Aussie surf brands headed for a wipeout?
Billabong International has been treading water since it was rescued by private equity firms, Centrebridge Partners and Oaktree Capital, back in 2013.
Despite significant restructuring, which has closed stores and divested several businesses, including Tigerlily in FY17, the company continues to struggle for profitability.
The restructuring has of the business has almost halved annual sales for Billabong International to $979.5 million over the past six years and left the company’s share price languishing at around 75 cents, a far cry from the more than $13 price in 2008.
The continuing share price struggle was a key factor in the company’s $77.1 million net loss for FY17, after directors decided to writedown brand asset values to align them with investor sentiment.
The $106.5 million in writedowns resulted in the full year loss.
Neil Fiske, who replaced Launa Inman as CEO in 2013, was surprisingly upbeat about the results for the latest financial year, claiming the company had achieved much better metrics in the second half.
However, Fiske conceded that the first half of the new financial year, now two months in, is likely to drag on full results, just as the comparable period did in FY17.
Fiske said comparable gross margins were up in the Asia, Europe and Americas regions, gross profits increased and operating costs were reduced in the second half.
Billabong International has reduced its brand portfolio after rapid debt-funded expansion, when the US and European markets dived and threatened the viability of Billabong International.
Inman commenced restructuring during her brief tenure, but Fiske revamped her turnaround strategy after the private equity investors took effective control of the publicly-listed company.
Time for a turnaround
Billabong International’s main brand focus now is on the Billabong label, RVCA and Element, although it also has a number of subsidiary brands, including Vonzipper, Surf Dive ‘n Ski, Honolua, Xcel and Kustom.
Fielke believes the turnaround strategy is restoring the company to health, despite an overall decline in sales for FY17 of 8.8 per cent and a drop in comparable store sales for the full year of 2.4 per cent.
The sales results for the second half did represent an improvement on the first half but like-for-like sales growth was still below water.
Billabong International’s first half sales are weighted towards Australia and Asia, with Christmas falling in the summer months, while the second half is weighted towards the northern hemisphere summer months in the European and Americas regions.
Fiske has assured investors the latest result marks a turning point for the company and creates an opportunity to rebuild.
“The key to our ongoing success is the relevance of our brands,” Fiske tells investors.
“We continue to strengthen the connection with our customers, with global social media followership up 42 per cent year-on-year to almost 37 million.”
The tough market conditions and what Fiske conceded was a misjudgement in the women’s swimwear range had forced the retailer to discount heavily to reduce stock levels.
The Australia and Asian region suffered an eight per cent fall in revenues to $367 million and a 28.3 per cent fall in earnings to $23.4 million in FY17, while profitability for the other two Billabong International regions, America and Europe, were stronger.
The Americas region posted a 46.9 per cent lift in earnings, despite a 7.5 per cent fall in revenues for the full financial year, while Europe boosted earnings by 8.9 per cent, even though there was a 1.9 per cent fall in annual sales.
Fiske said the results in all three regions reflected the tangible progress the company is making in implementing the turnaround started in 2012, but re-worked under the private equity recapitalisation in 2013.
Fiske said the second half of FY17 represented the first time in three years that comparable gross margins had improved in every region, year-on-year, an important measure for the company as with gross margin expansion being a key driver for profit improvement.
As part of the turnaround strategy, Billabong International has been developing global platforms that encompass sourcing and concept-to-customer supply chain initiatives.
The company will reduce global logistics and distribution costs by $10 million a year under a supply chain overhaul that has significantly cut its number of suppliers.
Fiske says Billabong International’s omnichannel initiative remains at the heart of the company’s customer engagement focus.
“Good progress has been made on a number of key initiatives, such as deploying a new digital business-to-business system and a more advanced merchandising planning and allocation system for retail,” he said.
“New industry-leading partners have been appointed to accelerate progress in e-commerce, retail point of sale, and customer relationship management.
The selection of the new partners was based on one overriding principle – delivering the best possible omnichannel experience for customers with certainty and speed.”
Fiske emphasises omnichannel was not just ecommerce, but the ability for customers to shop the way they wanted to shop – in stores and online, retail and wholesale, across all channels with richness of content and a personalised experience.
Fiske says the value of an omnichannel platform is in the integration of previously unconnected parts of the retail system.
While the online digital connections with customers are improving engagement, reducing costs and building sales, there is also a sting in the tale as Billabong International found in the Australian market last summer.
Social media driving customer attitudes was a factor in the mis-hit on the women’s swimwear range.
Billabong International designers rolled out a range of heavily printed swimwear designs in Australia stores when social media was driving a trend that favoured solid natural colours and different cuts.
Billabong International brought in stock for the US which received a more positive customer response, but the retailer had by then missed part of the season and was forced to clear the original ranges at deep discounts.
Surfstitch in troubled waters
While Billabong is expecting smooth sailing in the future notwithstanding the odd challenge along the way, another sports retailer looks like sinking as a result of a class action and internal management disputes which have compounded underwhelming trading results.
The Gold Coast based online retailer, Surfstitch, is in the hands of receiver managers, FTI Consulting, as its board of directors seeks breathing space to deal with two pending class actions and an investigation by the Australian Securities and Investments Commission.
The administration will provide temporary respite from at least some of the legal turmoil surrounding the company, but will also allow an examination of options to recapitalise the Surfstitch holding companies.
Under the administration, five retail brands are still trading: Surfdome Shop, Stab, Swell, Magic SeaWeed and Surfstitch.
Surfstitch was listed on the ASX in 2014 as a pureplay online sports retailer globally, providing a platform for other online retailers to sell products and services, as well as retailing its own ranges in the Australian, European and American markets.
The founder of SurfStitch, Justin Cameron, claimed the company was headed towards $1 billion in sales within five years but by last year, Cameron had left the company, which was forced to writedown the value of its assets amid mounting financial losses.
Ironically, Billabong International, was the largest shareholder in SurfStitch for a period of time.
Trading in Surfstitch shares on the ASX has been suspended since May.