Billabong: Dud stock or deep value play?

Shares of surfwear company Billabong (ASX: BBG) have fallen, and fallen hard. Over the last 12 months, as a number of investment firms have examined the company’s books and subsequently walked away, the company’s shares have sunk some 66%, compared with a 21% gain in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO).

Possible value play?

Looking back ever further, the decline becomes even more stark. According to The Australian Financial Review, Billabong’s market cap peaked at nearly $4 billion in 2007. Today, the company’s market cap is about $120 million, or less than one-twentieth its peak 2007 value. Talk about a wipeout.

However, for today’s investors, it’s the company’s future and not its past that is most relevant. With shares trading for just 35 cents as of this writing, and a new deal announced that will see the company under new management and with its debt load refinanced, many investors are asking if this company is a possible value play.

Terms of the deal

This week, Billabong announced it had entered a deal with Altamont Capital Partners, a private equity firm, in conjunction with related parties including Sycamore Capital Partners and Blackstone Group, which will see the company injected with $325 million in funding and a further $70 million from the asset sale of its DaKine brand. The complex deal includes facilities which could see the Altamont consortium come to own as much as 40% of the company.

In all, it’s not a deal any company would make of sound mind and free will. It’s got backs-against-the-wall written all over it. But it does mean the company will live to fight another day.

The future and Billabong’s category problem

So where does all this leave Billabong? There’s little question that Billabong’s core business has declined, with sales peaking in 2009 at about $1.7 billion and falling to about $1.4 billion in the last 12 months. The decline has been most marked in the U.S. and Europe.

It’s not just Billabong that’s been feeling the challenge. As The Sydney Morning Herald has reported, “Australia’s ‘big three’ – Rip Curl, Quiksilver and Billabong – had all experienced shrinking sales and expanding debts in recent years as consumers turned their backs on expensive surf-branded apparel, favouring high fashion-cum-high street trends and the cheaper convenience of online shopping.”

The takeaway for investors

In other words, Billabong has a category problem in a global sense. High prices and low demand aren’t a good mix. The way forward is for management to lower price points, further rationalise the supply chain, and continue to exit unprofitable stores and distribution points. Surfing and surfers are inherently sexy, and Billabong does have considerable brand recognition in the category, but it must figure out how to break out and sell in the brave new world of fast fashion and online retail.

The good news is, that’s not rocket science if the management team approaches the problem sufficiently humbled. So, while there seems no call  for a ringing endorsement of the stock, investors looking for a punt could possibly do worse than a few Billabong shares now.

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Motley Fool contributor Catherine Baab-Muguira does not own shares in any company mentioned in this article.

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