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Tiffany Montgomery
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Possible DC sale a hot topic during Quik earnings conference call

By Tiffany Montgomery
March 11, 2009 4:15 PM

The potential sale of DC Shoes was a hot topic on Quiksilver's first quarter earnings conference call today as analysts asked several questions about a possible sale of the skate shoe brand.

It also sounded like more cost cutting may be on the way as the company focuses on eliminating redundancies and organizational complexities.

Overall, revenues fell 11 percent to $443 million in the quarter ended Jan. 31. The company recorded a net loss of $9 million, excluding charges, vs. net income of $7.6 million during the same period last year.

Quiksilver executives declined to comment directly about a sale of DC, but did say it was focused on completing a sale of assets or other strategic alternatives to improve liquidity and its capital structure before the end of June, when a 55 million Euro line of credit matures.

All together, Quiksilver has $316 million in various short-term lines of credit that mature through 2010 that the company is looking to "deal with," with proceeds from any potential transaction, CFO Joe Scirocco said.

At the end of the quarter, Quiksilver had $120 million in total liquidity, he said.

Scirocco said the company believes it has adequate liquidity for the foreseeable future but wants to improve it because of the uncertain economic environment.

Store closures

The company does not have enough cash, however, to buy out the leases and close all of the 25 underperforming company stores, 21 of those in the U.S., it previously announced it wanted to dispose of, Scirocco said.

Year to date, the company has closed seven or eight stores, and three closures are planned in the current quarter, he said. The company will be looking to close the others in the normal course of business as leases expire. Scirocco said a number of stores are in bad locations, and need to improve sales per square foot and productivity - and that would still be the case even in a more normal economic situation.

Cost cutting

CEO Bob McKnight said the company is committed to further eliminating redundancies in its global structure if necessary and reducing complexity in areas such as merchandising, design, distribution and facilities.

Inventories

Quiksilver got stuck with extra inventory as demand weakened and it received some early deliveries of spring and summer product. Inventories were $381 million, up 4 percent vs. the same period last year. The company has taken actions to clear the extra inventory in its own stores, particularly via its outlet stores. Quiksilver has also cut wholesale buys for summer and fall inventories.

Channels

Steve Tully, president of Wholesale Americas, said business is difficult in all distribution channels and very tough in California, Florida and Hawaii.

Europe

Europe was the star of the quarter with Bob saying a few times that the European team was able to align its operating costs to match the current economic climate. He said Quiksilver was "very proud" of Europe's performance. Europe recorded 12 percent operating margin  while revenues grew 1 percent in constant current terms. In U.S. dollars, European revenue declined 9 percent to $182 million.

Americas

Revenue declined 13 percent to $203 million and the region recorded an operating loss of $11 million vs. a $7 million operating profit the same period last year.

During the call, an analyst asked if the recent departures of top Americas executives have cut into the muscle of the organization, and if the departures were part of the restructuring.

Scirocco declined to talk about specific individuals, but responded that the company has been hearing from investors that they want better performance out of the Americas region, and the restructuring was designed to accomplish that. He said it was really about adjusting the Americas infrastructure to the current size of the business, and all the actions were geared toward improving profitability. 

Asia Pacific

Revenues in U.S. dollars fell 5 percent to $57.6 million. In local currency, revenues rose 10 percent. Business in Japan was particularly strong, while Australia revenues were flat.

Brands

Quiksilver held its own during the quarter, and the Quiksilver Women's line has been very well received, Bob said. Roxy continues to struggle globally, as does the juniors apparel market in general, Bob said. DC is doing well at retail, its expanded apparel line has been well received, and its snow business is expanding in revenue and categories.

Q2 forecast

The company expects revenues to decline in the mid teens.

Full-year forecast

The company expects revenue to decline in the low double-digits.

 


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