Quiksilver Quickens the Pace

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Apparel and footwear manufacturer Quiksilver (NYSE: ZQK) had a bit of a surprise in store for investors yesterday when it reported earnings. Although it classified its Rossignol business as discontinued operations in preparation for the division's eventual sale, Quiksilver was able to post a profit of $0.30 a share from continuing operations, significantly besting analyst forecasts. (You can catch a wave to last quarter's earnings.)

Such guesstimates typically exclude one-time events, and the company's forthcoming sale of Rossignol caused it to post a GAAP loss of $206 million, or $1.59 per share assuming dilution, compared with its $0.04 loss last year. Removing such items helps in making comparisons.

The company's sales effort proved equally surprising, reporting increases in all markets. Europe posted the biggest revenue gains, as expected, with a 23% rise. Stripping out the currency exchange effects, sales on the Continent still grew by 7% year over year. Quiksilver's biggest revenue driver this quarter was its DC brand, which offers both footwear and apparel. DC has room to run in its growing international markets; currently, Europe's market is only about 25% of the size of its U.S. counterpart.

Although Quiksilver primarily distributes its merchandise to other retailers, it also has company-owned retail stores. They don't typically report same-store sales, but the company did note that comps were down in the U.S. for the quarter, with similar pressures growing in Europe. 

Even as the company's overall effort still missed expectations, Quiksilver's renewed focus on selling its surf and skate apparel may produce a much better business going forward. The surf and skate crowd seems fairly loyal to its brands, which may help explain why you find similarly situated retailers like Volcom (Nasdaq: VLCM) reporting growing sales, Zumiez (Nasdaq: ZUMZ) riding high, and even Pacific Sunwear (Nasdaq: PSUN) -- once you strip out all the changes going on there -- still enjoying strong demand. And with a 35% increase in May comps, Quiksilver noted that specialty retailer The Buckle (NYSE: BKE) was "blazing away."

The Rossignol acquisition was just bad form, seeming like little more than a sop to a friend of the company's president at the time. Now, that executive has moved on, with an eye toward possibly buying the ski maker himself. Quiksilver has written down hundreds of millions of dollars in relation to Rossignol, and diverted attention from its core operations. The company's shares trade at about half the level they did when the Rossignol deal was first announced.

Although it lagged analysts' expectations, I think Quiksilver had a relatively good quarter. Despite a core business of powerful brands, they haven't been immune to the nasty bug clawing at many other retailers. Let's hope management doesn't compound its previous errors by just giving away Rossignol, which admittedly still has a strong reputation and carries a lot of cachet with the ski crowd. If it can squeeze out a favorable sale price, investors might show as much loyalty to Quiksilver as surfers and skateboarders do.