I suppose meeting your earnings target is worthy of praise. However, don't expect me to pat surf-apparel specialist Quiksilver (NYSE: ZQK ) on the back, because its earnings still fell from a year ago.
The company earned $0.02 a share, excluding a charge of $0.08 for a pending acquisition of the rest of Roger Cleveland Golf Company, which it began to acquire in 2005. However, that earnings figure is still is a 50% drop from a year ago. Surfers were still shopping at Quiksilver -- sales grew 17% -- but the boost in revenue didn't flow to the bottom line. Gross margins contracted 1.4%, partially from a rise in manufacturing costs at Rossignol, which Quiksilver also owns. The company took on more debt, too, and that's not a wave you'll want to chase.
Despite the troublesome numbers, management reiterated its full-year guidance of $0.53 a share. At least one analyst has expressed skepticism, given the need to improve gross margins, and I have to agree.
The company announced plans to develop a new women's line, aimed at 18- to 24-year-olds. While the line may prove to be a growth vehicle, it won't be ready for another year. And although the company says it will be "designed for the edgy, independent young woman," that to me means dealing with a fickle fashion-oriented group. In other words, the whole thing could be hit-or-miss, or at least run hot or cold, depending on whether the designs are a hit with the "in" crowd.
Of course all retailers, including American Eagle (NYSE: AEO ) and Abercrombie & Fitch (NYSE: ANF ) , have all gone through these cycles and face the same concerns. So what we're seeing isn't necessarily a bad thing. Even expanding the product line does make sense, but it's just not a guarantee of a steady boost to profits. Evidently, the company is struggling to effectively manage the brands it already has, so adding to the portfolio now could potentially hinder the bottom line even further.
Declining earnings, a compressed gross margin, and a higher debt load all add up. Throw in a trailing price-to-earnings ratio of 24, and I'd choose a to surf a different beach.
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