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Quiksilver’s April 30 Quarter; There Are Some Numbers that Need Explaining

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Quik’s revenues for the quarter rose 2.1% to $478 million compared to $468.3 million in the same quarter last year. The gross profit margin rose from 53.2% to 54.8%. Sales, general and administrative expenses were up slightly, but fell as a percentage of sales. Interest expense was down as a result of their balance sheet restructuring from $21 to $15 million.

So how, you might ask, did they go from a bottom line profit of $9.4 million last year in the quarter to a loss of $83.3 million in the quarter that ended April 30, 2011?

First, there was a noncash asset impairment charge of $74.6 million compared to zip, zero, nada in the same quarter last year. If you ignore that charge, operating income was up from $35.9 million to $45.4 million.
 
The charge was “Due to the natural disasters that occurred throughout the Asia/Pacific region during the three months ended April 30, 2011 and their resulting impact on the company’s business…” Okay, I guess we can’t hold Quik responsible for earthquakes, tsunami, and core meltdowns. Although, I guess we’re all a bit responsible for the core meltdown we’ve had in our industry.
 
But I digress. That write down represents a real impact on Quik’s business going forward.
 
“The value implied by the test was affected by (1) a reduction in near-term future cash flows expected for the Asia/Pacific segment, (2) the discount rates which were applied to future cash flows, and (3) current market estimates of value. The projected future cash flows, discount rates applied and current estimates of market value have all been impacted by the aforementioned natural disasters that occurred throughout the Asia/Pacific region, contributing to the estimated decline in value.”
 
This says that cash flows are going to be reduced for some period (I don’t know what “near-term” means), risks are higher (that’s what you mean by raising discount rates, we finance trained people think) and, inevitably, given the other two factors, values are lower. It’s a noncash charge but not a meaningless charge given the impact on future business.
 
With that charge, pretax income fell from $19.5 million to a loss of $42 million. But the provision for income taxes rose from $9.4 million to $39.7 million. Huh? More taxes on a big loss? Shit. I’m going to have to delve into the dreaded income tax footnotes. Those of you who are into self-abuse can see the filing here and read the footnote starting on page 15. But beware- reading this can make you go blind.
 
I think I used that joke last week. I need some new material.
 
I’d urge you to go take a brief look at that footnote. Not because you’re likely to want to figure it out, but because hopefully you’ll then feel sorry for me as I attempt to explain it.
 
A deferred tax asset is a future tax benefit. It’s easy to understand why they exist. A company wants to tell its shareholders it made as much money as possible. It wants to tell the government it made as little as possible so it can at least postpone the payment of taxes. Quik has decided (I think it’s related to the asset impairment charge above) that their deferred tax assets were $26 million too high in the Asia/Pacific region. That is, they don’t think they are likely to get the benefit they were expecting, so they wrote them off.
 
There, that wasn’t too bad. Sorry to spend so much time on these two issues, but the numbers were so large I felt it was necessary.
 
Revenues rose 5.5% in the Americas to $210.7 million and it was fueled “…largely by our retail business,” according to CFO Joe Scirocco in the conference call. Company owned retail comparable store sales rose 23% in the quarter, and e-commerce sales grew 68%.   The Quik and DC brands were up, while Roxy was down. Wholesale revenues in the Americas “…were on plan and a couple of percentage points higher than last year.”
 
Wish they’d give us some numbers on how the wholesale business was doing in the U.S. 
Revenues fell 0.8% in both Europe and Asia/Pacific to $207 million and $58 million respectively. Europe was down 4% in constant currency and Asia/Pacific 12%.
 
Gross profit margin in the Americas rose from 46.6% to 49.1%. This was “…primarily the result of a favorable shift in product mix and, to a lesser extent, a greater percentage of retail versus wholesale sales.” 
 
It was up in Europe from 59.9% to 62% as a result of improved retail margins. It fell in Asia/Pacific from 53.5% to 53.1%.
 
In a trend that’s hardly unique to Quiksilver, you can see why lots of U. S. companies are more interested in international rather than domestic expansion. Oh- Quik is going into India and expects to open 10 new stores there in the next 12 months.
 
Quik reports, in one line in its 10Q, what it calls its Adjusted EBITDA. This is net income before “(i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) asset impairments.”
 
I’m kind of a bottom line, generally accepted accounting principles kind of guy, but sometimes this is worth looking at because it does eliminate some distortions. For the three months ended April 30, it was 13% both this year and last. For six months it was 10.7% last year and fell to 10.2% this year.
 
On the surface, the balance sheet is almost identical to a year ago, though equity has grown about 10% to $535 million due to the balance sheet restructuring. Liabilities have only fallen by about $42 million to $1.1 billion, but debt maturities have been pushed way out so there are no big repayments due over the next four years.
 
Inventories are up from $226 million to $290 million, or by 28% (18% in constant currency). They describe that as being to “…ensure timely production and delivery” and as representing “…a restocking relative to very lean inventories a year ago.” I wonder if there are any cost increases in inventory numbers yet. They note that “Consolidated average annual inventory turnover was approximately 3.0 at April 30, 2011 compared to approximately 3.6 at April 30, 2010.” Higher turns are generally better until you get to the point where you’re not able to fill orders.
 
Those are reasonable reasons to increase inventory, but I’d still be happier to see increases a bit more in line with sales growth. Maybe there’s also some stocking for the Quik girls line which just started shipping in February.
 
Quik makes it clear that they are not going to be rolling out a bunch of mall stores as their old retail strategy called for. But they do discuss a cautious experimentation with some concept stores. They talk about a couple of stores at Capbreton and Hossegor in Southwest France and a Paris store. All three are used for events and promotions. At Capbreton, they have a summer concert series and it includes an athlete training center. Apparently, they include not only all of Quik’s brands, but “…a deep stock of surfboards, wetsuits, skateboards and other products that reinforce our heritage and authenticity…”
 
They plan to import this concept into the U.S. The first such store is scheduled to open in Venice, California in the fourth quarter. It will be about 10,000 square feet.
 
My point of view on Quiksilver hasn’t changed much since they finished their financial restructuring. I’m still wondering where their sales growth is going to come from. Like most companies, they see some possible margin pressure in the second half of the year because of cost increases and uncertainty as to consumer response to price increases. Their conference calls have focused recently on lots of good things they are doing with product, teams, retail and brands. They are good things, but so far they haven’t translated into much top line growth.
 
It feels like they’re doing the right stuff but this market just isn’t going to respond like it used to.            

 

 

Some Comments on Quiksilver’s Quarterly Report

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Quik came out with its quarterly results last week and filed the 10Q with SEC all at the same time so I’ve got that and the conference call to work with. I know Volcom and Zumiez have also released their results for the quarter and year, but so far they haven’t filed their 10Ks for me to peruse. When they do that, I’ll give you a report. I don’t like delaying, but I just don’t know how to do a good job without those documents. Hope you understand.

This is really the first report from Quik in a long while where we don’t have to adjust for discontinued operations as Rossignol has worked its way off the financial statements. That’s great to see.

For the three months ended January 31, 2011, Quik reported a loss of $16.3 million compared to a loss of $5.4 million during the same quarter the prior year. Sales fell 1.45% from $432.7 million to $426.5 million. Sales in Asia/Pacific were essentially the same from one quarter to the other and rose $6.8 million in the Americas. But European sales fell 7.1% from $177.8 million to $165.2 million.
 
In the Americas, the 4% growth was driven by mid-teen growth in Quik’s retail business. Wholesale revenues were “essentially unchanged.” That means all the Americas growth came from retail which they say grew in the “mid-teens.” Let’s call that 15%. It follows that the Americas quarter over quarter sales growth of $6.83 million represents something like 15% growth in retail. To use a little simple algebra, if 0.15x = $6.829 million and we solve for x, we find that retail sales during the quarter were around $45 million, or about 23% of the total.
        
We don’t get any specific sales numbers by brand. Quiksilver was flat in constant currency. They expect it will grow in the second half of the year. They note that there was “very strong demand” for their winter sports and technical snowboard apparel. But we don’t know how many dollars that involves.
 
Roxy does about $525 million in annual revenues. CEO McKnight characterizes that business as “stabilizing.” Its revenues were down 10% to 15%. They think they see girls getting tired of the “cheap quality” that fast fashion has provided.
 
Management is positively giddy about the DC brand and its prospects. It grew 15% to 20% in the quarter. Bob McKnight says DC is “…dedicated to being the most sought after skate-driven action sports brand in the world.” He then goes on to discuss DC and Ken Block’s Gymkhana franchise and being the exclusive shoe sponsor of the Monster Energy AMA Supercross series.
 
Maybe I’m too old to be cool enough to understand the relationship between skate and motocross. Quik bought a great brand in DC and has managed its growth impressively. I just hope, with the Roxy and Quiksilver brands not growing as well right now, that they don’t expect more from DC than it can deliver. Their goal is to double DC’s revenues in five years. 
 
Gross profit as a percentage of sales rose from 51.3% to 52.4%. CEO Bob McKnight indicated the increase was the result of “…improvements in our U.S. retail stores and lower levels of discounting in the wholesale channel.” It’s not clear if he means to say those are things the company can take credit for.
 
In the Americas, gross margin was up from 43.3% to 46.2%. In Europe, it rose from 56.6% to 58.9%. It fell in Asia/Pacific from 55.3% to 54.7%.
 
All things being equal, I’m guessing that the Americas are Quik’s third choice for where they’d like to sell stuff. Look at the gross margin differences. Enthusiasm for international business and its growth opportunities come across in the reports and conference calls of Quik and a lot of other companies as well. And not just in our industry. I suppose that’s the inevitable result of real incomes dropping in this country.
 
Quik, like Billabong, is referring to 2011 as a transition year, where they are investing in certain initiatives that aren’t expected to produce significant results until 2012. You see this in selling, general and administrative expenses that rose 3.58% to $210.4 million. As a percent of sales, they rose from 46.9% to 49.3%.
 
Interest expense rose from $21.9 million to $29 million. But that included a $13.7 million non-cash charge for writing off “…deferred debt issuance costs associated with our European term loans that were paid off during the quarter…” Basically, those costs have to be put on the books as an asset like a building and written off over the life of the loan just as a building is depreciated. But when the loan goes away, the remaining value has to be written off. They note that their total interest expense was $6.6 million lower than it would otherwise have been due the reduction in their total debt over the last year.
 
Their 10Q presents balance sheets for January 31, 2011 and October 31, 2010. As usual, I chased down the one from January 31 of the previous year so we’d have a more valid comparison and I’m referring to the year over year changes below. Interestingly, they refer to the year over year change in the conference call as they discuss the balance sheet, so it would be logical for them to include it in the filing.
 
Over the year, the current ratio has improved from 2.24 to 2.56. Total liabilities to equity has also improved, falling from 2.91 to 1.82. Long term debt was down 18.8% to $697 million and stockholders’ equity rose from $456 million to $602 million. The rise in equity is largely the result of Rhone debt being converted to equity. Quik has had losses over the last year which obviously reduced equity.   Inventories are up about 2.8%. Days sales outstanding (how long it takes to collect receivables) declined by six days compared to last year from 64 to 58 days. That’s good work. Being tougher on extending credit and collecting is not unique to Quiksilver in this environment. 
 
In discussing their hedging activities and foreign exchange management, Quik makes a comment I want you to read. Not because it says anything about Quik, but because it teaches us something about how we got into our current economic problems in the first place. Here’s the comment from the 10Q.
 
“The Company enters into forward exchange and other derivative contracts with major banks and is exposed to exchange rate losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.”
 
Okay, but what if these banks (the counterparties, to use a phrase you may remember) can’t “fully satisfy their obligations?” I remember when that’s exactly what happened. Don’t you? The institutions that couldn’t “fully satisfy their obligations” included AIG, Lehman Brothers, Merrill Lynch, and a host of others.
 
Quik’s derivative numbers are small and it’s in no way an issue for them. But isn’t it amazing how quickly we forget? People are trusting Moody’s and S&P bond ratings again. They were the ones who rated subprime stuff triple A. It’s inability to remember even the recent past, I suppose, and the fact that greed is eternal that guarantees it will happen again.
 
Okay, off the soapbox.
 
Quik expects its gross margin to be the same this year as last year. They have raised some prices selectively. They see cost increases averaging 5% to 10% with some as high as 15%. The question, as CFO Joe Scirocco points out, is how the consumer will react to the higher prices. I’d say that’s on everybody’s mind.
 
Right now, DC is providing a lot of Quik’s growth momentum, and I hope they don’t push the brand too hard. As they indicated, 2011 is a transition year for Quiksilver. We’ll find out in 2012 how some of their marketing initiatives and the launching of the Quiksilver women’s line went. If DC can keep growing, Roxy can stop shrinking and start growing, the Quiksilver can get just a bit more momentum, and some of these marketing bets pay off, the company will be doing fine.  

 

 

Quiksilver’s Focus Goes From Balance Sheet to Income Statement; Their Quarterly and Annual Results

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Quiksilver continued to improve its balance sheet over the year and quarter, and this conference call is the first in a while where I’ve gotten a sense of where some growth might really come from. We’ll talk about that. 

But first, I thought some of you might actually want to know how much Quiksilver earned for the quarter and year ended October 31, 2010. Amazingly enough, if all you did was read the three pages of text in the press release and listen to the conference call, you wouldn’t know. You could finally see the actual, bottom line number on the financial statement on page four of the release.

For the quarter, Quik lost $22.1 million on revenues of $495.1 million. In the same quarter the previous year, they reported a loss of $1.78 million on revenues of $538.7 million. For the fiscal year, they lost $9.68 million on revenue of $1.837 billion. For the previous year, they had a loss of $192 million on revenue of $1.978 billion.
 
There. That wasn’t so hard. It’s not operating income. It’s not EBITDA. It’s not proforma. It’s not in constant currency. It’s just the bottom line results according to good old fashioned Generally Accepted Accounting Principles. A lot of really smart people worked really hard to give us GAAP. Couldn’t we just start with that and then provide the explanations and adjustments?
 
And we do need some of those explanations. We want to know that $119 million of last year’s loss was due to the Rossignol debacle and there’s value in being able to compare the company’s results without that impact by looking at continuing operations. But I wouldn’t want to act like that didn’t happen or that it somehow wasn’t a real loss.
 
Our industry’s popular press essentially reproduced the press release. The exception was Boardistan, who actually showed the quarterly loss in their headline.
 
On To the Numbers
 
With my rant now completed, let’s look a little harder at some of the numbers. Gross margin percentage in the quarter rose nicely from 47.6% to 53.5% compared to the same quarter last year on the decline in revenue noted above. With some help from a 3.6% reduction in selling, general and administrative expenses, this allowed them to increase their operating income from $15.1 to $34.3 million. But interest expense, not unexpectedly, jumped from $20.9 to $50.6 million. All but $16 million of that was the write down of debt issuance costs that had been capitalized and that went away when they paid off debt. The loss from continuing operations grew from $13.8 to $22 million.
 
The year ended October 31 looked a lot like the quarter. The gross profit percentage rose from 47.8% to 52.6% on the sales decline shown above. Selling, general and administrative expense fell 2.3%. Operating income was up 80% to $123.5 million. As in the quarter, interest expense rose as expected from $63.9 to $114 million, more than offsetting a reduction in income taxes from $66.7 to $23.4 million. The continuing operations result improved from a loss of $70.3 million to a loss of $8.1 million.
 
Quik’s reported business segments are the Americas, Europe, and Asia/Pacific. In the quarter, sales fell in all three, but the gross margin percentage was up in all, though gross profit dollars rose only in the Americas. All the gross profit increase, obviously, came from the Americas though it has the lowest gross margin percentage of the three segments at 48.1%. Gross profit percentage was 60.2% in Europe and 54.8% for Asia/Pacific. 
 
The big turnaround in operating income for the quarter was in the Americas, where it went from a loss of $9.3 million to a profit of $12.7 million. Europe’s operating income was up about $4 million to $20.9 million. Asia’s actually fell from $14.5 million to $8.6 million. I imagine Quik’s management would get positively giddy if they could get their Americas gross margins up to those of the other segments.
 
For the year, sales fell in the Americas and Europe and rose slightly in Asia/Pacific. Gross margin percentages were also up in all three segments, reaching 46.3% in the Americas, 59.8% in Europe, and 54.2% in Asia/Pacific. The Americas represented 46% of total revenue. Europe is 40% and Asia/Pacific 14%.
 
The trend in operating income for the year was much the same as in the quarter. The Americas went from a $25.3 million loss to a $56.9 million profit. Europe fell a bit from $104 to $94 million and Asia/Pacific was down from a profit of $23.2 million to a profit of $11.8 million.
 
The Quiksilver brand’s revenues were about $770 million during the year. Roxy and DC were each about $500 million in revenue for the year. DC is the brand where they see the most growth potential; especially outside of the Americas. They note that the juniors market is still impacted by fast fashion price point driven goods. As they put it, “Declines in the Roxy business are moderating, and it appears they will reach the bottom in fiscal 2011.”
 
The balance sheet, well, there is no balance sheet and I feel more ranting coming on. There are some balance sheet numbers (and to be fair, it’s most of the important ones) but we won’t see the complete balance sheet until the annual report. I’m actually writing this now rather than when that report comes out because at the end of the year, the SEC gives companies a lot longer to file.
 
Receivables, compared to a year ago, have fallen 14.5% to $368.4 million. They note in the conference call that days sales outstanding fell 5 days to 63 days. Inventories are essentially the same at $268 million, and they note in the conference call that it’s about where they expected inventories to be. I guess I would have expected some reduction with sales down, but given the increase in gross margin it’s hard to argue that inventories aren’t under control. Lines of credit and long term debt are down from $1.04 billion a year ago to $729 million. The debt reduction reduces their annual interest expense by $26 million. 
 
Sorry to disappoint those of you were looking forward to my scintillating discussion of the “GAAP to Pro-Forma Reconciliation” or the “Adjusted EBITDA and Pro-Forma Adjusted EBITDA Reconciliation” or even the ever popular “Supplemental Exchange Rate Information,” but I think I’ll move on to the conference call. You can view the complete press release here.     
 
Strategies for Growth
 
 CEO Bob McKnight said, “Our overriding strategic objective is to retain and remain the world’s number one action sports lifestyle company centered on boardriding. And boardriding for us has a broader connotation than just surfing, skating and snowboarding. It also includes the closely related interest of our growing global demographic. BMX, rally, moto, bike, hike, climb, paddle, mix martial arts, and many other growing action sports and activities.”
 
He identified four “primary initiatives” they would use to implement this objective. The first was to “…focus our energy and resources primarily on our three major brands.” Second is to “…focus on strategic core marketing initiatives and core athletes.”
 
The third is to “…expand through product line extensions, geographical reach, and further channel development.” This includes the Quiksilver Girls line, launching in spring. They also plan to expand DC into “…surf, snow, BMX, rally and moto.” They “… also believe we have a huge opportunity in mountain resorts and colder weather markets within the Americas and Asia-Pacific to replicate the success of our European winter outerwear business.” The geographic expansion will be where they already have a presence, but have underinvested in the past.
 
The fourth primary initiative “…is the development of incubator brand concepts that can potentially represent opportunities consistent with our culture and areas of expertise.” I don’t know quite what that means but he mentions Lib Tech and Gnu as examples, and that must have Mike and Pete reaching for their favorite adult beverage.
 
As is the case for every company of any size that wants to grow, the devil’s in the details. How do you focus on your three major brands and remain centered on boardriding but grow moto, bike, climb, paddle, mixed martial arts and others? How big a part of your business can those become before you’re no longer centered on boardriding? If you want to grow Lib Tech and Gnu “…consistent with our culture and areas of expertise,” that might be interpreted as putting some serious limits on their growth.
 
Quik’s ecommerce business is about $25 million, and they think it has the potential to be 10% of their business. They closed the year with 540 stores. They believe DC has the potential to be a billion dollar brand.
 
For 2011, they are looking for “…modest sort of growth” overall for the company. They’ve got cost pressures they estimate at five to ten percent, and expect to implement some selective price increases. They expect an overall gross margin for the year consistent with 2010. The price increase and some cost initiatives, along with favorable currency rates in some countries outside of the U.S., should allow them to achieve this in spite of costs going up.
 
What do they expect in terms of sales for 2011? “Quiksilver kind of low-single digit expectations for fiscal ’11; Roxy, down mid-singles, and DC, up somewhere in the high-single to low-double digit range. In terms of what we are expecting in regionally, much of the growth is focused on the Americas region in 2011. We are launching the Quiksilver Girls collection beginning on 2/25. Our first delivery is coming out.”   
 
It’s nice to see Quik more or less out from under their liquidity and debt problems and focused on brand building and the future. I can see that they have some possibilities for growth, but none of them feel easy and it sounds like real impact will be felt after 2011. I guess that’s just business for all of us these days. 

 

 

Quik’s Quarter Ended April 30, 2010- Sales Down, Profits Up.

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As usual, we’re dealing with the numbers in the June 3 press release and the comments in the conference call rather than the actual quarterly filing with the Security and Exchange Commission that’s full of details. That just drives me crazy, and I want to explain why and what I think the result is in this case.

Quik’s press release headlines the 5% decline in revenue, the increase in pro-forma income from continuing operations from $0.05 to $0.11 cents per share, and the growth in income from continuing operations from four to six center per share.
 
So I read that and thought to myself, “Wow, pretty good pro-forma and continuing operations results. I wonder how much they earned.”
 
You know- earned. Like bottom line. Net profit after taxes. Income. The generally accepted accounting principles earnings number. The number that most people, including me, think has the most to do with stock performance over the long term.
 
I read the rest of the press release text. It’s not there. I listen to the whole conference call. Nope- nobody mentions it there either.   “Must really suck,” I think to myself.
 
It doesn’t sucks. But you have to look to the bottom of the Consolidated Statement of Operations in the press release to find it. And here it is. Net income attributable to Quiksilver, Inc. rose 235% from $2.813 million in the quarter ended April 30, 2009 to $9.424 million. It’s only 2.0% of sales, but it’s up from 0.57% of sales in the same quarter last year.
 
I know that EBITDA, proforma income, one-time items like Kelly Slater’s stock grants ($5.2 million), exchange rates, non cash charges, gains and losses on sales of assets, restructuring charges and the impact of discontinued operations all offer additional information and perspective. But when the “GAAP to Pro-Forma Reconciliation” table is a page long and the “Adjusted EBITDA and Pro-Forma Adjusted EBITDA Reconciliation” table (including a half page “Definition of Adjusted EBITDA” which even I couldn’t stand to read) is another page in a ten page press release, then I have to believe we might be missing the proverbial forest for the trees.
 
Especially when it’s mostly good news, as we’ll discuss below.
 
Press releases, unlike SEC filings, are a chance to put your best foot forward, and certainly I would want to do that. And there are certain legal requirements for what and how you say things. But sometimes these things feel like the priests exploring the mysteries of the temple in a language many of the parishioners can’t understand. To the extent that it’s aimed at Wall Street, the analysts and institutional investors, maybe that’s the way they want it and maybe it’s even appropriate. But when I see media outlets reporting this by basically parroting back what Quik says in the press release (because, I’m afraid, they don’t understand the details and implications themselves) I think there must be a better way.
 
Here’s the link to the whole press release including the financial statements if you want to take a closer look.  www.quiksilverinc.com/pr/0610/ZQK_Q2FY10_earnings_press_release_3jun10_Final.pdf

Sales fell 5.2% from $494.2 million in the quarter ended April 30, 2009 to $468.3 million in the April 30, 2010 quarter. The Americas segment represents 43% of total revenue and, at $200 million, was down 13.2%. Europe, at $209 million was down 1% and Asia/Pacific was up 12.1% to $58.6 million.  In constant currencies (ignoring exchange rate movement), Europe revenues were down 5% and Asia/Pacific down 17%.
 
My last quarterly analysis for Quik was called, “Great Tactics- What’s the Growth Strategy?” Guess I could have used that title again. The conference call talked again, without offering any specifics (which you wouldn’t expect), about great product and technology, and good reception for its product. But it noted that DC and Quik were flat while Roxy was down for the quarter. The juniors market, they said, continues to be a challenge for branded girls surf apparel. Roxy is about a $550 million business.
 
Part of the sales decline was due to their explicit decision to control inventory and we’ll see the positive results below.  But the question I thought screams to be asked at the conference call, but which is never asked (no priest wants to be excommunicated) is, “You’re doing a great job controlling expenses, reducing inventory, paying off debt, collecting your receivables better and sourcing and it’s dramatically improved your profitability. But expenses can’t go to zero and product will never be purchased for free. You may get some more improvements in these areas, but eventually, you’re going to have to grow sales to grow earnings. How and where do you see that happening?”
 
Quik has given a partial answer. They said they are very well positioned to take advantage of an improvement in the economy and a pickup in consumer spending.  I agree that they (and lots of other companies) are, but that improvement is out of our control. Quik also noted that they were upping their inventory purchases where they were confident there were additional sales opportunities.
 
Quik’s inventory fell by 26% from $308 in this quarter to $226 million in the same quarter the previous year. You see the impact of this in their gross margin percentage, which rose from 47.2% to 53.2%, a 12.7% improvement. Quik reported lower levels of discounting and clearance sales then they had expected across the whole company. Selling, general and administrative expense actually rose from $203 to $213 million, and from 40.9% to 45.5% of sales, but in spite of that operating income was up 17.4% from $30.5 to $35.9 million. Improving that gross margin is a powerful thing.
 
Interest expense, as expected due to last year’s new financing, was up compared to the same quarter last year from $13.5 to $21 million ($7 million was noncash). Instead of a $1.926 million foreign exchange loss, they reported a $4.614 million gain. The tax provision didn’t change much, and you already know what the bottom line was.
 
Over on the balance sheet, you can see a lot of improvement in addition to the inventory numbers already discussed. Overall, their total liabilities to equity fell from 3.44 times to 2.36 times, a big improvement. And current ratio (a measure of short term liquidity) doubled from 1.42 to 2.86 at least partly because of the restructuring that happened last year. Receivables were down 19% as reported (21% in constant currency) and the number of days it took them to collect those receivables fell from 70 to 60 days. The increase in the reserve for doubtful accounts from $36.7 to $52.2 million had something to do with that.
 
Accounts payable were down 19%. The line of credit outstanding fell from $224 million to $15 million and current portion of long term debt was down from $226 million to $45 million. Some of this was just transferring current liabilities to long term liabilities, but total liabilities were down $201 million reflecting debt repayment and good cash management.
 
Some years ago, I started telling people that a focus on gross margin dollars was a good idea. Two to three years ago, I began to suggest we needed to plan for lower sales increases and operate better to grow those gross margin dollars. I would guess that Quik’s management would agree with me. They are doing great work in balance sheet improvement. But the sales decline is troubling- especially if you look at the European and Asia/Pacific sales numbers in constant currency and consider the economic prognosis for those areas. Let’s hope their product development efforts support some sales increases in the near future.
 
The Press Release I Would Have Written    
“Quiksilver’s net income for the quarter ended April 30, 2010 rose 235% to $9.4 million compared to $2.8 million in the same quarter the previous year. This was achieved in conjunction with a 5.3% decline in net revenue that was accompanied by an increase in gross margin percentage from 47.2% to 53.2% and a managed reduction in total inventories of 26.4% from $308 million to $226 million. A $200 million reduction in total liabilities resulted in a total liabilities to equity ratio that improved from 3.44 to 2.36 times over the year. Receivables were reduced by 19% and were collected an average of 10 days faster than in the same quarter last year. The company is very well positioned to benefit from a continuing recovery in consumer spending.”
 
They can and should go ahead and here and add all the other stuff. It’s important for a complete understanding. But couldn’t they start with a short, simple, fairly easy to understand paragraph that doesn’t take the temple priests to interpret and tells everybody the good news?      

 

 

Quik’s Quarter Ended Jan. 31, 2010; Great Tactics- What’s the Growth Strategy?

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A sales decline of 2.4% for the quarter ended Jan. 31, 2010 compared to the same quarter the prior year, from $443.7 to $432.7 million isn’t what you’d like to see.  Then you notice that their gross margin percentage rose from 46.7% to 51.3% and that their gross profit was up by 7.2% even with the sales decline and things look better.  Quik attributes this to a better economic environment, improved sourcing, reduced discounting and good inventory management.

 A year ago, on Jan. 31 2009, their inventory was $380.5 million.  At January 31st this year, it was down to $301.2 million, a decline of almost 21%.  Very impressive.  They have also reduced their receivables by 13.5% over the year and days sales outstanding (how long it takes them to collect their receivables) fell from 72 to 64 days.  Cash is up from $42 to $150 million.  Their current ratio has improved over the year from 1.63 to 2.24, indicative of the capital raised and the restructuring of their bank lines to improve liquidity.  Their total debt to equity has also improved from 3.81 to 2.91, also largely due to the equity raised.

But their long term debt and lines of credit still total $977 million.  While that’s down from $1.013 billion a year ago, it’s still a lot and they’ll have to work to reduce it if they want to improve their operating flexibility and maybe refinance their expensive (15% plus warrants) debt that they got from Rhone capital.  They expect to reduce that debt by about $100 million a year over the next three years.  In the conference call, they increased their estimate of free cash flow from $50 million to $75 million for the year.

I don’t typically lead with a balance sheet discussion, but it’s so pivotal to Quik’s future that it seemed to make sense.  Back to the income statement.

Selling, general and administrative expenses fell 1.8% to $203 million.  They expect their marketing expenses to be around $100 million in the current fiscal year, down from $120 million last year.  Operating income grew from $345,000 to $19 million.

Interest expense, to nobody’s surprise, was up from $14 to $21 million.  They expect total interest expense this year to be around $92 million $26 million of which, Quik reminds us, is noncash.  The loss from continuing operations was $65.2 million in this quarter last year, compared to $4.6 million this year.  The net loss fell from $194.4 million last year ($128 million of that was Rossignol related) to $5.4 million in the quarter ended January 31, 2010.

During the quarter, sales decreased by 8% in the Americas.  They fell by 2% in Europe and rose 16% in Asia/Pacific.  In constant currency terms they were down 12% in Europe and 15% in Asia/Pacific.  That translates into a decline in sales overall in constant currency terms of 11%.  As reported (that is, ignoring currency fluctuation), revenues were $187 million in the Americas, $178 million in Europe, and $67 million in Asia/Pacific.

They commented that the juniors market was difficult.  The Americas decrease was in Roxy and Quiksilver, offset by an increase in DC.  However, they note that increase “was partially related to the timing of shipments,” which means some of the increase was not organic growth, and will reduce next quarter’s sales.  In constant currency in Europe, the story was about the same, with declines in Roxy and Quiksilver offset by some growth in DC.

As with any company, there’s a limit to how much improvement you can see from inventory management, expense control, and sourcing improvements.  There is, I suppose, always room to do better, and I’ve been urging companies for maybe two years now to focus on gross profit dollars.  But at some point, to improve profits, you have to sell more.  What Bob McKnight said in the conference call was that Quik is “… in a prime position to benefit from future improvements in the world’s economies and in particular in consumer spending.”

I believe that, but what I also hear him saying is that they really need that improvement to get growth and profitability back on track.  For the second quarter, they expect to “…generate earnings per share on a diluted basis in the low single digit range.”  CFO Joe Scirocco believes they can still achieve the full year revenue objectives they outlined last quarter (he didn’t say profit projections), “…although some definite challenges remain, including a challenging juniors market, foreign currency headwinds, and uncertainty at retail.”

We didn’t get (and probably shouldn’t expect in a conference call) a lot of specificity as to where growth can come from.  CEO McKnight highlighted the core shop strategy that has been rolled out for all three brands where they have developed and are selling product only in their own stores and the best independent retailers.  I think that’s a great, and necessary, thing for them to do.  As I’ve argued before, however, I’m not sure that will be the source of enough additional revenue to make a big financial difference.  Hope to be wrong about that.

So I’m impressed by the steps Quik has taken to improve their liquidity, control expenses, manage their inventory and restructure their businesses for improved efficiency.  The last step will be reducing their leverage.  That’s just going to take some time and some cash flow.

The source of their future revenue growth (which they need if only because of their increased interest expense) is not clear to me.  I’ve said that a couple of times before in comments on their filings and it’s still true.  Like all of us, they are dependent on and hoping for a recovery in consumer spending.  They’ll get- are getting- some.  Like all of us, it won’t be as much as we’d like or have gotten use to.  But what they really need are some new places to sell their products.  At least in the U.S., I don’t know where else they can go with their distribution.  Maybe there are some opportunities in the rest of the world.

 

 

Quiksilver’s Annual Report

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In the middle of December, when Quik came out with its quarterly and fiscal year results and held aconference call, I pretty much ignored it.  I glanced at the release and read the conference call transcript, but I had no idea how to evaluate the results of a company that was highly leveraged without a complete balance sheet and the associated notes even though they included some summary balance sheet information in the release.

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Quiksilver’s Quarter and Nine Months Ended July 31, 2009

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I’ve read the press release and listened to the conference call, and here’s what I found out.

Quik’s total revenue for the quarter fell 11.2% to $501.4 million from $569.9 million for the same quarter the previous year. Their gross profit margin fell from 50.4% to 46.7%. Selling, general and administrative expense was down 9.1% to $211.8 million. Interest expense rose 30% to $15.3 million. Instead of a foreign currency gain of $1.2 million, they had a loss of $3.5 million.

After taxes, they had income from continuing operations of $3.4 million compared to $33.1 million in the same quarter the previous year. Those numbers exclude Rossignol.
 
The loss from discontinued operations (Rossignol) was $2.1 million this quarter compared with $30.2 million last year. Net income this quarter was $1.35 million compared to $2.85 million last year. That’s $0.01 per share compared to $0.02 last year. Income per share from continuing operations was $0.03 compared to $0.26 in the same quarter last year.
 
The numbers for the nine months ended July 31 show a decline in revenue of 13.2% to $1.44 billion compared to the nine months the previous year. Gross profit margin fell from 50.0% to 46.9%. There was a net loss from continuing operations of $57.5 million compared to a profit of $79.4 million for nine months the previous year. Net income, including the impact of Rossignol, was a loss of $190.3 million this year and $225.3 million last year for nine months.
 
We learned in the conference call that footwear sales have finally softened, and that weakness in the junior’s market is having some impact on Roxy. They are in the process of implementing structural changes and expense reductions that should improve profitability by $40 to $60 million over a full year once implemented. About half of this amount will come from margin improvement, and the restructuring has been extended to include DC Shoes once it was clear that the brand was not going to be sold.
 
They are using what Chairman and CEO Bob McKnight characterized as “More measured and creative approaches to marketing and advertising.” He cited as an example a reduction of 75% in trade show expense achieved by utilizing buses outfitted as booths that are driven into the show and then surrounded by pop up tents. I like it and look forward to seeing it.
      
Over on the balance sheet, total assets fell from $2.34 billion at July 31, 2008 to $1.88 billion at July 31, 2009. That includes a $67 million reduction in trade receivables and a $25 million decline in inventory, both of which you’d expect as part of managing through a recession. Most of the reduction came from current assets held for sale falling from $358 million to $2 million with the sale of Rossignol. There was also a decline of $96 million in goodwill.
 
Total liabilities fell $204 million to $1.435 billion. This was almost exclusively due to the reduction in current liabilities. Long term debt fell only $10 million to $734 million. That’s not a surprise as the debt restructuring Quik has been working on (the last piece will close this month) was meant to spread out maturities, not reduce debt. 
 
The current ratio, at 1.65 has declined only marginally from 1.71 last year. Total liabilities to equity has grown from 2.34 times to 3.26 times, largely as a result of stockholders’ equity falling from $700 million to $441 million. To me, this highlights the fact that Quik still has some work to do in improving its balance sheet, but with Rossignol and the restructuring behind them, they can do it by running their business well. 
 
Quik expects its fourth quarter revenues to be down in the mid teens on a percentage basis compared to the same quarter a year ago. It anticipates a loss per share, on a fully diluted basis, in the mid-single digit range. Earnings will be impacted by the higher interest expense they will incur as a result of the restructuring. They reduced their projection of that expense by $10 million to $100 million and pointed out that $30 million is non cash. Interest expense in their last complete fiscal year was $45 million. They expect interest expense of $21 million in the fourth quarter, and further gross margin contraction of 150 basis points (1.5%) 
     
Quik’s profitability improvement plan should just about make up for their increased interest expense. After all this good work in restructuring and managing expenses, the question is where do sales increases come from? In that regard they have the same issue as every other brand; “The company indicated that longer term visibility into revenues and earnings remains limited due to global economic conditions.”