MARKET WATCH: A Closer Look At Quiksilver
Jeff Harbaugh
- November 21 2008
- 1,725 views
- 28 comments
I’ve had a number of emails asking me what I thought about Quiksilver. Some of them have been along the lines of, “Should I buy the stock?” or “What’s it worth? If I knew with any degree of certainty whether or not to buy Quik stock, or any other stock, I’d be rich, rich, rich. As far as what it’s worth goes, it’s worth what it’s trading for right now. This minute. No idea if it will be worth more or less tomorrow.
I should start by saying that the last quarterly report came out in September for the quarter ended July 31. We should see the next one sometime around December 9th.
For that last quarter, Quik’s income from continuing operations (that is, before Rossignol) was $33.1 million. For the same quarter the previous year, the number was $35.7 million. But discontinued operations created a loss of $30.2 million in the quarter. In the same quarter the previous year, it was a loss of $43.6 million. Bottom line, Quik had net income of $2.85 million in the quarter ended July 31 compared to a loss of $7.87 million the previous year. For the nine months ended July 31, they reported a loss of $10.2 million in 2007 and $225.3 million in 2008.
Now let’s take a brief look at the balance sheet. At July 31, 2007, Quik had a current ratio of 1.72 and a debt to equity ratio of 1.73. Fast forward to July 31, 2008 and the current ratio is essentially the same at 1.71. But the debt to equity ratio has risen to 2.34 times. Total liabilities haven’t really changed but total equity is down as a result of the company’s loss so the debt to equity ratio has risen substantially. Cash and cash equivalents has actually risen from $76 to $99 million. It will be really interesting to see the financial statements in December and evaluate how they have changed.
Okay, now for the fun part. Let’s talk about some of the news that’s flying around and the concerns and speculations that seem to be on everybody’s mind. First, “But aren’t these great brands?!” everybody says. Implied is if the brands are so great, how come the stock’s at a dollar and the company’s credit rating has been downgraded?
I’d say they are great brands and they are going to continue to be great brands. I don’t know what the resolution of the financial/liquidity issues will be, but I do know that people are smart enough (no- make that greedy enough) to recognize powerful brands with a continuing future when they see them. If I were a Quik retailer, I would expect to continue to be one.
Meanwhile, Quik had previously hired Morgan Stanley as its financial advisor to help it get correctly capitalized. I suppose yesterday’s downgrade by Moody’s confirms that’s an issue, as if hiring Morgan Stanley hadn’t already done that.
You know, I can’t help but recollect that Moody is one of the fine rating institutions that told us not all that long ago that securitized subprime loans were AAA rated.
Sorry, I just couldn’t resist throwing that in. Back to Quiksilver.
In all the Rossignol/Moody’s/$1.00 stock/Morgan Stanley excitement, I haven’t really seen much about how Quiksilver has been impacted by the recession. I guess that will be in the next filing. I don’t imagine they’ve been immune, but I’m actually more concerned about how they’re being affected by the banking crisis. It’s a hell of a time to have to raise money.
I’m hoping we see a resolution to Quik’s immediate financial issues in short order. Now that they’ve got the Rossignol ball and chain off their ankle, it would be great if they could just get back to focusing on building brands and supporting surf.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.
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November 21st, 2008 at 11:44 am
Fully agree!
They will get over it, I’m shure.
November 21st, 2008 at 6:18 pm
Best line from all the other comments on the Quik topic:
Quiksilver: Kids don’t want it and the shareholders don’t even want it!
November 21st, 2008 at 9:43 pm
I think that analysts are trying to figure out which parts of this business are worth while and which are not. Clearly, DC and ROXY are standouts while the actual Quik brand still manages to do ok but continues to lose relevance in the face of new brands.
So then the question is- Why the out-of-whack debt/equity? That lies in the Top line decisions that Bob McKnight and his team made. His straying from core actions sports (Surf and Skate) to venture into Leisure sports which was a huge mistake. Skiing and Golf? Please. Who let this happen? I bet not Danny Kwok!!
So- that’s a few more issues to consider. The core brand of Quik actually still does pretty well. Maybe not in super forward trending coastal towns like Newport where kids wouldn’t be caught dead in quik. but the brand is somewhat vibrant though losing steam all the time. That latest Zumiez report was no boon for the big brands.
Funny, I think the idea in McKnight’s mind was “if Nike can come into Surf/Skate, certainly quik can go into leisure sports.” Apparently not. Furthermore- if they were to travel away from Surf/skate lifestyle they should have started with Snowboarding. The Cleveland golf deal was a total dud as well and along with the premium (and subsequent loss) paid for Rossi meant a shit load of bad debt.
One thing Jeff fails to mention above is the fact that the stock will (read: already has) reach a redemption status with the shareholders. McKnight could find himself getting shown the door and right quick.
The value of the company is actually not it’s stock+float of shares but rather it’s debt. That’s really all there is to it from an analyst standpoint. VF Corp would simply acquire the debt assuming they were a potential suitor.
I think a lot of folks are looking at this company as a bankruptcy play at this point and sell of the strong biz units. Teh huge negative EPS makes this deal a veritable dog with Flees strictly from and investment standpoint.
November 22nd, 2008 at 9:23 am
Thanks for a great comment! I’ll be a happy guy if what I write attracts this quality of discussion.
I never really understood the Rossignol deal either- just figured the Quik team knew what they were doing. I think if I’d wanted to move into hard goods, I might have just given Mervyn $10 million and seen what they might have done with that.
Especially when you’re a public company, you have to grow, but sometimes you run out of places to grow in. There’s a limit to how hard and fast you can push existing distribution so you find yourself, as a brand in our industry at least, opening retails
stores or making acquisitions. I suspect that was at least part of the rationale behind the Rossignol deal.
Hindsight of course is always 20/20.
You’re right that the issue for an acquirer is the debt (that is, the required financing Quik is trying to get- you have to have enough working capital to run the company after a deal). But an acquirer can’t just acquire the debt. I mean, Quik would love it if somebody just took debt off their balance sheet. I guess what you mean is that somebody would take on the debt as the purchase price for some or all of the company’s assets. That leaves a public company with the stock still trading but a smaller balance sheet. What happens to the stock and whatever assets and/or liabilities, if any, left in the corporation? Have the directors fulfilled their fiduciary responsibilities if the shareholders don’t get at least what the stock is worth before the deal was made, even if that’s $1.00 a share?
I’m not talking about Quik now, but in general for a situation like this. I would think choices might include a tender offer, the purchase of stock from the company in an amount and at a price that provided the required liquidity and diluted existing shareholders, or even a prepackaged bankruptcy if the situation were bad enough (which I don’t expect it is).
Isn’t there some investment banker out there who could offer a more informed point of view on this?
November 22nd, 2008 at 11:37 am
Quik has very valuable brands in DC and Roxy, Also the Quik brand is iconic and has built many lifetime consumers most of which. Based on yahoo their current shareholders equity is still positive (essentially the difference between assets and liabilities). This along with the true value of their goodwill (trademarks, IP etc) and them being a 2 billion dollar brand should be enticing to a strategic partner or even a private equity firm. If I were VF or Nike I would be in conversations as this is a good time to buy and reap the benefits down the road. There are still billions of consumers in the BRIC countries that the Quiksilver group of companies hasn’t even tapped. Also Quik could be a good strategic buy for someone that wants to have an outdoor sports division to rival VF. Maybe Liz Claiborne or Jones Apparel. All I know is at one dollar this stock looks like a good opportunity. If I was a crystal ball (I’m definately not as I bought volcom at $15 and thought i was getting a steal) it will be sold at $5 a share in the next 6 months or it will be $7 a share in 2-3 years. Bottom line is P/E’s are at their lowest levels since the eighties at around 13 or so. In the late nineties they were at 40!! Based on the fundamentals and forward P/E projections on average now is solid entry point from what I can tell. The problem is hedgefunds and institutional investors are trying to become more liquid and this could lead to an even lower bottom.
Go get you some.
November 22nd, 2008 at 11:45 am
If Quik was to sell they would most likely sell DC in order to reduce debt however this is their best property and the “Buckle” of wholesalers. The other way is for a strategic buyer to buy the entire company in an all stock transaction (I would assume the board would only take it if it was over $5 per share offer) and they would inherit the debt as well. (similar to the proposed microsoft/yahoo deal minus the debt) In hindsight Yang should have sold Yahoo at $30 per share as it is no at $11 and he has stepped down. Hopefully Bob doesn’t make the same mistake. Lastly a private equity firm could buy it and take it private and try and restructure. Heck maybe the future of the GOP Mitt Romney and Bain might take a look. That would be great as Bain are turnaround experts and I think Quik management might need a bit of retooling.
November 22nd, 2008 at 1:46 pm
There are indeed a lot of ways to do a deal. I wonder if convertible debt would make sense. Isn’t it fun to speculate?
J.
November 22nd, 2008 at 1:53 pm
Quik did venture away from surf/skate, and did buy a snowboard company.. Mervin mfg. makers of Lib Tech and Gnu snowboards a couple of years before the Rossi deal. When Quik bought Mervin, I thought it was the right move. Lib and Gnu are doing great now, because of Mike Olson’s, (One of the founder’s of Mervin) inovative design called “reverse camber”. For those of you who think that DC and Roxy are the only thing of value that Quik actually owns, I urge you not to overlook Mervin, It is killing it in our store.
Another thing I will beg to argue with is the lack of core interest in Quik in Newport. Sure, it’s not as cutting edge as brands like Volcom or RVCA, but, it is a staple comodity within our community. In our store it is always one of our leading sellers. I kind of view it as “the Milk in the Supermarket”, often over-looked and taken for granted, but always in demand, and always trusted by the consumer. Time after time when my wife and I go to Costco, I see a pallet of Quik selling for a fraction of the price that we sell it for and I get pissed, but, I go back into the store on a Monday, and see that is was still one of our best seller’s. Go Figure!
Marty and his people have made some bone-headed moves in the past, most recently sending email blasts to the consumer advertising the fact that Quik is 40% off for this weekend in all Quiksilver owned stores, as well as the web. But, hell, let’s face it, this is a desperate time for Quik.
I truly don’t think that if this Rossi deal wasn’t made a few year’s ago, that the company would be going through what it’s going through today. It was a major mistake that we are all paying for right now, and, with the economy like it is, almost a no win situation. But, like I stated before, Quik is a resiliant Company, and as long as Bob himself is making the desicions on what to buy, and what to pass on, and if Quik gets through this mess, we will continue to be able to still sell and profit from the “Milk” of the Surf Industry.
November 22nd, 2008 at 5:49 pm
I think there has been some really good discussion points brought up here. I don’t cover Quik as an analyst, but I’ve been following the company for a while now in my spare time. Most of my analyst friends have really beaten the company up as of late. However, over and above the financials and the consumer debacle, I think most of them don?t really understand the core surf market. In my opinion, this situation has to be looked at in the following three parts.
Part 1 ? The Consumer - Quik has multiple brands that cater to two different consumers. The first group of consumers is the nonsurfer who buys the product anywhere except the local surf shop. There was a massive marketing surge for this audience during the late 80’s and again in the past few years. As surfing became the sport du jour the second time around, the Roxy brand exploded. Now this younger audience of mall shoppers has shifted away from Roxy and has moved onto Abercrombie/Hollister, American Eagle and others. I remember being in the mall with my girlfriend watching all kinds of young hotties going bananas over Roxy bikinis, bags, shorts, just everything? Times have changed, which makes me believe the company has lost most of this audience, forever? What does this mean to the bottom line? Inventory issues galore. It appears to me that DC line is still very strong in mall stores, but this could turn on a dime. The big problem here is that Roxy died off just before what will be a massive recession. This was just bad timing, but it is what it is?bad timing.
The other consumer (The core surfer) hasn’t shifted too much in my opinion. These folks still like the brand and as long as ZQK keeps pumping out good stuff, they will stay loyal. The wetsuit line has improved drastically over the past few years, which had to help the books. The clothing is still doing well in surf shops. I would have to say it is business as usual on the core audience side.
Part 2 ? The Business Model ? Since this discussion is about the stock price, we must look at the bottom line. The bottom line is that Quik has gone into massive debt. This has been compounded by bad acquisitions. The street disagreed with the Rossignol/ Cleveland Golf purchase from day one and it doesn’t take a surfer to know that we are talking about two totally different business cultures. Quik failed to do what they wanted to do with this business unit and it cost them. This was diworsification at its best. The problem here is that even if Quik sheds bad product lines, they need to generate more cash to reduce debt. Going into this type of a recession, I have a hard time seeing that happen even if all product lines are hitting on all four cylinders. And yes, we are in a recession. Everyone is losing their jobs and when the consumer numbers come out after X-Mas shopping, it will be even worse. The stock price will never go up unless they start to unload the debt. This is not even up for debate. More debt = a lower stock price. How do they do this in hard economic times? They need a miracle worker.
My other concern is around the numbers of branded stores the company has opened and closed over the past few years. There were two Quik stores in my neighborhood and both have recently closed. One was at the mall, two down from Hollister. Hollister is still packed. Sorry for jumping back to Part 1. They need to do these stores where they will be winners. This isn’t Dunkin Donuts, or as I like to call it, “Inexpensive crack in a cup.”
Part 3 ? The X Factors ? There have been a lot of weird stories swirling around the campfire lately. The first one was that Carissa Moore was jumping ship. This is now reality. Hopefully this isn’t a sign of the times. The second story that’s swirling around is that Jimmy Slade is talking to CI Surfboards about an exclusive. With Burton behind them, this may not be that ridiculous of a thought. Kelly is the franchise player. If he left, this would be a huge turn of events. What’s interesting to me is that Quik has done a superb job of locking down the hottest junior talent on the planet. Crakie, Dane, Marzo, Julian. These guys are the best of the next generation and will pay off in dividends just from their freesurfing freakishness. It’s debatable that Jordy is the next big thing. I agree that he is a freak, but from a marketability standpoint he is less bang for the buck. Someone actually referred to him as a silverback gorilla while announcing a heat yesterday. That just doesn’t seem to be the right image.
In a nutshell, if you are looking at this stock you really need to look at parts 1 and 2 of my rant. These are the key fundamentals involved. This is also the most common knowledge. Part three is just something to think about. What I mean by this is that small things develop and can have a big influence on the company over many years. Who would have thought that Jimmy Slade would have won nine world titles? No matter what they paid him, he accounted for huge margins over ten years. What if they banked on someone else? What would that do to the bottom line? Rossignol is a rounding error compared to the kind of money someone like Kelly could do to a brand.
November 22nd, 2008 at 5:57 pm
I forgot to mention Jeremy Flores as a key recruit in my rant. He is the most well rounded of the young squad. Anyway, you get the drift…
November 22nd, 2008 at 7:39 pm
prior to quik’s purchase of rossignol, roxy made some ski’s which went off in europe. my guess is the success of the ski’s sparked interest amongst the quik big-wigs who thought roxy could go big in ski-wear. the ‘roxy girl’ on the slopes… with rossignol’s distribution channel they could get quik & roxy apparel/outerwear/goggles into more outdoor accounts.. especially east of france from austria to eastern eupore. so i think they bought rossignol with the european market in mind. but unfortunately there was a bad ski season and the rest is history…
November 22nd, 2008 at 10:02 pm
i might also add… some time before the cleveland purchase quik had a line of golf apparel called ‘Fidel’. I’m not sure if it still exists. the purchase of cleveland gave them access 1000’s of golfing stores to sell the fidel line to but for some reason it didn’t come to fruition. quik could have even turned the cleveland clothing into something more youthful ie. nike golf.
like jeff says - hindsight is always 20/20, but if the rossignol/cleveland buy turned out to be a success we would be praising bob right now.. but it didn’t and we’re not!
November 23rd, 2008 at 12:04 am
It is also wise to remember that for Quik to sell product at 40% off is still gaining them 10% margin over wholesale price. Yes, you have major brick and mortar overhead to consider but as far as their profit to product ratio, it is still a gain.
I want to point out how amazing these articles have been and how much I am learning in this historic time. Great forums, gents. And people always thought surfers were stoned, mindless Spicolli types.
November 23rd, 2008 at 5:17 am
yes that’s true. even at 40% off there is still a profit to be made in a vertical store. let’s say it costs $5 to make a tee, they sell it wholesale for $10, then retail for $20… 40% off at retail is $12. $12 minus cost price $5 is $7 profit. This should be enough to cover bob’s ski and golf trip.
November 23rd, 2008 at 10:04 am
I have never heard the term “diworsification” before, but I love it and will use it. Unfortunately, deals seem to turn out that way a lot.
Wish some of you would email or let me know who you are at a show or something. This is, indeed, a great conversation. Hope it can be continued on other topics as well that maybe aren’t quite as dramatic as this one.
I also notice that I’m doing this Sunday morning and I see a bunch of the recent comments came in Saturday evening/night. We have got to get lives!
November 23rd, 2008 at 1:43 pm
Bob has been a kook in all of this. He let Bernie buy Rossi from his french ski buddies and these guys had their heads in the clouds. World’s biggest outdoor company. They should take a lesson from the Bong who have schooled the quik execs. Bob has been too busy croozin in his jet counting his big salary. Now it will go to VF or Nike, or sell out to private equity. Great industry support here you bozos.
November 23rd, 2008 at 6:55 pm
It was actually Fidra (quiks golf line) and their face guy was the big easy (Els) and I think that is why it never succeeded but your right on the distribution contacts and relationships they aquired from Rossingnol and Cleveland. However without the right marketing and creating a story that differentiates your brand from the others it is hard to create a compelling value prop. They did it with Quik and Kelly and Roxy and Lisa and the beach lifestyle. I still think the stock has no where to go but up but that could be my way of not giving up hope as I’m in the whole quite a few dollars between this and volcom.
Peace,
November 24th, 2008 at 7:11 am
Duke…while I value your insight on this situation and certainly have the street cred as a key specialty retailer, I wonder why you use the reference to Quik as the “Milk” of the industry. Doesn’t Milk have an expiration date and is thus perishable? I would think canned goods would be more on point. A staple and certainly not fresh.
November 24th, 2008 at 9:43 am
Ha-ha…I can just see Danny Kwock and Kelly Slater in golf knickers! “How about a quik round of 9 hole after we ride a few waves, bro?” Priceless! Cleveland Golf and Rossi were a bad move for Quik. What were they thinking? Golf apparel as well? Mercy me…!!!
November 25th, 2008 at 4:45 pm
What happened to Quik, Bernard Mariette happened to Quik? During his time at the helm of Quik he pushed Quik into buying Rossi. BTW he has a lifetime friendship with the Rossi family and benifited from the deal. Once Quik realized what was up and what a bad purchase Rossi was he was fired and Bob took over again. However unloading the brand was a long painfull mess and then the perfect storm hit just as they finally found an out. Ok they have ended the bleeding that was Rossi and their other brands are strong. I hope they come back. It would be sad if one greedy ass takes down a great company
November 26th, 2008 at 6:17 pm
We all know that every stock has a “stopsell” price, seeing the stock price dip down to .88c must of has alot of shareholders sweatin’… this may be a difficult question to answer, BUT does anyone know what ZQK’s stopsell price would be???
- G
November 27th, 2008 at 10:26 am
Golds,
Help me out here. I don’t know what a “stopsell” price. I know that an individual investor who owns a stock can put a “stop loss” on the stock so it’s automatically sold if it reaches that price, but each investor has to set that themselves with their broker.
I’ve never heard the term stopsell and think maybe you mean stop loss, but there isn’t a single one for a stock. As far as I know anyway.
thanks,
J.
November 27th, 2008 at 10:34 am
Actually, I was kind of neutral on the Cleveland Golf thing. I didn’t know enough about the proposed strategy to say it was good or bad. It was the idea that you could make Rossignol into a big apparel brand, especially in the US, that I never understood.
J.