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Tiffany Montgomery
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Billabong lowers forecast on weak U.S. sales; will sell shares to lower debt

By Tiffany Montgomery
May 18, 2009 7:02 AM

Billabong announced today it will raise up to (Aus) $290 million in a 2-for-11 stock offering to reduce its debt levels.

Institutional investors are expected to buy shares worth (Aus) $200 million, while the company could raise up to (Aus) $90 million from individual investors.

After the institutional offering, the company will have approximately (Aus) $450 million in debt, or (US) $342.1 million at current exchange rates. Any additional money raised from individual investors will also be used to pay down debt.

Trading in Billabong shares remains suspended and is expected to resume Wednesday after Billabong announces the results of the institutional share offering.

Weak U.S. results

The company also downgraded its full year earnings forecast due to weak conditions in the U.S. market, which accounted for 46 percent of total company sales in the last fiscal year.

Billabong said weak retail sales at company-owned stores in late April and early May together with lower and later fall wholesale orders led the company to lower its forecast.

Retail sales spiked in mid-April with sales rising 7 percent vs. the same period last year. But same-store sales fell in the high teens to low 20 percent range from mid-April through early May, lower than Billabong had originally forecast. The company expects same-store sales to continue in that range for the rest of its fiscal year, which ends June 30.

On the wholesale side, retail customers are lowering inventories and delaying orders closer to the fall season. This means that orders typically delivered in the current fiscal year are being pushed into next fiscal year. The company also said retailers are hesitant to prebook large orders, but instead want to order in-season more frequently. Billabong also has fewer retail customers as stores close or the company opts not to sell stores it considers to be a credit risk.

To deal with the situation, Billabong said it has reduced inventory levels and has mostly preserved margins. U.S. EBITDA margins for the second half of its current fiscal year are expected to be 14 percent, up from 10.6 percent in the first half. However, the margins are lower than the 19.2 percent margin achieved in the second half of last fiscal year. The company is also managing overhead and implementing cost controls as it moves into the next fiscal year, it said.

Interestingly, Billabong said in its release that it believes retailers ordering less product ahead of time and manufacturers lowering inventory levels will lead to product shortages in the 2009-10 fiscal year, which Billabong believes it can benefit from.

Other markets

Sales in other regions of the world are faring better than the U.S. Billabong expects Europe to log double-digit growth, with Germany a key bright spot. Business in the UK, Spain and Eastern Europe is soft.

In Australia, some retailers are also delaying orders, but the overall market is steady.

Because of the weak environment in the U.S. and the strengthening of the Australian dollar vs. U.S. dollar, the company expects net profit after tax in the range of (Aus) $160 million to (Aus) $165 million for the fiscal year ending June 30. In 2007/2008 fiscal year, Billabong's net profit after tax was (Aus) $176.4 million.

The company also said it expects to incur non-cash impairment charges for its retail assets this fiscal year.


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