Glimmers of hope in a Billabong bloodbath

It might appear peculiar, given the context of the losses of $537 million and another earnings downgrade within which they appeared, but there are some tentative signs within the swamp of red ink in Billabong's results that Launa Inman's turnaround strategy might actually be gaining some traction.

Much of the red ink, of course, related to non-cash writedowns in the value of brands, investments and goodwill and the reported performance of the group before those writedowns – a slump in profit from $38.3 million to $19.2 million on sales that fell from $761.6 million to $699.6 million – was muddied by the sale of a majority interest in the Nixon brand last year, as well as the initial impacts of the Inman restructuring.

The group last year sold the Nixon brand, releasing $300 million, but retained a 48 per cent interest in the new ownership entity. The ‘'underperformance'' of Nixon caused Billabong to write down the value of its interest by $106 million.

Adjusted to exclude the Nixon sale, however, the results don't look quite as bad, with earnings before interest and tax rising 14 per cent, from $32 million to $36.4 million. The increase would have been about 17 per cent if it were expressed in constant currency terms.

On an adjusted earnings before interest, tax, depreciation and amortisation basis, Billabong's Americas division produced a 38.2 per cent increase to $20.5 million despite a 6.8 per cent decline in sales and the Australasian business a 29.8 per cent increase in EBITDA to $31.8 million despite a 2.6 per cent fall in sales. Europe remains a trouble spot, with EBITDA down 9 per cent to $2.4 million and sales 23.2 per cent.

The potential significance of the results, presented in that fashion, is not so much the numbers themselves but the fact that their direction and composition appears to fit with the Inman strategy. The private equity players still poring over Billabong's accounts will no doubt be testing that conclusion.

What Inman revealed about Billabong last year when she presented the results of her strategic review was an overly complicated and poorly managed business, with a lot of capital and attention devoted to very unproductive activity.

About 34 per cent of the group's styles produced only 1 per cent of its sales; a third of its customers generated only 1 per cent of its sales and only 1 per cent of its purchases came from nearly half its suppliers. Not surprisingly, Inman said she would take an axe to the range of styles and the number of suppliers. She also planned a ruthless rationalisation of the group's retail network.

The store closure program has already seen 119 outlets closed, with another 40-odd to go by midyear. Billabong said today the number of apparel supplies would be slashed from more than 275 to only 50 from next month as part of a restructure of its global supply chain.

Billabong will obviously shed sales as it shrinks the retail network but it does appear to be starting to get some EBITDA and margin growth as the drive to reduce costs is starting to have an impact. In Europe, with its economic woes, the cost-cutting thus far wasn't sufficient to offset the impact of the steep decline in sales, so Inman plans to launch another wave of restructuring.

She is also imposing a global management structure on the group to displace its previous regional structure, is introducing a new IT platform and reworking brand strategies.

There is no quick fix for the myriad of flaws within Billabong and Inman doesn't expect the benefits from rationalising suppliers and improving brands to materialise this financial year. The group's EBITDA guidance has been again moved down, from a range of $85 million to $92 million to a new range of $74 million to $85 million in constant currency terms.

The two private equity groups each separately considering a $1.10 a share bid for Billabong – Altamont Capital (in partnership with global apparel giant VF Corp) and Sycamore Partners, which would provide funding for a bid led by former Billabong director and Americas president Paul Naude – are still conducting due diligence investigations. That process, Billabong said, is expected to end next month.

One assumes they'll be more interested in the potential of the group than in its current performance.

Although the depth of the issues in Europe and the latest change to guidance won't add to confidence, the apparent stabilisation and modest lift in the underlying performance of the Americas and Australasian businesses ahead of the substantial changes in Billabong's structure and in its supply chain might encourage them to believe that the group's performance is starting to bottom out as the Inman strategy starts to have an impact.