Billabong’s Annual Report for Year Ended June 30, 2008

I’m supposed to crunch a bunch of numbers when I do these things, but first I’d like to highlight Billabong’s Operating Principles from its Corporate Governance Statement. There are eight of them and they are:

1.       Lay solid foundations for management and oversight.

2.       Structure the board to add value.

3.       Promote ethical and responsible decision making.
4.       Safeguard integrity in financial reporting.
5.       Make timely and balance disclosure.
6.       Shareholder communication.
7.       Recognize and manage risk.
8.       Remunerate fairly and responsibly.
 
They discuss in some detail how they try to accomplish each of these. You can see the discussion on pages 30-36 of their financial report here. http://www.billabongbiz.com/documents/20090821_Appendix4EFullFinancial_ReportWebsite.pdf
I’m sure it’s not easy, and I imagine you’re always working to get it right, but you can’t go too far wrong in running your business if you follow those eight principles.
 
Net profit fell from $176.4 million to $152.8 million Australian Dollars. That includes a noncash after tax impairment charge of $7.4 million on retail assets (all numbers in this article are in Australian Dollars unless otherwise noted. At June 30, 2009, it took 1.243 Australian Dollars to buy one U.S. Dollar). The profit decline came on a 23.6% increase in total revenue from $1.354 billion to $1.674 billion.
 
Sales grew by 9.1% in constant currency terms (that is, assuming the exchange rate was the same all year). Without the Dakine acquisition, constant currency sales grew only 2.8%. The date of the Sector 9 acquisition was July 1, 2008 so it was included in the results for the whole year. Billabong is projecting net profit after taxes to be flat in the fiscal year ending June 30, 2010. What happened? The recession, particularly in the United States, happened.
 
“Excluding the acquisitions of DaKine and Sector 9, as well as the Quiet Flight retail business which was acquired in June 2008, sales in North America were down approximately 13% in USD terms.” This was the result of generally poor economic conditions and retailers changing their traditional buying patterns to minimize inventory risk, as well as the company’s decision to hold prices.
“…sales to chain retailer Pacific Sunwear continued to decline and accounted for less than 10% of the Group’s sales in the Americas. This followed the Group’s reluctance to endorse Pacific Sunwear’s shift into a value price driven retail offer.”
 
Gross profit margins were 53.2% compared to 54.9% the previous year. Their ability to hold the margin decline to 1.7% reflects the company’s strategic decision to minimize discounting with the goal of maintaining brand equity. What discounting they did was mostly in the U.S. The margin decline also reflects Dakine’s and Sector 9’s use of third party distributors.
 
The sales increase means that gross margin dollars earned rose from $746 million to $894 million, but increasing expenses below this line meant that pretax profit fell 16% from $246 to $206 million. Selling, general and administrative expenses rose $126 million, or 31.6%, from $399 to $525 million. $75 million of that increase was employee benefit expense. The Sector 9 and Dakine acquisitions were going to increase those expenses. As percentage of total revenues, it rose from 29.5% to 31.4%.
 
Company owned retail was responsible for approximately 21% of revenue during the year. EBITDA (earnings before interest, taxes, depreciation and amortization) for the retail sector fell from 10% to 10.2% “…due to a marked decline in comparative store sales from October 2008 to the end of the financial year.” At year end, Billabong had 335 company owned stores.
 
The most important thing that happened over on the balance sheet was the raising of $290.8 million in new equity (before transaction costs) last May. As a result, net debt decreased by 36.6% to $225 million. Interest coverage is 7.1 times, down from 11.1 the previous year.
 
The new capital improved Billabong’s current ratio from 3.07 to 3.30, and its total liabilities to equity improved from 1.04 times to 0.89. It’s an especially good time to strengthen your balance sheet.
 
Intangible assets rose from $800 million to $1 billion, representing 45% of their total assets. That includes a $117 million increase in goodwill mostly, I expect, as a result of the Sector 9 and Dakine acquisitions.
 
During the conference call on the annual report, management noted that they were dealing with 10% less accounts than in the previous year because the account was no longer in business or due to credit risk. Receivables over six months past due have risen from $11 to $21 million. They noted that they were working hard on collections, and had slowed their payments to suppliers to compensate for their customers not paying them.
 
They indicated that they expected to see some product shortages during the holiday season due to retailer caution in placing orders. They have been meeting with retailers to discuss the product cycle and make it clear that while Billabong will do everything it can to respond to retailer and customer requirements, production times (especially for technical, seasonal products) can only be reduced so much.
 
Billabong has done a lot of things right. They have bought good brands (the only kind to own these days) at fair prices. They have managed their inventory and expenses in response to economic conditions. They have resisted discounting to maintain brand image and retailer support. They are reducing sales to customers who can’t support that brand image and the pricing it implies. They have raised capital to build their balance sheet. The decline in income (they still had a 15% return on equity) is in line to better than what other brands are experiencing and they are certainly well positioned for a recovery, though of course it depends on what form that recovery takes.
 
But you know what? The most important thing I’ve talked about in this article is probably those eight principals. If you do that, the rest will probably fall into place.