Quiksilver’s Potential Turnaround: High Risk/High Reward

Quiksilver (NYSE: ZQK  ) is doing everything it can to gear itself toward profitability. This includes divesting non-core assets, closing underperforming retail locations, scaling down its athlete roster, cutting marketing expenses, lowering employee compensation costs, and improving its global supply chain. Quiksilver is going all-out in its quest for consistent profitability, and this gives the company potential despite poor performances across all its brands and regions.

While Quiksilver offers turnaround potential, each of the following companies also targets a younger demographic and is likely to offer a safer investment opportunity without sacrificing growth potential: Urban Outfitters (NASDAQ: URBN  ) , Tilly's (NYSE: TLYS  ) , The Buckle (NYSE: BKE  ) , and American Eagle (NYSE: AEO  ) . We'll soon compare Quicksilver to these companies on top-line growth, valuation, and fiscal strength and as we shall soon see one of them stands out in a positive light.

Quickly declining
Quicksilver has a lot of work cut out for it on the top line. For instance, its fourth-quarter net revenue came in at $476 million versus $529 million in the year-ago quarter. In the Americas, the company's largest region, revenue plummeted 15% to $223 million. Declines in other regions weren't as pronounced, but the results were still negative. For instance, revenue slipped 6% in the Europe/Middle East/Africa region and 4% in the Asia-Pacific region.

The good news is that emerging market revenue grew 32% on a constant-currency basis. Therefore, top-line potential exists. For the quarter, Quiksilver also reduced its SG&A expenses by $7 million, to $220 million. This wasn't quite enough to close the gap between Quiksilver's revenue and SG&A expenses, but it's a start. Consider the chart below:

ZQK Revenue (TTM) Chart

ZQK Revenue (TTM) data by YCharts

Over the past year, Quiksilver's revenue hasn't managed to outpace its SG&A expenses. However, the company seems to be making all the right moves, not holding onto what's not working with false hope.

As far as the company's brands go, let's take a look at the big picture for fiscal year 2013. Quiksilver revenue declined 7% to $721 million, Roxy revenue slid 2% to $511 million, and DC revenue dropped 8% to $542 million. On top of that, wholesale revenue declined 8% to $1.29 billion. However, retail held its own with revenue only declining 1% to $447 million. Once again, emerging markets provided hope with constant-currency revenue in these regions increasing 21%.

Turnaround stories are high risk, and they usually don't pan out. On the other hand, Quiksilver's aggressive cost-cutting has been impressive. While turnaround stories rarely succeed, when they do they pay off for investors in an enormous way. Therefore, whether or not you want to invest in Quiksilver will have a lot to do with your risk tolerance. If you would prefer a proven winner in the teen and young adult space, then one company is especially enticing.

Targeting the young consumer ... and succeeding
The first thing we need to look at is top-line growth comparisons. Top-line growth demonstrates demand for a company's brand as well as pricing power:

ZQK Revenue (TTM) Chart

ZQK Revenue (TTM) data by YCharts

Quiksilver and American Eagle have been struggling the most over the past year. While Tilly's and The Buckle have shown top-line growth over the same time frame, only Urban Outfitters has consistently grown its top line. This stems from on-trend merchandise and broad product diversification that caters to different age groups and styles.

Urban Outfitters also has a pristine balance sheet, with $442.48 million in cash and short-term equivalents versus no long-term debt. The Buckle and American Eagle offer similar balance-sheet strength. The Buckle has $156.30 million in cash and short-term equivalents versus no long-term debt, and American Eagle has $357.21 million in cash and short-term equivalents versus no long-term debt. These strong balance sheets could make these brands appealing to a potential acquirer. However, this is just speculation. Tilly's also offers a strong balance sheet, with $50.82 million in cash versus just $3.62 million in long-term debt.

All of those balance sheets are impressive. They add value to each brand and prevent interest rate increases from eating away at growth potential. Unfortunately, Quicksilver's balance sheet isn't quite as healthy, with $62.38 million in cash and short-term equivalents vs. $1.26 billion in long-term debt. To make matters worse, Quicksilver generated negative operating cash flow of $9.18 million over the past year. Therefore, it will be difficult for Quiksilver to significantly reduce its debt.

On top of all this, Quiksilver is trading at 24 times forward earnings, whereas Urban Outfitters, Tilly's, The Buckle, and American Eagle are trading at 17, 14, 14, and 15 times forward earnings, respectively. Therefore, you will have to pay a premium for a leveraged, underperforming brand. Then again, that's what investing in potential turnarounds is all about.

The bottom line
Quiksilver is a high risk/high reward investment. It's certainly not for the risk-averse. If you have a high risk tolerance, then you might want to further investigate the company's situation and potential. If you're looking for an investment in one of the very few strong performers in a difficult retail environment, especially for teens and young adults, then you might want to consider Urban Outfitters. 

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