Billabong gasping for breath

At least we now understand why the procession of potential bidders for Billabong routinely filed out the door.

After writing off all its goodwill, the company now has taken a machete to hard assets with the unpalatable admission that things aren’t likely to improve any time soon.

This morning’s $859.5 million loss has highlighted the disastrous course Billabong’s board and management set in the wake of the global financial crisis to transform the company.

Difficult it may be to believe, but Billabong once had the ideal structure for the digital age; a designer and manufacturer of highly desirable sports apparel and hardware distributed through its nascent online operation with a handful of flagship stores around the globe with the bulk sold through specialist independently owned sports chains.

In 2007, however, it decided to expand into traditional bricks and mortar retail, a fundamentally different business even in normal times. That it occurred just as retail sales were on the verge of collapse with a dramatic shift in consumer behaviour towards online purchases sowed the seeds for the company’s demise.

By 2010, it had 639 stores around the globe. Since then it has sold or shut 158 and it has its Canadian chain West 49, bought at an enormous premium, on the block.

While Australia and North America are showing encouraging signs that the worst has passed, Europe is being throttled by the likes of retail rivals Zara and Topshop.

Meanwhile, it’s online Surfstitch business has failed to penetrate the European market, while the 10 year leases it signed on its bricks and mortar retail chains are dragging the group further into the mire.

Billabong may survive in some form. But the glory days have long gone and the heavy lifting has yet to take place. It needs to exit retail, which will require further losses. And it needs a heavy capital expenditure program to put it back on track. Except there is precious little capital to spend.

For the next few months, Billabong’s share price will be pushed and pulled by the tussle between competing hedge funds to carve up the business (see Billabong poised for a turnaround).

It once traded at $17. This year it has hit a 12c nadir and this morning dropped to 50c.

Click to enlarge

Source: Bloomberg