Sales slowdown due to global recession, Billabong

19 Dec '11

5 min read

At the time of its Annual General Meeting (AGM) in October, the Billabong International Limited indicated that Group sales revenue in the three months to 30 September 2011 was up 24.7% in constant currency terms (up 6.2% adjusting for the impact of acquisitions) compared to the prior corresponding period (pcp) and the business anticipated strong underlying EBITDA growth compared to the pcp in constant currency terms in the 2011-12 financial year.

At the announcement of the 2010-11 financial year results in August and again at the AGM, the Company also stressed the magnitude of the December and June trading months to the Group's overall results for the 2011-12 financial year.

Following receipt and finalisation of management accounts reflecting actual trading results for the month of November and receipt of preliminary retail sales data for company owned stores for the period ended 11 December, the sales growth trend has deteriorated significantly in this critical retail period.

Based on preliminary sales data to 11 December and assuming a continuation of current trends, it is now anticipated that sales revenue for the six months to 31 December will be approximately 5% higher than the pcp in constant currency terms (down approximately 3% adjusting for the impact of acquisitions).

The reasons for the sales slowdown vary by region, but the data received reflects the European sovereign debt issues and the ensuing fears of global recession which are impacting consumer confidence and spending patterns significantly. Within the key regions:

• The Group's European company owned retail stores, which were showing slightly positive comparable store sales growth to the end of October, declined sharply in November after a positive start to the month and this downward trend continued into the first week of December.

• With the lower sell through from the late start to winter and limited snowfalls, European retailers are pushing back early summer December deliveries to later in the year. While it is expected the Group will deliver the majority of these summer forward orders in the second half, the later deliveries may result in lower in-season repeats.

• In Australia, while there was some sales improvement following the November fall in interest rates, sales in the latter part of the month were significantly affected by unseasonally cold summer weather, particularly in New South Wales. The poor weather has continued into December and is reflected in same store sales declines.

• With respect to North America, the Group's business in the USA has continued to perform well, with good like-for-like sales growth in October and November but turning negative in the first two weeks of December on growing global concerns about Europe. Challenging trading conditions remain in Canada, in both wholesale and retail.

Overall, Europe is by far the Group's most challenging market, followed by Australia. The slower global sales come as the general market environment has become highly promotional and this is placing pressure on gross margins. Much of the consequent loss of gross profit is leading to a reduction in EBITDA given the limited ability to reduce the relatively fixed cost base in the short term.

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