Billabong CEO Neil Fiske painted a grim picture of the retail market in general and the action sports sector in particular during the company’s half-year earnings calls today.
He also sounded the alarm about the company’s balance sheet – namely that despite some operational improvements, the company has not been able to make enough financial progress to allow Billabong to pay down its looming debt that matures in less than two years.
The challenges that have stymied financial improvement include tens of millions in adverse currency movements on product costs, industry bankruptcies and account closures across multiple geographies, and channel shifts away from brick-and-mortar.
“These changes are systemic, structural and set to continue,” Neil said.
The gloomy scenario he painted seemed partly in service of explaining why shareholders should support Boardriders’ bid to buy the company, a move that has been unanimously endorsed by Billabong’s board of directors.
The company’s three largest shareholders – Oaktree Capital, Centerbridge Partners, and Gordon Merchant – all support the acquisition offer.
While Oaktree won’t be voting its shares because it owns Boardriders, which is the company making the offer, Neil stressed that both Centerbridge and Gordon Merchant know the reality of Billabong’s challenges.
“Both Centerbridge and Gordon have had deep insight into the progress we have made and the difficulties we have encountered, and have been represented on the board for more than four years and have confirmed they will be voting in favor of the scheme,” Neil said.
The results the company released today underscore the challenges Billabong faces.
For the six months ended Dec. 31, the Americas region was the only region that posted positive results, and RVCA was the only one of the big three brands to grow globally.
Company-Wide Numbers
Revenue: A$474.5 million, down 1.5% in constant currency.
EDITBA: A$19.3 million, down 15.9%
Gross margins: rose to 52% and increased in every region
Net Loss After Tax: increased to A$18.4 million vs. a net loss of A$13 million the same period last year.
BRAND PERFORMANCE
All results are wholesale equivalent revenue, which includes wholesale equivalent sales to the company’s own retail channels.
Billabong Brand
Down 0.5% globally.
In the Americas, the Billabong brand grew 13.1%.
In Europe, brand sales fell 4.7%.
And in Asia Pacific, Billabong brand sales fell 11.5%.
RVCA Brand
RVCA grew 9.6% globally with growth in every region. E-commerce sales grew 35.4%.
In the Americas, RVCA sales rose 8.2%.
In Europe, sales increased 26.6% off a small base.
And in Asia-Pacific, RVCA grew 11.7%
Element Brand
Element sales dropped 13% globally.
In the Americas, sales plunged 14.1%. The company said nearly the entire decline was due to the decision to exit a large account in Canada that was highly promotional.
In Europe, the largest region for Element, sales dropped 11.6%, largely due to a timing shift.
In Asia Pacific, Element sales fell 16.2%.
REGIONAL RESULTS
Americas
Revenue: up 3.9% to A$194.2 million
EBTIDA: A$13.3 million, up 34.1%
Gross margin: 49.3% vs. 48.2%
E-commerce sales grew 19.5% and accounted for 9.6% of sales.
Brick-and-mortar comps rose 0.7%, however margins were slightly lower.
Comparable e-commerce and brick-and-mortar sales combined rose 5.8%.
Store count: flat at 54
The company expects the big gains the Americas have logged recently to level out as comparisons become more difficult.
While the Americas recorded a strong half, the business is smaller there in the first half than in the second so the region was not able to positively sway total company results.
Europe
Revenue: A$81.7 million, down 6.1%
EBITDA: A$4.9 million, down 29.4%
Gross margin: 51.7% vs. 50.7%
Results were down due to a timing shift in an order and weaker than expected retail results.
Brick-and-mortar comp sales down 2.3%. E-commerce sales grew 15.1% – about 5.5% of total sales
Comparable e-commerce and brick-and-mortar sales fell 0.3%.
Store count 104 vs. 106 the same period last year
Asia Pacific
The retail sector overall in Australia has been very challenged of late, and Amazon is just getting started in the country.
Revenue: A$198.6 million, down 4.5%
EBITDA A$20.7 million, down 9.2%
Gross margin: 54.9% vs. 53.7%
Retail revenue in the region was up 1.3%. However wholesale sales fell 16.6%. The company cited weak market conditions and also assortment issues.
The challenging market conditions include account closures, competitors buying independent retailers, and retailers carrying more private label.
The company now has too much inventory in Australia that it will need to liquidate.
Brick-and-mortar comps rose 0.9% in the region. But in Australia, comps declined 0.6%. A bright spot, however, was the month of December – Australia comps jumped 2% that month.
E-commerce was another bright spot in the region, with sales growing 28.7%. In Australia, e-commerce sales jumped 40.2%.
For the region overall, e-commerce sales totaled only 2.5% of total sales.
Store count: 219 vs. 229 the same period last year
The weak results in Asia Pacific hurt the company’s overall results because Asia Pacific accounts for a bigger portion of business in the first half of the year.
Ominous Warning
If shareholders do not approve the acquisition, big changes are in store for Billabong, Neil cautioned.
“Billabong will not be in a position to continue on a business as usual basis,” he said. “Changes will be necessary to our capital structure, strategy and operations.”
There are many approvals that need to take place before the acquisition is finalized, including a shareholder vote on March 28.
If shareholders vote in favor of the deal, everything is likely to be completed by the end of April.
