Quiksilver Gets a Letter from an Unhappy Investor

A reader sent me an article I imagine most of you have already seen, though I haven’t seen it covered in industry media. It tells us that Ryan Drexler of Consac, an owner of 2 million Quiksilver shares, has sent a letter to Quik Chairman Bob McKnight and CEO Andy Mooney stating that the company’s turnaround strategy has failed and that they should look to sell the company. Here’s a link to one of the articles that was published. A simple Google search will lead you to others.

And look what I just found! If you go here and click on the small document in the center of the page, the actual letter will open as a PDF. God, I love the internet.

He says, in part, “The 11-point turnaround plan announced by Andrew Mooney 16 months ago has thus far failed to deliver the desired results and, based on the deterioration in the company’s core brands since that time, has in actuality had a profound detrimental effect on the financial position and operating performance of the company, in my opinion.”

Mr. Drexler is known in some circles as an activist investor, and this isn’t the first company with issues he’s approached this way. There is a certain rhythm/process/ that happens when an investor does this, and the letter reflects it. I am not prepared to say, as Mr. Drexler does, that Quiksilver’s turnaround plan has failed. But I will continue to say what I’ve been saying; there’s a certain conflict between being a public company and Quiksilver maximizing the value of its brands, and the company’s weakening balance sheet limits the time they have to reinvigorate those brands.

The performance of the stock, as Mr. Drexler points out, suggests that he isn’t the only one with concerns. I’ve also become aware that certain of Quicksilver’s European debt is trading at $0.60 on the dollars. Actually, that’s on the Euro. The CUSIP is Z4840DAB6 if you want to check yourself.

I don’t know what’s going to happen, and maybe this is the last we hear from Mr. Drexler. On the other hand, it may be the start of a process. Quiksilver is on a shortening financial leash. At one time, I thought the solution might be to take the company private by doing a tender for the shares, but I no longer think that can happens. Even if you paid $0.00 for the shares, you’d own a company losing money with $900 million in debt and be faced with the same problem current management has.

I guess Quik’s board will have to respond to Mr. Drexler and perhaps we’ll see that response. The company’s next quarterly results are due to be released in early December. I’ll probably have more to say about their options when I see those. I mostly like Quik’s strategy. But I‘m becoming worried that they don’t have the time or money to pull it off.

About a year ago, a reader reminded me, I wrote this article relating some of Quiksilver CEO Andy Mooney’s comments in a conference call to the broader market and conjecturing on what some of Quik’s challenges might be. I don’t think I’d looked at since I posted it (I tend to be really, really, tired of articles by the time they finally make it on my web site), but it seems to have held up pretty well.

20 replies
    • jeff
      jeff says:

      Howdy YKW,
      Well, maybe. But let’s not focus there. What can we learn here? The thing I find intriguing is trying to figure out if Quik is a victim of the normal progression that most brands go through or if Rossignol, the internet, and a bad economy did them in. Certainly, those three things speeded things up, but would they be facing the same issues (though to a lesser degree) if one or more of those things hadn’t come along?

      J.

  1. Big Guy
    Big Guy says:

    Jeff, my take on your 3 possibilities. I’ll start with the easiest one. The internet has complicated the situation for all brands, and all retailers, so I don’t think that has had an unduly harsh impact on Quiksilver over and above any other brand, so I’m ruling that out as a factor. Bad economy certainly doesn’t help the situation. A recovery of any kind has to be much easier, maybe by a factor of ten, in a boom economy, so I would give some credence to that being a significant factor. I’ve always noticed, at least for the last 30 years, that even poorly run companies can make it in a boom. What’s the old saying? “In a rising tide, all boats are lifted.” The biggest of the three factors you brought up is the Rossignol debacle. This put Bob McKnight, maybe for the first time, on the board’s radar as someone who could make a major mistake. Maybe this McKnights armor wasn’t as shiny as they had thought. Heavily influenced by his French counterparts, Bob pulled the trigger on a deal that launched them, not into the big leagues of a conglomerate corporation, but the big leagues of debt.
    I personally believe that if you took the Rossignol situation alone, and replaced it with something positive, like buying a profitable company, that things could be totally different today, and perhaps there never would have to be an Andy Mooney at Quik. They’d have had to tighten the belt buckle for sure, and I personally witnessed some of the overspending that went on there. Money was spent like it came out of a bottomless bucket, and we all know that that eventually catches up with you.
    So I think two of the three aspects that you brought up have had a big impact. As far as the time period after Mooney’s arrival, let’s just say that you can come in with a lot of smarts and rally the team behind new ideas and new ways of doing business, or you can come in like a bull in a china shop, with plenty of attitude and a machete tied to your tail swinging every which way. Mooney fits the latter model much more closely. Cheers, Big Guy

    • jeff
      jeff says:

      The only place I’d disagree with you is when you rule out the internet. You’re right, of course, that it impacting every brand. I don’t mean to say that it’s impact on Quik has been worse than on other brands, but it’s sure had an impact. With regards to the decision to buy Rossignol, I don’t know how the decision got made. Someday, I’d like to interview the board members at that time.
      Thanks,
      J.

  2. Rob Z
    Rob Z says:

    Someone had to end up being the next “Gotcha”. I figured Quik would just end up being the next “OP” looking at Mooneys history. (License license license!) To Jeff’s point though. You can’t talk about “core” and properly pull off being a public company.

    • jeff
      jeff says:

      Hi Rob,
      Just to be clear, I’d really like to see Quik succeed. It’s not that I wouldn’t be doing many of the things Andy Mooney is doing if I were CEO there; I am just concerned that they don’t have the time and balance sheet to pull it off. I do not agree with how Quik has chosen to work, or maybe I mean not work, with core stores. Recognizing all the financial/operational reasons to do what they are doing, I still think it’s shortsighted.

      Thanks for the comment,
      J.

  3. You Know Who
    You Know Who says:

    Here is how I see the situation. The misguided Rossi deal sent the rock rolling over the edge for sure but if all the other divisions (Roxy, DC and Quik) had been firing on all 8 cylinders they would be at the very least on their way to recovery. But that’s not the case at all. All their brands are in steep decline. Then Andy comes in and cleans house on all the (yes expensive) executives to save money (i’m sure) and to put his own team into place. What he forgot, or never understood is that this is a niche industry. Relationships count. He not only fired the “Brain Trust” but also killed off virtually all the relationships they possessed with the retail community. Then he further alienates the retail community by touting their (Quiksilvers) growth strategies in B2C, licencing and their own retail stores. Then they lose Kelly Slater, which had huge symbolic meaning to the core community.

    In the bigger picture, surf as a look or fashion statement (whatever you want to call it) is just not what’s in right now with young adults and kids. Fact. Talk to any key executive at ANY surf or beach lifestyle brand and they will all tell you in private that business either sucks or is at the very least very challenging. Add to this a (still) crappy economy a failed Rossi deal and a new (and I will say very bright) but disconnected CEO and you now have the makings of the situation they are in today.

    The save in my opinion (like anyone cares) would be to take the company private. Put Bob back in charge with a strong and connected President and executive management team, up the quality of the product steering away from the down market approach that Andy is setting into place, and really make every penny count and move on.

    Like Big Guy, I was also witness to the excesses in spending that took place at Quiksilver first hand. That really needs to change. Bob always used to say, think and act like a small company. That’s what they need to get back to. Thinking and acting small while being big. It can work. The question is, is it to late for Quik and it’s other associated brands? Only time will tell.

    • jeff
      jeff says:

      Love to get you and Big Guy in a bar, buy you an appropriate amount of your favorite adult beverages and record the conversation. Two things. First, I suspect it’s too late to take the company private. As I said, even if you get the stock for $0.00 per share, you’ve got a company that’s losing money and $900 million in debt. Second, when you call the business Quik is in a “niche” industry, I disagree. It’s true surf and action sports are niche businesses, but Quik is long past the time when that was its market. It’s where its roots are, but it’s certainly not where they, or any company it’s size, sells most of its product.

      Thanks,
      J.

  4. Big Guy
    Big Guy says:

    Jeff, I’m up for it, but live a bit far away at the moment, though that may change. As far as drinks, we won’t need those to go off on Quikie, They’ve laid plenty of groundwork for endless conversation. I like YKW’s idea of putting Bob back in charge, with a connected but smaller group of execs, but like both of you, I have serious doubts about how late they are in the game if that is going to happen. It would have to be like Aaron Rodgers drive down the field yesterday to win the game, starting with two minutes left and not time outs. I think the “no time outs” part is especially applicable. They needed a touchdown to win, not just a field goal, and the same applies to Quik.

    • jeff
      jeff says:

      Yup. Value in the brands, but they need to be in a smaller more focused market. Competitive positioning is a big issue, and hard to recover when you create a problem there.

      J.

  5. Big Guy
    Big Guy says:

    With yesterdays announcement of management “restructuring,” including Bob McKnight retiring, Andy promoted to chairman, and frenchy Pierre Agnes now president, I’m throwing in the towel. Game over, Quiksilver loses. – Big Guy

    • jeff
      jeff says:

      I suspect the official announcement was just formalizing what was more or less already the case. Did you notice how the stock popped on the announcement?
      J.

    • jeff
      jeff says:

      It has always been my experience with turnarounds that the founder/leader is usually the wrong person to make the required changes once things get really difficult. Pride, maybe, but also existing personal relationships. The people you are going to have to do difficult things to are your friends- you know their families, you feel responsible for them, they counted on you and you feel like you let them down. There is also a certain level of paralysis that can occur due to the compounding pressure. I should make it clear that I have no idea what Bob McKnight thinks or is feeling. I can only say what I’ve seen in other deals I’ve been involved in. It really sucks to be in that position and the only solace I’ve ever been able to offer a founder is that you’re doing what you’re doing to save what you built and the livelihoods of the people who are still there.

      J.

  6. You Know Who
    You Know Who says:

    Oh, shit! Didn’t see that one coming! Bob retires? Just read the latest interview on Shop-Eat-Surf on the Frenchifing of the company now. Oh man this is like watching a train wreck in slow motion. Mooney comes off as very credible in all his discussions but results are just not there. Then I read the interview with Pierre Agnes were he says “we (quiksilver) were the original boardshort company”? Really? Katin, Hang Ten, OP, Gotcha all came at or way before Quiksilver and as I remember sold quite a few shorts used for board riding. So the sheer arrogant’s here is astounding, or just maybe a lesson in history revision. Jeff, you are right about Quik now living outside of the niche market and maybe that was actually the first mistake that lead to all of this? The Rossi deal only accelerated it along with the overall weakness of surf as a fashion trend and economy. The fact is that they had a great run. Managed to re-invent themselves several times, made a lot of great decisions and some really disastrous ones. But in the end, at the stage were they are now, and with Bob now gone I still come back to my “Dead Man Walking” analogy. All we can do is now sit back and watch the continual slow decline of a once great brand, and it’s actually ok. We need to flush out the old every once in awhile and we as an industry are well over due for this. The dealers also need to wake up to the fact that their largest vendors are in fact NOT looking after their best interest and maybe, just maybe it’s time for them to realize it’s time to move on and let those big players focus their energy on there business with Macy’s, Costco, their own stores and B2C. But as always, what the hell do I know?

  7. Big Guy
    Big Guy says:

    You Know Who, you know more than most! I’ve sort of had my last word, as in “game over,” but I will still read and support and agree with you 100%. It’s time we all move on. By keeping Mooney and Pierre in the picture, they have sealed their fate. As of today, I’m going to stop caring. I’ll still check in on the column once in a while, just to see what you and Jeff and others have to say about it.

  8. You Know Who
    You Know Who says:

    One last word on this from me. In 5 years, Quik will be the new Hollister or maybe owned by AB&F??? Why not. With core sales drying up and we all know when that happens they will lose the Macy’s and Costco this might be the future for them. Seems better than selling Target. Actually makes sense to me. But what do I know. Over and out!

    • jeff
      jeff says:

      If there is a sale I expect it to be of individual brands as opposed to the whole company, but we’ll see. As I said, I don’t quite know how to buy the whole company given the value of equity compared to the debt.
      J.

Trackbacks & Pingbacks

  1. […] “At one time, I thought the solution might be to take the company private by doing a tender for the shares, but I no longer think that can happens. Even if you paid $0.00 for the shares, you’d own a company losing money with $900 million in debt and be faced with the same problem current management has.” – Jeff Harbaugh […]

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