The Quiksilver Conundrum; There Has to be a Deal

I’ve resisted writing this, but with the recent article in Bloomberg highlighted by Boardistan and Shop-Eat-Surf reporting, also based on a Bloomberg, that Quik had hired a restructuring firm, I guess there’s no reason not to.

What I want to do is take you through Quik’s circumstances and choices based on their most recent balance sheet dated April 30, 2015 We’ll seeing another one shortly, but I doubt that’s going to change my analysis. I also want to consider with you what a “restructuring” might mean and how it impacts the industry.

Quik’s most recent balance sheet states there are 174,642,124 shares of common stock issues and outstanding. That’s not a fully diluted number, but let’s work with it. As I write this (September 4) Quik’s stock is trading at $0.46 a share. Multiplying that price by the number of shares outstanding gives us a market capitalization of $80.3 million.

Now let’s suppose that all the shareholders of Quik’s common stock- every last one of them- offered to give me their shares for free. And let’s further assume that somehow when I got all those shares for free I wouldn’t have to pay income tax on $80.3 million in income.

How would I respond to the offer? Very, very carefully. If I accepted, I would become the owner of all of Quik’s assets- and its liabilities.

The liabilities total $1.153 billion, and I can guarantee that they are mostly very, very real. The largest is $785 million of long term debt. Total assets of $1.139 billion are less than liabilities. Hence the negative equity on the balance sheet.

In any kind of restructuring, we’d have to take a hard look at those asset values. Okay, I believe the $48 million in cash on the balance sheet is probably worth $48 million no matter what. I’m not so sure what the fixed assets of $190 million, the intangibles of $138 million and the goodwill of $80 million would be worth.

There’s also inventory of $291 million and receivables of $252 million. In any sort of a messy restructuring, would those be worth 100 cents on the dollar? My experience is that they would not, but it depends on just how things come down.

So were I to accept the offer, I’d own a company that wasn’t making any money and, realistically speaking, had assets that were significantly less than its liabilities. Sounds like a bad deal.

That’s why I am not expecting, and have not been expecting, any kind of offer to buy the equity. You’d just have a new shareholder with the same problem the current shareholders have.

Unless you think that the three brands- Quiksilver, Roxy and DC- have value well in excess of what they are carried for on the balance sheet.

Whoops- as I sit here writing this Shop-Eat-Surf has just published a story that says, “Quiksilver cuts jobs, stops severance payments.” To me, that’s further indication of their cash flow issues (not new) but also may have to do with ongoing negotiations.

Anyway where was I? Oh yeah- the value of the three brands. What I’ve said in the past is that all three brands have value, but that it would be easier to recognize that value as a private company. I’m pretty confident there’s no reasonable valuation that generates a sales price of a brand that solves Quik’s balance sheet problem. The sale price goes to pay down debt and leaves the company proportionally with the same problem on a smaller scale.

There are buyers for all three brands, but probably not at a price that does Quik any good. I’d love to be wrong and think we’ll find out if I am pretty soon.

You can see what’s going on. Quik has continuing and worsening cash flow issues. It’s in a lousy negotiating position. What I assume are ongoing negotiations and analysis is dealing with exactly the valuation assets I’ve raised for both the balance sheet accounts and the brands under different scenarios.

My best guess is that there’s no reasonable valuation a buyer will accept that can work without a restructuring of the debt, through whatever vehicle and in whatever form that might take. Quik management and the restructuring firm will be negotiating not just with potential buyers but with the secured creditors to try and put such a deal together.

As an industry, we have to be concerned about what happens to Quik’s three brands. We’d like them to end up where they could be nurtured a little to recognize their value, rather than blown up in distribution. It’s already been disconcerting for me to walk into Fred Meyers and see Quik and DC kids’ stuff on the racks and discounted in the Sunday newspaper ads.

I’ve highlighted for some time now what I see as a conflict between building a brand and being a public company. The way you rebuild brands in our current environment- like Billabong and Skullcandy are trying to do as public companies- is to pull back on distribution to better position the brand and improve margin while reducing expenses. But this requires some patience and I don’t think it lends itself to valuations that solve Quik’s problem.

Quik’s last financial statement reporting was in early June, so we should be seeing the next one any time. There’s going to be some kind of deal, and I don’t see how it can avoid involving some restructuring of debt. Let’s hope that whatever form it takes, the brands are still positioned to be supportive of the industry.

19 replies
  1. Jay Moore
    Jay Moore says:

    Jeff,
    Quick lost sight of reality when they went big years ago. You cannot go big by applying commodity principals to create success with a small company. These tools think like it is trading commodities, like corn futures, computers or tires! As soon as a action sports company loses it’s integrity it is on the way out. Some kids follow but in time all kids can smell a fading brand. Quick was on the way out 10 years ago. They lost the core years ago by blowing out distribution. That is the demise of many in time. If you grow organically it is a slow long slog. Publicly traded companies do not have that patience, they want 1/4ly returns. I say so be it they did it to themselves.

    • jeff
      jeff says:

      Hi Jay,
      How is Van’s doing it? It’s pretty clearly not impossible, but certainly it’s hard as hell as Vans seems to be the only really good example I can ever think of. You know I agree with you about the problems of being public.

      Thanks,
      J.

  2. you know who
    you know who says:

    No one outside of maybe Abercrombie is going to be intetested. SKUing the brand way down and going direct is the only way the name will survive. They are losing core support in droves, direct replacing Holistic is the only out as as see it today.

    • jeff
      jeff says:

      Hi YKH,
      Lots of people will be interested- it’s just a matter of the price. Abercrombie has their own problems. If you mean nobody is going to be interested in buying the whole company, rather than assets, I agree completely and made that argument in my article.

      J.

  3. Bruce
    Bruce says:

    Well I had to comment finally. And with Quiksilver. Not only have they lost their appeal, they are discounting it away, and are directly doing this. No, going direct is a disaster, as with all the rest. Some faceless company with a few careless reps. The old school, and traditional distribution, boots on the ground, with in distributors, and players, in every region, would make sense. And I don,t even have to mention the kids, youth line, where if you want more than a 1 generation brand, is where their main emphasis needs to be, and they licensed it out, and where it,s discounted in stores you don,t want to be. Hey if they would just wake up, pull back, as you suggested, and bring the brand back in to market where it belongs, the share holders won,t complain, ok? You went through the numbers and theres nothing left to lose.

    • jeff
      jeff says:

      Hi Bruce,
      I’m afraid we’ve gotten past the point where they have a choice that doesn’t involve a restructuring the debt. The cash flow just won’t support any kind of pull back and it’s a hard thing to do as a public company anyway. I see your point about the shareholders having nothing left to lose, but the secured creditors will be calling the shots now.
      Thanks,
      J.

  4. waterboy
    waterboy says:

    Hi Jeff.
    Solid economic arguments as always. But some of the issues don’t appear on a balance sheet; Pierre Agnes is smart and he’s a survivor – I’m sure he has a few ideas to save the company. Let’s not forget that Napali (Quiksilver Europe) is one of the biggest employers in the Basque Country, and I’m sure the French government won’t want to see them disappear. Pierre is expert at dealing with politicians and his first allegiance will be with France, so I wouldn’t be surprised to see a bailout by the government (or someone fronting for the government). If this means the company is split up so that only Europe survives, then so be it. We won’t have long to wait….

    • jeff
      jeff says:

      Good morning Waterboy,

      Perhaps, along the lines of what you suggest, there is a rabbit to be pulled out of a hat. I hope so because, as somebody reminded me in an email, there are jobs at stake and I probably know some of the people who could lose them.

      Still, what you are suggesting is another form of restructuring. At some point, it does in fact become all about the balance sheet and the value of the assets and liabilities. There’s a certain balance sheet strength, implied cash flow, and confidence of the creditors without which the company just can’t function. There may be other rabbits that could conceivably be pulled out of other hats as well. But all I know is the public information. I won’t speculate on what Pierre Agnes can do or not do.

      Thanks for the comment,

      J.

  5. Doggy Door
    Doggy Door says:

    Good points Waterboy – only issue is if the brand is not successful outside of Europe, than it will not survive. They need it to be successful in Australia and the US. Otherwise it would be a small brand in Europe who’s business is primarily mid tier sporting goods shops. I don’t think that’s what they want.

    • jeff
      jeff says:

      Doggy Door,

      My interpretation of what people are pointing out, correctly I’d say, is that the balance sheet is a symptom of the fact that Quik’s brands are no longer as attractive to the market as they need to be to support the existing balance sheet. It’s not that they are “good” brands or “bad” brands, but that their potential, whatever you think it is, can’t be realized under the current financial structure. However the brand fix, whatever you think that can or cannot be, is a long term process. The balance sheet fix is urgent.

      Thanks for the comment,
      J.

  6. You Know Who
    You Know Who says:

    As I have said for several years now, “Dead Man Walking”. The sad part is that they do have 3 great brands but no body cares anymore. Remember when Airwalk was the darling of the skate and snowboard business? But at some point when you lose the magic, no mater how good the product is you become irrelevant to the consumer. Under normal circumstances you could take ZQK and break it up and sell the pieces off to the likes of Iconic’s in NY for instance, but at what value? There is no valuation high enough to cover the $800 million dollar debt. Where does that go? . Yes the French government just might bail them out, (God knows the French don’t like anyone unemployed) but that will only buy them some more time. Truth is all three brands have lost their former magic in a market right now that doesn’t care about “Action Sports” brands in general. So on top of the colossal mistakes that they made several years ago, they now face a timing problem that just might be the final nail in the coffin. The market for surf related apparel is a fraction of the size it was just 5 years ago. If Quik were to just go away, it just might be good for the overall business as there is only just so much room in the market and at this stage 3 mega brands (Quik, Billibong, Hurley) might be one brand too many. I’m not a big fan of bail-outs. So if they can find a solution, then great, if not, they will become a part of our colorful history like Gotcha, Hang Ten, Airwalk and Op. .

    • jeff
      jeff says:

      Good Morning Y.K.W.,
      As you know, I pretty much agree with you. As far as Quik just going away, I think you mean that would be good only if the brands simply ceased to exist, rather than becoming even broader in distribution. I don’t see that happening and I’m guessing you don’t either. Anybody out there have any sense of what the individual brands might actually be worth?
      Thanks,
      J.

  7. You Know Who
    You Know Who says:

    Jeff, that’s the $800 million dollar question. How do you sell off a company that has negative equity, that is being de-listed from the NYSX and isn’t growing but in fact is a shrinking business model. As strange as it may seem, I think DC could bring the highest multiple. It is the least effected by the move away from Surf Fashion. When Nick ran it, it was firing on all 8 cylinders and in demand. Today, it’s in Penney’s and Kohl’s. Not the best of moves. But that said, it could still be “fixed” and marketed in a way that bight bring in at least some money.

    The more that Quiksilver is Frenchified, the less it will appeal to the American dealer and consumer base. I cannot name one European company in this space that has ever succeeded outside of the EU. Roxy is slowly getting better from what I have read, but overall is a shadow of what they used to be. I was in a local specialty shop recently and the manager told me that the tourist still by Quik and Roxy but starting about 18 months ago the local business has fallen like a elevator with the cable cut. Any potential buyer who does any due diligence will hear this as well and cause an even more depressed price offering. So in the end, I’m really not sure if I care if they survive or not. We have lost several leading brands over the years and the industry has gone on. Their time just might be up. But you cant sell to Walmart here in the states and do will Internationally. The biggest problem they have is that in their largest market (the USA) they are weakest. They can’t go BK, No one is going to buy them AND absorb the $800 million dollar debt, and a French government bail out is only kicking the can down the road. So I can only see three things in their future, 1 just close their doors. Unlikely at this stage. 2 Get a bail out from the French. 3 sell DC to someone like Nike and Quik & Roxy to a direct to consumer like Abercrombi or Guess. At least that way, the brand would live on here in the states. It’s better than being in Walmart and going direct will give the new owner the margin to absorb the $800 debt and live on. Other than that I really don’t know. I have to feel sorry for Bob McKnight as he is seeing his empire crumble and their seems little he can do to stop it. It’s got to be killing him.

    • jeff
      jeff says:

      Hi YKW,
      Guess our mutual speculations are now moot as they have actually filed. I’m digging into the press release, though I haven’t seen the actual documents.

      Thanks,
      J.

  8. Lawless
    Lawless says:

    How much does Quik owning it’s own stores play into this? I’ve heard the commercial leases for their stores are like a chain around their neck and Billabong seemed to go on a buying spree a while ago with purchasing small, core retailers and it seemed to really cause them a lot of problems down the road with recurring debt. I have no sense of how big or small a piece of the pie their retail footprint is in the grand scheme of things. Can you shed any light on that?

    • jeff
      jeff says:

      Hi Lawless,
      My perception is that the retail stores are a big issue. The bankruptcy documents I’ve seen so far tell me they are going to reject a bunch of leases as part of the process. In bankruptcy, you can pick and choose which contracts you want to keep and which you want to dump. I expect store closings, but don’t have a number for you as a result of the flexibility they get in bankruptcy. As of their last filed quarterly report (April 30) they had 719 retail stores.

      Thanks for the comment,

      J.

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