Billabong set to gain from SurfStitch IPO

Surf wear wholesaler and retailer Billabong (ASX: BBG) could be set for a boost if claims that online retailer SurfStitch — which is 51%-owned by Billabong — is readying for an initial public offering (IPO).

SurfStitch was founded in 2008 and over the intervening years Billabong has taken a cornerstone position followed by a controlling interest in the online retailer. According to a report in the Sydney Morning Herald, SurfStitch claims it is now the world’s largest online sports apparel and fashion retailer with a share of the Australian, Asian and most recently the European online marketplaces.

According to Billabong’s results for the financial year ending June 2013, losses of $7.6 million in earnings before interest, tax, depreciation and amortisation (EBITDA) on account of the ecommerce start-up of SurfStitch Europe were endured, however only 51% of these losses were borne by Billabong.

Billabong also owns 100% of online platform Swell which is a surf and fashion site focussed on customers in the USA and Canada, as well as online sites dedicated to its specific brands.

With a growing focus on the earnings of major online retailers, including department stores David Jones (ASX: DJS) and Myer (ASX: MYR), which have significantly expanded their ecommerce offerings as well as mall owner and manager Westfield (ASX: WDC), which is looking to leverage its brand name and client base by creating an “online mall”, the potential IPO of SurfStitch will be closely watched by investors looking for insights into the profitability of the online retail world.

Foolish takeaway

While claims of being the biggest retailer in its target market in a few short years is impressive, investors must also remember that it is hard to truly dominate the online retailing space. SurfStitch is expecting to turnover around $80 million this financial year — a relatively small revenue base compared with many bricks-and-mortar retailers.

Having said that, tech stocks and IPOs are ‘hot property’ at present, which makes the potential for a successful listing of SurfStitch not only quite possible but also potentially lucrative to Billabong shareholders.

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Motley Fool contributor Tim McArthur owns shares in Billabong International.

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