At surfwear maker and emerging retailer Billabong’s AGM yesterday, confidence about earnings for the coming year and a change in strategy helped take the sting out of what should have been a miserable time.
The meeting heard from chairman Ted Kunkel and management that the company was confident about the outlook, despite the shares more than halving in value this year which included a poor 2011 profit and weak outlook statement at the end of August. That saw the shares lose 25% in value in a few hours.
Both Mr Kunkel and CEO Derek O’Neill told shareholders the company was looking to go deeper into retailing to try and boost earnings and margins, a move that was already underway and producing results, they claimed.
They said the company is on track to grow underlying earnings before interest, tax, depreciation and amortisation strongly in 2011-12, in constant currency terms.
Total sales for the three months to September had grown 24.7% compared to a year earlier, in constant currency terms, and revenue excluding acquisitions had increased 6%.
The news saw the shares edge up 8.6%, rising 31c to $3.91.
"Our largest sales territory, the United States, has continued to perform well, in particular within company owned retail. The Group has seen same store sales growth for the first quarter of 6.4%, with the month of September up a strong 9.0%," Mr O’Neill said in his address.
"The Group has also experienced quite a stable environment in the wholesale channel, particularly among the smaller specialty retailers."
Chairman Ted Kunkel said in his address he wanted to "remind shareholders that in the 2010-11 financial year the net profit after tax result for the Group was supported by some large one-off tax benefits that are not expected to recur in the 2011-12 financial year.
"So I would encourage shareholders to judge the Group this year on strong underlying EBITDA growth and strong operating cash generation as a consequence of the anticipated improved EBITDA and a reduction in working capital as a percentage of sales."
In other words, ignore the net profit which will be lower and concentrate on the "underlying" result, which will be higher.
On the move deeper into retailing, Mr O’Neill said, "I can advise that the vertical margin contribution that the Group anticipated from the move deeper into retail is starting to become apparent, so that gives us confidence that the direct-to-consumer strategy is sound".
He told the meeting that it was “encouraging, however, that the areas where the Group has been investing – the full-price direct-to-consumer channel, which includes company owned bricks-and-mortar retail and online business – generated positive comparable store sales growth in the first quarter" (which is more than you can say for many other Australian retailers at the moment).
And Mr Kunkel exuded confidence in saying that the move by large retail chains to sell in-house brands, thus reducing floor space for surf brand wholesalers such as Billabong, had prompted the company to buy chain stores and develop an online business.
Another factor was the increasingly late buying each season by smaller retailers who were looking to cut costs and inventory.
These trends had existed over several years, mainly in North America and parts of Australasia, but had sharply accelerated in recent years, mainly because of the global financial crisis, he said.
"Left unchallenged, these trends had the capacity to undermine the future growth prospects of the Billabong Group," he told the company’s annual general meeting on Tuesday.
"It was determined that the Billabong Group would, in some regions, look to gain greater control of its route to market."
Mr Kunkel said this led to a series of small retail acquisitions, then, the take-over of larger retail chains over the last year, including Canada’s West 49 and Australia’s Surf Dive `n’ Ski, Jetty Surf, Rush Surf and Surfection.
He said takeovers made sound commercial sense, and would hit profitability while the company moved from being a wholesaler to a retail store owner.
Online sales, which made up 3% of revenue in 2010/11, would rise by more than 50% this financial year.
