MARKET WATCH: Billabong’s Recent Announcements

Jeff Harbaugh

• May 19 2009
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• 9 comments

I’m assuming you’ve already seen the news. Billabong had predicted in February that earnings for the year ending June 30, 2009 would be six to ten percent higher than the previous year’s AU$ 176.4 million. They reduced that yesterday to between AU$ 160 and AU$ 165 million, blaming conditions in the US market.

You can read Billabong’s announcement HERE, and a pretty good article on the announcement HERE.

They also announced that they would raise up to AU$ 290 million in equity which would be used to pay down debt. The first thing I did when I heard they were raising capital was to go back and look at their balance sheets for 31 December, 2007 and 2008. You can do the same on page nine HERE if you want to.

The main difference between the two balance sheets is that total liabilities have risen from AU$ 698 million to AU$ 1,346 million. The biggest factor is the AU$ 387 million increase in long term borrowings. Equity grew over the year from AU$ 783 million to AU$ 889 million so obviously leverage went up.

Billabong indicated in their conference call that they were in compliance with all their bank covenants and would be even if they didn’t raise the new equity capital. They are just trying to increase their financial flexibility in an uncertain operating environment.

Makes sense to me. Certainly their strategy of holding prices (compared to other brands) to maintain brand equity has cost them some sales, and may cost them some more as we work our way through this. You don’t have to do more than walk through a few retailers’ stores to see that they are managing their inventory very cautiously. Everything I hear and read is that retailers are reducing preseason orders and expecting to buy more mid season based on demand. That, of course, shifts the inventory risk towards the brands, who won’t want to make stuff they don’t think they can sell.

Interestingly, I’m not the only one who thinks this might create some actual product shortages by fall or in the holiday season. Could be a good thing. Getting consumers to consider the possibility that they might not always be able to find a product whenever and wherever they want it and at a discount price could be good for margins.

Wonder what Billabong (or any other brand with its own stores) does when there’s a shortage of product and they have to choose between supplying their own stores and other stores? I would expect they would generally prioritize their own stores and suggest to their other customers that they should have placed bigger preseason orders. And so the endless battle to make the other guy take the inventory risk continues.
Billabong also noted that their sales in Europe were holding up pretty well.  What I’ve been hearing and reading makes me think that the timing of the recession is Europe is behind the US, and may ultimately be worse. Let’s hope the US market turns before that happens- if it happens.

Billabong’s focus on margins and brand equity over sales appeals to me. But the bet they are making is that the customers are going to come back to preferring brand over price when the only discernable difference between two products is the label. We’ll see how that works in this new economic environment and to what extent the change in consumer psychology is permanent.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.