Billabong International Ltd.

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Billabong International Ltd.

1 Billabong Place
Burleigh Heads, Queensland 4220
Australia
Telephone: (+61) 75 589 9899
Fax: (+61)75 589 9800
Web site: http://www.billabong.com

Public Company
Incorporated: 1977 as Gordon & Rena Merchant Pty Ltd.
Employees: 500
Sales: A$380.2 million ($196.94 million)(2001)
Stock Exchanges: Australian
Ticker Symbol: BBG
NAIC: 315222 Men’s and Boy’s Cut and Sew Shirt (Except Work Shirt) Manufacturing; 315224 Men’s and Boy’s Cut and Sew Trouser, Slack, and Jean Manufacturing; 315228 Men’s and Boy’s Cut and Sew Other Outerwear; 315232 Women’s and Girl’s Cut and Sew Blouse and Shirt Manufacturing; 315233 Women’s and Girl’s Cut and Sew Dress Manufacturing; 315239 Women’s and Girl’s Cut and Sew Other Outerwear Manufacturing

Billabong International Ltd. markets apparel and accessories designed for surfing, skateboarding, and snowboarding. The company offers more than 2,200 products, including Board shorts; t-shirts; swimwear; shorts, pants, and jeans; fleece tops; “jumpers” or pullover sweaters; jackets; backpacks; sports eyewear; and many other products, primarily for young men and women. Billabong products are sold through licensees or directly from the company and are available in extreme sports shops in over 60 countries worldwide. In the United States, Billabong is among the top three brands of surfing apparel and in its home country of Australia Billabong is the leading brand.

From Kitchen Table Operation to International Brand

Billabong International started at the kitchen table in Gordon and Rena Merchant’s small, rented apartment on the Gold Coast of Australia. In 1973, the husband and wife team began to sew and sell knee length Board shorts designed for the rigors of surfing. The Merchants sold their Board shorts to surfing shops on the Gold Coast on consignment for A$4.50 per pair, selling A$5,000 in merchandise the first year in business.

The immediate success of the product and retailer demand persuaded the Merchants to give a name to their company and to add labels inside the Board shorts in 1974. They chose the name “Billabong” because of its uniqueness to Australia, being the aboriginal word often used to mean “oasis.” They developed the Wave device logo to create a recognizable representation of the business.

The business continued to grow and Billabong opened its first factory, a 1,000 square-foot space in 1975. By 1977, annual sales reached A$100,000. That year the company failed to get a business loan, but the following year Billabong obtained its first bank loan of A$7,500, allowing the company to relocate to a larger, 7,500 square-foot production facility. With continued innovation and new products designed for the needs of surfers and beachcombers throughout Australia, Billabong reached the milestone of A$1 million in annual sales in 1981.

As surfing developed into a professional sport during the 1970s and 1980s, Billabong positioned its brand products as integral to the surfer lifestyle. Promotions centered on surfer magazines and sponsorship of surfing events and individual surfers. In 1984, Billabong began to sponsor the World Final Surfing Contest, held annually in Hawaii, its largest event to date. The event provided international exposure just as the company started to expand into international markets.

Billabong began to export products to Japan and the United States, particularly Hawaii, in 1979, and the company decided to license its name and product designs in the early 1980s. Licensees sold Billabong products in New Zealand, Japan, and the United States. In 1983, Billy International, co-founded by Bob Hurley, established Billabong in the United States, with a design and production facility located in Costa Mesa, at the center of the surfwear industry in Orange County, California. After a decade in operation, Billy International built Billabong into a nationally recognized brand, with $25 million in annual sales. A 1988 license agreement established Billabong in the United Kingdom as a base for marketing and distribution throughout Europe. In 1992, Billabong took direct control of the European operations, relocating Billabong Europe’s headquarters in Hossegor, France, with sales offices in Spain, France, and the United Kingdom, where most European sales originated. Billabong surfwear became available at popular surfing areas in South Africa in 1989, through direct sales, and in Indonesia in 1991 through a licensee.

Billabong’s growth as a popular brand and expansion of its product line required new production facilities. The existing facility had been expanded several times to 40,000 square feet by 1989, when the company began operation of an in-house screen-printing shop. In 1992 the company opened a specially designed and constructed, 45,000 square-foot factory and sales showroom. New products at this time attracted crossover board sport enthusiasts in skateboarding and snowboarding. Billabong sold certain items to skateboarders using the “Bad Billy” logo in 1987, but did not target that group much until the mid-1990s. Thin Air, a subsidiary of Billabong formed in the early 1990s, produced jackets for use by surfers, for warming up after riding a few waves, or snowboarders. Thin Air produced snowboard carriers in the form of a backpack. International expansion at this time involved licensees in Brazil (1994); Peru (1995); South Africa (1995); Singapore (1996); and Chile (1997). By the end of fiscal year June 30, 1997 Billabong recorded revenues of A$47.4 million from direct product sales and licensing royalties, the latter at 5 percent to 7 percent of licensee sales. In 1998, Billabong built another, larger production facility and showroom at Burleigh Heads.

Billabong Loses U.S. Licensee in 1998

In June 1998, Bob Hurley of Billy International decided not to renew his license to produce and sell Billabong apparel. Hurley did not want to go in the direction that Merchant planned to take the company, selling accessories and junior women’s clothing, and had decided to start his own line of surfwear. The news caused a wave of trepidation in the surfwear industry as Billabong rated among the top three brands in many surf shops, bringing approximately $70 million in sales to Billy International in 1998. Also, the pending debut of Hurley’s line of surfwear raised speculation about new competition for Billabong. The brand was untested in the market, but Hurley had established a strong reputation as a businessman in the industry.

Billabong initially sought to find another licensee, but decided to form its own subsidiary, Burleigh Point Ltd., doing business as Billabong USA. The formation of the subsidiary hinged on the infusion of new capital from a consortium of investors led by Gary Pemberton and Matthew Perrin. Pemberton, who became a non-executive chairman at Billabong, brought experience as chairman of Quantas Airways and leadership in other prominent Australian companies, particularly in the area of international expansion. Matthew Perrin took the position of chief executive officer at Billabong while Gordon Merchant led Billabong USA. The consortium purchased Rena Merchant’s 49 percent interest in Billabong for A$24.6 million ($14.3 million) in preparation for taking the company public. In support of the long-term well-being of the company, the investors provided capital to form Billabong USA.

Maintaining a presence in surf and extreme sports shops in the United States was essential for Billabong to expand its market share. Billy International’s license expired in June 1999, and Billabong had to act quickly to maintain an uninterrupted flow of merchandise to surf shops. Hurley kept the manufacturing facility in Costa Mesa for his new company, so Billabong had to find a manufacturing facility and prepare it for operation in a matter of months. In November, the company leased an 80,000 square-foot facility in Irvine, California.

Merchant selected Paul Naude, a former executive at surfwear manufacturer Gotcha International, for president of Billabong USA. While Hurley retained many key employees, many chose to remain with Billabong, including national sales manager Richard Sanders and ten of 14 sales representatives. For the sales staff, to stay with Hurley meant a big cut in pay and to sell an unknown brand under Hurley. Naude’s reputation in the surfwear industry served to attract top designers and other high profile staff members to Billabong. The hiring process generated controversy and change in the surfwear industry, with several positions being filled by people from competing companies.

When Billabong USA displayed samples of its summer 1999 line at the winter trade shows, it reassured surfwear retailers that the Billabong brand would endure the changes in operations. Billabong found itself in the rather odd position of having Hurley present Billabong surfwear as well, selling the line next to Hurley’s debut line of surf apparel. Billabong was pleased with the Hurley’s Billabong line and resulting sales. Billabong expected sales in the United States to account for approximately 50 percent of total revenues, as direct control of the market brought product revenues rather than royalties.

Key Dates:

1975:: Billabong opens its first factory, a 1,000 square-foot production facility.
1979:: Billabong begins to export goods to Japan and the United States.
1981:: Annual sales reach A$1 million.
1984:: Billabong sponsors its first major surfing event, the World Final Surfing Contest in Hawaii.
1992:: The company moves to a new 45,000 square-foot production facility.
1998:: Billabong USA forms after licensee decides not to renew.
2000:: An initial offering of stock exceeds expectations, with the sale of stock closing early.

Also, in January 1999, Billabong debuted a line of clothing for girls and juniors. With Billabong Girls the company entered a largely untapped, niche market of young women, 16 to 22 years old, who often purchased young men’s surf, skate, and snowboarding apparel. The line featured body conscious knits, sheer knits, mesh, unusual floral prints, and bottoms which ranged from hot pants, to Capri pants, to loose, baggy-style pants. Wholesale prices ranged from $15 for a t-shirt to $120 for a jacket. Advertising targeted young women through general magazines, such as Teen and Seventeen, as well as specialty magazines, such as Surfer, Surfing, and Wahine (the Hawaiian word for “girl”). Billabong promoted the line through sponsorship of girls surf and skate meets and of world-class surfers, such as Malia Jones and Layne Beachley, spokeswomen for Billabong and members of the Billabong Girls sports team. Merchant combined Billabong Girls with Billabong USA, operating the two subsidiaries as one division from the facility in Orange County.

Public Offering of Stock Prompts Restructuring in 1999 and 2000

During 1999-2000 Billabong prepared to go public as means to obtain funds that allowed the company to diversify its product line and to expand its reach internationally. With its products being sold in more than 60 countries through licensees, Billabong wanted to obtain direct control over production and distribution. Billabong signed licensing agreements with manufacturers in Israel in 1998 and in Venezuela in 1999. Billabong gained direct control of business in Canada and New Zealand in 1999 and 2000, respectively, where licensees had previously operated. The company also planned to convert Australian Accessories Business, maker of Billabong hats, backpacks, and other accessories, to direct company control in July 2000.

Through direct operation of international operations Billabong sought to improve the marketing and promotion of its products, gaining higher margin income rather than royalty payments. Through management information systems, financial oversight, quality control, and economies of scale through central product sourcing, Billabong hoped to facilitate efficient market expansion as it diversified its product line. The company employed in-store merchandisers and account managers to oversee in-store presentation of its brand merchandise and the international network of commissioned salespeople became direct employees of Billabong with regular pay and sales incentives. Billabong formed a central product sourcing subsidiary in Hong Kong in 1999. While external suppliers existed, 40 percent of licensee sourcing originated with Billabong, allowing the company to reduce costs, provide consistent quality, insure timely delivery, and become flexible with changing market conditions. Also, the company established direct distribution facilities in Victoria and New South Wales, Australia.

At the time of the initial public offering of stock, Billabong products were sold in more than 2,600 surf and extreme sports shops around the world. Revenues at Billabong nearly doubled from A$64.5 million during fiscal year ended June 30, 1998 to A$112.3 million during fiscal 1999 on the strength of the U.S. market. Billabong USA recorded revenues of A$25.6 million in 1999, resulting from three months in sales of men’s products, after taking over from Billy International, and six months of sales in young women’s products, after the debut of Billabong Girls. Billabong products were distributed through over 900 surf, snow, and skate shops in the USA. In Australia sales to 600 accounts, for a total of 850 retail outlets, reached A$46.3 million in fiscal 1999. In Europe, where the product line included wet suits, accessories, and snowboarding equipment, Billabong products sold through 1,100 independent retail outlets in 25 countries and two company-owned stores in France. European sales generated A$40.4 million in sales. Billabong planned to expand into North Africa, the Middle East, and Asia, to expand its line of snowboard apparel and accessories in the United States, and to launch a line of swimwear for young women.

In July 2000, Billabong initiated the sale of 120.4 million shares of stock, including 11 million shares from oversubscription. Shares sold to institutions at A$2.60 per share and to retail investors at A$2.30 per share, each accounting for about half of stock purchases. The IPO raised A$295 million in capital, exceeding the goal of A$277 million. Strong demand for Billabong stock required the offering to close three days ahead of schedule, with the exchange price rising to more than A$3 per share on the Australian Stock Exchange. The stock offering included half of Gordon Merchant’s 51 percent interest in the company, with 60 percent of total company shares sold.

One of the first actions that Billabong took in extending its international reach was to take over the licensee operation in Japan, the fourth largest market for surfwear, after the United States, Europe, and Australia. While the licensee had sold $13 million in merchandise, compared to the leading surfwear brand, Quiksilver, at $43 million, Billabong planned to capture a greater share of the Japanese market. With headquarters in Osaka and a sales office in Tokyo, Billabong began official operation in Japan on January 1, 2001.

In early 2001, Billabong sought to diversify its product line without diluting its brand name by purchasing two apparel and accessories companies, Von Zipper and Element, both based in the United States. Von Zipper specialized in sunglasses and eyewear for extreme sports, such as snow goggles. Von Zipper formed in 1999 and quickly established itself as an up and coming brand. Element, founded in the early 1990s, was considered one of the leading brands of skateboarding apparel and accessories worldwide. Billabong retained key staff at both companies and allowed them to retain their unique identities and independent operations, providing capital resources to expand product lines and distribution to select retailers. News of the acquisitions prompted an increase in Billabong’s share price to over A$5.50.

By fiscal 2001, sales at Billabong increased to A$380.2 million, 15 percent higher than projected in the prospectus and 68 percent higher than the previous year, while net profit rose to A$42.1 million, 12.6 percent higher than forecast. Taking direct control of license distribution had a strong impact on revenues as did the formation of Billabong USA. Sales in Australia and Asia increased 26 percent to A$118.8 million, sales in North America increased 50 percent to $179.3 million, and sales in Europe, where distributors in Italy and Belgium were converted to company-controlled operations, sales increased 50 perfect to A$82.1 million. Billabong expected sales to grow approximately 15 percent in Australia/Asia and 25 percent in North America and Europe in 2002. In the United States, Pacific Sunwear, a chain of beachwear clothing stores accounting for 20 percent of sales at Billabong USA, announced plans to double the number of outlets in the United States.

While Billabong has maintained its commitment to surfing throughout its history through sponsorship of events and athletes, in 2001 Billabong initiated a new extreme surfing event, the Billabong Odyssey. This event challenged surfers to a three-year search for the biggest waves in the world, specifically, a search for the never-before surfed 100-foot wave. The idea for the project came as an extension of Project Neptune, an expedition to a surf break 100 miles off the coast of San Diego. The legendary Cortes Bank sea-mount had never been surfed before, but Mike Parsons, a surfer on the Billabong Team, rode a 66-foot wave, winning the Swell XXL for the year’s biggest wave. This adventure exhibited new possibilities for mid-ocean surfing by using motorized watercraft to tow surfers farther out to sea, an extreme form of surfing that began in the 1990s. Billabong invited internationally renowned surfers to participate in the event and planned eight expeditions of four to six surfers. Billabong offered a prize of A$1,000 per foot of face height to the surfer who rode the biggest wave each year and an A$500,000 prize to any surfer to ride a 100-foot wave.