Elisa Guimaraes Francisco _ FRA09298346Le Ngoc Thuan Nguyen _ NGU09299391

09/09/2009

Executive Summary

The report on Billabong Corporate provides an analysis of the company’s

performance 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 annual

publishment, are exploited in terms of three different functions in the

corporate: Operating, Financing, and Investing activities. The key ratios as

well as the changes in assets, profits, and debts are examined under the light

of those activities.

The company is a well developed one during the period with a large number

of investment capital has been generated. Effectiveness has been proved to

be quite steady; however, with the acquiring new assets of long term value,

efficiency should be focused as to utilise in the next few year.

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Table of Contents

Business Overview...........................................................................................4Operating Activities..........................................................................................5

Sales, Cost and Profit Trends.......................................................................5Assets...........................................................................................................6Accounts receivable......................................................................................8Inventory.......................................................................................................8Interest expense...........................................................................................9

Financing activities.........................................................................................10Return on Equity and Return on Assets......................................................10Capital Structure.........................................................................................11

Investing activities..........................................................................................12Changing of non-current assets..................................................................12Return on Assets........................................................................................13

Conclusion and Recommendations................................................................14References.....................................................................................................15Appendix 1.....................................................................................................16Appendix 2.....................................................................................................17

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Business Overview

Billabong Corporate is an Australian company with the core business on

apparel, accessories, eyewear, and wetsuits in the board sports industry.

Under the corporate different brand names are utilised for different types of

product lines, which diversifies and matches the company to different needs

of the market.

The company first started in Gold Coast in 1973, experienced a quick

expansion in the national surfing industry, and reached the outside world from

the late 1980s. Later on, Billabong entered the boardsports with the new lines

of skate and snow products.

For the period of more than 30 years, Billabong corporate has managed to be

well founded with the distribution of a channel in more than 100 countries with

approximately 10000 outlets worldwide, including specialised boardsports

retailers and its own retail stores.

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Operating Activities

The operating activities involve all movements related to acquire and sell the

business goods and services. Revenues and expenses are the amounts the

company expects to receive and consume in the selling process,

consequently are the main contents of operating analysis.

Sales, Cost and Profit Trends

As the financial reports informed, sales, profit and cost trends of the years

2006, 2007 and 2008 increased (Appendix 1), although the ability to create

profit 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

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Gross profit margin increased among 2007 to 2008, which meant the

efficiency in the manufacturing and effectiveness converting merchandise to

sales was improved, while it was mostly maintained between 2006 and 2007,

with a low decrease converting the percentage to money. In 2007 Billabong

has the best performance in cost control comparing gross profit margin and

net profit with the other years (Appendix 1).

It reveals that the decrease in net profit margin was not caused by a lack in

controlling the goods’ cost. Other possibility for these results is exchange

movements of benefits.

Analysing the efficiency Billabong had in controlling operating expenditures,

other than cost of goods, the operating profit margin decreased. It shows the

impact operating profit margin caused in net profit results. The operating costs

had 16% lack of control among 2006 to 2007 and few decrease in 2007 to

2008.

Figure 3. Operating profit margin

Assets

In order to analyse the company performance in generating sales from their

investments 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% through

year. However, in the second period (2007 to 2008) it dropped 6%, depicting

that for each dollar spent on assets the amount of sales were less. This trend

must change to a maintaining or increasing ratios for a long-term stability.

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Figure 4. Assets turnover

The operating performance in converting the profit received by assets in cash

is measured in accrual and cash flow comparisons. The percentages were

9%, 7% and 9% for each year respectively (2008, 2007 and 2006). It means

that although the investments in assets increased each year, the cash

generation decreased then increased in lower levels. For each dollar invested

7 and 9 cents were received in cash.

The return on assets equation is applicable to discover, in general, if Billabong

has been controlling their costs and use of resources based on sales. The

results for each year are: 2006 – 12%, 2007 – 12% and 2008 – 11%. The

difference is not high, but still it is a drop. According to the Financial Report, in

2008 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; their

Asset turnover is in a high margin. However, the company also focuses on a

product differentiation strategy, with good levels of net profit margin. The net

profit margin is considered in high level comparing with the average of 5.33%

in their industry sector (Appendix 2).

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Accounts receivable

Measuring the ability Billabong has turned their sales revenue in cash shows

they has been becoming more efficient along the years. The more times the

receivables are collected (days per year), the more cash available they have.

Figure 5. Accounts receivable turnover

The company monitored receivable balances and did not have a significant

result to bad debts. The credit risk to the stores’ customers is low, as the

sales received in cash or credit cards. Interferences to these results are more

likely to be related to retailers’ unexpectedly economic situations and credit

terms arrangement (considered recoverable).

Inventory

The inventory turnover analysis measures the capacity Billabong had to

convert their investments in inventory into revenue.

Figure 6. Inventory turnover

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In 2006 and 2008 every 4 months and in 2007 every 3 months, the inventory

was converted to sales, with 124, 90 and 126 days from 2006 to 2008

respectively. The strategy used in 2007 is clearly better than in the other

years. The reason for these yearly times is because their business industry,

as a manufacturer and selling in fashion, surfing and boardsports, works in

seasonal basis to refill the stock. This turnover can indicate management

efficiency, as the fashion retail sells in two divisions: Spring/Summer and

Autumn/Winter.

Interest expense

The operating activity of paying loan interests can measure financial risk when

is related to profit. In 2008 the profit before interest and tax could cover 13

times the interest value, 14 times the previous year and 32 times in 2006.

According to the company, this growth in interest expenses occurred for the

acquisition and expansion of stores in both financial periods. Especially in the

investment in South Africa to the Australia-Asia segment, the operating results

started to be consolidated in 2007.

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Financing activities

Return on Equity and Return on Assets

Return on Equity

= Return on Assets

x Financial Leverage

2006 20.45% 11.58% 1.772007 20.06% 12.05% 1.832008 22.17% 10.84% 2.04

From 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 period

of time, the financial leverage was also rising from 1.77 in 2006 to 1.84 in

2007 and reached 2.04 in 2008. As it can be drawn from the balance sheets

through these years, both shareholders’ equity and liabilities were moving up

each year; however, the funds from creditors were put more on the scale,

which led to the increase of Financial Leverage. Consequently, it has become

riskier for Billabong investors, even though the performance of the company

has been improved.

Another indicator to be noticed is the RoA. There was an increase from 2006

to 2007, but the figure was dropped to 10.84% in 2008, which was even lower

than 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 control

of 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 the

same period. However, from 2007 to 2008, the sales reached 10.07%, but the

inventories soared up to 22.04%. Therefore, even the corporate seems to be

more profitable each year to the shareholders’ interest, the efficiency in

utilising assets was not properly monitored.

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Capital Structure

The Debt to Assets of Billabong experienced an increase through years. For

the years 2006 and 2007, the debts rose, but was still less than 50%, which

means the Owners’ Equity played an major part in financing the corporate,

and it was a safe indicator for investors, with the assurance of adequate

capability 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 to

boost the business activities. In this case, the expansion to South Africa can

be a good explanation to the debt increase with a view for long term benefits.

The corporate became riskier as the debt exceeded the Equity from

Shareholders, but it was still not too risky when taking into account its position

in the market. In addition, Billabong still proved to be a healthy company when

its revenues and profits all increased.

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Investing activities

Changing of non-current assets

2006 2007 2008

Receivables10,767 2,875

(19.58%)7,677

(40.37%)

Property, plant, and equipment92,661 106,991

(15.46%)134,120(25.36%)

Intangibles assets 654,255660,104(0.89%)

800,897(21.33%)

Deferred tax assets 22,64535,371

(56.20%)12,008

(66.05%)

Other non-current assets 3,3961,719

(-49.38%)3,236

(88.25%)

Total 783,724817,060(4.25%)

957,938(17.24%)

From the table above, it is obvious that the non-current assets of Billabong

increased quite well, especially from 2007 to 2008. The most remarkable one

was the increase of intangible assets including goodwill and brand, which

means the prospect for future position and development, is more positive. At

the same time, the property, plant, and equipment also experienced a quite

sufficient growth through years. As mentioned above, it can be explained

through 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 for

investing activities at the same time, the cash was actually outspent with a

large amount of money. Therefore, it could be assumed that Billabong was

making great effort to build up more assets, especially non-current important

assets like brand and property. It is a sign of expanding due to healthy

development 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

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For the year 2006, it can be seen that the company was focused on

expanding its tangible non-current assets by paying a large amount for

obtaining subsidiaries, plant, equipment.... i.e. they paid attention to build firm

foundation 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 be

explained that Billabong was trying to establish its position in the market,

leading to its expansion in 2008. The revenue of Billabong through 3 years

was increasing through time, which was a signal of a healthy development

and the success in decision of investing.

Return on Assets

Return on Assets

= Assets Turnover

x Profit Margin

2006 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 in

the year of 2007 with the highest RoA and Assets turnover compared to the

other years. The company was highly effective in their selling, even though

the control of costs was not as good as the previous year. Still, 2007 was the

most profitable year. It may be explained by the decision to invest more on the

intangible assets which might help improve the brand awareness and brand

image. The year 2008 did not seem to be as profitable with the decrease in

both effectiveness and efficiency. The costs continued not to be well

controlled, and the effectiveness also decreased. It was probably because the

corporate aimed at expanding its property investing more with a view to longer

term; therefore, the profitability was not as high.

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Conclusion and Recommendations

Billabong has growth trends concerning sales, profit and costs. Operation of

the corporate is proved to be quite. Even though the Return on Assets was

not good for the previous year, the overall profitability to shareholders is well

handled with an increase every year.

More capital is being raised to boost the investing in properties, branding, and

expansion; therefore, it can be assumed that Billabong is trying to establish its

position in the international market. The requirements of more funds led the

company to borrow more from creditors, which makes the capital structure

become riskier. Moreover, the cash flow from the year 2008 is quite low

compared to the previous ones indicating more risk involved. However,

regarding to its performance and long term mission, it can be assured that the

company was reasonable and successful in its decision.

Verifying margins of performance indicators, it is possible to conclude on their

potential to achieve strategies objectives. For this, managers must focus in

reducing operating costs or control better to generate revenue. The

improvement in efficiency is also an issue that needs to be considered. The

use of resources can be improved and expected in the long run, as the

company had invested in new channels and brand ownership. The question of

making the most out of the assets they have been achieved is a critical one

for the next few year.

In the financial reports the company does not present separately the

marketing/promotion/advertising expenses to general and administrative

expenses. If it had been done, it would have been possible to analyse

performance of marketing managers’ decisions, which is important to the

enhancement of the intangible assets the company has acquired, i.e. new

brands, its position, and licences.

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References

Billabong Corporate 2009, Billabong Overview, viewed on August 22http://www.billabongcorporate.com/about-billabong.php

Billabong Corporate 2009, Company History, viewed on August 22http://www.billabongcorporate.com/company-history.php

Billabong Corporate 2009, Investors Reports, viewed on August 22http://www.billabongcorporate.com/investors-reports.php

Yahoo Finance 2009, Consumer Goods Sector, viewed on September 6http://biz.yahoo.com/p/3qpmu.html

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Appendix 1

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Appendix 2

Consumer goods sectorNet profit margin %

Sporting Goods -3,5Textile - Apparel Clothing 0,2Textile - Apparel Footwear & Accessories 6,3Average 5,33

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