Warning in retail capital raisings

A few weeks ago I predicted that a lot of companies would follow online ads giant Seek and go to the market to raise capital to help them reduce their debts, increase their cash and buy themselves some flexibility.

I was right – and I was wrong.

I was right in that Billabong and toy group Funtastic both announced capital raisings yesterday and in both cases the monies raised will help pay down debt and provide a bit of balance sheet breathing room.

But I was wrong in that Seek actually failed to get its capital raising away, which came as a shock to most pundits and underlined the fact that investors remain very, very nervous.

Billabong and Funtastic should get their capital raisings away fairly easily. Billabong’s $225 million raising is underwritten, while Funtastic’s $24.6 million should get the support of an investor base that includes Lachlan Murdoch.

But the signals out of both companies do bear further examination.

Funtastic is in the midst of a turnaround that is progressing reasonably well despite the difficult retail conditions. While announcing its capital raising yesterday, managing director Stewart Downs reaffirmed the company’s guidance of earnings before interest, tax, depreciation and amortisation (EBIDTA) for the 12 months to July 31, 2012 of $20.1 million compared with $3.6 million for the 2010-11 year.

Downs also released guidance for the 2012-13 year, with EBIDTA tipped to be $23-25 million.

But, ominously, the company said its 2012-13 financial year assumptions include “no improvement to current Australian retail conditions, which are expected to remain challenging for the foreseeable future” and “no major change in the domestic customer landscape”.

The capital raising then is all about prudence. With no improvement in retail conditions in sight, Funtastic is making sure it won’t be caught with too much debt if things get worse.

Not exactly a great signal from the retail sector, is it?

But at least Funtastic appears to have got its business in reasonable shape and can look forward to some growth.

The same cannot be said for Billabong, which is in a horrible mess.

Like Funtastic, yesterday’s capital raising contained a number of other announcements, though none were positive.

Firstly, there was another downgrade to EBIDTA guidance; EBDITDA for the 2011-12 year is expected to be $130-135 million down from February’s prediction of $157 million. As an extra kicker, the company warned that even this lower figure is dependent on good trading in June.

Secondly, it was announced that chairman Ted Kunkel will leave the board sometime between October and February, after the company’s next annual general meeting. Allan McDonald, head of the board’s audit committee, is also on the way out.

Thirdly, Billabong revealed that new CEO Launa Inman will need another few months (until August 24, to be precise) to get her new business plan in order – which suggests the company is in an even bigger pickle than she first thought.

And finally, Billabong founder Gordon Merchant announced he will only take up 85% of his entitlements under the share offer.

That will still cost him $30 million, which is a fair chunk of money. But it’s only a few months since Merchant was railing against a $3-a-share private equity offer, telling the world he wouldn’t even sell Billabong for $4 a share. Now he won’t even take up his full entitlements in a capital raising at $1.02 a share.

Is Merchant losing faith? He could certainly be forgiven for doing so.

Funtastic and Billabong are telling us that the retail outlook shows almost no signs of improvement. This is not the time for a company’s model to be in disarray. Funtastic isn’t in that position, but Billabong sure is.

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