Is Pac Brands the new Billabong?

Bonds, Berlei and KingGee apparel maker wants to expand overseas

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 June 20, 2013 12:19 pm AEST

Pacific Brands (ASX:PBG), the owner of well-known brands such as Bonds, Berlei, KingGee and Hard Yakka, could be about to follow Billabong International (ASX:BBG) into trouble.

In an investor presentation earlier this week, Pac Brands outlined plans to expand its Australian centric business internationally. The company wants to take its underwear and homewares products into the UK, USA, China and parts of Asia. Additionally, Pac Brands wants to establish relationships with multi-national customers to expand its Workwear business within the next 3-5 years.

Pac Brands has also set itself a target of rolling out new retail stores, particularly for the Bonds brand. The company currently has 5 Bonds stores, which is forecast to double by the end of this year. Outlet stores are expected to be converted to Bonds outlets, with other stores converted to clearance stores. Bonds is the primary revenue earning brand, representing more than 54% of sales in 2012.

Billabong faced the same issues as Pac Brands in Australia, unable to grow significantly due to our small population. The company then went offshore, expanding through the acquisition of other brands and rolling out hundreds of retail stores. That has all come crashing down, and now Billabong is peering over the cliff of financial disaster.

So far though, customers appear to like the new concepts and changes Pac Brands is making, while analysts have taken up the cause enthusiastically.

Pac Brands says the outlook for this financial year is cloudy, with sales performance mixed across brands and categories. The company says earnings will depend greatly on market conditions, sales performance and the implementation of its new strategy. It could also be further impacted by ongoing restructuring and rationalisation.

Foolish takeaway

Currently trading on a prospective P/E ratio of 8.7, and paying a fully franked dividend yield of 6.6%, Pac Brands appears to be fairly cheap. The issue is that sales have been falling, and costs rising. International expansion could either be a winner or a company killer and Foolish investors might want to take a wait-and-see approach for now.

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Motley Fool writer/analyst Mike King owns shares in Billabong.

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