Billabong: Light at the End of the Tunnel

At the annual meeting on December 10, Billabong’s Chairman, Ian Pollard, and new CEO Neil Fiske talked to shareholders. Ian talked about what the last year plus had been like and Neil outlined his ideas and strategies for Billabong going forward. You can see their presentations here if you want to. At the moment, it’s the first item under “Recent News.” 

Though I’ll get to it, it wasn’t Neil’s strategic presentation and plan going forward that I found most interesting. Honestly, there wasn’t much in it that hadn’t been mentioned before or that was, at least to me, unexpected.
 
But in both presentations there was an honesty, a focus, a clarity of purpose that has been missing from Billabong presentations over the last year or two as they’ve struggled to stabilize the company and deal with competing proposals.
 
There was a palpable sense of relief in Ian’s remarks. As he put it, “It is also the first time in at least 12 months where the company’s future success will be firmly in the hands of management and their ability to achieve their business goals – rather than the Company’s need to respond to change of control or refinancing proposals.”
 
He went on to say:
 
“These proposals inhibited reform in two ways:
·         First by dominating the attention of both the Board and management.
·         Secondly, potential bidders would only remain engaged if major strategic changes were put on hold.”
 
“The consequent delays in strategic change impacted the Company’s overall financial
performance.”
 
I have previously expressed some surprise that more of former CEO Inman’s plan hadn’t been implemented while she was there and since she left. Chairman Pollard is telling us why that is. The bidders didn’t want it happening until they were on board because, I guess, they didn’t want what they were investing in to change without their involvement. Fair enough, but it seems like some of her proposals (a number of which are also in Neil’s plan) were going to make sense no matter who was in charge, and I’m sorry they couldn’t make some progress sooner.
 
So are Billabong’s board and management I’m sure. Must have been frustrating as hell to know what you needed to do, have a plan to do it, be ready to do it, and not be able to do it. As Ian put it, “Throughout this period a brand that has been built on some of the simplest joys of life has been mired in high profile corporate transactions of extreme complexity.”
 
“Mired.”  Yup, pretty much sums it up.
 
CEO Neil Fiske practically had me sold as soon as he stopped going through his background and said:
 
“A good turnaround has three components:
·         A clear strategy
·         A management team that can execute on that strategy
·         A capital structure that provides stability and room to reshape the business.”
 
He’s right. Or at least that’s been my experience as well. It’s important for you to realize that having two out of three isn’t enough; it doesn’t let you get two thirds of the work done. There’s damned little you can do without all three.
 
This attitude- that the worst is behind them, they can focus on building the business, work on positive things, maybe even have some fun- is as important as Neil’s three components. Don’t worry, I haven’t gone completely touchy feely on you. We’ll get into the strategy next. There’s a lot of work to do and no guarantee of success. It’s a turnaround. Still, I can’t over emphasize the importance of this apparent attitude adjustment (which needs to permeate the whole organization) if they are going to succeed.
 
They are going to focus and simplify. As Neil puts it:
 
“We have been trying to do too many things – and none of them particularly well. Building global brands takes one skill set. Running regional multi-brand retail is something totally different. And being a pure play multi-brand e-commerce business is another thing altogether. Then multiply that complexity by a regionalized organization structure with independent decision making and different operating infrastructures. As complexity grew, we lost focus. We confused the organization.”
 
You’ll notice similarities to what Quiksilver is doing. And to K2’s reorganization a couple of years ago. And for that matter to Microsoft’s “One Microsoft” strategy they announced this past July.
 
When sales increases are harder to come by, operating in independent silos is just too expensive. If you want sales increases, you better put your best foot forward. “Fewer, bigger, better” is how Neil puts it.
 
Neil and his team have determined that Billabong is about “building powerful global brands.” They are going to divide all their brands into the big three (Billabong, Element and RVCA) and the other “emerging” brands. There will be specific strategies for each brand based on its potential and market position. It sound like there may be some brands among the emerging brands sold if they don’t see a strong competitive position and bright future for them.
 
They will differentiate brands partly by using “the creativity and uniqueness of the brand Founders” and will “focus on the authentic core youth consumer.”
 
To me, that implies a certain period of retrenchment where they will “…push the uniqueness of each brand by fostering creative and cultural environments with distinctive brand DNA and vivid personalities.” I wonder (and I’ve said this before, oh, dozens of times at this point) if that focus is consistent with the requirements of being a public company. Where and how do they grow each brand, but retain its uniqueness- its competitive strength if you will. I guess they’re figuring that out.
 
As he moves on to talk about a product, Neil says we can expect at least a 25% reduction in the number of styles. He notes that Billabong “…lacks clear merchandising strategies. We have great design and terrific products. But we don’t have great merchandise planning, buying, allocating and inventory management.” Obviously, there are some systems issues there that need to be addressed. It will be made easier both by simplifying the organization and cutting the number of styles.
 
What was most interesting in the discussion of marketing was that Billabong had tended to fund each brand at the same level (by which I think they mean a similar percentage of sales). They are changing that and will put more resources towards brands where they think they can get a better return. Imagine that.
 
It makes it seem even more likely to me that some additional brands might be sold. Weaker brands are not going to perform better when their marketing spend is reduced.
 
I also like the idea that they are going to “…have an integrated marketing calendar that lays out the major story and key items each month – and then aligning all our marketing and our depth of buy against those big stories. Windows. Print ads. Digital media. Front Tables. Everything converges on and amplifies the big story.”
 
That seems kind of obvious when you read it, but it’s damned hard to do when you have “…a regionalized organization structure with independent decision making and different operating infrastructures.” That’s part of why the structure is changing.
 
The marketing “war chest” is going to be funded by cuts in other G&A expenses.
 
These days, no discussion of marketing strategy is complete if you don’t work in the term “Omni-Channel” and low and behold, here it is as point IV in Neil’s presentation. He notes that “The best customers shop in all our channels – digital, our own retail stores, and wholesale. And they are worth 3-4 times the value of a traditional single channel customer.” I haven’t heard that stat before, but it’s pretty compelling.
 
He goes on, “One of our priority initiatives, therefore, is to build our mono-brand direct to consumer platform – which integrates digital, retail, and CRM. That Direct to Consumer segment should grow to a substantial part of our sales over the next five years. Again, we believe this can be done in a way that grows consumption and market share – and is complementary to our wholesale strategy.”
 
Every company wants to do this. And if you can’t, all you end up with is a really expensive digital presence that potentially cannibalizes your brick and mortar stores. Why is Billabong going to be better at this than its competitors? I think Neil would say because of the quality of their brands, the unique focus each brand is going to have, and the simplification of the organization. Billabong’s multiple ecommerce platforms around the world are going to be unified.
 
You’re going to see a supply chain with fewer, bigger, suppliers. Neil hopes to increase inventory turns from 2.4 to 4.0 times. That will take a couple of years, but will free up a bunch of cash and reduce other costs. That includes distribution and logistics costs, which Neil sees as being 50 to 100 basis points higher than they should be.
 
We are going to see a companywide reorganization rolled out at the end of January or early February. Hardly a surprise given what’s been described above. There will also be some improvements in financial discipline- also not much of a surprise. I can guarantee you won’t increase your inventory turns from 2.4 to 4 without some.
 
What we have here is a series of solid initiatives that are similar to what a lot of other companies in a lot of other industries are doing given the economy we’re all operating in. Wish Billabong could have gotten started sooner, but they’ve told us why they couldn’t.
 
I think we’ll see sales of some additional brands because of the focus on prioritizing the brands with the most potential (and some limits on financial resources). Reading between the lines, we’re also going to see continuing deemphasize on retail, because Billabong’s focus is on “building powerful global brands.” West 49 is about to be gone. My guess is that every store decision will now be based on how it supports brand building. If it doesn’t make money and it doesn’t make the brands look good, it will be closed. How does the omni-channel strategy change how many stores they need and where they need them? Probably a good question for any brand.
 
As Neil says, this is going to take some time. One of the first signs of success I’ll be looking for is an improvement in the gross margin and operating income even if sales don’t rise much, or even decline. I’ll also be curious to see how he recruits for the management team. Remember when Gary Schoenfeld came in as PacSun’s CEO he essentially rebuilt the whole senior management? It was months to accomplish and longer to get them working well with the organization.
 
Feels like a good start. Now all they have to do is implement.