In releasing both a big financial loss and a new strategic plan, Billabong’s CEO, Launa Inman, stopped short of bagging the lack of financial and commercial discipline in the company she took over in May.
The iconic surfwear brand began life as a wholesaler, but later started opening its own shops. With Inman’s appointment came a promise to deliver a strategic plan to save the business, and to answer critical questions about the reasons for its poor performance.
In doing so this week, Inman repeatedly complimented the company's entrepreneurial leadership. But Inman’s own analysis of Billabong’s current position and future potential made the gaps in management all too clear: no research about who the customers are or about what they want, no research on the industry itself, no global financial reporting, a mish-mash of suppliers, and knee-jerk reactions to recent business issues that did more harm than good.
“We need to hold on to the great entrepreneurs [who started the company],” she told investors and analysts. “We need to retain the culture, but become more disciplined. We need to plan and to measure results to ensure the strategy is executed.”
Billabong’s report card was bad: a net loss after tax of $275.6 million on revenue of $1.55 billion, which was down 7.9%.
The company reported significant costs, impairments and charges of $336.1 million, a figure much higher than the proceeds of its partial sale of its best-performing brand, Nixon, which raised $201.4 million.
What went wrong?
Inman says Billabong did not make a mistake going into retail; but it did make mistakes in the way it did so.
The company has already closed 58 stores, reducing store numbers to 634, and intends to close another 82 in the current financial year.
Paying out leases on closed stores, selling off the inventory at reduced prices, then the reduction in sales from fewer outlets and the partial sale of Nixon all contributed to the significant and exceptional items.
Then a big American customer, PacSun dropped Billabong and started making its own house brand.
When sales fell, the company slashed its marketing budget. “In our quest to save profit, we cut our marketing budget, but that reduced our sales,” Inman told analysts and investors today, shouldering responsibility for a decision taken before her time. “Then, because of poor sales, we ended up with excess stock and had to mark it down.”
This year’s results
It’s not unusual for a new CEO to make a bit of a write-down at the start of their tenure. Billabong has taken all the pain of selling off its surplus stock at discount prices into 2011-12.
Doing so allows it to allocate a relatively small amount – about $80 million – to restructure its operations over the next four years.
This helps Inman to draw a line under the past management, and achieve the growth figures she has set out – $155 million EBITDA (earnings before interest tax depreciation and amortisation) by 2016 – which have been broken down into six specific areas of change.
Inman pointed out that the total sportswear market is $15 billion, and is growing at about 4% a year.
Which brands will lead the company's recovery?
Inman believes she can add another $65 million to EBITDA by brand building. She has identified the brands that she believes will deliver the bucks: Billabong ($25 million) and three smaller brands: Element, DaKine and RVCA ($40 million).
This defines Inman’s solution as essentially a marketing one. She wants to convert awareness of the brand into sales. In Australia 86% of people know the brand, but 46% have actually bought it. The number that Inman is interested in is the 53% who would consider buying it in the future.
In America, 47% of the population have heard of Billabong, and only 14% have ever bought it. It’s a big opportunity, in Inman’s view.
Inman points out that Billabong has done well with all the brands it has bought over recent years, with every one of them making more money that they did when they were bought.
Still, she is planning to focus a big marketing effort on only three: skate brand, Element; hiking brand, Dakine; and RVCA, a youth brand.
Why these three somewhat unknown brands? Because their conversion rates are high. Although only 32% of people have heard of Element, 11% have bought Element products, for example.
The problem today is that Billabong is undifferentiated from competitors, such as Quiksilver. When it launched 40 years ago, the idea of a surfwear brand was unique. Now, it is not.
“We want to be famous for something,” says Inman. However, her chosen goal – to be famous for continuously setting a new standard in board sports through youthful lifestyle brands and experiences – did not run off the tongue. The broad point is clear: Billabong needs to be seen as different.
The customers Billabong wants, and what they want from Billabong
Billabong’s core customers are the sports fanatics – the people who surf, snowboard or skate every week, and the participants, who get to it every so often. There are another 34% of people who have active lifestyles, and are passionate about these sports, but do not participate. These offer a big opportunity, Inman says.
There are 34% who have same values but don’t participate as much. This is all about ‘psycho graphic values’: how they perceive themselves and what products they want. The 19% are the image leaders, the trendsetters. The others say, ‘I may not be the best surfer but I think like them, act like them and am passionate about the sport.’ We can stretch the Billabong brand to target the 34% without offending the core customer.”