Following robust improvement in the first half ended December 31, Billabong International expects the Americas region “to level out in the second half as it cycles tougher comparables and operational improvements.”
In the first half, EBITDA in the Americas region grew 26.9 percent to Australian $13.3 million, or 34.1 percent on a constant-currency basis. Revenue picked up 1.1 percent to Aus $194.2 million, or 3.9 percent on a currency-neutral basis.
Gross margins in the region improved 110 basis points to 49.3 percent while the cost of doing business (CODB) in the region was reduced 40 basis points to 42.4 percent.
Billabong said the Americas region continued to see benefits of change initiatives undertaken in the past four years.
The region began turning around in 2016 although sales only began recovering recently. In the fiscal year ended July 31, 2017, the Americas region for Billabong showed a 46.9 percent gain in EBITDA on a currency-neutral basis despite a decline in sales of 7.5 percent on the same basis.
The strongest channel in the region was e-commerce, which expanded 19.5 percent. Among Billabong’s regions, e-commerce is most developed, representing 9.6 percent of the region’s sales. Brick and mortar comparable store sales were up 0.7 percent on slightly lower margins. Total comparable retail sales, combining comparable stores and e-commerce, were up 5.8 percent and margins were down, by 60 basis points.
Unfortunately, Billabong saw weaker results in Europe and the Asia-Pacific region and that led to a wider loss in the half. Results came in line below plan due largely to timing issues and the company reaffirmed guidance for the year. But management said its continued challenges add further support to its need to be acquired by Boardriders, the parent of Quiksilver, Roxy and DC Shoes.
“The benefits from initiatives such as global sourcing, concept-to-customer and business simplification continue to be offset by negative financial impacts due to unfavorable external conditions,” Billabong CEO Neil Fiske said.
“We have made substantial progress over the last four years, but we have had to confront tens of millions in adverse currency movements on our product costs, industry bankruptcies and account closures across multiple geographies, and fundamental channel shifts away from brick and mortar. The fact that a number of industry participants are currently undergoing a sales process is yet another indication of the tremendous disruption that we are witnessing. These changes are systemic, structural and set to continue.”
The loss in the half widened to Aus $18.4 million from Aus $13.0 million.
EBITDA declined 19.1 percent to Aus $19.3 million and was down 15.9 percent on a currency-neutral basis. The shortfall was blamed on a revenue shift in the wholesale shipping pattern in Europe between the halves, which accounted for about $1.5 million of the first half EBITDA decline, as well as a shift in the timing of some Billabong global marketing costs from the second half to the first half, which represented another $1 million of the lower H1 EBITDA.
In Europe, EBITDA was down 29.4 percent on a currency-neutral basis to Aus $4.9 million due to a wholesale revenue timing shift and weaker than expected retail results. Sales on a currency-neutral basis were down 6.1 percent to Aus $81.7 million.
In the Asia-Pacific region, EBITDA was down 9.2 percent on a currency-neutral basis to Aus $20.7 million. Revenues fell 4.5 percent to Aus $198.6 million. Billabong said the region is facing a lag effect from some assortment and execution issues that have been addressed and progress is also being undermined by ongoing weak market conditions.
Among its brands, the flagship Billabong brand was down 0.5 percent for the half (up in Americas, down in APAC). The brand continued to gain share in the important U.S. specialty channel, strengthening its position as the number-one brand within the core market
Element fell 13 percent, impacted by the timing shift in Europe and a change in distribution strategy in Canada. Element faced a challenging first half in all geographies, but is expected to record modest full year sales growth in Europe, its largest market.
RVCA was up 9.6 percent with growth in every region and good share results generated in its core market in both men’s and women’s categories.
Billabong confirmed the guidance provided in early January that it expects the company’s FY18 EBITDA to exceed the prior year, to be in a range between $51.1 million and $54 million. The company continues to have a significant bias of second half earnings to the Americas, with a high concentration of sales in the month of June. Trading in that month remains key to achieving the company’s full-year expectations.
The earnings report arrived following news earlier in the week that major Billabong shareholder Ryder Capital questioned why the independent expert’s report ignored the key Christmas trading month of December in arriving at a valuation of the retailer between 96 cents and $1.20 per share. A shareholder vote on the merger is set for on March 28.
In Billabong’s earnings report, Billabong Chairman Ian Pollard noted that the bid represents a 16.6x enterprise value/pro-forma FY17 EBIT multiple and a 69 percent premium to the three-month average share price prior to the disclosure that Boardriders had approached Billabong. He also noted no other competing proposals had arrived since the Boardriders proposal was first made public almost three months ago.
“While Billabong has made significant operational progress in recent years, this progress has been slower and more difficult than anticipated at the time of the 2014 recapitalization, and its earnings growth has been impacted by market conditions and other factors including currency, channel shifts and significant restructuring in the global retail sector,” said Pollard.
Pollard said full-year guidance implies the third consecutive year of relatively flat EBITDA (adjusting for the sale of Tigerlily), where market conditions have offset the operational progress. Added the chairman, “These difficult market conditions are not expected to improve in the near term.”
Pollard added that besides continued lack of meaningful earnings growth, Billabong’s Aus $2281 million term loan matures in September 2019 and will need to be addressed.
“The Board has considered alternative scenarios in detail, including raising more equity and refinancing, or selling more assets. Both of these options offer less certainty, particularly in an environment where debt funding for retail-oriented companies is proving to be very difficult,” said Pollard.
“Having regard to all the factors, the Board believes that the Boardriders offer provides both a superior outcome for shareholders–and a far more certain one. If this Scheme does not proceed, change will be necessary to the company’s capital structure, strategy and operations.”
Photo courtesy Billabong
