Is This New CEO A Game Changer?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Six years of annual losses have left Quiksilver (NYSE: ZQK) investors eager for a CEO changeup. Though losses have significantly narrowed, the stock has never returned to its highs above $15.00 per share. After a year of searching, Quiksilver's board and a leading executive search firm have finally found the best possible candidate to replace McKnight: Disney's Andy Mooney. 

Investors responded quite enthusiastically to the change, with the stock up more than 17% since the announcement on January 3rd. Is the new CEO really a game changer? I think so.

It's time for a change

Quiksilver faces two major challenges: (1) a severely distressed balance sheet and (2) growth pains.

Tough times began when Quiksilver acquired Rossignol for $560 million in 2005. By 2008, Quiksilver was already retreating from the acquisition. Not only did the Rossignol brand earn consistent losses, Quiksilver only received $50 million for the brand when it was divested, recording a 91% loss on the "asset."

The Rossignol fiasco has resulted in severe and long-lasting damage to Quiksilver's balance sheet. Though losses have narrowed significantly since 2007, the balance sheet has only improved slightly, making McKnight's goal to improve operational efficiencies a brutally difficult task. Today Quiksilver's balance sheet has an uncomfortable financial leverage ratio of 3.12 and a debt-to-equity ratio of 1.31

Furthermore, after Quiksilver achieved phenomenal growth in the years leading up to 2007, revenue has abruptly halted. Though revenue has modestly increased over the last three years, investors had higher expectations, especially given the company's global scale with sales in more than 90 countries.

Now as losses are narrowing and Quiksilver's brands, especially DC, are gaining worldwide appeal through increased spending on marketing and a number of well-chosen world-class athletes, Quiksilver is finally positioned to re-energize its global growth. With a market cap under $1 billion and revenue of just $2 billion, Quiksilver pales in comparison to Nike (NYSE: NKE), with a $42.9 billion market cap and $24.5 billion in revenue. If Quiksilver could take just a sliver of Nike's $2.1 billion in net income, investors would be exuberant.

Investors should welcome fresh and experienced blood at the helm. In light of Quiksilvers struggle since 2007, Andy Mooney is a welcome change.

Mooney is a game changer for Quiksilver

One day after Quiksilver made the announcement regarding the CEO change, Goldman Sachs analyst Taposh Bari increased his price target for the company from $4 to $6.50, citing Mooney's operational expertise and product knowledge as the reason. Can one man really make that big of a difference? I think so.

Mooney has quite the resume, having served over a decade in senior positions of two of the world's largest and most respected companies in the world: Disney and Nike. In Mooney's last position, he served as Chairman of Disney Products (DCP) where he oversaw Disney's worldwide licensing, publishing, and retail businesses. As outlined in Quisilver's press release, his tenure at Disney lasted 11 years. Mooney spent a whopping 20 years at Nike, serving in various senior level roles "including Chief Marketing Officer, Founder of Nike's equipment business and General Manager of Nike's global apparel business."

Bob McKnight might have been the right CEO for Quiksilver in its early days, helping the company go from a small board short company to a multi-billion dollar global apparel, footwear, and accessory company. But with sales in over 90 countries, a seasoned veteran in global consumer products will help Quiksilver achieve operational efficiency in these countries. As James Ellis, the company's Presiding Director remarked in the press release, "Andy is ideally suited to lead Quiksilver into its next phase of growth and profitability."

As Mooney noted in the press release, McKnight's three initiatives for Quiksilver will still remain central to Quiksilver's future:

  1. Strengthening Quiksilver's brands
  2. Increasing global sales
  3. Driving operational efficiencies

The only difference this time around is Mooney's proven experience in all three of these areas. To put the icing on the cake, in his 11-year tenure at Disney, retail sales tripled to $36 billion. Can Mooney triple sales again?

Quiksilver's stock is cheap

Even after a 17% rise in Quiksilver's stock, the shares are still available at a great price. Despite Quiksilver's industry-leading gross profit margins of 52.5%, even when compared with sports apparel behemoth Nike (43.2% gross profit margins), Quiksilver is extraordinarily cheap when measured both by price-to-sales and price-to-book value metrics.

In the two charts below, the company is compared to Nike, Columbia Sportswear (NASDAQ: COLM), and Under Armour (NYSE: UA), measured by price-to-sales in in the first chart and price-to-book value in the second.

ZQK Price / Sales Ratio TTM data by YCharts

ZQK Price / Book Value data by YCharts

Though Columbia Sportswear comes close when measured by price-to-book value, Quiksilver's price-to-sales ratio of .43 is ridiculously low. If Quiksilver finds anyway to turn those sales and monstrous gross profit margins into profits, the stock should see upside.

The bottom line

Mooney's operational experience on a global scale at Nike and Disney bring Quiksilver well-needed (and well-received) leadership. With a dragging stock price over the last six years, fresh blood could re-energize the company's growth prospects.


DanielSparks has no position in any stocks mentioned. The Motley Fool recommends Nike and Walt Disney. The Motley Fool owns shares of Nike and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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