Quiksilver Got Slammed. So What?

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

I've written about Quiksilver (NYSE: ZQK) on multiple occasions, usually touting the potential of their DC brand. After a 13% decline in the stock after disappointing Q4 results, it's time to take a look again. Were there any long-term implications in the quarter that have changed the story? Definitely not. Quiksilver missed estimates. So what? The long-term story still holds true.

The Results

Wall Street expected Quiksilver to report earnings of $0.10 and sales of $559 million. Instead, Quiksilver reported earnings of $.07 and missed revenue estimates by 1%. Furthermore, margins continued to contract for the fifth quarter in a row. In this quarter margins contracted 300 basis points lower than the same quarter last year, a steeper decline than expected.

Investors who took the time to listen to Quiksilver's earnings call were tipped with a useful explanation regarding the 300 basis point decline in gross margins: Most of the erosion in Q4 gross margins was due to the liquidation of overbought inventory. According to management, Quiksilver is entering 2013 with normal inventory levels, and margins should not be eroded due to overbought inventory in future quarters (unless Quiksilver overbuys again, of course).

The Big Picture

As stated in the Q4 earnings call, Quiksilver management has three long-term initiatives:

  • Strengthening our brands
  • Expanding our business
  • Driving operational efficiencies
When you zoom out, it is clear that Quiksilver is executing on all three of these initiatives. For the full year, revenue was actually up 7% in constant currency, with all three brands and all three operating regions recording growth. This is quite a feat considering the economic challenges in Europe, which represents 35% of revenue. In fact, revenue in constant currency in Europe actually increased 1%.
 
Though gross margins for the year are down, when you zoom out and look at the ten year picture there is a clear upward trend in gross margins, rising from just 40% in 2002 to 49% today. Even more impressive, Quiksilver's pricing power is so strong that it's very tough to find any competitors or similar companies with gross profit margins as high. Its gross margins are higher than Nike (NYSE: NKE), Under Armour (NYSE: UA), Columbia Sportswear (NASDAQ: COLM), Buckle (NYSE: BKE), and American Eagle Outfitters.

<img src="http://media.ycharts.com/charts/24c590147fd481c7e33e8a0b8bfbd5e9.png" />

ZQK Gross Profit Margin Quarterly data by YCharts

Though Quiksilver's balance sheet is definitely in bad shape, the stock is drastically cheap when measured by a price-to-sales ratio (see below)--especially given the fact that Quiksilver's brands have enough pricing power to earn 50% profit margins.

<img src="http://media.ycharts.com/charts/020d485fb40328b266929a58ecc58649.png" />

ZQK Price / Sales Ratio TTM data by YCharts

Though investors should never depend on it, it serves as an interesting side note: With a struggling balance sheet, three powerful brands (Quiksilver, Roxy, and especially DC), and a clear position as the world leader in outdoor sports apparel, Quiksilver looks ripe for a buyout from a bigger player like Nike.
 
The Bottom Line
 
Don't sweat the short-term decline in Quiksilver's stock price. The long-term story still remains. It was only in October when the stock was trading at just $3.00 a share. With over a 30% rise in the stock price in less than two months, many short-term investors were eager to take their profits on the bad news. For those who decide to stick it out for the long haul, I believe Quiksilver is a great bet.


DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of The Buckle, Nike, and Under Armour. Motley Fool newsletter services recommend The Buckle, Nike, and Under Armour. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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