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Tiffany Montgomery
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McKnight on new partners plus more details about Quik's Q2 performance

By Tiffany Montgomery
June 08, 2009 4:49 PM

Quiksilver CEO Bob McKnight described the financial restructuring of the company announced today as a pivotal point in the company's history and for the future.

Bob sounded excited about being able to keep all three of Quiksilver's key brands under the company umbrella and upbeat about having most of Quiksilver's short term liquidity issues resolved.

The centerpiece is a $150 million loan from a transnational private equity firm called Rhone that carries a 15 percent interest rate. In exchange for the loan, Rhone will receive warrants that give it the right to acquire up to 20 percent of Quiksilver's outstanding common shares at a strike price of $1.86.

With Rhone's commitment, executives now believe Quiksilver will be able to restructure its European debt that matures at the end of June.

In addition, Bank of America and GE Finance have agreed in writing to refinance Quiksilver's U.S. debt into a new, three-year, $200 million credit facility.

The agreements will allow Quiksilver to push back the due dates for much of its debt to 2012 - 2013, CFO Joe Scirocco said.

"That's why we're so excited about it," he said.

He noted during the call, however, that Quiksilver will only have a slight reduction in its approximately $1 billion in debt after the cash infusion from Rhone and will record a combined $110 million in interest expense each year on its debt.

The new arrangements allow Quiksilver to stabilize its capital structure, take full ownership of each of its brands, and gain a seasoned international business partner, Bob said.

Bob noted that Rhone has experience working with middle market companies with globally diversified businesses, is very entrepreneurial and creative in its thinking, and that two Rhone partners surf and so understand the action sports space.

Going forward, Quiksilver will be focused on profitability, cash flow and rationalizing its cost structure. In the past, Bob said, Quiksilver focused too much on growth to make up for losses in hardgoods. Now, profitability is the watchword.

Executives said they plan to improve profitability in part by streamlining production and sourcing costs, having less discounting on products in its stores, and by implementing more consolidation in merchandising and design, sales and distribution.

In the design area, executives described creating "Centers of Excellence" globally. For example, the winter outerwear "Center for Excellence" is now in Europe, while led to 10 positions being eliminated in the U.S. One designer remains in the U.S. to work on regional differences.

All told, the company expects to begin reducing costs by another $40 million to $60 million annually beginning in 2010.

Second Quarter results

Total company revenue: down 17 percent to $494.2 million. In constant currency, sales declined 8 percent.

Net income from continuing operations, excluding severance charges: $6.6 million, an 83 percent decline.

Americas: Sales declined 7 percent, with negative same-store sales at company stores a big factor. Wholesale contracted less than retail. Gross margins declined to 47.2 percent because of increased discounting. The company was not able to reduce its summer and spring buys in time and is liquidating extra inventory. Executives believe inventories will be more in line for fall and holiday.

Europe: Europe revenues declined 13 percent in constant currency, and retail performed better than wholesale. The company opened nine net new stores during the quarter and had 28 more stores than in the second quarter of 2008. Europe managed its cost structure particularly well, and gross margins were 56.7 percent.

Asia Pacific: Sales rose 14 percent in constant currency, largely because of Japan's inclusion in the segment.

DC: Bob said DC's sportswear has been well received, and that the brand is taking share in the action sports footwear market. Like other companies, the recession has impacted its business, and the company had to moderate its robust growth forecast for DC.  In the second quarter, DC's sales were up overall, with Europe leading the way.

Roxy: Sales were down in Europe and the Americas. Scirocco noted that Roxy pushed hard in certain distribution channels in Europe in the past and there is now a correction going on.

Quiksilver: Had a little better quarter than Roxy but down in Europe and Americas.

Quiksilver Women: Bob said the brand is incubating very well and is still very small. Nordstrom recently told Quiksilver the brand was the top selling brand in one department within Nordstrom stores. The No. 1 mission is to take Quiksilver Women global, Bob said. The company is also broadening the assortment to make it accessible to a broader marketplace. Bob said Quiksilver is very pleased with the line and that it is a bright spot.

Retail: Quiksilver is now reckoning with the store base in the Americas it built over the past several years, Scirocco said. The company still wants to close 20 to 25 stores, but doesn't have the cash to buyout leases and is instead waiting for leases to expire or taking advantage of kick out clauses. The company has closed five U.S. stores so far this year, with four more closures planned. During the second quarter, same-store sales fell approximately 20 percent in the U.S., 10 percent in Europe and were slightly down in Asia/Pacific.

Slater contract: Bob declined to provide the financial details of Kelly Slater's new contract, but did say that Kelly agreed to take part of his payment in company shares, which Bob said shows his belief in Quiksilver. Upcoming projects Kelly is working on include an Imax movie about surfing, new competition formats to make contests more exciting and advances in wave pool technologies.

Economy: Overall, the economy remains challenging and Bob said they haven't seen an improvement in the tone out there. Retailers are being conservative with their fall and holiday orders. Bob said Hawaii, California, Arizona, Nevada, Florida, Spain, UK and France are particularly tough areas. However, he said, Quiksilver is in no worse shape than anyone else and is likely in better shape than some competitors.

Guidance: The company expects total revenues to decline in the mid teens, gross margins to contract 400 basis points because of increased discounting of inventory and earnings per share to be in the low-single digits, excluding special charges.


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