Surfs Up!

12/10/2004 12:00 am EST

Focus:

Alexander Green

Chief Investment Strategist, The Oxford Club

"We've found a surfing sportswar company smack in the middle of a rising wave of higher sales and earnings," says Alexander Green in The Oxford Communiqué . "And we think it’s giving us the opportunity to ride the pipeline to superlative profits." Here's his review.

"Quiksilver (ZQK NYSE) appears to be experiencing an endless summer. And the company’s shareholders are, as well. Business has been booming at Quiksilver for almost 30 years. In fact, you’d never know we experienced a bear market recently by looking at this stock. Shares of this casual apparel company are up 60% over the last year, 140% over the last two years, and more than 450% from the lows of four and a half years ago. (The S&P 500 has lost 8% over the same period.) History shows that fads come and go. But surfing and other board sports never go out of style. Meanwhile, surf attire comes in all shapes, sizes, and colors. And nobody is selling more of it than Quiksilver.

"Maybe that’s because the company’s love of the sport starts right at the top. Thirty years ago, CEO Robert McKnighthimself an avid surfer bought the license for Quiksilver USA from the Australian surfers who founded the company. He went on to buy worldwide rights and expand it into a $1 billion global lifestyle brand. Today Quiksilver is universally recognized as the embodiment of the surfing lifestyle. And it’s not just bikinis and surf trunks. Quiksilver sells an astonishing array of tee shirts, jackets, sweaters, pants, hats, visors, shoes, sandals, wetsuits, eyewear, and watches. The company also has an obvious flair for promotion. It keeps its name out in front of board-riding circles by sponsoring surfing tournaments and other major events. And it uses extreme-sports stars such as Tony Hawk and Kelly Slater to endorse its products.

"The company currently owns more than 400 stores worldwide. Yet most of its sales come from wholesale channels, including surf shops, specialty stores, and department stores. Right now roughly half of Quicksilver’s business comes from overseas markets. And that’s where things are really starting to heat up. The company’s European sales rose 23% in the last quarter to $115 million. Sales from Asia were even more impressive. They grew 67% to $33.1 million. (The company just opened two new stores in Hong Kong.) And sales in Australia and Japan are growing at a blistering rate, too. Fortunately, Quiksilver tends not to stray too far from its casual lifestyle image. That’s a good thing, since they have excellent brand recognition and have found a highly profitable niche.

"Of course, most surf wear is bought by young folks. Yet Quiksilver has devised an ingenious strategy to keep their aging customers in the loop. The company recently launched Quiksilver Edition, a higher priced line of casual apparel geared to men age 25 and up. And it’s already selling well. Plus earlier this year, the company acquired DC Shoes. Another smart move. The sports-related footgear company is already responsible for 34% of Quiksilver’s year-over-year sales growth. In short, I believe this is one of the most attractive specialty retailers out there. Quiksilver has a 30-year history of marketing success. And with both domestic and international growth set to soar in the months ahead, this investment looks like a day at the beach. So what are you waiting for? Surf’s up!"

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