Yesterday’s trading update and capital raising from surfwear group, Billabong International, told two different stories.
The trading update saw earnings downgraded in a way that told of seeming acceptance and inevitability, especially the driver being falling sales and orders from US retail clients.
The rise in the value of the Aussie dollar hasn’t helped and there were suggestions the company was looking for a rebound in the 2010 financial year as the update talked about product shortages.
And yet the $290 million capital raising is being made at a substantial 30% discount to the closing price last Thursday.
The issue price is $7.50 to the closing price of $10.62. Shareholders will be offered two new shares for every 11 shares held.
The size of the discount always tells us the strength of the need by the company for the new capital.
$200 million of the offer is underwritten and is being made to professional investors: the remaining $90 million will be sought from retail investors who may not be all that happy to support it, given the way the company’s shares have been hit hard by the recession.
Billabong said in the update to the ASX that it was now expecting to report full year net profit in the range of $160 million to $165 million, compared to $176.4 million in the prior corresponding year.
Billabong said the new earnings forecast was due largely to weak US earnings; possible further non-cash impairments in the current financial year, and the impact of the strengthening Australian currency.
"For the 2008-09 financial year, the Company has revised currency assumptions, which comprise actual monthly average exchange rates for the 10 months to the end of April and assumed monthly average exchange rates for May and June of 75 cents for the AUD/USD and 55 cents for the AUD/Euro.
"These new assumptions in relation to previous guidance provided at the Company’s last market update in February have resulted in a $6.4 million reduction at the net profit after tax line."
The possible impairment charges relate to various retail assets. Billabong doesn’t expect them to top $10 million before tax for the full financial year and will include the $2.3 million charge already announced in the interim results.
"Since Billabong’s last market update in February, a deterioration in trading conditions at a consumer level in the US in late April and early May, together with a reduction in forward orders within the Company’s US wholesale account base and the strengthening of the Australian dollar against the US dollar, has led Billabong to review its expectations for the remainder of the 2008-09 financial year," the company said in the statement.
"During the February to April period, the signals from the US retail market have been mixed.
"The Company experienced a subdued sales month of March but saw a considerable spike in early to mid April, around Easter, with comparable store sales in its own retail network lifting 7% compared to the prior year.
"However, the period from late April through early May saw a rapid deterioration in Company owned retail sales, with comparable store sales down in the high teen to low 20% range.
"This was lower than the Company’s original expectations and Billabong now forecasts this current level of activity in its own retail network will continue through to the remainder of the 2008-09 financial year.
"The softness in the US is also being felt in the Company’s US forward order book for the fall season.
"Wholesale customers are similarly reducing the amount of inventory in store and are undertaking a seasonal realignment of their business which is leading them to specify delivery dates closer to the middle of the season.
"This is impacting late May and June deliveries as orders are pushed into the 2009-10 financial year.
"Rather than placing larger forward orders, customers are looking to buy at-once in-season products more frequently.
"Additionally, the wholesale account base that Billabong is choosing to service in the US has been reduced by the closing of customers’ stores and Billabong proactively exiting accounts in response to increasing credit risk of some retail customers," Billabong said.
The company said that despite this downturn, the US division had cut overall inventory levels without any significant gross profit margin dilution.
"The Company continues to preserve brand equity by not participating in heavy discounting and thereby maintaining industry leading margins.
"US EBITDA margins for the second half in isolation are expected to grow from 10.6% in the first half to approximately 14% in the second half compared to 19.2% in the second half of the 2008-09 financial year. Management of overhead and cost controls will continue to be a key focus moving into the 2009-10 financial year.
"Billabong’s European business remains strong and on track for double digit growth in the 2008-09 financial year with continued strong growth in Germany, while the retail environment in both the UK and Spain remains soft, and Eastern Europe has recently weakened.
"The Australasian business result will be slightly affected as some Australian retailers move early summer deliveries into mid-season so that product usually delivered in June will be delivered in the 2009-10 financial year.
"Overall, however, the total indent remains solid as the current Australian
