Monday, December 28, 1998

Quiksilver, Inc.
Phone: 949-645-1395
Website: http://www.quiksilver.com
Price (12/24/98): $29 3/4


Surf's up at Quiksilver (NYSE: ZQK)! After seeing its stock take an early September dip into the low teens, this hip apparel maker didn't just hang ten, but more like seventeen or, maybe, Seventeen.

While some of its customers, such as Delia's Inc. (Nasdaq: DLIA) and Pacific Sunwear of California (Nasdaq: PSUN), have been hurt this year by the Gap's (NYSE: GPS) back-to-basics theme, Quiksilver has continued to grow with fashion-forward (and sometimes backward) designs. That's because it is leveraging its surf-shop credibility into a more mainstream business.

The numbers tell the story. Sales for Q4 ending October 31 caught a wave, rising 57% to $104 million, as domestic sales soared 61% and European sales weren't far behind, up 42% in French francs or 49% in U.S. dollars. Net income exploded for a 99% gain as EPS came in at $0.43 versus $0.22 a year ago.

That was like closing out a great year by riding a pipeline to a case of Moet & Chandon waiting on the beach. FY98 sales shot ahead 36% to $316 million as European sales increased 45% in French francs and U.S. sales edged up 35%. EPS for the year surfed 37% ahead of the $0.90 per share reported a year ago. With corks popping left and right, the stock bubbled higher on the Q4 results.


Quiksilver designs, arranges for the manufacture of, and distributes casual sportswear, swimwear, activewear, and snowboardwear. Its brands include Quiksilver, Roxy, Lib Tech, Gnu, Arcane, and Bent Metal. About 64% of sales come from the U.S., with nearly all the rest from Europe.

The company has expanded its young women's apparel offerings under the Roxy, Raisins, Leilani, and Radio Fiji brands. They now account for about 40% of overall sales and should rise to half of revenue in FY99. Roxy alone accounts for up to 15% of Pacific Sunwear's juniors business.

About 83% of sales last year came from surf shops, specialty chains, and other non-department stores. The company has been gradually increasing sales to department stores such as Macy's in California, Nordstrom, The Bon Marche, Le Printemps, and Harrods.

Insiders own 7.3% of the stock, with most held by Chairman/CEO Robert McKnight, Jr. The stock split 2-for-1 in April.


Income Statement
12-month sales: $316.1 million
12-month income: $18.0 million
12-month EPS: $1.23
Profit Margin: 5.7%
Market Cap: $432.9 million

Balance Sheet*
Cash: $3.1 million
Current Assets: $135.9 million
Current Liabilities: $59.6 million
Long-Term Debt: $15.3 million
(*As of July 31, 1998)

Price-to-earnings: 24.2
Price-to-sales: 1.4


The baby boomers' baby boom has created demographics that make all teen apparel designers and retailers potentially interesting investments. Quiksilver's McKnight has talked about the 23 million 12- to 17-year-olds in the U.S. who spend about $34 billion a year on apparel.

Yet, Quiksilver's margins weren't keeping pace with strong sales growth during the first half of FY98. Were the troubles beginning to hit specialty retailers due to be reflected down the road in Quiksilver's bookings? Still, the stock could have been boarded at just 14 times trailing EPS of $0.96 at the September low. Not bad considering revenues were growing at double that rate.

The Q3 results sealed the deal, as fears of a juniors apparel slowdown proved unfounded. Sales rose 34% thanks to a 68% jump in sales at Quiksilver's domestic women's division, and a 302% increase in the European juniors revenues thanks to Roxy. With juniors sportswear selling at higher average profit margins, gross margins increased slightly and EPS trekked ahead 37% to $0.28.


Zacks shows earnings estimates of $1.46 a share for FY99 ending in October, and $1.78 for 2000, putting the stock at 21 times forward estimates, in line with its projected long-term growth rate. So, Quiksilver isn't the bargain it was in September, especially given that fashion apparel poses constant risks.

Even so, the company appears to be enjoying such great momentum that it could beat these numbers. The aggressive move into higher-margin juniors apparel could allow Quiksilver to catch another wave. Getting to Delia's 5 million teen girls may be only the beginning.

According to an excellent October 29 article in Women's Wear Daily, Quiksilver will launch a $4 million ad campaign for FY99, including major Roxy promotions in Seventeen magazine. The goal is to get Roxy into more department stores and double sales next year to $100 million without diluting the brand's cachet. It's now featured in 50 Macy's stores, up from 15 a year ago.

The current line of tank tops and Bermuda shorts has a retro Hawaiian-print look, with some inspiration from old Ocean Pacific wear. Quiksilver has also launched its Hula scent as part of what could prove the first step toward a broader move into skin care products and bath gels.

Like other apparel makers working to build its brand, Quiksilver is also emphasizing its general retail presence. In addition to its flagship New York Boardriders Club in Soho, the company has recently opened two stores in Paris for a total of seven. There are another 52 independently owned Boardriders, with plans to double that number in the next few years.

Quiksilver is also looking to open more "stores" within retail stores. It now has 32 such shops, but plans 75 more in FY99 and another 125 in 2000. The Buckle (NYSE: BKE), Dayton's, and Macy's are likely partners.

Rising margins and continued growth opportunities make Quiksilver a wave worth examining. Before you catch it, though, you should remember that the company is fairly valued based on current earnings estimates. One question worth pondering is whether the Gap's basics campaign will continue to impact teen fashion in 1999 as it did in 1998. If not, then Quiksilver might have some unexpected upside potential.

-- Louis Corrigan

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