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Why Billabong International Limited shares have skyrocketed today

The long-suffering shareholders of embattled surfwear retailer Billabong International Limited (ASX: BBG) have reason to smile at long last today following its annual general meeting.

Billabong’s shares are up 8.5% to $1.18 after chairman Ian Pollard revealed that the company expects to return to earnings growth in FY 2017.

Despite a soft start to the year management believes full year earnings before interest, tax, depreciation, and amortisation (EBITDA) before significant items will be in the range of $60 million to $65 million.

This equates to EBITDA growth of between 4.3% and 13% on FY 2016’s result. This is a step in the right direction considering last year Billabong delivered EBITDA of $57.5 million, down 12.4% drop from FY 2015.

If the company delivers on its promise then it will be great news for shareholders. But I’m reasonably sceptical on its outlook and feel we can add Billabong to the growing list of companies promising a better second half.

Based on the first four months of FY 2017 management expects EBITDA to be down on last year’s corresponding period due to weakness in Australian and European retail. I’m not confident that from such a poor start it will be able to better last year’s result.

Whilst the work the company is doing to cut costs and improve margins is commendable. I would suggest investors take the overall guidance with a pinch of salt and wait until the company delivers on it before making an investment.

Investors have been burned many times before by Billabong and fellow surfwear retailer Surfstitch Group Ltd (ASX: SRF). The retail sector is a difficult space to operate in, let alone surfwear retail.

Investors wanting to gain exposure to the retail sector might be better served with investments in either Baby Bunting Group Ltd (ASX: BBN) or Premier Investments Limited (ASX: PMV) in my opinion.

Alternatively, these hot stocks could be just what your portfolio needs right now.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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