In disclosing better-than-expected results yesterday, executives of the Quiksilver group expressed deep relief that they had sealed an agreement for the sale of Rossignol, the French ski company that has been a drag for the board sports group since its acquisition three years ago along with Cleveland Golf’s operations, which were recently sold separately to Srixon.
As reported in a news alert that we sent to our e-mail subscribers last week, the offer selected by Quiksilver for the sale of Rossignol was issued by Chartreuse & Mont Blanc, a new holding company headed by Bruno Cercley, a former chief executive of Rossignol. Its majority shareholder is Macquarie Group, an Australian investment company which otherwise specializes in infrastructure. The remaining, non-voting stake of 20 percent is in the hands of Jarden Corporation, the big American company that owns sports and outdoor-related brands from K2 to Marmot and Coleman.
Cercley has been in charge of Europe, the Middle East and Africa at Coleman since he left Rossignol in 2005. However, he made it clear that he would not seek any synergies with any winter and outdoor sports companies in the Jarden group. The 49-year-old Frenchman said that Jarden’s participation could be regarded as a financial investment and as a move to support a leading player in the industry, which could have positive repercussions for its own brands.
Covering the Rossignol brand as well as Lange, Look and Dynastar, the deal is expected to be finalized in the next two months, to be paid in cash at €75 million and through a seller’s loan at €25 million. Quiksilver had bought Rossignol for €240 million and the assumption of €120 million in debt. Although it already reaped about $105 million from the divestment of Cleveland, the golf business that belonged to the Rossignol group, its failed diversification still caused a substantial financial hit. For the nine months ended July 31, the loss on its discontinued operations has been entered into Quiksilver’s books as $304.7 million, on top of a $82.9 million loss from these operations in the same period in 2006-07.
Cercley said that he was targeting break-even results for Rossignol within two years and a sustainable operating profit margin of 5 to 10 percent from the third year. During its last season, Rossignol posted an operating loss of about €40 million on sales of roughly €300 million.
Cerley, a connoisseur of the operational side of the business who worked previously for St. Gobain, knows Rossignol well, as he worked for the company for four years and began a restructuring process there prior to his rather abrupt departure in 2005. His immediate priority is to regain profitability by cutting costs at all levels, from manufacturing to logistics and marketing. He said that he would continue to outsource some labor-intensive production and that he could not make any commitments about employment, but he insisted that the cuts would not necessarily entail more large-scale transfers of production from France and Spain to Eastern Europe or the Far East. The Frenchman pointed out that raw materials make up about 70 percent of the manufacturing costs in the ski business and that fluctuations in their prices, as well as exchange rates, would all be part of the equation. A more detailed plan will be mapped out a few weeks into the deal.
Another major aspect of the turnaround is to review the positioning, pricing and product ranges of each brand, to focus more strongly on quality. This applies to equipment as well as apparel, which constitutes Cercley’s second priority. In spite of its resources, Quiksilver never managed to lift Rossignol’s apparel sales beyond annual revenues of about €30 million. Furthermore, due to the size of the organization that was mobilized for the push, the apparel division is heavily loss-making. It should be significantly scaled back over the next years, to focus on more upscale apparel.
The takeover was warmly welcomed by leading French customers, who had been anxious about the destabilizing impact of Rossignol’s troubles. They were reassured by the Cercley's track record, his inside knowledge of the company and his stated ambitions to invest for the long term.
Quiksilver managers admitted that the sale would barely enable them to reduce their debt load of $1,070 million. About $100 million would be needed to build up Rossignol’s working capital until the end of October, which would erase most of the proceeds of €100 million from the sale. Furthermore, once the deal is rounded off, Quiksilver will take a non-cash charge of $150 million to $200 million representing to the gap between the sale price and the value of the assets in its books.
While the group’s debt level will remain largely unchanged, operating margins will improve sharply after the divestment of Rossignol. Without the French company’s losses, debt will fall to a level below four times the company’s operating profits (EBITDA), and it should be gradually reduced thereafter by using the group’s free cash flow.
For the third quarter of Quiksilver’s fiscal year, until the end of July, Rossignol again contributed a loss of $30.2 million, but it was smaller than the $43.6 million suffered in the same quarter last year. Income from continuing operations was down by 7.4 percent to $33.1 million, chiefly due to higher expenses, but thanks to the lower loss on Rossignol, Quiksilver’s bottom line showed net income of $2.8 million, compared with a loss of $7.9 million at the same time last year.
Excluding Rossignol, the Quiksilver group’s consolidated sales increased by 7 percent to $564.9 million for the quarter, although managers admitted that nearly all of this could be attributed to exchange rate changes. Europe was an exception since Quiksilver’s sales in the region climbed by 8 percent in constant currencies. Managers pointed out that the quarterly performance had been inflated by early deliveries. It was feeling the economic strain in large markets such as France, Spain and the U.K., but was enjoying robust growth in other markets in southern Europe, such as Italy, and in Eastern Europe.
In reported terms, again excluding Rossignol, European sales jumped by 25 percent to $232 million. The group’s gross margin in the region reached a staggering 59.7 percent, up by 380 basis points for the quarter, and its operating income jumped by 49.8 percent to $40.9 million – equivalent to an operating margin of 17.6 percent.
Sales in the Americas fell by 4 percent to $272 million, as comparable sales in the company’s own stores proved disappointing, and there was a short delay in shipping from Quiksilver’s new distribution center in California. In the Asia-Pacific region, sales were down marginally to $59.6 million, which was blamed on Quiksilver’s own mistakes in Japan. It has consistently over-supplied the market and its efforts to reposition the brand have caused a steep decline in Japanese sales.
Overall sales were driven by the undiminished growth of the DC brand, which is gaining ground in footwear as well as apparel. The Quiksilver brand has done reasonably well so far this year, managers said, given the economic circumstances. The men’s business was resisting better than the women’s side, but managers were still satisfied with the launch of the Quiksilver women’s range. Roxy has been more of a struggle, partly due to strategic changes by its largest customer, the Pacific Sunwear retail chain in the USA.
Sales in Quiksilver’s own stores were down at low to mid-single digit rates in comparable terms for the quarter, but managers said that August had been the best month of the year so far. It opened about 20 stores in the American market during the latest quarter, along with another 20 to 25 in Europe and only a handful in Asia. The company said that it would be slowing down its store openings over the next quarters due to the rough retail climate, but some of its franchisees and distributors are still opening stores by the dozens. Furthermore, Quiksilver itself is investing in e-commerce with the launch of an electronic store for DC.
Encouragingly, the group’s gross margin improved by 270 basis points to 50.4 percent for the quarter, due to the fact that more of its sales are generated in Europe and in its own stores. Some of the increase could also be attributed to Quiksilver’s moves to reduce its sourcing costs, but managers were quick to add that further improvements would be much harder to achieve in sourcing, with widely-spread inflation in production costs. The company is studying alternative sourcing arrangements, in Asia and Mexico for the Americas, as well as Eastern Europe and North Africa for Europe.
While fattening its gross margin, the expansion of Quiksilver’s store network sharply increased its expenses as well. They reached 41.1 percent of sales, a rise of 430 basis points. The group’s operating profit margin ended up at 9.3 percent, amounting to $52.7 million, down by 8.7 percent compared with the same period last year.
Quiksilver said its wholesale customers were ordering conservatively. Its inventories rose by 14 percent in dollars and by 6 percent in constant currencies, but this was chiefly caused by the company’s retail expansion. For the full year, Quiksilver still predicts sales growth of 10 percent to about $2.25 billion and earnings slightly below $0.90 per share.