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Billabong, Rip Curl: The tides are changing

Within Australian surfwear brands, there has been something akin to a changing of the guard recently, brought on by age, changing trends and economic realities.

In the early 2000s, Rip Curl and Billabong (ASX: BBG) were expanding into the US and Europe, and together with Quiksilver (NSYE: ZQK), an Australian company headquartered in California, were taking surfwear and later skatewear mainstream.

Riding a wave of success, Billabong began buying many brands, and growing its business right up until the GFC, but when that economic wave came crashing down, those names had much less value than they once had. Consumers now had less money to spend, and in the case of European surf/skate fans especially, the high youth unemployment rate wiped out their discretionary spending.

The company has had $1.35 billion in write-downs and impairments over the past two years, and of the $1.26 billion in intangibles and goodwill it had in 2011, only $212.7 million remaining. With that, the bloated balance sheet has lost a lot of its bulge, and the company has reset back to a time more alike before the earlier brand buying spree.

Its 2013 revenue of $1.3 billion is on the same level as it was in 2008, so if it can scale back its cost of doing business at the same time that the US is recovering, a restructured company — even one taken private for a while — could turn things around. In 2012, Billabong saw losses in all three of its major business divisions of Australia, the US and Europe. This year, only Europe had a net loss, although the other two were far down from where they were in 2011.

Also changing with the times, Rip Curl founders Brian Singer and Doug Warbrick have left the board of directors of privately held Rip Curl International. Together, they control 72% of the company, so they will still have influence over the course that the business will take. There was an attempt to sell the company for around $400 million, but the plan was withdrawn because of a subdued business climate.

Separately, the former Billabong US head Paul Naude is working with former Billabong CEO Derek O’Neill to create a new surfwear brand company. Naude, who oversaw Billabong’s EU business between 1992 and 2003, is making O’Neill the European master licensee for the new brand, which will be competing head to head with Billabong in the region where its sales are currently its weakest.

This year, amongst the several takeover offers that Billabong received, one of them was led by Naude himself, whose $0.60 a share bid was turned down. Billabong shares trade around $0.38 currently.

Foolish takeaway

As companies mature, they slow down, and have to reinvent themselves to remain relevant and attractive to consumers.  Turnarounds are difficult, but sometimes the more successful parts of a company are separated as spin-offs, and that can be a source of good returns for investors.

Even if Billabong or Rip Curl are not the hot brand names they once were, they still can develop and merchandise up and coming new names, and apply their business and market experience to existing and new markets. As the US and Europe begin to recover, watch for signs of improving revenues and profits, and ride the wave from there if they look good.

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

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