This Apparel Maker has an Overlooked Jewel!

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few weeks ago I wrote an article on Quiksilver (NYSE: ZQK) entitled, Quiksilver: An Undervalued Turnaround. On the day I wrote it, Quiksilver was trading $3.05 per share. Quiksilver's stock soared higher after its earnings release and it is now trading around $3.61 per share, up over 18%. Now a question lingers for Quiksilver investors: Is Quiksilver still undervalued? I believe it is. In fact, I believe Quiksilver shares are more than 45% undervalued. Why? Mainly due to Quiksilver's overlooked jewel: DC Shoes.

A Double-Digit Growth Catalyst

To no surprise, DC continued its trend of double digit revenue growth rates in Q3. Sales of DC shoes increased by 16% in constant currency between Q3 2011 and Q3 2012. This is actually an acceleration of growth compared to the last two quarters.

All this growth comes despite some serious headwinds in Europe, where Quiksilver has heavy investment. Quiksilver's European region saw positive revenue growth in constant currency and positive same-store sales growth despite terribly tough economic conditions in UK and Spain (both very large markets for Quiksilver). Economic troubles were not the only troubles Quiksilver faced in Europe over the last 12 months. Last winter there was a lack of snow and in the summer there was lots of rain. Despite all these challenges, Quiksilver's Europe region marches on with positive same-store sales growth for Q3 and year-to-date.

With no sign of a slow-down, DC Shoes is becoming a much more significant catalyst to Quiksilver for investors to watch than it was in the past. DC Shoes now represents a whopping 28% of revenue according to the 2011 annual report. This number has surely risen since then, but we won't know the exact number until we get to read the annual report after this quarter. To visualize DC's growth as a percentage of revenue, take a look at the chart below:

Global Brand Recognition

Quiksilver has greater growth potential than some brands such as Rue 21 (NASDAQ: RUE) and Buckle (NYSE: BKE), who operate completely domestically. Quiksilver's opportunity for further international penetration leaves room for potentially greater upside--just look at the global scale of Nike (NYSE: NKE), who generated $12 billion in revenue in fiscal 2012 from regions outside of North America.

Consider this direct quote from Quiksilver's annual report:

"We've seen great success over the recent past in countries such as Germany, Austria, Switzerland, Russia and the Czech Republic, where we've had an established presence but have only just begun to invest in growth. We've driven impressive, profitable growth in Brazil, while Mexico and the non-coastal US states represent key growth opportunities for us in the Americas. In our Asia Pacific Region, China, South Korea, and Taiwan are untapped opportunities where we've recently made key moves to build a solid business infrastructure for each of our three main brands" (source: sec filings).

This quote highlights many of Quiksilver's international opportunities that companies like Rue 21 and Buckle can't even consider without an established presence in any country but the United States. As Quiksilver management explains, most of DC Shoes growth will come from international penetration. Quiksilver's existing presence and opportunities in these many countries will help this international penetration become a reality.

But Quiksilver is not alone in its passion to further penetrate growing international markets. In fact Columbia Sportswear (NASDAQ: COLM) recently announced a joint venture in China with Swire Resources to better position the company for opportunities in China. The ultimate purpose of the venture is to "pursue the significant long-term growth opportunities in China." The Columbia Sportswear press release announcing the venture goes on to say that "China's rapidly growing outdoor market is benefiting from an expanding economy, increasing consumer discretionary incomes, and greater interest in outdoor leisure activities." Without a doubt these opportunities overlap with Quiksilver's outdoor sports brands.

Plenty of growth lies ahead

Quiksilver management believes that by 2016 DC will reach a sustainable contribution of $1 billion in revenue per year to Quiksilver revenues -- that's double the 2011 DC Shoes revenue of $500 million. To achieve such a goal, DC will need to grow at a rate of 15% per annum. Three quarters later, DC is still on track to meet this goal.

Based on these growth estimates for the DC Shoes brand, profit margins that exceed Rue 21, Buckle, Nike, and Columbia Sportswear, and positive revenue growth across all 3 brands, all 3 distribution channels, and every geographic region of operation, DC Shoes is a valuable asset to Quiksilver.

ZQK Gross Profit Margin data by YCharts

The Bottom Line

As DC Shoes continues to become a larger percentage of Quiksilver's of revenue, its double digit growth will begin to have a greater impact on Quiksilver's growth overall. This incremental benefit will help Quiksilver make a successful turnaround, returning to profitability.

                                                                                                                                                           

 


DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of The Buckle. Motley Fool newsletter services recommend Nike and The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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