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Tigerlily’s next move

TigerlilyRevealing a sense of pragmatism about the task ahead, Billabong Group last week offloaded Tigerlily, the most profitable small brand in its portfolio, for $60 million to private equity firm Crescent Capital, making over $54 million on the business it bought in 2007.

Calling the current portfolio “too complex and too difficult for investors to follow”, Billabong CEO Neil Fiske said the Tigerlily sale signalled a new focus on fewer, bigger and more global brands going forward.

The surfwear retailer has seen a sharp divide in recent times between the weak performance of its APAC and European divisions and a booming business in the Americas.

Despite more than doubling earnings before interest, tax, depreciation and amortisation in the first half of FY17 in its dealings across the Pacific, Billabong last week reported an overall 21 per cent decline in underlying EBITDA to $29.3 million.

At a time when Billabong’s fortunes are riding more than ever on its global success, Tigerlily, with 25 bricks-and-mortar stores in Australia and New Zealand, was not a global brand. It was on track to earn the ASX-listed company between $7-8 million in revenue this financial year.

The decision to cash out now rather than reap the long-term rewards of growing the swimwear business ultimately came down to organisational constraints, according to Billabong’s head of Asia Pacific Paul Burdekin.

“Could we have kept growing Tigerlily? Yes. Would something else have had to make way for that to happen? Absolutely. It really comes down to organisational capacity, and strategy has to trump everything,” Burdekin told IRW.

Billabong’s immediate priority is paying down the net debt it still holds from the $294 million refinancing deal it took in 2013.

“We are carrying a debt level which has a pretty significant interest level attached to it, and we’d like to see that level reduced. The sale will help with that,” he said.

Going forward, Burdekin said Billabong will continue to stock Tigerlily products in its multi-brand Surf, Dive ‘n’ Ski stores, as long as the relationship is “mutually beneficial”. He described the arrangement as a “win-win” for both Billabong and Tigerlily, but declined to provide further details of their agreement.

Peter Thornely, a mergers and acquisitions specialist at Grant Thornton, says this is a particularly shrewd move on Billabong’s part.

“They have access to good products that are in demand and can still take a margin on those products sold in their stores,” Thornely told IRW.

“Billabong has done really well with Tigerlily. If you look at what they paid for the business and what they realised, they were able to capture significant value, despite having a lot of issues in the [broader] Australian business.”

Indeed, the bigger question in all this is where the Billabong sale leaves Tigerlily.

Tigerlily’s global expansion plan

According to Tigerlily’s brand manager Sally Tullett, the change in ownership is a good step for the beachwear company, which has long harboured international ambitions.

“We’re really excited about the opportunities that will present themselves with this transition,” Tullett told IRW. “As much as we’re grateful for the support that Billabong has given us in the past, we’re glad they realised the time was right for us to transition to new owners.”

Tullett, who met with Crescent Capital several times before the sale was finalised, said she has discussed Tigerlily’s international expansion strategy in broad terms with the private equity firm.

“We see significant opportunities on the West Coast of the US, as well as in beach communities in Europe, such as Ibiza. Even the UK is on the cards,” Tullett said, noting that Tigerlily will likely take a wholesale approach first, before setting up bricks-and-mortar shops overseas.

A spokesperson for Crescent Capital confirmed the plan to IRW.

“We think Tigerlily is positioned exactly right for domestic and international expansion,” said Stephen Whitehead, corporate relations director at Crescent Capital. “Together with the current management team, we’ll be looking at different angles to deliver that, including brand building and distribution.”

But while the private equity firm specialises in taking domestic Australian brands to the global stage, the process is not without challenges.

“Tigerlily has got scale and has done very well, but Crescent needs to be able to add some value for it to continue to grow,” said Thornely.

“The challenge for Tigerlily is it doesn’t have the management capability in-house, so it’ll be relying on a management team in the [private equity] business to drive that growth.”

For instance, the company will need to build up its finance, IT and warehousing capabilities from scratch, since these functions were previously performed by the Billabong Group.

The brand also faces a more competitive market than when it first debuted. This is compounded by the claim from one senior employee who left the business last year that Tigerlily has scaled back spending on unique prints and specialty design elements, which set the brand apart.

“There were big cutbacks to what the design team could spend. The designs used to be really unique…it doesn’t have the same appeal anymore,” said the former Tigerlily employee.

Tullett agreed the brand has had to be more strategic in the design of its swimwear lines, but attributed any cost cutting to the declining US dollar putting pressure on margins. As for emerging brands encroaching on Tigerlily’s signature bohemian look, Tullett welcomes them.

“We see the brands that may be replicating what we have created as an opportunity to push the brand forward and not repeat what we’ve been doing in the past,” she said.

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