Slater & Gordon (SGH) is preparing a class action against Billabong International (BBG) on behalf of investors who say the surfwear retailer engaged in misleading and deceptive conduct and failed to comply with its continuous disclosure obligations.
The action will allege Billabong gave earnings guidance for fiscal 2012 that lacked reasonable grounds.
The legal firm said Billabong forecast strong earnings growth in August 2011, then a few months later withdrew the guidance and flagged a substantial fall in earnings.
In the following days the company's share price dropped by more than 50%.
Investors allege Billabong misrepresented the assumptions on which the fiscal 2012 earnings growth guidance was based, Slater & Gordon senior associate Odette McDonald said in a statement.
"The company stated that achieving guidance depended on internal initiatives, such as achieving synergies between its newly-acquired retail outlets, and increasing the proportion of total revenue from Billabong product," Ms McDonald said.
"However, it is alleged that, in reality, Billabong’s growth guidance required an extraordinary lift in overall sales revenue during an extremely challenging retail environment.
"Our clients allege that Billabong’s internal initiatives had no viable chance of substantially increasing profit margins, contrary to what the company had conditioned investors for.
"They further allege that, had the market been informed of the true dependencies underpinning the earnings forecast, it would have disregarded the guidance as unrealistic, and this would have been reflected in Billabong’s share price."
Ms McDonald said that based on investigations so far, the legal firm believes Billabong has a case to answer.
Comprehensive Legal Funding is funding the proposed action, which investors can join until April 4.