August 27, 2012 10:56 am

Billabong plans revival push as TPG lurks

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The new chief executive of Billabong International has set out her plans to revive the ailing Australian surfwear retailer after the company posted a maiden annual loss and said it had opened its books to a financial suitor.

Unveiling a four-year plan to return the company to positive sales growth and lift earnings by A$155m, Launa Inman on Monday said Billabong would focus on simplifying the business, “leveraging” its namesake brand and improving its supply chain and e-commerce offerings.

Ms Inman, the former head of discount retail chain Target Australia, said the initiatives, which would cost A$80m, provided a clear pathway to unlocking the “inherent value” within the group, which is a takeover target for TPG Capital.

Analysts were less convinced. “Given the performance of the Billabong brand in recent years, this will require a significant turn around in sales performance, which the market could struggle to take at face value,” said Nick Berry at Nomura.

Shares in Billabong have fallen almost 80 per cent over the past year as sales have declined in Europe and North America and its brands have lost appeal with younger shoppers. An ill-timed acquisition spree left the company saddled with large debts.

TPG has lodged a preliminary A$1.45-a-share cash offer for the struggling retailer and has amassed a 12.45 per cent stake after buying shares from two of Billabong’s largest shareholders.

The US buyout group made that bid in July, five months after it had a A$3.30 share offer knocked back by Billabong and its founder and largest shareholder Gordon Merchant. Ms Inman said due diligence on the latest approach, worth A$695m, had started after TPG signed a confidentiality agreement.

Billabong unveiled the turnround plan alongside a net loss of A$275.6m for the year to June 2012 – its first annual loss since listing in 2001 – against a profit of A$119m last year. Revenues fell 7.9 per cent to A$1.55bn.

“At an underlying trading level, the group remains profitable,” said Ms Inman.

Stripping out A$343m of impairment charges, A$173m of restructuring costs and a A$200m gain on the sale of watch brand Nixon, underlying earnings were A$33.5m, which was broadly in line with analysts’ expectations.

Billabong also revealed it paid A$2.5m in “termination benefits” to former chief executive Derek O’Neill, who was fired in May shortly after the company launched a A$225m rescue rights issue. Under his leadership, Billabong made a string of acquisitions just before the global financial crisis. In the wake of the cash call, net debt has fallen to A$94m.

The company said it had shut 58 “non-performing” stores last year and identified a further 82 for closure this year. Ms Inman said trading conditions in Europe were soft, with full-year sales there down 17.6 per cent, and off 11 per cent in North America. In contrast sales in Australia rose 4.1 per cent.

For the new financial year Billabong, which owns brands such as Von Zipper and Element, said it expected trading conditions to remain “tough”. However, it forecast earnings before interest, tax, depreciation and amortisation would rise to A$100m-A$110m in constant currency terms, from A$84m in 2011/12, as the benefits of its restructuring initiatives start to flow through.

Billabong shares rose 0.7 per cent to A$1.36 on Monday.

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