Long & Strong $ZQK: Why We Really Like Quiksilver

Takeaway: Quiksilver is one of our top long-term ideas. We think that consensus has it all wrong.

Editor's note: This unlocked research note was originally published February 06, 2014 at 14:53 by Retail Sector Head Brian McGough. For more information on how you can subscribe to Hedgeye click here. Institutions please ping

Note: Our goal today is not to present a complete bullet-proof bull case on ZQK, but rather to share some of the building blocks of our call, and set the stage for a more comprehensive research product that we expect to present in the coming weeks.


Long & Strong $ZQK: Why We Really Like Quiksilver - quik1


ZQK is one of our top long-term ideas. We think that the consensus view has it all wrong.


Those who are bullish are focused around the new management team, cost cutting, and optimization of a broken organization.  While we agree with those points, the reality is that those initiatives will only get the stock into the high single digits. Which doesn't get us too excited given that the stock is already pretty much there. In order for us to build confidence in ZQK as a BIG call from here, we need revenue growth.  We were skeptical at first – probably because the company hasn’t grown its top line in about 5 years.  Yeah, we really like new management – and quite frankly are surprised that the Board attracted such high quality – but if you hand a bunch of broken and saturated brands to even the best management team, we’re pretty sure it will be a colossal failure. Fortunately, our research suggests that's not the case here.


We conducted an extensive analysis based on insight from a diverse group of Action Sports consumers, and walked away with confidence that the ZQK brands are far more relevant and authentic than we suspected. There’s very little that needs to be done to get these brands to a point where the new ZQK management team can kick-start growth.


While we’re only slightly ahead in 2014, our revenue estimate in the out years is 23% ahead of consensus. We also think that ZQK has well over $1.00 in earnings power, which is more than 50% ahead of consensus.  A buck in earnings on top of a $7 stock certainly grabs our attention.


Accordingly, this is the first of a series of notes that outlines some key factors behind our thesis, with this report focusing specifically on brand desirability and authenticity. The data referenced is based on a statistically valid survey of 1,000 Action Sports consumers.


Later in this series, we’ll ultimately build up, in specific detail, how and why we are different than the Street as it relates to categories, brands, consumers, and geographies. If you’d like to listen to our original presentation on ZQK, click the following link ('R(u6/zqk-survey-conference-call).



Question #1: Brand desirability remains high

It goes without saying that underinvestment in ZQK's core brands has hurt top line growth trajectory, but brands have bent - not broken. We asked consumers to rank the following brands in the order that they would purchase if price was taken out of the equation – which we translate as ‘desirability’. In charting out the results (see chart below), ZQK brands scored towards the higher end of the peer group. Vans, Nike S.B., etc. have stolen share over the past few years, but not to the extent that we had anticipated. Quite frankly, we expected ZQK’s brands to score near the bottom. This was clearly not the case.   


Long & Strong $ZQK: Why We Really Like Quiksilver - alec1


Question #2: Core consumers still like the brand

One of our greatest concerns headed in to our study is that we’d find out that Action Sports Enthusiasts would consider Quik, Roxy and DC as being too mainstream. Unfortunately, once a brand becomes mainstream, there’s really no coming back. Again, we thought we’d learn that ZQK scored near the low end of its’ peer group. In reality that simply was not the case.  Did it do as well as Nike, Vans and Converse? No. But it outscored well over a dozen other brands (some are not pictured here), and proved to be well above average. In a perfect world we’d like higher scores, but the bottom line here is that the survey tells us that ZQK's core consumers have not given up on the brand. Not by a long shot.


Long & Strong $ZQK: Why We Really Like Quiksilver - chart2 2 6


Question #3: Repurchase Intent

The worst thing a brand can do is fire its consumer. It’s abundantly clear to us that ZQK did not go there. A company can fix distribution, product, and brand messaging, but it’s nearly impossible to get consumers back when they've said they are gone for good (i.e. LULU).


So we asked questions to gauge people’s intent and willingness to purchase product in the future.  The groupings to the right side of the chart show the percent of people that indicated they would ‘likely’ or ‘definitely’ shop these brands in the future. Any way we slice it, we think that the numbers are impressive.  But the key area to look at is the cluster of three columns to the far left. This is where we ask people if they will ‘never shop this brand again’. We ask this in all the surveys we conduct, and by far and away ZQK’s reading ranked among the most favorable. Only 2.0%-2.5% of consumers say that they’ll never return – and we’d argue that Roxy’s high reading is a function of older teens having outgrown the core product.  


Long & Strong $ZQK: Why We Really Like Quiksilver - chart3 2 6


Question 4: Power Rankings

One of the ways we rank brands is in what we call a ‘Power Ranking’. In effect, it takes into account two factors. 1) Where the brand ranks in consumers’ desirability and awareness, and then 2) the revenue base of the brands. Why does that matter? Everybody is aware of Converse and Vans. But not necessarily the case with much smaller brands like DC, Volcom, and Etnies. So we take the brand factors, and we adjust for the size of the revenue base it generates. It’s one of the best ways we can normalize stats across companies.

Surprisingly, in our Power Rankings, ZQK is beat by only one brand – Hurley (owned by Nike), which has a surprisingly strong awareness relative to its size. But DC and Roxy registered particularly strong results. Quiksilver came in at 0.9x, which is in-line with Converse, Vans and Volcom. Overall, a good showing.


Long & Strong $ZQK: Why We Really Like Quiksilver - chart4 2 6


The Bottom Line

Our goal here today is not to outline a complete bullet-proof bull case, but rather to share some of the building blocks that will lead to a research product that we expect to present in the coming weeks.   This is only 4 of 52 slides we have in our deck, and our data files include much more information.


Please contact us if you want more info.  

[video] Keith's Macro Notebook 2/21: Dollar | Japan | UK

EHTH: Worst To Come

Takeaway: Quick update on our short thesis below. If you have any questions, or would like to see supporting notes and analysis, let us know.


  1. IFP Application growth likely peaked: Management suggested that 1Q14 applications are lagging that of 4Q13. Management expects another surge into the March 31st deadline. With a little more than a month remaining, our tracker suggests this isn't happening.  We'll continue to monitor, and provide updates.
  2. Attrition risks yet to emerge: Members that left EHTH because of cancellations and/or migration to the gov't exchanges are still included in EHTH's 4Q13 IFP membership metrics. EHTH won't know the status of existing member attrition until commissions are reported to them by their MCOs in 1Q14.
  3. Net-net, IFP membership growth may be worse than we thought: 4Q13 applications, which are likely the NTM peak, provide some insight into gross IFP membership growth.  But the full brunt of cancellations/attrition remains unknown to EHTH until 1Q14.  Given that less than 10% of EHTH’s 4Q13 IFP applications were from existing clients (churn), the probability of cancellations leading to attrition is now considerably higher. 
  4. Consensus still doesn't get it: 2014 guidance was below consensus expectations, with revenues of $206M-$213M vs. consensus of $219M.  Consensus estimates have declined to $215, above the guided range; suggesting the street is not taking the cancellation risk seriously, or is too bullish on application growth into the March deadline.  We're expecting 2014 revenues in the $200-$205M range, and expect management to reduce the top end of guidance (at a minimum) on the 1Q14 release. 
  5. 2015 setup is worse: Consensus is assuming another 20% revenue growth in 2015.  The cancellation risk increases in 2015 as a larger percentage of existing IFP members are facing cancellations.  Further, EHTH cannot sell subsidized plans in every state and functionality on the government exchanges continues to improve; making EHTH more vulnerable to attrition.  We doubt any uptake on the private exchanges can compensate in 2015.

If you have any questions, or would like to see supporting notes and analysis, let us know.


Hesham Shaaban, CFA




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Retail Callouts (2/21): GPS, AMZN, RL, UA, JWN, ANF, PUMA,

Takeaway: LULU fixes another miss. GPS wages going up. AMZN gets the Anti-Amazonians (RL). UA vindicated. Puma taking wrong path. JWN – U G L Y. ANF



JWN - Nordstrom's reports 4Q13 Earnings


Takeaway: A $0.03 beat doesn’t matter much when you take down 1Q guidance from $0.79 to $0.60-$0.70. This puts the two store closures announced earlier this month into context. By our math, closing the Portland, OR and Vancouver WA stores conservatively saves JWN $0.05-$0.06 per share -- and potentially as much as a dime. They need every penny they can get.  This SIGMA chart looks absolutely brutal.


Retail Callouts (2/21): GPS, AMZN, RL, UA, JWN, ANF, PUMA, - chart1 2 21


AMZN, JCrew, RL, HBC - Amazon Tempts the Anti-Amazons



  • " Inc. is in talks to bring listings for J. Crew khakis, Ralph Lauren polo shirts and Lord & Taylor suits to its site, according to people familiar with the talks."
  • "The discussions, which seek to win over retailers that have largely shunned the online marketplace, involve about 10 well-known retailers, these people said, including Abercrombie & Fitch Co. and Neiman Marcus Group Inc."
  • "Amazon wouldn't sell the goods directly; the listings would be links to the retailers' own sites. The arrangement would generate traffic for the retailers, while providing Amazon with more customer data and a new enticement for its Prime shipping program as it plans to raise rates."
  • "The initiative could launch as soon as this summer, the people familiar with the matter said. Under one scenario it has discussed, Amazon would offer the goods with free shipping to its Prime customers, who pay $79 a year for membership, though the retailers would be responsible for arranging and paying for the deliveries, these people said."


Takeaway: This is a win/win. Never in a million years would someone like Ralph Lauren ever list directly with AMZN.  But now RL can benefit from Amazon's breadth, but maintain control of the customer transaction 100%. For AMZN, all it cares about is a) being legitimized by higher end brands, and b) Prime.


UA - US Speedskating to Renew Under Armour Deal



  • "US Speedskating and Under Armour Inc. will announce that they have renewed their partnership through the 2022 Olympic Games, the company confirmed, a deal that comes on the heels of a public flap over new Under Armour skinsuits that divided the team in Sochi."
  • "Under Armour Chief Executive Kevin Plank 'is a proud American and they will not retreat from supporting USS despite the challenges we've gone through together,' US Speedskating executive director Ted Morris said in an email to athletes, reviewed by The Wall Street Journal."
  • "A spokeswoman for Under Armour confirmed the deal, but the terms of the deal weren't immediately known Friday."


Takeaway: Everyone has an opinion on this issue. So here's ours. Simply put, this whole thing is ridiculous. If you were going to 'go for gold' in the Olympics, do you think that just maybe you'd have tested out your suit before the games? We have to think that these athletes did (in fact, they did at the Olympic trials -- and did not complain when they were beating athletes wearing Nike suits).   A few of the classier athletes -- like Shani Davis -- stood up and said something like "I'm not blaming the suit. I went out there and gave it my all, and other skaters were simply faster". #respect, Shani. We give the USS credit for sticking to its guns with UnderArmour despite this PR mess. If they really thought that it was the equipment that kept us off the podium, we can't imagine that they'd stay married to UA.





  • "Abercrombie & Fitch Co. today confirmed that Engaged Capital, which owns approximately 0.58% of the outstanding shares of Abercrombie & Fitch, has submitted notice to nominate five candidates to stand for election to the Abercrombie & Fitch Board of Directors at the Company's 2014 Annual Meeting of Shareholders."
  • "Arthur Martinez, the newly appointed Non-Executive Chairman of the Board, said, 'Abercrombie & Fitch is committed to continued engagement with its shareholders, including regarding corporate governance matters. This commitment has already resulted in the appointment of three new, highly experienced independent directors and the separation of the positions of CEO and Chairman. As we have communicated during numerous discussions with Engaged Capital, I am committed, and the entire Abercrombie & Fitch Board is committed, to continue taking significant steps to strengthen and enhance corporate governance as the company moves into the next phase of growth.'"


Takeaway: The only downside is that Engaged Capital owns less than a percent of the outstanding shares. As much as we'd like to see it succeed, the reality is that it does not have the kind of clout to make the kind of changes it's proposing. It's probably hoping (as are we) that other holders will step up and support the case -- which is ultimately to impeach Jeffries. 


KER, FL - Jay Piccola Talks Puma Lab Concept



  • Puma Lab, a collaboration...Puma...and...Foot Locker, will bring styles from the breadth of Puma’s offering to stores under a periodic table-like framework that highlights design, luxury, creativity and multiple sport categories." 
  • "The stores — much like the House of Hoops concept Foot Locker created with Nike, and the Flight 23 Jordan-brand store that opened with Footaction — will be run and operated by Foot Locker and stocked with Puma merchandise."
  • "When it comes to the rollout of the new concept, Puma and Foot Locker are thinking big. The concept is expected to expand to 125 Foot Locker doors as either components or shop-in-shops." 


Retail Callouts (2/21): GPS, AMZN, RL, UA, JWN, ANF, PUMA, - chart2 2 21


Takeaway: In fairness, we have not been inside one of these Labs, yet. But Puma's problem is not distribution, and it's not branding, it's product. The brand does not know what it wants to be. Is it fashion, is it performance?  It's probably more the former (especially in light of having Kering/Gucci as its parent company). But it needs to up the R&D to keep up with the likes of Nike, UnderArmour, and even AdiBok -- who are all crushing it with new technology and product introductions. Without great product, cool looking stores are meaningless.


WWW - Keds® Unveils New Global Multimedia Campaign; Debuts New Grant Giving Program And Microsite



  • "Keds®, the iconic lifestyle brand established in 1916, announces today the largest multimedia campaign in its history. Titled Million Brave Acts, the campaign introduces several new initiatives that will help build a generation of stronger, more confident young women."


Retail Callouts (2/21): GPS, AMZN, RL, UA, JWN, ANF, PUMA, - chart3 2 21


Takeaway: We fear the day that Taylor Swift stops wearing sneakers.


LULU - Lululemon Will No Longer Ban Online Shoppers Who Resell Items



  • "Lululemon Athletica Inc...came under fire after shoppers complained that the company would no longer ship online orders to some customers who had resold used items on sites such as EBay Inc. Lululemon’s online customers only have 14 days after the delivery date to return items, which also must be unworn and have the tags still attached."
  • "Lululemon’s policy was intended to block large amounts of inventory from being bought and resold at higher prices, Therese Hayes, senior vice president of communications and sustainability, wrote in an e-mailed statement today. The company heard last week from unhappy shoppers who were blocked from buying online."
  • “'We looked into it and realized that we had indeed gone too far and have taken steps to fix it as quickly as possible,' Hayes said. 'Our approach is simply intended to limit major reselling which results in assortments not being available to all of our guests.'”


Takeaway: LULU's original intentions were genuine. But yes, they went too far. The second they added to the angst that already exists with such a big part of its former customer base, they should have backed off. As much as we're critics of LULU, we give it credit for fixing its mistake. Only thing worse than making a mistake is not fixing it. As for the stock, we still think expectations are too high, and that there's another shoe to drop. BUT, we would not be short the stock ahead of the company's analyst meeting in April. After that (presuming the company does not radically change our mind) it's fair game.


GPS - Gap Readies Minimum Wage Increase



  • "On Wednesday, chairman and chief executive officer Glenn Murphy said in a letter on Gap’sWeb site that the company will make a strategic investment to increase the minimum hourly rate for employees to $9 in 2014 and $10 in 2015."


Takeaway: GPS was able to pull off $9 for only so long…now it's into the double digits. Our Commander in Chief will be proud. The bigger point for us is that GPS is so expansive, that an 11% increase in its' minimum wage will definitely impact competing retailers. The question in our mind is whether this will actually put pressure on GPS' employee count, or average hours worked in each store. That's the natural offset for a retailer who takes up minimum comp and wants to prevent it being dilutive to margins.




APP - American Apparel Taps Skadden for Restructuring Advice



  • "Retailer and clothing manufacturer American Apparel Inc. tapped restructuring advisers as it battles weakening sales and a hefty debt load, people familiar with the matter said."
  • "Los Angeles-based American Apparel...recently enlisted lawyers at Skadden, Arps, Slate, Meagher & Flom LLP to work on restructuring options, though it is unclear exactly what the strategy will be, these people said. Skadden also has served as the company's outside corporate counsel."
  • "Some of the company's bondholders are starting to organize and are reaching out to restructuring advisers, these people said." - Tencent, Said in Talks to Combine E-Commerce Business



  • "Tencent Holdings Ltd., Asia’s largest Internet company, is in talks to combine its e-commerce operations with Chinese online retailer Inc., according to two people familiar with the matter.
  • The companies are considering options that may involve Tencent injecting its online shopping operations in return for a 6 percent stake in Beijing-based, one person said, asking not to be identified because the discussions are confidential."
  • "A combination would marry’s established market selling everything from electronics to fashion with Tencent’s less-popular e-commerce platform. For, which is planning a U.S. initial public offering, the 272 million active users on Tencent’s WeChat messaging service could bring increased traffic to its online store."


L - Joe Fresh Launches International Expansion in 23 Countries with Signing of 3 Partnership Agreements



  • "Loblaw Companies Limited and its affiliates, the owners of Joe Fresh, today announced the signing of three separate partnership agreements that bring the brand into 23 new countries. The agreements cover key growth markets in the Middle East, North Africa, Europe and South Korea. The partnerships represent the first expansion for Joe Fresh beyond North America."
  • "Fawaz A. Alhokair & Co. to open at least 96 stores in 17 countries by 2018; Retail Arabia International to open at least 15 stores in 5 countries by 2018; Origin & Co., Ltd. to open up to 30 stores in South Korea over the next 5 years"
  • "Today, Joe Fresh is available online, in more than 340 retail locations across Canada, in six freestanding stores in New York, including a flagship location on Fifth Avenue, and in over 650 J.C. Penney stores across the United States."




Footwear Sales Grow Online



  • "According to Goldstein [ fashion footwear industry analyst at The NPD Group Inc.], for the 12 months ended Dec. 13, e-commerce represented 19 percent of all footwear sales, up from 17 percent the year prior. Online sales, which totaled $10.5 billion, even outpaced brick-and-mortar sales, driving growth in the industry, she said. And the average price per pair of shoes bought online was higher than in stores.  However, she added, this trend has started to change as more lower-income households (those under $75,000) have been buying more online. The digital realm also attracts a more mature customer, with baby boomers representing a significant part of that audience, according to Goldstein."
  • "Although online shoe shopping is on the rise, returns continue to be a major concern for e-tailers, as roughly 30 percent of product gets sent back…"

Currency War, Anyone?

Client Talking Points


The Burning Buck arrested its decline for all of 24 hours off its year-to-date lows (the Nikkei loved that!). With that said, I will likely short the bounce and buy more Gold (and bonds) on that as both US Dollar and UST 10-year yield fail our Hedgeye TREND resistance. Check out those slow-growth Utilities (XLU) ripping +6.7% YTD.


Got currency-correlation volatility? The Yen down 20 basis points versus the US Dollar and the Nikkei rips up +2.9% on that (after being down -2.2% in the session prior). The Nikkei VIX (volatility) is wicked hot as central planners turn the stock market into a pachinko parlor.


Did you take our lead on #StrongPound? I hope so as it continues to drive accelerating consumption growth in the UK (see Retail Sales for January up +4.3% year-over-year – yes, even with the weather!). We still like both European currencies and growth investments more than the USA, Asia, or Latam. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


NATGAS: up another +3% to $6.25 this morning (despite the warmer weather) = +48% YTD @KeithMcCullough


“No one ever drowned in sweat.” - USMC


Approximately 1 in 600 Americans kids are registered to play ice hockey. Meanwhile, north of the border, 1 in 55 Canadians are.


Singapore contracts in Q4. Here is the growth and market share breakdown. 



Market trends

  • Singapore gross gaming revenues declined 12% YoY in Q4 2013 to S$1.7 BN.  Adjusting for hold (based on average since inception of 2.80%) for both periods, GGR still slumped 9% YoY.
  • Market VIP rolling chip volume shrank 7% YoY in 4Q, snapping 4 quarters of high double digit gains  
  • Mass revenue fell again in Q4, -6% YoY, the 2nd consecutive quarterly decline
  • Net non-gaming revenue fell 8% YoY in Q4, the 1st decline since 3Q 2012

Market shares

  • MBS GGR share is in-line with the 3 year average but below recent trends 
  • Volume share was consistent in Q4 relative to Q3 with MBS holding 47% of VIP rolling chip share and 57% of mass table volume share
  • MBS's mass table revenue share rose 2% points sequentially to 59% due to higher mass hold and volumes
  • MBS's slot revenue share was unchanged sequentially in Q4

* Blue trend lines in the charts below are from MBS's perspective