Industry Analyst Jeff Harbaugh, the author of the long-running Market Watch column in Transworld Business, has pulled up stakes from twbiz and is about to launch his own blog.

Harbaugh's analysis is often some of the best―and opinioned―in the business, and the addition of his blog is likely to spice up the stew of online industry coverage. At the very least it should provide the type of crunchy detail that's made him so widely read.

His revised Web site should be up this month, but in the meantime, he's posting everything on his Facebook page and his old www.jeffharbaugh.com web site under the articles section.

Recently, he’s written an analysis of Billabong’s six month results and told me that I could go ahead and post it here. As always, his views are his own. But what he has to say about Billabong’s retail strategy is kind of interesting. So here it is:



 

Billabong’s Semi-Annual Report

Billabong released its numbers for the six month ended December 31, 2009 last week and held a conference call. Though clearly not immune to a tough economy, the company’s raising of capital to strengthen the balance sheet, long term focus on brand equity, willingness to lose some sales rather than become too promotional, realism as to the operating environment, and nuts and bolts management of costs and inventory has left them in a pretty good position.

But what really caught my attention was the discussion of retailing during the conference call. I’d like to spend some time on that before I get to the financial results.

Billabong’s Retail Perspective
Billabong closed the year with 360 company owned retail outlets, up from 335 June 30th. 90 of those are in the European segment, 157 in Australasia, and 94 in the Americas. Retail now represents just a little more than 25% of the company’s sales.

No, I don’t know why those three numbers don’t add up to 360. I’ve emailed Billabong to ask.

Billabong CEO Derek O’Neill is clear in the conference call that we shouldn’t “…expect for retail to suddenly become a huge component of our business but it’s clear we will continue to identify opportunities to get our product to market where required.” I read a little bit of ambiguity as to Billabong’s retail strategy into that statement, or maybe a little understandable reluctance to state what they really think of the retail situation. Later conference call comments provided more insight into their thinking and created an intriguing picture of the retail market as Billabong sees it and how they may approach it.

They start by noting that there is still some softness in prebooks (though things have improved) both in terms of the size of the orders and the numbers of retailers they have received orders from for summer.  O’Neill indicates that 80% of the account base (referring, I think to the US) had orders in, where it would have been 90% two years ago. There is still “…a little bit of an apprehension to actually placing forward orders, and some customers preferring to do a little bit of business in season.” “I’d say that’s a trend that’s probably going to be there for a little while,” he continues.

I’d be curious to know just what he means by “a little while.”

Next, he talks about tight credit conditions and the health of independent retailers. “I can’t sit here at all and say that all the accounts that we are currently dealing with will still be there in three months time,” is how he puts it. He also thinks they may have to tighten credit by the end of the current six months.

Finally, he says, “If you look at the wholesale level, most of the business going on, the buyers are focused on your price point category and up to your mid price print category.”

Any brand talking about the US market (and some other countries as well) might say the same thing. We’ve got a new set of economic conditions that look to be long lasting where independent retailers are falling out, the survivors are ordering more cautiously, consumer spending is down and focused on low to middle price points.

No surprise there, but now the plot thickens. “…in our own retail, which has definitely outperformed our wholesale side in this period, in our own retail we can showcase and merchandise a product across all the price points and we’re doing really well right across the board.”

“The cycles with our own retailers, we are beginning to drop product into our own retail even faster than wholesale channel. We are beginning to, on certain key styles…build product that may go into our own retail before even the wholesale consumer sees it in an indent (sic) process. But we’re beginning to utilize our own retail to test product a lot more and we’re just becoming a little more focused on that shortening of the whole supply side.”

And then, just to make this even more interesting, he says, “If you look at the big retail brands out there, they don’t have a buyer to get past, they just decide what they’re going to make and they put it in their own stores and therefore they could have a very short cycle.…we are looking more and more at some of our own retail stores where we can looking at touching on a more vertical model. And not having that delay with going out and having an eight week ordering pattern and then go away and ordering product, we’ll just go straight to retail.”

What percentage of total revenues could retail represent?” somebody asked. “It’s probably going to depend on what happens with the wholesale account base,” O’Neill responded.

There’s more, but I think that’s enough quotes. You can see the report and the conference call here: http://www.billabongbiz.com/news-business.php

In summary, given foreseeable economic conditions, Billabong isn’t sure what level of growth and profitability it can rely on from its independent retailers. Right now, it believes it can merchandise and sell its product better in its own stores because of the independents’ reluctance to order and tendency to order the lower to mid priced items, and its results bear that out. It’s also looking for ways to short cut its product cycle so it can have product sooner that it will just drop in its own stores before it gets to the independents. This is also, in part, a response to the branded retailers. Dare I say Forever 21? Seems like they are the poster child for product cycle blues these days.

Not to belabor the point, and certainly not to put words in Billabong’s mouth, but if a well managed company like Billabong is unsure of the role and importance of independent retailers going forward, and thinks they can do better business in their own stores, how will the role of those independents evolve?

It’s always been an industry article of faith that core retailers were the bedrock of the business but that might be changing as companies get large and we become increasingly fashion based and fashion competitive.

By The Numbers
I have to begin by reminding you that Billabong’s functional currency is the Australian Dollar, and the numbers here are in that currency. Just for reference, at the moment one U.S. dollars equals 1.12 Australian dollar. A year ago a U.S. dollar cost 1.55 Australian dollars. That’s a 28% change over the year and that can wreak havoc on your financial planning and reporting. In this case, it did so I’m going to report some constant currency results along with reported results. Management notes that each one cent movement in the average monthly exchange rate between the Australian and the US dollar for the five months of the year that are left above or below the 0.90 rate they are planning will change reported net profit after taxes by $500,000 from their projection.

Revenues fell 10.8% in reported terms from $810 million in the half year ended December 31, 2008 compared to the half year ended December 31, 2009. They were only down 2.8% in constant currency.

In the Americas, reported sales were 17.6 lower, but only down 6.2% in constant currency.

They point out that “…direct comparisons to the prior year are somewhat misleading. The latest result includes a full six months of trading from DaKine versus three months in the prior year. The prior corresponding period also included three months of trading in the period that preceded the global financial crisis.”

They also note that sales to PacSun were down about 50% for the half year. Billabong anticipates that “…the retailer’s percentage contribution to the Group’s overall North American sales will decline to the single-digit level across the full financial year.”

Given Billabong’s focus on brand equity and interest in selling higher end product, I have to agree with their approach, though I don’t know how they easily replace those sales.

European sales were $164 million, down 7.6% in reported terms but up 2.6% in constant currency. Billabong reports strong momentum in Europe. Australasia revenue fell 2.5% in reported terms but only 1.4% in constant currency.

With sales down, cost of goods fell 14.2% as reported from $373 to $321 million. Gross margin percentage actually strengthened from 53.8% to 55.5%. Selling general and administrative expenses were down 7.7% from $260 to $239 million. Finance costs fell 40.8% from $20.6 to $12.2 million due to the repayment of debt following the May 2009 raising of capital.

Reported net profit was down 15.4% from $82.4 to $69.7 million. They blame that almost entirely on unfavorable movements in exchange rates.

Much of the strengthened balance sheet is the result of the capital they raised in 2009. Between December 2008 and December 2009 cash increased from $169 to $213 million. Receivables fell 15% from $394 to $334 million and they reduced inventories 23.8% to $247 million. Total current assets were down 10.6% and noncurrent assets fell 11.3% from $1,317 to $1,168 million.

Trade and other payables were down 34.5% from $273 to $178 million. That explains most of the drop in current liabilities from $302 to $215 million. The current ratio improved from 3.04 to 3.81.

By far the biggest change in the non-current liabilities is in borrowings which, as a result of the capital raised, were reduced by half from $810 to $397 million. Deferred payments also fell significantly from $161 to $107 million, reflecting a $34 million payment to the former owners of Dakine and other payments as well. Between earnings and the equity raised, total equity grew 34% to $1,190 million. Total liabilities to equity plunged from 1.51 to 0.67. This is my kind of balance sheet!

Billabong is confident, but a bit cautious about the rest of the year.

“Retail markets remain extremely volatile and difficult to predict, consumer spending patterns remain erratic and global economic concerns continue to weigh on general sentiment. Against this backdrop, the Group’s North American business continues to experience challenging conditions. While there is some stability emerging within the independent specialty channel, there is no recovery evident amongst the Group’s larger mall-based customers. Australasia is showing mixed performances, with South Africa, Japan and New Zealand expected to remain soft but the balance of the region remaining steady. Europe, a highlight in the first half, is expected to remain relatively buoyant.”

They expect better foreign exchange hedge rates and the impact of previous expense reductions to help their results. The most intriguing thing to me, however, is still their perspective on and approach to the retail business. It will be interesting to see if other action sports brands share their perspective and if any take a similar approach.



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