QuickSilver (NYSE:ZQK): Skate Getting Traction in Slow Economy

By: Think Equity Research

QuickSilver (NYSE:ZQK): Recent ActionWatch data highlights improving business trends for core skate and surf shops across the U.S. in 4Q. We view this channel as a bellwether for overall industry demand (and brand-specific trends), given our view that core skate and surf channels help define and set trends within the action sports industry, with these trends subsequently carried through to more mainstream channels of distribution. However, while industry trends are improving, they remain negative on a Y/Y basis for Quiksilver brands, which we believe suggests that Quiksilver has significant work ahead of it with respect to stabilization of the U.S. business.

Skate/Surf industry sales and inventory trends improving. ActionWatch POS data leaves us comfortable with our strong growth assumptions in core channel. C4Q data from ActionWatch, which captures Point of Sale data from over 100 core skate surf shops suggests a healthy uptick in sales from the channel, with total industry same store sales up 4.6% Y/Y in C4Q (December), following several quarters of declines. Inventory trends are also healthy, with C4Q inventory growth of 4% Y/Y, acceleration from 1.7% Y/Y growth in 3Q.


Quiksilver sell-in and sell-through in core channel remains challenging. ActionWatch data indicates that total Quiksilver revenue in the core U.S. channel was down 19.6% Y/Y in 4Q versus 3Q sales in the core channel down 19.6% Y/Y, with retailer inventories of Quiksilver brands down 14.3% in 4Q, versus 12.4% inventory declines in 3Q. This suggests to us that demand trends remain challenging for core Quiksilver brands. Note that we view ActionWatch data as a useful tool to evaluate direction of sales and inventory trends and not the magnitude of sales trends, given the modest sample size of the data set.

Reiterating FY11 Revenue and EBITDA estimates. Given signs that improvement in business trends is taking hold (albeit slowly), we are increasingly comfortable with our F1Q and FY11 sales and adjusted EBITDA estimates. Our model is for adjusted FY11E EBITDA of $212.7M, slightly below prior year levels of $214.3M. Full year guidance is for slight sales growth and adjusted EBITDA roughly in line with FY10. The company expects F1Q sales to be down 5% Y/Y, with EBITDA down up to $10M from prior year levels of $38.9M.

Adjusting EPS estimates to reflect adjustments to our (previously incorrect) tax assumptions. We are revising our FY11 EPS estimates from $0.33 to $0.20 and our FY12 EPS estimates from $0.46 to $0.41. This is due to a change in our income tax expense assumptions, which were previously incorrectly understated as we miscalculated international income tax expense. Our model is now in line with company guidance with respect to annual tax expense.

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