Quiksilver, Inc. (ZQK)

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Quiksilver (ZQK)

Q4 2013 Earnings Call

December 12, 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

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Kelly L. Halsor - BB&T Capital Markets, Research Division

Joseph Bess - Roth Capital Partners, LLC, Research Division

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

Andrew Burns - D.A. Davidson & Co., Research Division

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

Christian Buss - Crédit Suisse AG, Research Division

Presentation

Operator

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

And now, I would like to introduce Robert Jaffe, Investor Relations for Quiksilver. Please go ahead, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver fiscal 2013 fourth quarter and full year 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 fact, 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 on our quarterly reports on Form 10-Q. All forward-looking statements made on this call speak only as of today's date, December 12, 2013, and the company undertakes no duty to update any forward-looking statements.

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.

We have also posted on the Investor Relations section of the company's website supplemental financial tables, which you may find helpful. These tables contain additional information on Quiksilver Inc.'s continuing operations and discontinued operations for the current and prior periods.

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. For the fourth quarter, Quiksilver and Roxy brand sales remained steady compared with the same quarter last year. However, as expected, we saw a significant decrease in DC brand sales. While total net revenue decreased, this quarter's pro forma adjusted EBITDA improved by $3 million, primarily due to improved gross margin and SG&A reductions of $15 million, excluding severance and other restructuring charges.

Since our last conference call, we continued to reduce costs and rightsize the organization in line with our Performance Improvement Plan (sic) [Profit Improvement Plan]. We also took steps to enhance the top line medium to long term. I will highlight these actions, then Rich will take you through our Q4 financials in detail, and then we'll open up the call for Q&A.

On cost reduction and rightsizing, we further reduced our athlete and event rosters and made some difficult decisions to reduce marketing headcount. These steps will allow us to increase marketing resources devoted to new and traditional media on sales support and athlete activation beginning spring of 2014.

We continue to see gains in our direct-to-consumer business. E-commerce revenues grew 22% in Q4, and we continued to improve the profitability of our brick-and-mortar retail stores by closing 17 underperforming retail stores, mostly located in Asia Pacific and Europe.

We sold the snowboard business, Mervin Manufacturing, for approximately $58 million, and are working on opportunities to divest other non-core operations, including Hawk and Surfdome. We also made the decision to discontinue the Moskova and our Maui and Sons license.

With regard to our management team, we named a global Chief Information Officer, global heads of retail, e-commerce and our Waterman business. We strengthened our global distribution, logistics and supply chain teams with the recent additions of a Global Vice President of Distribution and a Vice President of Strategic Sourcing.

We made important headway in optimizing our supply chain, reorganizing the function, recruiting experienced executives for key positions and establishing global processes and controls.

We made solid strides in rationalizing our style counts, further reducing SKUs for fall holiday 47% over prior year, and anticipate realizing the benefit of these actions in fall 2014 and beyond.

To enhance the sales efficiency, we reorganized our U.S. wholesale sales force and have begun analyzing our wholesale operations in EMEA, and began centralizing e-commerce to global systems and processes under the leadership of a new global head of e-commerce.

Turning to the sales growth part of our plan, we used a portion of the proceeds from the Mervin sale to invest in our joint ventures in Mexico and Brazil, and we now own 100% of our operations in both countries.

We entered into our first major licensing agreement with the U.S. subsidiary of Li & Fung, a multibillion-dollar global apparel group. Li & Fung will design, manufacture and market children's apparel bearing the Quiksilver and DC brand trademarks in the Americas. We expect this agreement to help grow our children's apparel business, and it dovetails with the Profit Improvement Plan, enabling us to focus our energies and resources on our core apparel business, while significantly reducing SKUs in our supply chain.

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