Quiksilver’s Quarter: The Impact of Market Trends
In the quarter ended April 30, Quiksilver’s revenue fell 10.4% from $456 to $408 million. The net loss grew from $32.4 to $53.1 million. Discontinued product lines contributed $9 million to revenue in last year’s quarter, but none in this year’s. A year ago, they also owned Mervin and the Hawk brand. I’m a little surprised they didn’t mention how much revenue those brands contributed a year ago.
I’ll spare you a long quote from CEO Andy Mooney on the profit improvement plan (PIP), but basically he says, we’ve done what we said we’d do and we’ll do more. He notes they’ve cut brands and product lines, are rationalizing sponsored athletes and event participation, licensing peripheral products, closing losing stores, reducing headcount, managing expenses down, centralizing merchandising and design, cutting SKUs and factories, and reducing SG&A.
But then they announce that they are pushing back the PIP profit target for a year to the end of fiscal 2017. Why, if they are doing all this good stuff, is that necessary?
Let me quote CFO Rick Shields as he explains what’s going on.
“Over the last 12 months in the U.S. alone we have seen approximately 20% of our smaller wholesale accounts close. This trend has also been evident in Europe where smaller core retailers face the added pressures of weak economies and higher youth unemployment… In apparel, the demand for lifestyle apparel is increasingly being met by fast-fashion vertically integrated apparel retailers at price points significantly below those currently offered in Action Sports.”
He goes on to discuss that in Europe and the Americas, “…our initial pricing has been too high for the last few seasons. This resulted in poor sell through, high markdowns and returns, a significant reduction from initial gross margin to final gross margin and lower wholesale pre-bookings for subsequent seasons. We believe that by being more competitive with initial pricing that sell in and sell through will improve along with subsequent reductions and markdowns in returns. We believe this change will support improved wholesale channel performance and we anticipate being able to hold our final gross margins.”
I agree with him. It’s not that I like to see this kind of competitive pricing pressure, but I think their approach is operationally sound and will benefit their brands. Does anybody reading this think he’s wrong about the costs and inefficiencies of the process he describes?
Now let’s hear from CEO Mooney: “We are adjusting our growth strategies to increase investments in DTC channels primarily in emerging markets to be much more competitive in core specialty and more focused on fashion right, price right, SMU programs for large and non-core wholesale channels in North America and Europe. We anticipate that these strategies will take more time to implement and consequently now anticipate achieving our PIP profit target by the end of fiscal 2017.”
This is not the market that Quik and other industry brands grew up and succeeded in. It’s more price competitive and promotional than ever. Sales increases are hard to come by. Here’s an example Andy gives.
“There’s the case of apparel, the fast fashion vertical retailers, where on the lifestyle component of the segment they are introducing products like board shorts or swimwear where it used to be the norm and still is the norm to say sale a pair of board shorts in a specialty surf shop at $60. Increasingly a lifestyle variation of that product could be sold at an account like H&M for $20.”
“So that is the significant chasm between two price points. So I think if you’re going to be with the mall-based specialty retailer in the lifestyle segment, we don’t intend to be at $20, but we probably have to be much less than $60.”
In North America, Andy tells us, “…60% of the business is in shorts.” I guess I’d be surprised if that was across all three brands. Perhaps he just means the Quik brand, but I can’t tell. What would be the impact of lowering board short prices between, say, 17% and 33%? Would price reductions on other products and brands be similar? Would it give you enough volume to make up for the lost margin?
They’ve made progress optimizing their production network. Andy gives us the example of buying t-shirts for spring 15 from only five factories where they used to buy from 55 factories. I don’t know if progress with other product is equally dramatic. They are also seeing the cost benefit of producing bigger numbers at fewer factories.
They are going to take some costs out of some products we learn. I don’t know the impact on quality and features, though Andy tells us, “I know in spring ‘15 that the quality of our product will improve, particularly when you look at it from a price to value perspective because we’re basically plowing much if not all of the factory price improvements that we’re getting through reduced SKUs and a narrower factory base into product quality and sharper pricing to drive the top-line growth again and drive sell-through in our wholesale channel.”
Two comments. First, it seems the reason they have to push out the impact of the PIP is because the cost reductions they have achieved through better factory pricing and logistics are going right back into reduced pricing. Second, one definition of improved product quality is apparently product with fewer features and lower quality, but with a lower price.
A lot of what Quik (and other industry brands) are doing strikes me as defensive as nature. They are being forced to compete in a market they really would prefer didn’t exist. That bothers me. Let’s take a look at some of the numbers then come back to that idea in the conclusion
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The Numbers
I started off the article with the sales numbers. Let’s break those down a bit by geographic segment, brand, and channel as reported in the filing. You can review the 10Q yourself here is you want.
You can see that all three regions declined, but that most of the decline was in the Americas. North American revenues fell 20%, but those in Brazil and Mexico rose 30%. We don’t have any information on the relative sizes of those markets or of other country markets not specifically mentioned.
“EMEA segment net revenues decreased by a high single-digit percentage in the wholesale channel and a low single-digit percentage in the retail channel. These decreases were partially offset by strong double-digit percentage growth in the e-commerce channel. The net revenue decrease in the EMEA wholesale channel was primarily due to decreased year-over-year net revenues of Spring/Summer products and increased returns and markdowns to aid inventory sell-through versus the prior year period.”
“APAC segment net revenues increased by a high-teens percentage in the retail channel and in excess of 40% in the e-commerce channel. These increases were partially offset by a high single-digit percentage decrease in wholesale channel net revenues.”
There was the following comment in the conference call by Andy Mooney; “And as we work through litigation with our partner in China, we hope to be able to develop that market there as quickly as we possibly can.” The litigation section of the 10Q doesn’t mention this. However, China seems to be a market Quik, and everybody else for that matter, is counting on. I hope the litigation issue is not serious and that they work through it quickly.
Revenue for all three brands was down, but you can see that the decline in DC, at 20%, was by far the largest. As Andy Mooney put it, “…the decline in DC footwear is largely a result of poor execution [and] distribution expansion in the U.S.” He says that with less inventory in the wholesale channel, they are starting to see some improvement. DC was down 30% in the Americas wholesale channel and 20% at retail in that market.
As you see directly above, the biggest chunk of the problem is in wholesale. They highlight the 30% increase in ecommerce, but it’s from $23 to $30 million. You know what would be really interesting? Taking out the DC wholesale business in North America and seeing what things looked like.
Quik ended the quarter with 658 company owned retail stores. That’s 28 more than at the end of last year’s quarter. Most of the new stores are in the Asia-Pacific (APAC) region.
Moving on to gross margin, we have the following result by region.
From the 10Q: “This 280 basis point improvement in gross margins was primarily due to four factors: 1) lower net revenues from clearance sales within the wholesale channel (120 basis points); 2) a net revenue mix shift toward the higher margin retail and e-commerce channels (80 basis points); 3) the net revenue mix shift toward the higher margin EMEA and APAC segments (40 basis points); and 4) the gross margin benefits from licensing activities (20 basis points).”
I’m glad to see the biggest part of the improvement coming from reduced clearance sales. Though I know it’s GAAP, I’m not sure how I feel about including licensing revenue as part of gross profit as there is no product cost involved.
SG&A expenses were down a few million from $217 to $214 million. But with the revenue decline, they rose as a percent of sales from 47.6% to 52.3%. SG&A expense reductions were offset by an $11 million bad debt expense for “…two rather unusual distributor situations… “
There were impairment charges of $20 million from a $15 million write down of Surfdome goodwill and $4 million to restructure their ecommerce system. The operating loss was $34.7 million, up from $13.3 million in last year’s quarter.
Interest expense rose from $15.3 to $19.2 million, and that’s a good lead in to discussing the balance sheet.
The headline for me is that long term debt rose from $769 million a year ago to $847 million due, I assume, to higher borrowing and increasing interest rates. This does not include the current portion of that long term debt.
The current ratio improved a bit, rising from 2.64 to 2.84. Inventory fell by 12% from $366 to $321 million. They don’t tell us how much of that was from selling brands and discontinuing product lines. Their inventory days on hand rose by 7 days to 138 days. That reflects declining sales. There’s some more work to be done with inventory, which they acknowledge.
Equity has fallen from $546 to $333 million. That decline, coupled with the rise in debt, has pushed the total liabilities to equity ratio from 2.08 to 3.63 over the year. Net cash used in operations rose from $18.4 to $40.2 million.
Sorry to inflict a blinding flash of the obvious on you, but the balance sheet deterioration can’t continue.
Known or Anticipated Trends
That’s actually the title of a short section that Quik has seen fit to include on page 28 of their 10Q. Here’s what it says:
“Based on our recent operating results and current perspective on our operating environment we anticipate certain trends continuing to impact our operating results during the second half of fiscal 2014, including:”
“• Year-over-year net revenue comparisons continuing to be unfavorable. Within this trend, we expect the year-over-year net revenue comparisons to be unfavorable in our North America and Europe wholesale channels, and favorable in our emerging markets and our ecommerce channel;”
“• Year-over-year SG&A comparisons being less favorable in the second half of fiscal 2014 due to annualizing against the expense reduction initiatives we implemented last year and to the timing of planned marketing campaigns; and”
“• Fiscal 2014 Adjusted EBITDA being below fiscal 2013 results with third quarter year-over-year comparisons being more impacted.”
My interpretation of this is that things are going to get worse before they get better. We’ve seen that the worst of Quik’s problems are in the wholesale market in North America and, to a lesser extent, in Europe across all three brands. The trends may be positive for ecommerce and emerging markets, but I wonder just what percentage of revenues we’re talking about for those two markets.
The competitive environment has changed and Quik, along with other industry companies, finds itself on the defensive in a lower priced, fast fashion, broader market where their traditional strengths aren’t as important. I agree with pretty much everything they’ve done. I am certain it is having and will continue to have a major operational impact. What I don’t know is whether it will make them into a more successful competitor in the market they now have to compete in.
Part of the problem, if I can say it again for the 12 or so time, come down to the contradiction between solidifying your brands on the one hand and being a public company requiring revenue growth on the other. I continue to see the two as being incompatible.
In a perfect world, I’d like to see Quik taken private, where I believe the value of their brands could be more easily realized.
For those of you who can’t see that happening remember that, like me, you probably didn’t see VF buying Vans coming either.
If they want to compete on price the quality and build of the product has to change. They will make up some margin by lower COG. they can also make up some margin by lowering SKU count which will benefit both development costs and promote production volume. I was just out today. You can get on trend board shorts for less than half what the action sports brands charge. Not ideal but I don’t really see how they have a choice. The mall is where the kids shop. Simple as that
Hi Pat,
They don’t have a choice and they clearly see it that way too. It would be a much bigger problem if they didn’t see it. The results depends on details we don’t have. On which products will they come down in price how much, how much will the cost come down, what cost efficiencies will they get by not having to mark down and take back and resell in other channels? Maybe more importantly, do consumers and retailers think more of the brand because it’s handled that way and distribution is maybe a little cleaner? We’ll see.
Thanks for the comment,
J.
Jeff,
What is interesting to me is how analysis, especially when done using the normal language and metrics of the financial markets of the day, always seems to leave out the vibe that a company is either building or tearing down with its constituent marketplace. Your analysis makes perfect sense, and I have no disagreement with much at all of your points regarding the quarter and its impact. What all the above leaves out is the intangible, (but nonetheless very powerful) aspect of what I will call here “Tribe Vibe.” The “Tribe” is the core marketplace, mostly in this case, surf, beach, and authentic lifestyle retailers, their employees, and team riders. The “Vibe” part is the perception that those retailers carry about each brand, and that brands perceived authenticity, “sellout status”, amount of “family ties,” etc. If you don’t think the major brands are talked about until the subject is exhausted, think again. Quiksilver has huge problems in this often neglected arena (neglected in that it doesn’t get entered into the metrics.)
If the surf shop, for instance, perceives that it is now being treated simply and strictly as a number on some companies spreadsheets, there is a reaction to that that will almost certainly result in lower commitment from that retailer. If a surf shop carries a brand, and that brand has a new CEO that is rumored to be driven to work and back every day in a limousine, that small fact adds to a whole new perception of that company. In short, they lose authenticity. If that company cleans out top and middle management, including many people who’ve built up relationships with retailers for years and sometimes decades, the “family ties” quotient
the “family ties” quotient will suffer. There are a hundred other ways that the Tribe Vibe is affected by a companies new persona, and in Quiksilver’s case, most of the changes have had a negative effect. When Quik sent a letter to its smaller retailers, telling them that they would no longer have a rep, they would now have to order any product using B2B, and they would have to post their credit card so that it could be dinged the day they are shipped, that is how they lose 20% of their smaller retailers. 20% did not go out of business, as Quik’s response seems to indicate. They have lost positive Tribe Vibe at a rapid rate, and I don’t see how they can turn that around. Core retailers are having a very difficult time seeing Quik as “part of the family” like they used to, and that is going to hurt those retailers commitment to Quik. There are tons of good brands competing for that shelf and rack space, and Quik must give retailers more reasons to support them through thick and thin, a factor they always had in the past but are losing quikly.
Hi Big Guy,
Thanks for the great information and discussion of the vibe and tribe. I agree it’s critical for a certain part of the market. The trouble is that part of the market is just not as large a part of the market as it used to be and Quik can’t expect a lot of growth there. Inevitably, especially as a public company, they’ve got to look to the larger market for growth. As I described in a number of articles, the problem is that the further away you get from the market you have your roots in, the harder it is to differentiate the brand. Those consumers in broader distribution may know your brand, but they don’t know and probably don’t feel connected to your story- the vibe and tribe as you call it. And once that happens, why are they going to spend more money for your product when it’s fundamentally not a different product from other brands? Like you, I think they need to embrace their root market even if that market is something of a pain in the ass to deal with (which it is). But especially in turnaround mode, I’m afraid the financial model, at least in the short term, just doesn’t lead them that way.
Thanks for the comment,
J.
Jeff, I always take note when you point to the larger market, but I will still contend that even the larger and big box retailers go and look at the premier or “flagship” surf and action sports stores to see what those retailers are doing. They want to share in what is cool at those stores. You lose the vibe with the core, and it slowly filters out to the mass market to the point where every retailer knows you’ve slipped in the standings.
Cheers,
Bigs.
Big,
Retailers will carry whatever sells at good margin. And sure, they look to catch up and coming brands. Always have, always will. “Cool,” whatever that means may start coming from somewhere else. And price may be becoming more important than cool.
Thanks for the comment,
J.
Jeff very good analysis once again. I am a pretty buttoned up guy and I never thought I would say this, but having read the call transcript and listening to them speak live on occasion, one thing that comes through is the arrogance of new management. Name the last truly noteworthy Quik add? Name the last Quik event that people talked about (to me that was the cancelled New York contest). What was the last interesting thing DC did? I am a margin guy, but there is a need to make kids want a brand. Do you really think dropping the price of trunks a few bucks is going to make a kid buy Quik instead of RVCA, Hurley or a new small up and comer? I never hear anything from new management about their great new marketing ideas. The way they talk about vulcanized footwear as their great white hope is shocking. They never talk about why someone would buy their product instead of Vans. You would think they would get that is kinda important. Guys like me can easily cut costs, but at the end of the day you need people to want what you make.
Hi Chuck,
I”m also getting some off line comments from industry people along the lines of what you and Big Guy are saying. I would remind everybody that Quik had some major, major issues before Andy Mooney ever showed up. So let’s not be too quick to blame somebody who you’d have to admit is doing some things at Quik that need to be done even if he isn’t “cool” and doesn’t “get it.”
Everybody is raising the same issue. Can you not be “cool” at the core but still succeed in the broader market? Used to be the answer was an unequivocal “no,” thought I’d point out that what we considered the broad market then was way narrower than now. Now what I’m starting to believe is that even if you’re cool as hell at the core, it may not translate into the very broad market you need to reach. Look, you’re right to the extent that Quik has to do something to differentiate its brands. Your belief, and that of others, is that the something is to be credible at the core. I’m not sure that’s enough, but I’m not quite sure what else to tell them to do.
See you at Agenda I hope.
J.
Hi Jeff
great coverage as always
Wanted to pick up on a point made about the decline in small retailers. In Europe its blamed on weak economies and high youth unemployment. This is true in part but the main reason is that Quik etc have decided to go with Amazon, own online retail and just about any other ‘big’ retailer that will write a decent number. The writing has been on the wall for a long time, don’t really blame them but its disingenuous of these brands to constantly point the finger elsewhere and not accept the true situation. In Europe exactly the same thing that has happened to Quik, Bong etc is now happening to the next level of brands, no names but it won’t be long before more start to have troubles. Its a shame but nothing stays the same forever and all the action brands fundemental lack of connection with the aspirational 12-25 year old is at the root of it. all.
Hi Ian,
As you say, nothing stays the same forever. When a market gets bigger, it attracts the attention of a different group of competitors. That’s just the way it is. As I’ve written, the real action sports market is actually pretty small. Part of the decline in small retailers is the fact that being a small retailer requires a good business person to run their business well. Before the economy went south, we had a lot of small retailers who weren’t good retailers, but managed to stay alive because it was so easy to increase sales. As I first wrote well over 10 years ago, cash flow covers up all sorts of management mistakes. Those days are over. Did the way the large brands have acted hurt the small retailers? Hell yes. Would Quik and other large brands be in business if they had remained focused on those retailers? Nope. Or at least not as big public companies. Of course, they may not be that way for long anyway. I am pretty certain that a whole bunch of independent specialty shops would have gone out of business no matter what Quik and other brands had done.
Thanks for the comment,
J.
Vans pulls this off every day. If you have not seen it, there is a very interesting and long self serving article yesterday by a Quik short at Seeking Alpha which makes the case for Billabong vs Quik. I don’t believe everything in it, but ………………
Hi Chuck,
Yeah, I saw the article. And you’re right about Vans. But whatever the market conditions, somebody always succeeds. Vans has been owned by VF for a long time now, and they had the benefit of VF’s management rigor and balance sheet.
Thanks,
J.
Great commentary Jeff. And the article Chuck referenced is an interesting read as well. Here is the link in case your readers are interested. Competing in the mass market is a losing proposition for specialty brands such as Billabong and Quiksilver. It seems Billabong has figured this out while Quiksilver will most likely learn the hard way.
https://www.google.com/url?rct=j&sa=t&url=http://seekingalpha.com/article/2258193-billabong-and-quiksilver-two-similar-financial-paths-two-different-strategic-paths%3Fsource%3Dgoogle_news&ct=ga&cd=CAEYACoTMzE5NjU3MTY4MjkzNDYxNjAxNjIdYmMzYzU1MDg3NDYwNTE5ODpjb20uYXU6ZW46QVU&usg=AFQjCNGA0TA7coP1gv2_PQcGh3XlJ27pVQ
Hi Steve,
Yes, that’s a great article, though I’d remind everybody that author is long Billabong stock and short Quik stock, so he has a financial interest in convincing people of his point of view. My concern for Billabong and Quik, and others that are public as well, is that if they can’t compete in the mass market they can’t grow enough to be public companies. However, I’d follow that up by saying that I’m no longer clear what the terms “mass market” and “specialty brand” mean. Does reaching consumers at every touch point with your brand change the role and impact of distribution? We got some once a century economic and demographic changes going on in this country and I don’t know how they impact our market.
Thanks for the comment,
J.
Jeff, first off, always love your commentary and public company analysis. Been following your blog for a while now and am a big fan. I’ve been apart of the surf industry my entire life, surfed professionally on the ASP WQS/WCT for a number of years, and now work with many of the companies you write about.
While I agree with your commentary on Quik’s 10Q and see the end goal for Andy Mooney’s PIP I still think he is still off track. Even if Andy successfully implements his PIP and everything goes smoothly, Quik has lost touch with its entire customer base and its sales for this quarter proved it. The first step in running any business is knowing who your targeted customer is, understanding that customers needs/wants, then developing and delivering a product to satisfies those demands in the quickest and least expensive way possible.
Andy seems only to be focused on everything except who their targeted customer is. I understand he has obligations to the shareholders to increase profitability and yes Quik needs a major overhaul structurally but you still have to create a product and image that the consumers want to buy and he is not doing that. Quik, DC, Roxy, all these brands and many others are becoming stale and old. Until they figure out what audience they want to target and create a brand image which caters to that target market then their sales will continue to decline.
Given the current circumstances it might not be a bad idea for Quik to take a look at Forever 21’s business model and rebrand the company in a similar fashion. Cheap, trendy, mass market production for the everyday kid who can’t afford the $100 board short. Sometimes quantity over quality is the way to go.
Hi Nate,
If you’ve read the other comments, you’ll see that a lot of people agree with you. It’s actually more than you see, but not everybody wants what they think to be public. Implementing the PIP and getting things running smoothly is only the first step for Quik. Frankly, it’s the easiest step and generates the most cash flow the fastest and that’s what they needed to do. Remember that some of what they are doing is financially driven. As in, they may not want to do some of it, but have no choice. As I noted, their balance sheet is continuing to deteriorate.
Now, we all agree that you have to sell the right product to the right customers at the right price and with the right features or none of the other stuff matters. “Focus on the core” everybody says. Okay, I agree the core should be important to them even if core stores are small volume and sometimes hard to deal with. But they can’t do much of their total business in the core no matter how much they focus on it. It’s too small.
Okay, but not we have to go on the discuss what we mean by “the core.” Is Zumiez core? Is it only small, specialty surf and skate shops? I don’t know any more. I think Quik has to do most of their business outside of the core to succeed. Can they do that and be credible in the core? As I see it, attitudes and spending habits have changed since 2007. Consumers are more price sensitive and while they may be into the surf lifestyle as a fashion statement, a lot of them don’t about surf authentic brands. You can say, “Well Quik shouldn’t be in that market,” but then what market should they be in?
Honestly, Nate, I’ve been struggling with this for a while. What is the market? Do most kids care about the brand on a pair of trunks as long as they trend and color right if the price is $20 lower? How has ecommerce and easy access and knowledge of new brands not dependent on retailers changed things? We can all say, “Focus on the core,” but what that means has changed, hasn’t it? Or not? Brands come and go. Always have, always will.
Nate, this is a new kind of market and distribution. Yet we’re all going, “Focus on the core!” Are we completely sure that’s right? I think you might be on to something with the Forever 21 model, but I don’t know how Quik makes that transition.
Thanks for the comment.
J.
Jeff,
You have some great points and I agree. Most companies like Quik are struggling between appealing to “mass markets” and the “core retailers.” Like you mentioned, who are “core customers” these days?
In my opinion I view retailers such as Tilly’s, PAC Sun, and such as large retailers who carry products based on what is trending amongst America’s youth. I would not call the kids who shop here “core customers.” These kids don’t care who Kelly Slater, Mick Fanning, and Nija Houston are. They only care about what the popular, fashion forward kid is wearing to school. I think the “target market” which Quik should focus on is this demographic. The kid who skates once in a while but mostly just wants to be cool at school or the middle aged guy who surfs once a week. If you are 19-30 years old and are semi-into surfing, skating, or snowboarding you only want to buy the best products on the market. Just a personal opinion, but I don’t think Quiks products are up to the same level as brands like Billabong, Hurley, and O’neil.
So how can Quik transition to this new demographic without losing its entire “core” customer base? Well, sadly I think they have already lost it. With Kelly no longer in the equation they don’t have any presence in the surf industry anymore. This brings us to the artist Lorde and Forever 21 as previously mentioned.
If you look at any underground fashion blog, Lorde is everywhere, and, as of right now considered one of the trendiest people out there. Every girl in America loves how she dresses, acts, and looks. In fact, Forever 21 styles many of its looks after her. If Quik can merge individuals like this with popular underground surfers, skaters, snowboarders etc. and produce inexpensive yet trendy products they might succeed. Granted their profit margins wouldn’t be as high but atleast they would be selling a lot more product which after time should compensate for the short term loss.
So how does Forever 21’s business model fall into play here and how does it relate to Quik? Forever 21’s business model is very unique. They find what’s popular, who’s wearing what, and within a few weeks they have that look available in their stores. By being quick to market and only offering limited quantities of the looks they create, they’ve created a high demand and stores usually sell out within a week or less. Furthermore, they only carry these products 1x so if you don’t buy it the first time you see it, the odds are it will be gone for good the next time your there. While the price points for these products are usually between $5-20, the quantity of products they sell makes up for the smaller profit margins. If Quik followed a similar model within in it’s own stores and dropped it’s price point to around $20 I think it might just work. Either way need to do something soon or they will lose all credibility.
Just a few added thoughts to what has been previously discussed.
Hi Nate,
I think every brand in our space is making some moves towards Forever 21s business model. Everybody talks about being on trend and faster to the market and better pricing. It’s just the market we’re in. But making a fundamental transition from it’s old market position to the one brands like Forever 21 are in is tough. It means reaching new customers and new, more powerful, competitors. What I’ve said is that as you expand into the broader market (as I think public companies especially have to), you need to reach customers who may know your brand, but they don’t know your story or what the brand stands for. So why should they buy it? What’s your competitive advantage?
Two more points. First, Quik has acknowledged in their public information that they have to and are focusing on product. There is room for improvement and they tell us they are working on it. To soon to know what the result will be. Second, I might agree with you about how, in an ideal world, Quik needs to change its market positioning. But that’s a long term, expensive proposition, and I don’t think they have a balance sheet that will allow it to be done successfully.
Thanks for the good conversation,
J.
Great article! I guess I’m one of those core retailers and used to carry heaps of Quik. But as they seem to discount more and more of their product through their own stores and their own website then we were seen as a more expensive option for our customers. It’s always add ons and bundling stuff together and it’s right from the start of each season and they don’t give us the same deal. So of course we reduce our future wholesale orders with them as our customers stop buying their brands. We are in the APAC area and heaps of other fellow retailers have also done the same. And that’s with their margin being over 55% in our area. So my question is really about how much the connection is between growing ecommerce and your own retail and how that impacts your wholesale? It seems to me that if you don’t offer stuff cheaper online then people don’t buy it and so the more that Quik compete with their wholesale accounts then the more their wholesale sales going forward will suffer.
Hi Geoff,
Seems like there are a lot of retailers like you out there these days. One question-When you say the margin is over 55% is that the margin you would get on Quik product? I assume that’s not the margin you are actually getting or you’d love selling the stuff wouldn’t you? If you were a U.S. retailer and were getting 55% I think you’d be pretty happy. Not true in New Zealand?
Your question about the connection between ecommerce, brick and mortar retail, and wholesale is one we’re all thinking about. Trouble is, I don’t think anybody has a good answer yet. But let me give you a few things to think about. First, as I’ve said a few times, doing ecommerce well costs a lot of money. You have to earn enough money from incremental gross profit to pay for all that. If all you are doing is taking revenue out of brick and mortar and putting it into ecommerce, you aren’t accomplishing anything. Second, think separately about ecommerce and mobile. To see what I mean, go read this article I wrote and pay particular attention to what the guy from Walmart (yes, Walmart) says. Finally, I know you already know this, but if you’re competing too much on price, it’s game over. If you’re authority as a retailer in your customer community, and the distinctiveness of the brands you carry (based at least partly on cautiously managed distribution) isn’t sufficient, it’s hard to see how specialty retailers compete.
I know, Geoff, that it’s very easy for me to say that and very hard for you to do it well. At least in the U.S., in the economy we’re in and with consumers having access to so much information, there’s no way to avoid being impacted by the price game. That’s why so many specialty retailers have gone out of business.
Not sure I’ve completely answered your question. Come back at me if I haven’t. The trouble is I could probably write for the next two hours and not answer it completely.
Thanks for the comment,
J.
Jeff,
I can tell you from firsthand (rep) experience that Geoff’s gross margins as a retailer could well be 55%. The last “surf” line I repped had 57% gm when I first started, which declined over the recession years to about 52%. This has become an incentive to retailers, just as much as giving them a 3% discount to get their order in by order deadline, or any other margin incentive. Starting margin vs. sustained margin is a more difficult equation, but it still holds true that if you start with a high gm, you are likely to end up with a higher sustained margin. If you can somehow avoid lots of markdowns, or “matching internet prices,” you can come out with a close to 50% gm at the end. Almost no retailer is able to do this, especially today, and never across all brands. Many retailers will now match internet prices, and many can’t afford to. I have seen shirts that I sell wholesale at $40 end up on Amazon at $28 retail, and this is while they are still current in my line! I have been told that Amazon will do that when they are down to their last couple of units of a style, but in a way it doesn’t matter. It still pisses off the retailer, sometimes to the point where they don’t order for a season, just to “teach you a lesson” that you had better do something about Amazon. This is just one example of how we are in a real mess, as an industry, and I don’t think you can ultimately blame Quiksilver, or Billabong, or any one entity. It is just a more complex retail environment, with more “land mines” than ever before for the small retailer. I would love to see you start an interview column on your website, where you interview retailers that have A. gone out of business- and also B. Still doing very well. Let’s hear from them what is took to do either.
Sort of waiting this one out but here is my 2 cents.
First my disclaimer. I am not anti growth or anti profits or some bleeding heart head in the sand core guy. I am a realist who is focused on right sizing brands for long term sustainable profitability. So with that said here is my long winded diatribe of the day.
Quik is on an accelerating downward death spiral. It hurts to say that, but it’s just a fact. They have little vibe as Big Guy so clearly pointed out. Yes, I would agree that Andy has done some very important and long over do things on the back side that should help. But as smart (and I really do think he is a smart guy) I also think he is the wrong guy at this particular piece of time in the life span of Quik. This new race to the bottom strategy is just one step away from selling Target. By eliminating the executives that had the credibility and relationships he has just made everything they are trying to do just that much harder.
But here is the real uncomfortable truth;
Surf is not a fashion statement that kids aspire to right now. It’s not cool. If your going to the beach and need a pair of board shorts, ok fine. Why do you think mainstream Hollister is hurting? Pac Sun can’t get ahead and their best selling lines are Urban or reality star (I use that term loosely) based. We need to face the fact that surf just isn’t cool right now. Then you have the now prevalent cannibalization of the industry as well. You simply can’t sell to Costco, have several hundred of your own stores, discount in-line product on your direct B2C website during Christmas, sell Macy’s, Famous Footwear and build to order product for TJ Max and Ross and expect to stay relevant. I had a good laugh when I read the ass kissingly long article in Shop-Eat-Surf about their (Quiksilver’s) Steve Jobs wannabe show they put on for the retailers recently. They made a big deal about how they were going to lower prices on Vulc shoes and clothing and how they turned down an offer to work with Hollister. And everyone in the audience clapped enthusiastically. Really? Tell me what the difference is right now between Quik and Hollister? Team riders and a contest or two? That’s it. I would offer that Hollister is actually less of a threat to the specialty retail community than Quik is. Yeah, I get that very few within the Ohio offices of Hollister have ever surfed, but how may executives at Quik surf other than Bob? AND why is that even important? The fact that the dealers applauded simply amazes me. Oh, we sell Costco, under cut you in price during the busiest time of the year, open our own stores all around you and make stuff TO ORDER for TJ Max and you are applauding us for NOT selling Hollister? No wonder the core accounts are dropping like fly’s! They are sleeping with the enemy and still haven’t figured it out. Like sheep being lead to slaughter. They sucked up to Nike and look how they got screwed there. Oh SB is just for you. 6.0 is just for you, oh, we changed our mind now. It’s all Nike. It’s generic and it’s everywhere. Gotcha! Stupid asses.
30 years ago if anyone sold a Macy’s, the merchandise would be in a pile on the sidewalk in 30 minuets. What happened to the back bone of the dealers? We are eating our own and will end up just like the ski and snowboard industry if the dealers don’t wake up and the manufactures stop thinking that there is an inexhaustible supply of consumers and retails to feed off of. We need to be focusing on how to create a sustainable industry that will serve the needs of the participants and mainstream when that’s applicable. So there you have it.
Sorry for the long rant. Public companies in our industry don’t work and never will long term.
Thanks and good luck to everyone.
Greetings YKW,
Mostly, I’m just going to leave this for everybody to read and think about. You already know I agree with you on public companies not working right now in our industry. If I can extend your uncomfortable truth a bit, I think the economy requires that any public company do what Quik is doing. The post 2007 economy has exposed just how small the real core market is and it just doesn’t support (especially given all the stores that have closed) a large dollar business and required revenue growth. The other thing the economy has done, of course, is make price even more important. Especially for our prime customer group. But Quik has acknowledged that they are going to have to come down in price due to competitive pressures. But those competitive pressures are coming from companies I think they will have a hard time competing with. They’ve gone from being a big fish in a small pond to a small fish in a big pond, and have no meaningful point of differentiation. Especially if, as you say, surf isn’t cool.
Well this all sucks. Thanks for being nearly as depressing as I can be sometimes.
J.
Guys !!! Forget about all of this, let´s GO SURF !!!!!!!!!!
Hmmmmmmm. Okay, this guy’s smarter than all of us. Hey Cutslash, how’d you like to write the Market Watch column?
Thanks for reminding us,
J.
Sorry Jeff but the margin I was referring to was quiks gross profit margin of 55% in the APAC area. I only wish we could get that as a retailer. The point I was trying to make is that they were able to compete more on price because they had more margin to play with and we didn’t have that luxury. Having said that I agree with you totally on not getting sucked into the price competition vortex. That is essentially our difference these days with our brand mix which is mainly focused on those brands that aren’t found cheaper elsewhere. Can’t say that I disagree with much of what “you know who” has written either.
Hi Geoff,
Thanks for the clarification. YKW is wise. However, the smartest guy in this conversation is Cutslash, who reminded us to forget all this crap and go surfing.
Selling brands that aren’t found cheaper elsewhere is what smaller retailers have to do to some extent. It’s the only way they can differentiate themselves. But they see taking on these brands as a risk (I suppose it is, but what’s the choice?) and these brands won’t give them long dating or, even better, product on wheels.
Thanks,
J.
I sort of went through and re-read a lot of the responses to your analysis on Quik. A couple of key points surfaced to the top, while pondering all this. 1. It is obvious that you are strongly convinced that in a company with Quiksilver’s numbers, the “core market” is part of the pie, but only a small part. In looking at Quik from the 10,000 ft. elevation view, yes, I now have to agree with you. The mass market is where it’s at for Quik, especially when you consider it’s public status and the demand for not only profits, but growth.
2. A responder commented that what is hot is what the trend-setter at the local high school wears. I also think this responder hit the nail on the head. Is what the tastemaker wears at a high school in Boulder, CO, the same as what the tastemaker in Buffalo, NY wears? The US is much more capable today of that very thing happening than it was 30 years ago. Social media, viral vids, and kids following fashion tastes online are dream avenues for promoting product, and I don’t think any of the action sports brands have fully developed that. MTV was probably an early example of how fashion trends and tastes could be influenced en masse through electronic media. Dyrdek is a more recent example of someone using media fairly successfully to promote a brand. DCs numbers might have fallen off much more severely without him. Rob Dyrdek means nothing to me. But he is unquestioningly an influencer, and is doing a better job of it than a CEO could hire someone to do. Right place, right time, right cred for Rob, and more power to him. Conclusion: All the companies that want to influence the tastemakers need to develop more infiltration into viral Youtube vids, influential media characters like Dyrdek, and other social and mass media outlets.
3. Something that did not come up too much is the rep changes that Quiksilver has made, and I don’t think the info is public enough to be an issue for most. I talk to retailers every day, and I can tell you that when Quik takes one of it’s territories, which used to have 3 reps – Quiksilver young mens, Waterman collection, and Roxy- and reduces it to one rep handling all 3 of these divisions, you are painting a picture for lots of things falling through the cracks, including sales volume. The sole survivor rep that is left holding the bag can be the greatest rep in the world, but it doesn’t mean they have been put in a very enviable position. They must see most of their accounts at shows, and some accounts that can’t make it to the shows tend to just fall away, and buy elsewhere. This is an area where tactical mistakes are made by Quiksilver that only the retailers and other reps in that area know about. The chitchat about it among retailers and reps contains phrases like “What were they thinking???” “They’re shooting themselves in the head, not the foot.” “I won’t buy their product anymore.” Enough said.
4. There is going to be resentment from within the industry for a non-surfer, even if he came in and successfully turned a company completely around and made it extremely successful. That’s a given. Whether Mooney is still there in two years is anybody’s guess. But I think you have successfully pointed out that he is just there doing his job, and most likely in the best way he knows how. By the very act of his stepping in, he became a target for criticism. Such is life. Those of us that were affected by the changes, myself included, must simply go on and change with the times. Hopefully we all do a better job as CEO of me, Inc.
Hi Big Guy,
Thanks for the thoughtful ideas. Mostly, we seem to agree. Good point about the changes in the rep force. Can you see any positive financial result from an expense point of view in reducing reps? Assuming sales didn’t change, would commissions drop? You know more than I do about this, but I wonder if they didn’t change the rep structure because more, larger accounts are being taken in house?
Thanks for the comment.
J.
Jeff,
I think that the changes made in this regard are made to save money on paying commissions, but I don’t think Quik thought about the tradeoff that inevitably happens. You have already lost valuable customer service by reducing staff there. Now, you reduce reps. With that change, you add even more of a feeling (to the retailer) that there is less and less contact with the company, that you as an account are just incidental and expendable to Quiksilver, and since you have become expendable to Quik, why not turn the tables and make Quik the expendable one? Perhaps the “corporate think” here is that purely by attacking everything as a “reduce costs at all costs” menu item, a lot of other intangibles (things that don’t show up on spread sheets) get thrown out the window, like the amount of face time a retailer has with vendor personnel. Just my thoughts. Big Guy
Hi Big Guy,
I actually think that you’re probably right about Quik wanting to save money on commissions. And I certainly believe you’re right that some retailers see Quik as expendable, especially among the “core.” What I’d add to what you said is that the traditional reps aren’t the right people, or necessary, for selling to Zumiez, Macys, etc. And as more and more business as a percentage of the total comes from those larger accounts, there’s less and less need for the reps. Make any sense?
Thanks,
J.