1. Elisa Guimaraes Francisco _ FRA09298346
Le Ngoc Thuan Nguyen _ NGU09299391
09/09/2009

2. 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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3. Table of Contents
Business Overview.........................................................................................................4
Operating Activities.......................................................................................................5
Sales, Cost and Profit Trends.....................................................................................5
Assets.........................................................................................................................6
Accounts receivable...................................................................................................8
Inventory....................................................................................................................8
Interest expense..........................................................................................................9
Financing activities......................................................................................................10
Return on Equity and Return on Assets...................................................................10
Capital Structure.......................................................................................................11
Investing activities........................................................................................................12
Changing of non-current assets................................................................................12
Return on Assets.......................................................................................................13
Conclusion and Recommendations..............................................................................14
References....................................................................................................................15
Appendix 1...................................................................................................................16
Appendix 2...................................................................................................................17
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4. 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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5. 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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6. 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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7. 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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8. 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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9. 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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10. Financing activities
Return on Equity and Return on Assets
Return on = Return on x Financial
Equity Assets Leverage
2006 20.45% 11.58% 1.77
2007 20.06% 12.05% 1.83
2008 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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11. 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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12. Investing activities
Changing of non-current assets
2006 2007 2008
10,767 2,875 7,677
Receivables
(19.58%) (40.37%)
92,661 106,991 134,120
Property, plant, and equipment
(15.46%) (25.36%)
660,104 800,897
Intangibles assets 654,255
(0.89%) (21.33%)
35,371 12,008
Deferred tax assets 22,645
(56.20%) (66.05%)
1,719 3,236
Other non-current assets 3,396
(-49.38%) (88.25%)
817,060 957,938
Total 783,724
(4.25%) (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 2008
Payment for subsidiaries, businesses -77457 -22604 -90688
Payment for property, plant, and equipment -61848 -39179 -54688
Payment for intangible assets -4810 -12601 -3221
Sale of property, plant, and equipment 412 382 1730
Net cash flow -148711 -73462 -146867
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13. 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 x Profit Margin
Assets Turnover
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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14. 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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15. References
Billabong Corporate 2009, Billabong Overview, viewed on August 22
http://www.billabongcorporate.com/about-billabong.php
Billabong Corporate 2009, Company History, viewed on August 22
http://www.billabongcorporate.com/company-history.php
Billabong Corporate 2009, Investors Reports, viewed on August 22
http://www.billabongcorporate.com/investors-reports.php
Yahoo Finance 2009, Consumer Goods Sector, viewed on September 6
http://biz.yahoo.com/p/3qpmu.html
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16. Appendix 1
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17. Appendix 2
Net profit
Consumer goods sector margin %
Sporting Goods -3,5
Textile - Apparel Clothing 0,2
Textile - Apparel Footwear & Accessories 6,3
Average 5,33
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18. 18