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.  

 

 

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.

 

 

Well, At Least It Can’t Be Any Worse Next Year; The Trade Show Schedule

The box on this page contains, as most of you are no doubt painfully aware, this year’s trade show schedule. Pretty intimidating. But of course it doesn’t include any key account presentations suppliers might have to make. Or regional shows. Or shoe shows, or bike shows, or toy shows or whatever other shows some suppliers and retailers might need to attend. And when’s that new ASR back to school show? When’s MAGIC? Granted, these aren’t all winter sports shows, but basically all retailers and many suppliers aren’t only in the winter sports business.

  
Show                                                 Date
 
Outdoor Retailer                               January 5-6
NBS                                                    January 10-13
Supershow                                       January 19-23
Winter Sports Market                       January 27-28
SIA                                                      January 29- February 2
ASR                                                    February 2-4
ISPO                                                   February 2-5
NSIA on snow                                  February 7-8
NSIA show                                        February 10-13
SBJ (Japan)                                      February 28-March 3
 
 
Now, I guess no single person actually has to go to all of these. Well, wait a minute. I can think of one guy. The guy who gave me this schedule actually. Maybe I can talk him out of some of his frequent flier miles. He can’t possibly use them all.
 
I started writing this sometime in mid January and, at that point, it was something of an abstraction to me. Now, sitting here in Long Beach for ASR in my hotel room on a Sunday evening in early February, it’s all too real. Tomorrow will be my seventh straight day of trade shows, and I don’t even have to fly to ISPO. I had a moment of clarity as I walked into the ASR show this morning and one of the security guards looked at me and said, “Don’t worry, you’ll get through this.” Apparently, I had a bad case of trade show stare.
 
What the hell happened? How did we find ourselves in this position? What can we do about it? This number of shows of this duration this close together can’t possible be argued to be in the interest of retailers or suppliers.
 
Apportioning Guilt
 
In that great American tradition, I guess we should start by finding somebody to blame. Can’t be our fault we’re in this mess. I know- let’s blame the associations that put on all the shows.
 
I think pointing a finger there is at least partly appropriate. It’s not that all the show producers got together and decided how to make us all broke, jet lagged and exhausted. All of them, I imagine, know in their heart of hearts that there are too many shows, but it’s unlikely that any of them are going to volunteer to close themselves down. Organizations are almost organic in their tendency to survive and grow whether they should or not.
 
In a weaker economy with, as I perceive it, fewer retailers going to fewer shows and staying fewer days, the trade organizations find themselves competing with each other for “market share.” It’s no different than any other industry. In the computer industry, or the snowboard industry for that matter, too many companies fought for market share and many of those companies didn’t make it. But in the process of that fight, the customer got a constantly improving product for less and less money.
 
The customers of trade shows, of course, are the suppliers and, to a lesser extent, the retailers who attend the shows. But it’s the suppliers who pay whoever puts on the show to be there, in addition to costs for building, transporting and staffing their booth. Retailers pay to attend too, but they don’t have to build a booth or pay for space.
 
In most industries, the customers don’t rush to pay for and use more of something than they really need, want, or can afford. In the snowboarding business, where marketing is critical and many companies try to look bigger than they are, competitive pressures can make suppliers show up at trade shows, do more, and stay longer than they really want to. If they aren’t there, or their presentation isn’t what’s expected, the rumors start flying. Let’s call it the lemming affect- we all scurry in the same direction.
 
The longer shows are and the bigger the booths, the more money the organization sponsoring the show makes. Talk about a potential conflict of interest with your customers. Competition among trade show promoters doesn’t seem to result in the trade show customers getting a better, more affordable, product.
 
To the larger players, the cost, hassle, duration and number of trade shows may be a pain in the butt (an expensive pain in the butt), but it doesn’t threaten their ability to compete and survive. For smaller companies, or brands just trying to get off the ground, the need to make their presence felt at shows can be a formidable barrier to success. They just don’t have the people, booths and money to be everywhere.
 
In an industry that could use some fresh new products and brands, that’s too bad.
 
Hey, wait a minute! We can blame the economy and snow conditions. Well, that doesn’t really work. It’s true that if the economy was stronger and it was cold and dumping everywhere we might not complain as much. Cash flow covers up a variety of sins. But it wouldn’t change the existing issues with the trade show schedule.
 
This is inconvenient, but at the end of the day, I’m afraid we’re going to have to look into the mirror and accept some blame ourselves. We are, after all, the ones who show up and nobody exactly puts a gun to our head.
 
SIA and What To Do
 
Vegas is our trade show run by our association. But, as I’ve made clear above, many suppliers and most retailers have trade show responsibilities and concerns that go beyond winter sports. It’s the interplay of all the trade shows and their schedules-not just winter sports- that really creates the problems. SIA can’t fix all those problems. What might they do?
 
SIA has a board of directors run by suppliers who are also Vegas exhibitors. They are responsive to our concerns because they are us, though they may not act as quickly as we’d like. Shows like Vegas get planned and contracted years in advance, so perhaps that’s inevitable. We’re the shareholders, so money SIA takes in goes to programs that help winter sports and, according to SIA, Vegas costs us less than a comparable show put on by a for profit organization. That’s all good.
 
This year in Vegas, the number of buyers was down 10.8 percent. Given the new dates, the economy, and, maybe most importantly, a Superbowl weekend, that wasn’t too surprising. The question for me, however, isn’t how many buyers were registered. What I’d like to know (and I guess we don’t have a way to get this number) is how long they stayed. That is, if you take all the buyers who showed up, and add up the days each stayed, how many was it and how does that compare to previous years?
 
My guess is that the total number of buyer days was down and by more than the number of buyers. That’s fine because this is now a preview show. The first thing I’d like SIA to do is cut the show down to three days. That’s a number most people I spoke with seemed to think was reasonable. I understand we’re down to four days next year from January 24th through the 27th,  I further understand that existing commitments can’t be arbitrarily changed. But three days seems about right. On day four I was there and it was very quiet. On days five, I was gone but I’m told that deserted might not be too strong a term.
 
Does that mean less income for SIA? From both a financial and a management point of view, I expect suppliers would rather pay higher dues than spend two more days in Vegas.
 
Next, let’s see if SIA can merge with Outdoor Retailer. Those discussions are apparently ongoing. When OR’s numbers came out, the gossip was that SIA was in the catbird’s seat for the negotiations. At Vegas, as it became clear that show attendance would be down, the handicappers seemed to give OR the edge. If SIA had been before OR, I’m sure the opposite would have happened.
 
Anyway, I think that merger makes sense though I can imagine that reaching an agreement between a for profit and a non-profit organization will require some creative structuring.
 
OR’s on snow is January 28th and 29th next year. Their show is January 30th through February 2nd. For those who have to be at both, that’s tougher than this year unless through some miracle there’s a merger that’s effective for next year’s shows.
 
Speaking of scheduling, I hope and assume that SIA does everything it can to keep Vegas from overlapping with ISPO and ASR. In fact, ISPO is February 1-4 next year, so that’s an improvement from this year for people who want to attend Vegas and ISPO. ASR, on the other hand, is January 23rd through the 25th, offering a two day overlap with SIA compared to one this year. I’d guess that most suppliers who go to SIA don’t exhibit at ASR as well. But there are a lot of retailers who would want to go to both. They have a problem
In Vegas, I saw bigger booths. Never in my wildest dreams did I imagine I’d see that this year. In this industry, at this stage of its development, are there still companies that think that booth size correlates with sales? Maybe, and I’m only half kidding, SIA should limit booth size. Of course, that would cut into their revenue and be in the interest of the smaller companies…… Personally, I think snowboarding could stand to see success by new, fresh, smaller companies, though a viable financial model is a hard thing to achieve.
 
I just got a phone call from somebody I respect who said he thought Action Sports Retailer would start approaching the snowboard companies. In the far distant past, they all went to ASR anyway. The timing’s more or less the same as Vegas, it’s just three days, most of the retailers will be there as they also tend to do either skate or surf, and in terms of the lifestyle and demographic, snowboarding belongs with skate and surf more than with ski. Interesting idea.
 
At the end of the day, the interest of trade show producers, on the one hand, and suppliers and retailers, on the other, aren’t necessarily the same. Perhaps SIA is an exception, at least in part. Change will happen because enough attendees, at whatever show, make it clear they won’t show up if things don’t change.
 
Wouldn’t it have great if five major companies at SIA had put big tarps on their booths at the end of three days with signs that said, “We’re Done. We’re Gone.”