Speaking of Consolidation- Boardriders’ Acquisition of Billabong

Back in September of 2013, when Centerbridge and Oaktree invested in Billabong, there was some discussion/consternation about the possibility of Oaktree combining Quiksilver, which it already controlled with Billabong.  Quiksilver’s name, as you know, was changed to Boardriders.  It owns the Quiksilver, Roxy and DC brands.  Billabong’s three largest brands are Billabong, RVCA, and Element.  It also owns some smaller brands which I continue to expect will be sold.  Probably easier to do that once Billabong is not a public company.

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Billabong and Rip Curl; A Tale of Two Surf Companies and Their Interesting Juxta Positioning

A few weeks ago, you no doubt saw the reports that Billabong (which would mean Oaktree Capital Management– the controlling investor in Billabong) was doing due diligence on Rip Curl as a possible acquisition.  Oaktree, of course, is also a major investor in Quiksilver.

When Oaktree invested in Billabong, there were some rumblings about combining it with Quiksilver, but nothing ever happened.

Meanwhile, we have a bit of information on Rip Curl’s earnings and last week, and Billabong held its annual shareholders meeting where Chairman Ian Pollard and CEO Neil Fiske reviewed the full year results.  Those results were released back in the middle of August and I wrote this article about them.

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Core Versus More; A History of the Surf Industry

Perhaps I bring the most value to the industry when a reader sends me something they think is important but that they don’t want to be directly associated with.  And they figure, “Send it to Jeff!  He’ll publicize anything.”

Most of the time, they’re right and this is one of those times.

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Quiksilver’s Annual Results and a Bankruptcy Update

Quik filled its 10-K for the year ended October 31, 2015 on January 27th. Meanwhile, as you probably know, the bankruptcy court has confirmed the company’s reorganization plan and it may be out of bankruptcy by the time you read this.

Doing my usual detailed review of the year doesn’t seem all that productive as the post-bankruptcy Quik will have such a different structure than the company that filed. Still, I want to highlight a few numbers and trends. I’ll also summarize very briefly the terms under which Quik is coming out of bankruptcy and comment on where they go from here.

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The Quiksilver Bankruptcy: Where Should We Be Focused?

As we go through the process of watching Quiksilver try to resurrect itself what issues should have our attention? Certainly not the endless pages of bankruptcy court filings. Not even I’m reading all of those. The process will grind through to its conclusion. The secured creditors will come out more or less intact, the common stockholders and unsecured creditors, not so much. As I read the deal right now, the common shareholders will get the big goose egg and most of the unsecured creditors 2.7% of whatever they were owed.

Those chips will fall where they may. In the meantime, there are four things we might care about as an industry. Or at least there are four things I think we might care about. Here’s the short list. You’ll see that they are not unrelated.

  1. Quik’s balance sheet
  2. Brand value and position
  3. The management team
  4. Any possible combination with Billabong.

Let’s take a brief look at each.

The Balance Sheet

It’s common knowledge that the level of Quiksilver’s debt is one of the things that led to the bankruptcy filing. Their last published 10Q (for the quarter ended July 31) showed long term debt of around $800 million. Interest expense during that quarter was $18 million. Multiply that by four and it’s around $72 million a year; simply unmanageable given their revenue.

Comparable debt when they exit bankruptcy, as the plan is currently structured, will be $318 million, or 60%, lower. In projections filed with the court, Quik projects interest expense in 2016 at $27.5 million, which is way better than $72 million. If you accept their assumptions, the projected balance sheet seems reasonable and manageable.

The projections Quik has provided the court are for the years ending October 31, 2016-18. For the first year, they are projecting revenue of $1.247 billion, ending receivables of $224 million and ending inventory of $292 million. The last full annual report we have was for the year ended October 31, 2014. For that year, Quik reported revenue of $1.57 billion. Year end receivables were $320 million and inventory $278 million. We don’t have a full year number for the year ended October 31, 2015. Revenue for the nine months ended July 31, 2015 were $1.01 billion down from $1.17 billion from the same period the prior year.

Okay, I’m just sort of thinking out loud here. I’d like to see a further decline in inventory given the decline in sales, but they are going through a chapter 11 proceeding and there’s going to be some further store closing and rationalization of the business so I can see why it wouldn’t happen the first year.  I also notice they are planning for little to no inventory increase in the next two years as sales grow to $1.297 and $1.391 billion respectively. That’s a good thing.

So the balance sheet seems reasonable, which is as much as I can ever say about any projection.

Brand Value and Position

 Not to overstate the obvious but if the brands can’t keep/recapture/build some credibility with the target customers, nothing else matters and a bankruptcy filing and the associated restructuring will just buy some more time for Quiksilver before it finds itself in trouble again.

In that regard, I am actually encouraged by the revenue decline Quik is projecting for its first year.  Let’s look at a couple of comments Quik makes in discussing its projections.

“Global wholesale revenues in 2016 are projected to decline compared to the prior year, primarily impacted by decreased volume, particularly in North America, and will partially be offset by increased selling prices. Growth is projected to be 7% in both 2017 and 2018 and will be largely driven by sales volume and increased revenues from ex-licensed categories. “Global retail sales in 2016 are projected to decline compared to the prior year due to the impact of store closures, a majority of which will occur in the U.S. New store openings and store growth, focusing on Boardriders and shop-in shop retail concepts, will drive sales growth in through 2018.”

Then, talking about the Americas (United States, Canada, Mexico, Brazil) they say:

“Sales in 2016 are largely impacted by a decline in North American orders as the Company exits certain distribution channels. Going forward, sales growth is projected to be driven by increased revenues from sales of previously licensed product categories and growth in Mexico and Brazil, with modest growth in North American orders.”

The part where they talk about exiting some distribution in North America and increasing selling prices gives me a warm, fuzzy feeling. Regular readers know I think being cautious with distribution is critical to brand building and getting good margins when, as in the case for most brands in this industry, your product isn’t fundamentally different from the competition’s.

And if that helps you raise your prices, as Quik seems to allude to, that means you can improve your bottom line even if you don’t grow your revenues and you can also reduce the working capital invested in the business.

On the other hand, I don’t much like the part where they talk about revenue from the previously licensed products being one of the drivers of global growth in 2017 and 2018. As I read that, instead of royalty income, they will have top line revenue. Nothing wrong with that (and I like that they are pulling back from the licensing program) but it’s kind of robbing Peter to pay Paul.


Quiksilver has damaged its brands’ positioning and credibility as a result of some of the distributions decisions it has made in recent years. It sounds like they are going to reverse some of those. Good. I hope it’s not too little too late.

The Management Team

Remember how Billabong bemoaned how hard it was to keep good management as they went through their restructuring travails? Quiksilver, I imagine, has the same problem. Billabong resolved the issue not just by completing their financial restructuring but by bringing in a new CEO who has made big changes in both the organization and the management team.

Quiksilver tried that with Andy Mooney and it didn’t work out. I know all the reasons people say Andy was the wrong person and I agree with some of them. I also know he started taking some required actions that should have been started way before he got there but weren’t. He also didn’t have the advantage of coming in as the financial restructuring was completed.

I wrote at the time with some sympathy about how founders and long established CEOs often had a hard time making difficult decisions a business required because of momentum and their long standing relationships with the people and organization. Maybe having to file a chapter 11 wipes out any hesitancy about making fundamental changes (not just tough decisions- plenty of those have been made at Quiksilver) in the business focus and direction. I hope so. At the very least, potential new senior hires will have to note (fairly in my opinion) that existing leadership bears some responsibility for Quiksilver’s current circumstances.

Combination with Billabong

 With Oaktree Capital Management involved on both sides, one can’t help but wonder if a merger between Billabong and Quiksilver is a possibility. Though we know the subject has come up, we’re still left wondering. As you may recall, the Oaktree representatives on the Billabong Board resigned right before the Quiksilver filing, and Oaktree’s involvement, was announced to avoid an obvious conflict of interest.

I don’t have enough information to even form an opinion as to whether or not a merger would be a good idea. Both Billabong and Quiksilver management kind of have their hands full right now, so I’m pretty confident it’s not imminent.

The reason some might like the merger idea is because it would imitate the highly successful VF actions sports coalition that includes Vans, The North Face, Timberland, Reef and other brands. Except it doesn’t really. Quiksilver and Billabong are direct competitors. The VF brands mostly don’t compete with each other. I expect that Billabong, as I’ve written, has already benefited from Quiksilver’s problems. If I were Billabong, I’d keep my powder dry and see how Quik manages its brand positioning issues. I might even be cheering for Quiksilver to succeed, because I as Billabong might not want well known surf and skate brands thrashing around in the market.

So you (and I) are saved from reading too much small print on legal documents. You can assume that the balance sheet is adequate and that a merger between Quiksilver and Billabong is not imminent (please no announcement to the contrary the day after I publish this). The overriding issue is the direction the management team takes the brands. At the end of the day, that’s what will matter.

Quiksilver’s 10Q; Not Really a Surprise

In the aftermath of Quik’s bankruptcy filing, the 10Q feels like an afterthought. Still, it’s worth a brief review. There was no conference call. Hell, what’s left to say?

In the quarter ended July 31, revenues fell 11.1% to $336 million from $378 million in the same quarter last year. Gross margin didn’t do much of anything, rising from 47.9% to 48%. Below are the comparative sales and gross profit for both quarters.

Quik 7-31 10q 9-15 #1Revenues as reported for the Americas, EMEA and APAC were down, respectively, 15.3%, 8.7% and 4.1%. Talking about revenues, Quik tells us, “Year-over-year net revenue and gross margin comparisons continuing to be unfavorable due primarily to the impact of currency exchange rates and licensing. We also expect our net revenues and margins to be unfavorably impacted by late deliveries in the short term and an evolving distribution channel strategy, particularly in North America.”

I don’t know what they mean by the “evolving distribution channel strategy.” I hope they mean they are pulling back from some questionable channels.

By channel, wholesale revenue fell 15% from $233 to $198 million. Retail was down 9% from $123 to $112 million. E-commerce rose from $20 to $21 million, or by 5%. Licensing revenue was $5 million, compared to $2 million in last year’s quarter.

They note that the drop in wholesale revenue includes $21 million “…from licensed product categories.” Instead of getting that $21 million, they received $5 million in revenue, but of course they received it without any cost or effort. Ignoring for a moment the impact on the brands of where and how that product was sold, it seems like a pretty good deal if for no other reason than the positive impact on cash flow.

By brand, Quiksilver was down 6% from $141 to $132 million, Roxy by 18% from $118 to $97 million, and DC by 11% from $108 to $96 million.

We’ve got a 19.2% reduction in SG&A expense from $205 to $166 million. These numbers include asset impairment charges of $17.4 million in this year’s quarter compared to only $180,000 in last years. $16 million represented “…the write-down of the carrying value of the Quiksilver trademark…”

“The decrease in Americas segment SG&A was primarily due to reductions in employee compensation, advertising, and bad debt expenses. The decrease in EMEA and APAC segment SG&A was almost entirely due to changes in foreign currency exchange rates.” Remember that a stronger dollar makes things cheaper when translated into US dollars.

When we’ve got a goodwill impairment charge of $80 million, down from $178 million in last year’s quarter. We’ve got an operating loss that’s fallen from $203 to $102 million, but you can see that’s pretty much just the result of the impairment charge being $100 million lower. Interest expense at $18 million is a big lower than the $18.7 million in last year’s quarter and foreign currency produced a gain of $4.7 million compared to a loss of $2.3 million last year.

So the net loss fell from $223 to $125 million. Depending how you think about the goodwill impairment charge, you might conclude that this year’s quarter was pretty much the same as last year’s.

The key thing to note on the balance sheet is that the long term debt has been classified as a current liability due to the bankruptcy filing. That interesting, because obviously the September 9 bankruptcy filing occurred after the July 31 date of the financial statements. Quik says the reclassification is what’s required by generally accepted accounting principles. They also tell us, “As of July 31, 2015, the estimated fair value of the Company’s borrowings under lines of credit and long-term debt was $583 million, compared to a carrying value of $822 million.”

At the end of the day, the balance sheet as presented isn’t of much interest right now, as all the unsecured creditors have made a contribution to Quik’s equity by virtue of the filing. That is, they can’t get paid unless the court approves payment or until a plan is confirmed. Some will get more, some less and a lot nothing.

That’s pretty much the end of the shortest analysis of a Quik filing I’ve ever done. My two major concerns as we watch the current restructuring process move forward continue to be 1) where will the sales growth come from and 2) is existing, long term management the right ones to pull this off.

Quiksilver’s Bankruptcy Filing: And the Beat Goes On

As pretty much everybody knows, Quiksilver filed for Chapter 11 Bankruptcy on September 9th. This is another step in a long process that’s been going on for years now and that we’ve followed together on these pages and in other places.

This will not be an explanation of bankruptcy or a discussion of why companies get into trouble. I’ve written those articles years ago (not specific to Quiksilver) and have posted them at the bottom of my home page under Classic Market Watch Columns. I sent that same link and information out last week. That’s probably the first time most of you have seen the bottom of my home page. Hell, I haven’t seen it in a while.

Before we get into some of the specifics of the filing and the plan, let’s briefly talk about what I think matters most.

In every report from Quiksilver I’ve analyzed in recent years, I’ve asked, “Where’s the sales growth going to come from?” No amount of bankruptcy filing, restructuring, store closings, downsizing and rejection of contracts resolves that issue.

That doesn’t make the filing unimportant. As I wrote before the filing, some form of restructuring had to happen because the existing balance sheet and implied cash flow did not support continued operations. As a result of the filing, and assuming the plan is approved, debt and interest expense will decline and so will other expenses. For example, Quiksilver reported it had north of 700 stores at April 30. Lease contracts for unprofitable stores will be rejected in bankruptcy and the store count will decline. That will reduce expenses further.

But it will also reduce sales once the liquidation of excess inventory that results from the closings is done. I’m fine with that. The Quiksilver, Roxy and DC brands could all stand to be a little less broadly distributed from a brand building point of view. As you know, however, I believe there’s a potential conflict between building brands with hard to differentiate products and being a public company.

My point is that none of this restructuring stuff matters unless consumers want to buy products with the Quiksilver, Roxy and DC names on them. The good news in that regard is that consumers typically don’t notice a bankruptcy filing. With that in the back of our minds, let’s look at what’s happened.

Who Filed for Bankruptcy?

While it’s easy to say, “Quiksilver filed for bankruptcy,” that’s not an description adequate for our discussion. Quik’s U.S. operations filed. Here’s a list of the legal entities included in the filing.

Quik bk filing 1 9-15










And here’s Quik’s complete organizational structure from one of the filing documents. I know the picture is too small to really read, but I just wanted you to have a sense of the scope of the legal entities composing what we think of as Quiksilver. The shaded boxes are the ones filing for bankruptcy, and correspond to the list above. The legend at the bottom right of the chart refers to the shaded boxes as “Non-Debtor.” I think that’s a mistake.

quik bk filing 2 9-15

Now, why do you care?

A “Prepackaged” Filing and the Role of Secured Creditors

Without getting into too much detail (like I’m going to be able to avoid that), you are probably aware that Quik has various pieces of long term debt. Around one-third of it is secured. That is, if Quik doesn’t perform under the terms of the deal under which they borrowed the money, the secured debtholders can seize the collateral securing the loans. Collateral can include various classes of assets including inventory, receivables, cash, trademarks, buildings, etc. It just depends what’s in the agreement.

That doesn’t change in bankruptcy. The secure creditors still have the right to the assets if Quik doesn’t perform under the loan agreement. But if the secured creditors take their collateral, Quik ends up selling its assets for the benefit of its creditors, the company goes away, and the secured creditors get less than if they can somehow restructure the debt and keep Quik operating. Or at least so they’ve apparently calculated. Knowing what I know about what happens to asset values in liquidation scenarios, I suspect they are right.

So a secured creditor has some leverage, and you can’t do a chapter 11 bankruptcy, prepackaged or otherwise, without their cooperation. Quik has played “Let’s Make a Deal” with that creditor in advance, and the plan is effectively part of the filing.

The press release tells us the filing “…is supported by 73% of the Company’s senior most class of debt…” It further tells us that “…holders of the Company’s Eurobonds sufficient to waive any technical default arising from the filing have agreed to allow the Company to reorganize its U.S. operations in Chapter 11.”

The rights and remedies of the secured creditors are no doubt carefully spelled out in documents, and you may all feel free to go find and read those documents to your heart’s content, because I’m not going to. My hope is that whichever, if any, secured creditors may not have agreed to this deal don’t have the ability to slow it down. The whole purpose of a prepackaged deal is to get the company in and out of bankruptcy quickly.

Here’s a list of the three biggest chunk of Quik’s debt included in the filing. The first one is the notes denominated in Euros.

Quik bk filing 3 9-15

You’ll note the $279 million in secured notes in the middle. You may also notice that none of this is due to be repaid farther away than 2020, and the first notes (the ones denominated in Euros) are due in 2017.

Who’s Getting Treated How and Just What’s the Deal?

 The thirty largest unsecured creditors are listed in the original filing. The biggest by far is US Bank as trustee for $225 million of unsecured notes. That’s the third item on the chart above. The next largest is, I think, a supplier and it’s for $7.3 million. Most of the rest are for merchandise, but there is a couple for “real estate” that I take to be store leases. Don’t know for sure. There are a few individuals for severance. As you are aware, Quik already stop paying under its severance agreements (35 people I think), but most of those amounts aren’t big enough to make the top 30. The smallest amount on this list is $931,000.

Unsecured creditors don’t typically do well in a chapter 11 filing, but in this case it sounds like some will do better than others. What I’ve typically seen is that they have to be dealt as a single class and treated equally. They can’t be paid until the case is settled, though they can continue to sell to the filing company (in this case Quik) if they want to.

Quik, however, has petitioned the court to pay some or all of what they owe to “critical suppliers.” The court has approved those payments up to some specific limits. That makes some sense to me because they need these suppliers to get product. If these suppliers start messing with production or the supply chain, Quik could be in a world of hurt quickly. Okay, they already are, but even more hurt.

I wonder- if I were one of those critical suppliers, I’d be thrilled to get paid but I’m not clear how excited I’d be to continue to give Quik terms on new products. Those must be interesting discussions.

It would be great if some lawyer reading this would explain what I don’t understand. I know bankruptcy judges have a lot of discretion (they should), but I’m surprised you can treat some unsecured creditors differently from others.

The rest of the unsecured creditors are not going to do quite so well as the critical suppliers. They would “…receive cash in an amount equal to its pro rata share of the Unsecured Creditor Recovery.” The total of that Unsecured Creditor Recovery is $7.5 million. We haven’t yet seen the schedule that shows us all the unsecured creditors, but I’m thinking this will mean pennies on the dollar.

Then there are the holders of the common stock. There’s a 60 page list of those people. Interestingly, there seem to be an awful lot of people who own one share. Last time I saw, Quik stock was trading between $0.08 and $0.10 a share. As currently structured, those shareholders are going to end up holding common stock that’s worth exactly and specifically zero. Just to be clear, here’s how Quik put it in an SEC filing. “All of the Company’s existing equity securities, including its shares of common stock and warrants, will be cancelled and extinguished, without holders receiving any distribution.”

Like the people with severance agreements, some store landlords can expect their leases to be rejected in bankruptcy. Quik will close the stores where they choose to do that, though they would have the option of renegotiating the leases with the landlord to get more favorable terms.

So far, there are 27 stores to be closed and, in fact, that process started before the filing when Quik made a deal with a liquidator to sell the inventory and fixtures in those stores. The process is to be completed by the end of December.

Quik has also opened some “pop up” locations to dispose of obsolete or distressed inventory. I don’t quite know if that refers only to the inventory from the stores being closed or not.

Product from all three brands is involved in the store closing and liquidation. This can’t be good for the brand’s market perception.

The happiest people in this deal have to be the ones who hold the Euro notes. Basically, if they keep quiet and don’t cause trouble, the non-debtor foreign subsidiaries will continue to pay principal and interest as it comes due during bankruptcy, and the claims of the Euro holders will be unchanged when Quik exits bankruptcy. And if they want, they can get 25% of their notes paid down if they agree to extend the maturity by three years. Quik would like those notes not to have to be paid in 2017.

The other two sets of notes, totaling about $500 million, will go away. That will result in a big improvement in the balance sheet and reduction in interest expense. However, the 2018 notes can be converted into common stock. The 2020 notes will be in the unsecured creditor pile and get not much as I described above. Boy, are they screwed.

Oaktree Capital, as you know, will provide part of the “debtor in possession” (DIP) financing. Some lenders like to do DIP financing because it has a priority in bankruptcy over just about everything. As I recall, it’s senior to all claims except taxing authorities and the professionals (lawyers, accountants, etc.) who work on the case. Oaktree will provide $115 million in DIP financing. Bank of America will provide another $60 million, essentially continuing their asset based lending facility through the bankruptcy process.

By definition, asset based lending facilities are secured. But you don’t see it in the debt list above because it’s short term borrowing. There was $33 million outstanding under that line at April 30. I’m guessing that maybe there was $60 million outstanding at the time of the filing.

When they exit bankruptcy, Bank of America will replace its existing ABL line with a new $75 million line. As a secured creditor, it appears they will more or less come out of this whole. Asset based lenders usually do.

“Upon consummation of the Proposed Restructuring, the new Company will be funded by two separate rights offerings of up to $122.5 million and €50.0 million, respectively. Both rights offerings will be backstopped by the Plan Sponsor [Oaktree]. It’s the owners of the $279 million of notes due in 2018 and of the Euro notes that will have the chance to participate in these offerings. And if they don’t participate, Oaktree will take the whole amount. That’s what’s meant by “backstop.”

This will apparently involve some combination of new debt and common stock at a discount price. We don’t’ yet know what the new price will be. The proceeds from those two offerings will be used to repay Oaktree it’s DIP financing (yes, they may end up partly repaying themselves), paying the unsecured creditors, buying back the 25% of the holders of the Euro debt from those who want to extent their notes for three years, and for “general corporate purposes.”

What Does This All Mean?

As I started off telling you, no amount of restructuring addresses in any way the attractiveness, or lack of attractiveness, of Quiksilver’s brands in the market. But, hopefully, it gives them another chance to focus on that.

That was the whole idea when they got out from under the Rossignol debacle and brought in financing from Rhone, but here we are with a bankruptcy filing. In the words of Quik CEO Pierre Agnes in the press release, “Our fresh capital structure, with a very low level of debt for our industry, will enable us to invest in and reinvigorate our brands and products. We are confident we will emerge a stronger business, better positioned to grow and prosper into the future.”

This restructuring does a lot more for the balance sheet than the prior one. But I bet if I went back and looked at the press release for that deal, I’d find similar words.

The next thing I’m focused on is the roll of Oaktree. As you know, they are a major investor in Billabong, and now in Quiksilver. All over the summary plan document is the recurring phrase, “…which shall be in form and substance acceptable to Oaktree.” How is this going to work exactly? How much control will Oaktree exert? Their representatives resigned from the Billabong board right before the filing, but I’d be pretty surprised if somewhere, somehow, Oaktree people hadn’t thought about some kind of coordinated strategy or consolidation or sharing of functions or something. I doubt the legal and ownership structure would permit that right now, but everybody wants to be the next VF.

Quiksilver stock, as you probably know, has been delisted from the New York Stock Exchange. As of September 10th, it was traded on the over the counter market under the symbol ZQKSQ. Large chunks of stock are going to be owned by Oaktree and others. Someday, it’s possible they may want that stock to go up in value so they can sell it and make money.

I’m guessing that if things go well for Quik, we’ll see a secondary offering a year or three down the road so that the current shareholders can have some liquidity for their holdings. But we don’t have to worry about that right now.

Meanwhile, somebody sent me a copy of a letter than Quiksilver President Greg Healy sent out to dealers more or less when the filing occurred. I’m not going to reproduce the whole letter, but I want to quote one sentence.

“The challenges we face today stem from poor decisions made by previous management, which saddled the Company with a burdensome debt load.”

I’m kind of wondering what they mean by “previous management.” Not Andy Mooney. The debt was there before anybody at Quik had ever heard his name. It’s true that Andy didn’t understand the market, but he was also responsible for initiating a bunch of operational changes that should have been implemented, in some cases, years sooner.

This statement really bothers me, because it suggests not being completely in touch with reality. There is nothing worse in a turnaround. And the longer a turnaround lasts, the more the pressure builds and the harder it gets to be in touch with reality. Andy Mooney may have been the wrong outsider, but my experience is that an outsider is a good idea. I am wondering just how much leverage Oaktree will exercise in this area. Remember, they brought Neil Fiske into Billabong.

I’m going to urge you all again to go to the bottom of my home page under Classic Market Watch Columns, and read the one about why companies get in trouble.

The next court hearing is scheduled for October 6th. I’ll watch for new documents and try to keep you up to date. In the meantime, keep in mind that this necessary step doesn’t solve all Quiksilver’s problems- it just gives them another chance to address them.

Article on Quiksilver Bankruptcy Filing

A reader forwarded this article, published in Australia, to me.  I thought it had some good information.  I’m particularly intrigued by the short discussion about how Quiksilver and Billabong will or will not be combined or work together.  Here’s the link.

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.

Quiksilver’s April 30 Quarter; Where is Sales Growth Going to Come From?

Quiksilver reported a loss of $37.6 million for the April 30 quarter compared to $60.9 million in last year’s quarter. Last year’s quarter included a loss of $23 million loss on discontinued operations. Ignoring that, the net losses are almost identical.  Net revenue fell 16.1% from $397 to $333 million. The revenue results by operating segments are below.Quik 4-30 10q #1







As reported, the decline was 14% in the Americas, 23.2% in EMEA, and 5.77% in APAC.

The Quiksilver brand revenues fell 17% from $167 to $139 million. Roxy was down 13% from $120 to $105 million and DC dropped 21% (Yikes!) from $103 to $81 million. Across all three brands, currency was responsible for $44 million of the decline. We don’t get any discussion about how each brand is doing in various markets.

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