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Quiksilver Gets Lifesaving Deal, But Investors Balk at Costs

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Homard   Monday, 06/15/09 11:43:44 AM
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Quiksilver Gets Lifesaving Deal, But Investors Balk at Costs
By MICHAEL LYSTER - 6/15/2009
Orange County Business Journal Staff

Huntington Beach-based Quiksilver Inc. said last week it struck what could be a lifesaving investment and loan deal.

But investors quickly turned their attention to the deal’s cost and the clothing maker’s outlook, which wasn’t as encouraging.

Shares of Quiksilver fell some 35% last week as investors worried about the retail slump continuing to hamper the company’s sales, profits and fledgling recovery from 2005’s $560 million ill-fated buy of French ski maker Rossignol.

Quiksilver, which had a recent market value of $375 million, unloaded Rossignol in a $50 million fire sale late last year but continues to be plagued by $1 billion in short- and long-term debt from the deal and borrowing to keep Rossignol afloat before the sale.

Outlook

For the three months through July, Quiksilver forecast profits before charges in the “low single-digit range” per share. Analysts had been looking for a much higher profit of nearly $12 million, or 9 cents per share.

Much of the lower profit outlook is driven by ongoing blowouts of unsold clothes.

“We expect that will continue again into the (July) quarter (and) perhaps somewhat less in the (October quarter),” Chief Financial Officer Joe Scirocco said on a conference call last week. “We’ve got some excess goods to move through. We expect to liquidate that just as hard and as fast as we can do responsibly.”

The blowouts suggest that Quiksilver’s clothes inspired by surfing, skateboarding and snowboarding—which have retained a solid image despite the company’s troubles—continue to struggle in the ongoing retail downturn.

The cost of Quiksilver’s loan and investment deal also spooked investors.

Last week, Quiksilver said France’s Rhône Group LLC is lending it about $150 million over five years to help the company refinance a U.S. line of credit and consolidate its European debt.

The deal includes $25.6 million in warrants that allow Rhone to buy about 20% of Quiksilver’s shares. Rhone is set to name two directors for Quiksilver’s board.

Chief Executive Bob McKnight called the loan and investment deal “the cornerstone of Quiksilver’s financial restructuring plan.”

But analysts pointed to the deal’s 15% interest rate—steeper than that of Quiksilver’s existing debt—and the provision for Rhone to own a fifth of the company.

“We view progress on the refinancing of the business as a positive and see a light at the end of the tunnel for near-term liquidity concerns,” Thomas Weisel Partners LLC analyst Jim Duffy wrote in a note to clients. “The cost of financing, however, is daunting.”

Quiksilver may have had little choice.

The company looked at selling some parts of its business, and perhaps the whole company, as some analysts warned of the prospect of
bankruptcy.

The company’s growing DC Shoes unit, which makes shoes and clothes inspired by skateboarding, was widely expected to be sold to handle about $315 million in debt due this year and in 2010.

But offers for DC Shoes could have come in lower than what Quiksilver had hoped for, making a sale of the unit unrealistic.

“Off the Table”

Quiksilver said last week that a sale of DC Shoes or any other company brand is “off the table” with the Rhone deal.

The financing deal allowed Quiksilver to get a written commitment from Bank of America Corp. and General Electric Co.’s GE Capital to refinance a credit line to a three-year, $200 million credit line tied to the company’s assets.

The company said it’s also working with French banks to consolidate its European debts into a new credit line and “expects a positive resolution in the near term.”

The refinancing news and outlook came as part of Quiksilver’s results for the three months through April.

For the recently ended quarter, Quiksilver reported a profit of $6.6 million, which beat analysts’ expectations of $5.3 million.

Sales fell 17% from a year earlier to $494 million, versus the $502 million Wall Street had expected.


--------------------------------------------------------------------------------
Orange County Business Journal, Copyright © 2009, All Rights Reserved.

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