Billabong CEO Derek O’Neill and CFO Craig White hosted a conference call with analysts yesterday to discuss why the company lowered its six month and full year earnings guidance.
Previously, Billabong had forecast Net Profit After Tax for its first half to be slightly lower than the previous year. Now, the company expects NPAT to decline between 8% to 13% in constant currency.
For the full year, which ends June 2011, Billabong had forecast NPAT to grow 2% to 8%. Now, the company expects NPAT in constant currency to be flat.
Click here to read the company’s official press release.
Here are some highlights from the transcript:
Bigger retail impact
Now that revenue from company-owned retail makes up a much larger portion of total revenue, results during key retail months such as December have a bigger impact.
In key markets of Australia, North America and Europe, revenue from company-owned retail previously totalled about $30 million (AUD) in December. Now, that figure has more than tripled, which means even small swings have a bigger impact, Derek said.
In Australia, the company had forecast better results than materialized in the past four weeks in its own stores. Weak consumer sentiment in Australia combined with unseasonably cool weather, particularly in Queensland, led to weaker than expected results.
The company had also forecast more in-season orders in its wholesale business in Australia since more retailers are placing fewer prebook orders.
Since retail in Australia and Canada has been slower than expected and less units are moving, that has meant less opportunity to fill in inventory with company-owned brands at newly acquired retailers. The company had planned on getting a little extra margin lift from newly acquired retail by adding in more goods from company-owned brands sooner.
West 49 had a positive September, a negative October, a slightly weak November and a slightly weak start to December. Since the acquisition, Billabong has reduced the promotional activity at West 49, which has led to less units moving.
See page 2 for U.S. and European results, plus a forecast for the next 6 months
U.S.
In the U.S., company-owned retail has improved, with comp store sales up approximately 10% in November and the first two weeks of December.
However, wholesale sales in the U.S. were negatively impacted in the first half ended Dec. 31 because some large retailers want spring goods delivered closer to the actual spring season.
Derek O’Neill gave the example of Billabong and Element sales being down to PacSun more than 50% in the first half. While RVCA sales have made up some of the difference, company sales in the first half were still down considerably to PacSun, he said.
However, the company expects this to improve in the second half, and should end its year with sales to PacSun down only slightly.
Europe
In Europe, the business is overall doing well, but repeat orders have been softer than expected during the last four weeks as competitors discounted technical outerwear early.
In addition, supply chain challenges have stretched out some delivery dates, which delayed some orders into the second half, leading to a minor impact on results, executive said.
Second half
In its second half of Billabong’s fiscal year from January through June, the company expects conditions in Australia to remain challenging. Winter orders there are down about 20%.
Europe should show EBITDA growth.
Conditions in the U.S. seem to be improving, with Billabong brand forward orders up double digits, Derek said.
“I think everyone will be encouraged by the U.S. numbers at the half,” he said.
Transition year
Billabong previously announced that 2010/2011 would be a transition year when the company digested its acquisitions. It expected to start seeing bigger benefits from those acquisitions in 2011/2012.
Analysts asked whether 2011/2012 would turn out to be a transition year as well.
Derek emphatically said that would not be the case.
