Sporting fashionwear retailer and exporter, Billabong International is feeling the conflicting winds of the global economic crunch and credit freeze, and the slumping Australian dollar.
On balance, so far after the first three and a bit months of the new financial year, the company believes the upside from the weaker Aussie dollar will outweigh the downside of the hesitant demand among consumers, so it has upgraded its guidance.
The company’s CEO, Derek O’Neill told the company’s annual general meeting on the Gold Coast yesterday that the company was now forecasting earnings per share growth of 12%-16% in the 2009 year, despite falling sales.
"There has been a dramatic fall in the value of the (Australian dollar), in particular against the USD and the Euro," Mr O’Neill said.
"After so many years of watching the Company’s reported profits eroded by an appreciating AUD, there is now the prospect of strong reported gains from a depreciating AUD."
Despite an easing of sales as the global financial crisis bit, Mr O’Neill said, the falling dollar led to higher income in Australian dollars.
"Based on the Company’s most recent full year forecasts, the previously indicated easing in sales would have led to a revision of the prior guidance to a range of 4 per cent to 8 per cent earnings per share growth," Mr O’Neill said.
"However, given the significant depreciation of the AUD against various currencies to date, in particular the USD and the Euro, guidance for the 2008/09 financial year is being upgraded to 12 per cent to 16 per cent earnings per share growth."
He said this assumed an annual average exchange rate of 80c for the AUD/USD and 55c for the AUD/Euro.
The Aussie dollar was trading uncertainly around 60 USc yesterday, despite a third day of Reserve Bank intervention to keep the market well supplied with dollars.It rose to just under 63 US cents overnight.
Every one cent movement from these assumed exchange rates meant a 0.6% change in profit for Billabong, Mr O’Neill said, although some product deliveries for which the company was yet to hedge the purchases, primarily in May and June 2009, could slightly negate some of the currency translation benefits.
Mr O’Neill said that while the retailer had solid foundations, it could not be immune from the impacts of conservative consumer spending.
"Billabong International is growing sales, but not quite at the rate the company initially expected."
In August, Billabong forecast 8%-12% improvement in its earnings per share in the current year on the back of forward orders.
"In the eight weeks since the Company released its 2007-08 annual results and forward guidance, sales are slightly below our previous expectations.
"More specifically, in the latter part of September and the first two weeks of October consumers retreated from traditional spending patterns to digest the new economic landscape.
"However, at this stage, the Company still anticipates it will be delivering double-digit sales growth – particularly given that from 1 October 2008 the Group includes sales from DaKine, which is currently outperforming the Company’s internal expectations.
"Current conditions are leading to some apprehension from retailers in the placement of initial orders.
"That said, forward order books in the US and Europe remain good, although there is some weakness in Australia. There’s also evidence of some retailers being apprehensive in initial ordering and placing a greater emphasis on repeat orders.
"On the positive side there has been a dramatic fall in the value of the AUD, in particular against the USD and the Euro.
“After so many years of watching the Company’s reported profits eroded by an appreciating AUD, there is now the prospect of strong reported gains from a depreciating AUD.
"So, how does the Company see the year playing out? On 22 August 2008 the Company gave guidance assuming exchange rates at that time of US88c for the AUD/USD and €59 cents for the AUD/Euro.
“As we meet today, the year-to-date averages for the 2008- 09 financial year are not too far off those levels, so Billabong is yet to see the real benefit of the falling AUD.
"Based on the Company’s most recent full year forecasts, the previously indicated easing in sales would have led to a revision of the prior guidance to a range of 4% to 8% earnings per share growth.
“However, given the significant depreciation of the AUD against various currencies to date, in particular the USD and the Euro, guidance for the 2008-09 financial year is being upgraded to 12% to 16% earnings per share growth."
Billabong shares jumped sharply in late trading to rise more than 6% or 68c to $11.63, in a market that was off 2% and more at times during another tough day of trading.The market bounced at the end, along with the likes of Billabong.
