Billabong’s Half Year Results- 12/31/06; The Impact of Acquisitions

I love reading Billabong’s reports. No, wait, I hate it. Actually I’m hopelessly conflicted. On the one hand, being traded in Australia, they don’t have to comply with the U. S. Security and Exchange Commissions filing requirements. There’s less small print and less mind numbing and sometimes superfluous information. But there’s also less information in general. Still, though they are allowed to take a bit more, let’s say, poetic license, they do a pretty good job of presenting the critical information.

 
And it’s not like they have anything to hide.
 
In the six months ending December 31, 2006 they had revenue in Australian Dollars of $614 million (all these numbers are in Australian Dollars). Today, February 27th, there are about 1.2712 Australian Dollars to a US Dollar.).
 
Oh, and while I’m thinking about it, here’s the link to the reports themselves in case you want more detail than I can provide here. http://www.billabongbiz.com/investors-reports.php
 
Anyway, that six month revenue number was up 25.3% from $490 million in the six months ending December 31, 2005. I’m just going to refer to those two six months period as 2006 and 2005.
 
2006’s net profit was 90.5 million compared to 79.5 in 2005. Now, EBITDA stands for earnings before interest, taxes, depreciation and amortization. It’s kind of a measure of operating income. Below, I show you their comparative revenues by geographic segment and the EBITDA associated with those segments, along with a couple of other numbers. This table is taken directly from their report. Billabong has allocated its corporate overhead to each of these segments based on sales. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
You can see that Australasia sales grew 13%, the Americas by 31%, Europe by 39% and the rest of the world’s sales fell by 28%, but the last number was small to start with. EBITDA for the whole company was up around 11.2%, though it fell in Australasia by 6.8%. My favorite number in this whole report is the gross margin of 53.7% for 2006, more or less the same as the 53.8% in 2005.
 
Okay, you might wonder, is all this about just growing their existing business? Let’s start to answer that with a little side trip to the balance sheet.
 
It’s a strong balance sheet. Current ratio (current assets/current liabilities- a measure of liquidity and the ability to pay operating expenses) is 3.48. The debt to equity ratio is less than one.
 
Long term debt grew 110% to 332 million. The table above showed interest expense up from 1.7 to 7.7 million, so that’s no surprise. Inventory grew 42%. Property, plant and equipment were up 76% and the ever popular intangible assets grew from 542 to 662 million. The balance sheet’s close relative, the cash flow, shows big increases in receipts from customers and payments to suppliers and employees, and a payment of 23 million for property, plant and equipment. 
 
These balance sheet and cash flow changes don’t occur just because of the sales increase, so it’s off to the footnotes we go to find out what happened.
 
Note 6, Business Combinations, seems a likely candidate for some explanatory information. On November 1, Billabong acquired the Amazon Group, and paid cash of 21.146 million. That’s mighty close to the 23 million payment for property, plant and equipment shown in the cash flow.
 
Amazon, by the way, is a 19 store multi-branded retail business in New Zealand. As of December 31, 2006, Billabong “international retail presence lifted to 144 stores (up from 110 at 30 June 2006) and contributed more than 16% of the Group’s global revenue for the first half of the financial year. Retail EBITDA margins were above those achieved by the Group” (italics added).
 
I’m guessing we can expect more retail growth from Billabong, if only because they say, “Further store openings are planned in the second half in Europe.”
 
We also learn that in October of 2005, they acquired 60% of the assets of Beach Culture International and in November, the Pacific Brands Retail group, “which had been operating Billabong outlet stores under license.” Also during this period, “The previously licensed Billabong operations in Singapore, Malaysia and Indonesia were integrated into the group.”    Just to finish the list, Nixon, acquired in January, 2006, now accounts “for approximately 6% of the Group’s global sales.”
 
You can see where the balance sheet changes came from when you think about the impact of these acquisitions. Some new assets came into the balance sheet. New sales, and new expenses also showed up, in some cases in place of royalty payments. Nixon’s numbers don’t show up in the six month comparison because they were acquired in early 2006. The debt? Well, Billabong had to pay for all this stuff.
 
You also get a glimpse into the company’s strategy. They’ve told us to expect more retail and I wouldn’t be surprised to see more acquisitions. If, like most brands, they are interested in expanding into the broader fashion/apparel market (because how else can they continue to grow?) look for brand extensions, and maybe advertising and promotions that start to position the brand in the broader market.
 
How about B for Billabong? Oh, wait, never mind. Somebody already did that.