Billabong International Limited reported sales declined 7.9 percent in the year ended June 30 as growth of core brands were more than offset by the closing of dozens of underperforming stores, the partial divestiture of Nixon and a resurgent Australian dollar (AUD) that hurt sales in virtually all overseas markets.
Billabong reported revenues declined to AUD$1.55 billion ($1.68bb), down 5 percent decline in currency-neutral (c-n) terms from 2011. The continued appreciation of the AUD against the Group’s operating currencies, in particular the Euro and U.S. dollar, reduced sales by AUD$51.8 million ($53.8mm), EBITDA by AUD$5.0 million (5.2mm) and net profit after tax (NPAT) by AUD$3.3 million ($3.4mm).
“Today's results reflect further turbulent times for retail, not only in Australia but also in Europe, Canada and New Zealand and in fact there are few countries not affected by the consumer downturn,” said Managing Director and CEO Launa Inman, a former Target executive hired in May to turnaround the company. “That slowdown is responsible for much of the decline in the Group's sales of 5 percent in constant currencies.”
The Australian company, which owns Billabong, Element, DaKine, RVCA, Von Zipper and seven other action sports brands, reported a net loss after tax of AUD$276.6 million ($286mm) in the twelve months ended June 30, compared to net income of AUD$119.1 million ($118mm) in 2011 due largely to previously reported one-time costs totaling AUD$336.1 million ($349.1mm). Those costs were net of a gain of AUD$201.4 million ($209.2mm) on the sale of the Nixon brand earlier in the year. Excluding one-time extraordinary costs, Billabong’s EBITDA declined 40.9 percent to AUD$120.6 million while its net profit after tax (NPAT) declined 74.3 percent to AUD$33.5 million ($34.8mm) on global revenue of AUD$1.55 billion ($1.6bn).
“At an underlying trading level, the Group remains profitable,” insisted Inman, noting that Billabong’s revenues, EBIDTA and NPAT all fell within its previously issued guidance. She added that the Group had reduced working capital to 19.7 percent of sales from 27.8 a year earlier, more than tripled cash flow from operations, and reduced debt 41 percent.
In the Americas, sales declined 8.1 percent c-n to AUD$750.3 million ($775mm) on strong sales of Billabong-branded girl’s product and RVCA-branded men’s product. The U.S. East Coast performed better than the West Coast and Canada remained challenging at both the wholesale and retail level, while Peru emerged as a promising market. EBITDA fell to negative AUD$39.3 (-$41mm) from AUD$80.2 million in 2011. EBITDA margin for online sales also moved into the red, falling to a negative 5.2 percent from 9.5 percent in 2011.
In Europe sales fell 12.6 percent in c-n terms to AUD$278.1 million, as core markets Spain, Italy, Greece and Portugal struggled, the wholesale account base shrank and fall/winter bookings were poor. The company has closed 25 percent of its wholesale accounts in Europe in the last 18 months. Technical products, such Dakine outerwear, generally fared better than lifestyle products, although Element continued to grow due to the growth of skate culture. The decline triggered a swing in EBITDA to negative AUD$12.3 million (-$13mm) from AUD$54.2 million a year earlier. EBIDTA margin was negative 4.4 percent compared to 16.1 percent a year earlier.
“Brand Billabong has historically been very strong in the southern parts of Europe — Spain, Greece and Portugal,” said Inman. “Unfortunately those are the very countries worst affected by the devastating high unemployment and general sovereign debt issues. So there have been concerns about some of our wholesale accounts in Europe and we've been actively managing down the number of wholesalers with whom we do business.”
In Australasia, revenues grew 5.0 percent c-n to AUD$522.3 ($539mm) despite subdued trading in the core markets of Australia, New Zealand and South Africa thanks to modest growth in the rest of Asia. Retailers cut back orders and canceled deliveries in June. Here too, EBIDTA and EBITDA margin turned negative.
Under a Strategic Capital Structure Review initiated in February, the Group has raised AUD$285 million by selling a 51.5 percent stake in Nixon, closed 58 under-performing stores, cut staffing at some stores and cleared out much of the aging inventory in its retail stores, particularly in the United States, where TJ Maxx, Marshalls, Ross have developed a very robust and efficient clearance channel. For that reason, Billabong will likely shift some surplus inventory from Australia and Europe to the United States.
Billabong has already identified another 82 for closure in FY13. Inman said the Group had reduced working capital from 19.7 percent of sales compared to 27.8 a year earlier, more than tripled cash flow from operations, and reduced debt 41 percent. She expects to shave costs by another $30 million per year in FY 2013.
The company will also scale back distribution of its seven slower growing and smaller brands to rein in advertising and promotions costs.
Still, Billabong expects the current challenging conditions to continue during FY 2013. Assuming no further deterioration in economic conditions, FY13 EBITDA is currently expected to be in the range of AUD$100 million to AUD$110 million in constant currency terms. This compares to pro-forma FY12 EBITDA of AUD$84.0 million, excluding 100 percent of Nixon and significant and exceptional items.
