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ONLINE actions sports retailer SurfStitch (ASX:SRF) endured another day of pain on the stock market as its shares more than halved on news that its annual loss has blown out to $154.7 million.
The FY16 result by the Gold Coast-based company, a former subsidiary of Billabong (ASX:BBG), has been impacted by $99.3 million in goodwill impairments.
However, despite this SurfStitch still managed to report an underlying EBITDA loss of $18.8 million despite a 15 per cent lift in underlying revenue to $235.6 million. The losses are also expected to continue this financial year as well.
The dour result and forecast led to another massive sell-off by investors who have become used to bad news from the company over the past nine months. The shares slumped more than 50 per cent to a low of 10c with more than 55 million shares changing hands.
The company's stock floated at the end of 2014 at a $1 issue price and it has traded as high as $2.13 in the last 12 months.
"The results are clearly very disappointing," says CEO Mike Sonand who was enlisted by the company earlier this year to manage a turnaround in performance.
"SurfStitch is fundamentally a great business, but the company has been through a period of rapid expansion, which has involved significant management time in effecting the relevant acquisitions and two major capital raisings."
SurfStitch has moved quickly to lighten its load with plans to sell Surf Hardware International, an online surf shop which was acquired by the company for $23.7 million in December last year. The company has appointed Deloitte Finance Advisory to assist with the sale process.
Sonand says the company's strong focus on lifting market share in a difficult trading environment, particularly in North America, has hurt retail margins and overall earnings.
"The accelerated roll-out of the e-commerce platform, planned global rebranding and other initiatives had an impact on expenses and cashflow," he says.
"The number one priority on my appointment was to implement a stabilisation plan with a key focus that the business has better control of its cashflow."
As part of the restructuring, the company has targeted a 65 per cent reduction of its North American workforce and a 25 per cent reduction in the UK.
"Forecast spending has reduced, the cash position has stabilised and we've materially improved our working capital," says Sonand.
"We've strategically reduced the number of brands we offer, reduced inventories in line with our retail plan and are on track to deliver an increase in our gross margins.
"The team is heavily focused on day-to-day execution and is aligned in their thinking with a strong action plan."
However, the outlook for the year ahead remains subdued, with SurfStitch forecasting single-digit sales growth and another underlying loss.
The company is forecasting EBITDA to be in the red between $2 million and $3 million, although Sonand highlights that this will be a big improvement on FY16.
As a result, cash from operations is forecast to fall by between $6 million and $7 million during the year. SurfStitche ended FY16 with $21.3 million in cash, down from $39.7 million a year earlier.
"We have set demanding retail metrics to drive improved performance across the business," says Sonand.
"Over the coming months we will better leverage our traditional and new channels to drive engagement and focus on creating a customer experience that generates loyalty and repeat business.
"If we can do all of these things well we are confident that we will further consolidate and take advantage of our position as the world's leading online action sports retailer."
Pictured: Founders Lex Pedersen and Justin Cameron
Read more from the Surfstitch saga
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