Rossignol Bears Fruit for Quiksilver in Q4…

Quiksilver saw the first fruits of the Rossignol acquisition during the company’s fiscal fourth quarter, which ended on ended October 31. The company’s sales increased 22% to $778.4 million versus $637.4 million in Q4 of 2005. Due to cost savings and margin improvements, net income for the fourth quarter nearly doubled with an increase of 94% to $65.3 million compared to $33.6 million the year before.

The sales increase was spread across all of Quik’s brands. Rossignol sales led the group increasing roughly 30% during the quarter; Quiksilver increased 10%; Roxy grew 24%; and DC was up 23%. Regionally, sales in the Americas increased 14% during the quarter to $330.4 million. European net revenues increased 28% in U.S. dollars during the fourth quarter to $345.8 million. As measured in euros, European sales increased 23% for the same period. In U.S. dollars, Asia/Pacific net revenues increased 30% to $100.3 million in the fourth quarter. In Australian dollars, Asia/Pacific revenues increased 31%.

Much of Rossignol’s top-line growth far exceeded ZQK’s plan in '06, but much of the growth was due to better shipping and logistics this year compared to last, when the brand delivered much of its pre-season orders during the fiscal first quarter of 2006 instead of Q4 of 2005. In addition, having Rossignol and Cleveland for the full year had a positive effect on revenue growth, but didn't have a corresponding effect on profit growth for Quiksilver.

Looking forward for the Rossignol brand, Quiksilver plans on beginning shipments of the newly redesigned apparel product in the fourth quarter of fiscal 2007. The company plans to grow the apparel aspect of Rossignol to roughly $50 million and to $100 million by fiscal 2008. Previously, Rossignol’s apparel collection was seen as “100% technical, and 100% skiwear.” The new line is closer to 60% technical apparel and 40% lifestyle.

The restructuring, integration, and cost-savings initiatives at Rossignol are running well ahead of plan and the company expects this to continue through fiscal 2007. In October of 2005, Quiksilver management said that they could achieve $10 million in cost savings a year by 2008, and now, at the end of fiscal 2006, the company has already realized two thirds of this goal. The company said that they are still on-track to reach a goal of $20 million in SG&A savings per year.

For Quiksilver’s other core brands, sales were boosted by strong results with fleece and hoodies on the men’s side, in addition to the walk short and board-short business extending further into the winter months. Accessories, backpacks, and belts are doing well.

In the women’s business, novelty fleece, outerwear, and sweaters are driving the business. In the little girls' line, the active fleece is doing very well. In accessories, smaller handbags, totes, military-inspired hats, and baseball hats are all doing well. The loungewear business and the luggage business is strong.

One of the future growth opportunities Quiksilver management sees is through brand extension from its core brands, like Roxy’s new ski line and cosmetic line, as well as DC’s apparel line. Management said there would be further extensions, but would not disclose details.

Quiksilver’s gross margin during the fourth quarter was 44.9%, down 20 basis points from 45.1% last year. The decline was due to margins in the Americas, which decreased 60 basis points to 40.0%, as well as Asia-Pacific gross margin, which decreased 43.2% from 48.8% due to increased sales of hardgoods.

European gross margin increased 110 basis points to 50.2% from 49.1%, primarily because of the industrial improvements at Rossignol. Quiksilver has also launched a very ambitious “global sourcing initiative” which will work to develop products globally over the course of three years and in-turn, boost margins by roughly one percentage point.

SG&A expenses were ahead of expectations at 31.0% of sales for the quarter, down 430 basis points versus 35.2% the year before. Over half of this improvement was driven by leveraging expenses as the apparel businesses grew. The other big component was improvement at Rossignol, where SG&A was essentially flat even though revenues grew 30%.

Quiksilver re-iterated fiscal 2007 guidance of $2.5 billion in revenue and diluted earnings per share ranging from 88 cent to 92 cents.

For the first quarter of fiscal 2007, management is forecasting revenues of approximately $550 million to $555 million with diluted earnings per share of approximately nine cents.

Gross margin gains are expected in the first half and significant gross margins again in Q4 as more of the industrial improvements are realized from Rossignol. Operating margins are expected to improve in all quarters, with the exception of Q1, when SG&A is expected to increase as a percentage of sales.