Quiksilver’s Annual Results and a Bankruptcy Update

Quik filled its 10-K for the year ended October 31, 2015 on January 27^th. Meanwhile, as you probably know, the bankruptcy court has confirmed the company’s reorganization plan and it may be out of bankruptcy by the time you read this.

Doing my usual detailed review of the year doesn’t seem all that productive as the post-bankruptcy Quik will have such a different structure than the company that filed. Still, I want to highlight a few numbers and trends. I’ll also summarize very briefly the terms under which Quik is coming out of bankruptcy and comment on where they go from here.

Part of the reason this can be a (hopefully- I never know when I start) shorter article is because I already wrote “The Quiksilver Bankruptcy- Where Should We Be Focused?” back in December. I said we should be focused on:

1. Quik’s balance sheet
2. Brand value and position
3. The management team
4. Any possible combination with Billabong.

My thinking on those issues hasn’t changed, but now we’ve got a little more information which I’ll discuss below. You might start by reading that article if you haven’t previously.  Or, maybe this is way more than you want to read anyway.

The 2015 Fiscal Year Results

You can view the 10-K here. I know you usually leave reading this stuff to me, but I’d recommend pages 33-35 at least- “Events Leading to the Commencement of the Chapter 11 Cases.” What you will note is that the actions they took were essentially the same actions most other companies are taking to be competitive. All good things to do, and overdue, but not things that create a sustainable competitive advantage for their brands.

Okay, the fourth quarter of the year ended October 31. Revenue in the quarter fell 16% from $401.3 to $335.9 million. The gross profit margin was 40.4% down from 46.6% in the same quarter the previous year. The net loss was $133.1 million compared to $49.3 million in last year’s quarter. They don’t supply any details on the quarter in the 10-K.

Revenue for the year fell 14.3% from $1.571 to $1.346 billion. The gross profit margin fell from 48.6% to 46.2% and declined in all three geographic segments. They reduced selling, general and administrative expenses by 16.2% from $827 to $693 million. Goodwill and asset impairments totaled $118.5 million compared to $189.1 million in the previous fiscal year. The operating loss for the year declined to $190 million from $253 million the previous year.

Interest expense of $67 million was down a bit from last year’s $76 million. There were $35.2 million in “Reorganization items.” $15.1 million were for professional fees. Remember, this is just through the end of October. The net loss was $307 million compared to $318 million last fiscal year.

As reported, Quiksilver brand revenues fell from $628 to $537 million. Roxy declined from $480 to $404 million and DC fell from $427 to $367 million. The strength of the U.S. dollars had a significant negative impact on all three brands.

Wholesale revenue, again as reported, fell 19.2% from $1.039 billion to $840 million. Retail was down from $445 to $408 million (8.3%). That’s kind of interesting in that the number of company owned stores rose from 683 to 723. Full price stores were up from 266 to 352, shop in shops fell from 270 to 222 and factory outlets rose from 147 to 149. As an aside, it’s my sense that the whole factory outlet thing is going to decline to die in general. Consumers have the internet to find deals and I think most of them have caught on to the fact that the prices at the so called outlets aren’t so great. We’ll see.

Ecommerce rose from $77 to $82 million and represent 6.2% of total revenue. Foreign exchange has a significant negative impact on all these revenue by channel numbers as well.

35% of revenue came from the U.S. France was the second largest source of revenue at 12%.

I’m not even going to discuss the balance sheet. It’s being completely restructured in bankruptcy and the old one doesn’t matter except as a cautionary tale. The one number I will highlight is inventory which rose slightly from $285 to $295 million. Seems like it should have been moving the other way.

The Bankruptcy

Quiksilver filed an 8-K with the SEC on February 5^th. It announced that the bankruptcy court approved, on January 29th, the company’s plan to emerge from bankruptcy. Here’s their “Summary of the Material Features of the Plan” from the 8-K.

“On the effective date of the Plan, all of the Company’s existing equity securities, including its shares of common stocks and warrants, will be cancelled and extinguished without holders receiving any distribution. New common shares will be distributed to the holders of the Company’s 7.875% Senior Secured Notes due 2018 and 10.000% Senior Unsecured Notes due 2020, and additional new common shares will be issued to the holders of the Company’s 7.875% Senior Secured Notes due 2018, 10.000% Senior Unsecured Notes due 2020, and the backstop parties that participated in rights offerings described under the Plan. In addition, the Debtors will enter into an asset-based revolving credit facility in the principal amount of up to $140 million, as well as a term loan credit facility in the principal amount of up to $50 million. The debtor-in-possession financing provided to the Debtors and authorized by the Bankruptcy Court, consisting of a secured revolving credit facility and secured term loan credit facility, will be repaid in full utilizing new financing and proceeds from the exit rights offering obtained by the Debtors. “

Among the holders of the common stock and warrants being cancelled is “Entities Affiliated with Rhone Capital III.” They were the largest holder of the existing common stock at 33.5%.

What is it we really want to know that we don’t quite know yet? First, I’d love to see a post-bankruptcy balance sheet. With the general unsecured creditors and unsecured note holders not getting that much, the balance sheet will be way cleaner. My estimate is that debt will decline by around $600 million.

When might we see such a balance sheet? Well, I’m not sure. Maybe never. Oaktree is going to be the major shareholder and my conjecture (I’ve seen other people suggest the same thing) is that they will buy out the remaining shareholders and take Quik private.

That would make a lot of sense. You know I don’t think being a public company is a good idea in our space right now, and I hope and expect that Quik will make some different distribution decisions as a private company. But with a reduced revenue foot print, even in a good cause, how will the cash flow and the balance sheet look even with the improvement that’s coming as a result of bankruptcy?

I’m kind of getting tired of saying this, but for the last, I don’t know, three to six years every time Quik comes out with a filing I’ve asked, “Where is the revenue growth going to come from?” What strength will the Quiksilver, Roxy and DC brands prove to have in the market? How much of a distributional pullback will be required to give them a chance to become more credible and how long will that take?

Here’s a link to an article from Business Wire on the plan being confirmed.  I’ll leave you with a quote from Quiksilver CEO Pierre Agnes from that article.

“This is an important milestone in the evolution of Quiksilver and we are pleased with the Court’s confirmation of our plan to emerge from bankruptcy only months after filing our voluntary petitions. “This is a testament to our strong vision, leading and resilient brands, passionate employees and loyal customers.”

I’ve never seen bankruptcy described quite that way.