Surfwear retailer Billabong could be in for a world of pain if the local currency continues to fluctuate even further, with a new RBS report suggesting the company could face problems with its debt, which is in US dollars.
The report comes despite retail conditions appearing to stabilise heading into Christmas, with the RBA even hinting at the possibility of an interest rate cut – although experts suggest the economy is at the mercy of international economic activity.
Analyst Daniel Broeren has said in his latest report that “the threat of a global recession is most concerning for Billabong”.
“While underlying earnings in the Americas and Europe may come under pressure, the immediate risk, in our view, is a debt covenant breach as its US dollar-denominated debt expands on translation,” he said in his note.
“Given wholesale funding markets are tightening further, we believe it may be best for Billabong to take action now.”
The business is currently carrying debt of $468.3 million.
The growing fear that a falling dollar could significantly impact Billabong’s debt comes as economists believe the local currency could fall below $US0.90c. It also comes after a shocking year for the retailer, whose shares have plummeted by more than half over the past year.
In August the company’s profit fell by 18% to $119 million, sparking discussion over what the business would do to reverse its current position. Some experts put forward the possibility the company could become a takeover target for private equity.
Forrester Research analyst Steven Noble says the fluctuating and falling dollar is a problem for any retailer, especially those with close ties to the United States.
“Volatility of the Australian dollar is a huge issue for any Australian business that is exposed, and there are a number of ways they could be. One is through simple prices, another could be online prices they compete against.”
“The third could be if they are making revenue from overseas sales, and especially if they have their debt denominated in another currency.”
Noble says while many businesses are able to hedge themselves, plenty don’t, and it may get worse as the industry heads into Christmas.
“The future direction of the dollar is contingent not just on factors that you can see in today’s economic model, but decisions that are made in the future. No one can predict what will occur.”
While Noble recognises two consecutive months of retail spending growth, and interest rates having been set at 4.75% for a year, he nevertheless says retailers will be at the mercy of the international economy.
“It really depends on whether there are any fundamental shocks to the economy, and if they do or don’t occur. Whether they do is in the hands of decision-makers far removed from us, and it’s extremely difficult to predict what will happen.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
