Buy the Quiksilver Crash at Your Own Risk

Shares of surfing apparel maker Quiksilver have been whipsawed this week, plunging 40% on a poor earnings report and then gaining 10% on buyout rumors. Is Quiksilver a buying opportunity, or a stock to be cautious about?

Jun 10, 2014 at 9:25AM

Quiksilver (NYSE:ZQK) was once particularly powerful in the surfing and skateboarding apparel industry. But over the years, the market has soured on Quiksilver as the company has had big issues with effectively analyzing consumer trends and has faced crushing competition.

Recently the stock nosedived 40% on a terrible earnings report. But then, a day after the big drop, the shares gained 10% on rumors that Quiksilver may be bought out by VF Corporation (NYSE:VFC), the parent company of brands like Wrangler, Lee Jeans, the North Face, Vans, and Timberland. Should investors consider adding Quiksilver to their portfolios on buyout rumors, or should they stick to the sidelines?

A terrible quarter
Before potential investors look into Quiksilver, a close look at the company's financials is in order. Unfortunately for Quiksilver, the company's last quarter was a flop, and a long-term view suggests that trends have continued in the wrong direction.

ZQK Revenue (TTM) Chart

ZQK Revenue (TTM) data by YCharts

Quiksilver reported a net loss of $0.15 per share for the quarter, considerably more than Wall Street's projected loss of $0.02 per share. Sales during the quarter ended on April 30 fell by 10.5% to $408 million, versus $456 million in the same quarter during the prior year.

More disturbingly, Quiksilver saw declines in major global markets. Sales in the Americas declined 18% to $186 million, while sales in constant currency fell 16%. Sales in Europe, the Middle East, and Africa fell 2% to $162 million from $165 million, and were down 5% in constant currency. Net revenue in the Asia-Pacific region was down by 6% to $60 million, but up 3% in constant currency.

To add salt to the wound, legendary surfing star Kelly Slater has announced he is cutting off his 23-year sponsorship agreement with Quiksilver. Slater's decision highlights management's poor decisions in the last few years and arguably should have come years earlier.

The lone bright spots for the quarter were improving sales in e-commerce and emerging markets. E-commerce sales rose by 23% versus the prior year. Quiksilver also realized strong growth in countries such as Brazil, Russia, and Mexico with 28% growth in emerging markets revenue during the quarter.

Insiders also took the opportunity to load up on more shares of Quiksilver at a discounted price after the free-fall. Quiksilver CEO Andrew Mooney has amassed 100,000 shares at $3.40 per share, while CFO Richard Shields also snapped up 100,000 shares. Insider buying is often a good sign as management could be expressing confidence in the company's prospects. Quiksilver insiders may essentially be saying, "There is no better place to pour my money into than my own company."

However, despite Quiksilver's improvements in e-commerce and emerging markets, the people at the top have simply not been able to gauge the public's tastes effectively and have ended up making Quiksilver suffer at the hands of companies like Nike and Under Armour. So is there any room for a potential turnaround in Quiksilver's future?

A risky proposition
Beaten-down companies sometimes stage big comebacks, and it seems that some investors are picking Quiksilver to be the next turnaround. Global financial services firm UBS stated in a research note that V.F. Corporation may have reason to acquire Quiksilver due to Quiksilver's well-known family of brands and cheap share price.

However, buyouts can be very risky places for investors to place their hopes, as company executives could change their minds at any time. Remember that neither Quiksilver nor VF Corporation has expressed interest in a buyout proposal. No evidence to this date has come out confirming the rumors. Rumors are simply that: rumors.

Although the UBS report has several strong warrants for why VF Corporation may take over Quiksilver, I don't believe those warrants are strong enough for value-oriented investors to stake much real-life money on with the expectation of large returns. The risks with Quiksilver far outweigh any potential gain. If a buyout does not materialize, Quiksilver is not in a position to generate value for shareholders over the long term due to decreasing brand power, declining revenues, and overall market position.

A safer, more profitable alternative
If you're looking for a long-term investment possibility, consider VF Corporation. VF Corporation touts a dividend and better revenues and stock price appreciation compared to Quiksilver over the last year.

ZQK Chart

ZQK data by YCharts

VF Corporation also has a broader product portfolio geared more toward winter products, thus having a wider market than Quiksilver, which focuses exclusively on surfing and skateboarding. VF also owns two jeans brands which are all-year-round products.

Whichever way you look at it, the risks with Quiksilver are high. Prospective investors hoping for a buyout bounce should be forewarned and may wish to examine VF Corporation as a superior investment alternative. 

The consistent pathway to successful returns 
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Evan Buck has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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