Billabong Holds Its Annual Meeting; Progress and Headwinds

At Billabong’s annual meeting a couple of days ago, CEO Neil Fiske and Global Billabong Brand Manager Shannan North made presentations describing the company’s progress and challenges since the results for the year ended June 30 were announced in July. Let’s see what they said.

It’s only been four months since the year’s results were presented so, as CEO Fiske put it in his opening remarks, “The themes of our presentation today are not new.”

He reemphasized that the turnaround, while taking hold, was a long term effort. “We said a couple years ago that this was a complex difficult turnaround. That it is going to take time to build the foundation necessary to sustain growth and margin expansion.” Below is the list of areas, taken directly from the presentation, where the turnaround continues to be focused.

1. Brand
2. Product
3. Marketing
4. Omni-Channel
5. Supply Chain
6. Organization
7. Financial Discipline

If you’re looking for more detail on these, you can see Billabong’s earlier discussions in documents on their investor web site, and I’ve reviewed them in previous articles on my web site. I’m sure we agree that all seven are important. But in which areas can Billabong do something better than other industry companies? Where can it build a sustainable competitive advantage?

Overall, I believe that size is now an advantage in this industry, if only because of the investment in systems and in the omnichannel that’s required. Billabong, compared to most industry companies (depending on how we define the industry) has that going for it. I’ll also say I think Quiksilver’s problems have given Billabong an opportunity in some markets.

Starting from the bottom of the list, financial discipline gets easier as your balance sheet gets stronger. Billabong’s has certainly strengthened and I note that they are funding marketing programs through reduced expenses in other areas. Sounds like financial discipline to me.

I’ve no doubt there is money to be saved through revamping both the organization and the supply chain. But these are things other companies can and are doing as well. If you see these as a long term competitive advantage, it’s because you believe Billabong’s revamped management team can do it better than competitors.

Neil thinks that “over the next several years” they can get to the point where they are spending $30 million less annually on sourcing and logistics. He thinks they can cut their product lead times by 30%.

Making good product seems like the price of entry. Not something you can do better than others in the long run- you just have to do it to have the chance to compete. You can come up with some product innovations from time to time, but I doubt you can keep your competitors from doing the same.

Branding is a place where Billabong has an opportunity. This has a lot to do with their organizational changes. As Neil Fiske put it, “We are moving from a fragmented and regional business to a brand led, global company focused on building big powerful brands and maximizing their reach.”

The focus on what they decided are their three strongest brands with the greatest potential- Billabong, Element and RVCA- allows for certain efficiencies in all areas of the business. Remember, none of the seven strategies stand in isolation from each other.

Billabong is 52% of the company’s wholesale business, with each of Element and RVCA representing 16%. I suspect RVCA has the most growth potential. It’s not closely tied to a single activity like the Billabong and Element brands. In this regard, I thought Shannan North’s comment, talking about the Billabong brand, that “The brand’s turnaround is as much based on gross margin expansion as it is on revenue growth…” was interesting and appropriate.

For now, the Billabong brand (and I suspect Element as well) will be focused on its core (I still hate that term) market. At some point, with that further solidified, it will be interesting to see if they have the ability to break out of their core positioning without damaging that positioning. That’s pretty much the challenge for any brand in this industry as it grows, isn’t it?

Okay, omnichannel. Yes it’s important. As Neil puts it, “…probably the biggest game changer. Being able to connect all our channels – retail, wholesale, and ecommerce – to give the customer a seamless brand experience. Anytime, anywhere. Bricks and clicks. Content and Commerce. Social, mobile, local. Knowing our consumer like the back of our hand and being able to engage them on their terms, the way they want to interact. Omni is about unlocking the full value of the multi-channel shopper from one global unified platform.”

If Billabong was doing it badly, they need to do it well. Again, I’ll ask if that’s a source of competitive advantage or something you have to do well to compete.

2016, we learn, “…will be a year of heavy implementation on our big initiatives,” as CEO Fiske puts it. But, he points out, “…we have a set of external market challenges that must be met and overcome. Here’s what he says they are.

He says, “Last year at this time, the Australian Dollar was 87 cents to the US dollar and the Euro was 1.25 to the US dollar. Today the Australian Dollar is closer to 71 cent and the Euro closer to 1.07 Euros.” The problem, he says, isn’t so much the level as it is adjusting to the new level when currency values change quickly. I agree.

“Our second challenge,” he continues, “is the sector weakness we are seeing in the last several months in North America. This includes the big action sports chains, department stores, teen retail, and tourist retail. Specialty retail, where we hold the number one position, is better but still relatively flat and cautious. The hardgoods market in skate has been particularly slow in the first few months of our fiscal year and this has hurt sales of both Sector 9 and Element skateboards.”

Finally, he notes that “…price discounting and promotion online and in the mall remain high and the consumer is waiting for deals. We don’t intend to enter the fray. We will stay focused on quality products, quality distribution, and price integrity… on strengthening our brands with the core consumer.”

I like that decision. If you’re focused on building big brands, how else can you approach it?

The overall financial result is that EBITDA for the first four month of this fiscal year is $2.5 million Australian dollars less than what it was last year.

Billabong is working to pull off a complex turnaround in market conditions that are not improving quickly if at all. Though their balance sheet is restructured, they are not without financial constraints on what they can do and how quickly. I like their plan and focus. Anybody who expected to see faster, stronger results in this economy was kidding themselves.

The thing I wish I understood better is where they are going to be able to consistently do better, not just as well, as their competition. I’m also wondering if Billabong and Element can find ways to eventually expand beyond their surf and skate franchises with the brand positioning they are working so hard to manage intact. If there is some constraint on revenues growth by these two brands (perhaps offset by improved margins and profitability even with lower revenue growth), maybe some of their other brands, in addition to RVCA, will step up and surprise us.