Inman's astute picture of a revived Billabong
Billabong boss Launa Inman has unveiled a strategy for resurrecting the stricken clothes maker and retailer. As private equity circles, the plan may not come to fruition but could be worthwhile nonetheless.
The reason the former Target managing director may not get the opportunity to implement her strategy, of course, is that private equity giant TPG has made an indicative, non-binding and conditional offer to acquire the company and is currently conducting due diligence.
If TPG proceeds with the $1.45 a share offer it has foreshadowed, an offer that values Billabong at $695 million, Inman’s strategy will become academic.
There are a number of reasons, however, why the transformation plan that Inman and a range of consultants have put together isn’t a waste of time and money.
The most obvious is that it is possible that TPG might not proceed to make an offer. That could be the result of the due diligence – TPG might not like what it has seen – or because external events change the context for the proposal. Given the fragile states of Europe and the US anything is possible.
In that scenario, Billabong has to have a "Plan B" to get from its current state of disarray and instability to something sustainable. Inman’s strategy is that Plan B.
Even if TPG does come out of due diligence committed to proceeding, however, the exercise Inman has undertaken is still worthwhile.
The strategy targets an increase in earnings before interest, tax, depreciation and amortisation from the $84 million of underlying EBITDA Billabong generated before it was overwhelmed by writedowns last financial year.
Inman believes the incremental EBITDA generated by the strategy could be more than $155 million by 2016, with the plan costing $80 million or more to execute.
If the market, or more particularly Billabong shareholders, believed an earnings recovery of that magnitude were credible there is no way TPG could buy the group for $1.45 a share. Even if it/they thought the prospective improvement were less than that, however, the presentation of the plan casts a spotlight on Billabong’s potential.
In effect, if TPG does want to proceed, Inman is talking to two audiences. One is TPG itself, giving it a ready-made gameplan from an experienced retailer for adding and extracting value – and a reason for being willing to pay more. The other is the market, giving it a sense of what is achievable that might provide Billabong with either negotiating leverage with TPG to get a better price or else an independent future.
How effective that might be as a tactic would depend on whether the market can be convinced the plan is achievable and how much it discounts the prospective increase in earnings for the execution risk and the time value of the dollars involved.
It has to be said that, at face value, Inman’s broad gameplan looks sensible and is also an implicit indictment of the way the business has been managed in the past, which was obvious anyway from its recent results.
Billabong started as a one-brand local wholesaler that grew, largely over the past decade, into a multi-brand global wholesaler and retailer across a range of youth-oriented fashion segments. It went from being a relatively simple business to being an extremely complicated one and doesn’t appear to have had either the management experience or the systems to manage that complexity.
There was a slide in today’s presentation that illustrates both that complexity and the potentially easy gains if the business is simplified.
It is a slide with three components, looking at cumulative global sales by style, global cumulative sales by customer and cumulative purchases by supplier. It shows that 34 per cent of Billabong’s styles generate only 1 per cent of its sales; 33 per cent of its customers generate 1 per cent of its sales and 1 per cent of its purchases come from 46 per cent of its suppliers.
That a lot of unproductive activity. Inman plans to cut 15 per cent of the styles and 35 per cent of the suppliers. The fact that it is an obvious thing to do and will make the business a simpler one gives it credibility.
The bigger gains, and the more difficult ones to assess, relate to leveraging both the Billabong brand and the other brands within the portfolio, improving the performance of the retail network, globalising the Billabong supply chain and building an e-commerce platform. The biggest gains relate to the brands and are dependent on retailing skills and insights.
What the strategic plan illustrates is Billabong’s potential as a renovation project. Whether Inman gets the opportunity to execute it or not will be up to TPG and the market.