billabong cut to lowest rating at four brokers

Billabong Cut to Lowest Rating at Four Brokers After Forecast

By Robert Fenner

May 19 (Bloomberg) -- Billabong International Ltd., Australia’s largest surfwear maker, was cut to the lowest rating by at least four brokers after reducing its profit forecast.

The stock’s rating was cut to “sell” by Royal Bank of Scotland Group Plc, “underweight” by JPMorgan Chase & Co., and “underperform” by both Macquarie Group Ltd. and Credit Suisse.

Billabong’s U.S. customers are cutting inventory and pressing the company for discounts as the recession leads to a slump in consumer demand. Sales at company-owned outlets, which sell the namesake brand and its other labels such as Element, have fallen by as much as 20 percent with as many as 7 percent of its North American stores to close this year.

“The old Billabong story was a seductive growth story as surf fashion took market share in the urban and street apparel segments,” Greg Dring, a Sydney-based Macquarie analyst, said in a note to clients today. “The new Billabong story seems to center on customers that are increasingly short-term focused and are reluctant to order for the future.” Dring cut earnings estimates in 2010 by 23 percent.

Annual earnings before one-time items may fall as much as 9.3 percent to A$160 million ($122 million), the Gold Coast, Australia-based company said yesterday. In February, Chief Executive Officer Derek O’Neill said earnings would rise between 6 percent and 10 percent.

New Stock Sale

O’Neill also announced plans to sell as much as A$290 million of new stock to reduce debt.

“Billabong’s decision to raise equity reflects a lack of confidence in the near-term outlook for the business,” RBS analysts led by Daniel Broeren said in a note. “Growth going forward should now be more subdued, which should be reflected in valuation multiples,” he said, after cutting his rating from “hold.”

The new shares will be sold at A$7.50 each, a 29 percent discount to their last traded price. Billabong stock is halted from trade as it completes the A$200 million institutional component of the share sale, which is being underwritten by Goldman Sachs JBWere Pty.

About 25 percent of Billabong’s U.S. customers have yet to buy new clothing for the fall and back-to-school seasons, orders that are typically completed by early May, the company said yesterday.

“The shift to retailers managing inventory tighter is likely to continue,” Shaun Cousins, an analyst at JPMorgan in Sydney, said in a report. “We expect that Billabong may have to resort to lower prices, or introduce more products at lower price points.”

The company, which supplies other retailers as well as its own stores, is closing some wholesale accounts in response to rising “credit risk” of some customers. It may close as many as 12 of its own North American stores, with some to be relocated to take advantage of lower rents.

The stock is rated the equivalent of “sell” by five of the 11 analysts tracked by Bloomberg. Five brokers have a “hold” recommendation and only Goldman Sachs JBWere has a “buy” on the shares.

To contact the reporter on this story: Robert Fenner in Melbourne [email protected]

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