AUSTRALIA WEIGHS ON BILLABONG RESULTS FOR FY17

ASB MAGAZINE: Billabong announced the financial results for the 12 months ended 30 June 2017 (FY17) and issued the following media statement. With regard to brand performance in Asia Pacific, the Company noted some fashion misses and execution issues, notably with brand Billabong. For example, in women’s swimwear the region recorded a very strong result in FY16. The same assortment formula that worked in the prior year was repeated for the start of FY17, just as the market was shifting to new trends. The U.S. assortment was on or ahead of those trends, but Australia lagged. The U.S. range was quickly tested in a set of Billabong stores in Australia and produced a stronger outcome. The new assortment has now been rolled out to all stores. With consumers increasingly connected globally through social media and digital commerce, the Company sees an opportunity to capitalise on trends moving more quickly across markets. CEO Neil Fiske said, “Early reads on the new seasonal assortment were encouraging.”

Despite a hiccup (as reported) with its Omni Channel partner NetSuit, the Company remains focused on its Omni Channel strategy saying that Omni was not just ecommerce, but the ability for customers to shop the way they wanted to shop – in stores and online, retail and wholesale, across all channels with richness of content and a personalised experience. Billabong expects to move quickly into deployment of its alternative Omni Channel provider and says Surf Dive ‘n’ Ski is scheduled to be operational by the end of this calendar year.

Full results, coverage and analysis to follow the earnings conference call. Overview:

• Strong second half lifts FY17 Earnings Before Interest Taxation Depreciation and Amortisation excluding significant items and discontinued businesses (EBITDA) to $51.1 million up 2.8% year-on-year constant currency (cc)

• Key metrics improve second half (H2) over first half (H1); comparable gross margins up in all regions in H2 year-on-year (yoy)

• Americas leads the turnaround with full year EBITDA up 46.9% cc (yoy) before global allocations (excluding significant items and discontinued businesses) • Operating cash flow improved by $31 million (yoy)

• Non-cash impairment of $106.5 million leads to statutory Net Loss After Tax of $77.1 million • Net Loss Before Tax of $8.4 million (excluding significant items and discontinued businesses)

Billabong Chief Executive Officer Neil Fiske said, “At the Annual General Meeting we said we were confident that our strategy would produce a strong second half and drive overall EBITDA growth for the year, despite a first half that was behind the prior period. We have achieved those ambitious goals. This result marks a turning point for the Company, and one on which we can build.

“We had three core objectives for H2: continue the turnaround in our largest market of the Americas, expand comparable gross margins across all of our regions – a key indicator of brand health – and reduce the Cost of Doing Business (CODB). We hit all three of those targets.

“The key to our ongoing success is the relevance of our brands. We continue to strengthen the connection with our customers, with global social media followership up 42% year-on- year to almost 37 million. “EBITDA for the year of $51.1 million is up 2.8% constant currency and is less than a million dollars below the guidance range that we provided in November and affirmed again in February, allowing for the sale of Tigerlily. If not for the widely reported weak retail conditions in Australia we would have been well up in the range.

“These results reflect the tangible progress we are making in implementing our turnaround strategy in all regions, particularly in the Americas and Europe. The outcome validates our approach and provides a way ahead to address the performance in the Asia Pacific region, where there have been challenges in the broader retail market over the past year, particularly in Australia.

“This half represents the first time in three years that comparable gross margins have improved in every region, year-on-year. Gross margin expansion is a key driver of our profit improvement plan and margins were up 210 basis points for the half, and up 380 basis points in our largest market of the Americas. “In the second half, EBITDA on a constant currency basis was up 50%, by far the best growth we have reported for any period since the recapitalisation in 2013.

“The result in the Americas, on top of a strong EBITDA lift in H1, gives us confidence that this region, often described as our greatest opportunity, has turned the corner. “We simplified the business with the sale of Tigerlily and paid down debt. As a result Tigerlily is excluded from these results.

“Looking ahead, market conditions remain challenging, particularly in Australia, but we see opportunities for sustained earnings growth driven by further expansion in gross margins, acceleration of our direct to customer channels, strength in the Americas, growth in our RVCA brand, expanded global distribution, cost efficiencies and the ongoing benefits of our global platforms.”

Brands The big three brands of Billabong, RVCA and Element continue to expand their consumer engagement, with global social media followership for the Group’s brands, athletes and ambassadors up 42% yoy to 36.9 million. This growing cohort of fans and consumers demonstrates a strong endorsement for the qualities represented by the brands, and positions them well for ongoing market success. In 2017 the Group’s brands were recognised by the leading surf industry awards in the United States (SIMA) and Australia (SBIA). Major awards included:

United States: • Billabong: Women’s Marketing Campaign of the Year • Billabong: Women’s Apparel Brand of the Year • Billabong: Women’s Swim Brand of the Year

Australia: • RVCA: Men’s Brand of the Year • Billabong: Men’s Marketing Campaign of the Year • Billabong: Women’s Marketing Campaign of the Year • Billabong: Women’s Brand of the Year

Asia-Pacific The result in Asia-Pacific was shaped largely by two distinct factors: macro retail conditions in Australia, and some correctable brand execution issues. The weak Australian retail market dragged on the result. Retail comparable store sales were down 5.0% and retail gross margins were behind FY16 by 210bps due to higher promotions and clearance markdowns. Asia Pacific EBITDA before global allocations dropped $9.2 million, or 28.3%, on an 8.0% revenue decline. In wholesale, the macro factors that pressured the retail results also impacted wholesale accounts, leading to further market consolidation, cautious buying and fewer repeat orders. In Australia, wholesale margins, however, improved substantially over the year from 70 basis points down in H1 (yoy) to 450 basis points up in H2 (yoy). Americas

The Americas has been the top priority for the Group’s turnaround and has delivered a vastly improved set of numbers, highlighted by: EBITDA up 46.9% prior to global allocations. • Billabong and RVCA, the two biggest brands, gain market share in core specialty channel • Ecomm most developed in the Americas – 7.4% of sales (excluding Sector 9) and growing rapidly • Inventory down 14.0%. In the face of challenging market conditions, the top-line was planned conservatively and intense focus was placed on controlling inventories, streamlining the organisation, reducing costs, improving owned retail, growing ecommerce, and expanding gross margins through the Group’s sourcing and concept-to-customer projects.

Europe

The region delivered its fourth consecutive year of EBITDA growth, up 8.9% for the year before global allocations, on the back of a strong second half. The UK market overall struggled after the Brexit decision, and was a drag on comparable store sales which were down 2.5%. Europe’s sustained year-on-year improvements reflect a disciplined approach to strategy, improved quality of revenue, concentration on the big three brands, and leveraging of global platforms.

Platform initiatives

Work undertaken on global platforms has underpinned much of the Group’s operational improvements. Global sourcing and concept-to-customer, which have been key focal points of the Group’s turnaround strategy, helped deliver strong improvements in gross margins. This momentum should continue into FY18 with further margin improvements.

A third initiative, focused on reducing global logistics and distribution costs by $10 million per annum at maturity, is now well into implementation. The Group closed its Canadian warehouse, stood up consolidation centres in Asia, transitioned to a third party logistics provider in the US and developed plans for further distribution centre rationalisation to be rolled out in the next two years.

The Omni initiative remains at the heart of the Group’s customer engagement focus. Good progress has been made on a number of key initiatives, such as deploying a new digital business-to-business system and a more advanced merchandising planning and allocation system for retail.

New industry-leading partners have been appointed to accelerate progress in ecommerce, retail point of sale, and customer relationship management.

The selection of the new partners was based on one overriding principle – delivering the best possible Omni channel experience for customers with certainty and speed.

The Company emphasised that Omni was not just ecommerce, but the ability for customers to shop the way they wanted to shop – in stores and online, retail and wholesale, across all channels with richness of content and a personalised experience. The value of an Omni platform is in the integration of previously unconnected parts of the retail system.

Rather than rely on one provider for that solution, the Company outlined an approach that utilises the best off-the-shelf software solution for each of the major components, and proven system integrators to bring those building blocks together. Each of the major partners is a leader in their field, but importantly they have worked together extensively on similar implementations. The solution design is cloud-based and scalable to countries and distribution partners around the world.

Between the experience base of these partners, the advancement of the technology, and the work already done, the Group expects to move quickly into deployment. For example, Surf Dive ‘n’ Ski is scheduled to be operational by the end of this calendar year.

Financial Summary

• Total sales of $974.7 million were down 4.7% cc, excluding Tigerlily and Sector 9. However, comparable retail revenue (comparable Bricks & Mortar stores + ecommerce) was up 0.1%, and ecommerce sales overall grew 22.0% cc, excluding Tigerlily and Sector 9. • Group EBITDA of $51.1 million was up 2.8% cc and 0.3% as reported. In the second half, EBITDA of $27.2 million was up 50.1% cc and 41.1% as reported. • Inventory was down 7.5% cc (excluding Tigerlily) and gross margins improved 90bps. • The Company reported a Net Loss Before Tax of $8.4 million, excluding significant items and discontinued businesses. After a predominately non-cash impairment charge of $106.5 million the Net Loss After Tax was $77.1 million.

VIA PRESS RELEASE

 

 

07:09AM / Torquay / Vic / Aus

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