$treet $ector: New Feature Looks At Quiksilver, Bob McKnight

By Jeremy Caslin, Staff Writer

THE DAILY introduces $treet $ector, a new feature that will chart the performance of a specific sector of sports-, media- and entertainment-related stocks and offer an inside look at one company’s prospects within that group. Industries being spotlighted will include sporting goods, motorsports, action sports, video game manufacturing, tracks and gaming, apparel and footwear, media, golf and ad agencies. Today’s edition looks at the action sports and ski sector, with a special focus on Quiksilver, including an interview with co-Founder, Chair & CEO Bob McKnight. Additionally, to gain a Wall Street perspective on Quiksilver, we spoke with Nollenberger Capital Partners Senior Research Analyst Angelique Dab, who covers the footwear and specialty apparel industry.

STOCK ACTION: The following looks at the one-year and five-year stock performances of several companies related to action sports and skiing. All four companies that were publicly traded as of February ’02 have easily outperformed the S&P 500 index since then, with Vail Resorts and Quiksilver each logging gains of over 200%. With Quiksilver still working on the integration of its ’05 acquisition of French ski-maker Rossignol, the company has had to revise its earnings lower on six occasions, including for the current quarter and full year. Just two weeks ago, Quiksilver issued full-year ’07 revenue guidance of $2.43-2.46B, with earnings per share of $0.75-0.78, which was below analyst expectations of $2.51B and $0.91 per share, respectively. The company cited unusually warm weather and poor snow conditions in the U.S. and Europe. The stock has therefore underperformed against the S&P and most companies in the action sports sector over the last year.

ONE-YEAR PERFORMANCE^
COMPANY	2/15/06	2/15/07	%CHANGE
VailResorts	$30.60	$48.91	59.8%
Zumiez	$24.34	$34.89	43.3%
Nike	$83.01	$105.51	27.1%
K2 Inc.	$10.70	$12.12	13.2%
S&P 500	$1,280.00	$1,456.81	13.8%
Quiksilver	$13.40	$14.25	6.3%
Volcom	$33.19	$32.85	Flat
FIVE-YEAR PERFORMANCE^
COMPANY	2/15/02	2/15/07	%CHANGE
Vail Resorts	$14.90	$48.91	228%
Quiksilver	$4.61	$14.25	209%
Nike	$56.03	$105.51	88.3%
K2 Inc.	$6.95	$12.12	74.3%
S&P 500	$1,104.18	$1,456.81	31.8%
Volcom	N/A	$32.85	N/A
Zumiez	N/A	$34.89	N/A

^ = adjusted for splits and dividends

Quiksilver's McKnight Continues To Partake In Action Lifestyle

MCKNIGHT THINKING LONG-TERM ON QUIKSILVER: California native Bob McKnight and fellow surfer Jeff Hakman acquired the U.S. licensing rights to surfwear-maker Quiksilver in ’76, with the company having been founded in Australia six years earlier. McKnight, who says Quiksilver’s core customer is 12-20-year-olds, took the company public in ’86 and it moved to the NYSE in ’98, by which time Quiksilver had long since diversified its offerings beyond boardshorts to include skiwear, swimwear, T-shirts, jackets and more. The company’s current offerings include apparel, boardshorts, denim, wetsuits, watches, footwear, eyewear, surfboards and snowwear. Beyond the Rossignol acquisition two years ago, which brought with it Cleveland Golf as a subsidiary, perhaps Quiksilver’s most significant moves were starting its Roxy women’s line in ’90 and its acquisition of DC Shoes in ’04. Annual sales, which came in at $19M in ’86, are now well over $2B. We recently caught up with McKnight, who talked about his company and Wall Street’s reluctance to embrace the Rossignol acquisition.

Q: Wall Street reacted somewhat negatively to the company’s acquisition of Rossignol, but you’ve said Wall Street doesn’t “understand most things we do.” Why the lack of respect or understanding from the Street?
MCKNIGHT: I wish I knew. ... They didn’t like it when we bought DC [Shoes]. They don’t like anything we do. They didn’t like it when we started Roxy. I can’t worry about that, I run this company for the long term and for shareholder value, and the whole Rossignol idea is to take our company out of the limited board sports space and get us into the board sports plus outdoor, which is a huge space. … It sets us up for the next ten years of growth and profitability, and so if they don’t get it, well, too bad, but I think in a few years they will get it.

McKnight Sees Long-Term Benefit In Acquisition Of Rossignol

Q: What have been the biggest obstacles with the Rossignol acquisition?
MCKNIGHT: It’s a hard goods company and hard goods are tough. It’s weather-dependent. ... I think when we add the apparel piece which is more winter and summer, and more lifestyle and more ski wear and outerwear and fashion wear, I think it’ll limit the risk of just being so tied to snow conditions.

Q: How much of a factor is Nike in action sports apparel? Is that becoming more evident?
MCKNIGHT: Yes, they’ve definitely seen the zone, they’ve identified it, they’re coming after it. They are entering it through the skate area. They’re a great company with great leadership. And I think they’ll be good competition.

Q: Quiksilver’s stock has been relatively flat the last couple of years, despite strong revenue growth and successful acquisitions. Why should someone invest in the company’s shares now?
MCKNIGHT: Because I think there’s growth in sales and growth in revenues to come. The overall portfolio of brands is very strong and compelling. I think we have a great track record, and we have very consistent, seasoned managers here that aren’t going anywhere. I think we run the company professionally and effectively.

$TREET SIDE PERSPECTIVE: Nollenberger Capital Partners Senior Research Analyst Angelique Dab echoes McKnight’s emphasis on needing to take a longer-term approach to evaluating the Rossignol acquisition, and she points to his track record of successfully integrating earlier acquisitions that have become core Quiksilver brands. Dab: “I believe in the longevity of it. ... The question just becomes what will this look like and how long will it take. That’s really the big question on everybody’s mind, and so the share price hasn’t really reflected it because it’s going to take time.” Commenting on McKnight’s statement that the investment community “doesn’t get it” yet, Dab said, “Wall Street does get it. I think Wall Street gets the timeline. Unfortunately Wall Street tends to look for things a bit quicker, in the sense of quarter to quarter, to move share price.”

FUTURE GUIDANCE: With Quiksilver earlier this month cutting its Q1 and full-year ’07 earnings guidance due to warm weather and poor snow conditions in the U.S. and Europe, Dab said the short-term concerns about Rossignol will continue, despite the fact “everybody believes in Bob and the strength of the core [Quiksilver] brand.” Dab: “Those are unforeseen things, but at the same time that puts out that timeline of when that acquisition actually helps the company. It increases the risk into the next year. If there was a really difficult season for outerwear sales this year, then what does that mean for next year? What if there are issues again with the weather?” Dab said of Quiksilver’s lowered guidance, “I need to take a step back and let them show me a little bit before I get behind it again.”