Treasure Chest | Apr 19 2016
By Greg Peel
Consumer sentiment in the US has declined over the past few months. North America’s large action sports chains, department stores, teen retail and tourist retail have suffered subdued activity for the past several quarters, Moelis & Co notes.
As a result, price discounting and promotion wars in-store and online among retailers has been rife. Action-wear retailers have been bemoaning a weak outlook and confidence has not been boosted by retailer PacSun electing to restructure under Chapter 11, which will likely imply further discounting. For the Lazarus of the Australian surf, skate and ski-wear scene, Billabong International ((BBG)), the long turnaround story is presently riding over a bumpy patch.
Analysts at Moelis & Co believe Billabong will successfully turn around in the longer term, and investors willing to back this view should garner strong returns as a result. However in the shorter term, the company is facing headwinds.
Critical to Billabong’s turnaround is targeted cost savings through to FY20. In valuing the stock, Moelis has applied a familiar, bear case, base case and bull case methodology. The broker’s bear case assumes Billabong misses its cost savings target. The base case is $20m in annual savings by FY20 and the bull case is $25m in annual savings by FY19 and a revenue boost from e-commerce.
Management’s ability to lift margins is currently running into a currency dampener, Moelis notes. The company has borrowed in US dollars and thus has faced increasing AUD interest payments over 2016 as the Aussie dollar has depreciated. The flipside, nevertheless, is higher revenues in AUD from sales in the Americas and Europe. Sales in Australia have also improved online as offshore products have become more expensive in AUD.
On the balance of longer term upside and shorter term issues, Moelis has initiated coverage of Billabong with a Hold rating and $1.70 price target.
Three of the major brokers in the FNArena database cover Billabong. Deutsche Bank and Citi both retained Hold ratings following the company’s full year result release in February. Ord Minnett’s forecasts were beaten, and as such the broker upgraded to Accumulate from Hold.
The consensus target price in the database is $1.92, suggesting 26% upside, though price targets might be subject to revision when brokers update in light of the latest market developments.
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