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Surfstitch profits jump 40% after major acquisition spree

It’s been a swell ride for Surstitch. Picture: Getty Images

nline surf wear retailer and digital media company Surfstitch delivered a maiden profit of $5.7 million following a string of acquisitions which helped boost sales by 40 per cent in the six months ending December.

Surfstitch swung to a modest statutory net profit of $368,000 from a $5.6 million loss in the year-earlier period.

But proforma net profit soared to $5.7 million in the six months ended December 31 from the year-earlier $300,000 and proforma earnings before interest tax depreciation and amortisation rose almost fivefold to $13.9 million from $3 million as sales rose 40 per cent to $144.9 million.

The proforma results assume that SurfStitch and several businesses acquired over the last two years, including Surfdome, SWELL, Magicseaweed and Stab, were part of the group as of July 2014.

Co-founder and chief executive Justin Cameron said strong, double-digit revenue growth was expected to continue and gross margins were expected to remain strong, after rising 140 basis points to 48.3 per cent in the December-half.

However, the group did not reaffirm its full-year EBITDA guidance, which was between $15 million and $18 million compared with $7.7 million in 2015.

“Given the pace of change and long term opportunities presented to the business, management and the board believe it is no longer prudent to focus on a defined EBITDA range,” Mr Cameron said.

“Instead, EBITDA growth will be flexed based on investment around the global content strategy. Additional opportunities for growth exist through acquisitions to support the group’s strategy, however focus remains on internal content investment.”

Analysts expect net profits to reach $11.7 million this year.

No dividends are planned and cash will continue to be reinvested in growth opportunities.

The online retailer, which started selling board shorts on eBay ten years ago, is quickly transforming into a digital media and content company with a sideline in surfboard accessories manufacturing.

After selling a stake in the business to Billabong International in 2009 to fund expansion, Mr Cameron and co-founder Lex Pedersen bought out Billabong’s stake in 2014, acquired leading North American online retail platform Swell from Billabong and bought Europe’s largest online surf retailer, Surfdome, from the Quiksilver Group, creating the world’s largest online action sports and youth apparel retailer.

Five months after the float, SurfStitch outlaid $21 million for Stab, a leading online surf content platform, and Magicseaweed, a user-generated surf forecasting network, funding the deal by raising $37.5 million in new capital at $1.50 a share.

Last November the company paid $15 million for Garage Entertainment and Production, which makes videos such as The Bra Boys and The Crew and has a library of more than 3000 action sports titles which it distributes through its own video-on-demand platform and dedicated TV channels.

A week after the Garage deal, SurfStitch raised another $50 million at $2 a share to buy leading surfboard and accessories manufacturer Surf Hardware International.

The pace of change has surprised some of the original investors in Surfstitch’s $214 million float in December 2014. But Mr Cameron says online shopping habits are changing and consumers are buying based on content and engagement rather than just on product and price.

Shoppers who travel to SurfStitch’s online store through its content sites spend about 50 per cent more than other shoppers, and tend to buy higher-margin hardware such as surfboards and wetsuits. Conversion rates are 700 points higher and purchase frequency is 50 per cent higher.

SurfStitch shares, issued at $1, reached $2.09 in December and are now trading around $1.73.

This article was originally published on Business Day. Follow Business Day on Facebook.

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