Losses are expected to double at SurfStitch as the retail crunch intensifies

Haleiwa, Hawaii. Gabe LHeureux/ Getty Images

SurfStitch says bigger losses are ahead as the retail crunch continues to drag at the online clothing retailer’s sales.

The company is now forecasting an underlying EBITDA (earnings before interest, tax, depreciation and amortisation) loss for the full year of between $10.5 million to $11.5 million, a sharp deterioration from the $5 million to $6.5 million loss forecast in February and the previous estimate of a $4 million to $5 million loss.

“The work to transform our business model — through improved operational capabilities, enriched customer engagement and a reduced cost base — is going well,” says CEO Mike Sonand in a market update.

“However, the retail environment has made it difficult to deliver the planned sales and gross margin improvements as quickly as we would like, resulting in the revised forecast.”

Clothing retailers in Australia have been under pressure from emerging competitors online and weak market conditions.

In February, fashion labels Marcs and David Lawrence went in to voluntary administration, the latest in a string of players going into administration, including Payless Shoes, Pumkin Patch, Howards Storage World and Dick Smith stores, which closed last year.

The post-Christmas sales, including end of year and Boxing Day sales, have been disappointing. Myer, in its half year results, says sales were subdued during the stocktake due to widespread “discount fatigue” among consumers.

Mike Sonand at SurfStitch says the company has made substantial progress in to cutting costs, streamlining operations and transfer its core SurfStitch.com website to a new platform.

However, Sonand says the general business environment for apparel and footwear has been very difficult in each key market, particularly in the UK.

“Our new platform in Australia is a responsive solution that materially improves functionality, reduces the cost of operating the site and will improve customer experience,” he says.

“Its core pillar is ‘mobile first’ which aligns with our strategy of optimising customer engagement.”

In February, SurfStitch posted a half year loss of $5.6 million, an $8 million improvement on the same six months the year before. Revenue was down 13.1% to $106.30 million.

Surfstitch’s management was restructured after the surprise departure of CEO and co-founder Justin Cameron in March last year. The company then said it understood Cameron was pursuing a potential acquisition of the business in conjunction with private equity. There has been no news since.

The company says the integration of companies acquired over has been slower than anticipated and the benefits lower than expected.

The retailer is now looking at the sale of some or all of its assets.

SurfStitch chairman Sam Weiss says the board is committed to delivering a business that is cash flow positive as soon as possible and maximising value for shareholders.

“Notwithstanding the difficult business environment and the operational and external challenges facing SurfStitch, the board, the management and the global SurfStitch team are highly engaged and enthusiastic about the opportunity to deliver on the significant potential of our business,” Weiss says.

Last month SurfStitch sold action and extreme sport video business Garage Entertainment to the Madman Media Group for a loss. SurfStitch in 2015 paid $15 million in cash and shares for Garage and its assets including the acclaimed Australian documentary Bra Boys.

In December SurfStitch sold its surfboard subsidiary Surf Hardware International at a loss to investment company Gowing Bros Ltd for $17 million. The company company says the business it bought 12 months ago for $23.7 million wasn’t a good strategic fit.

SurfStitch is also in the middle of legal proceedings by Coastalcomms, part of the Coastalwatch group, Australia’s largest network of surf cams and surf reports, which also has 10.4% stake in SurfStitch.

Coastalcomms is in dispute with SurStitch over a failed content and software agreement.

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