Billabong International Ltd. now expects report full year net profit after tax in the range of A$160 million to A$165 million (U.S. $122.5-123.5mm) for the 12 months ending June 30, down from A$176.4 million (U.S. $135.1mm) a year ago. The surf giant said the earnings forecast revision is attributable largely to weak US earnings. Additionally, further impairment testing by the company at year end may result in non-cash charges.
The reduced earnings guidance is the third issued since mid-2008 In addition to its namesake brand, Billabong owns labels such as Element, Von Zipper, Kustom and Tigerlily.
Billabong is also looking to raise Australian $290 million (U.S. $217.6mm) to pay down debt. The company intends to use offering proceeds of the offer to reduce the amount of outstanding drawn debt.
Billabong said the charges, which are expected to relate to various retail assets, are not anticipated to exceed A$10 million (U.S. $7.7mm) pre-tax for the full financial year and include the A$2.3 million (U.S. $1.8mm) charge already announced in the first half results.
Since Billabong's last market update in February, the company noted in a trading update “a deterioration in trading conditions at a consumer level in the US in late April and early May, together with a reduction in forward orders within the company's US wholesale account base and the strengthening of the Australian dollar against the US dollar, has led Billabong to review its expectations for the remainder of the 2008-09 financial year.”
It added, “During the February to April period, the signals from the US retail market have been mixed. The company experienced a subdued sales month of March but saw a considerable spike in early to mid April, around Easter, with comparable store sales in its own retail network lifting 7% compared to the prior year. However, the period from late April through early May saw a rapid deterioration in company owned retail sales, with comparable store sales down in the high teen to low 20% range. This was lower than the company's original expectations and Billabong now forecasts this current level of activity in its own retail network will continue through to the remainder of the 2008-09 financial year.”
The company added that the softness in the US is also being felt in the company's US forward order book for the fall season.
It added, “Wholesale customers are similarly reducing the amount of inventory in store and are undertaking a seasonal realignment of their business which is leading them to specify delivery dates closer to the middle of the season. This is impacting late May and June deliveries as orders are pushed into the 2009-10 financial year. Rather than placing larger forward orders, customers are looking to buy at-once in-season products more frequently. Additionally, the wholesale account base that Billabong is choosing to service in the US has been reduced by the closing of customers' stores and Billabong proactively exiting accounts in response to increasing credit risk of some retail customers.”
In reaction, the US division has reduced overall inventory levels without any significant gross profit margin dilution. The company said it continues to preserve brand equity by not participating in heavy discounting and thereby maintaining industry leading margins. US EBITDA margins for the second half in isolation are expected to grow from 10.6% in the first half to approximately 14% in the second half compared to 19.2% in the second half of the 2008-09 financial year.
Management of overhead and cost controls will continue to be a key focus moving into the 2009-10 financial year.
European Business
Billabong said its European business remains strong and on track for double digit growth in the 2008-09 financial year with continued strong growth in Germany, while the retail environment in both the UK and Spain remains soft, and Eastern Europe has recently weakened. The Australasian business result will be slightly affected as some Australian retailers move early summer deliveries into mid-season so that product usually delivered in June will be delivered in the 2009-10 financial year. Overall, however, the total indent remains solid as the current Australian trading environment remains steady, although retailers continue to actively manage floor stock levels.
The company continues to actively manage its working capital and considers it remains conservative in the provisioning of doubtful debts and the provisioning of inventory writedowns.
For the 2008-09 financial year, the company has revised currency assumptions, which comprise actual monthly average exchange rates for the 10 months to the end of April and assumed monthly average exchange rates for May and June of 75 cents for the AUD/USD and 55 cents for the AUD/Euro. These new assumptions in relation to previous guidance provided at the company's last market update in February have resulted in a A$6.4 million reduction at the net profit after tax line.
Looking ahead, the company said, “As the company approaches the 2009-10 financial year, management's focus will remain on tight overhead, cost and working capital controls to reduce the relative size of the overall cost base while maintaining brand strength and equity. In addition to sales being pushed into the 2009-10 financial year as retail customers delay purchases, the company expects the general trend towards lower inventory and lower forward looking orders in the US market will lead to product shortages in the 2009-10 financial year and this will have a positive impact on wholesale demand in a tight inventory environment. The company is well positioned to benefit from considerable operating leverage across both its wholesale and retail businesses and return to a consistent growth profile, supplemented by the full year sales impact of the DaKine acquisition, when the current economic cycle turns.”
The new guidance, together with each of the above assumptions, assumes the absence of any further exceptional, unforeseen circumstances and, in particular, any further significant deterioration in the company's retail markets.
Stock Offering
Regarding its plans to sell stock to raise Australian $290 million (U.S. $217.6 million), Billabong is offering a fully underwritten 2-for-11 rights offer to institutions, at A$7.50 a share, worth A$200 million, and a matching offer to retail shareholders, which would raise up to A$90 million.The offer price of A$7.50 represents a 29% discount to Billabong's closing share price on May 13 of A$10.62. The offer also represents a 26% discount to the theoretical ex-rights price or TERP.
In a statement, chief executive officer, Derek O'Neill said, “Billabong's capital position remains strong and the Board and management of the company believe that it is prudent to maintain a healthy balance sheet to ensure that the company is well positioned during the period of challenging operating conditions, violate currency markets and uncertain capital markets.”
The maximum number of shares which may be issued under this entitlement offer is up to 38.77 million shares. The entitlement offer is underwritten by Goldman Sachs JBWere Pty Ltd. Billabong will pay an underwriting fee equal to 2.4% and a management and arranging fee equal to 0.5%, of the institutional offer proceeds.
The institutional entitlement offer is scheduled to close at 12.00 PM Australian time on May 19, 2009, while the retail entitlement offer is scheduled to close at 4.00 PM Australian time on June 11, 2009. Billabong expects to announce the outcome of the institutional entitlement offer to market on May 20, 2009.
