If you listened in on Quiksilver's (NYSE:ZQK) third-quarter earnings conference call, judging from management's glowing remarks, you would have never guessed that its stock was being shunned on Wall Street. What's the disconnect? The stock market is fixated on short-term results and the seasonality impact of the company's Rossignol brand, but it may be overlooking the long-term possibilities for growth.
In the newest edition of Fool On Call, we will dive into the company's latest conference call, highlighting Rossignol in particular. We will focus our attention in these areas:
- Seasonality impact
- Integration efforts
- Brand expansion
Rossignol's
seasonality
The surf, skateboarding, and skiing industry includes such names as Pacific Sunwear (NASDAQ:PSUN), Oakley (NYSE:OO), K2 (NYSE:KTO), and even Hot Topic (NASDAQ:HOTT). None of these stocks have had a particularly good year in the stock market.
Does that mean the industry as a whole has gotten too far ahead of itself, and is now going through a cool-off period? Maybe. But having analyzed these companies over the past year, I think it's more likely that each has its own set of challenges to be worked through -- Quiksilver included.
The most notable hurdle facing Quiksilver at present is the Rossignol integration. CEO Bob McKnight said during the call that the company is "going to take Rossignol, which is already one of the most recognized brands in the world, to a whole new level." That may be; in the meantime, however, Rossignol that took Quiksilver down to a whole other level. Despite a 41% jump in net revenues for the company, earnings-per-share came in at $0.04 per share -- well shy of the $0.20 EPS mark met a year ago.
Stock compensation expenses were a part of the drag, but another significant factor is the seasonality of Rossignol's business. The first and fourth quarters -- yes, the winter months -- are when Rossignol shines, but the second and third quarters? Not so much. It was explained during the call that Rossignol operating expenses "do not fluctuate with revenues." When sales are weak in the summer months, the company still has the burden of fixed, consistent operating expenses.
These expenses are significantly leveraged in the winter season, however, when sales for this ski equipment maker are strongest. But even with the strength of Rossignol's fourth quarter, note that earnings expectations for the upcoming period were still revised downward, since Quiksilver is also being challenged by its golf business.
Cost-cutting through consolidation
As far as the integration process goes, I do like what Quiksilver has been able to achieve, as it looks to be setting itself nicely for the future. The primary office has been relocated, along with the other brands, into its Park City, Utah facility. This will help develop a synergy between the various brands within the company. Additionally, the 10 European offices were consolidated down to a single office, and the 17 distribution centers were cut down to three. Plans are also in place to close one factory in France, shifting the production to another located in Spain.
Quiksilver President Bernard Mariette believes that these changes will enable it to "dramatically increase the profitability of the business over the next several years." We should begin to see the impact of these cost-cutting changes in the fourth quarter; CFO Steve Brink stated during the Q&A portion of the call that Rossignol is expected to contribute "70% to 75% of the profit growth" in the period. Sales for the brand are estimated to be up roughly 25%, which will also be accompanied by "some gains in the gross profit margin."
Expanding the Rossignol brand
Rossignol is largely known as a hardware manufacturer of skis and related equipment. And while we won't see it step out of the hardware business -- on the contrary, the company is excited about a new ski for the upcoming winter season that can change its "flexibility" -- we should begin to see the Rossignol brand accelerate sales in different markets, through different products.
France has been the hub for Rossignol sales for years, but looking ahead, the countries of the former Eastern Bloc will increasingly become an important area for Quiksilver and its various lines. But the real news for Rossignol is the launch of its apparel line at the end of fiscal 2007. The impact of this new apparel line will be significant, since management is maintaining its target of $100 million in apparel revenues in fiscal 2008 from Rossignol alone. This will go a long way toward moving Rossignol out of the single-digit growth territory it has been stuck in as a result of its slower-growth equipment biz. Additionally, Brink said that revenue from Rossignol apparel is expected to carry margins that "will clearly be higher than the equipment margins."
The final effect of the Rossignol apparel introduction: The line will not be limited to winterwear, instead targeting every season. This should help smooth out some of the brand's current seasonality.
Take to the slopes?
I guess you can't blame the stock market for shortsightedness -- it appears to be a part of its nature. But as Quiksilver continues to iron out its Rossignol acquisition, there appears to be a real payoff in the not-so-distant future for long-term-minded shareholders. Earnings are expected to grow 21% to 26% per share in fiscal 2007, and when you add in the effect of its massive apparel launch at the end of next year, it's not hard to see why management is so enthusiastic about what's in store for the company.
More Fool On Call analysis:
- FuelCell (NASDAQ:FCEL) may be losing today, but it could save us tomorrow.
- TiVo (NASDAQ:TIVO) has a new revenue stream to tap into.
Pacific Sunwear and TiVo are Motley Fool Stock Advisor recommendations. To see why and to find out how the Gardner brothers are trouncing the market, sign up for a free 30-day subscription.
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Fool has a disclosure policy.
