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Billabong's Wipeout—It Wasn't Just the Board Shorts

Billabong's Wipeout—It Wasn't Just the Board Shorts

Photograph by Kirstin Scholtz/ASP via Getty Images

A lifeguard may have finally arrived for Billabong International (BBG:AU), the struggling Australian surf brand.

A consortium of private equity firms, including Altamont Capital and Blackstone Group (BX), threw the company a line of capital on Tuesday. The package is complicated, including a $294 million bridge loan and a new chief executive officer. Billabong took the deal and announced the leadership change. Yesterday, its current lenders, U.S. distressed debt investors Centerbridge Partners and Oaktree Capital, offered what they described as an even better deal that could trump the private equity offering.

Shareholders will decide on the particulars. The big question remains: How did such a hot performer—a sun-kissed beach brand—wipe out so spectacularly? Yes, those big, baggy swimsuits went out of fashion, but there were much bigger problems, in particular, an uncanny inability to avoid making bad decisions.

The company peaked in 2008 with $158 million of profit on $1.2 billion of revenue, a 13 percent margin. But as the recession loomed, Billabong went on a spending spree. It spread out from surfing, spending $100 million to buy DaKine, a board-and-bike fashion and accessories brand, and snapping up Sector 9 skateboards for an undisclosed sum. Meanwhile, it purchased a string of small retail stores, patching together a brick-and-mortar footprint instead of building its own flagships à la Apple (AAPL) or Gap (GPS). A few months later, Billabong made a foray into e-commerce, buying, a U.S. Web retailer, for an undisclosed sum.

“They grew too fast and leveraged themselves too hard,” Evan Lucas, a market strategist at IG Markets in Melbourne, told Bloomberg.

As Billabong’s product line grew, its supply chain became a bit of a mess. It struggled to link 500 different suppliers with its fast-growing retail network of roughly 600 stores. About one-third of its products accounted for just 1 percent of revenue—hardly selling at all—according to its financial statements.

While Billabong was shopping, its customers increasingly were not. In an August 2012 conference call, then-CEO Launa Inman said the crisis washed out a lot of independent surf shops, the key component of Billabong’s wholesale business. Meanwhile, PacSun (PSUN), its largest American buyer, started making its own line of swimwear.

Desperate to hang on to its profit margins, Billabong cut marketing spending, which exacerbated its sales slide. Last year it posted a loss of $499 million. In the 18 months ended in February, the company absorbed almost $1 billion in impairment charges.

“If we can just get to average, we can unlock huge value,” Inman told investors in August.

At this point, “average” would be an achievement. The companies offering to rescue Billabong are betting it can slim down fast. It’s in the process of closing more than 150 stores and streamlining its supplier base to about 50 manufacturers.

Financing is critical, but fashion will be just as important. Today’s e-commerce darlings like Bonobos are selling short, thigh-hugging “swim trunks.” Billabong’s inventory is still built on baggy, knee-length “board shorts,” a style that GQ was calling dated as early as 2009.

In August, Inman said the company would “be immediately cutting off the tail” of its product line, scrapping the piles of hoodies and swimsuits that just didn’t sell.

Citigroup (C) analysts, meanwhile, have upgraded the stock. In particular, they like the just-announced CEO, Scott Olivet, a veteran of Gap and Nike (NKE) who recently ran Oakley. Of course, his appointment was tied to Deal No. 1. It’s unclear what will happen now that Deal No. 2 is on the table. A shareholder vote has not been scheduled, but Olivet is already on the job and Inman is expected to transition out of the company in the next few weeks.

Meanwhile, morale at Billabong is surging. When the first rescue package was announced at its Gold Coast headquarters in Australia this week, the workforce whooped and cheered like giddy surfers scooting out of a gnarly wave.

Stock is an associate editor for Twitter: @kylestock

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