Background

Billabong International Limited was established in Australia during 1973 by a surfer and surfboard shaper named Gordon Merchant and Rena. The early days of the company were rusty as both of the owners used to design the boardshorts at home while cutting them on the table and then selling to local surf shop (Billabong International Limited, 2015). However, the business took its leap in the 1980s when the Australian culture of surfboarding started to flourish. During 1980s the company finally took flight towards international expansion by focusing on North America and then touching the peak by quickly holding the name in market as a trusted brand in surfboard industry (Billabong International Limited, 2015). In 1990s the surfboard industry touched its peak as its demand grew exponentially due to which Billabong International Limited increased its product base by introducing skateboards, snow and wake and other boardsport market products. After holding a respectable status in the market, Billabong International Limited went public in mid-2000 (Billabong International Limited, 2015).  Billabong International Limited has been dealing in marketing, wholesaling, distributing and retailing of eyewear, wetsuits, accessories, apparels and hardgoods in the sports sector. The brands under which Billabong International Limited operates in sports sector are Honolua Surf Company, RVCA, Element, Palmers Surf, Kustom, Sector 9, Tigerlily, Xcel and Von Zipper. Billabong International Limited expanded its product base by acquiring wetsuit brand Xcel, footwear brand Kust and Palmers Surf brand during 2004 followed by acquisition of Element footwear, Sector 9 skateboard brand and DaKine premium boardsport accessories brand during 2008 (Billabong International Limited, 2014).

 

Significant Issues

According to the recent Managing Director’s and CEO’s report, the company has decided to follow a seven step turnaround strategy (Billabong International Limited, 2014). The shift is focused to divert firm’s attention towards customers’ needs in retail and wholesale and onto core followers globally. The organization has recently appointed 65 new senior highly qualified executives with high direct industry experience. The seven essential pillars of turnaround strategy that is about to be followed by Billabong International Limited are brand, product, marketing, omni-channel, supply chain, organization and financial discipline. The first pillar is about building strong global brands by focusing on the core action sports customer while holding the highest standard of board authenticity, uniqueness and integrity. The focus of Billabong International Limited is on building Billabong, Element and RVCA by creating such an environment which allows the smaller brands to be operated with more autonomy and with higher growth (Billabong International Limited, 2014). The second pillar is about building a much better product by taking initiatives like merchant front end and concept to customer. Through such initiatives Billabong is focusing on designing the products with better styles and better designs more strategically. The third pillar of turnaround strategy is marketing which is about tighter alignment to product strategies with better story telling. Young customers are targeted through digital media and by managing customer relationship. The fourth pillar of turnaround strategy is omni-channel in which consumer shops will be evolved using multi-channel world. The firm is trying to test a new digital commerce site to increase and accelerate the direct consumer relation. This strategy is made for expanding the overall business along with the core wholesale channel. The mono-brand websites will be established through omni-channel (Billabong International Limited, 2014).

Figure 1: New Executive Leadership Team Structure

Source: (Billabong International Limited, 2014)

Corporate governance snapshot

The board of directors of Billabong International Limited is responsible to the shareholders for the performance of all brands and believes that the highest standards of corporate governance should underpin the long term objective of maximizing return to shareholders (Billabong International Limited, 2014). The board is also responsible for high level of governance and nurture the culture based on ethical standards and corporate integrity. The company follows ASX recommendations for complying with the corporate governance practices. The principles followed by Billabong International Limited are in accordance with ASX. The first principle is about laying solid foundations for management and oversight where roles and responsibilities of board and management are established. The second principle is about forming a board based on appropriate balance between directors with experience and knowledge of the group and directors along with an external perspective (Billabong International Limited, 2014). While it is also ensured by the board that the size of the board is conducive to effective decision making and discussion. While the assessment of Non-executive directors’ independence is carried out each year. The third principle is about acting ethically and with responsibility by Billabong International Limited. The code of conduct of the company is available in eight different languages that is steered towards drawing together all the practices and policies of the company. Billabong International Limited follows an ethical code of conduct based on honesty, integrity, independence, teamwork, mutual trust, desire for excellence and mutual respect. The company also follows the principle of safeguarding integrity in corporate reporting (Billabong International Limited, 2014). The audit and risk committee has the responsibility of assisting the board to fulfil its corporate governance responsibilities through overseeing the integrity, scope, compliance, effectiveness, appointment, removal, remuneration, qualification, performance, independence of external auditor, integrity of audit process, nature of non-audit services and the Group’s compliance with the legal and regulatory requirements. The Billabong International Limited makes timely and balanced disclosures while respecting the rights of the security holders. All information regarding ASX compliance are disclosed along with the transcripts from conference calls and is also posted on the Billabong’s corporate website followed by a receipt of confirmation from ASX. A copy of the disclosure policy and stakeholder communication policy are also posted and made available on the corporate website of Billabong International Limited. The risk is recognized and managed by the audit and risk committee by following a strong risk management policy based on risk identification, risk evaluation, risk mitigation and risk reporting. The remuneration policy is also developed fairly and responsibly by the HR & Remuneration Committee (Billabong International Limited, 2014). The key performance indicators are set out by the committee in the start of each financial year while the details of nature and amount of each remuneration package are provided in the separate remuneration report. Overall Billabong International Limited follows a strict code of conduct and follows corporate governance efficiently (Billabong International Limited, 2014).

 

Key Financial Ratios

1.1        Profitability Ratios

1.1.1          Return on Assets

It can be calculated by using the formula as

ROA =  (Peterson & Fabozzi, 1999)

Billabong International Limited
Years	Net Income	Average Total Assets	ROA
2014	-239,933	885579	-27%

The average total assets are computed by adding beginning and closing total assets and dividing them by 2.  It is computed in the table below.

	Beginning Assets	Ending Assets	Average Total Assets
2014	1,019,292	751,866	885579

 

1.1.2          Net Profit Margin

It can be computed as

Net Profit Margin =  (Peterson & Fabozzi, 1999)

Billabong International Limited
Years	Net Income	Net Sales	Net Profit Margin
2014	-239,933	1,125,454	-21%

 

1.2        Asset Efficiency Ratios

1.2.1          Inventory Turnover and Days Inventory

It can be calculated as:

Inventory Days =  (White, Sondhi, & Fried, 2003)

Whereas inventory turnover is computed by:

Inventory Days =  (White, Sondhi, & Fried, 2003)

The average inventory is computed by adding beginning and closing inventory and dividing it by 2.  It is computed in the table below.

Billabong International Limited
Years	Cost of Goods Sold	Average Inventory	Inventory Turnover	Days in Period	Inventory Days
2014	555,758	223,514	2	365	147

 

	Beginning Inventory	Ending Inventory	Average Inventory
2014	266,806	180,222	223514

 

Billabong International Limited
Years	Total Liabilities	Total Assets	Debt to total assets
2014	492,830	751,866	0.66

 

Evaluation of Billabong International Limited

By looking at the financial statements and financial ratios we can analyze that Billabong International Limited is going through rough phase. The net loss for 2014 has improved from previous year i.e. loss of $863,002,000 in 2013 (Billabong International Limited, 2014). This year the company has cut off its other expenses by over $ 581,663, however finance cost and cost of goods sold have increased. Yet the incredible decrease in the net loss from discontinued operations has reduced to $239,933 from $863,002 in 2013 (Billabong International Limited, 2014).   Looking at the capital structure ratios we can see that creditors of Billabong International Limited provide $1.90 of assets for each $1 of assets provided by the stakeholders. This is considerably high debt to equity ratio and shows that the creditors have more stake in the assets of Billabong International as compared to the stakeholders. The debt to total assets ratio shows that $0.66 of every $1 asset is financed through debts and rest of $0.44 is financed by equity financing. This also indicate a risky situation as investors would like to invest in the company with lower debt to equity ratio and lower debt to total assets ratio (Billabong International Limited, 2014).

However the current and quick ratios show a good liquidity position as for every $1 of current liabilities Billabong International Limited has $2.20 of current assets. This is a strong liquidity position. The inventory days and receivable days are 147days and 58days respectively which shows that the company convert its inventory into cash in 147days while receives the cash from debtors in 58days. This depends on the industry in which the company is operating yet it shows a bad situation in which company is operating. The longer the cash conversion cycle, the lesser the profitability is (Stickney, Brown, & Wahlen, 2004).

engage with the suppliers that do not submits to an audit for demonstrating workplace standards below as per imposed by WRAP.

By analyzing Billabong International Limited, we can see that it is socially responsible and have efficient code of conduct principles in its operations. However, the grim situation in its income statement is getting better day by day (Billabong International Limited, 2014). Yet the overall loss is huge but with seven step turnaround strategy, Billabong International Limited is moving towards a better future. The efforts of expanding and firming the business in North America and other parts of the world shows the promising future of Billabong International Limited. Being a Socially Responsible Investor, the investor can take the opportunity of investing into the business and be a part of the company’s efforts (Billabong International Limited, 2014).