Quiksilver Predicts Leaner Times as Prices Drop and Ad Costs Rise

In a sign of choppy waters ahead for the surfwear industry, bellwether Quiksilver Inc. said Thursday it is lowering its projections for the current quarter and next fiscal year, even as it reported healthy sales and earnings for its May-through-July quarter.

The gloomy forecast stems from intense competition that is pushing down prices and the increased expense of a beefed up advertising campaign, said Quiksilver, the world’s largest maker of surf apparel.

The Huntington Beach company said it now expects fourth-quarter earnings of 30 cents to 32 cents a share, down from 42 cents a share in the same quarter last year. Next year, earnings are likely to range from $1.50 to $1.55 a share, well below the $1.85 a share that analysts had expected, according to a Thomson Financial/First Call survey.

Quiksilver announced its quarterly results and outlook after the close of regular U.S. trading hours. The stock, which has been slipping all week, closed Thursday at $19.03, down 98 cents a share, on the New York Stock Exchange.

The company’s scaled-down projections come as surfwear makers and retailers are immersed in the back-to-school selling season, which for many in the industry is more critical than Christmas. Surf shops along the coast say they have been encouraged by strong back-to-school sales after one of the worst spring-summer performances in recent memory.

“We’re recovering from a very tough spring and early summer, and that’s the trend across the board,” said Eric John, owner of Laguna Surf & Sport and co-owner of several other Orange County surf shops.

The setback this year has been jarring for both small surf shops and larger manufacturers, who had been enjoying bustling sales since the mid-1990s. The problems began when an overcast spring dampened sales.

“When it got warm later, the business got better, but it didn’t save what was a pretty dismal spring,” said Dick Baker, chief executive of surfwear maker Ocean Pacific Apparel Corp. in Irvine and president of the Surf Industry Manufacturers Assn. “Back-to-school has been much better.”

Indeed, Quiksilver’s earnings for the three months ended July 31 matched analysts’ expectations, climbing 19.3% to nearly $8 million, or 33 cents a share, from almost $6.7 million, or 29 cents a share, a year ago. Sales rose 27.3% to almost $155.3 million.

Quiksilver’s steady performance reflected the company’s diverse product line, its strong European sales and its hot Roxy brand for girls, analysts say.

But over the last few weeks, it became apparent that the sagging retail market was hurting business, Chief Executive Robert B. McKnight Jr. told analysts in a conference call.

“Although we have been aware that this environment has been under strain, I don’t think any of us thought it would persist throughout fiscal 2001,” he said.

Surfwear makers say their styles are still popular, but sales have been hurt by a saturation of products.

As the laid-back, Southern California look caught on over the past decade, many large companies--including Abercrombie & Fitch, Old Navy and Target--began pushing their own surf styles, often at lower prices than at beach shops.

A “flood of excess products . . . has put a great deal of pressure on margins,” McKnight said.

To bolster its namesake brand and its Roxy label, Quiksilver said it will “substantially increase” its advertising budget and launch a television campaign.

While loyal customers have helped keep surf shops afloat, mall shoppers are more fickle. Pacific Sunwear of California, the Anaheim-based retailer of surf and skate apparel, has suffered from a drop in mall traffic and a lineup of products that failed to ignite much enthusiasm among young shoppers, analysts said.

“There’s still young consumers wanting to make purchases,” said Joe Teklits, an analyst with First Union Securities. “Part of the problem in the mall is it’s gotten a little boring in the last year or two.”

Offering a glimmer of hope, Pacific Sunwear on Thursday reported an upturn in sales in August following a dismal second quarter. Sales at stores open at least a year--a key industry indicator--nudged up 0.6% after falling 7.3% in the second quarter.

The improvement was traced to increased purchases of girls’ clothing and continued strong sales of footwear and accessories. The weakness in men’s clothing sales continued.

Pacific Sunwear’s stock closed at $16.61, down $1.28 a share, in Nasdaq trading.

For the surfwear industry, the heated competition makes it even harder to rack up sales in an uncertain economy. And some are now wondering whether even Christmas will bring much cheer.

“The retail climate is very tough,,” said Steven Richter, an analyst with Tucker Anthony Sutro Capital. “And we see that carrying through to the end of the year.”