Quiksilver Reports Q2 Results

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Here’s an exert from Quiksilver’s Conference Call held on June 5, 2008.

For the complete Transcript CLICK HERE

CEO/ President Bob McKnight:

“Good afternoon everyone and thanks for joining us for our second quarter conference call. As you have undoubtedly seen by now in our earnings press release, we’ve moved the entire Rossignol business into discontinued operations including both the Target and its apparel divisions. Both Jo and I will be speaking more about Rossignol in a few moments, but for now let’s begin with the high-level financial highlights from second quarter focusing on our core apparel and footwear brands which now compromise our continuing operations.

We’re pleased with our second quarter results and with our progress on certain initiatives. Net income from continuing operations for the second quarter was up more than 19% over the second quarter of 2007. For our core apparel and footwear business, consolidated net revenues for the second quarter of fiscal 2008 grew 15% to $596 million. Consolidated gross profit grew 250 basis points to 50.4% of sales and expenses during the quarter increased 130 basis points to 38.7% of revenue. Our sales growth and improved gross margins in our core business drove an operating profit increase of 27% to $69 million.

Two things about this performance are particularly noteworthy given the challenges we’ve all witnessed in the retail environment. First, our results benefited from the contribution of our European business which typically has the highest gross margins within our group. Although Europe has its own challenges, our results this quarter illustrate the merits of our highly diversified business. Secondly, we’re pleased to see some early signs of higher gross margins attributable to sourcing improvements which we identified as a major initiative for this year and beyond. It suggests that we are on the right track in this important area of profit improvement.

Nonetheless, I must say that the environment remains challenging. As retailers in our industry have reported before us, some of our key regions are amongst the hardest hit economies over the past several months. In this challenging environment our retailers are understandably cautious and all of us are controlling our inventory levels as we await greater visibility. In response, we’ve taken a more cautious outlook towards the second half of this fiscal year.

With respect to the global expansion of our business, I visited operations in Eastern Europe during the quarter and I was very impressed with our growing market penetration and of consumer enthusiasm for our brands and products. It is clear that action sports and the lifestyle of [inaudible] is quickly spreading around the world. In fact, our local selling California newspaper, the Orange Coast Register, this weekend ran an article with images of skateboarders on Letna Park in Prague, which was formerly a shrine to Joseph Stalin. The boardriding lifestyle is truly a global phenomena and this is the culture of today’s youth. By the way, Quiksilver Europe has three stores in the Czech Republic that each generate sales of more than $2 million annually. In short, our efforts to expand throughout the continent have been working and we feel good about our leadership position in a growing global market.

I’d now like to spend a moment to update you on Rossignol on the process current underway to sell that business. Upon completing the preparatory phase during the latter portion of the second quarter, our initial list of potential buyers has been reduced to a select group of candidates who will now receive a confidential background data. We expect this process to proceed at a reasonable pace and to conclude with a competitively priced sale of this business in its entirety, and because of the sensitive nature of this process, there’s really no more that we can say publicly regarding this matter till the process is complete and a definitive agreement has been reached. Taking the longer view, our brands are really all about the authenticity of a lifestyle epitomized by the athletes we sponsor.

Our Quiksilver Roxy and DC sponsored athletes continued to distinguish themselves this quarter as the very best in their respective sports. Just this last Monday, Quiksilver surfer Kelly Slater won the Globe Pro Fiji for the first third win in the first four events of the year. This is his best start ever on the ASP Tour and has a solid grasp on the No. 1 ranking while Jeremy Flores is currently ranked No. 13 and Dane Reynolds is ranked No. 16. Quiksilver’s snowboarder Austin Smith won Rookie of the Year at the 2007 Transworld Snowboard Rider’s Poll awards in Las Vegas.

Among our female athletes, Roxy surfer Sofia Mulanovich is currently ranked No. 1 in the women’s ASP World Tour while Sally Fitzgibbons is currently the 2008 WQS Tour leader. Roxy snowboarder Torah Bright is on a fantastic run winning the World Superpipe Championship, the Nippon Open Superpipe, the US Open Halfpipe, and the overall Global Open Championship. Roxy snowboarder, Kjersti Buaas won the US Open Slopestyle while Sarah Burke recently won the World Ski and Snowboard Superpipe Festival. And providing some additional exposure for our brands this quarter, five of our DC sponsored athletes were recently featured on the covers of our industry’s leading action sports magazine.

I’d now like to spend a few moments describing a few of the dynamics that are driving increasingly wide acceptance of our brands around the world. To begin with, boardriding and action sports such as surfing, skateboarding, snowboarding, motorcross, and weightboarding have come to represent much more than an activity to a generation of kids and young adults. This lifestyle is growing beyond traditional action sports and represents a movement into new environmental or outdoor sports such as kite, climb, bike, and paddle, just to name a few. Quiksilver defines this lifestyle. Our target customers are part of an enormous male and female demographic. This group is adventurous, curious, and technologically savvy, searching the internet, watching videos on U-tube, posting blogs on My Space, and playing video games over the internet with friends in other countries, and they are connected, connected to the lifestyle, the latest fashion, new music, language, and their own sensibilities. Our reach is growing right along with this demographic. We’re expanding our presence throughout Eastern Europe, into Russia, into Latin America, and into China. Our products are currently distributed on 6 continents and in over 90 countries and roughly 60% of our revenues are generated outside of the United States. Quiksilver Roxy and DC are leaders across the action sports base and are positioned as the premier lifestyle action sports brands in the world.

So in summary, we’re pleased with our solid second quarter financial results and the early progress of our margin expansion initiative. We remain committed to the Rossignol sale process, and as we separate the results of the Rossignol group from those of our continuing core businesses, it becomes increasingly clear that our broadly diversified mix of brands, products, geographies, and distribution channels position us in challenging economic climates such as the one we all face today.”