Billabong International Ltd. reduced its earnings forecast due to the impact of Japan's earthquake and tsunami. Annual earnings on a constant currency basis will now fall between 2% to 6% in the 12 months ending June, compared with last month's forecast that called for flat results, Australia-based Billabong said in a statement.
The company had a net income of A$146 million ($145 million) in the year earlier.
Besides Billabong, its brands include Billabong, Element, Von Zipper,
Honolua Surf Company, Kustom, Palmers Surf, Nixon, Xcel, Tigerlily,
Sector 9, DaKine and RVCA.
The company said in a statement, “While Billabong's offices and warehouse in Japan appear to have suffered no direct physical damage from the earthquake and subsequent tsunami, a number of company owned retail stores and the wider wholesale account base have been, or are likely to be affected.”
Billabong said it has 44 company-owned stores in Japan and they contribute 60% of its sales revenue in the country. A total of 10 stores were initially closed due to damage, loss of power or standard earthquake and tsunami evacuation procedures. As of March 16, 18 company-owned stores remained closed. Billabong said it understood that two of these stores were badly damaged by the tsunami, three suffered major unspecified damages and a further 13 remain closed due to power disruptions, access issues or until landlords complete damage assessments.
At the same time, Billabong said significant revenues and profit is also generated from approximately 500 wholesale accounts in Japan. Billabong added, “It remains extremely difficult to determine the exact impact of trading within the wholesale account network, but preliminary discussions indicated that many accounts are currently closed. Billabong expects to work closely with its wholesale partners accounts to help them through this difficult period.”
In the 2009/2010 financial year, Japan contributed approximately 4% of its global sales revenue and approximately 3% of its EBITDA.
Approximately two-thirds of the company's overall annual profit in Japan is generated in the four months from March to June and the company is now assuming that there will be a “significant shortfall in sales that were previously expected in this period.”
Billabong said some insurance is in place in Japan and while there is an expectation that some monies will be recovered, this is highly unlikely to occur in the current fiscal year.
Compounding matters is that the natural disasters in Japan follow an earthquake in Christchurch, New Zealand on February 22. Billabong has six company owned stores in Christchurch, three of which remain closed due to significant damage.
“In isolation and given that the insurance was in place albeit acknowledging the amount likely to be recovered from insurance remains uncertain, the Christchurch earthquake was not expected to have a material impact on the group's overall business. However, when couple with the latest natural disasters in Japan, there is potential for the combined impact to reach levels that would materially impact group profitability.”
Billabong added, “While it is extremely difficult to forecast the ultimate financial cost for such natural disasters and their likely effect on both wholesale customers and consumer sentiment, particularly within tourism destinations throughout the Pacific rim, the direct cost will likely result in the Group's NPAT (net profit after tax) for the 2010-11 financial year being lower than the forecast.”
On February 18, it forecast NPAT to be flat in constant currencies compared to the prior year. The company now anticipates NPAT is likely to be 2% to 6% lower in constant currency terms compared to the prior year.
Billabong finally noted that there was no significant physical injuries to any Billabong employees as a result of the natural disasters in Japan and New Zealand.
“The Board of Billabong, on behalf of its employees globally, take this opportunity to express their sympathies to the people of Japan and New Zealand, in particular the families of those who have lost their lives,” the statement concluded.
