Like other makers of clothes inspired by surfing and skateboarding, Irvine’s Billabong USA faces the toughest market in recent memory.
But Billabong has one thing going for it that rivals don’t: a weak Australian dollar.
The company, part of Australia’s Billabong International Ltd., stands to see a boost in sales and profits when they are reported to its parent company Down Under.
The Australian dollar, which surged to nearly equal the U.S. dollar in summer, now is down 34% since July. The currency has fallen with global demand for commodities, the basis of Australia’s economy.
Of course, the weak Aussie dollar isn’t going to spur U.S. shoppers to buy more Billabong clothes. But when Billabong USA’s sales and profits are converted to Aussie dollars, the company stands to see a 50%-plus boost that could offset a slowdown here.
“They get a big benefit from the currency translation,” said Kristan Walker, a Deutsche Bank AG analyst in Sydney.
In October, the lower Aussie dollar prompted Billabong International to raise its yearly profit growth forecast for the 12 months through June to 12% to 16%, up from 8% to 12% projected in August.
The upped guidance came despite a sales slowdown in the past few months, the company said. Profit growth may have come in as low as 4% without the currency effect, it said.
The weak Aussie dollar is good news for Paul Naude, president of Billabong USA.
Last year, the strong Aussie dollar had Billabong International looking to Europe and Asia for growth as exchange rates squeezed results from Naude’s operation, the company’s traditional growth engine.
$500 Million
Billabong USA generates about $500 million of its parent company’s $1.2 billion in yearly sales.
The weak Aussie dollar stands to help Billabong USA’s results amid a recession that’s hit retailers and clothing makers particularly hard.
Anaheim-based Pacific Sunwear of California Inc., a mall retailer that sells Billabong and clothes from other surfwear makers, saw November sales fall 10% from a year earlier, albeit better than the 14.3% decline analysts had predicted.
Huntington Beach-based Quiksilver Inc., the largest surfwear maker ahead of No. 2 Billabong, also is hurting.
Quiksilver is battling weak sales while it copes with more than $1 billion in long- and short-term debt, most from its former Rossignol ski unit that was unloaded in a fire sale last month.
Some analysts have said Quiksilver might have to put itself up for sale.
Currency only can do so much for Billabong.
The weak Aussie dollar won’t help it save on the cost of goods and manufacturing since most of Billabong’s products are made in Asia, analyst Walker of Deutsche Bank said.
“It’s more of a benefit for reporting,” Walker said. “But the translation will more than offset the negative impact on the purchasing of products or cost of goods.”
Nor are Billabong’s currency gains likely to help U.S. investors, who would take a hit on any gains in the company’s Australian traded stock when profits are converted to U.S. dollars.
Tough Market
Billabong USA still has to cope with the prospect of weak U.S. sales, Walker said. That means watching costs and resisting the urge to blow out unsold clothes, he said.
“They’re going to have to keep their brand strength by marketing and appealing to the end consumer rather than just trying to get it through the door,” Walker said.
The cachet of Billabong’s namesake brand and others including Element, VonZipper, Nixon, Honolua, Xcel and Tigerlily should help the company during the downturn, according to Walker.
For the fall season, Billabong was among the three “hottest” men’s surfwear brands ahead of Costa Mesa-based Volcom Inc. and Quiksilver, according to Robert W. Baird & Co. analyst Mitch Kummetz’s recent survey of surf, skate and snow retailers.
The company’s Billabong and Element brands also were among the “hottest” women’s brands, according to the survey.
The company, which acquired VonZipper and other brands, continues to buy.
Recent acquisitions include August’s buy of Oregon accessory maker DaKine and July’s purchase of San Diego skateboard maker Sector 9.
Strong Brand
Walker is quick to credit Billabong’s brand to Naude and others at its U.S. headquarters, saying their approach has been “nothing short of exceptional.”
The company sells its products to large retailers including Pacific Sunwear and department stores such as Macy’s Inc. It also cultivates a “hardcore, independent” image by selling through smaller surf and skate shops, Walker said.
Billabong also runs about 45 of its own stores.
“They’ve been really stable with the way they’ve gone to market their brands,” Walker said. “They’ve created a demand profile by making Billabong more niche.”
