Billabong International recorded heavy losses for its fiscal year ended June 30, 2017, after writing down the value of several of its brands. It posted a net loss of $77.1 million Australian dollars (€51.3m-$61.3m), compared with a net loss of A$23.7 million a year earlier. But the company said that it has turned the corner.
The group's total revenues were down by 8.8 percent to A$979.4 million (€651.8m-$779.0m), or by 6.7 percent in constant currencies, in the past financial year, but they were off by only 4.7 percent excluding the divested Tigerlily and Sector 9 operations. Also, Billabong's underlying Ebitda after the removal of one-off items was up by 2.8 percent to A$51.1 million (€34.0m-$40.6m) in constant currencies, although this came in below Billabong's previously forecast range of A$52 million (€34.6m-$41.2m) to A$57 million (€37.9m-$45.2m).
All the improvement took place in the second half of the year, particularly in the Americas and Europe. The gross margin increased by 2.8 percentage points during the period and Ebitda grew by 50.1 percent on a currency-neutral basis.
The extraordinary items that dragged down the net results for the year included impairment charges of A$106 million (€70.5m-$84.3m) relating to goodwill and brands. The company has indeed written off the value of goodwill it attaches to several brands, with RVCA suffering the biggest writedown, cut from a value of A$78.1 million (€52.0m-$62.1m), to zero. Xcel's writedown was A$4.4 million (€2.9m-$3.5m), while A$518,000 (€344,759-$410,877) was removed from the value of the Honolua brand.
The writeoffs were partially offset by a A$48 million (€31.9m-$38.1m) profit on the sale of Tigerlily to Crescent Capital Partners, which happened during the second half of the fiscal year. The swimwear brand, which Billabong had bought for A$5.8 million (€3.8m-$4.6m) in 2007, was among the entities the group wanted to divest as part of its efforts to simplify its business.
Weak sales of swimwear and difficult retail conditions dragged down Billabong's revenues. The chief executive of the company, Neil Fiske, told the Australian Financial Review that it had great success in women's swimwear in the prior year and went back to the same formula this year, “but the market had moved on.” In the U.S., he said, female customers are favoring solid-color swimsuits rather than Billabong's traditional bo-ho prints, while men are opting for more colorful, patterned boardshorts
The company's sales in the Americas region dropped by 10.1 percent to A$432 million (€287.4m-$342.6m), or by 7.5 percent in constant currencies. Excluding the sale of Sector 9, revenues were down by 3.1 percent. However, comparable store sales in the Americas were up by 2.3 percent in constant currencies, with an increase of 32.1 percent in online sales. The gross margin in the Americas was up by 2.9 percentage points to 49.3 percent. Billabong's regional operating profit (Ebitda) before global allocations grew by 44.5 percent.
In Europe, the group recorded a third straight year of improvement, as the regional operating profit before global allocations rose by 8.9 percent to A$17.1 million (€11.4m-$13.6m), also on a constant currency basis, thanks to higher-quality revenues concentrated on the group's three main brands – Billabong, RVCA and Element - while leveraging the global platform of the group. However, the gross margin dipped by 1.2 percentage points to 50.7 percent, negatively impacted by reclassifications, and regional sales declined by 9.3 percent to A$174.8 million (€116.3m-$138.6m), with a 1.6 percent drop in constant currencies, hampered by the late arrival of chillier weather and weakness in the U.K. market following the Brexit vote.
In the second half, European sales grew by 2.8 percent, with an increase of 4.6 percent in the wholesale channel, and the gross margin improved by 0.6 percentage points. At retail, comparable store sales were down by 2.5 percent for the year, but they rose by 0.4 percent excluding the U.K., while e-commerce jumped by 27.5 percent, representing 4 percent of regional sales.
The retail market was said to have been sluggish in Asia-Pacific, which dragged down sales by 7.1 percent, or by 8.0 percent on a constant currency basis. Comparable stores sales were down by 4.1 percent. In Australia, same-store sales were off by 5.0 percent and the group's wholesale business was challenged by consolidation in the retail sector. Furthermore, Billabong admitted that it missed some key trends in the market.
Billabong says it has made progress with its global sourcing adjustments and has streamlined logistics with the closure of its Canadian warehouse and the establishment of consolidation centers in the Far East to ship products directly to large customers. At the same time, the group has been building up distribution and licensed retail stores in more markets. Its omni-channel strategy is to be supported by a new business unit for digital commerce and customer experiences.
Despite weaker sales globally, Fiske believes that Billabong is at a turning point. He mentioned a growing “followership” on social media, up by 42 per cent year-on-year to 37 million followers. He said the strong Ebitda growth in the U.S. and Europe reflect the progress the company is making in implementing its turnaround strategy in all regions.
Looking at the current fiscal year, the company expects market conditions to remain challenging, particularly in Australia, but sees opportunities for sustained earnings growth. It expects Ebitda, excluding significant items, to exceed last year's level of A$51.1 million (€34.0m-$40.6m).
