Sales dropped by 12 percent to $441.5 million at the Quiksilver group for the third quarter ended July 31. Net income skyrocketed, however, jumping by 534 percent to $8.3 million. This year’s results included $2.6 million in asset impairment and $1.8 million in restructuring charges. The quarterly gross margin rose by 5.6 percentage points to 52.3 percent. Net debt was reduced by $183 million to $687 million as a result of the previously announced debt-for-equity swap with investor Rhone Capital.
All regions saw declines in revenues. Europe fell by 20 percent to $151.7 million (-11 percent on a currency-neutral basis). The Quiksilver brand as well as DC and Roxy all suffered declines, with Spain and the U.K. especially weak. Comparable store sales fell by the mid single digits, with company-owned stores flat compared with last year. Earnings before interest and taxes declined by 37.5 percent to €12.5 million in Europe, for an Ebit margin of 10.4 percent. The net debt in the European segment fell to €139 million, down from €224 million last year. The regional gross margin increased by 3.1 percentage points to 60.6 percent.
Asia-Pacific dropped by 1 percent (-10 percent in constant currencies) to $54.5 million, mostly on weakness in Australia. The group added nine new shops there in the quarter and 37 in the year to date as own retail stores now account for 40 percent of sales in the region. The regional gross margin ticked down by 1.0 percentage point to 52.0 percent, leading to an operating loss of $1.6 million, compared with income of $2.3 million last year.
The Americas dropped by 9 percent to $234.6 million. The wholesale channel was down there, offset by a slight increase in retail revenues. The Quiksilver brand was up modestly in the region while DC was down and Roxy performed in line with the rest of the challenged branded juniors market. Comparable store sales were up modestly but there were 12 fewer stores as a result of recent closures. The gross margin in the Americas rose by 9.0 percentage points to 46.7 percent. Operating income jumped by 520.6 percent to $27.7 million.
Quiksilver indicated that much of the reduction in sales was the result of lower closeouts compared with last year. It also notes that it has been cleaning up distribution in its DC brand and is focusing more efforts on core specialty shops for all its brands where recent sales trends have shown progress. It sees its brands performing in the fourth quarter along the lines of recent results, when Quiksilver declined in mid-single digits, Roxy was down in line with its market and DC was down mostly due to the previously mentioned clean-up.
The fourth quarter should continue to have foreign exchange headwinds and the group expects a decline in the mid-teens for turnover. The gross margin is expected to rise by 4.0-4.5 percentage points. In Europe specifically, sales are expected to decline by 7 percent, in line with the company’s plan, as a result of the reduction in sales of prior season stock and the closure of some unprofitable stores, especially in the U.K. Order are rising in France, the German-speaking countries and Russia among all three brands. For the full year, the European gross margin should hit 58.6 percent, up from 55.8 percent for 2009.
Meanwhile, the company has entered into an amended and extended asset-based line of credit for the Americas with Bank of America Merrill Lynch and GE Capital, which has reduced interest rates by 1.5 percentage points and commitment fees by 0.5 percentage points. The facility has a capacity of $150 million and a four-year term until 2014. Quik also plans to refinance the remaining $23 million stub on the Rhone financing before the end of the year, which will result in about an 8.0 percentage point reduction in interest costs from the 15 percent it is paying now. Altogether, Quiksilver said it will reduce annual interest costs by $26 million.
