SurfStitch's massive loss was driven by a combination of bad deals and bad luck

Cameron Spencer/Getty Images

SurfStitch, the online retailer started by two friends from Sydney’s northern beaches eight years ago, today posted a full year loss of $155.35 million when six months before it recorded a profit $5.7 million.

The problem was one of growth. The company bought businesses, pursuing a strategy of buying content to attract customers online.

This pushed revenue up an amazing 143% to $237.95 million over 12 months but this growth was mainly from a string of acquisitions which took time and management focus to bring on board.

And gross margins fell to 39% from 46%, while “challenging conditions” resulted in significant losses in the North American and expenses increased, driven by a fast-tracked global branding and eCommerce platform roll-out.

In May last year, the retailer bought a surf weather site, Magicseaweed, and a global online news magazine, Stab Magazine, for $13.8 million cash and 4.8 million shares.

In November, the company bought action and extreme sport video producer Garage Entertainment, a local Sydney company, for $15 million in cash and shares.

When Mike Sonand, the company’s former chief operating officer, was appointed CEO in June he immediately launched a review.

From this, the company booked a non‐cash impairment of goodwill, intangibles, plant, property and equipment and aged inventory totaling $99.3 million.

Justin Cameron’s shed where SurfStitch started. Image: supplied

The other big drag on the company was a content deal which went wrong, meaning $20.3 million in revenue was reversed. The loss relates to a licence made to a third party for the use of the company’s content contained in SurfStitch and its units Garage Entertainment, Rolling Youth and MagicSeaweed.

The company’s management was restructured after the surprise departure of CEO and co-founder Justin Cameron in March.

The surf and skateboard clothing company then said it understood Cameron was pursuing a potential acquisition of the business in conjunction with private equity. There’s been no news since then.

Rapid Growth

The company was formed by Cameron and Lex Pedersen eight years ago. Pedersen ran Surfection, the surfwear shops, and Cameron was an investment banker and research analyst at Credit Suisse.

The rapid growth goes back to the days they worked out a garage. Under Cameron, SurfStitch was on a steep curve upwards, not paying dividends as it built market share and expanded into content-related businesses.

Since its IPO in late 2014, the company has done six acquisitions, with a significant rise in spending and a focus on gaining market share and boosting top line sales.

Cameron’s vision was of SurfStitch as the Netflix or Amazon of extreme sports, the centre of a digital ecosystem around the surf and action sports lifestyle.

It was all about the idea that owning content is good for business because it creates and audience which can be converted to sales.

The first major indication of the worse than expected annual results was in May when the company said the integration of companies acquired over the last year had been slower than anticipated and the benefits lower than expected.

Too many brands

When Sonand was appointed he found that the company was dealing with too many brands. Since then he’s cut them in half to 350 from about 700.

He’s also gone about reducing staff numbers, restructuring the senior executive and refocusing on higher margin products.

Surf Hardware International, bought in December 2015, is being sold. Deloitte Finance Advisory has been appointed to help with divestment options.  

“Forecast spending has reduced, the cash position has stabilised and we’ve materially improved our working capital,” Sonand said today when releasing the results.

“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.” 

The content play is still the focus.

“Our media assets are a core part of merging content, community and commerce,” Sonand says.

Sales Forecast

He’s forecasting single digit sales growth in the year ahead. Nothing like the top line number of 143% or even the underlying 18% for 2015.

“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,” Sonand says.

“A focus on increasing market share, combined with difficult trading conditions (particularly in North America) had a major impact on retailing margins and overall results.

“The accelerated roll‐out of the eCommerce platform, planned global re‐branding and other initiatives had an impact on expenses and cash flow.

“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 cash flow.”

Today the company shares are trading at $0.115, down by half from Monday’s close.

A year ago, in August 2015 founders Cameron and Pedersen sold 10 million shares at $1.77 each.

The strike price was $1 each at the IPO in December 2014.

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