Billabong has come under further fire today with the announcement law firm Slater & Gordon is preparing a class action against the beleaguered surfwear brand.
The class action is being funded by Comprehensive Leading Funding and 400 claims have been received to date with more expected.
The class action will claim Billabong engaged in misleading and deceptive conduct and failed to comply with its continuous disclosure obligations.
It will allege Billabong gave earnings guidance to investors for the financial year 2012 that lacked reasonable grounds.
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On August 19, 2011, Billabong forecast that it would achieve strong earnings growth in financial year 2012.
A few months later, the board of the surfwear company withdrew that guidance and revealed its earnings would suffer a substantial fall.
As a result, Billabong’s share price dropped by more than 50% in the days following.
The class action participants allege Billabong misrepresented the assumptions on which the FY12 earnings growth guidance was based.
Slater & Gordon senior associate Odette McDonald told SmartCompany the issue is that Billabong stated that achieving guidance depended on internal initiatives, such as achieving synergies between its newly acquired retail outlets, and increasing the proportion of total revenue from Billabong product.
But the class action claims, in reality, Billabong’s growth guidance required “an extraordinary lift” in overall sales revenue during an extremely challenging retail environment.
McDonald says the class action will claim Billabong’s internal initiatives “had no viable chance” of substantially lifting profit margins and if the market had been informed of the true issues underpinning the earning forecast “it would have disregarded the guidance as unrealistic”.
“Businesses need to be aware of their legal obligations to keep the market fully informed. Investors make important decisions when it comes to information, so it is critical to ensure the proper operation of the market, and that investors get adequate and timely disclosure from companies of information that is going to have a bearing on price,” McDonald says.
“Based on our investigations to date, we believe that Billabong has a case to answer.”
Ian Ramsay, professor of commercial law at the University of Melbourne, told SmartCompany the class action had been foreshadowed, so to a certain degree, it may have been expected by the market.
“This latest class action announcement fits with the long trend of Australian securities class actions focusing upon disclosure and, in particular, alleged failures to comply with continuous disclosures,” he says.
“The trend of these actions has been to settle and not to result in a court judgment, so there is quite an important question as to whether this will eventuate in a court action.”
Ramsay says it is difficult to predict the amount of money at stake as there is “enormous variety” in class action claims from “miniscule amounts” to $100 million.
McDonald says she expects the quantum to be “quite sizeable.”
At the start of the year Billabong shareholders overwhelmingly approved a 40% takeover of the retailer by US hedge funds Oaktree Capital and Centerbridge Partners.
This followed a difficult time for Billabong with its share price tumbling while Derek O’Neill, head of the surfwear retailer for 20 years, was replaced first by Launa Inman and then more recently by Neil Fiske.
SmartCompany contacted Billabong for comment but did not receive a response prior to publication.