Well, the press release was back on June 3rd. And the sale of Sector 9 was, I guess, a week ago. Happily, it’s not my job to be timely, but to give you things to think about with the goal of maybe helping you do better business.
So let’s think about Billabong. Back when CEO Neil Fiske took over, there was a decision early on to focus on their big three brands- Billabong, Element and RVCA. Good decision, I thought. Most recently, they’ve sold Sector 9 for US $12 million. As I’ve written previously, I expect the sale of additional brands. Some of them may be small enough that a formal announcement of the sale won’t be required. Maybe they are already gone.
I’m kind of guessing that $12 million is around one times sales. To nobody’s surprise, that’s less than Billabong paid for the brand but given the (inevitable) decline in the long board market, probably a reasonable price.
I’m sure Neil wishes he could have sold Sector 9 sooner for a higher price, but he’s kind of had his hands full. And it takes longer to market a company and complete a sale than you might think. Even though they’ve sold it for less than they paid, it’s won’t have much of an impact on their fiscal 2017 financial results, according to the press release. Remember Billabong wrote down a lot of its asset values in past periods.
So why is this, and the future brand sales I expect, a good thing? First, they can use the cash. As Billabong has noted, they are funding their marketing efforts from expense reductions. Any balance sheet building they can do that gives them more financial flexibility is a good thing. Second, Billabong is really an apparel company. Hard goods aren’t their focus. Yes, I know they own Element and I’m sure they are happy to sell all the decks they can, but from the day Billabong bought it, I’ve basically seen it as an apparel play.
Third, they’ve decided to focus on their big three and anything else is a distraction at several levels. Growing small brands is hard right now. It also takes resources and focus away from their big bets. We’re not just talking about Sector 9 here. Add up all the time, attention and cash their brands other than Billabong, Element, and RVCA require and I think you’ve got a significant number.
Also, remember that Billabong is going through a complete restructuring and revamping of its organization, systems, and logistics function. From my own experience, knowledge of Billabong, and the discussion of this in their filings and conference calls, “all-encompassing” may not be a strong enough term. And of course they are doing it while running the business. Probably a little like juggling while you drive a car.
Neil has told us that the process is taking longer than they initially thought. But I’m guessing that the benefits that Billabong can expect are going to end up being greater than what he’s announced. Under promising and over delivering is always the way to go.
And anyway, it doesn’t matter how long it takes. It has to happen. It’s a competitive necessity. Notice I didn’t say competitive advantage.
Meanwhile, if you are doing all this new integration stuff, which brand is it easier to do it for? Billabong or Sector 9? I don’t know the specifics of what they are doing, but in general it’s easier to do for fewer brands and the difference between doing it for a $12 million brand and a $120 million brand may not be that great. If that’s true, it’s another reason to focus on the big three.
I wonder if this isn’t another factor motivating them to sell small businesses that they see as peripheral. If I were Neil, I might have made the decision as to which businesses I was selling early on and I might have tended to isolate them from the whole restructuring process.
Now on to the press release. You can go to this page and open it. It’s entitled, “Billabong Widens Lead in Core Surf Sector.” Well, that’s certainly good news. And it’s generally consistent with what I’ve heard anecdotally, though I’m cautious when something like that starts to feel like “ACCEPTED COMMON KNOWLEDGE.”
Still, I’ve got some quibbles with this press release.
I’ll start by noting in passing that Billabong really ought to be thanking Quiksilver for the door (really, really, big door) that it left open for Billabong, but I don’t suppose that’s the kind of thing you put in a press release.
Here’s how the press release starts.
“Billabong International Limited’s (“Billabong”, “Company” or, together with its subsidiaries, the “Group”) largest brand has widened its lead in the core surf sector in the United States and cemented its position as the number one brand in Australia based on retailer feedback.”
Let’s note first that this statement refers just to the Billabong brand- not the whole company. They make that statement based on an “…Independent analysis of 150 “core” action sports retail stores across the United States conducted by Action Watch shows brand Billabong dominated the sector in 2015 for both Men’s and Women’s apparel.”
I really like what Action Watch does and think their data is valuable and unique. But it’s only 150 stores. I’m inclined to want to know what percentage of the Billabong brand’s U.S. revenues come from these shops. I’m also curious what the word “dominated” means. Can the results in those 150 shops reasonable be construed to represent the whole U.S. market?
The press release goes on:
“Action Watch’s Cary Allington confirmed to industry publication Shop-Eat-Surf that Billabong Men’s and Boys’ is the number one brand among the ActionWatch’s panel of core specialty stores in terms of market share and widened its lead in 2015. The same data set showed Billabong was also the only top tier surf brand to grow in 2015 in the specialty channel, including opening up a clear gap in the critical board shorts category.”
So, uh, this isn’t based on Billabong’s analysis of the Action Watch numbers, but on an article in Shop-Eat-Surf reporting those numbers? And whatever those numbers were, Billabong didn’t think they should report them in the press release? That’s interesting.
Look, I think Billabong is doing well. But I’m puzzled that they’d word the press release the way they did. If this news is so good, and worthy of a press release, why didn’t they give us some details?
Instead, they make it sound a little like puffery (A U.S. legal concept. “…an exaggeration or statement that no reasonable person would take as factual.”)
I don’t think it is. Well, not too much anyway. But it’s too bad that a potentially very positive and momentum building announcement leaves me skeptical as to what it really means and maybe more cautious about how Billabong is doing than I was before I read it.