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Billabong International Ltd. (BBG) said its 40-year-old surf brand was worthless after the company’s losses tripled amid store closures, firings and a breach of debt terms. The stock slumped as much as 16 percent.
Founded by Gordon Merchant in 1973, Billabong helped sell Australian surfing culture worldwide and rose to a market value of A$3.84 billion ($3.45 billion) at its peak in 2007. Earnings have plummeted in the last two years as competitors including Abercrombie & Fitch Co. (ANF) stole market share and Billabong took on debt to build a store network that it’s now shrinking.
“You can see how much the core business has deteriorated over the last few years. There’s still a massive challenge to get the business going right,” Todd Guyot, an analyst at Moelis & Co. in Sydney, said by telephone. “It probably isn’t cool any more for the youth of today to wear Billabong.”
The Gold Coast, Australia-based company has closed 158 stores, canceled relationships with three-quarters of its suppliers, and is cutting 15 percent of jobs in its European division.
The value of its 13 brands fell to A$90 million at the end of June from A$614 million in December 2011, and the Billabong label itself is worthless, the company said in its financial statements today. About A$37 million of group brand value was locked up in the DaKine outdoor clothing and backpack label which Billabong sold to Altamont last month.
Four other brands, including Element skateboards and Palmers surfboard accessories, were also written down to a zero valuation, according to the statements.
Full-year losses widened to A$860 million in the year ended June from a A$276 million loss in the previous 12 months, compared to the A$547 million average loss expected from four analysts surveyed by Bloomberg. A 14 percent fall in sales put revenue below the company’s operating costs and the company took a loan from Altamont Capital Partners to refinance its debt.
The stock dropped 8 percent to 52 cents at 3:37 p.m. in Sydney, headed for its lowest level since Aug. 7, after earlier plunging as much as 16 percent. Billabong has lost 37 percent this year, compared with an 11 percent gain for the S&P/ASX 200 index.
Billabong’s net tangible assets fell 86 percent during the year to 11 Australian cents per share, it said today.
The company has agreed to a $294 million refinancing deal with a group led by Altamont Capital Partners and is studying a rival offer from a group including Oaktree Capital Management LP and Centerbridge Partners LP. The Oaktree and Centerbridge proposal would save Billabong as much as A$143 million in interest over five years, according to that group.
The prospect of refinancing and better business in recent weeks suggest the company is on the road to recovery, Peter Myers, acting chief executive officer, told an investor call after the results announcement. It has “clearly been a tumultuous year,” he said.
The company has been been fielding takeover or refinancing proposals for all but five weeks of the time since Launa Inman took over as chief executive officer in May 2012. Inman stepped down this month and the company appointedMyers as acting CEO until discussions about former Oakley Inc. chairman Scott Olivet assuming the role are finalized.
The business spent A$23 million during the year on consulting and banking costs in relation to its takeover and refinancing proposals, greater than the value of its earnings before interest and tax.
Olivet hasn’t taken up the CEO role because he wouldn’t want the job if the Oaktree and Centerbridge offer succeeds, Myers said.
Some factors relating to the Oaktree and Centerbridge bid are “yet to be clarified”, Myers said.
Losses in Billabong’s European division meant the company’s business costs ran higher than its sales revenue, with the group making a A$1.9 million loss before interest, tax, depreciation and amortization.
Discounting one-time items, Ebitda was A$73 million over the full year, beating the A$70 million average of eight analyst estimates and at the top end of a A$67 million to A$74 million range Billabong forecast June 4.
Adjusted Ebitda in the Americas division came to A$20 million and A$4.4 million in Australasia, overwhelmed by A$25 million of Ebitda losses in Europe. Sales fell 8.5 percent in Europe after adjusting for the effects of currency movements, dropped 5.6 percent in the Americas and 5 percent in Australasia
The company has been experiencing “continued difficult trading conditions, particularly in Europe,” Michael Simotas, an analyst at Deutsche Bank AG in Sydney, wrote in a note to clients Aug. 7. In Billabong’s home market, “consumer sentiment continued to weaken and warm weather weighed on winter apparel sales,” he wrote.
Net debt rose 28 percent to A$207 million over the course of the year and operating income excluding one-time items dropped 51 percent to A$22 million, enough to cover Billabong’s interest payments just 1.7 times.
Net losses of A$1.14 billion over the past 24 months were greater than the A$1.11 billion in profit that the company posted over the preceding eight years, according to data compiled by Bloomberg.
Since Billabong listed in 2001 with a market value of A$600 million, the net A$781 million it’s raised from selling shares to finance its operations is nearly five times the A$160 million its earned for shareholders as net income, according to data compiled by Bloomberg.
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