Christopher Niesche: Strategy wipeout for surfwear firm

Surfstitch founders Lex Pedersen (L) and Justin Cameron. Photo / News Corp

Two or three years ago SurfStitch was an ASX market darling. Its founders, a former investment banker and an experienced surfwear retailer, were profiled favourably in the media, posing for photos in their shorts and T-shirts, the vanguard of a new way of doing business.

The business had gone from selling wetsuits out of a garage north of Sydney to a surf and sportswear company worth more than half a billion dollars with offices in the Gold Coast, Bondi Beach and Venice Beach, California.

Late last year the company's shares were double their issue price as the market fell in love with its mix of online retailing, and youth and surf culture. The average age of its employees, we were told, was just 24.

In March, CEO and co-founder Justin Cameron sent an email to the board saying he was resigning from all positions effective immediately and was considering a potential acquisition, backed by private equity investors. However, the company hasn't heard from Cameron since then and there has been no takeover bid. No one ever got to the bottom of his abrupt departure.

Last week the company delivered its third profit downgrade in five months and appointed a new chief executive to fix the mess. It announced it would make an A$18 million loss this year, instead of the A$18 million profit it had forecast.

At one point last week the share price was so low the company was worth just A$74 million - down from A$580 million in November last year.

During 2015 it outlaid more than A$80 million in cash and shares to acquire online surf magazine Stab, user generated surfing network Magic Seaweed and video maker Garage Entertainment.

The idea was the content created by the three would bring surfers to the website thereby increasing sales. The charismatic Cameron even had plans to charge for content.

A mysterious content deal was one of the reasons for the company's most recent profit downgrade. Last year SurfStitch granted a perpetual licence to an unnamed third party to use the Garage Entertainment and Magic Seaweed content, followed by an amendment in March which added in services including access to software and hosting the SurfStitch online store.

For companies, it's a lesson in sticking with what you know. How did SurfStitch think it could turn a buck by selling content when so many media companies are struggling to do so, even with all their experience and resources?

It's a point made by incoming CEO Mike Sonand last week, who said the company's previous managers focused too much on growing revenue and not enough on profits and keeping costs under control.

"The focus has to be on profitable retail management - basic Retail 101," said Sonand as part of a blunt critique of the previous managers.

Changing fortunes

Every three months, the Australian Stock Exchange reconsiders the composition of its benchmark share indices, including the S&P/ASX-100 and S&P/ASX-200 indexes.

Companies which have shrunk get demoted from the index and those which have grown are added. The changes often tell a story about the economy and markets. This is certainly true of the latest index changes, due to take effect in a week or two.

Vitamin and supplement supplier Blackmores has been promoted to the benchmark S&P/ASX-100 index and milk company A2 was added to the S&P/ASX-200 index. Both of these companies are doing well from increasing demand for Australian food in China.

They are replacing companies like Spotless Group and Liquefied Natural Gas Ltd. Spotless Group is a caterer and cleaner floated by private equity investors a couple of years ago. Like so many private equity floats, shares in the company started falling after those who floated and managed the company sold out, leaving other investors holding the losses.

Liquefied Natural Gas is an aspiring gas exporter. Its shares have bounced around wildly on takeover rumours. But the trend is downward; the company's share price fell from about A$5 a year ago to less thanA$1 as resources and energy prices have fallen.

The market capitalisation one-time market favourite slashed from nearly A$2 billion a year ago to less than A$300 million before the takeover rumours kicked off - hence its removal.

The main share market indexes are important because many fund managers have mandates which specify that they can only invest in stocks in a particular index or have investment strategies which mirror the index composition.