- ZQKs revenue and operating margin have remained dismal in comparison to its peers, despite favorable industry-wide trends.
- ZQKs brand focus connects more directly with action sports, while that of its competitors connects with a fun and comfortable sports-as-fashion lifestyle.
- ZQKs brand focus is translating into low sales growth as consumers take sportswear and accessories more as fashion items.
Outdoor sports apparel and accessories industry has been witnessing sales increases for quite a few years because of increased consumer expenditure on sports-related apparel and accessories. Consumers are also spending more on such merchandise as sportswear has become part of everyday lifestyle and fashion. The growth has been particularly high in Latin America and Asia.
Quiksilver Inc. (NYSE:ZQK) is an outdoor sports and sports retailer which is still lagging behind its peers in profitability growth. Quiksilver's sales decreases in comparison to sales increases of its peers [Columbia Sportswear Company (NASDAQ:COLM), Nike Inc. (NYSE:NKE) and CF Corp (NYSE:VFC)] look like this:
(Data source: Morningstar.com)
Comparison of operating margins look like this:
(Data source: Morningstar.com)
Still the ZQK spends roughly the same as its peers on the designing, manufacturing, and distribution of its merchandise. Sourcing, designing, manufacturing, distribution and retailing practices remain similar across the industry. ZQK's cost of sales are within three percentage points of that of its peers. Cost of sales comparisons look like this:
(Data source: Morningstar.com)
ZQK's profitability is being eaten out of its selling, general and administrative expenses and low revenue growth.
ZQK spends significantly more on marketing, advertising and brand building activities than its peers, which on the one hand, has reduced operating margin to negative figures, and on the other hand, has not translated in revenue growth despite industry-wide favorable consumer spending and macroeconomic trends. ZQK's brand focus is the key here. Lately, ZQK's sales declines mainly came from reduced sales of Roxy and DC brands, in the wholesale channel in North America and European markets. While the peers, COLM, NKE and VFC also employ the wholesale channel as the main contributor to revenue, their brand focus is markedly different from that of ZQK.
ZQK's brands directly target the action sports lifestyle. The three brands, Quiksilver, Roxy and DC are positioned on surfing and board-riding sports; female surfing, beach and board-riding; and technical skateboarding apparel and footwear, respectively. ZQK brands targets youngsters who have an aspirational connection snow, surf and skate board sports. The company has been actively involved in surf, skate and snow sports. It sponsors leading athletes, including Rob Dyrdek, Torah Bright, Dane Reynolds, Jeremy Flores, Nyjah Huston, and Stephanie Gilmore among others. ZQk also sponsors sports events including Quiksilver Pro and Quiksilver In the Memory of Eddie Aikau. Some of the athletes also participate in X-Games and Olympics Sponsored use and demonstration of ZQK's brands in event and brand communications associates ZQK's brands with lifestyle of those who are active in these sports.
On the other hand, brands by COLM, NKE and VFC, e.g. Columbia, Sorel and Air Jordan, are positioned more on comfort, fun and active lifestyle values. Such brands position themselves on demographic and fashion specific customer segments. For example, COLM's brand Sorel offers premium fashion, casual and cold-weather footwear with an emphasis on fashion-forward females. prAna offers stylish and functional apparel and accessories made with an emphasis on sustainable materials and processes. COLM targets a wide range of consumer segments with its differentiated brands. In contrast to ZQK, COLM keeps a diverse brand focus according to customer segments and does not position its brands with an special emphasis on sports activities.
Consumer trends driving industry growth include customers' increased preference of sportswear as a fashion and lifestyle choice, not as a direct aid of or aspiration to athletic sports activities.
In this way, ZQK's brand focus is misplaced. Its brands are positioned as a direct aid and aspiration to sports activities and lifestyle; as opposed to being sources as providers of fun, comfortable and fashion-forward element in customers' lives. I think that this places ZQK in a less favorable position in the minds of its customers. As customers look for integrating sports-related apparel and accessories as a fashion choice in their lives, brands by companies like COLM, NKE and VFC appeal more to them than the brands by ZQK. This has resulted in ZQK's low sales growth and has caused its margins to decline. As revenue increases remain low, fixed costs have a smaller base to spread upon and thus contribute to higher SG&A expenses.
I think that ZQK's brand focus keeps it at a disadvantage in the current outdoor sports apparel ad industry environment. As the company is unlikely to successfully shift the positioning of its brands in a short time period, I believe that ZQK's stock is best avoided.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)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.
Source: http://seekingalpha.com/article/3106686-quicksilvers-brand-focus-keeps-it-at-a-disadvantage
