Shredding With Quicksilver

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

Quiksilver (NYSE: ZQK) is getting ready to release its fourth quarter and year-end earnings in a few days.  I’ll be taking a look at its numbers and will make some predictions of where I see the company going in the future.   Having a snowboarder in my home, I’m quite familiar with the Quiksilver brands.  A conversation with my daughter last night showed her esteem for the Quiksilver name, its products, and its sponsorship of talented snowboarders.  She dropped the names of other brands that she holds in high regard like Holden, Patagonia, and Swany as well as others that she referred to as the “Wal-Mart of the ski industry”.

At around $4, the company has been trading off of its 52 week high of $4.89. 

What I’m Looking For:

When the numbers are released on Monday, December 10, I’ll be looking first at its growth in total sales.  I’m hoping to see a YOY increase of around 3% with quarterly sales coming in around $561 million.  This is a 9% increase from third quarter numbers, which may appear optimistic, but with the increased popularity of snowboarding, the upcoming ski season, (and the ringing endorsement from my daughter), I think they can pull this off.

Quiksilver’s costs have been widely fluctuating range over the past few years.  Its Gross Margin has been fluctuating in the 47-55% range.  I’m projecting that they’ll hold costs enough to bring the Gross Margin in around 51% or $286 million.  Sales and Administrative costs have also been fluctuating in a wide range over the past several years.  I’m projecting that SG&A will come in around $252 million or 45% of sales.

Just looking at the numbers it is apparent to me that Quiksilver needs to get some religion regarding how it operates.  Much tighter controls need to be instilled regarding its overall expenses.  It doesn’t do a lot of good to increase sales, if the production and marketing expenses are left to run wild.

Even a quick look at Under Armour, (NYSE: UA) and Lululemon Athletica (NASDAQ: LULU) shows that clothing manufacturers can be managed in a much more efficient manner.  Like Quiksilver, Under Armour’s Gross Margin has been in the 48-50% range.  That’s where the similarities end.  Lululemon’s Gross Margin is closer to 55%.  Under Armour’s SG&A expenses are 37% vs. 28% for Lululemon and a whopping 46% for Quiksilver.  Net Income (ttm) comes in around 18% for Lululemon, and 6.4% for Under Armour vs. Quiksilver’s paltry 2.6%.  Finally Quick ratio for Lululemon is close to 4, around 1 for Under Armour, but only 0.3 for Quiksilver.

Longer Term

It will be interesting to see how the lawsuit by a Delaware Trust is resolved.  The Vladimir Gusinsky Living Trust has claimed that the company violated its incentive plan by awarding “excessive” stock incentives.   Along those same lines, Yahoo!Finance has a high level of concern regarding Quiksilver’s Corporate Governance of Compensation.

Bottom Line

Looking towards the future, with average analyst earnings projected to be $0.21 in 2014 and a PE closer to the industry average of 20, I could see Quiksilver trading around $4.50 to $4.75.  If the firm learns how to control and stabilize its expenses, EPS could be as high as $0.25 next year with a stock price closer to $5.25.        

GailPEddy has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica 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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