Quiksilver: Restructuring The Quicksand Capital Structure

Summary

• Quiksilver's primary business segments have faced significant brand equity erosion and market share losses over the past twelve months, particularly across Roxy and Quiksilver brands.
• Weak wholesale revenue led to an EMEA goodwill impairment charge of $182 million in FQ3'2014, including a $38 million non-cash charge for the impairment of DC Shoes goodwill.
• Quiksilver's common stock is a terminal short; 17% of outstanding common shares are sold short and the common stock has realized a Y'o'Y price per share decline of -76%.
• Quiksilver's USD-denominated senior secured and senior unsecured notes may appear to offer attractive relative value but expected recovery rates do not support current trade levels.

Overview

Quiksilver, Inc. (NYSE:ZQK) has been running out of steam as a player in the highly competitive retail industry, in light of stagnant macro fundamentals and losing the interest of its target consumers. It seems reasonable to expect that Quiksilver, Inc. is less than six months away from Chapter 11 bankruptcy, even with sufficient liquidity as of the mostly reported quarter. After years of weak acquisitions and high turnover across its executive team, Quiksilver's over-diversification and general lack of focus on developing the most efficient supply-chain processes and nurturing the perceived value of its core product offerings and brands has stretched thin its resources and forced the company to now compete on price, instead of perceived value and brand appeal. The company has played musical chairs with its capital structure and product offerings and brands, iterating through many different product strategies, acquisitions and supply chain ideas but lacking attention on developing long-term supply chain knowledge and feedback loops to achieve the leanest inventories and shortest path from design to converting customer sales. Quiksilver's failures give rise to at least two potential capital structure plays that may yield significant risk-adjusted returns over the next six months. We strongly doubt that Quiksilver can realize ~$150 million of supplementary annual EBITDA from implementing its 11-point Profit Improvement Plan and achieve 15x to 17x multiples within three years to operate at VF Corp.-level efficiency. We assume diminution of core revenues will precipitously increase over the next three years as Quiksilver's brands become less relevant to their target consumers. Quiksilver's retail prices will never come close to prices of comparable product offerings from fast-fashion retailers. Management's recent deferral of PIP positive EBITDA impact to FY'2017 gives us even less faith in their ability to protect or enhance shareholder value. Sources of wholesale revenue should continue to evaporate as more mom and pop specialty stores shut down and as larger department store retailers implement more sophisticated inventory management programs and more precisely allocate their buyers' purchasing power across retail brands and styles to drive higher inventory turns and lower markdowns.

Investment Thesis

Short

• Quiksilver, Inc. 10.0% Senior Unsecured Notes
• Quiksilver, Inc. Common Stock

Based on an assessment of Quiksilver's total enterprise value as of FY'2015E, assuming Quiksilver, Inc. files Chapter 11 in 2015, Quiksilver's Senior Unsecured Notes and Common Stock are worthless, making these instruments attractive short opportunities that could still yield greater than 50% returns over the next 6 to 12 months.

Operational Perspective

Pros

• Globally recognized, established apparel brands positioned as leaders in surf, skate and ski culture
• Retail and e-commerce channels continue to generate flat to LSD growth in developed and emerging markets
• Licensing agreements have the potential to generate incremental EBITDA of $5 million to $10 million annually, while offering further opportunities for SKU optimization

Cons

• Inability to successfully evolve brand image to remain relevant as a pure-play surfwear wholesaler
• Highly concentrated revenue base within the price elastic teen apparel segment
• Fast fashion vertically integrated retailers have pressured Quicksilver's core wholesale markets with competing offerings at value price points
• Substantially overlevered capital structure (13.2x Total Debt/LTM Adjusted EBITDA) presents potential near-term liquidity constraints

Financial Perspective

• Quiksilver, Inc. common stock may ultimately get wiped out in the event the company seeks relief under Chapter 11 of the U.S. Bankruptcy Code. Bankruptcy seems inevitable for Quiksilver, given its disproportionately high total leverage relative to LTM EBITDA and its tangible net asset base against the backdrop of a fundamentally weak action sports industry, facing changed consumer preferences and increased pricing pressure from retailers, like H&M, Zara and Forever 21
• Little, if any, recovery expected from the 10.000% Senior Unsecured Notes in the event of an uncured indenture event of default and the 7.875% Senior Secured Notes remain unattractive at recent trade prices of $61.50 and $90.44, respectively, as of 10/7/2014
• No recovery expected for pre-petition equity in a hypothetical Chapter 11 bankruptcy scenario
• Management anticipates a potential inflection point across Quiksilver's wholesale segment by Spring/Fall 2015 but a lack of guidance or supporting rationale leaves investors scratching their heads
• High debt burden and quarterly operating cash burn will become increasingly troublesome for continued debt service coverage

Source: Company SEC filings, Hadrian Capital analysis

Source: Company SEC filings

Macro Perspective

• The global macroeconomic climate directly impacts Quiksilver's operations, with the majority of its revenue and earnings generated outside the U.S.

The chart below provides a geographic breakdown of the company's earnings and identifiable assets.

Source: Company SEC filings

• The macroeconomic outlook for Quiksilver, particularly across continental Europe and other key trading regions, remains cloudy. Youth unemployment rates (people aged 8 to 25 is the broad demographic target for Quiksilver brands) in most continental European countries have remained high since the last recession, with the exception of Germany. France and Spain generate nearly 50% of the company's EMEA sales.

Source: Eurostat

• While the challenges in Europe remain, there continues to be significant weakness in the Americas, especially the U.S. Recent trading commentary from Quiksilver and key comparable, Billabong highlights some of the core market challenges, with recent commentary more mixed compared to previous primarily negative commentary.

Source: Company earnings call transcripts

Company Summary

Quiksilver, Inc. is a global manufacturer of surfwear and other boardsport-related equipment with a snow, skate and surf-focused portfolio of brands across three core operating segments: Quiksilver, Roxy and DC. Quiksilver also owns and operates 658 retail stores globally. The company employs approximately 6,300 people and generates a majority of its revenue from Quiksilver, its iconic surf brand, which consistently drives 40.1% of Quiksilver, Inc.'s total net revenue. Quiksilver, Inc. reported LTM $1.65 billion of total revenues and $63 million of Proforma Adj. EBITDA as of July 31, 2014. As of FQ3'2014, Roxy provided 31.8% of the company's LTM net revenue, while DC produced 25.5%, and with the remaining 2.5% coming from other sources.

Source: Company SEC filings

Quiksilver

• Core Market: Guys & Girls, Ages 14 to 25
• Global surf & snow brand
• ~40%, or $662 million, of LTM net revenue as of FQ3'2014
• Quiksilver reported revenue of $143 million for FQ3'2014 ended July 31, 2014, a Y'o'Y decline of 17%
• Quiksilver August 2014 Same Store Sales decreased 29% Y'o'Y, but improved from -34% in July

Roxy

• Core Market: Girls, Ages 8 to 18
• Female surf & snow brand
• ~32%, or $525 million, of LTM net revenue as of FQ3'2014
• Roxy reported revenue of $119 million for FQ3'2014, or a decrease of 8% Y'o'Y
• For August 2014, Roxy had Same Store Sales of -11%, highlighting the fourth consecutive month of negative comps, albeit a clear improvement over -23% in July

DC

• Core Market: Guys & Girls, Ages 14 to 25
• Skate, snow & moto brand
• ~26%, or $421 million, of LTM net revenue as of FQ3'2014
• DC reported revenue of $119 million for FQ3'2014, or a Y'o'Y decrease of 34%
• DC Same Store Sales somewhat improved as comps decreased -12% Y'o'Y, as opposed to -13% in July

Quiksilver's wholesale channel revenue decreased 30% in FQ3'2014. North America and EMEA segments saw revenue decline -27% and -13%, respectively. Top line across Quiksilver's brand portfolio continued to weaken in FQ3'2014 relative to FQ2'2014, with DC brand revenue experiencing the worst decline in Q'o'Q revenue.

Quiksilver Themes At Play

Quiksilver's recent earnings call and SEC filings make clear the company's top-line underperformance is the product of a systemic shift in consumer preferences against surfwear and surf culture in an increasingly promotional and price competitive retail environment. Falling out of favor with teen-retail has to lead to precipitous decline in Quiksilver's profitability and sales performance amidst an increasingly competitive backdrop with fast-fashion vertically integrated retailers. While the current management team has placed a great deal of weight on the Profit Improvement Plan (the "Plan") which addresses many operational issues under the company's control to turnaround business performance, it continues to support a fundamentally troubled business model. Even if the Plan remains on course to reach $150 million of EBITDA by FY'2017 (recently extended from FY'2016), it will not come to fruition early enough to provide flexibility under the company's overlevered capital structure.

Declining Youth Fashion Trends in Surfwear

The surfing and skating culture that Quiksilver promotes is no longer fashionable because of transient consumer preferences. Quiksilver's model, and that of peers Billabong and PacSun, have and will continue to experience significant volatility through reliance on the transient preferences of the youth fashion market, which can be unforgiving. For example, while teenagers in the current market are more interested in streetwear brands (i.e. The Hundreds, Supreme), it is reasonable to question the longevity of its fashion appeal. The systemic phenomenon is evidenced by a fundamental erosion of Quiksilver's smaller core distribution channels with 20% of doors closing; management admits to underestimating the magnitude in the erosion of these store closures. The movement against surf and skating culture has also been cited by Billabong, Quiksilver's closest pure-play public peer. In the most recent earnings call, CEO Neil Fiske's comments when asked about the poor state of the US consumer: "…the short answer is it's a sporadic pattern and it would be hard to take any comfort at this point in a rebound in the overall teen market… And I think my guess is we'll continue to see inconsistent patterns and weakness in the teen apparel fashion sector, sometimes up, sometimes down. It also varies quite a bit by market. We saw this last half in particular, the Canadian action sports market was really soft and much more so than even the U.S. market. That can't persist forever, but be difficult to call the rebound at this time in the market."

Vertically Integrated Retailers are Satisfying the Demand for Lifestyle Apparel Products

In apparel, the demand for lifestyle apparel has been increasingly satisfied by fast fashion apparel (i.e., H&M and Zara) and off-price retailers (i.e., TJX and Ross) at firesale price points far below those offered by action wear brand retail stores or the large department store chains that action wear brands sell to at wholesale prices (i.e., Macy's, Dillard's and Bloomingdale's). Fast fashion retailers that sell lifestyle apparel have been rolling out competitive apparel offerings, such as men's board shorts and swimwear. Five or more years ago, Quiksilver had no concerns about successfully pushing its $60 MSRP board shorts to a host of mom and pop surf shops. However, times have changed, as evidenced by the company's recent earnings call that called attention to a whopping closure of 20% of the specialty retail stores Quiksilver typically sells to. Increasingly, a lifestyle variation of Quiksilver's board shorts can be found at H&M for $20 MSRP, creating a wide pricing gap between Quiksilver's offerings and similar generic brand merchandise being offered by fast fashion retailers. It is more critical than ever before that wholesale sell-ins to mall-based specialty retailers be priced right, fashion conscious and swiftly brought to market. Quiksilver has struggled with this concept as it recently reported zero improvement in sell-through for its recent Fall line. Quiksilver's wholesale channel yet to stabilize - visibility of inflection point remains cloudy Quiksilver is predominantly a teen-apparel wholesale business selling into mall based retailers comprising of approximately 70% of total revenues. The last several quarters have shown significant setbacks in the company's efforts to find an inflection point in the wholesale channel largely due in part to the macro trends previously mentioned (i.e. loss of core accounts, fickle teen apparel environment and competition from fast-fashion retailers). The most recent quarter (FQE Jul-31) saw wholesale revenues decline 30% and the 3-year CAGR for the channel has been -10%. It is increasingly looking like Quiksilver has walked away from a stable yet inefficient core independent retailer base without finding new partners to replace that lost revenue. The foundation of Quiksilver's business model has been built on product distribution through surf shops, skateboard shops, snowboard shops and our proprietary concept stores, where the environment communicates the brand's "core" message. In the past, this core distribution channel served as a base of legitimacy and long-term loyalty to the company's brand portfolio. Most of these buyers, stand-alone stores or small chains, face multiple challenges of both a systemic and cyclical nature; core multi-brand apparel retailers faced competitive challenges from larger vertically integrated players in the lifestyle segment and pure play online retailers in both core and lifestyle segments. In Quiksilver's FQ2'2014 earnings call, management reported that approximately 20% of smaller wholesale accounts alone had closed in the U.S over the LTM period. The same can be said for Europe where smaller core retailers face increased pressure from weak economic growth and higher youth unemployment. In modeling the implied top-line growth required to reach the Plan's FY'2017 sales target of $2.2 billion, management is increasingly reliant on emerging market growth in its direct-to-consumer business which appears to be overly optimistic absent a communicated model for 3- to 5- year store growth. Upon review of the How big is the wholesale business in developed markets? 3-year CAGR for total wholesale and developed wholesale Retail partners will only reinvest in Quiksilver brands with evidence of improving sell-through, likely delaying a turn in revenues until late FY'2015, at the earliest. Increasingly promotional environment has impacted sell-through. The market in Europe and North America continues to be extremely price competitive and promotional; apparel has essentially evolved into sale or return business. Quiksilver's initial pricing has been too high for the last few seasons which have 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. Consumers shopping at multi-brand retailers are more price-conscious than shoppers visiting Quiksilver's owned and operated retail stores or e-commerce sites, such as Surfdome.com. Besides competition from a distribution channel perspective, the company's brand portfolio faces a myriad of lower priced but relevant competitors, both in apparel and footwear. Management has set out to be more competitive with initial pricing to combat poor sell through. While the recent strategic move in pricing was expected to positively impact Fall sell-through, management has cited that sell-through have been the same as they were in the past. We are encouraged that the Spring 2015 product line is expected to ship in at a more appropriate price point, the potential benefit of that sell through will not become apparent until the company's FQ2'2015 filing. Bear in mind that early signs of the Spring order book are reported to be down on a dollar basis but flat or even up on a units basis.

Capital Structure

Quiksilver's capital structure includes over $340 million of senior secured debt and $490 million of senior unsecured debt, or total leverage of at least 13.2x LTM Adjusted EBITDA of $63 million as of FQ3'2014 ended July 31, 2014. Quiksilver's nearest term debt maturities are its Senior Secured EMEA credit facilities due October 31, 2016.

Source: Company SEC filings, FINRA Trace

Valuation

Illustrative Discounted Cash Flow (DCF) Valuation

We performed an illustrative discounted cash flow analysis to determine a range of implied enterprise values of Quiksilver as a going concern. All cash flows were discounted to October 31, 2014, and terminal values were based upon a range of EBITDA multiples of 5.0x - 7.0x applied to estimated FY2019E EBITDA. Forecasted financial information used in this analysis was based on base case projections mentioned above. Applied discount rates range from 11.0% to 13.0%, reflecting estimates of the weighted average cost of capital of Quiksilver. This analysis resulted in a range of implied total enterprise values of $380 million to $450 million.

Source: Hadrian Capital analysis

Note: (1) Assumes mid-period convention discounting (2) WACC: Market risk premium: 6.5% to 7.5%; Beta range: 1.5 to 1.8; Cost of equity: 12.1% to 15.9%; Pre-tax cost of debt: 10.0%; Target debt/total capital: 20.0% and (3) Effective tax rate of 33.6%.

Using the same set of projections, we also performed a sensitivity analysis to analyze the impact on enterprise value from annual improvements or declines to annual EBITDA margin from 2015E to 2019E. The analysis applies a range of annual premiums/discounts to EBITDA margin projections in the base case and terminal EBITDA multiples of 5.0x to 7.0x applied to 2019E EBITDA. Constant factors included sales growth assumptions from the base case and a discount rate of 12.0%. This resulted in a range of total implied enterprise values of $388 million to $689 million.

Source: Hadrian Capital analysis

Precedent Transactions Analysis

The criteria for evaluating relevant transactions in measuring Quiksilver's private market value centers around businesses with comparable operations in branded footwear and/or apparel; wholesale/retail mix size and performance at the time of the acquisition. While none of the companies listed below are directly comparable to Quiksilver, the selected transactions in our focus list are representative of companies undergoing a turnaround at the time of the transaction. Note: the transaction outlined in red represents a § 363 asset sale.

Source: Company SEC filings

The overall low to high EBITDA multiples observed for the selected transactions were 5.6x to 15.7x. The applied range of selected multiples of 5.5x to 7.5x, derived from the selected transactions (taking into consideration the relative growth profile and operating performance of the Company in comparison to the companies that were the subject of the precedent transactions), to the Company's LTM EBITDA as of 7/31/13 of $62.9 million yields a enterprise value range of $346 million and $472 million.

Dual-Track § 363 Process

• The acquisition of select Quiksilver intellectual property (IP) rights through a § 363 asset sale in Chapter 11 seems the most plausible outcome, given the attractiveness of acquiring the company's assets free and clear of all liens and encumbrances, in addition to the opportunity to "cherry-pick" Quiksilver brand trademarks and existing licensing agreements
• Based on prior investments in retail and distressed situations, sponsors that could participate in an auction process include but are not limited to Sycamore Partners, Golden Gate Capital, CCMP, Apax Partners, Altamont Capital and Sun Capital
• Similar to the retail bankruptcies of EBHI Holdings, Inc., et al. (f/k/a Eddie Bauer Holdings, Inc.) (filed 2009) and Coldwater Creek, Inc., et al. (filed 2014), it can be reasonably expected that Quiksilver's tangible assets and store leases, specifically below-market operating lease agreements, property, plant & equipment (PP&E) and finished goods inventory, may be sold by a liquidator, such as Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC, through a combination of Going Out of Business (GOB) Sales across Quiksilver-owned and operated stores and assignment of below-market store leases.

Intellectual Property - Trademarks and Patents

• 54th Street Holdings S.à.r.l. owns most or all Canadian trademarks
• QS Wholesale, Inc. owns most or all U.S. trademarks (encompassing Quiksilver, Roxy, DC and other Quiksilver-owned brands) and patents (primarily, sports equipment and footwear), which have been pledged as collateral pursuant to the Security Agreement arising from under the
• Biarritz Holdings, S.à.r.l. owns most or all European trademarks and patents

Illustrative Claims Recovery Analysis

Our illustrative claims recovery analysis contemplates two potential bankruptcy scenarios:

1. Liquidating Chapter 11: Quiksilver files Chapter 11 and then disposes all its assets in piecemeal through a dual-track § 363 sale
2. Going Concern Chapter 11: Quiksilver successfully reorganizes and later emerges from Chapter 11 as a going concern

In either scenario, it is assumed that Quiksilver's outstanding common stock is worthless as equity claims are disallowed and expunged by the bankruptcy court. Additionally, Quiksilver's 10.0% Senior Unsecured Notes may ultimately realize zero (0%) recovery, except in the unlikely event that the Total Enterprise Value (TEV) of Quiksilver, Inc. is greater than $588 million in the Disclosure Statement filing, which is considered the best case scenario realizable by disposing Quiksilver's assets through a dual-track § 363 sale process.

Nevertheless, many uncertainties remain in respect of the value of Quiksilver's assets and liabilities in Chapter 11, which include:

• The value of any potential below-market operating leases, assuming these leases are fully assignable at their existing contractual lease rates
• The realizable liquidation value of Quiksilver's finished goods inventory
• The illustrative hypothetical recovery analysis assumes that bankruptcy professional fees approximate $63.2 million accrued in the pendency of Chapter 11 and does not include ongoing fees and expenses of ordinary course professionals. However, assuming that Quiksilver files a free-fall Chapter 11 in 2015 (not a prearranged or prepackaged filing) with approximately $1.3 billion of total assets and $1.6 billion of LTM total revenues, bankruptcy professional fees and expenses could end up as high as $78 to $244 million.
• At this time, no assumptions have been made regarding new money debtor-in-possession (DIP) financing or DIP sizing, although a hypothetical post-petition financing would incur fees and expenses that would further impair recoveries for lower priority rank claims, including senior secured and senior unsecured claims.
• Bankruptcy professional, U.S. Trustee and DIP fees and expenses may be allocated pro-rata across the bankrupt debtors' estates based on either total revenue or liabilities generated by each debtor entity.

Illustrative Claims Recovery Analysis for EMEA & APAC

Source: Hadrian Capital analysis

Illustrative Claims Recovery Analysis for Americas

Source: Hadrian Capital analysis

Illustrative Liquidation Analysis

Based on Quiksilver's balance sheet values as of the latest FQ3'2014 10-Q and applying various haircut discounts to the assets, liquidation values for Quiksilver's assets may range between $338 and $644 million, excluding any trustee wind-down costs or other fees and expenses that could arise if a hypothetical Chapter 11 case were to be converted to a Chapter 7 proceeding.

Source: Company SEC filings, Hadrian Capital analysis

Fixed Income Comparables

Trading levels for Quiksilver, Inc. 2020 Senior Unsecured Notes have recently moderated; however, any perceived relative value fails to compensate for expected recovery rates in event Quiksilver files Chapter 11 over the next six months.

Source: FINRA Trace, Federal Reserve Bank of St. Louis, Hadrian Capital analysis

Competitive Landscape

Quiksilver competes with other action sports brands, including Nike's Hurley, VF Corporation's Vans and Reef, Kering's Volcom, Abercrombie & Fitch's Hollister, Billabong, Rip Curl, Sole Technology's Etnies, O'Neill and others.

Kering's Sport and Lifestyle Division - Volcom

Similar to Quiksilver, Kering's Sport and Lifestyle Division, which includes iconic brands like Puma, Volcom, Cobra, Electric and Tretorn, took a goodwill impairment charge of € 183 million in its first half of 2014 in addition to reporting EBITDA erosion of -30.5% across that business segment. According to Kering's first half financial report, "strong competitive pressure, combined with a volatile and unsettled economic environment in a number of regions once again weighed on wholesale sales in the first six months of 2014."

On the surface, Kering's wholesale sales decline across its Sport and Lifestyle bears strikingly similar resemblance to the story reported by Quiksilver in its latest 10-Q for FQ3'2014. However, what is unique about Kering's Volcom story in face of continued weak market conditions for surfwear and action sports, an important differentiating factor from Quiksilver and Billabong's parallel turnaround plans, is that Volcom has managed to avoid the similar EBITDA erosion and sales declines recently experienced by its direct competitors, possibly because Kering has a superior management team in place with a deeper understanding of how to maximize supply chain efficiency, drive brand appeal and tightly manage inventory.

Volcom and Electric recorded combined revenue of €113 million in first-half 2014, more or less unchanged from the first-half 2013 figure as reported (down 0.4%), but up 4.0% based on comparable exchange rates, with sales growth picking up pace in the second quarter. Volcom reaped the benefits of the initiatives launched in 2013 to safeguard its margins, improve its distribution and more effectively harmonise its product offering, especially Women's collections. In light of these factors, wholesale sales held firm and sales in directly-operated stores (accounting for 14% of the total) rose sharply. Sales for Volcom's Apparel category contributed some 82% to the brand's revenue for the period and were up compared to first-half 2013, fuelled by a good showing in the second quarter.

Source: Kering Half-Year Financial Report

Overall trends were more positive in the second quarter of the year, however, and business gradually began to pick up. The order book evolution is also encouraging, suggesting a gradual improvement across the Division.

Peer Benchmarking

The margin and growth profile of lifestyle branded peers presents a significantly different operating picture relative to Quiksilver's turnaround phase. The segment currently trades at a range of 10.0x and 14.5x 1-year Forward TEV/EBITDA which is not a fair benchmark for Quiksilver when considering the company's current challenges. While Billabong is considered to be the company's best pure-play surfwear comparable, declining EBITDA blurs current valuation levels and doesn't present an accurate measure of value. Valuation of select mall-based retailers is a more accurate indicator of value since peers ANF, AEO, ARO and PSUN have shared in the macro challenges facing teen apparel. This segment is fairly valued at 5.0x to 7.5x 1-year Forward TEV/EBITDA.

Source: Company SEC filings, Wall Street broker estimates

Peer performance is mixed within both sub-peer groups. Branded lifestyle peers have stronger revenue growth and consistent EBITDA performance (excl. Billabong) while specialty teen apparel retailers have experience negative revenue growth and fluctuating EBITDA margins. The underlying challenges faced by the leading underperformers in both peer groups, Billabong and PacSun, can be traced back to the structural issues faced by the action sports industry.

Source: Company SEC filings, Wall Street broker estimates

Seasonality

With the significance of Quiksilver's product offerings tied to seasonal pieces, such as swimsuits and boardshorts, and winter outwear and hardgoods, Quiksilver may be more vulnerable to unfavorable weather trends than other lifestyle brands or traditional retailers.

Management

Chief Executive Officer and President

Andrew (Andy) P. Mooney has served as Chief Executive Officer and President of Quiksilver, Inc. since January 2013. Prior to his current position, Mr. Mooney served as President of Walt Disney's consumer products segment as well as Chief Marketing Officer and Head of Nike, Inc. where he led the reorganization of Nike's brand marketing initiatives and developed new advertising tactics. Mr. Mooney holds an Accounting Certificate in the United Kingdom and was awarded an Honorary Doctorate of Business Administration by Queen Margaret University in Edinburgh.

2013 Compensation Received/Earned: $1,374,608; 2013 Salary: $617,500

Chief Financial Officer and Principal Accounting Officer

Richard J. Shields, CPA has served as Chief Financial Officer and Principal Accounting Officer of Quiksilver Inc. since mid-2012. Previously, Mr. Shields served as the Chief Financial Officer at Oakley Inc., a sunglasses and sports performance equipment manufacturer, since November 2005 and similarly served as its Principal Accounting Officer. Before that, Mr. Shields was Chief Financial Officer, Principal Accounting Officer and Assistant Secretary of Southwest Water Co., which provides water-related services and generates annual revenues of over $200 million. Long before that, Mr. Shields began his career at PricewaterhouseCoopers LLP. Mr. Shields has a Master of Business Administration from the University of Notre Dame and a Bachelors of Arts in Business/Accounting from Eastern Washington University.

2013 Compensation Received/Earned: $558,600; 2013 Salary: $522,090

Chief Administrative Officer, General Counsel and Secretary

Charles S. Exon Esq. has served as Chief Administrative Officer of Quiksilver Inc. since February 2008 and Secretary and General Counsel since August 2000. Prior this role, Mr. Exon served as an Executive Vice President of Legal Affairs and Business at Quiksilver Inc., from August 2000 to February 2008 and before that served as Outside Corporate Counsel for Quiksilver Inc. for more than ten years. Prior to joining Quiksilver Inc., Mr. Exon practiced law, as a Partner at Hewitt & McGuire, LLP. He received a B.A. degree in English from the University of Missouri, a M.A. degree in Communications from Stanford and a J.D. degree from the University of Southern California.

2013 Compensation Received/Earned: $1,198,260; 2013 Salary: $550,000

Revenue and EBITDA Outlook

Looking ahead, the prospect of a return to stable financial performance proposed by management's Profit Improvement Plan appears delayed when taking into account systemic and company specific challenges. In the near term, we anticipate Quiksilver's wholesale challenges will persist against a backdrop of ongoing tough market conditions for surfwear and other action sports. We estimate FY'2015E net sales and adjusted EBITDA of $1,603 million and $71 million (4.5% EBITDA margin), respectively. Any form of financial growth or stabilization rests on a reversal of the current bleed in wholesale, which appears to be delayed until FY'2017. We anticipate retail and e-commerce to carry on their current growth trajectory, however will find it difficult to compensate for wholesale's struggles due to their relative size. Our projections contemplate a net sales and EBITDA CAGR from FY'2015E to FY'2019E of 1.1% and 16.0%, respectively. Earnings power momentum is expected to come from improved coordination of design, sales and marketing across geographies, product line rationalization and improved efficiency of sourcing operations and SG&A management. Licensing agreements replacing ~$100 million of wholesale revenues are expected to generate EBITDA of ~$10 million annually, which could fully ramp up by FY'2017E. Overall, we remain conservative relative to current Wall Street brokers' estimates, which forecast FY'2016E EBITDA of approximately $138 million, or an EBITDA margin of 8.25%. Any prospects of a return to high single-digit EBITDA margins over the next 1 to 2 years would require flawless execution of management's profit improvement plan which has already been delayed (Q2 earnings call).

From a short-form free cash flow perspective, our estimated 2015E EBITDA of $71 million must cover $45 million of capital expenditures and ~$70 million of cash pay interest, implying pro-forma cash burn of $44 million in FY'2015E. That said, Quiksilver reported approximately $84 million of unrestricted cash and cash equivalents as of FQ3'2014 ended July 31, 2014.

Source: Company SEC filings, Hadrian Capital analysis

Variant View

Out-of-Court M&A Scenario

• A pre-petition, or out-of-court, acquisition of the entire company as a going concern seems unlikely, since prospective suitors will presumably avoid assuming or refinancing Quiksilver's outstanding indebtedness and pay-off costly make-whole call premiums

Improved sentiment around surfwear and a sharp rebound in Quiksilver's upcoming earnings performance and FY15 outlook

• Any improved commentary around surfwear demand is unlikely due to the structural issues faced by Quiksilver and its core peers
• Better than expected results in wholesale fall sell-through and an improved outlook for the Spring 15 order book (expected to be down on a dollar basis) could be perceived as a possible inflection point for the business
• An improved fundamental picture could trigger a positive reaction in the commons and 2020 notes

Rescue Financing

• Likelihood of a recapitalization to stabilize the business and avert a Chapter 11 filing is limited due to the company's significant erosion of profitability and outstanding leverage
• Questions remain about the value of unencumbered assets - the net value appears to lie somewhere between $200 and $300 million in contrast to the ~$849 million of non-guarantor subsidiaries' total assets, according to Quiksilver's 10-Q for FQ3'2014.
• Quiksilver's situation is incomparable to Billabong's 2013 recapitalization (via the Oaktree/Centerbridge consortium), given the wide gap in leverage between the two companies (Billabong 2.8x net (Jun-13) vs. Quiksilver 11.9x net)

Disclosure: The author is short ZQK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.