Quiksilver (NYSE:ZQK) announced January 3 that it had finally found the right person to lead its trio of global consumer brands into the future. Although it had been searching for a CEO to succeed co-founder Bob McKnight for a year now, I don't think anyone who follows the company quite expected the caliber of hiring. Andy Mooney takes over as CEO Jan. 13 after 11 years at Disney's (NYSE:DIS) consumer products division and before that, 20 years at Nike (NYSE:NKE), including a stint as Chief Marketing Officer. At age 57, he's got the perfect resume to take Quiksilver to the next level. Investors loved the news, sending its stock up 18% over two subsequent days of trading. Will the euphoria last? I'll have a look.
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If you've followed Quiksilver's demise and rebirth over the last few years then you're no doubt well aware of how its stock price found itself below a dollar in March 2009. For those unfamiliar, Quiksilver acquired ski maker Rossignol for $320 million in 2005. Two years later following large losses, it sold Cleveland lf (acquired with Rossignol) for $133 million and then Rossignol in 2008 for approximately $50 million. Generating a $137 million loss on the purchase price as well as three years of income statement losses was a big deal. The losses, however, weren't the biggest problem. The real killer was the debt it piled on to make the acquisition in the first place. It had $163 million in long-term debt as of October 2004; one year later after acquiring Rossignol it had ballooned to $640 million. Taking its focus away from its Quiksilver, Roxy and DC Shoes brands, it was clear from the beginning that it had made a serious mistake. Seven years later and it's still wriggling its way out of its self-inflicted mess.
What's Mooney Inheriting?
Quiksilver is a business that's firing on enough cylinders to generate an operating profit in fiscal 2012, but little else. As I indicated above, it has an unbelievable amount of total debt, finishing the fiscal year with $758 million and interest payments of $61 million, ensuring its sixth consecutive year with a loss. In the go-go years a decade ago, Quiksilver routinely generated double-digit operating margins. Today, it's lucky if it can hit 3%. Although revenues are growing, it's at the expense of gross margins and profitability. If it wants to get back to better days, it's going to have to do a better job of inventory management, not to mention selling more merchandise at full price. Promotional selling is killing profitability. Mooney has his work cut out for him that's for sure.
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In its Q4 conference call it mentioned that its DC brand sell-through at JC Penney (NYSE:JCP) was doing very well. In fiscal 2012, DC increased revenue by 12% year-over-year to $594 million. Five years earlier DC's annual revenue was $365 million, suggesting a compound annual growth rate (CAGR) of 10.2% during that time. Both Roxy and Quiksilver have seen revenues shrink in the same five-year period. Quiksilver paid a total of $137 million for DC Shoes in March 2004 - $87 million in cash and stock plus the assumption of $10 million in debt and $40 million in performance target payments over four years - which in hindsight is a great deal given its growth since its acquisition. Mr. Mooney will want to keep growing this brand internationally.
Although Quiksilver's Asia/Pacific and Americas regions both had double-digit revenue increases in 2012, it was Europe that provided the most pleasant surprise increasing 1% year-over-year on a constant currency basis; in the process it took market share from weaker competitors. If it can continue to hold the line in Europe until the economy there recovers, its top-line growth globally should be impressive.
Lastly, its e-commerce business grew 155% to $87 million in fiscal 2012. More importantly, its online sales represent 19.2% of its $454 million in retail sales, 510 basis points (BPs) higher than what Ralph Lauren (NYSE:RL) generated online in fiscal 2012. Sure, its dollar value ($480 million) was higher but not as a percentage of retail sales, which is how the industry objectively rates a brand's e-commerce business. With profit margins higher online than in physical retail locations, the doubling of revenues in each of the next few years will be very helpful to its overall profitability.
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Andy Mooney's inheriting a business with three strong brands in reasonable shape except for the company's debt. Its $265 million in European senior notes, which aren't due until Dec. 15, 2017, come with an 8.875% interest rate. With the notes accounting for 35% of its debt, the sooner it can reduce its annual interest cost, the better. Given Mooney's experience, I see no reason why he can't whip Quiksilver into shape over the next couple of years and then sell it to his former employer (Nike) or VF Corp (NYSE:VFC). Both can afford to buy it many times over and both already compete with Quiksilver.
If you're a patient investor, I don't see why you can't double your money within 18-24 months.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.