Low tide for those that once caught a wave

SURF'S UP: Billabong began on the Gold Coast, but has fallen on hard times after expanding too far.
SURF'S UP: Billabong began on the Gold Coast, but has fallen on hard times after expanding too far.

As a teenager I remember weekend wear for blokes generally fell into two camps - the cool dudes wore Billabong and Quiksilver boardies and the not so cool, but ever so practical guys wore stubbies, jeans and cords. Surf gear was trendy and it commanded a price premium for its "cool" factor.

It has been sad to watch Billabong "wipeout" over the past 12 months, with a collapsing share price, declining earnings, two failed takeover bids as prospective buyers walked away, and now the very real prospect that the business might not survive. How can such an iconic brand go so wrong?

There are all sorts of explanations for what has gone wrong for Billabong over the past decade. The company was founded on the Gold Coast in 1973 by Gordon Merchant who is still a significant shareholder today. He created triple-stitched board shorts that surfies liked as they didn't come apart during tricky board manoeuvres.

Billabong garments were soon exported around the world, and when the surfing industry took off in the 1990s, Billabong became a significant player.

Arguably the company's first mistake was its rapid expansion through acquisition. Throughout the 1990s and 2000s, the company acquired new brands and retail outlets (largely debt financed), at one point announcing four acquisitions in the space of four months.

Initially the company's growth strategy worked and in 2000 when the company listed on the Australian Stock Exchange it had sales of $225 million, growing to $1.7 billion in 2011. Profits peaked at $249m in 2007.

But the summer weather didn't last. The company didn't adapt to a changing market landscape and lost its relevance with its core market - surfers. Newcomers who were more in touch with Billabong's traditional customers arrived on the scene and captured market share. Surf shops consolidated and retailers picked and chose the brands they wanted to sell. In the late 2000s Billabong had an extensive portfolio of brands and its debt burden made it difficult to respond to competitor activity.

By the time the bankers came calling last year as the company breached its financial covenants, the company was on its knees. It has been a steep slide for a company that five years ago was a A$4b ($4.74b) company with a share price of A$14.

After the second potential bidder walked away (leaving investors wondering just what they found when they looked under the hood), the share price tumbled to just A$0.15 and the company is now worth under A$100m.

It now seems the company will be forced to sell a substantial chunk of its assets to alleviate its debt burden and try to turn its fortunes around.

This job will be hard enough, but made even worse by the recent earnings result from competing firm Quiksilver, which was founded four years before Billabong and is listed on the New York Stock Exchange.

Quiksilver missed its earnings projections and said it intends to sell assets and inventory to turn its fortunes around.

Looks like we're going to be bombarded with cheap boardies and T-shirts. Good news for teenagers.

Carmel Fisher is managing director of Fisher funds, an investment manager and KiwiSaver provider.

Sunday Star Times