Quiksilver (ZQK)

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Quiksilver (NYSE: ZQK) designs and sells sportswear and equipment for young, outdoorsy costumers. Its Roxy and Quiksilver brands, which together account for almost 60% of revenue^[1], sell casual apparel, wetsuits, and winter gear, while its popular DC brand targets young skateboarders. The company sells its products through its own company stores and through department and sports specialty stores.

While Quiksilver’s clothing and footwear sales have been strong in recent years (up 19% in FY 2007 ^[2]), its equipment segment has been lagging; for example, low demand and unseasonably warm winter temperatures dragged ski equipment revenue down 22% in FY 2007^[3]. As a result, Quiksilver took a $171MM loss on goodwill impairment, sending operating income into the red for the year. These factors have led Quiksilver to rethink its sporting goods business. Although the company remains confident in the growth potential of its Rossignol ski equipment brand, Quicksilver sold its Cleveland Golf division in December 2007 as part of a plan to lessen its exposure to the equipment of the retail market.

[edit] Company Overview

[edit] Breakdown of Holdings

Quicksilver Product Segment Breakdown by Revenue, FY2006^[4]

Products: The majority of Quicksilver’s revenue comes from its apparel segment, which the company sells through its network shops and in department stores. With the recent weakness in its sporting goods business, the apparel segment is likely to increase in the future, as it has generated strong earnings for the company.

Quicksilver Distribution Breakdown as Portion of Revenue, FY2006^[5]

Distribution: Like many sporting goods companies, most of Quicksilver’s sports apparel and equipment are sold in specialty stores and sports shops, which account for over three quarters of revenue. Included in this number are some 500 stores that Quicksilver either owns or with which it maintains licensing arrangements. The company distributes casual apparel through Macy’s, Dillard's, and Bloomingdales department stores, which account for about a tenth of revenue.

[edit] Recent Earnings

Quicksilver Net Revenue and Operating Income, 2004-2007^[6][7][8][9]

Over the past few years, Quicksilver has posted strong earnings as a result of recent acquisitions and strong apparel growth. The 2005 acquisitions of Rossignol and Cleveland Golf accounted for almost three-quarters of the 33% revenue growth seen in 2006^[10].

However, 2007 saw a significant decrease in the strength of Quicksilver's equipment business. With that segment down 22% in 2007, the company took a $171M writedown in goodwill in the fourth quarter^[11]. Following such a week performance, the company rethink its sporting goods and holdings and decided to sell the golf business that it had acquired only a year earlier. These factors conspired to Quicksilver's negative operating income for the year. Although this was a one time loss, it signals the potential for long-term softness in this area of Quicksilver's business.

[edit] Trends and Forces

[edit] Economic Conditions

Recent trouble in the credit markets, coupled with high gasoline prices, have the potential to depress consumer spending, thereby impacting Quicksilver's bottom line. If these factors lead consumers scale back on vacation travels to beaches and ski resorts, Quicksilver's equipment business is particularly vulnerable.

However, some factors may serve to protect Quicksilver's bottom line: its products are moderately priced and are focused on a very specific segment of the market—those interested in purchasing wetsuits and snowboards have a relatively small variety of businesses to choose from.

[edit] Dependency on Department Stores

Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from wholesalers like Quicksilver. As a means of increasing market share, companies have also sought to differentiate themselves from the competition by demanding exclusive contracts and store-specific private labels (e.g. Ralph Lauren's "American Living" line for J.C. Penney).^[12]

Although department stores currently account for only 10% of Quicksilver's distribution, retail apparel and footwear have been the company's strongest segment in recent years. As the company seeks to capitalize on this growth (and shy away from its equipment business), department stores may become a bigger part of Quicksilver's business model.

[edit] Competition

Quicksilver competes with a variety of brands in the outdoorswear and sporting goods industry. V.F. Corporation owns Reef and Vans, two popular brands in the surfing community that compete against Roxy and Quicksilver for that community's dollar. Quicksilver also competes with Nike, as both companies sell skateboarding and aquatic apparel and footwear.

[edit] References

1. ↑ Quicksilver 2006 10-K, p. 2 (available at http://www.secfilings.com).
2. ↑ Quiksilver, Inc. Reports 2007 Fourth Quarter and Full Year Results
3. ↑ Quiksilver, Inc. Reports 2007 Fourth Quarter and Full Year Results
4. ↑ Data from Quicksilver 2006 Annual Report, p. 87
5. ↑ Data from Quicksilver 2006 Annual Report, p. 90
6. ↑ All amounts in thousands.
7. ↑ 2004-2006 data from Yahoo! Finance.
8. ↑ 2007 data taken from Quiksilver, Inc. Reports 2007 Fourth Quarter and Full Year Results (published December 13, 2007).
9. ↑ 2007 data is unaudited.
10. ↑ Quicksilver[2006 10-K], p. 24 (available at http://www.secfilings.com.
11. ↑ Data taken from Quiksilver, Inc. Reports 2007 Fourth Quarter and Full Year Results (published December 13, 2007).
12. ↑ "Top fashion designers go down-market", USA Today (published September 25, 2007)
13. ↑ These figures were taken from Yahoo! Finance