Quiksilver's Costly Ski Lessons

Looks like Quiksilver (NYSE: ZQK) won't be hitting the slopes this season -- or selling equipment to skiers and snowboarders, at least. Of course, the company never should have taken on the mountain in the first place. Just two and half years after purchasing its winter-sports brand, Quiksilver is reportedly considering three different offers for its Rossignol division.

The company plans to keep the brand name and continue a Rossignol apparel line, but it wants to unload the hard goods segment. Quiksilver has done well selling well-known clothing lines like Roxy and DC Shoes to its target teen market, but I think it made a serious error in buying the entirety of Rossignol two years ago. The ski maker had been facing declining sales and rising costs before the buyout, while losing market share to K2 and others.

The company's idea -- aside from bailing out a family friend of Quiksilver's president -- was to splash the Rossignol name on shirts, jackets, and other paraphernalia. While the skis might have lost their wax on the racks, the name still held cachet. CEO Bob McKnight wanted retail clothing sales to grow to 20 times their then-$50 million size. Unfortunately, a clunky ski manufacturer came tethered to the deal, dragging Quiksilver's own performance down.

K2, now owned by Jarden (NYSE: JAH), continued to grow through numerous acquisitions of its own. Head (NYSE: HED), Atomic, Elan, and Salomon were all chipping away at Rossignol's dominance. Sure, it was great that Quiksilver was expanding beyond its beach and skating scene, mixing in a whole new season of products. But I believe this is a classic example of Peter Lynch's de-worse-ification principle in action.

After the most recent quarter, when the company found itself riding the wrong wave, Quiksilver realized that its rising costs from the Rossignol were squeezing its bottom line. Earnings had fallen despite a 17% growth in sales, and the gross margin collapsed 1.4%. The company is clearly struggling to manufacture Rossignol gear, and I think it's time to retire from the sport. Quiksilver did announce the development of a new line of women's clothing, and it will continue to sell a full line of Rossignol-branded attire. Hopefully the company will find greater success by focusing solely on its portfolio of apparel brands; that way, it can at least salvage something from its Rossignol purchase.

There's no price yet disclosed on what anyone is willing to pay for the ski maker; since Quiksilver paid $500 million to acquire it, this could become an expensive lesson. Still, sometimes it's better to learn such lessons late than never at all.