Surfstitch narrows loss, cuts guidance

surfstitchOnline surf wear retailer Surfstitch has narrowed its losses in the second half, but has revised its loss forecast for the full year amid slowing sales in Q3.

Losses from continuing operations, excluding the recently offloaded Surf Hardware business, were $5.6 million for the half year ended December 31, representing an $8 million improvement on the previous period.

Revenue for the half was down 13 per cent to $106.3 million, which the company attributed to a stronger Australian dollar and lower sales in the North American market.

Surfstitch put the first half sales slump in Europe down to the impact of Brexit on the pound and British consumer confidence, as well as singling out “tough conditions” in Australia and North America.

The narrowed losses buoyed shareholders, who sent the company’s share price up 2.5 per cent to 19 cents on Tuesday morning, but declining sales across its three operating regions has held back expectations.

Chief executive Mark Sonand, who came into the role last year after the resignation of his predecessor, told shareholders that the company progressed well on achieving its goals to turnaround the company in the last half, particularly with cost cutting measures.

He said that a reduction in fixed costs was driven by a $12.5 million reduction in inventory, $12 million of which was aged product. While variable costs remain an ongoing focus, Sonand noted that a 25 per cent in cost per order is a good step in the right direction.

The cost cutting measures delivered a 5.1 per cent increase in margins, helping to drive a $7 million improvement in NPAT losses for the period.

“With the full benefit of the expense savings realised through second half, coupled with improving margins, we do expect to see a material decline in cash burn for the second half year-on-year,” Sonand told shareholders.

“Prudent investment” is now on the agenda for the company after hiring Clover Chambers at the start of this year to head-up a business intelligence team that will work to drastically improve data analysis of consumer behavior.

“We’re investing in that capability of actually being able to analyse and get insights so we can make better decisions,” Sonand told Inside Retail after the briefing.

Surfstitch is also ramping up its private label focus, hiring a new team to drive the vertical last year that’s working to making the range account for 10 per cent of all sales by fiscal 18.

Sonand is bullish on the company’s direct sourcing efforts, targeting 20 per cent or more as a proportion of total sales in the “very medium term”.

“We’re still a multi-branded retailer, but private label just provides us with that extra level of margin to sustain the returns and profitability that’s required of any retailer,” he explained.

He insisted the company will be strategic about the implementation of their private label ranges, outlining expected improvements in customer attention, operating efficiencies and return on investment to shareholders.

But with Surfstitch shares now trading at 17 cents, compared to their $2.09 high in November 2015, Sonand still has a lot of convincing to do.

Despite the recent consolidation of the group’s portfolio, which involved offloading non-core operations to focus on retail, the company is still embroiled in a legal dispute with former CEO and founder, Justin Cameron.

The company has also announced a “retention equity incentive award” to Sonand, who will receive three million performance rights under the plan, which the board says is in recognition of his work to “stabilise and refocus” the company and to secure his continued performance.

Surfstitch has also announced the appointment of Abigail Cheadle as an independent non-executive director, effective 1 March, as part of a board renewal program announced last year.

It’s part of a focus to establish a smaller board at the company, comprising of mostly non-executive directors focused on rebuilding the company.

“Cheadle has experience in technology, corporate restructuring and forensic accounting gained in a career predominately spend in Asia and Australia,” said chairman Sam Weiss.

Cheadle has experience working with the likes of Deloitte, EY and KordaMentha. She is also a non-executive director of Qantm Intellectual Property (ASX:QIP).

She will serve as the chair of Surfstitch’s Audit & Risk Committee and will be a member of the Remuneration and Nomination Committee. The appointment will fill a casual vacancy until election for full term at the company’s AGM in November.

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