It’s more troubling times ahead for Quiksilver (NYSE ZQK). The company that at one point owned a huge chunk of the snowboarding world has continued on its slow and steady downward spiral. In a letter from investor Consac LLC dated April 22nd, 2015 their president Ryan Drexler urged chairman Robert B. McKnight Jr. to sell the company.
Inside the letter he cited such reasons as:
The company has continued to disappoint shareholders since my last letter in March. There was the admission of a lack of internal control over financial reporting and revenue recognition, resulting in the restatement of prior period financial statements. That revelation came on top of a 38.6 percent decline in fiscal first quarter pro-forma adjusted EBITDA, a 13.7 percent decline in net revenues that spanned across all brands along with the wholesale and retail distribution channels, and a loss from continuing operations of $18.3 million. Shareholders have seen their stock drop another 26 percent from a one-month high in March, while enduring an even more precipitous 81 percent decline from the stock’s two-year high. Product discounting has become rampant, further eroding the company’s brand value, while lawsuits filed in court mount due to allegations of violations of federal securities laws.
As for yourself Mr. McKnight, the company paid you total fiscal 2014 compensation of more than $3 million in your prior position as executive chairman–almost three times the former CEO–and more than $6 million in the prior year. You received this pay while the stock price of the company plummeted 85
percent and the company suffered a net loss of $320 million; a net loss that now exceeds the market capitalization of the company by more than $20 million. Given the abysmal performance of the company under your direction, your compensation package would appear to be quite excessive, especially since $2 million of your compensation in 2014 was for monthly “severance” payments, despite the fact that you never left the company.
In the past year, the stock has plummeted 74 percent against a 10 percent positive total return in the S&P SmallCap 600 index. The performance is even worse when measured against active clothing peers such as Columbia Sportswear Co. and Under Armour Inc.
Consac LLC owns 3.5 million shares of Quiksilver and has mentioned before that they should look to selling the company.
Who Would Buy Quiksilver
In the same letter it was mentioned that Nike and VF Corp could be potential buyers of the brand. While not mentioned a third dark horse contender could potentially be Altamont Capital Partners as they previously bought Mervin Manufacturing in November of 2013 from Quiksilver.
Of those three listed companies where would Quiksilver find the best fit?
Nike is the biggest of the three and a behemoth of a brand. They’ve proven time and again that when they enter a market they can dominate it, but will only stick with it if the financials make sense. We saw this with snow as they pulled out from it this past fall. Of the three companies under Quik’s umbrella they all have a portion in snow, albeit not as big a portion as lifestyle, surf, and skate.
Similar to snow Nike has pulled back on Surfing and Hurley doesn’t have the name presence that Quiksilver has. Let alone the retail store locations. Hurley operates 29 stores compared to the 700 plus between Quiksilver and Roxy.
DC comes with an established name, established customer base, and footing in skate, lifestyle, and snow. This could be the push Nike needs to get back into snow in some capacity, but the lifestyle sales would be the bread and butter for this brand.
Over all looking at the situation it doesn’t seem like a sale of Quiksilver to Nike would make sense for Nike as the benefits for the brand don’t match up with current trends of the company.
VF Corp on the other hand seems to align more with what Quiksilver has going on. Their umbrella of brands could fit a surf, skate, and snow brand in it. DC would compliment Vans on both the snow and skate side of things as well as add more value into their over all lifestyle brand approach. This would also give VF Corp a hard goods brand which is something they’ve been lacking.
Quiksilver and Roxy would fit into a different market and price point compared to The North Face brand. With VF Corps denim division of Lee and Wrangler this could translate over to lifestyle as well as collaborations to broaden brands reach.
The 713 retail locations that Quiksilver has as well would prove vital not only for distribution but for brand expansion and presence. The cross marketing platforms of having more brands in both the Vans flagship stores as well as Quiksilver/Roxy flagships has potential to attract more consumers.
When looking at Altamont Capital Partners and their diverse portfolio of brands one can see that they understand lifestyle, technical outerwear, and hard goods. They also hold a license with Quiksilver to produce Roxy’s hard goods. This would ultimately end that licensing agreement and bring the production back to being in house.
One thing to note is that APC does not have a boot company underneath their brands. DC would be a perfect addition to this and give them a broader market for snow as well as help to compliment the Huf shoe brand.
In terms of lifestyle Quik and Roxy would parallel Brixton, Fox Head, and Dakine. This could build on distribution and brand presence.
Ultimately the biggest issue with a sale of these brands is going to be changing leadership and brand direction to get them on track with what other companies have done. At one point Quiksilver was one of if not the biggest conglomerates of major brands in action sports.