Billabong and Rip Curl; A Tale of Two Surf Companies and Their Interesting Juxta Positioning

A few weeks ago, you no doubt saw the reports that Billabong (which would mean Oaktree Capital Management– the controlling investor in Billabong) was doing due diligence on Rip Curl as a possible acquisition.  Oaktree, of course, is also a major investor in Quiksilver.

When Oaktree invested in Billabong, there were some rumblings about combining it with Quiksilver, but nothing ever happened.

Meanwhile, we have a bit of information on Rip Curl’s earnings and last week, and Billabong held its annual shareholders meeting where Chairman Ian Pollard and CEO Neil Fiske reviewed the full year results.  Those results were released back in the middle of August and I wrote this article about them.

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Some Insight from Rip Curl

A reader sent me the article below that was published in the Australian on March 12th. I’d love to just provide you with a link, but The Australian would want you to sign up for an account and pay them money. I don’t blame them, but I doubt you’re going to do it and I thought you’d find this interesting.

You may recall that Rip Curl had some hard times and went through a restructuring back in 2013. It worked out, and Rip Curl director Tony Robert’s explanation of why is worth reading. He says in the article that

“…he believed the group had managed to avoid the worst of the global financial crisis and extended downturn in retail conditions because, unlike its bigger rivals, Rip Curl had stuck to its core product lines.”

“We are more of a core surf brand than either key competitors. They both grew bigger than us but in growing bigger they stretched into that non-core market more than we have and we have been very true to our roots in terms of our core products.”

Regular readers know I’m not necessarily against a brand expanding its market reach. But I believe it has to be done thoughtfully because there comes a time when your newly sought after customers may know your brand but not your story- then how are you going to compete? Anyway, the whole article is below.

·      Surfwear retailer Rip Curl valued at AUD310m after share buyback

·      The Australian March 12, 2015 12:00AM Eli Greenblat, Senior Business Reporter

Privately owned global surfwear retailer Rip Curl has been valued at $310 million by directors after the board approved a share buyback form former senior executives no longer with the company.

This compares with a $400m price tag placed on the iconic surfwear group two years ago when it was planning a sale, possibly through an initial public offer, which was later abandoned due to tough market conditions that slashed its earnings along with other brands in the retail category, such as arch rivals Quiksilver and Billabong.

Rip Curl director Tony Roberts told The Australian he believed the group had managed to avoid the worst of the global financial crisis and extended downturn in retail conditions because, unlike its bigger rivals, Rip Curl had stuck to its core product lines.

“We are more of a core surf brand than either key competitors. They both grew bigger than us but in growing bigger they stretched into that non-core market more than we have and we have been very true to our roots in terms of our core products,” Mr. Roberts said.

“For example, our wetsuits are our champion products and have been since the company was founded; probably that’s one reason why the GFC didn’t hit us as hard as it hit them.’’

Mr. Roberts confirmed the positive benefits of a restructure forged two years ago — which initially plunged the group into the red — had flowed through to 2015 with the surfwear retailer on track to reap its third consecutive full-year profit.

“Like a lot of retailers, and we are not a pure retailer, retail conditions are tough and patchy,” he said. “That’s a good way to describe them, both around Australia and globally. But we are performing well and are strong in some markets.”

Documents lodged with the corporate regulator show Rip Curl posted a 63 per cent increase in full-year net profit to $23.32m in the 12 months to June 30, 2014, as revenue increased 7.8 per cent to $429.58m.

“We had a great year last year and we are continuing to be above last year but definitely we are finding the way tough,’’ Mr. Roberts said.

He said the core business, selling surfwear products and apparel through independent surf shops, continued to be strong, while the “aspirational” side of the business — selling to customers who were not surfers but aspired to take up the sport or simply liked to be associated with the sport — had “taken a battering”.

The fresh valuation of $310m on the business came as Rip Curl, founded in the Victorian seaside town of Torquay 45 years ago by business partners Doug “Claw” Warbrick and Brian “Sing Ding” Singer, sought to buy back 1.5 per cent of its issued capital from investors.

It is believed former Rip Curl chairman and current Australia Post boss Ahmed Fahour will hold on to his small parcel of remaining shares after stepping down from the board of the surfwear equipment and apparel group last year and cashing in the majority of his stock for about $3m.

The new share buyback is part of an employee share agreement struck in 2000 that allowed senior executives to invest in the tightly held private company. The buyback will see about 76,000 Rip Curl shares bought back from former executives of the company with a price tag of $63 a share.

With just under five million shares on issue it gives Rip Curl a capitalization of $310m.

Rip Curl is still controlled by founders Mr. Warbrick and Mr. Singer, who jointly own 72 per cent of the company.

The company’s third-biggest shareholder is Francois Payot, who helped create Rip Curl’s European business.

Neither of the founders or Mr. Payot will be selling into the buyback.

Turning to the weakening Australian dollar, which puts stress on Rip Curl’s margins through the higher price of imported goods or imported product components, Mr. Roberts said the impact would need to be addressed, but in the current competitive climate it was difficult to lift prices at the retail level.

Rip Curl Financial Results

Thanks to an alert from a reader, and a follow-up with a journalist who wrote about their results, I was able to come up with a copy of Rip Curl’s financial statements for the year ended June 30. There’s no discussion of operations or breakdown of what’s selling and where like we’d have if they were a public company. But I’ll take what I can get and I thought you’d be interested in their year over year improvement. 

You may remember that the company was for sale earlier this year but was pulled from the market when management decided there was no prospect of getting an offer they considered acceptable.
The numbers, of course, are in Australian dollars.
Total revenue for the year fell 3.4% from $412.5 to $398.3 million. Revenue from the sale of goods was down 3.7% from $406.8 to $391.6 million. Some may ask how I can characterize that as part of an “improvement.” Obviously, it can’t go on forever or there will be no company left. But long term readers know that I think there are a lot of competitive and financial advantages in being focused on managing your distribution and generating operating margin dollars rather than just sales growth. To be clear, I’m not against sales growth, but it should not be your only engine of profit improvement. 
Below is a table from their report that shows some of their expenses during the past two years ended June 30 (in thousands of Australian dollars).  The first column is 2013 and the second 2012.

You can see that they reduced their employee, rental, and selling and marketing expenses in 2013 compared to 2012. They had to take a restructuring charge of $4.5 million last year to do it, but the result is an EBITDA that rose 42% from $26.2 to $37.2 million. Rip Curl’s pretax profit increased from $938,000 in 2012 to about $14 million in 2013.
Now, anybody can slash expenses and do better at the bottom line. For a while. I guess we won’t know until next year how this looks as a more cohesive strategy and whether there’s further pay off.
That’s partly because the restructuring is still going on. Of the $4.5 million provision they took in 2012, they used only $195,000 in that year. $2.7 million was utilized in 2013 and the rest is expected to be used in 2014 as they complete the restructuring. No further charges are anticipated. The restructuring costs were for “…employee termination benefits, exit costs in closing retail stores, write down of assets no longer required and consulting fees.” None paid to me unfortunately.
The balance sheet showed some improvement. The current ratio rose from 1.03 (way, way too low) to 1.93. There was a rise in cash from $10.7 to $14.9 million and a decline in receivables from $85.5 to $77.7 million, which you like to see when sales fall. Inventory went up just a bit from $85.4 to $86.7 million. Overall current assets were down about $3 million to $185 million.
The improvement in the current ratio is largely the result of some reclassification of debt. Loans and borrowings classified as current liabilities fell from $111.2 to $32.1 million. But non-current loans and borrowings rose from $3.2 to $32.1 million. So basically it looks like they pushed their payment schedule out, though total loans and borrowings did decline from $114.3 to $94.8 million.
Total liabilities fell by 12.9% from $198.8 to $173.2 million. The balance sheet improvement plus profit growth means that equity rose from $66.9 million to $86 million. Total debt to equity improved from 2.97 times to 2.01 times.
Rip Curl improved during the year, but it’s still a work in progress. We’ll see what happens next year. I’m getting tired of saying that about industry companies.



What’s Going on With Rip Curl?

I don’t generally have a way to get good information on Rip Curl, but somebody sent me the interview below with Rip Curl co-founder and owner Brian Singer. Why don’t you read it, then I’ve got a comment for you. 

Rip Curl co-founder and owner Brian Singer speaks exclusively to the Surf Coast Times about Rip Curl sale.
Rip Curl will only be sold to a company that looks after brands and the communities in which they reside and to which they are connected, according to one of its owners.
Following the announcement last week that the board of Rip Curl has appointed financial advisors Merrill Lynch to assist the business in exploring opportunities for whole or partial sale, company co-founder and part-owner Brian Singer spoke exclusively to the Surf Coast Times to reassure the community that Rip Curl would only be sold to a company that has the business’ and community’s best interests at heart.
“Merrill Lynch has got a clear objective in this,” he said.
“We’ve told them we’re interested only in a company with a track history of looking after brands and the people involved with them.
“We’ve had a couple of approaches from a couple of companies that have that track record, which led us to appointing Merrill Lynch to explore the opportunities on our behalf.”
Mr. Singer said should the business be sold, he could see no reason as to why the purchaser would change much about how the business is run – including maintaining Rip Curl’s global headquarters in Torquay.
“We see no reason to believe anything would change. If somebody or (a) company purchases it, why would they upset the apple cart? The company was born there (Torquay). Why mess with a formula that’s worked?
“The company’s had a long association with Torquay and the (Easter Rip Curl Pro surfing) competition at Bells Beach. We expect that the building would remain there and the people will remain there.”
Last week, Rip Curl issued a statement saying the company had grown its revenue compared to the year prior – in contrast to general surf industry performance – and the board had appointed Merrill Lynch to assist them in exploring opportunities available as well as assessing the merits of introducing a third-party investor to the group.
“The board recognizes that if any such investment were to occur it would need to be consistent with our objectives of ensuring our company values and brand values are respected – supporting our staff and being in the interests of our shareholders,” the statement read.
The company is valued between $480 million and $500 million and employs 260 staff in Torquay, making it one of the biggest employers on the Surf Coast.
Surf Coast mayor Brian McKiterick said he had spoken to Mr. Singer who had reassured him that the company would continue in Torquay if it were sold.
“He confirmed that they’ve been looking at some companies who made approaches,” Cr McKiterick said.
“He was adamant that it would be business as usual; the Rip Curl Pro would continue at Bells Beach and the business would remain operational in Torquay.
“He said they were very conscious that if it was sold it would have to be to a company who didn’t have a history of breaking up brands. “It’s very welcome news for the town, the surf industry and the shire as a whole.”
What I find intriguing about this is that it’s hard to imagine a buyer or investor paying full price for Rip Curl, or any other company, and agreeing in the contract not to move it or break it up and that it would be “…looking after brands and the people involved…” regardless of what assurances they might give outside of the contract. One has to believe that Merrill Lynch has told Rip Curl’s principals exactly that, as typically investment banks only get paid if the deal closes.   
I personally admire what Mr. Singer is saying and hope he can pull it off. Maybe Rip Curl doesn’t really need a deal or is so attractive that Mr. Singer can be very selective as to who he makes a deal with. If that’s not the case, he’d better lose the rose colored glasses. 



The Possible Rip Curl Deal

A couple of readers were thoughtful enough to send me articles on the possible sale of Rip Curl. You can read them here and here. What’s intriguing from my perspective is that the offers came along at the same time as the conditional TPG offer for Billabong. As you know, that’s in due diligence right now, though there’s no certainty a deal will be made. 

Rip Curl is a private company, but according to one of the articles it earned AUD 7.9 million in the year ended June 30, 2011 after making AUD 15.5 million for the year ended June 30, 2010. No numbers are given for the latest fiscal year results, but we do learn that, “During the 2012 financial year Rip Curl acquired 24 Rip Curl branded and multi-branded stores in Australia and South Africa.”
For all I know, Rip Curl had a spectacular fiscal 2012 and just thought it would be a good time to sell the company, but that seems unlikely given what we know about conditions in Australia. And if I were going to sell, I don’t think I’d look to do it at the same time a direct competitor was up for sale.
Anyway, just thought you might want to see these articles.