Can Billabong ride out this wave of loss?

The controversy about the future of Billabong (ASX: BBG) takes yet another turn with the massive write-down of assets totalling $776.5 million, which more than three times the company’s total market capitalisation of $232 million. The fall of this Australian icon comes from a mix of the GFC crunch and bad management of the international board shorts and surfwear retailer and distributor.

Revenue was down 6.84% from $1.44 billion to $1.34 billion, and a net loss of $859.5 million resulted after cost of impairments of assets. Gross gearing is at 120%, and although debt is slowly being paid down, the net interest expense of $25.67 million was just a little less than half of the company’s gross profits, so mortgage stress will be at least one thing to look forward to for shareholders. $68 million in proceeds from a capital raising in July 2012 were used to pay down debt.

The group currently operates 562 stores in Australia, New Zealand, the US, Europe and South Africa, so despite the financial woes, it still has a very wide footprint. It also has two online retail sales websites.

Sales in Europe were down, and earnings fell by $19.5 million. Sovereign debt issues and overall consumer confidence erosion kept retail sales weak. In Australasia, profits were up $4.7 million, assisted by cost savings from the company’s store closure program. The Americas saw a 5.6% drop in revenue, yet earnings before interest, tax, depreciation and amortisation was slightly higher than the previous year — $38 million compared to $37.7 million.

Large investors have been circling the company as a takeover target, and as many as four potential offers came in this 2013 year. The would-be acquirers made their offers, got a peek into the books and the company’s near-term outlook, and the first three backed out. It began to make news, asking the question of “what did they get to see that we don’t know yet?” Now we know.

The last buyout offer finally disappeared itself, but currently Billabong is in talks with the fourth group about funding, and they are hashing out a deal to keep the money flowing.

Just as recent as 24 June, the share price was trading at $0.12, way, way lower than its 2007 high of $14.20.  Interestingly, had you bought it on that June day, you would have almost quadrupled your investment in about two months because it ran up to $0.60 and sits at around $0.50 currently. That sure beat the S&P ASX All Ordinaries Index (ASX: XAO) if anyone was still looking to buy Billabong.

Foolish takeaway

“It ain’t over til it’s over” fits this story. For the older shareholders, great amounts of value have been lost, but other turnarounds have happened in the past, too. The best solution may be to take the company private, fine-tune the business for a few years until it is in peak shape, then refloat the transformed company. It can happen in the right hands.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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