Quiksilver CEO On Q2 Performance

Quiksilver, Inc. announced yesterday that its revenues for the second quarter of 2011 rose 2% over the same period last year to $478 million. Gross porfits were also up 5% to $262 million, gross margins climbed 160bps to a record 54.8% of revenue, and net debt declined 19% but still stands at $594 million.

Despite these solid figures, Quiksilver posted a loss of $83.3 million, or 51 cents a share, for the quarter ended April 30, 2011, compared with a profit of $9.42 million, or 6 cents a share, for Q2 2010. This loss was primarily due to a $74.1 million impairment charge and valuation allowances against tax assets.

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For the full SEC filing click here.

Yesterday afternoon, Quiksilver executives Robert McKnight, chairman, president and CEO; CFO Joe Scirocco; and VP of Investor Relations Bruce Thomas hosted a conference call to discuss the company’s Q2 2011 fiscal results. Following the conference call, Quik’s stock climbed nearly 10% in after hours trading.

“We’re pleased with our solid results in the second quarter, as the performance of our Americas and European businesses more than offset the impact of events in the Asia Pacific region,” summarized McKnight. “Despite the difficulties, we’re confident in the growth opportunities throughout Asia and in the recovery of our business in Japan, Australia and New Zealand. The initiatives we set into motion are gaining traction and we remain on track to successfully transition to stronger growth in the future.”

“In the Americas, revenues we’re up 5% compared to last year, fueled largely by our Retail business, which grew nearly 20% despite having 6 fewer stores,” sums up Scirocco. “Our company-owned retail store comps were up 23% in the second quarter, while our Americas E-commerce business grew 68%. Wholesale revenues in the Americas were on plan and a couple of percentage points higher than last year.”

Here are some highlights from the call, the complete transcription, and the release for the company’s Q2 fiscal performance:

  • European business performed better than expected in Q2
  • Fall/winter order books in Europe are up for Quiksilver, Roxy and DC,  over last year and support  growth plans
  • Quik’s European concept stores are performing well and it plans to open one using the same model in Venice, California in Q4 and Rio de Janeiro, Brazil
  • Comps in company stores in the Americas increased by double digits
  • DC provided the strongest growth in Quik’s Americas wholesale business. Brazil and Mexico were up 20%
  • Quik is now doing business in India. Tje Quiksilver, Roxy brands have entered a license agreement with the Reliance Group, India’s largest private company
  • Roxy’s fall bookings in the U.S. are up mid-single-digits over last year
  • Asia Pacific revenues fell 12% in constant currency primarily due to the Japanese disasters. The company took a one-time, noncash goodwill impairment charge of $74 million based on the impacts of the disasters on the regional economy

Earnings Call Transcript & Brand Highlights For the Quarter

Quiksilver CEO Robert McKnight

Quiksilver CEO Robert McKnight

Robert McKnight:

Good afternoon, everyone, and thanks for joining us for our second quarter conference call. I want to start by saying that we’re very pleased to have exceeded expectations for the second quarter despite several natural disasters that have unfortunately, impacted the Asia Pacific region over the past few months. Our Americas and European businesses delivered very solid performance coming at ahead of plan and offsetting the near-term impact of these natural disasters.

As such, I am pleased to report solid second quarter results that were better than we expected when the quarter began. Revenues of $478 million in the second quarter exceeded our plan, and were up when compared to the second quarter of 2010. Gross profit of $262 million was up 5% this quarter compared to a year ago, demonstrating that our business is performing considerably better. Gross margins expanded 160 basis points to a Q2 record, 54.8% of revenues as we benefited from continued improvements in our U.S. retail stores and less discounting in the wholesale channel. Pro forma adjusted EBITDA was $62 million in the second quarter, in line with last year, as gross profit gains were offset by increased spend ahead of revenue generation. And finally, our net debt at April 30 was $594 million, representing 2.9x pro forma adjusted EBITDA, that’s down 19% over the last 12 months, reflecting the enormous progress we’ve made in improving our balance sheet.

Taken together, the solid second quarter performance resulted from us continuing to do what we do best: Developing and delivering exciting, innovative, authentic, quality products and connecting with our consumer base with creative and impactful marketing campaigns. Signs of improvement are evident in many areas of our business and we believe we are well positioned to capitalize on growth opportunities within our 3 strong global action sports brands and our many markets around the world.

Our European business performed better than expected in Q2, despite weaker sales in markets such as the U.K. and Spain. Our business is much better now in France and sales were strong in our emerging European markets where investments made to further develop our business are driving profitable growth in all 3 brands, Quiksilver, Roxy and DC, are doing well.

On the European retail front, we’re delighted with our new concept stores. We’ve had great reaction and strong performance from the new store formats in the core markets of Capbreton and Hossegor in Southwest France, as well as the incredible Bercy Village store in Paris. These stores feature broad offerings from each of our brands, together with a deep stock of surfboards, wetsuits, skateboards and other products that reinforce our heritage and authenticity to the consumer in a way that other brands simply cannot.

The Capbreton store features an athlete training center, and like the Bercy Village store in Paris, is used for many of our events and promotions. Events at our Capbreton store include a summer concert series, as well known French artists and frequent guests include many of our team riders, their peers, as well as many well-known sports stars and personalities. In the same spirit and direction, we have retrofitted several other the key stores and the plans to refit or, at least, update the feel of many more of our European stores before the end of the year. And we plan to further own the Atlantic coast and the French Alps, as we take the same store concept to other key European surf and snow destinations that include Ericeira in Portugal, Distro Beach[ph] in the U.K. and the heart of the Alps in Chamonix. These stores will reinforce our marketing — our market-leading position on the continent.

Looking forward, we’re very encouraged that the fall/winter order books in Europe for each of our brands, Quiksilver, Roxy and DC, are up over last year and support our growth plans. The return to growth in Roxy fall orders indicates that the changes we made to design and merchandising for spring 2011 have resonated with the consumer, and that confidence is back in Roxy, which remains the leading surf brand for girls.

In the Americas, revenues were up compared to the same quarter last year as improvements we made to our company-owned retail stores have driven higher levels of performance. Our progress was reflected once again by solid double-digit positive comps in the second quarter. Our Wholesale business in the Americas was up compared to last year with DC providing the strongest growth and our business in both Brazil and Mexico was up nearly 20% in Q2, Quiksilver and DC, both growing aggressively. Both of these are profitable markets for us that show even greater promise. Our business in Brazil, for example, generates about $50 million in revenue, on an annual basis, solely through on wholesale accounts. We believe that further penetration of the market requires us to better showcase our brands to the consumers. And so we are very pleased to have signed for our first retail store in Rio de Janeiro, which should open by September.

We’re also planning to import the same concept store design, I spoke about earlier, into the U.S. market with our first such freestanding store in Venice, California, opening in the fourth quarter.

As with Europe, we plan to take the concept to other select markets around the U.S. in the years ahead.

Turning now to Asia. Despite the recent natural disasters and the resulting weak economies in Japan, Australia and New Zealand, we remain convinced that our investments elsewhere in Asia, especially in markets like China, Taiwan, South Korea and Indonesia, will drive meaningful growth for us in the region, and we fully believe that Japan and South Asia Pacific will recover in due course.

We’ve recently hired a new Country Manager to concentrate on our DC brand growth in China and we’re making other investments in order to address opportunities across the region. In this context, it’s unfortunate that events in Japan triggered an accounting impairment in this quarter. Joe will provide some additional details in his remarks. I just want to be clear that for the longer term, our growth outlook for the region is unchanged.

Let me mention one other newer market opportunity. I’m excited to announce that Quiksilver is now doing business in India. We entered into a license agreement for the Quiksilver, Roxy brands with the Reliance Group, India’s largest private company. We’re convinced that Reliance was the right partner for us there, and they opened the first store recently in New Delhi. Our current plans call for 10 new stores to open in India within the next 12 months, and we see broad opportunities in this developing market.

Let me now take a brief moment to highlight our brands. I’ll start with Quiksilver, which, as you know, is the biggest and most respected action sports lifestyle brand in the world. Quiksilver’s global brand revenues grew again in Q2 as many success stories emerged from our spring 2011 range. Many of the best-selling categories were grounded in and product design and innovative leadership and we’ve continued to set the standard for the action sports industry.

Quiksilver apparel and footwear that took market share and were retail performance leaders in their respective categories included board shorts, walk shorts, wetsuits, hanging footwear, many items within the Quiksilver Waterman’s Collection, as well as Amphibians. The Amphibian is a walk short silhouette that utilizes board short fabrication. The result is a very functional garment that works both in and out of the water. Quiksilver is at the forefront of the Amphibian trend and it’s been a very strong selling category of ours for spring and summer. We’ll continue to innovate and grow our Amphibian offering to capitalize on this new product category.

Regarding our new girl’s line under the Quiksilver label, spring deliveries began in February, and we’re receiving great feedback from our retailers and customers. We’ve developed and deployed a cohesive branding, point-of-purchase, window and imagery strategy in the stores and online that has driven strong sellthrough to both Quiksilver Girls and Quiksilver Women’s, our women’s line at retail and through our e-commerce channel. In fact, several of the items in the Quiksilver Girls spring line have been listed among the most popular items ordered on quiksilver.com during the period. Our first full season will begin shipping later this month and the early buzz is very favorable.

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 our plan to grow revenues in the second half of the fiscal year.

Let’s turn now to Roxy, the largest most respected and most recognized girl action sports brand in the world. The Roxy business continues to build momentum on the strength of the current spring/summer offering and marketing campaign that repositions Roxy as the iconic, California-inspired surf lifestyle brand. We’ve been focusing Roxy product and marketing strategies around go-to categories and have seen overall performance improvements in Q2.

Iconic warmer weather Roxy apparel and footwear are once again driving sales as beach pants, swimwear, sandals, beach dresses, casual footwear and canvas bags are most popular. We’re very encouraged that Roxy sportswear is, again, part of the brand’s driving force. This is coming back in our key markets of Florida, Hawaii and Southern California. And we’re really encouraged by Roxy’s performance in the specialty channel of distribution. With the emphasis on leveraging our brand heritage, we’re seeing strong performance in all product categories in this channel and we anticipate continued positive results as we move forward into the summer season.

Looking ahead, Roxy’s solid fall bookings in the U.S. are up mid-single-digits over last year, while the reaction to the new Winter ’11 range has been very good. Similarly, high single-digit growth in Roxy’s fall/winter order book in Europe is also a good indicator of a positive momentum of the brand there in Europe. With its core in board sports, Roxy’s return to its roots have clearly helped drive the brand’s resurgence as our surf authenticity and iconic Roxy heritage are, once again, unmistakable.

Turning now to our powerful and incredibly popular brand, DC. DC is dedicated to being the most sought-after, skate-driven, action sports brand in the world. As we pursue this goal, we continue to see solid returns on the investments we’re making in the DC brand. DC’s mid-single-digit growth in the second quarter was on plan, and strong forward orders in each of the regions around the world confirmed DC’s expanding global traction. Revenues from core skate and surf shops are strong and continue to grow, demonstrating the success of our commitment to style, innovation and the brand’s heritage.

Furthermore, we saw a strength all across DC’s range of footwear from casual lightweight canvas on the low end to our $90 to $100 high-end skate shoes featuring Viz Air technology.

We launched a new skate logo in the second quarter that leverages our tradition and now acts as our rallying flag for our team riders and fans of the DC brand. These skateboarding enthusiast recently came out in force to help us launch the second season of The Street League DC Pro Tour Skateboarding Competition. The new season kicked off with a hugely successful event in Seattle, and the finals were broadcast live on ESPN. The new event in the Street League series will take — I’m sorry the next event of the Street League series will take place in Kansas City on June 11 and 12.

We’re also continuing to position DC for expansion beyond our core skate market. We’ve concluded the end of a very successful season of motocross sponsorship recently with the AMA Supercross season final in Las Vegas. DC was the official and exclusive shoe sponsor of the very popular Supercross Series. With 15 events nationwide, DC’s exposure soared amid sold out venues and hundreds of thousands of motocross fans. DC team rider Trey Canard won 3 times this year and was named the 2011 Rookie of the Year. DC has been a supporter of the motocross industry for some time, and we support several of the sports league athlete including the legendary Jeremy McGrath. This partnership with the Supercross Series, not only shows our support in helping the sport continue to grow, but it’s also a great chance for DC to interact with the most loyal and enthusiastic consumers in action sports.

DC’s ability to connect with consumers is vital to being recognized as the most sought-after, skate-driven action sports brand in the world. Our digital marketing efforts across the milestone in Q2 when DC’s Facebook page registered its 5 millionth fan. According to this measure, DC remains the number one action sports brand on Facebook. In fact, DC has many more Facebook followers than any other company in the sporting apparel industry.

Turning now to our athletes. A substantial contributor to our success and our proved performance is our stable of athletes that surf, skate, snowboard, drive, paddle, climb, hike and otherwise ride in the name of our brands.

The athletes we sponsor not only embody our involvement in the action sports in which they excel, but they also attract a great deal of attention to our brands, and most importantly, they move product. We have assembled an amazing array of athletes who are particularly influential within their sport. And we couldn’t be happier that many of these hugely popular athletes are actively engaged in product input and design, and they help create their own style media in our marketings. If given a chance, they join our best-in-class teams because they see how we operate. They know we involve our riders in the specification and design of our technical product, and they know that our teams are all about family.

A few of these athletes have recently made some news. I’ll begin with 25-year old Quiksilver surfer Dane Reynolds. We re-signed Dane to a 6-year deal with the Quiksilver team to contribute to the design and develop of a new signature line of products. Dane is thought by many to be the most influential surfer in the world today.

We also re-signed 23-year old French surfer, Jeremy Flores, to a new endorsement contract. Sponsored by Quiksilver since the age of 9, Jeremy was the youngest surfer to ever qualify for the ASP Tour back in 2007. In December, Jeremy became the first European surfer to win the prestigious Pipe Masters contest in Hawaii, which helped him finish 9th in the ASP World rankings last year.

Australian Roxy surfer, Sally Fitzgibbons, has won 2 of the first 5 events in 2011 ASP Women’s World Tour and is currently ranked number 2 in the world.

Also, we re-signed 20-year old Australian surf sensation, Craig Anderson, to our Quiksilver surf team and added him into the DC team as well, Ando was named the Breakthrough Performer of the year at this year’s Surfer Poll Awards.

And we further strengthened the DC global skate team in Q2 by signing Mikey Taylor, one of the most popular and influential skaters who’s known for his ability to skate all types of skate spots with an easy and polished style.

And finally, I want to remind those of you on the East Coast that Quiksilver will be bringing the sport of surfing and our entire stable of action sports influence to New York City this summer. Quiksilver Pro New York is set to take place on Long Beach, I’m sorry, Long Island’s Long Beach from September 4 through 15. This event will be the sixth stop on the ASP 2011 World Tour and the first-ever World Championship Tour stop on the East Coast of the United States.

The surf contest will coincide with the series of events conducted by Quiksilver, Roxy and DC in and around the New York metro area beginning on September 2, that will comprise of major brand-building effort as we host enthusiasts of surf, skate, art, fashion and music who will gather in New York as summer comes to a close. We’ll provide more details as we get closer to the event.

It’s evident from the improvement in our financial results and the momentum in our business that we are now operating at a higher level. To provide more color on our progress, Joe will now take you through our second quarter financial details.

Joseph Scirocco

Thanks, Bob. Good afternoon, everybody. As reported, consolidated second quarter net revenue at $478 million were up 2% the last year and were better than we expected a quarter ago, driven by higher-than-expected sales in the Americas region.

In the Americas, revenues were up 5% compared to last year, fueled largely by our Retail business, which grew nearly 20% despite having 6 fewer stores. Our company-owned retail store comps were up 23% in the second quarter, while our Americas E-commerce business grew 68%. Wholesale revenues in the Americas were on plan and a couple of percentage points higher than last year.

European revenues were down 1% because of weaker sales in markets such as the U.K. and Spain. By contrast, sales were strong in Germany and Russia and held steady in other markets. Bob mentioned the new concept stores that we’ve rolled out in Capbreton and in Paris, which will be followed by the refitting or upgrade of 2/3 of our European stores to one degree or other. We are already seeing improved sales trends in these stores especially in France.

Asia Pacific revenues, as reported, were approximately the same as last year, but were down 12% in constant currency, primarily due to the effects of the various natural disasters on top of already weak consumer spending. It’s a bit of a challenge to anticipate the timing of recovery in the region. However, we want to be clear that we remain optimistic and have not reduced our outlook over a 5-year horizon. Having said that, I’d like to explain the impairment charge in this quarter’s results.

Our goodwill in the Asia Pacific region was established between 2003 and 2005 when we acquired our licenses in Japan and Australia along with the retail chain. The effects of the earthquake and its aftermath in Japan required us to test for a possible impairment this quarter instead of at year end as we normally would. Measurement of the impairment is very rule-driven and the accounting result is that we’ve taken a one-time, noncash goodwill impairment charge of $74 million. We also provided valuation allowances against tax assets totaling $26 million. These charges have no effects on our operations, cash flows or on any debt covenants.

Turning back now to our consolidated results. We expanded gross margins by 160 basis points to a second fiscal quarter record of 54.8%. The increase was fueled by higher contribution from our retail stores in the U.S., a strong improvement in our high-margin E-commerce business and better margins in Europe. Our Americas business delivered the largest improvement, 250 basis points, while Europe’s margin also expanded to an impressive 62% of revenues. Our Asia/Pacific business saw margins down 40 basis points.

Overall, SG&A expenses were $217 million, up approximately $10 million from last year, largely resulting from higher spending on product development and marketing for new growth initiatives, as well as higher level of variable expenses associated with our growing E-commerce business. In constant currency terms, SG&A was up only $3 million compared to the second quarter last year.

We continue to focus our attention on EBITDA as a key measure of our performance. We generated second quarter pro forma adjusted EBITDA of $62 million or 13% of sales, approximately the same as a year ago.

Interest expense was $15 million in the quarter, down from $21 million last year based on our improved debt structure. After interest and taxes, our pro forma consolidated income for the second quarter was $17 million or $0.09 a share compared to $16 million or $0.11 a share in the same quarter a year ago.

I’ll now turn your attention to the balance sheet for a few moments, and in particular, to the dramatic improvement in our capital structure compared to a year ago. Accounts receivable at $342 million or 4% lower than for the same period last year in constant currency. On an overall basis, DSOs decreased by one day to 59 days this year compared to 60 days in the second quarter a year ago.

Inventory at quarter end was $290 million. That’s up 18% in constant currency. Consistent with industry practice these days, we bought inventory in advance to ensure timely production and delivery. And also to a degree, the increase represents a restocking relative to very lean inventories a year ago. If you recall, last year at this time, inventory was down 30% in constant currency year-over-year.

CapEx was $16 million in the quarter, up $5 million compared to a year ago with the increase driven primarily by spending related to our ERP system implementation as planned.

We ended the quarter with approximately $594 million of net debt. That’s a 19% reduction from the $733 million of net debt a year ago. Cash on hand at the end of the quarter was $139 million. As a result of our significant progress in improving our capital structure this year, the ratio of our net debt to pro forma adjusted EBITDA for the 12 months ended April 30, was 2.9x compared to 3.8x a year ago.

Now that we’re nearing the end of fiscal 2011, we’d like to reassure investors that we remain focused on the longer-term growth and profitability of our business and are taking the necessary actions to achieve our objectives. Consistent with this direction, we do not plan to comment on the short-term outlook. However, we would like to reiterate that we remain on track to achieve our longer-term financial objectives of generating annual revenues between $2.5 billion and $3 billion and at least $350 million of annual EBITDA.

And with that, I’ll turn the call back over to Bob for closing remarks.

Robert McKnight

In summary, we’re pleased with our solid results in the second quarter, as the performance of our Americas and European businesses more than offset the impact of events in the Asia Pacific region. Despite the difficulties, we’re confident in the growth opportunities throughout Asia and in the recovery of our business in Japan, Australia and New Zealand. The initiatives we set into motion are gaining traction and we remain on track to successfully transition to stronger growth in the future.

Thanks again for participating in our call this afternoon.

Reports Fiscal 2011 Second Quarter Financial Results Press Release

— Revenues of $478 million grew 2% compared to Q2 last year
— Gross Profit of $262 million grew 5% compared to Q2 last year
— Gross Margin expanded 160 bps to a Q2 record 54.8% of revenues
— Pro-forma Adjusted EBITDA of $62 million was ahead of plan
— Net Debt at April 30 reduced 19% from a year ago to $594 million
Huntington Beach, California, June 2, 2011–Quiksilver, Inc. (NYSE:ZQK) today announced
operating results for the second fiscal quarter ended April 30, 2011. Revenues grew 2% to
$478.1 million as compared to $468.3 million in the second quarter of fiscal 2010.
Consolidated gross profit of $262.2 million increased 5% compared to the second quarter of
fiscal 2010 as gross margin expanded 160 basis points to a second quarter record of 54.8%
of revenues. Pro-forma Adjusted EBITDA of $62.1 million was higher than the company's
expectations and was roughly the same as a year ago. Pro-forma income from continuing
operations was $17.3 million, or $0.09 per share, compared to $15.7 million in the second
quarter of fiscal 2010. Pro-forma income for the second quarter of fiscal 2011 primarily
excludes a $74.1 million non-cash goodwill impairment charge and valuation allowances
provided against tax assets totaling $26.0 million related to the Asia Pacific region.
Including the impairment charges and valuation allowances, the loss was $83.3 million, or
$0.51 per share, compared to income from continuing operations of $8.8 million, or $0.06
per share, for the second quarter of fiscal 2010. A reconciliation of GAAP results to proforma
results is provided in the accompanying tables.
Robert B. McKnight, Jr., Chairman of the Board, Chief Executive Officer and President of
Quiksilver, Inc., commented, "We are pleased with our operating results for the quarter, and
in particular with our return to overall revenue growth and our record gross margins. Our
Americas and European businesses delivered strong performances, although our business in
Asia Pacific was affected by the natural disasters occurring in several of our markets. While
global markets remain uneven, we are seeing some really encouraging signs for the future.
For example, this was our second consecutive quarter of strong double digit comp store
sales in the U.S., and, for the first time in a while, we are seeing growth in our fall/winter
order books for Roxy, which remains the world's largest and most respected girls action
sports brand. So the initiatives we've set into motion are gaining traction and we remain on
track to successfully transition to stronger growth in the future."
Net revenues in the Americas increased 5% during the second quarter of fiscal 2011 to
$210.7 million from $199.7 million in the second quarter of fiscal 2010. As measured in
U.S. dollars and reported in the financial statements, European net revenues decreased 1%
during the second quarter of fiscal 2011 to $206.9 million from $208.7 million in the second
quarter of fiscal 2010. In constant currency, European segment net revenues decreased
4% compared to the prior year. As measured in U.S. dollars and reported in the financial
statements, Asia/Pacific net revenues decreased 1% during the second quarter of fiscal
2011 to $58.1 million from $58.6 million in the second quarter of fiscal 2010. In constant
currency, Asia/Pacific segment net revenues decreased 12% compared to the prior year.
Please refer to the accompanying tables in order to better understand the impact of foreign
currency exchange rates on revenue trends in the European and Asia/Pacific segments.
The company reduced its net debt by 19% to $594 million compared to $733 million a year
ago.