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| ZQK > SEC Filings for ZQK > Form 10-K on 10-Jan-2013 | All Recent SEC Filings |
10-Jan-2013
Annual Report
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. The MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" within Item 1A.
Overview
We began operations in 1976 as a California company making boardshorts for surfers in the United States under a license agreement with the Quiksilver brand founders in Australia. We reincorporated in Delaware and went public in 1986 and, in subsequent years, acquired the worldwide licenses and trademarks that created the global company that we are today. Our business is rooted in the strong heritage and authenticity of our core brands, Quiksilver, Roxy and DC, each of which caters to the casual, outdoor lifestyle associated with surfing, skateboarding, snowboarding, BMX and motocross, among other activities. Today, our products are sold throughout the world, primarily in surf shops, skate shops, snow shops and specialty stores. We operate in the outdoor market of the sporting goods industry in which we design, develop and distribute branded apparel, footwear, accessories and related products. We have four operating segments consisting of the Americas, EMEA and APAC, each of which sells a full range of our products, as well as Corporate Operations. Our Americas segment includes revenues primarily from the United States, Canada, Brazil and Mexico. Our EMEA segment includes revenues primarily from continential Europe, the United Kingdom, and South Africa. Our APAC segment includes revenues primarily from
Australia, Japan, New Zealand and Indonesia. Royalties earned from various licensees in other international territories are categorized in Corporate Operations along with revenues from sourcing services for our licensees.
Results of Operations
The following table sets forth selected statement of operations data expressed as a percentage of net revenues for the fiscal years indicated. The discussion that follows should be read in conjunction with the table:
Year Ended October 31,
2012 2011 2010
Statements of Operations data
Revenues, net 100.0 % 100.0 % 100.0 %
Gross margin 48.7 52.4 52.6
Selling, general and administrative expense 45.5 45.9 45.3
Asset impairments 0.4 4.4 0.6
Operating income 2.8 2.1 6.7
Interest expense 3.0 3.8 6.2
Foreign currency and other income (0.1 ) (0.1 ) (0.3 )
(Loss)/income before provision for income taxes (0.1 )% (1.6 )% 0.8 %
Other data
Adjusted EBITDA (1) 7.0 % 9.9 % 11.1 %
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(1) For a definition of Adjusted EBITDA and a reconciliation of (loss)/income attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (5) to the table under Item 6. Selected Financial Data.
Fiscal 2012 Compared to Fiscal 2011
Revenues, net
Revenues, net - By Segment
The following table presents consolidated net revenues (in millions) by segment
in historical currency for each of fiscal 2012 and 2011:
Americas EMEA APAC Corporate Total
Fiscal 2012 $ 992 $ 711 $ 307 $ 3 $ 2,013
Fiscal 2011 914 761 272 5 1,953
% increase/(decrease) 8 % (7 %) 13 % 3 %
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Our net revenues for fiscal 2012 were $2.01 billion, up 3% from $1.95 billion in fiscal 2011. The $60 million increase in net revenues in fiscal 2012 was driven by a $78 million increase in our Americas segment and a $35 million increase in our APAC segment, partially offset by a $50 million decline in our EMEA segment. The decline in net revenues in our EMEA segment in fiscal 2012 was almost entirely due to unfavorable changes in foreign currency exchange rates between fiscal 2012 and fiscal 2011. Absent changes in foreign currency exchange rates, EMEA net revenues increased just under 1% in fiscal 2012. A more detailed discussion of net revenue changes by segment, brand and channel as adjusted for changes in foreign currency exchange rates (i.e., in constant currency) is set forth below.
We use constant currency measurements to better understand actual growth rates in our foreign operations. Constant currency measurements remove the impact of foreign currency exchange rate fluctuations from period to period. Constant currency is calculated by taking the ending foreign currency exchange rate (for balance sheet items) or the average foreign currency exchange rate (for income statement items) used in translation for the current period and applying that same rate to the prior period.
The following table presents consolidated net revenues (in millions) by segment in constant currency for each of fiscal 2012 and 2011:
Americas EMEA APAC Corporate Total
Fiscal 2012 $ 992 $ 711 $ 307 $ 3 $ 2,013
Fiscal 2011 904 706 273 5 1,888
% increase 10 % 1 % 12 % 7 %
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In constant currency, net revenues increased 7% compared to the prior year. Net revenues in the Americas segment increased 10% versus the prior year due to low double-digit percentage growth across all three core brands (Quiksilver, Roxy and DC) and growth across all three distribution channels, particularly within the wholesale channel. Net revenues in the EMEA segment increased 1% versus the prior year with low double-digit percentage growth in DC revenues largely offset by high-single digit percentage declines in Quiksilver and Roxy revenues. Growth in the e-commerce and retail channels within EMEA were offset by a decline in the wholesale channel. Net revenues declined a combined 15% in constant currency within the wholesale and retail channels in the United Kingdom and Spain due to the negative economic circumstances in those countries. These declines were offset by significant e-commerce net revenue growth, partially due to an acquisition in the United Kingdom, as well as net revenue growth in Russia and Germany. Net revenues in the APAC segment increased 12% due to strong growth across all three core brands as well as in the wholesale and retail distribution channels. Net revenue growth in emerging markets, particularly Indonesia and South Korea, contributed significantly to the APAC net revenue growth.
Revenues, net - By Brand
Net revenues by brand (in millions), in both historical and constant currency, for each of fiscal 2012 and 2011 were as follows:
Net Revenue by Brand in Historical Currency (as reported):
Quiksilver DC Roxy Other Total
Fiscal 2012 $ 794 $ 594 $ 524 $ 101 $ 2013
Fiscal 2011 806 545 519 83 1,953
% (decrease)/increase (1 )% 9 % 1 % 21 % 3 %
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Net Revenue by Brand in Constant Currency (current year exchange rates):
Quiksilver DC Roxy Other Total
Fiscal 2012 $ 794 $ 594 $ 524 $ 101 $ 2013
Fiscal 2011 773 530 503 82 1,888
% increase 3 % 12 % 4 % 24 % 7 %
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Quiksilver brand net revenues decreased 1% on an as reported basis due to a significant decline in EMEA wholesale revenues. In constant currency, Quiksilver brand net revenues increased 3% with low double-digit percentage growth in the Americas and APAC segments partially offset by a high single-digit percentage decrease in the EMEA segment. By channel, Quiksilver net revenues increased in both the retail and e-commerce channels and decreased slightly in the wholesale channel. DC brand net revenues increased 9% on an as reported basis and 12% in constant currency with double-digit percentage growth across all regional segments and distribution channels. Roxy brand net revenues increased 1% on an as reported basis and 4% in constant currency with strong growth in the Americas and APAC segments partially offset by a mid-single digit percentage decrease in the EMEA segment. Roxy net revenues grew in each distribution channel during fiscal 2012. Net revenues from our other brands increased over 20% due to expanded distribution of these much smaller brands.
Revenues, net - By Channel
Net revenues by channel (in millions), in both historical and constant currency, for each of fiscal 2012 and 2011 were as follows:
Net Revenue by Channel in Historical Currency (as reported):
Wholesale Retail E-com Total
Fiscal 2012 $ 1,472 $ 454 $ 87 $ 2013
Fiscal 2011 1,480 439 34 1,953
% (decrease)/increase (0 )% 3 % 155 % 3 %
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Net Revenue by Channel in Constant Currency (current year exchange rates):
Wholesale Retail E-com Total
Fiscal 2012 $ 1,472 $ 454 $ 87 $ 2013
Fiscal 2011 1,429 425 34 1,888
% increase 3 % 7 % 155 % 7 %
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Wholesale net revenues decreased slightly on an as reported basis and increased 3% in constant currency in fiscal 2012 versus the prior year. Wholesale net revenues in our Americas and APAC segments increased in the high single-digits on a percentage basis versus the prior year, partially offset by a high single-digit percentage decrease in our EMEA segment. Significant economic difficulties in Europe have resulted in the loss of many small accounts and increased discounting in our EMEA segment. Retail net revenues increased 3% on an as reported basis and 7% in constant currency versus the prior year. Retail net revenues increased in all three regional segments when measured in constant currency. EMEA retail decreased slightly on an as reported basis due to unfavorable changes in foreign currency exchange rates. E-commerce net revenues increased over 150% versus the prior year due to significant growth in each of our online platforms, particularly within the EMEA segment through both organic and non-organic growth.
Gross Profit
Gross profit decreased to $980 million in fiscal 2012 from $1.02 billion in fiscal 2011. Gross margin decreased to 48.7% of net revenues in fiscal 2012 from 52.4% in the prior year, a decrease of 370 basis points. We experienced gross margin decreases across all three of our regional segments during fiscal 2012, primarily due to increased clearance sales at lower margins within our wholesale channel compared to last year (240 basis points), increased discounting within our retail channel (80 basis points), and the impact of changes in the geographical composition of our net revenues. We experienced net revenue growth in our Americas and APAC segments, but experienced a net revenue decrease in EMEA, which is historically our highest gross profit segment. Gross margin as a percentage of net revenues by regional segment for each of fiscal 2012 and 2011 was as follows:
Basis
Point
2012 2011 Change
Americas 43.3 % 46.5 % (320 ) bp
EMEA 55.4 % 59.6 % (420 ) bp
APAC 51.1 % 53.1 % (200 ) bp
Consolidated 48.7 % 52.4 % (370 ) bp
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The increased level of clearance sales in our wholesale channel and the higher level of discounting in our retail channel were driven by our decision to more aggressively liquidate excess prior season inventory in fiscal 2012, particularly in the fourth quarter. The level of excess prior season inventory was attributable to the revenue shortfall
in EMEA versus our internal plans, retail store inventory rebalancing in the Americas, and slower inventory sell through than we anticipated for earlier seasons. The clearance sales within our wholesale channel were at lower margins than in fiscal 2011. As of October 31, 2012, prior season inventory was approximately 7% of total inventory, which was generally consistent with historical levels as of fiscal year-end. Due to the current economic difficulties in Europe, we believe that discounting within both the wholesale and retail channels may continue to impact our year over year gross margin comparisons in the EMEA segment. The relative level of discounted sales can be driven by a number of factors, including customer acceptance of our product designs, our projections of consumer demand, fashion trends, economic conditions, and changes in consumer spending, all of which are inherently difficult to anticipate. As a result of these factors, the level of discounted sales can fluctuate significantly from quarter to quarter.
Selling, General and Administrative Expense
Selling, general and administrative expenses ("SG&A") increased $20 million, or 2%, to $916 million in fiscal 2012 compared to $896 million in fiscal 2011. The increase in SG&A was primarily due to higher e-commerce expenses associated with the expansion of our online business and higher non-cash stock compensation expenses within our Corporate Operations segment, partially offset by reductions in marketing and other expense savings measures across all regions. Within APAC, the increase in SG&A was attributable to higher retail, selling and marketing expenses associated with the opening of new retail stores and growth in our emerging markets. SG&A by segment (in millions) as reported for fiscal 2012 and 2011 was as follows:
2012 2011 Basis
% of Net % of Net $ Point
$ Revenues $ Revenues Change Change
Americas 362 36.5 % 361 39.5 % 1 (300 ) bp
EMEA 338 47.5 % 340 44.7 % (2 ) 280 bp
APAC 157 51.2 % 148 54.3 % 9 (310 ) bp
Corporate Operations 59 47 12
Consolidated 916 45.5 % 896 45.9 % 20 (40 ) bp
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As a percentage of net revenues, SG&A improved by 40 basis points to 45.5% in fiscal 2012 compared to 45.9% in fiscal 2011. SG&A improved approximately 300 basis points in each of the Americas and APAC segments primarily due to net revenue growth outpacing SG&A growth in fiscal 2012. SG&A deleveraged 280 basis points in EMEA as the 1% reduction in SG&A expense was less than the 7% decrease in net revenues.
Asset Impairments
Asset impairment charges were $7 million in fiscal 2012 compared to $86 million in fiscal 2011. Impairment charges in fiscal 2012 were primarily related to our decision to close certain retail stores. Impairment charges for fiscal 2011 were primarily due to a $74 million goodwill impairment charge recorded in APAC due to the natural disasters that occurred in the region and their resulting impact on our business, as well as $12 million of impairment charges for certain retail stores.
Non-operating Expenses
Net interest expense decreased to $61 million in fiscal 2012 compared to $74 million in fiscal 2011 primarily as a result of the decline in our total non-cash interest expense. Non-cash interest expense decreased from $19 million in fiscal 2011 to $4 million in the current year, primarily due to a $14 million write-off of deferred debt issuance costs in fiscal 2011 associated with our European term loans that were paid off during the prior year upon the issuance of our European senior notes.
Our foreign currency gain amounted to $1.7 million in fiscal 2012 compared to $0.1 million in fiscal 2011. The current year gain resulted primarily from the foreign currency exchange effect of certain U.S. dollar denominated liabilities of our foreign subsidiaries.
Our income tax expense was $8 million in fiscal 2012 compared to a tax benefit of $14 million in fiscal 2011. Although we incurred a net loss during fiscal 2012, we incurred income tax expense of $8 million for the year as we were unable to benefit from the losses in certain jurisdictions where we have recorded valuation allowances. We also increased our gross deferred tax asset and valuation allowance relating to foreign net operating loss carryovers by approximately $82 million relating to a net operating loss incurred in a tax jurisdiction where we do not incur significant taxes. After valuation allowance, the impact of this additional net deferred tax asset resulted in a tax benefit of approximately $3 million in fiscal 2012.
Net Loss attributable to Quiksilver, Inc.
Our net loss attributable to Quiksilver, Inc. in fiscal 2012 was $11 million, or $0.07 per share on a diluted basis, compared to $21 million, or $0.13 per share on a diluted basis for fiscal 2011.
Adjusted EBITDA
Adjusted EBITDA decreased 28% to $141 million in fiscal 2012 compared to $194 million in fiscal 2011 primarily due to the gross profit margin decrease noted above. For a definition of Adjusted EBITDA and a reconciliation of loss from continuing operations attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (5) to the table under Item 6, Selected Financial Data.
Fiscal 2011 Compared to Fiscal 2010
Revenues, net
Our total net revenues increased 6% in fiscal 2011 to $1,953 million from $1,838
million in fiscal 2010. In constant currency, net revenues increased 3% compared
to the prior year. The following table presents net revenues (in millions) by
segment in historical currency for fiscal 2011 and 2010:
Americas EMEA APAC Corporate Total
Fiscal 2011 $ 914 $ 761 $ 272 $ 5 $ 1,953
Fiscal 2010 843 729 261 5 1,838
% increase 8 % 4 % 5 % 6 %
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Revenues in the Americas increased 8% to $914 million for fiscal 2011 from $843 million in the prior year, while EMEA revenues increased 4% to $761 million from $729 million and APAC revenues increased 5% to $272 million from $261 million for those same periods. The increase in Americas' net revenues came primarily from DC and Quiksilver brand revenues, while Roxy brand revenues were consistent with the prior year. The increase in DC brand revenues came primarily from our footwear product category and, to a lesser extent, our accessories product category. The increase in Quiksilver brand revenues came primarily from our accessories product category and, to a lesser extent, our footwear and apparel product categories. Roxy brand revenues experienced growth in our accessories and footwear product categories, which was offset by a decrease in our apparel product category.
The following table presents net revenues (in millions) by segment in constant currency for fiscal 2011 and 2010:
Americas EMEA APAC Corporate Total
Fiscal 2011 $ 914 $ 761 $ 272 $ 5 $ 1,953
Fiscal 2010 843 754 295 5 1,896
% increase/(decrease) 8 % 1 % (8 )% 3 %
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EMEA net revenues increased 1% in constant currency. The currency adjusted increase in EMEA came primarily from growth in DCbrand revenues, partially offset by modest declines in our Roxy brand revenues and, to a lesser
extent, Quiksilver brand revenues. The increase in DC brand revenues came primarily from growth in our apparel product category and, to a lesser extent, our accessories and footwear product categories. The decrease in Roxy brand revenues was generally from our apparel product category and, to a lesser extent, our accessories product category, partially offset by growth in our footwear product category. The decrease in Quiksilver brand revenues was primarily from our accessories product category and, to a lesser extent, our footwear product category, partially offset by slight growth in our apparel product category. APAC's net revenues decreased 8% in constant currency. The currency adjusted decrease in APAC revenues came primarily from Roxy brand revenues and, to a lesser extent, Quiksilver brand revenues, partially offset by strong growth in DC brand revenues.
Net revenues by brand (in millions) in historical currency for each of fiscal 2011 and 2010 were as follows:
Quiksilver DC Roxy Other Total
Fiscal 2011 $ 806 $ 545 $ 519 $ 83 $ 1,953
Fiscal 2010 770 471 528 69 1,838
% increase/(decrease) 5 % 16 % (2 )% 20 % 6 %
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Gross Profit
Gross profit increased to $1.02 billion in fiscal 2011 from $967 million in the prior year. Gross margin decreased slightly to 52.4% of net revenues in fiscal 2011 from 52.6% in the prior year.
Gross margin as a percentage of net revenues by regional segment for each of fiscal 2011 and 2010 was as follows:
Basis
Point
2011 2010 Change
Americas 46.5 % 46.3 % 20 bp
EMEA 59.6 % 59.8 % (20) bp
APAC 53.1 % 54.2 % (110) bp
Consolidated 52.4 % 52.6 % (20) bp
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Gross margin in the Americas segment increased 20 basis points to 46.5% from 46.3% in the prior year. EMEA gross margin decreased 20 basis points to 59.6% from 59.8%. APAC gross margin decreased 110 basis points to 53.1% from 54.2%. The increase in Americas' gross margin was primarily the result of a greater percentage of retail versus wholesale sales, including e-commerce sales. Our retail gross margins are typically higher than our wholesale gross margins. Our EMEA gross margin decreased primarily as a result of a smaller percentage of retail versus wholesale sales, as we operated fewer retail stores throughout EMEA during fiscal 2011. In APAC, the gross margin decrease was primarily due to a smaller percentage of retail versus wholesale sales, partially offset by continued margin improvements at retail in Japan, although such improvements were somewhat muted due to the impact of the natural disasters that occurred in that market.
Selling, General and Administrative Expense
Our SG&A increased 8% in fiscal 2011 to $896 million from $832 million in fiscal
2010. As a percentage of net revenues, SG&A increased to 45.9% of revenues in
fiscal 2011 compared to 45.3% in fiscal 2010. SG&A by segment for fiscal 2011
and 2010 was as follows:
2011 2010 Basis
% of Net % of Net $ Point
$ Revenues $ Revenues Change Change
Americas 361 39.5 % 325 38.5 % 36 100 bp
EMEA 340 44.7 % 340 46.7 % 0 (200) bp
APAC 148 54.3 % 128 49.2 % 20 510 bp
Corporate Operations 47 39 8
Consolidated 896 45.9 % 832 45.3 % 64 60 bp
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In the Americas, SG&A expenses increased 11% to $361 million in fiscal 2011 from $325 million in fiscal 2010. SG&A as a percentage of revenues increased to 39.5% compared to 38.5% in the prior year. The increase in SG&A as a percentage of revenues in the Americas was primarily due to additional spending to support growth initiatives, including marketing, retail and e-commerce expenses. In EMEA, SG&A was unchanged at $340 million. SG&A as a percentage of revenues decreased to 44.7% compared to 46.7% in the prior year. The decrease in SG&A as a percentage of revenues in EMEA was primarily due to lower retail store expenses resulting from fewer retail stores. EMEA's SG&A decreased 3% in constant currency. In APAC, SG&A increased 15% to $148 million from $128 million for those same periods. SG&A as a percentage of revenues increased to 54.3% compared to 49.2% in the prior year. In APAC, the increase in SG&A as a percentage of revenues was primarily the result of lower revenues and, to a . . .
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