Value.able: Billabong
Roger Montgomery runs through the numbers behind Billabong’s spectacular 40% sell-off this week. Read Roger’s article at www.eurekareport.com.au.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
prashant
:
Guys…i have worked in the apparell industry. I know people who work in Rip Curl & Quicksilver and they are absolutely sh##ting bricks right now….as Billabong now dominates the distribution of their product here in Australia…and is fact becoming a big global player in their distribution..
If Billabong wants….they could de range…or range less of Rip curl, Quick silver etc….at the benefit of their own brands in their Retail stores….
Making the move into Retail to protect their market access was a very smart move….it gives them more control over the end price their garments get….so they can control their brand image….plus they get the double benefit in margin when the industry / business cycle recovers
Sure…the Billabong brand is now more targeted to a “mature” consumer…..but they have other brands in their stable likce RVCA etc….to target the younger generation…
Also the move online is not that major a threat for them as they control their product from factory to shop floor so there are no leakages along the way…..the only stock that is sold online from them is by them through their own businesses….
The big overhang on their share price right now is because of capital management concerns / risk of a rights issue….once this gets resolved i reckon BBG will easily double or triple like Pacific Brands did in 2008 when they had similar capital management issues / bad press…
Keith
:
I think we know that others using PE ratios to value and benchmark companies often creates the value opportunities we seek. I have benefitted in the past when it has seemed that David Jones has been priced in the market at some sort of “parity” with less well managed retail stocks and am watching it with some interest currently. One of the questions I am having difficulty assessing is the potential impact of online – both within DJs operations and business model and that of the competition. For eg my late twenties children and their associates are increasingly using online sites for luxury and lifestyle type purchases and overseas companies like Macy’s are becoming increasingly aggressive in this space. Similarly I hold and am keenly watching ORL for how it will manage its online presence and compete here.
Simon
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Don’t forget the weakness of the Euro @ 80c now! Several Gen Y that I know (all went to same school as my daughters) are now comtemplating purchasing their footwear/clothing/video games online from U.K, even in preference over U.S sites.
Roger Montgomery
:
Or Italian lake Como waterfront!
Jerry
:
Nice roger I hope I don’t have to compete with you when buying!
Andrew
:
I have contemplated the very question regarding online retailing affect on DJS. One way i think it could be solved is to get a list of allt heir brands and see what the online options are. I know some of their suppliers do not have their own retail stores, some do. David Jones are releasing their own online store now so it will be interesting to see how that goes. I like the fact DJ’s are negotiating exclusive agreements with some brands in Australia, this should help them have some element of control.
Oroton have done online really well and online is now their biggest store by sales.
As for Macy’s and other US department stores, its a cheap and easy option for sales growth so why wouldn’t they. Not to worried with Macy’s compared to David Jones, Macy’s is more Myer but Bloomingdales, Saks etc would be in competiiton with DJS.
I am not as down on bricks and mortar retailing (at least in the fashion businesS) as some. I think there is a future for them and a way to still be successful but they just need to be innovative and offer something tangible that online can’t offer in exchange for a higher price. I think DJ’s, as the higher end luxury brand department store, has scope to offer this.
For all those retail watches like me out there, i was at out local shopping centre (a major one in Sydney) with my wife (who i think many retail/fashion businesses should ask for advice from) and we walked into Myer and it was like we had discovered a hidden retail store which hadn’t seen humans in hundreds of years. it was completley empty and eearily silent and even some of the lights were not turned on making it seem even more empty. If this is similar to all other stores than i feel yet another profit downgrade down the corner for them. Management has a lot of questions to answer.
Andrew
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There are some interesting prices being shown up in the retail sector at the moment but Billabong is not the place to be.
I have been testing out a new invention of mine and it shown up an interesting result.
First of all, to all of the value.able purists out there i apologise for some of the words i am about to mention.
As of the time of this post David Jones and Myer are trading at an almost identical P/E ratio. (gasps i can hear all round, “did he really say the P word?”)
Now before you send me to the wastelands, let me just say that I do not pay much attention to P/E Ratios but i thought it was interesting in a relative sense as David Jones is such a better quality company than Myer both performance and strength wise. is it undervalued intrinsically, i will need to have a deeper thought about that but it is interesting.
I do think there is potential value coming up in the retail space. My wife made a good observation that the busiest stores are those that offer really cheap items or really expensive items. Myer unfortunatley is in the middle so was empty (and this was post Christmas).
As for billabong though, they are a lost cause.
Simon
:
Just caught your interview today ABC Midday news. Surprised to find your bearish comments regarding commodities i.e iron ore prices and the 2012 outlook. Maybe you have let Bill Evans have your ear ? , yesterday he predicted China GDP falling to 7.75% in the new year. If we take RIO current share price $60.65 and BHP $34.54 I am quite confident that both companies will rise by 15% from today price before June 30 2012. You can quote me on that six months from now. My reasoning is based on current supply out of Brazil vs increased production out of WA and the growth of Indian demand will more than make up for the current softer iron ore prices
Roger Montgomery
:
You are right. They will increase production to compensate. It’s currently building up at Chinese ports though.
The Financial Times recently published the following. It’s worth following the FT.
Richard Haass, Financial Times
FT.com
“I have been travelling to China for more than three decades, but never have I encountered a Chinese leadership so uncertain of the country’s future. It is little exaggeration to say that the world’s most populous country is on its heels. The irony is inescapable: political leaders in the US and Asia are busy debating how best to meet what they see as the threat from China; political leaders in China are debating how best to meet the many threats they perceive to China.
“Most of the threats the Chinese see to their country come from within. For three decades China has depended on robust growth, largely from ever-increasing exports, to maintain high levels of employment and raise living standards, thereby assuring social tranquillity.
“This era may have run its course. Years of low economic growth in Europe and the US (and the prospect of more to come) have limited their ability to absorb Chinese goods. There is also increasing resistance to the country’s policy of keeping its currency at artificially low levels to reduce the cost of its exports to consumers in Europe and the US.
“Domestic pressures – the need to raise hundreds of millions more Chinese out of poverty, growing resentment over income and wealth inequality, the need to keep growth rates high – are also pushing China to find something to complement, if not replace, export-led growth. The result is that China is in the early days of a transition, one in which economic growth will increasingly have to stem from increased demand at home. Like all transitions, economic rebalancing is easier to call for than to bring about.
“What makes it hard to accomplish is the inflation and a housing bubble that must be brought under control. Such pressures argue for policies that cool the economy – something that makes long-term economic sense but risks causing short-term political criticism. A further complication is that China must undertake this economic transition amid a political transition. The next generation of leaders is about a year from assuming office. The men taking over will face a daunting array of challenges in addition to those already mentioned: a deteriorating environment (when I was in Beijing recently it was possible to see only a few hundred metres and all but impossible to breathe), an ageing population and an increasingly brittle political context. The recent protests of the southern villages of Haimen and Wukan are but the tip of the iceberg: China experienced well over 100,000 political protests of some scale this past year, most over grievances from land confiscation to unemployment and the environment.
…
“It is also helpful to maintain perspective. China may be the world’s second-largest economy but per capita output is at most only one-fifth that of most developed countries. China is building up militarily, but military spending is maybe a quarter that of the US. The issue should not be China’s rise, which is inevitable even if many underestimate the looming hurdles, but the character of a more powerful China. Hedging against the possibility of a more aggressive China is fine, but adopting a policy of containment would be premature and could actually help to create an adversarial relationship that would serve the interests of no one.
Richard Haass is president of the Council on Foreign Relations.
Copyright The Financial Times Limited 2011.
Simon
:
http://usa.chinadaily.com.cn/business/2011-12/24/content_14320360.htm
Helps to put things in perspective, as a lot of the heat (speculation) has already come out of the market and 2012 shall see more of a stabilizing of prices a “soft landing” if you will due to the price-restriction policy, each local government has already begun to realize its annual target of maintaining increases at a level lower than GDP growth if that figure falls to 7.75% then we will see further declines in lending rates.
Michael
:
There was a very good point about Billabong in the AFR – when kids see their parents wearing a certain brand – its no longer cool. Billabong is a brand that relies on being ‘cool’. And with the likes of Big W selling surfwear at half the price, Billabong can’t compete on price.
Ash Little
:
Yep
It’s crap.
You wrote hundreds of words Roger and I wrote 2 but it’s the same conclusion
Roger Montgomery
:
Should I write 2 words for every stock discussed here? Much easier for me….
John C
:
What two words would you use to describe OrotonGroup (ORL)?
David King
:
How about “Girls shop”.
Clint
:
Billabong should be a simple (and very profitable) business but years of mismanagement have destroyed the brand. Get a shirt made in china for $1 and sell it for $50, this company should give its shareholders a license to print money. But unfortunately they have continued to dilute the brand with VERY expensive acquisitions, when what they should be doing is protecting the brand and buy back shares when they are cheap.
Roger Montgomery
:
The pursuit of growth versus profitability.
Ryan
:
Most of these business are bought pre-GFC and as above were very expensive. Furthermore they were bought relatively quickly and without the structure needed for such growth. Hence the simplicity outlined above is lost.
This is a monster with too many arms and legs for the head! I can imagine that one or two of the labels in the Billabong portfolio will be sold off quite cheaply to help reduce their levels of debt.
Anyone want to get into the Surf Industry?
prashant
:
Billabong clothes are not just worn by sufers……..they are a fashion item…
Comparing billabong shorts to shorts from say Target is like make the same comparison of an Oroton bag with a cheaper alternative in Target…..When people buy Oroton….they are buying the brand oroton
also the brand billabong contributes less then half of the total businesse’s sales….so even if its orientation is now towards a more mature consumer….they also have other brands targeting other age segments….
PPR paid $600M last year for Volcom…..a company with revenue’s of $300M and a net profit of $22m…
BBG’s current market cap is in the $400M range….sales are $1.7B….and profit is around $120M….
BBG is a sitting duck for acquisition…… :-)