Quik claims market share gains in Europe

The Quiksilver group managed to lift its turnover for the last quarter of its fiscal year, which ran until the end of October, but this was achieved with abundant closeout sales and discounts that badly hit the company's gross margin and caused a pre-tax loss for the quarter.

The group's turnover advanced by 3 percent to $559 million for the three months, which amounted to an increase of 6 percent in constant currencies. The rise was driven by the Americas, where the group's sales jumped by 12 percent to $279 million, up by 13 percent in constant currencies. They also increased by 6 percent to $87 million in Asia-Pacific, representing an improvement of 7 percent in constant currencies. On the other hand, the company's sales shrank by 9 percent to $192 million in Europe. In constant currencies, European sales dwindled by 2 percent, with the DC brand performing better and Quiksilver and Roxy experiencing declines.

Still, the group's managers said that its team in Europe deserved tremendous praise for aptly navigating choppy markets. They said that the group's brands had increased shelf space and certainly taken market shares in Europe by working more intensely with leading multi-store retailers, while some smaller retailers had closed. The British and Spanish markets were among the worst affected, while Russia and Germany outperformed the European market, and France was aligned with the group's regional performance. In constant currencies, the Quiksilver group's comparable store sales in Europe were flat, while its online sales were on the rise.

Still in constant currencies, the Roxy and DC brands both expanded their global sales in the quarter, up by 2 percent to $135 million for the young women's brand and by 18 percent to $187 million for the footwear brand. Then again, the Quiksilver brand saw its sales decline by 5 percent to $200 million, which was entirely blamed on the situation in Europe. Retail and wholesale sales both increased by 4 percent for the quarter.

However, the entire group's gross margin was down by 6.0 percentage points to 45.9 percent for the quarter, due to heavy discounting in the group's own retail business and clearance sales in its wholesale activities. The gross margin dropped by 4.8 percentage points to 42.3 percent in the Americas and by 2.5 percentage points to 50.0 in Asia-Pacific, but it was worst hit in Europe, where it shrank by 7.8 percentage points to 49.4 percent.

Richard Shields, the company's new chief financial officer, said that the sharp drop was chiefly caused by overbuying, which led to an inventory pile-up. The group ended the third quarter with products from the prior season worth about $65 million, making up some 16 percent of inventories. It led aggressive clearance sales to reduce the worth of that inventory to $25 million at the end of the quarter.

 Another factor that added to the decline in the gross margin was that the group made a larger share of its European sales with multi-store chains that obtain a larger wholesale discount. Furthermore, the margin was also depressed by the lower share of sales coming from Europe, where the group previously reaped its highest margins.

Excluding onetime charges and income, such as costs related to staff reductions and store closures, the group's adjusted Ebitda reached $40 million for the quarter, down from $54 million. It ended the quarter with a pre-tax loss of $4.2 million, compared with pre-tax income of nearly $3.9 million for the same period last year. However, the group also enjoyed a tax benefit of $64.2 million for this quarter last year, whereas the benefit reached less than $7.4 million this year, so that the company's net income plunged from $67.9 million to $4.4 million.

The picture was quite similar for the full financial year. The Quiksilver group's sales were up by 3 percent to $2.0 billion, which was an increase of 7 percent in constant currencies.

Despite the small dip in the last quarter, European sales were still up by 1 percent in constant currencies for the year, but in reported terms they were off by 7 percent to $711 million. The group's turnover in the Americas grew by 8 percent to $992 million, up by 10 percent in constant currencies, while Asia-Pacific sales reached $307 million for the year, which was a rise of 13 percent in reported terms and of 12 percent in constant currencies.

Despite its slide in the last quarter, the Quiksilver brand's turnover was ahead by 3 percent in constant currencies to $794 million for the full year. Roxy's sales jumped by 4 percent to $524 million and DC's turnover climbed by 12 percent to $594 million.

Wholesale revenues contributed an increase of 3 percent to $1.5 billion, compared with a jump of 7 percent to $454 million for the group's own retail business. Comparable sales in company-owned stores expanded by 4 percent for the year, and online sales alone soared by 155 percent to $87 million.

Yet again, the group's gross margin was down by 3.7 percentage points to 48.7 percent for the full year. This was blamed on clearance sales as well as higher input costs and unfavorable exchange rates. The gross margin reached 55.4 percent in Europe, down by 4.2 percentage points, while it dropped by 3.2 percentage points to 43.3 percent in the Americas and by 2.1 percentage points to 51.0 percent in Asia-Pacific.

Again excluding onetime charges, the group's adjusted Ebitda declined to $153 million, compared with $192 million the previous year. Before income tax, Quiksilver incurred a loss of $2.2 million, much less than the loss of $32.2 million suffered the previous year, partly due to heavy asset impairment charges at the time. The group ended the fiscal year with a loss of $10.8 million, almost exactly half the loss of $21.3 million incurred for the previous fiscal yeart.

Shields said that the company expects to achieve a sales increase of 4 to 7 percent in constant currencies for the current financial year, driven by the DC brand and by more sales in the U.S. market, in emerging markets and online. The company predicts that the situation will remain tough in Europe, although it enjoyed an early arrival of snow in the last weeks.

When it comes to the gross margin, the group's managers said that input costs are likely to be about flat next year, and the same applies to labor costs. It would benefit from the reduction of its ranges and concentration on fewer suppliers. Furthermore, clearance activities could be more efficient due to the opening of 11 new outlet stores. The shift to larger European accounts is a negative in terms of the gross margin, but this is partly compensated by the rise of online sales.

The company will purchase more conservatively and the risk of overbuying should be reduced due to investments in IT and inventory management systems. However, the company will continue to shrink its costs, including a small reduction in marketing expenses.