Quiksilver, Inc. (ZQK)

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Quiksilver (ZQK)

Q3 2013 Earnings Call

September 05, 2013 4:30 pm ET

Executives

Robert Jaffe

Andrew P. Mooney - Chief Executive Officer, President and Director

Richard J. Shields - Chief Financial Officer and Principal Accounting Officer

Analysts

Taposh Bari - Goldman Sachs Group Inc., Research Division

David M. King - Roth Capital Partners, LLC, Research Division

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quiksilver Fiscal 2013 Third Quarter Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded.

I'd now like to introduce Robert Jaffe, Investor Relations for Quiksilver, who will host this afternoon's call. Please go ahead, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver Fiscal 2013 Third Quarter Earnings Conference Call. Our speakers today are Andy Mooney, President and Chief Executive Officer; and Richard Shields, Chief Financial Officer. Bob McKnight, our Executive Chairman, joins us as well.

Before we begin, I'd like to briefly review the company's Safe Harbor statement. Throughout our call today, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding Quiksilver's business outlook and future performance constitute forward-looking statements, and results could differ materially from those stated or implied by these forward-looking statements, as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the section titled Risk Factors in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q. All forward-looking statements made on this call speak only as of today's date, September 5, 2013, and the company undertakes no duty to update any forward-looking statement.

In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.quiksilverinc.com.

With that, I'd like to turn the call over to Andy Mooney.

Andrew P. Mooney

Thank you, Robert. Good afternoon, everyone, and thank you for joining our call today.

This quarter's pro forma adjusted EBITDA growth of $4 million was largely driven by SG&A reductions of $18 million, excluding severance and other restructuring charges. With gross margins essentially flat compared with Q3 2012 at 49.4%, these cost savings more than offset our revenue decline of 3%.

I'll take you through progress to date on our profit improvement plan. Rich will then take you through our Q3 financials in detail. And we'll then open up for Q&A.

By way of reminder, the overarching theme of our profit improvement plan is focused with the objective being to accelerate progress against those 3 key strategies of strengthening our brands, growing revenues and driving operating efficiencies.

One of the key initiatives clearly has been to reduce costs throughout that organization. We're making solid progress against this initiative, which was clearly evident in the substantial reduction in SG&A in Q3.

The management team is now fully in place and the process of globalizing the key functions of product development, marketing and supply chain have considerably advanced.

In addition to global leaders in apparel, footwear and licensing, CMO and a global supply chain leader, we recently appointed Eric Kergolot as our global leader for retail stores and Nicolas Foulet as the global head of our e-commerce business. Eric and Nicolas have done an excellent job managing our EMEA brick-and-mortar and e-commerce businesses. And with this global shift, we plan to leverage retail operations, such as store design and store construction globally, as well as e-commerce, operations and marketing.

I'm excited about the world-class team we've assembled. They are capable of not only executing our profit improvement plan, but also managing a significantly larger business in the future.

I turn now to sales growth part of our plan. As evident in this quarter's results, revenue growth in the short-term will be difficult to achieve. However, our new product development teams are on track to significantly improve the product offerings of all 3 brands.

As a reminder, the earliest their efforts will bear fruit is fall 2014. And we're really looking at spring 2015 for the teams to hit full stride.

In the second -- I'm sorry, in the third quarter, sell-through of Roxy branded products remained strong. And as expected, sell-through of DC footwear, specifically in North America, remains challenging.

Quiksilver brand revenues declined 10% for the quarter, with revenues in the wholesale channel declining 16%. There were several reasons for this. We made the strategic decision to exit Quiksilver Women's earlier this year and are comping against prior year revenues of $2.5 million. This business, however, was essentially breakeven. Sales of Quiksilver products to clearance channels in North America also declined $5 million year-over-year.

The economic environment in Europe continues to be challenging, particularly in France, Spain and Italy. And this is a particular challenge for smaller, independent-sourced specialty retailers, and we continue to see store closures occurring in these countries. Although we continue to gain share on the remaining specialty accounts, nonetheless, the environment for revenue growth remains challenging.

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