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Billabong: Restructuring News and Sale of West 49

I got four pieces of information for you. If you’d prefer, you can read Billabong’s announcement which came out Monday their time. It’s the first item under “Recent News.” 

The most interesting, which they leave for last, is the pending sale of West 49 to YM Inc., “a leading fashion retailer with a number of highly successful stores including Stitches, Urban Planet, Sirens, Siblings, Suzy Shier and Bluenotes.” They are buying 92 stores for a total of between $9 and $11 million Canadian dollars. Billabong will keep six Billabong and two Element stores in Canada.
 
I recommend you take a few minutes and look over YM’s web site. They say what I think are a number of insightful things about operating and their target market. 
 
YM and Billabong also signed “…an initial two year supply agreement” under which Billabong brands will continue to be sold in West 49 stores. We don’t get any specifics about which brands or how much. At the end of the day, I assume that YM, like any retailer, will choose to carry the brands that sell best at good margins.
 
You will remember that Billabong bought West 49 in the summer of 2010 for $83 million Canadian dollars. At the time, West 49 had 140 store fronts. I can’t tell what the West 49 assets are presently carried at on Billabong’s balance sheet, so I don’t know what the accounting impact of this deal on the income statement will be. But its cash positive and, most importantly, it gets Billabong out from under the lease obligations of those 92 stores. West 49 will now be strictly a wholesale customer, so some margin and revenue goes away, but so do all the operating expenses.
 
We also learn that US$300 million of the previously announced US$360 million 6 year senior secured term loan was received and used pay off the US$294 million term loan and associated interest and fees previously received from Altamont. That gets Altamont out of the picture. 
 
Third, we learn that the seven person board of directors will consist of independent directors Sally Pitkin, Ian Pollard and Howard Mowlem. “The other directors are founder and substantial shareholder Gordon Merchant, Jason Mozingo (nominated by Centerbridge), Matt Wilson (nominated by Oaktree), and CEO Neil Fiske.” The two directors who had represented Altamont are out of there.
 
Finally, we’re told that “Billabong continues to work with GE Capital to provide an asset-based multi-currency revolving credit facility of up to US$100 million. This has been reduced from up to US$140 million in part due to the sale of West 49.”
 
That it’s being reduced because the sale of West 49 reduces their needs make sense. But that’s only “part” of the reason it’s being reduced and we don’t know what the other reason or reasons might be. I’m kind of interested to see that it isn’t done yet and would love to ask why.
 
Billabong’s restructuring and refinancing continues. I’m happy to see it moving forward, but I’m still waiting to understand the results of the customer and brand positioning analysis that started under former CEO Launa Inman. They can restructure and cut expenses till the cows come home, but customers still have to like the brands.

 

 

Billabong Purchase of West 49 and Implications for the Industry- Questions, Questions, Questions

Billabong’s acquisition of West 49 was the biggest retail expansion by a brand so far. We’ll see more brands buying more retailers and opening more stores. This article is about why. What are the motivations and the industry impacts? And what are some of the conflicts and contradictions companies will face as they pursue this strategy? Some of this is a bit repetitive of stuff I’ve written before, but we’re really talking strategy and industry evolution at the highest level. I want to tie it all together.

A Little History

Years ago we all knew, and I and lots of others wrote, that we didn’t need any more retailers (not just in action sports). Especially as the internet came into its own, consumers had more choices of product and place to buy than could possibly be useful. That didn’t mean a new store by brand x couldn’t succeed- we were all giddy with rising income and asset values after all- but if it wasn’t opened, no consumer was likely to care.
 
Then came the recession. If things are improving, we’re hardly out of the woods yet. U.S. Unemployment is 9.6% (a lot higher if you count people who have given up looking). The creation of 150,000 jobs in October was hailed as a big success, but that’s not much more than the number we need to keep up with population growth. Foreclosures and housing prices are still a major burden. Banks are cautious about their lending (we want them to be, I think- isn’t not being cautious part of what got us into this mess in the first place?), and consumers are still paying down debt and saving (again, hard to say that’s a bad thing).
 
Wish we were doing as well in the U.S. as in Canada. Well, this is for a Canadian publication after all and there’s nothing like a little ass kissing directed at the editor to minimize requests for rewrites.
 
Anyway, retailers across the whole economy closed when the recession hit, and the process is still continuing. We are all intimately familiar with the impact on action sports core stores. I’m sure everybody reading this knows a favorite store that’s gone away or is struggling. West 49’s public financials made it very clear it had some issues before it was acquired, and I expect its problems were part of the motivation for the deal.
 
Point one, then, is that if the economy is improving, we’re still struggling, at least south of the border.
 
Point two is that the role and numbers of “core” retailers is changing. Use to be that we thought anybody who was an independent retailer and carried hard goods was a “core” shop. Turns out we were wrong. A real core shop caters to participants and serious lifestylers who are not so price sensitive, carries the newest and best product, and is owned and staffed by people who are part of the culture and are participants themselves.
 
What does a core shop have to do to be successful?   My list is below.
 
Attributes of a Successful Core Retailer
 
By the way, I first created this list (slightly modified here) so long ago that I can’t even find it on my web site.
 
·         Good management accounting systems that they actually maintain and use
·         A quality internet presence
·         Active participant in its community
·         Sales volume high enough to make their shop financially viable (duh!)
·         A career path that helps them keep good employees for at least a while
·         Willingness to carry and promote new brands
·         They excel at selling and servicing hard goods.
 
The Rationale for More Stores
 
Things are better in Canada, so maybe it’s easier to justify new retailers there than in the U.S. Still, looking at the overall economic picture, and what I’d characterize as the apparent lack of consistent, real, growth in skate/snow/surf participation, one has to wonder why more stores make sense.
 
Answer? They probably don’t overall. But of course each company does what it perceives to be in its own best interest at the time. Especially as a public company, you’ve got to find ways to grow and become more profitable. Your choices of how you might grow haven’t changed in a long, long time.
 
You can sell more to existing independent retailers. Well, the action sports market doesn’t quite offer the organic growth potential it used to. There are fewer of those retailers, and the growth you can expect from them becomes less and less significant as a company gets bigger and bigger.
 
You can expand your distribution. I think at this point we all understand that there are limits to that unless you’re fundamentally changing your brand’s positioning- not an easy thing to do.
 
You can make acquisitions, and we’ve seen a lot of that from Billabong and others. I expect we’ll see more.
 
You can try and expand your brand franchise into other product areas. Quiksilver’s women’s brand comes to mind. You can add product under an existing brand like Electric (owned by Volcom) is doing with apparel. You can start a new brand. All of these have costs and risks as well as potential that aren’t the subject of this article.
 
You can run your business better, trying to improve your inventory management and controlling expenses in hopes of improving the bottom line even with limited sales increases. Pretty much everybody who’s made it through the recession has done and is doing this.
 
And finally, you can go vertical and, as part of that, open or acquire retail stores. Why does that appear to be so attractive right now? That question brings us to the list below. The points on the list are not of my creation. They are taken from conference calls, publications, and conversations.
 
Why Retail Locations?
·         Capture the middleman’s margin dollars.
·         Better control of our brand and image. Improving the consumer experience with the brand.
·         As a response to fast fashion; we can get new product into retail faster and we don’t have to convince some buyer to order it.
·         Collection issues and uncertainty as to the future of small, independent retailers.
·         We don’t see better growth opportunities (okay, nobody exactly said it quite that directly).
·         Ability to merchandise their offerings better across the complete product line.
·         Leverage with landlords, infrastructure and vendors.
·         As a competitive response.
 
I am not saying these points are all valid for any brand that opens retail stores- only that they have the potential to be. Or that brands going into retail believe they are. One of the things I wrote when the Billabong/West 49 deal was announced was that I thought Billabong might find integrating a 130 or so chain with some apparent financial difficulties more challenging than integrating a brand (like their previous acquisitions) that was growing, profitable, and well managed. As far as I can tell, Billabong really has left their acquired brands more or less alone. I wonder if they can do that with West 49.
 
The Strategic Conundrum
 
I’ll get to the tactical issues for brands building its retail base below. Right now, I want to take a few paragraphs to talk about how this retail focus might fit into the industry’s general evolution. It’s possible I’ve got more questions than answers, but it’s clearly something anybody running a brand or a retailer needs to be thinking about.
 
And maybe the distinction between brand and retailer is a good place to start.  Action sports began as brands selling to core retailers. Those sales expanded into broader distribution. Now brands are also selling their own (and other) brands direct to consumer through both the internet and their own stores. I expect this to continue to grow.  Brands becoming retailers, retailers becoming brands. The impact?
 
If you’re a small independent retailer, go back and read the box with attributes of a successful core retailer. If you read between the lines, you have figured out that you have to be a brand too- but a local brand in your community, not a national one.
 
But maybe I’ve spoken too quickly. There’s the internet after all. Think of a shop like Evo in Seattle. It’s got a successful retail store, but just one. Where it seems to be growing is with its internet presence. And it’s not the only one. As a brick and mortar retailer, it’s a local brand. With its internet sales exceeding its store sales is it a national brand? Can it be? Will it start selling Evo branded product to other retailers?
 
Next, it seems clear that the brand retail explosion is pretty much ending any stigma there was to being in a mall. This is working particularly well for Zumiez which, with its hard goods and action sports lifestyle committed employees, looks and tries to act an awful lot like a core shop. It’s almost like brands open retail locations in malls are validating Zumiez’s business model, but can’t match Zumiez’s history and focus. Maybe Billabong thinks West 49 can have a similar positioning and advantages in Canada.   It will be interesting to watch Zumiez does in Canada now that West 49 is part of Billabong.
 
Now, let’s talk about the action sports business. What is that exactly? For one thing, it’s a term that’s been thrown around out of habit even as the industry has evolved almost beyond recognition. Try this: The action sports industry is that group of brands and retailers who develop and sell product to participants in the sports of snowboarding, skateboarding, surfing, and wakeboarding, (arguments can be made to add others) and to a close circle of non-participants actively involved in the sports and lifestyles.
 
If you accept my definition, it becomes pretty clear that retail building brands aren’t just after the action sports market. It’s just not a big enough market given their existing size and objectives. I came up with the “lifestyle sports fashion business,” as a description of the market they are focused on growing in, but I’m not sure that captures it either. Maybe that’s why we keep using terms like “action sports” and “core.” We have no idea what to replace them with. Maybe youth culture is the correct term.
 
It’s no secret that this growth and industry evolution means we’re more fashion and non-participant oriented in our sales. I don’t say that critically- it’s kind of inevitable. The retail blossoming we’re experiencing puts companies like Billabong into a whole new market. I’ll say it again- it’s where they have to go to grow, and they face a whole new set of competitors as they go there.
 
What Will Billabong Do?
 
There are a number of issues Billabong will have to address as they integrate West 49. But I hasten to mention that any company with multiple brands and a retail presence will face similar issues.
 
How much of their owned brands will they sell in West 49 stores? Billabong’s Paul Naude suggested it might get up to 60% eventually. West 49, of course, was already a customer of Billabong’s. But given the higher margins and the leverage they get, Billabong would like to increase it. Go back and review my “Why Retail Locations” list.   In a perfect world, where it wouldn’t cost them any sales, they’d probably love to make West 49 stores all Billabong and its owned brands. With brands including Nixon, Element, Sector 9, Dakine, Von Zipper. Xcel and others, they certainly have the product to increase the proportion sold in West 49.
 
Assuming for a minute that Billabong wants to keep essentially the same levels of total inventory in West 49 stores (subject to any changes in sales levels), do they bring in more Dakine backpacks and reduce or eliminate Hurley, just to pick a brand? There are also Element backpacks. And Billabong backpacks. And Vans. Etc.
 
Billabong’s strict financial and operational bias will be to replace Vans, Hurley and other backpacks with its own brands. They can’t, however, make that decision without reference to West 49s customers and its market position. Do customers come in asking for Hurley backpacks and will they care if they end up with an Element one instead?
 
Would Billabong be okay with selling a bit less at West 49 stores if they got higher margins because of their owner brands?
If Billabong sells more of its owned brands in these stores, it will have to carry and sell less of somebody’s brand. Who’s? How much less? Will the customers care?
 
Billabong believes it can better merchandise it product and position its brands through its own retail because it can present the whole line the way it wants. Doesn’t Hurley, to continue with the same example, feel the same way?
 
When Billabong, or another brand, begins to control how much of which product is carried in a retail store, what happens to the manager/owner’s ability to change product/brands in response to changing local conditions?
 
So, if you’re Hurley and Billabong is cutting back its purchases of backpacks for the West 49 stores, how far do they have to cut it back before you begin to feel like your product is an afterthought and that there’s not enough product and selection of product to represent the brand well?
 
Might not Hurley (owned by Nike) take a look at the situation not just in terms of backpacks, but strategically in terms of the overall impact of brand owned retailers on its brand? One conclusion they could reach is that the distinction between brands and retail is disappearing and that competitive conditions require them to control more of their own retail. Go look at the list of reasons a brand might want to be in retail again. Given the advantages listed there, how can a big brand not do some of its own retail?
 
How about the implications for retail chains? If you’re going to have to compete with vertical brands with the advantages I’ve outlined. You’d better have a hell of a market position. I wouldn’t be surprised to see some more chains up for sale as this all evolves. And I wouldn’t be surprised to see some competition for buying them. The economics are very compelling. They might be equally compelling when it comes to buying a brand that would fit into your retail.
 
What would I do if I were Billabong? I’ve be crunching my numbers, looking at margins and sell through for various brands in West 49. I’d be talking about Billabong owned brands and what are possible substitutes for other brands. I think I’d probably conclude that I don’t want to carry brands that I can’t merchandise correctly. My bias would be to eliminate some brands rather than to inefficiently cut back on a lot of them.
 
Conclusion
 
Billabong’s purchase of West 49 feels like it might be the formal announcement of a new industry consolidation based on vertical integration. The competitive dynamics associated with this out in the larger world of sports fashion lifestyle product are driving it. As I said, I don’t like that term. But I don’t have a better one and I have to draw a distinction between the action sports market as I defined it above and this much, much larger market that the big, public, multi-brand companies are focused on.
 
The break between the two seems so fundamental that I can almost see a big gap between them. Maybe that’s where the “youth culture market” fits in. If you are in what I’ve defined as the action sports market, forget about what vertical brands are doing. If you are one of those vertical brands, you aren’t going to ignore the “core” market, but you are going to get a declining piece of your revenue and profitability from it and you will focus accordingly.

 

 

Billabong Acquiring West 49

Or Maybe Zumiez is Going to Buy Them
 
Oh, and Billabong Bought RVCA
 
Okay, Zumiez is Out of the Picture
 
Anyway, This is All Really Interesting- and Related
 
As you know, Billabong made an offer on June 30 to acquire the Canadian action sports retailer West 49. Only July 9th, Zumiez said that, subject to a satisfactory due diligence review, it would be prepared to make a higher offer. On the 14th, they said, “Never mind.” What we’ve got work with here are some of Billabong’s comments about retail in its last half yearly review conference call, it’s conference call and presentation on the proposed West 49 acquisition, West 49’s financial results for the quarter ended May 1 and the associated conference call, Zumiez’s announcement that they were prepared to beat Billabong’s offer (and then that they weren’t) and their announcement that they were opening some stores in Canada. Meanwhile as I was writing this, Billabong announced it had bought RVCA, which fits nicely in the discussion below on Billabong’s strategy and retail positioning.
 
Damn, I feel like a kid in a candy store. Although I have to admit that having Zumiez come and go and RVCA bought since I started researching this article has made for an interesting editorial challenge.
 
This analysis will be strategic in nature. Though obviously we’ll discuss the numbers and specifics of the offer what’s more interesting to me is what this says about the retail environment, the evolution of the industry and the shape that larger, successful industry companies are going to take as they continue to expand into the broader market. Let’s start by looking at the players.
 
West 49
The chain is a Canadian action sport retailer founded in 1995 by current CEO Sam Baio. They’ve got 138 mostly mall based stores (not unlike Zumiez- the plot thickens). There are 81 West 49 stores. They also have five Billabong stores.
 
The remaining 52 stores include 19 under the D-Tox label, 16 Off the Wall Stores, and 17 Amnesia store. Billabong’s presentation on this deal has some info on page describing how these other brands are positioned. You can see the complete presentation here and I suggest you take a minute to do that. It’s just 12 Power Point slides long and won’t take long.
 
Many of these other brands (Most? I’m not sure.) were acquired by acquisition. More brands, of course, means more marketing expense and some complexities in operating around, for example, inventory purchasing and management. Keep that in mind as we review briefly West 49’s recent financial results, which include all 138 stores. I wonder if Billabong would keep all those other store brands. Would Zumiez have renamed all 138 stores as Zumiez?
 
In the quarter ended May 1, 2010 West 49 lost $2.6 million Canadian on sales of $40.9 million. This was very close to the same sales and loss they experienced in the same quarter one year ago. Comparable store sales were down $2.6% (3% for West 49 branded stores). CEO Baio cited pressures on margins as a result of the competitive landscape and said they were still waiting for consumer confidence to return. As you’ve probably noted, other retailers and brands have shown some almost inevitable rebound in their quarterly results as the very difficult conditions of a year ago have eased. West 49 did not and that was some cause for concern.
 
The balance showed $0.00 in cash and cash equivalents compared to $7.9 million on January 30, 2010. Obviously, no business operates without some cash to pay its ongoing bills. For all I know, the day after this balance sheet they drew down an available line of credit in the ordinary course of business and the balance showed some cash again. But I’d note that the current ratio at 1.05 was barely over one.
 
We didn’t get any more information on their financial condition because at the end of the conference call, there were no questions. That’s because the stock is pretty closely held (note that Billabong already has 56% of the voting shares agreeing to the transaction) and I guess the analysts don’t follow it. I certainly don’t have the information to conclude that West 49 has serious financial or liquidity issues.  But the information I do have makes me think that concerns in those areas could be a factor in their being prepared to sell the business now.
 
Billabong’s Retail Strategy
This isn’t a new topic for me. I wrote about their half yearly review and spend a lot of time on their retail strategy. See that here. http://www.jeffharbaugh.com/2010/02/25/billabongs-semi-annual-report/. At least scan through it and read the quotes about their retail strategy. Here’s what I said early in that article.
 
“Billabong CEO Derek O’Neill is clear in the conference call that we shouldn’t ‘…expect for retail to suddenly become a huge component of our business but it’s clear we will continue to identify opportunities to get our product to market where required.’ I read a little bit of ambiguity as to Billabong’s retail strategy into that statement, or maybe a little understandable reluctance to state what they really think of the retail situation.”
 
Billabong has described its acquisition approach as “opportunistic.” At the same time, they’ve discussed the tendency of independent retailers to purchase lower and mid price point product and to often not be able to merchandise the complete Billabong line well. They have noted that their own retail had outperformed their wholesale business and expressed some concern about tight credit conditions and the health of independent retailers. The company is also looking for ways to short cut its product cycle so it can have product sooner that it will just drop in its own stores before it gets to the independents.
 
You really need to go read the complete quotes in that article. Billabong’s strategy may be opportunistic with regards to timing (anybody’s acquisition strategy is) but I don’t think there’s any doubt that they have been planning to make retail a bigger part of their business. The presentation on West 49 says, in part, “Billabong has a long track record of successfully acquiring and integrating ‘bolt-on’ acquisitions consistent with its key strategic objectives of growing its brand portfolio and expanding its retail distribution network.”  (Emphasis added) And their store count has grown from 49 in 2004 to 510 this year assuming they complete the West 49 deal.
 
An acquisition strategy, of course, supports a general business strategy and can be the tool a company uses to transform itself. You might go look at what VF Industries, Collective Brands, and Genesco have done by selectively buying (and selling) brands to grow their companies and reposition themselves in markets they found attractive. It wouldn’t completely surprise me to find that those company’s strategies are a subject for discussion around Billabong’s executive offices from time to time.
 
Nuts and Bolts
 Billabong has offered to buy West 49 for $99 million Canadian. That’s about $96 million US. The deal is supposed to close in September, and will be funded using Billabong’s existing credit lines. Remember a year or two ago when Billabong raised some capital to improve its balance sheet? It wasn’t really a necessary thing to do, and the timing could have been more favorable. But without it, Billabong wouldn’t be able to do this deal without a financing contingency. This is one of the things I really like about Billabong. They always have consensus on what their strategy is and they have their eye on the long term ball as they pursue it.
 
Presently, “…across West 49’s portfolio Billabong has a brand share of approximately 15%.” They will be looking to increase that over time, but will leave the stores multi branded. CEO Derek O’Neill indicated in the conference call on the deal that the share of Billabong product in the West 49 stores might reach 45% over a couple of years.
 
If the West 49 stores go from 15% to 45% Billabong and Billabong owned brand products, obviously some other brands are likely to be unhappy with their share. There is, as we all know and no longer try to dispute, an inevitable tension between retailers and brands when the brand becomes a retailer.
 
In the past, when Billabong bought Nixon, Sector 9 and Dakine they paid high (fair might be a better term) prices for profitable companies with clear growth potential that Billabong could support, but that could more or less run on their own. I applauded that strategy because my experience is that buying a company is easy. Integrating a company and fixing it if it’s broken is much harder.
 
This deal isn’t quite the same judging from the data on West 49’s performance we reviewed at the start of this article.    In addition, just from going from 15% to 45% of Billabong brand product in its stores implies a transition that Billabong didn’t have to manage with those other three acquisitions. Of course, they have managed it with other retailers they’ve acquired, but none of those had 138 stores.
 
The analysts expressed some concern in the conference call. Though they didn’t come right out and say it (analysts never do) they seem to have some concerns that Billabong might be overpaying for this one.
 
As an example, Craig Woolford, and analyst with Citigroup, asked, “…even if I look back to ’08, it looks like it’s [West 49] been a very low margin business at an EBITDA level. Can you comment as to some reasons why it’s had such low profit margins?
 
CEO O’Neill’s basic response was that they had a plan to increase those margins over time, and that they’d talked to West 49 CEO Sam Baio who had a credible plan to get those margins up to “mid to high single digit EBITDA.”   I should note that Billabong’s last quarter results had its EBITDA retail margins at 14%.
 
Analyst Woolford continued, “Forgive me if I sound cynical but why would the shareholders of West 49 sell — I mean on a sales multiple, it’s 0.5 times sales, surely they would feel that they can then improve margins themselves before selling out to Billabong?”  Other analysts had questions that focused on the multiple being paid and how the deal would improve Billabong’s earnings per share during fiscal 2011.
 
Billabong’s answer to why margins would improve and why it would turn out to be a good deal was three fold; synergies, elimination of the costs of being a public company, and the higher margins they get when they put their own product in the stores in place of another brand’s products. They also think there’s potential to open some more stores in Canada.
 
Those are all good answers, but only eliminating the costs of being a public company is a slam dunk. Synergies can be surprisingly elusive and take time and cost money to realize. Billabong, to be fair, has just announced an agreement in principal- not a closed deal. So they can’t necessarily talk about exactly what they’d do and how they’d do it. But with other acquisitions of similar size, the issues just didn’t come up in quite the same way.
 
Partly, they didn’t come up because Nixon, Sector 9 and Dakine weren’t public companies. There was no public stock price. But this is also a different kind of deal that will require Billabong not just to support its new brand behind the scenes, but to take a very active role in helping it evolve. As a result I thought, when they first announced their interest, there was a reasonable chance that Zumiez would end up owning West 49. 
 
The Zumiez Offer
On July 9th, Zumiez came out and announced that they’d like to buy West 49 too. They had previously announced an interest in opening stores in Canada. Like Billabong’s, Zumiez offer would not have been contingent on financing. It “…would be prepared to make an offer, that would not be subject to a financing condition, to acquire all of the outstanding common shares and preferred shares of West 49 for a cash price in excess of $1.30 Canadian per share [what Billabong offered]” The offer would be contingent on Zumiez’s satisfactory completion of a due diligence review.
 
If an offer had been made, Billabong would have had five days to decide whether or not to match it.
 
West 49 already had a deal with Billabong but, as a public company, they have a fiduciary responsibility to act in the best interest of their shareholders. If two deals are equally likely to close, shareholders tend to like the one with the higher price per share.
 
West 49, of course, would love a higher offer, but isn’t all that thrilled at the idea of telling a retail competitor who’s just announced it’s entering West 49’s market everything about itself as would happen during a typical due diligence review. I’ll be interested to see how the two parties finesse that.
 
I’m happy to tell you that I wrote the sentences above before Zumiez’s July 13 announcement that they couldn’t reach an agreement with West 49 on how to conduct a due diligence review. I’m not completely surprised by that result, but I am a little disappointed. I think it would have been great fun to have a good old fashioned bidding contest for a company in our industry.
 
As has been discussed above, Billabong has some work to do to realize the value of a West 49 acquisition. This is a bit different from some of its other larger deals, and has some stakeholders nervous about the price being paid and the sources of the improved performance.
 
Zumiez is exclusively a retailer with a proven model. Like West 49, its stores are largely mall based. Like Billabong, it could have eliminated the West 49 public company expenses and no doubt realize some synergies itself in a combination. It wouldn’t have gotten the benefit of higher margins that Billabong gets when it places more of its owned brand product into its retail, but maybe it would have gotten some better terms from suppliers due to higher volume, though it probably gets pretty good deals already.
 
The argument that Zumiez could have made was that it just has to transplant its existing systems and management programs onto the West 49 stores to achieve results comparable to what it gets in the US. That sounds conceptually simple, but would not have been in practice. For one thing, Zumiez has always prided itself (rightfully so I think) on its management training and the fact that everybody works their way up from being a sales associate. I have to believe that finding and/or training enough people to turn West 49 stores into Zumiez stores (which I assume would be the long term goal) would have been a challenge. And I’m assuming a lot of similarity between the US and Canadian markets, which may not be the case.
 
I don’t know if the $1.30 Canadian that Billabong is prepared to pay is a fair price or not, but my immediate take is that Zumiez could have justified paying a little more than Billabong. Guess we won’t find out now. 
 
RVCA Deal 
And as if there wasn’t enough going on, Billabong has announced the long anticipated acquisition of RVCA. It’s a comparatively small deal, so not many details were announced, but we know that RVCA will add about $30 million to Billabong’s annual revenues at its current size.
 
And it’s an easy deal to explain. Like they typically have in the past Billabong is buying a solid brand that they will support, but leave management to run from a marketing and product development point of view. They will benefit not only from the growth of the brand’s sales to non-owned retail, but from putting RVCA into Billabong’s retail distribution. Pretty much the same concept they had for Nixon, Dakine, Sector 9 and most of their other acquisitions.
 
It’s pretty simple to explain, and it’s worked before. As we’ve spent parts of this way too long article discussing, it’s an interesting comparison to a West 49 deal that I see as more complex for Billabong and not quite fitting their historical approach. At the end of the day, that’s why I think Zumiez might have ended up as the successful bidder if they had been able to get past the due diligence issue with West 49.
 
In the economic environment we have now and, I think, will have for a few more years, brands are uncertain of the viability of core shops and unsure how much growth they can expect from them. As they and their lines get larger, they are also finding they can merchandise better and make more money through their own retail. Vertical integration, fast fashion, the imperative for cost control, market expansion into the mainstream, and the need for growth if you’re a public company all will push companies in the direction Billabong is taking as they get larger.