New chief executive Launa Inman has wasted no time setting up Billabong’s accounts to suit her tenure, producing over $500m in write-downs, provisions and other non-cash charges, in one of the most asterisk-prone financial reports of recent memory.
The accounting has two noticeable themes:
1) recognise in the current period as many future expenses as possible; and
2) move as many expenses as possible out of ordinary results into significant and exceptional items.
The treatment of inventory provides a straight forward example of these shenanigans. A $74m provision has been taken to liquidate inventory at less than cost. Of this, $33m is applicable to this year’s results, which at the stroke of a pen transfers $33m in costs to the significant items basket and improves pro-forma EBITDA by the same amount. The remaining $41m of this provision will then benefit next year’s EBITDA by $41m, as the now ‘low cost’ inventory is sold at a very healthy gross margin.
Billabong has further recognised $3m in significant items for the cost associated with the clearance of this inventory, apparently different somehow from the costs of clearing other inventory. They’ve then cheekily recognised as an extraordinary expense a further $8m (non-IFRS and unaudited) reflecting ‘margin dilution on the clearance of inventory… which resulted in a margin below that achieved by the Group historically’. Yes you’ve read that right. They’ve discounted inventory to clear it, and are recognising profit in their pro-forma results as if they had sold it at full price.
The doubtful debts provision and ‘early termination of leases and onerous lease/restructuring’ expense both achieve similar outcomes; taking a bath this year in order to make future profits look better.
This year, at least, they have been forced to split out the significant and exceptional results in some detail. If this management team are still around next year, don’t expect them to provide a detailed breakdown of how the sandbagging in FY2012 has improved results. No doubt you’ll have to make your own adjustments.
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