Billabong final report

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Billabong final report

  1. 1. Elisa Guimaraes Francisco _ FRA09298346 Le Ngoc Thuan Nguyen _ NGU09299391 09/09/2009
  2. 2. Executive SummaryThe report on Billabong Corporate provides an analysis of the company’sperformance for the past 3 years, which gives insights into its sales trends,profitability, and also the shortcomings in its operation.The financial reports of this period of time, obtained from the annualpublishment, are exploited in terms of three different functions in thecorporate: Operating, Financing, and Investing activities. The key ratios aswell as the changes in assets, profits, and debts are examined under the lightof those activities.The company is a well developed one during the period with a large numberof investment capital has been generated. Effectiveness has been proved tobe quite steady; however, with the acquiring new assets of long term value,efficiency should be focused as to utilise in the next few year. 2
  3. 3. Table of ContentsBusiness Overview.........................................................................................................4Operating Activities.......................................................................................................5 Sales, Cost and Profit Trends.....................................................................................5 Assets.........................................................................................................................6 Accounts receivable...................................................................................................8 Inventory....................................................................................................................8 Interest expense..........................................................................................................9Financing activities......................................................................................................10 Return on Equity and Return on Assets...................................................................10 Capital Structure.......................................................................................................11Investing activities........................................................................................................12 Changing of non-current assets................................................................................12 Return on Assets.......................................................................................................13Conclusion and Recommendations..............................................................................14References....................................................................................................................15Appendix 1...................................................................................................................16Appendix 2...................................................................................................................17 3
  4. 4. Business OverviewBillabong Corporate is an Australian company with the core business onapparel, accessories, eyewear, and wetsuits in the board sports industry.Under the corporate different brand names are utilised for different types ofproduct lines, which diversifies and matches the company to different needsof the market.The company first started in Gold Coast in 1973, experienced a quickexpansion in the national surfing industry, and reached the outside world fromthe late 1980s. Later on, Billabong entered the boardsports with the new linesof skate and snow products.For the period of more than 30 years, Billabong corporate has managed to bewell founded with the distribution of a channel in more than 100 countries withapproximately 10000 outlets worldwide, including specialised boardsportsretailers and its own retail stores. 4
  5. 5. Operating ActivitiesThe operating activities involve all movements related to acquire and sell thebusiness goods and services. Revenues and expenses are the amounts thecompany expects to receive and consume in the selling process,consequently are the main contents of operating analysis.Sales, Cost and Profit TrendsAs the financial reports informed, sales, profit and cost trends of the years2006, 2007 and 2008 increased (Appendix 1), although the ability to createprofit from its sales decreased in 4% 2006 to 2007 and 4.5% 2007 to 2008,reducing earns in each dollar of the net profit. Figure 1. Net profit margin ratios Figure 2. Gross profit margin ratios 5
  6. 6. Gross profit margin increased among 2007 to 2008, which meant theefficiency in the manufacturing and effectiveness converting merchandise tosales was improved, while it was mostly maintained between 2006 and 2007,with a low decrease converting the percentage to money. In 2007 Billabonghas the best performance in cost control comparing gross profit margin andnet profit with the other years (Appendix 1).It reveals that the decrease in net profit margin was not caused by a lack incontrolling the goods’ cost. Other possibility for these results is exchangemovements of benefits.Analysing the efficiency Billabong had in controlling operating expenditures,other than cost of goods, the operating profit margin decreased. It shows theimpact operating profit margin caused in net profit results. The operating costshad 16% lack of control among 2006 to 2007 and few decrease in 2007 to2008. Figure 3. Operating profit marginAssetsIn order to analyse the company performance in generating sales from theirinvestments in assets we can verify the assets turnover. In the first period(2006 to 2007) the assets were well used, with an increase of 8% throughyear. However, in the second period (2007 to 2008) it dropped 6%, depictingthat for each dollar spent on assets the amount of sales were less. This trendmust change to a maintaining or increasing ratios for a long-term stability. 6
  7. 7. Figure 4. Assets turnoverThe operating performance in converting the profit received by assets in cashis measured in accrual and cash flow comparisons. The percentages were9%, 7% and 9% for each year respectively (2008, 2007 and 2006). It meansthat although the investments in assets increased each year, the cashgeneration decreased then increased in lower levels. For each dollar invested7 and 9 cents were received in cash.The return on assets equation is applicable to discover, in general, if Billabonghas been controlling their costs and use of resources based on sales. Theresults for each year are: 2006 – 12%, 2007 – 12% and 2008 – 11%. Thedifference is not high, but still it is a drop. According to the Financial Report, in2008 the company invested in acquiring Billabong license in South Africa,reflecting this impact.It is possible to infer that Billabong works in a cost leadership strategy; theirAsset turnover is in a high margin. However, the company also focuses on aproduct differentiation strategy, with good levels of net profit margin. The netprofit margin is considered in high level comparing with the average of 5.33%in their industry sector (Appendix 2). 7
  8. 8. Accounts receivableMeasuring the ability Billabong has turned their sales revenue in cash showsthey has been becoming more efficient along the years. The more times thereceivables are collected (days per year), the more cash available they have. Figure 5. Accounts receivable turnoverThe company monitored receivable balances and did not have a significantresult to bad debts. The credit risk to the stores’ customers is low, as thesales received in cash or credit cards. Interferences to these results are morelikely to be related to retailers’ unexpectedly economic situations and creditterms arrangement (considered recoverable).InventoryThe inventory turnover analysis measures the capacity Billabong had toconvert their investments in inventory into revenue. Figure 6. Inventory turnover 8
  9. 9. In 2006 and 2008 every 4 months and in 2007 every 3 months, the inventorywas converted to sales, with 124, 90 and 126 days from 2006 to 2008respectively. The strategy used in 2007 is clearly better than in the otheryears. The reason for these yearly times is because their business industry,as a manufacturer and selling in fashion, surfing and boardsports, works inseasonal basis to refill the stock. This turnover can indicate managementefficiency, as the fashion retail sells in two divisions: Spring/Summer andAutumn/Winter.Interest expenseThe operating activity of paying loan interests can measure financial risk whenis related to profit. In 2008 the profit before interest and tax could cover 13times the interest value, 14 times the previous year and 32 times in 2006.According to the company, this growth in interest expenses occurred for theacquisition and expansion of stores in both financial periods. Especially in theinvestment in South Africa to the Australia-Asia segment, the operating resultsstarted to be consolidated in 2007. 9
  10. 10. Financing activitiesReturn on Equity and Return on Assets Return on = Return on x Financial Equity Assets Leverage2006 20.45% 11.58% 1.772007 20.06% 12.05% 1.832008 22.17% 10.84% 2.04From the table above, it can be seen that the RoE was increasing each year,which is a healthy indicator for better performance of Billabong. For this periodof time, the financial leverage was also rising from 1.77 in 2006 to 1.84 in2007 and reached 2.04 in 2008. As it can be drawn from the balance sheetsthrough these years, both shareholders’ equity and liabilities were moving upeach year; however, the funds from creditors were put more on the scale,which led to the increase of Financial Leverage. Consequently, it has becomeriskier for Billabong investors, even though the performance of the companyhas been improved.Another indicator to be noticed is the RoA. There was an increase from 2006to 2007, but the figure was dropped to 10.84% in 2008, which was even lowerthan that of 2006. The efficiency of the company was therefore not so good.Looking more closely to the assets, the problem might come from the controlof costs, especially the costs of inventories. While sales went up to 19.72%from 2006 to 2007, it took only the increase of 6.08% in the inventories of thesame period. However, from 2007 to 2008, the sales reached 10.07%, but theinventories soared up to 22.04%. Therefore, even the corporate seems to bemore profitable each year to the shareholders’ interest, the efficiency inutilising assets was not properly monitored. 10
  11. 11. Capital StructureThe Debt to Assets of Billabong experienced an increase through years. Forthe years 2006 and 2007, the debts rose, but was still less than 50%, whichmeans the Owners’ Equity played an major part in financing the corporate,and it was a safe indicator for investors, with the assurance of adequatecapability to repay debts. When it came to 2008, the ratio went up to 51.08%,which meant Billabong decided to generate more funds from creditors toboost the business activities. In this case, the expansion to South Africa canbe a good explanation to the debt increase with a view for long term benefits.The corporate became riskier as the debt exceeded the Equity fromShareholders, but it was still not too risky when taking into account its positionin the market. In addition, Billabong still proved to be a healthy company whenits revenues and profits all increased. 11
  12. 12. Investing activitiesChanging of non-current assets 2006 2007 2008 10,767 2,875 7,677Receivables (19.58%) (40.37%) 92,661 106,991 134,120Property, plant, and equipment (15.46%) (25.36%) 660,104 800,897Intangibles assets 654,255 (0.89%) (21.33%) 35,371 12,008Deferred tax assets 22,645 (56.20%) (66.05%) 1,719 3,236Other non-current assets 3,396 (-49.38%) (88.25%) 817,060 957,938Total 783,724 (4.25%) (17.24%)From the table above, it is obvious that the non-current assets of Billabongincreased quite well, especially from 2007 to 2008. The most remarkable onewas the increase of intangible assets including goodwill and brand, whichmeans the prospect for future position and development, is more positive. Atthe same time, the property, plant, and equipment also experienced a quitesufficient growth through years. As mentioned above, it can be explainedthrough the acquiring of new outlets as well as licences in other countries,which will return better benefits in the long run. Looking at the cash flow forinvesting activities at the same time, the cash was actually outspent with alarge amount of money. Therefore, it could be assumed that Billabong wasmaking great effort to build up more assets, especially non-current importantassets like brand and property. It is a sign of expanding due to healthydevelopment as well. 2006 2007 2008Payment for subsidiaries, businesses -77457 -22604 -90688Payment for property, plant, and equipment -61848 -39179 -54688Payment for intangible assets -4810 -12601 -3221Sale of property, plant, and equipment 412 382 1730Net cash flow -148711 -73462 -146867 12
  13. 13. For the year 2006, it can be seen that the company was focused onexpanding its tangible non-current assets by paying a large amount forobtaining subsidiaries, plant, equipment.... i.e. they paid attention to build firmfoundation for the business. The next year it happened pretty much the same,but at the same time, the intangible assets received more attention. It can beexplained that Billabong was trying to establish its position in the market,leading to its expansion in 2008. The revenue of Billabong through 3 yearswas increasing through time, which was a signal of a healthy developmentand the success in decision of investing.Return on Assets Return on = Assets x Profit Margin Assets Turnover2006 11.58% 81.72% 14.17%2007 12.05% 88.49% 13.62%2008 10.84% 83.33% 13.01%From the figures above, it can be concluded that Billabong worked better inthe year of 2007 with the highest RoA and Assets turnover compared to theother years. The company was highly effective in their selling, even thoughthe control of costs was not as good as the previous year. Still, 2007 was themost profitable year. It may be explained by the decision to invest more on theintangible assets which might help improve the brand awareness and brandimage. The year 2008 did not seem to be as profitable with the decrease inboth effectiveness and efficiency. The costs continued not to be wellcontrolled, and the effectiveness also decreased. It was probably because thecorporate aimed at expanding its property investing more with a view to longerterm; therefore, the profitability was not as high. 13
  14. 14. Conclusion and RecommendationsBillabong has growth trends concerning sales, profit and costs. Operation ofthe corporate is proved to be quite. Even though the Return on Assets wasnot good for the previous year, the overall profitability to shareholders is wellhandled with an increase every year.More capital is being raised to boost the investing in properties, branding, andexpansion; therefore, it can be assumed that Billabong is trying to establish itsposition in the international market. The requirements of more funds led thecompany to borrow more from creditors, which makes the capital structurebecome riskier. Moreover, the cash flow from the year 2008 is quite lowcompared to the previous ones indicating more risk involved. However,regarding to its performance and long term mission, it can be assured that thecompany was reasonable and successful in its decision.Verifying margins of performance indicators, it is possible to conclude on theirpotential to achieve strategies objectives. For this, managers must focus inreducing operating costs or control better to generate revenue. Theimprovement in efficiency is also an issue that needs to be considered. Theuse of resources can be improved and expected in the long run, as thecompany had invested in new channels and brand ownership. The question ofmaking the most out of the assets they have been achieved is a critical onefor the next few year.In the financial reports the company does not present separately themarketing/promotion/advertising expenses to general and administrativeexpenses. If it had been done, it would have been possible to analyseperformance of marketing managers’ decisions, which is important to theenhancement of the intangible assets the company has acquired, i.e. newbrands, its position, and licences. 14
  15. 15. ReferencesBillabong Corporate 2009, Billabong Overview, viewed on August 22http://www.billabongcorporate.com/about-billabong.phpBillabong Corporate 2009, Company History, viewed on August 22http://www.billabongcorporate.com/company-history.phpBillabong Corporate 2009, Investors Reports, viewed on August 22http://www.billabongcorporate.com/investors-reports.phpYahoo Finance 2009, Consumer Goods Sector, viewed on September 6http://biz.yahoo.com/p/3qpmu.html 15
  16. 16. Appendix 1 16
  17. 17. Appendix 2 Net profitConsumer goods sector margin %Sporting Goods -3,5Textile - Apparel Clothing 0,2Textile - Apparel Footwear & Accessories 6,3Average 5,33 17
  18. 18. 18

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