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Surf Wear Riding New Wave of Popularity

Retail: Industry gets lift from retro trend, products with brighter colors and some upcoming movies.


After wading through a rough year of slower sales, the surf wear industry is coming back, analysts say, as surfers are returning to the waves and surf wear makers benefit from a hot retro trend, products with brighter colors and upcoming surfing movies.

In the latest strong indicator that surf wear is up, bellwether brand Quiksilver Inc.--the world's largest surf wear maker--announced Wednesday that it beat analysts' earnings expectations in its fiscal second quarter ended April 30. Though quarterly profit was off about 4%, fall bookings jumped 18% compared with last year. Confident that it is heading into a strong second half of the year, the Huntington Beach-based company raised earnings expectations for this year and next.

After a hot streak that had stretched over a number of years, the industry slumped in 2001 as the retail climate weakened and deteriorated further after the Sept. 11 terrorist attacks.

Any comeback will be welcome news for an industry that is synonymous with Southern California and that also has become a fashion trendsetter for youth nationwide, not just surfing enthusiasts.

Though 2002 may not yield record sales for the industry, insiders said the upswing appears to be benefiting several key players. Costa Mesa-based apparel makers Volcom and Hurley International, which was purchased in February by Nike Inc., are moving strongly into the second half of the year. Also gaining strength are some older surf wear brands that are riding the retro trend, such as Irvine-based Ocean Pacific Apparel Corp. It expects sales to jump 40% this year over last.

"In our launch of OP Classic, we literally resurrected patterns and color combinations from the '70s," Chief Executive Dick Baker said Wednesday. "The striped knit shirts, exact '70s color combinations, that's what's ... selling in the surf shops."

Twice as many surf shops said sales and margins were up in May compared with the year before in a just-concluded nationwide survey of 29 retailers who sell products to surfers and skaters, said Mitch Kummetz, an analyst with Wedbush Morgan Securities.

"So far, so good," said Kummetz, who conducted the survey. "I'm pretty encouraged about how the summer is starting off."

In other indicators that change is underway, analyst Dorothy Lakner of CIBC World Markets picked up coverage of Quiksilver on Wednesday and issued a "strong buy" rating. A day earlier, analyst Jennifer Black of Wells Fargo boosted her rating to "buy" from "market perform" on Anaheim-based Pacific Sunwear of California Inc., a retailer that sells many of the hot brands made by Southern California companies.

In a further positive indicator, ad sales for Surfer magazine's oversized August issue, the largest issue of the year, are up 10%, said Rick Irons Jr., associate publisher of the San Clemente-based magazine.

Industry insiders give several reasons for the turnaround. In addition to tighter business practices that reduced inventory, lessening the necessity for markdowns that hurt profits, the industry is expecting a boost from some surf films, especially "Blue Crush," a film about female surfers.

Even the colors of the products are brighter, reflecting a more optimistic attitude throughout the industry, they say.

Although some smaller companies were wiped out last year, the strong companies are getting stronger, insiders say.

Quiksilver, for example, raised its earnings expectations for the year to between $1.38 and $1.40 a share, up from $1.32. The company, which boasts a wide range of brands--including the Roxy juniors line and Hawk Clothing for skateboarders--also said it has decided to boost ad spending by $1.5 million for the second half of the year to promote the Quiksilver brand in national magazines.

Quiksilver reported Wednesday that second-quarter earnings totaled almost $13.5 million, or 55 cents a share, compared with nearly $14 million, or 58 cents a share, in the comparable period last year. Sales increased 10.6% to almost $186 million, compared with $168.2 million in the second quarter of 2001.

Quiksilver's stock gained $1.50 Wednesday, closing at $24.50 on the New York Stock Exchange. The stock is up 42% this year. Pacific Sunwear's stock closed at $19.55, up 75 cents, in Nasdaq trading. It's down 4% in 2002.

Despite the good news for larger, established companies, business in this industry can still swing enough to make small-business owners seasick. At the Frog House in Newport Beach, sales are tied directly to the surf and weather, owner Thomas "T.K." Brimer said.

In January and February, with summer-like weather, sales were very strong, he said. But as the surf flattened in March and April, revenue dropped off by as much as 20%, compared with the year before. Last month, as the waves swelled once more, business kicked back into gear, Brimer said.

"I'm convinced consumers have the money at hand and want to spend," he said. "I think we're going to be having a fine, strong summer. It all looks that way."

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