The Quiksilver group suffered an underlying sales decline of 4 percent in Europe in the three months until the end of April, due to shrinking sales in the U.K. and Spain. However, the company enjoyed robust growth in countries such as Germany and Russia, and European orders are up for all of its brands - Quiksilver, Roxy, DC, Gnu and Libtech.
In reported terms, the group's European sales dipped by 1 percent to $206.9 million for the quarter. Then again, it achieved a gross profit margin of about 62 percent in the region, an increase of 2.1 percentage points.
The group's quarter in Europe was marked by the encouraging performance of the updated concept stores it opened in Capbreton, on France's Atlantic coast, and in Bercy Village, near Paris. Their sales have risen by 20 to 30 percent since they were refitted. Furthermore, the company opened a Boardriders House in Hossegeo, again on France's Atlantic coast, consisting of a sports center in a green property of about 10,000 square meters.
The store concept will be replicated at Ericeira in Portugal this month, at Fistral Beach in Newquay next month; in Chamonix in November. About two-thirds of the group's 266 European stores are to be refitted by the end of the fiscal year, to integrate at least some elements of the new concept.
Separately, Quiksilver Europe reported that its sales for the six months since the start of the fiscal year reached €270.6 million, down by 1.9 percent compared with the same period last year, but slightly ahead of expectations.
European sales for the half-year were boosted by a 7 percent sales rise for the DC brand, as well as robust sales in Germany, Austria and Russia, where sales jumped by 10 and 20 percent. The rise would have been more impressive without the closure of several loss-making stores. The group's orders in Europe also confirmed a return to growth in France, Belgium and the Netherlands, encouraging Quiksilver Europe to firm up its forecast of revenues for the full fiscal year reaching more than the €540.6 million it reported for its last fiscal year.
For the six months until the end of April, Quiksilver Europe's gross margin reached 60.6 percent, up by 1.2 percentage points, chiefly due to the fact that it is increasingly bundling purchases with Quiksilver units in the Americas and Asia. Exchange rate changes are another favorable factor. Quiksilver Europe said these two factors should continue to lift its gross margin in the coming quarters, more than making up for higher costs of labor and raw materials.
Quiksilver Europe's income before interest and tax landed at 16.5 percent of sales, which was much better than expected and 3 percentage points more than last year. The company attributed this to the closure of unprofitable stores and a stronger focus on quality distribution.
Quiksilver Europe predicts that its growth will accelerate in the second half of its fiscal year, thanks to store openings and rising orders for all its brands. It forecasts a rise of more than 20 percent in profitability,.
Back to the quarterly results, the entire Quiksilver group saw its global sales increase by 2 percent to $478.1 million, owing to a strong pick-up in the Americas. The management qualified the performance as robust and ahead of expectations. The improvement was driven by the Quiksilver brand, which saw sales increase at a low-single-digit rate; and the DC skating brand, which enjoyed a mid-single-digit sales increase for the quarter.
The Roxy brand's sales continued to decline, at a mid-single-digit rate, but the Quiksilver group's managers are bullish about its return to shape. Repositioned as a California-inspired lifestyle brand, Roxy enjoyed stronger sales among specialist retailers as well. The company pointed to a return to growth in orders for Roxy – up by a mid-single-digit rate in the Americas and by a high-single-digit rate in Europe. Orders are up as well for the Quiksilver brand in the Americas and in Europe.
The group's sales in the Americas region jumped by 5 percent to $210.7 million for the three months. Its retail sales there went up by nearly 20 percent, even though it had six stores fewer than the same quarter last year. Its comparable stores sales jumped by 23 percent, while its online sales soared by 68 percent. The group's wholesale business in the Americas was on the rise as well, with DC leading the way. Its gross margin in the Americas reached 49.1 percent, up by 2.5 percentage points.
Sales soared by nearly 20 percent in Brazil and Mexico, which are both profitable markets for the group, driven by the Quiksilver and DC brands. It reached sales of about $50 million in Brazil on an annualized basis, through wholesale sales only – and its growth could accelerate as it will become more visible with a store to open in Rio de Janeiro in September.
On the other hand, the group was under pressure in the Asia-Pacific region, due to the floods in Australasia and the Japanese earthquake. Its reported sales in the region decreased by just 1 percent to $58.1 million for the quarter, but in constant currencies they dropped by 12 percent. The group's gross profit margin for Asia-Pacific also dropped by 0.4 percentage points to 53.1 percent.
Still, the group's managers stressed that they expected markets such as China, Taiwan, South Korea and Indonesia to drive continued growth in the coming years. It has just appointed a new country manager for the DC brand in China. Furthermore, as reported earlier, Quiksilver signed a licensing deal a few months ago with the Reliance group in India, for the Quiksilver and Roxy brands. A first Quiksilver store was opened in New Delhi and the plan is to open 10 Indian stores in the next 12 months.
On the whole, the group's gross profit margin increased by 1.6 percentage points to a second-quarter record of 54.8 percent, due to the growth of its American retail business and fewer discounts. Its pro-forma adjusted earnings before interest and tax (Ebitda) reached $62.1 million, which was about the same as last year but ahead of the company's expectations.
The bottom line is a loss of $83.3 million for the quarter, but this is due to two onetime items: a non-cash goodwill impairment charge of $74.1 million, and valuation allowances provided against tax assets reaching $26.0 million. The impairment charge is directly related to the Japanese earthquake, which forced the company to test its goodwill in the quarter. Between 2003 and 2005, the group bought out its licensees in Japan and Australia, along with retail assets. Excluding these onetime items, and with a few smaller adjustments, pro-forma income from continuing operations landed at $17.3 million, up from $15.7 million for the same period last year.
Separately, the company reassuringly reduced its net debt by 19 percent to $594 million. Quiksilver Europe reduced its debt to €90 million, down by 42 percent in the last 12 months and by 64 percent in the last 24 months. It generated positive cash flow of €65 million in the last four quarters and €161 million in the last eight quarters. Its ratio of net debt to Ebitda dropped to 1.1 at the end of April.
The Quiksilver group declined to provide detailed guidance for the remainder of its fiscal year, but indicated that gross margins will drop slightly. Its managers confirmed that the group would be affected by higher costs in the second half, with an increase in the range of 10 to 15 percent. This is to be offset by selective price increases, as well as the group's hedging program and its efforts to consolidate purchasing.