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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | APRIL 27, 2004
 FOCUS STOCK By Marie Driscoll, CFA Quiksilver Catches a Growing Wave S&P digs the trendy surfer-gear seller, which is expanding in Asia and preparing potentially lucrative brand extensions From its start in 1969 as a niche supplier of surfer gear, Quiksilver (ZQK; recent price, $23) has evolved into a multibranded, multichannel marketer of apparel and other products. Its offerings span the toddler to adult market, with a main focus on young adults, male and female. We at Standard & Poor's Equity Research believe Quiksilver can achieve long-term earning gains of 15% to 20% and consider the shares undervalued vs. the company's industry peers and the S&P SmallCap 600 index. Quiksilver carries Standard & Poor's highest investment recommendation of 5 STARS, or buy. WELL-DIVERSIFIED. Opportunity for market-share gains are expected over the next few years as Quiksilver penetrates international markets (Asia being the latest) and profit margins benefit from recent capital investments. We believe Quiksilver enjoys strong global brand awareness, which suggests brand-extension opportunities in ancillary categories. Management has cited shoes, eyewear, and watches. The retailer's technical products -- clothing and accessories aimed at high-level surfers and skateboarders -- help it to establish brand authenticity among its youthful target group, while casual products provide the sales volume. While the Quiksilver brand is positioned (and sized) for young men ages 15 to 24, it reaches a younger audience with the Quiksilver Boys and Quiksilver Toddlers marques. Quiksilveredition is the men's line. Other brands include Roxy, Hawk, Raisins, Teenie Wahini, and Leilani. In our view, Quiksilver has a high level of diversification in key categories: brands, products, distribution channels, and geography. In fiscal 2003, the sales mix by brand was 58% Quiksilver, 32% Roxy, and 10% other brands. T-shirts represented 20% of product sales. Accessories, footwear and hardgoods category added another 20%, with outerwear contributing 18%, bottoms 17%, tops 13%, and swimwear 12%. By region, 50% of sales came from the Americas, 40% from Europe, and 10% from Asia Pacific. As for distribution channels, 44% of sales were in specialty stores, 36% from Quiksilver's proprietary retail concept Boardriders Clubs, 11% in department stores, 5% from U.S. exports, and 4% through distributors. SURFING TO CHINA. Quiksilver sponsors about 500 amateur and professional athletes. We think this keeps it in touch with users and venues that authenticate the brand and creates demand among its target audience. In 2003, Quicksilver Entertainment was created to produce programming to communicate the outfit's board-riding lifestyle. Its developed the 54321 daily action-sports-news magazine for Fox Sports Net and the Surf Girls series for MTV. Quiksilver is also pursuing growth opportunities in the Asia Pacific region. It just opened its first Boardriders Club store in China. We think the Chinese marketplace is hungry for Western lifestyle brands like Quiksilver and Roxy. Together with its partner, Glorious Sun Enterprises, one of China's largest retailers, Quiksilver has plans to open additional stores in Hong Kong and Beijing as well as other locations in the country. Another crucial part of Quiksilver's global strategy is the development of its Boardriders Clubs. Stocked primarily with Quiksilver and Roxy products, we think they provide brand-building opportunities and a product-testing platform. Company-owned stores numbered 141 in January, 2004: 61 each in the Americas and Europe and 19 in Asia Pacific. Quiksilver also had 149 licensed stores at wholesale accounts and 94 shops in licensed territories. SHOE SHOPPING. Retail concepts provided about 15% of fiscal 2003 (ended October) revenues. With the number of company-owned stores projected to double in three to five years, this percentage should grow. Quiksilver gets wider gross margins through retail -- offset by higher selling, general, and administrative (SG&A) expenses -- that we believe will be leveraged as the store base grows. Another avenue of growth is strategic acquisitions. Quiksilver plans to buy privately held DC Shoes, a marketer of everyday and technical skateboarding footwear, in the third quarter of fiscal 2004. We think the deal would bring another emerging youth brand under the Quiksilver umbrella. DC Shoes generated about $100 million in 2003 revenues, about 75% footwear and 25% apparel and accessories (mainly T-shirts and hats). DC Shoes provides knowhow that Quiksilver will apply to its growing footwear sales (the latter's current total is estimated at $50 million annually). Likewise, we believe Quiksilver's skill in global apparel sourcing and distribution will benefit DC. Combined, the opportunities for more rapid market penetration with greater profitability should improve. The deal is expected to add about 6 cents to fiscal 2005 earnings per share, which isn't factored into our current estimates.
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