Why I recently bought Billabong

Is this company set to be dumped, or surf its way back into profit?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 8, 2012 7:16 am AEDT

Yes you read that right. I bought shares in a bombed out retailer, Billabong International (ASX: BBG). Another one, following my recent purchase of shares in David Jones Limited (ASX: DJS).

If you've already read my earlier two articles, on David Jones and Fairfax Media, you're probably thinking I've lost my marbles – but there is reason to my madness.

Let me explain why I've bought shares in Billabong.

As you are probably aware, the company's shares slumped (again) after two private equity (PE) firms walked away from takeover offers they had made, both at $1.45 per share. Not that most investors really expected either deal to get across the line, with the share price trading at a substantial discount to the offer price for some time.

Following the withdrawal of TPG Capital, the surfwear retailer's shares slipped to as low as 74 cents. Whilst the market is none-the-wiser for the reasons for both PE firms to walk away, speculation suggests that the company has some longer term leases that would be very costly to exit, which means the company is stuck with an expense it can't do much with. Of course, it could be a multitude of other reasons.

With the share price trading at close to all-time lows, I felt that there is still substantial value left in the business, not justified by the low price.

Billabong expects challenging conditions to continue during the 2013 financial year, but still expects to report EBITDA in the range of $100-$110 million, in constant currency terms. Looking further out, in 2016, Billabong is targeting EBITDA of more than $210 million, through a range of initiatives. These include simplifying the business, investing in key brands, building its global online platform and improving its supply chain.

Underperforming stores are being closed, and the company aims to reduce the number of unique styles it currently has from over 25,000 by 15% as well as cut the number of suppliers – around 500 of them – by 35%.

The company has reduced its debt to more manageable levels, and has a stable of well known, respected brands, including Billabong, Nixon, Element, Von Zipper, Kustom, Tigerlilly, DaKine and RVCA to mention a few. Billabong products are licenced and distributed in more than 100 countries, and available in over 600 of the company's own stores and more than 10,000 outlets worldwide.

The company has also embraced the online space and plans to expand its online sales (much like David Jones is currently doing, which appears to be very successful).

Much of the transformation is being driven by Launa Inman, who was appointed managing director in mid-May of this year. Ms Inman comes from previous roles at Target – owned by Wesfarmers Limited (ASX: WES) and Woolworths Limited (ASX: WOW), and has a strong track record in retailing. According to the Australian Financial Review, Ms Inman lifted earnings at Target by 85% over six years.

The Foolish bottom line

While another takeover offer may come, that's not the reason why I bought into the company.

A strong turnaround plan, with the right management in place bodes well for Billabong. Directors actively buying more shares is encouraging. With so many areas that can be targeted to generate cost savings or increase revenues, virtually the only way left is up. I'll be closely watching for signs of improvement.

If you only invest in one company this year, make it our "Top Stock for 2012-13". Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

More reading

Motley Fool writer/analyst Mike King own shares in David Jones, Fairfax and Billabong. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.