Billabong International Limited drops 5%: Is it facing a wipeout?

Surfwear maker Billabong International Limited (ASX: BBG) has again disappointed investors with a weaker share price, following the release of its annual report. The retailer has continued to make heavy losses in the past few years, losing 38% of its value since 2009. Much of this was owed to record write-offs totalling $776.5 million in 2013. In its latest FY14 report however, Billabong’s situation wasn’t as bad and I think we’re starting to see glimmers of hope for the beaten-down retailer.

Here are some important takeaways from today’s report:

  • Net loss after tax of $233.7 million for FY14
  • Excluding significant items, earnings before interest, taxation and depreciation were $52.5 million for the year
  • Revenue rose 1.6% to $1.125 billion for the year
  • No final dividend was declared, meaning no dividends have been paid for the year.

What do these results mean?

While the results may seem disappointing, it’s important to note that losses have been substantially cut during the past year, falling approximately 73%, quite a drop indeed!

The improvement indicates that measures used to improve brand exposure have been working, despite its American businesses continuing to weigh down on its recovering Asia Pacific and European divisions. Revenues in its American divisions dropped 10%, causing a staggering 54.6% drop in earnings before interest, tax and depreciation.

While management agreed that its American division is facing some difficulties, Billabong has been taking the appropriate measures to dampen these losses. Its most recent divestments reflects this, given the sale of its 51% stake in online surfwear retailer Surfstich and its North American online business, Swell, for about $35 million.

These divestments are aimed at reducing its lagging American exposure and lifting its bottom line into positive territory. This is to be done in conjunction with modest sales growth in Europe and the Asia Pacific.

What now?

What I find most promising about struggling companies like Billabong are endeavours by management to reorganise business functions to maximise efficiencies. From its most recent annual report, it’s quite clear that Billabong has been doing just that.

Billabong has recently initiated its “7-step strategy”, which involves diverting attention only to its three biggest and most successful brands – Billabong, RVCA and Element. Focusing on these areas will give it a simplified business structure with less stores and products, given it closed down 41 of its underperforming stores this year. Billabong has also been targeting its supply chain efficiency by moving to fewer, yet bigger suppliers. Ultimately, management is aiming to turnaround its lagging businesses by improving efficiencies and reducing costs.

I think Billabong’s contingency plan is a very smart move but as management inferred, these processes are complex, taking a while before they materialise and therefore investors shouldn’t be expecting record profits any time soon.

Billabong doesn’t seem to be offering much in terms of future growth prospects, but If investors are looking for a high-risk, high-return investment that has the potential to be a turnaround story, then I think Billabong is a relatively good bet for your money, but it’s definitely not for the feint hearted.

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Motley Fool contributor Aryan Norozi does not own shares in any of the companies mentioned in this article.

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