Quiksilver Reports Fiscal 2014 First Quarter Financial Results

Quiksilver, Inc. (NYSE:ZQK) (the Company) today announced financial results for the fiscal 2014 first quarter ended January 31, 2014.

“We continued to execute our Profit Improvement Plan over the last few months,” said Andy Mooney, President and Chief Executive Officer of Quiksilver, Inc. “During the first quarter, we further reduced our expense structure and made progress on optimizing our supply chain and laying the foundation for stabilizing and expanding revenues.

“Pro-forma adjusted EBITDA improved versus the prior year quarter, continuing the progress made in the final two quarters of last year,” added Mooney. “The key drivers for the improvement were reduced selling, general and administrative expenses, along with higher Roxy brand sales and increased revenues in our direct-to-consumer channels and emerging markets. We were able to report this improvement despite decreased net revenues, which were driven by lower sales in our wholesale channel, especially in the developed markets in North America and Europe.”

As previously announced, the Company sold its Mervin Manufacturing and Hawk businesses, and is pursuing the divestiture of its Surfdome business. As a result, the Company has reclassified the current and prior year operating results of these non-core businesses as discontinued operations. All of the results presented below represent the Company’s continuing operations.

Please refer to the accompanying tables for a reconciliation of GAAP results from continuing operations to certain non-GAAP results from continuing operations, including pro-forma loss from continuing operations, pro-forma loss from continuing operations per share, adjusted EBITDA and pro-forma adjusted EBITDA, for the first quarter ended January 31, 2014 and 2013, net revenues in historical and constant currency, and a definition of the Company’s emerging markets.

Fiscal 2014 First Quarter Review:

The following comparisons refer to results of continuing operations for the first quarter of fiscal 2014 versus the first quarter of fiscal 2013.

Net revenues were $393 million compared with $412 million, and were down 2%, or $9 million, in constant currency.

  • Americas net revenues decreased 5% to $173 million from $183 million, and were down 3% in constant currency.
  • EMEA net revenues decreased 4% to $149 million from $156 million, and were down 6% in constant currency.
  • APAC net revenues decreased 4% to $70 million from $73 million, but were up 11% in constant currency.

Gross margin was consistent with the first quarter of last year at 50.9%. Modest improvements in gross margins in the Americas and EMEA segments were offset by increased promotional activity in the APAC segment.

SG&A expense decreased $12 million to $204 million from $216 million, primarily due to reduced employee compensation expenses, including incentive compensation, and reduced athlete and event spending.

Pro-forma Adjusted EBITDA increased to $16 million from $12 million.

Net loss from continuing operations attributable to Quiksilver, Inc. improved to $22 million, or $0.13 per share, from $32 million, or $0.19 per share, primarily attributable to income tax benefits of $10 million recognized in continuing operations related to the sale of the Mervin and Hawk businesses, which are not expected to be recurring.

Pro-forma loss from continuing operations, which excludes the after-tax impact of restructuring and other special charges and non-cash asset impairments, was $16 million, or $0.10 per share, compared with $26 million, or $0.16 per share, also largely as a result of the income tax benefits recognized in continuing operations related to the sale of the Mervin and Hawk businesses.

Fiscal 2014 Q1 Net Revenue Highlights:

Net revenues from continuing operations (in constant currency) by brand and channel for the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 were as follows.

Brands (constant currency):

  • Quiksilver decreased $11 million, or 6%, to $163 million.
  • Roxy increased $6 million, or 5%, to $117 million.
  • DC decreased $4 million, or 4%, to $102 million.

Distribution channels (constant currency):
  • Wholesale revenues decreased 7% to $239 million.
  • Retail revenues increased 4% to $131 million. Same-store sales in company-owned retail stores increased 2%. Company-owned retail stores totaled 645 at the end of the fiscal 2014 first quarter compared with 615 at the end of the fiscal 2013 first quarter.
  • E-commerce revenues grew 16% to $23 million.

Emerging markets generated net revenue growth of 32% in constant currency.

About Quiksilver:

Quiksilver, Inc., one of the world’s leading outdoor sports lifestyle companies, designs, produces and distributes branded apparel, footwear and accessories. The Company’s apparel and footwear brands, inspired by a passion for outdoor action sports, represent a casual lifestyle for young-minded people who connect with its boardriding culture and heritage. The Company’s Quiksilver, Roxy, and DC brands have authentic roots and heritage in surf, snow and skate. The Company’s products are sold in more than 100 countries in a wide range of distribution, including surf shops, skate shops, snow shops, its proprietary Boardriders Club shops and other Company-owned retail stores, other specialty stores, select department stores and through various e-commerce channels. The Company’s corporate headquarters are in Huntington Beach, California.

Forward-looking statements:

This press release contains forward-looking statements including, but not limited to, statements regarding divestiture of non-core businesses and management’s expectations for improved sales, efficiency and profitability in the future. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. The Company undertakes no obligation to update these statements, which are made only as of the date of this press release. For the factors that could cause actual results to differ materially from expectations, please refer to the Company’s SEC filings and specifically the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Forward-Looking Statements” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

NOTE: For further information about Quiksilver, Inc., please visit our website at www.quiksilverinc.com . We also invite you to explore our brand sites, www.quiksilver.com , www.roxy.com and www.dcshoes.com .
 
QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
     
 
Three months ended
In thousands, except per share amounts January 31,
2014 2013
 
Revenues, net $ 392,612 $ 412,189
Cost of goods sold   192,776     202,416  
 
Gross profit 199,836 209,773
 
Selling, general and administrative expense 203,784 216,339
Asset impairments   883     3,168  
 
Operating loss (4,831 ) (9,734 )
 
Interest expense 19,420 15,501
Foreign currency loss   2,828     3,065  
 
Loss before (benefit)/provision for income taxes (27,079 ) (28,300 )
 
(Benefit)/provision for income taxes   (4,385 )   2,949  
 
Loss from continuing operations (22,694 ) (31,249 )
Income from discontinued operations, net of tax (includes net gain on sale of $38,103 and $0, respectively)   37,617     625  
 
Net income/(loss) 14,923 (30,624 )
Less: net loss/(income) attributable to non-controlling interest   464     (505 )
 
Net income/(loss) attributable to Quiksilver, Inc. $ 15,387   $ (31,129 )
 
Loss per share from continuing operations attributable to Quiksilver, Inc.:
Basic $ (0.13 ) $ (0.19 )
Diluted $ (0.13 ) $ (0.19 )
 
Income per share from discontinued operations attributable to Quiksilver, Inc.:
Basic $ 0.22 $ 0.00
Diluted $ 0.22 $ 0.00
 
Weighted average common shares outstanding:
Basic 169,747 165,767
Diluted 169,747 165,767
 
Amounts attributable to Quiksilver, Inc.:
Loss from continuing operations $ (22,333 ) $ (31,568 )
Income from discontinued operations, net of tax   37,720     439  
Net income/(loss) $ 15,387   $ (31,129 )
 
QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
     
In thousands January 31, 2014 January 31, 2013
 

ASSETS
Current Assets
Cash and cash equivalents (includes restricted cash of $60,617 and $0, respectively) $ 130,605 $ 68,361
Trade accounts receivable (net of allowance of $61,534 and $58,126, respectively) 338,723 330,826
Other receivables 27,278 30,153
Income taxes receivable - 1,010
Inventories 360,146 402,403
Deferred income taxes - short-term 9,563 27,651
Prepaid expenses and other current assets 29,243 36,764
Current portion of assets held for sale   13,676     28,370  
Total Current Assets 909,234 925,538
 
Fixed assets, net 224,914 237,020
Intangible assets, net 134,665 135,891
Goodwill 258,238 261,567
Other assets 50,389 45,069
Deferred income taxes - long-term - 121,147
Assets held for sale, net of current portion   23,715     21,720  
Total Assets $ 1,601,155   $ 1,747,952  
 

LIABILITIES AND EQUITY
Current Liabilities
Lines of credit $ - $ 11,897
Accounts payable 168,005 215,609
Accrued liabilities 119,757 104,735
Current portion of long-term debt 43,424 42,358
Income taxes payable 1,913 -
Current portion of assets held for sale   9,075     11,194  
Total Current Liabilities 342,174 385,793
 
Long-term debt, net of current portion 821,224 734,191
Other long-term liabilities 34,503 37,435
Deferred income taxes - long-term 21,590 -
Assets held for sale, net of current portion   1,577     157  
Total Liabilities 1,221,068 1,157,576
 
Equity
Common stock 1,733 1,702
Additional paid-in capital 574,081 555,905
Treasury stock (6,778 ) (6,778 )
Accumulated deficit (260,499 ) (74,450 )
Accumulated other comprehensive income   59,496     94,522  
Total Quiksilver, Inc. Stockholders' Equity 368,033 570,901
Non-controlling interest   12,054     19,475  
Total Equity   380,087     590,376  
 
Total Liabilities and Equity $ 1,601,155   $ 1,747,952  
 
QUIKSILVER, INC. AND SUBSIDIARIES
INFORMATION RELATED TO OPERATING SEGMENTS (UNAUDITED)
   
 
Three months ended
In thousands January 31,
2014 2013
Revenues, net:
Americas $ 173,165 $ 182,636
EMEA 149,397 156,174
APAC 69,875 72,695
Corporate operations   175     684  
$ 392,612 $ 412,189
 
Gross Profit:
Americas $ 75,110 $ 78,121
EMEA 87,849 91,734
APAC 36,808 39,236
Corporate operations   69     682  
$ 199,836 $ 209,773
 
SG&A Expense:
Americas $ 83,692 $ 85,187
EMEA 76,712 77,215
APAC 32,615 37,192
Corporate operations   10,765     16,745  
$ 203,784 $ 216,339
 
Asset Impairments:
Americas $ 222 $ 1,621
EMEA 661 1,547
APAC - -
Corporate operations   -     -  
$ 883 $ 3,168
 
Operating Income (Loss):
Americas $ (8,804 ) $ (8,687 )
EMEA 10,476 12,972
APAC 4,193 2,044
Corporate operations   (10,696 )   (16,063 )
$ (4,831 ) $ (9,734 )

The Company's references to emerging markets in this press release refer to net revenues generated in Brazil, Mexico, Korea, China, Indonesia, Taiwan and Russia collectively.
   
QUIKSILVER, INC. AND SUBSIDIARIES
GAAP TO PRO-FORMA RECONCILIATION (UNAUDITED)
 
 
Three months ended
January 31,
In thousands, except per share amounts 2014 2013
 
Net loss from continuing operations attributable to Quiksilver, Inc. $ (22,333 ) $ (31,568 )
Restructuring and other special charges, net of tax of $40 and $404, respectively 5,309 2,601
Non-cash asset impairments, net of tax of $0 and $556, respectively   883     2,612  
 
Pro-forma loss from continuing operations (16,141 ) (26,355 )
 
Pro-forma loss per share from continuing operations, basic and diluted $ (0.10 ) $ (0.16 )
 
Weighted average common shares outstanding, basic and diluted 169,747 165,767
 
QUIKSILVER, INC. AND SUBSIDIARIES
ADJUSTED EBITDA & PRO-FORMA ADJUSTED EBITDA RECONCILIATION (UNAUDITED)
   
 
Three months ended
January 31,
In thousands 2014 2013
 
Net loss from continuing operations

attributable to Quiksilver, Inc.
$ (22,333 ) $ (31,568 )
(Benefit)/provision for income taxes (4,385 ) 2,949
Interest expense 19,420 15,501
Depreciation and amortization 10,545 11,943
Non-cash stock-based compensation expense 5,063 7,336
Non-cash asset impairments   883     3,168  
 
Adjusted EBITDA $ 9,193 $ 9,329
 
Restructuring and other special charges   6,448     3,005  
 
Pro-forma Adjusted EBITDA $ 15,641 $ 12,334
 

Definition of Adjusted EBITDA and Pro-forma Adjusted EBITDA:

Adjusted EBITDA is defined as net income/(loss) from continuing operations attributable to Quiksilver, Inc. before (i) interest expense, (ii) (benefit)/provision for income taxes, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) non-cash asset impairments. Pro-forma Adjusted EBITDA is defined as Adjusted EBITDA excluding restructuring and other special charges (including, but not limited to, reserves and other charges associated with restructuring activities, non-operating charges for gains and losses on lease exit activities, as well as severance and other employee termination costs incurred as a result of downsizing and reorganization). Adjusted EBITDA and Pro-forma Adjusted EBITDA are not defined under generally accepted accounting principles (“GAAP”), and may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Pro-forma Adjusted EBITDA, along with other GAAP measures, as measures of profitability because Adjusted EBITDA and Pro-forma Adjusted EBITDA help us compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments, the effect of non-cash stock-based compensation expense and restructuring and other special charges. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and the expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of non-cash asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the non-cash impact of our asset base. We also remove from Pro-forma Adjusted EBITDA the impact of certain reserves and charges associated with restructuring activities, non-operating charges for gains and losses on lease exit activities, as well as severance and other employee termination costs, as these costs are not typically part of normal, day-to-day operations. Adjusted EBITDA and Pro-forma Adjusted EBITDA have limitations as profitability measures in that they do not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense, the effect of non-cash asset impairments and the effect of restructuring and other special charges.
         
SUPPLEMENTAL EXCHANGE RATE INFORMATION

(Unaudited)
In order to better understand growth rates in our operating segments, we make reference to constant currency. Constant currency reporting improves visibility into actual growth rates as it adjusts for the effect of changing foreign currency exchange rates from period to period. Constant currency is calculated by taking the ending foreign currency exchange rate (for balance sheet items) or the average foreign currency exchange rate (for income statement items) used in translation for the current period and applying that same rate to the prior period. The following table presents revenues by segment in both historical currency and constant currency for the three months ended January 31, 2014 and 2013 (in thousands):
 
Americas EMEA APAC Corporate Total
Historical currency (as reported)
January 31, 2014 $ 173,165 $ 149,397 $ 69,875 $ 175 $ 392,612
January 31, 2013 $ 182,636 $ 156,174 $ 72,695 $ 684 $ 412,189
Percentage change -5% -4% -4% -5%
 
Constant currency (current year exchange rates)
January 31, 2014 $ 173,165 $ 149,397 $ 69,875 $ 175 $ 392,612
January 31, 2013 $ 179,387 $ 159,014 $ 62,893 $ 698 $ 401,992
Percentage change -3% -6% 11% -2%

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