The good, the bad and the ugly of Billabong
Is an investment in Billabong International Limited (ASX: BBG) akin to trying to catch a falling knife, or are there brighter days ahead for the struggling 41-year-old iconic Australian surf brand?
The ugly
The siren song of Billabong has lured many a doomed soul into the jagged rocks since falling from its peak of $18.30 in 2007 to the current price of around 70 cents (while reaching a low of 13 cents in 2012).
Billabong has recently been subject to a series of compromised financing deals and takeover bids; however these arrangements appear for now at least to be behind it. In September 2014, it again restructured its debt, this time striking a deal with private equity firms Centerbridge Partners and Oaktree Capital Management.
More problematic, however, are falling revenues, a sign that Billabong's once market-leading premium brands may have fallen out of favour with consumer tastes. Revenue has declined from $1.5 billion to $1.1 billion over the last five years.
Not surprisingly the company didn't pay a dividend in 2013, and seems unlikely to do so in the foreseeable future.
The bad
Approximately 44% of Billabong's revenues come from the Americas, and in these markets revenues fell in the 2013-14 period by 1.7% (excluding significant items and divestments).The worst results came from the soft Canadian segment and from Brazil, where the company is restructuring operations.
In Europe, Billabong says earnings have "stabilised"; however, revenues fell by 7.5% over the 2014 period, following years of decline.
The challenging global results remain in part a hangover from the company's aggressive acquisition push since 2001. To this end, incoming CEO Neil Fiske summarised Billabong's recent woes, saying: "We've been trying to do too many things, and none of them particularly well."
The good
In a bid to "simplify" the business, in late 2013, Fiske outlined the company's seven-point plan, with the prevailing mantra: "fewer, bigger, better".
With the debt-financing issues for now seemingly behind it, a key plank of the investment thesis from here lies in streamlining operations and improving financial stability.
In the 2013-14 period, Billabong has considerably downsized and restructured operations across most geographies, closed 41 underperforming stores and made strategic sales; to date, it had brought overheads down by $22.6 million.
Improving productivity in the supply chain and online will also have a large bearing on the success of the turnaround.
In 2014 Billabong announced it will implement a new global supply chain operation and overhaul its Asian sourcing operation, as well as redesign its global logistics and distribution network.
Capital investment of global IT and direct-to-consumer platforms is also underway, given reports that existing infrastructure is inefficient, incompatible across businesses, and under-developed.
To guide the strategy, Billabong has undertaken a wholesale restructure of senior management staff, making 63 leadership appointments across most geographies and brands.
But most importantly, the Billabong investment thesis largely lies in its core brands. On brand strength, Fiske says, "Billabong… is still the number one brand in speciality surf shops in Australia and the U.S."
Its other "core" businesses, especially Element and RCVA, as well as TigerLily and Von Zipper, also have prominent market recognition and will also be key to the turnaround's success.
To date, Fiske has maintained cautious optimism that the strategy is "gaining traction."
So is Billabong a buy?
It's for good reason that Warren Buffett says "turnarounds seldom turn". This is especially the case for large, complex retail outlets, as investors in Myer Holdings Ltd (ASX: MYR) can attest. But with brand recognition, a renewed focus on improving productivity, streamlined operations and stronger financials, Billabong might yet be worth a punt for Foolish investors prepared to make a speculative wager.
