business in Japan is tough, we remain on plan also in that market.”

By brand, Quiksilver's revenues grew on a constant-currency basis and the Fall order book for the Quiksilver brand in the Americas, and the corresponding Fall/Winter book in Europe are both up over last year, supporting the company’s goal of increased revenues in the second half of the fiscal year.
First quarter sales benefited from “very strong demand” for winter sports and technical snowboard apparel. Strong items for spring appear to be board shorts, walk shorts, tops and items from the Watermans collection. Spring deliveries are beginning at surf specialty retailers and Quiksilver stores for its new Quiksilver girls line label, aimed at the 18- to 24-year-old girl with a coastal mindset, and “early buzz is very encouraging,” said McKnight.

Roxy, with more than $525 million in annual business, is “stabilizing” with the Fall order book in the Americas and the Fall/Winter order book in Europe – both higher than last year.
Strength in snow business and casual footwear are helping offset weakness in other areas. But McKnight said the brand's return to its roots “has been clearly reflected in its spring and summer 2011 offerings, that have restored the styling and color of the surf authenticity and iconic Roxy heritage. Retailers have told us that Roxy's strong spring collection has slated an important role in giving them confidence in their larger fall orders.”

DC's growth in the fiscal first quarter was “better than expected” with strong forward orders in each of its regions around the world. “DC has done a great job of positioning the brand for expansion in markets adjacent to their core skate heritage,” said McKnight.

McKnight said DC is further connecting with its consumer through digital marketing. Its Facebook likes increased 50% between November and January, maintaining the position as the number one action sports brand on Facebook. DC is also the leading action sports brand on YouTube with more subscribers than ESPN.
Gross margins expanded 110 basis points to 52.4% of sales, slightly better than expected. Margins benefited from improvements in its U.S. retail stores, and lower levels of discounting in the wholesale channel.

The Americas business delivered the largest improvement in margins, up 290 basis points to 46.2% of sales. Europe's margin also expanded 30 basis points to a company-best 58.9% of sales.
SG&A, expense excluding special charges, were $213 million in the first quarter, up approximately $13 million from last year, largely resulting from higher spending on product development, and marketing for new initiatives such as Quiksilver girls.

Looking ahead, Quiksilver confirmed that it continues to expect full-year revenues to be slightly above those of fiscal 2010 and pro-forma adjusted EBITDA to be roughly in line with last year.