It is a tough market out there. You bought that house at the beginning of the year for $1.5 million and now it's down to $287,000. Ouch. As it turns out, you're not alone. Quiksilver (NYSE: ZQK), purveyor of all things beachy, has taken the same sort of hit in 2014. The company's shares are down 81%, year to date, and nothing is looking sunny anymore.
Spoiler: This doesn't end well
As a general rule, strong companies don't start their earnings releases with, "We continued to execute against the key initiatives laid out in our profit improvement plan." Quiksilver's third quarter, led off with that statement, and things continued on that same path. The company has lost relevance, lost market share, and lost its way. Here's an overview of what's gone wrong and how Quiksilver can still make up some ground.
Apparently, nobody surfs
Through the first nine months of this year, Quiksilver's sales have fallen 11% compared to last year. On top of that, the company's operating margin was crushed, falling below zero. Quiksilver has taken a one-off hit to goodwill this year due to its Rossignol brand divestment, but even without that charge, the year to date operating margin is negative.
Part of the decline in sales can be linked back to Quiksilver's decision to move many of its businesses to a licensing model. The goal is to reduce SKUs, cut down on costs, and ultimately generate more income for the business. The short-term result of that switch has been a drop in revenue, and Quiksilver is still working on building its licensing business up in order to make up for the lost revenue.
One of the biggest challenges for the company, though, has been staying current. Quiksilver's retail business has put up small favorable increases in same store sales for the past year and online sales have risen, but the company's wholesale business is stagnant. Unfortunately, wholesale revenue accounts for a full 60% of the company's total.
The Quiksilver rebuilding effort
Even with poor sales, there are still some potential bright spots for Quiksilver. The licensing model could be very good news, as in the first nine months of the fiscal year, the company spent 107% of its revenue on producing and selling its products. The potential for cost reduction -- part of Quiksilver's plan -- is massive.
The next steps toward reduction are going to come from things like staff reduction due to licensing -- "rightsizing" is the term management has latched onto -- and a decrease in production costs. There is a long way to go on those fronts to get Quiksilver back into profitable territory, but there's a path in place.
Quiksilver's long game
With a market capitalization below $300 million, struggling operations, and a handful of known brands, Quiksilver looks very much like an acquisition target. Companies like VF Corp or even Nike could easily snatch up the brand portfolio and fold it into their operations. That's the sort of move that I would expect to see sooner rather than later, though.
If Quiksilver can start gaining a bit of momentum in 2015, then there might be a chance for it to work its way back into the heart of retailers and shoppers alike, putting it out of acquisition range and making it a profitable business again.
As a third option, the whole thing could just fall apart. Again, as a rule of thumb, it's not a good sign when analysts on your earnings call offer their condolences for the horrible quarter you've had. While Quiksilver has lot of solid pieces in its toolkit, the rest of the bag is just full of old buttons and surf wax containers. If that ends up being the ongoing state of affairs, I can see any reason to invest in Quiksilver.
