Fast-Growing Quiksilver Generates Style, Financial Waves : Fashion: The Costa Mesa-based company is riding the crest of the nationwide boom in surf wear, but there are crosscurrents in the water. As one competitor put it, “Size is the enemy of cool, man.”

Three years ago, a brash Bob McKnight would brag how his office crew would go surfing at lunchtime. As president of Quiksilver, McKnight criticized rivals for being too concerned with sales growth and selling surf wear in too many stores.

Today, McKnight is more serious. He compares the fast-growing Quiksilver to a button-down bank. And he talks about the surf wear manufacturer becoming a dominant force in the young men’s sportswear business within three to five years.

In short, Quiksilver has grown up. And the company is as much interested now in making a financial statement as a fashion statement.

“The Quiksilver story today is a lot different,” McKnight said in a recent interview. “Under a facade of casual atmosphere and youth, there’s substance behind the life style.”

Within the past few years, the Costa Mesa-based firm has emerged as one of the nation’s hottest companies in the surf wear business, with merchandise in more than 2,000 stores across the United States.

Quiksilver’s transformation mirrors what has happened to the surf wear industry as a whole.

The $1-billion specialized market has come a long way from the days when a handful of pioneers like Hang Ten, Lightning Bolt and Ocean Pacific dominated the surfing apparel industry. These days, the field is crowded with an estimated 300 intensely competitive firms--many of them based in Orange County, regarded by many as the nation’s surf wear capital.

While Quiksilver is not first in sales--that honor goes to Ocean Pacific Sunwear Ltd., with about $200 million in annual sales--when it comes to image the company is the hottest name at the nation’s trend-setting surf shops.

Even so, with Quiksilver’s growing presence at major department chains, some retailers question how long the manufacturer will ride the crest of popularity.

The company’s growth has been phenomenal--even in an industry where fast growth and fast demise is the byword.

From $5.3 million in fiscal 1983, Quiksilver’s sales climbed to $48.3 million last year. For the current fiscal year ending Oct. 31, net sales are expected to reach more than $68 million. Net income after taxes should reach $6.3 million, a 65.7% jump from last year’s $3.8 million, according to retail analysts. A decade ago, it had 10 employees; today it has 220.

Some industry insiders credit Quiksilver’s success to its durable apparel and innovative designs. The double-sided walk short, for example--with contrasting colors on upturned hems and inside pockets--was a Quiksilver innovation, as was an amphibious short which can be either a swim trunk or a walk short.

Others say it is the company’s knack for appealing to both the younger and older beach set, as well as to young women who buy at least 10% of the line.

But to McKnight, the company’s formula for success is not all that mysterious. The industry may have changed a lot since the USC Business School graduate started Quiksilver with partner Jeff Hakman, a longtime professional surfer. But customers’ demands remain basically the same. Quiksilver gained popularity in the ‘70s because it withstood season after season of rough-and-tumble wear in the surf--and because it was a hard-to-get line worn by many professional surfers.

“It was the best thing going 20 years ago when I was a teen-ager. And they’re still the best surf trunks made,” said Tony Mardian, president of the 13 Hobie Sports shops in California and Hawaii.

McKnight and Hakman bought the American rights to what was then an Australian surfing trunk, bought some fabric on credit and began peddling their inventory of 300 pairs of board shorts up and down the coast out of McKnight’s van.

In March, 1985, the company acquired Pro-Lite and began selling board covers and accessories, all under the Quiksilver name.

Late the following year, Quiksilver went public with eight shareholders selling a 50% stake in the company for $16.3 million. With $3 million of the money, the company bought all rights to the Quiksilver name, logo and trademarks in the United States and Mexico from Quiksilver Australia.

But Quiksilver has hit some choppy waters over the years.

The company is just starting to lift an 18-month freeze on opening new accounts in Southern California--the result, McKnight admits, of past problems with delivery.

At about the same time, the company has begun a major expansion. In 1987, Quiksilver brought aboard John Warner, a May Department Stores executive from Denver, to help ease Quiksilver’s entry into major department stores.

By February, 1988, Warner was named chairman of the board and chief executive. Since then, the company has moved into a new 87,000-square-foot building in Costa Mesa and increased its staff by 50%. The firm has reduced its in-stock inventory at the same time it has added new computer systems, a new shipping system and new inventory controls.

The strategy has paid off. In the first nine months of fiscal 1989, net sales climbed 49% to $54.8 million and net income rose 75% to $5.4 million. In the last year, stock has risen from $5 to its current $21.625.

Warner’s retail background was crucial for another reason as well. Quiksilver’s biggest customer these days is the three divisions of R.H. Macy & Co. Inc. This year, sales to major stores such as Nordstrom and the Broadway are expected to account for 45% of Quiksilver’s total revenues.

But to many trend-setting buyers, an item can’t be hip if it’s in the department store. Surf wear manufacturers worry just as much about overexposure as they do about sales.

“If there’s too much product out there, the name loses its cachet,” explains Thomas Foster, a research analyst with Wedbush Morgan Securities in Los Angeles. “It’s like if a dump truck operator starts wearing Polo--there’s other, good-quality clothing without the darn logo on it, so why pay for it?”

Or, as Mike Tomson, the president of Quiksilver’s rival Gotcha puts it: “Size is the enemy of cool, man. You can’t become this huge thing without suffering from the consequences along the way.”

Quiksilver executives say they have no intention of letting that happen. “The single surf shop is as important to us as Nordstrom,” Warner says. After all, adds McKnight, it is those shops “that really fuel the energy of the product line and your image.”

To keep their all-important specialty retailers happy, Quiksilver offers no volume discounts. And the company carefully cultivates its image by advertising in Surfer and Surfing--the industry bibles--and paying hefty sums to champions to represent Quiksilver and plaster its label onto their boards.

While Quiksilver executives can control how their product is seen, they cannot control the public’s reaction. And already, there are signs that Quiksilver may be becoming too popular to suit the trendy surf shops.

At Pacific Sunwear’s 34 specialty stores, some categories of Quiksilver--Bermudas, for example--are showing a drop-off in popularity in favor of less-available labels, says founder Randy Blumer.

And while Quiksilver is still the top seller at Island Water Sports, a 23-store chain based in Florida, owner Kirk Cottrell believes sales will continue growing this year, but he is concerned they could flatten after that. “My biggest concern is they’re going to start playing it safe” to have more appeal to department store buyers. Quiksilver executives make no secret of the fact that they are ready to dive into bigger waters. “We want to continue our rate of growth. We intend to be a much larger company,” Warner says.

Industry sources say Quiksilver is aiming for $250 million in sales by 1993.

To get there, the company is banking on a combination of continuing to broaden its merchandise line at the same time it aggressively expands into the Midwest, Southwest and Southeast.

To promote year-round sales, Quiksilver last year began making ski wear. The line could add $3 million to $6 million in sales for fiscal 1990, according to estimates by PaineWebber Inc.

To help keep in touch with its hard-core roots, Quiksilver is planning this spring to introduce Generation X, a board short aimed toward the hard-core surfer.

Warner and McKnight also talk about the possibility of adding a junior-wear line for young women, as well as eventual growth through acquisitions. “If something fantastic were to come down the pike, we’d consider it,” Warner said. “But for now, our focus is to maximize the Quiksilver logo.”

After all, as McKnight has said for years, “There are a million ways to reach bingo.”

QUIKSILVER Quiksilver Inc. has emerged in the past few years as one of the hottest companies in the surf-wear business, with 2,000 retail accounts across the United States. The Costa Mesa-based company began by making board shorts for surfers, but has since expanded into everything from ski wear to volleyball shorts and backpacks. Now a $60-million-plus company, Quiksilver hopes to be a dominant force in the young-men’s sportswear business within three to five years.

Year ends Oct. 31

(in millions) 1989** 1988 1987 1986 1985 Net sales $68 $48.3 $30.1 $18.6 $12.9 Net income $6.3 $3.8 $2.4 *$2 n/a

Assets $24.6 million

Number of employees 220

Weighted average shares outstanding 6.3 million***

52-week price range$5-$25.625

Friday’s close (NASDAQ) $21.625

CEO and chairman of the board John C. Warner

President Bob McKnight

* pro forma net income

** estimated

*** including options

Source: Quiksilver Inc.