Billabong surfs back onto the bourse but its shares wipe out

Surfers are known to sit patiently on their boards out past the break, waiting for that perfect wave to ride. Patience is an attribute shareholders in Billabong International (ASX: BBG) have also had to acquire, with the most recent takeover talks dragging on for nearly a month.

As reported here, it appears the takeover talks have ended and in the aftermath of that announcement Billabong’s shares initially dropped 57% — that’s what surfers call a wipe out! By early afternoon the stock had steadied itself but was still down around 40%.

Accompanying the ‘reinstatement to official quotation’ and update on the takeover transaction discussions was a trading update. With regards to trading, the Australasia segment is trading below expectations with sales down 5.4% and gross profit down 2.3%. The Americas are trading ahead of plan, however the critical month of June for the northern hemisphere is just beginning. Europe continues to be weak with loses from the start up of the online shop SturfStich being greater than anticipated.

The poor trading in Australasia provides another insight into the state of clothing and footwear retail sales in the region. Premier Investments (ASX: PMV), owner of Just Jeans and Smiggle, has cleverly diversified via Smiggle into the stationary category, which somewhat protects its previous overreliance on the fashion sector and has also created an exciting growth avenue for the company. Meanwhile the underperforming streetwear apparel manufacturer Globe International (ASX: GLB) continues to suffer from the same weak trading conditions as Billabong.

Foolish takeaway

It’s understandable that Billabong’s sales are struggling in the face of weak consumer sentiment. The lesson for investors here is to stay away from companies carrying excessive levels of debt. If it was just slow sales, Billabong would probably just be treading water but coupled with high debt, the company has been forced to its knees.

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Motley Fool contributor Tim McArthur owns a share of Billabong.

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