SurfStitch hit with $100m class action

The troubled surfwear chain has been hit with a $100m class action on behalf of shareholders. Photo / News.com

Troubled surfwear chain SurfStitch has been hit with a A$100 million (NZ$107m) class action lawsuit on behalf of shareholders who were wiped out by a series of shock downgrades.

The claim period relates to shareholders who purchased or held shares in SurfStitch between 27 August 2015 and 8 June 2016, who saw the value of their shares plummet by 85 per cent.

Law firm Quinn Emanuel, which filed the suit in the Supreme Court of Queensland on Monday, allege SurfStitch breached its continuous disclosure obligations and engaged in misleading or deceptive conduct in relation to announcements made the market concerning its business and brand acquisition regime.

"The guts of it is that they had a hole in their revenue [and they] tried to paper it over with these deals that ostensibly looked to make a lot of money for the company, but were in fact possibly even income negative," said Quinn Emanuel partner Damian Scattini.

"When the scales fell off everyone's eyes and the market found out they'd been papering over it, the share price fell through the hole. It looks like a A$500m collapse in shareholder value, but the actual claim period for us seems like about A$100m."

The case is being funded by litigation funder Vannin Capital, and is believed to be one of the first shareholder class actions under the Supreme Court of Queensland's new class action rules which came into effect on 1 March.

Mr Scattini said companies "need to know that the free market depends on them being upfront with investors". "Class actions like this send a powerful message to company boards that if you mislead investors, you will be held to account," he said.

Vannin Capital director of investments Pip Murphy said it was a "clear case of a breach of disclosure obligations and misleading and deceptive conduct, and we are confident in being able to achieve a positive outcome for shareholders".

The company, which went through a spectacular fall from grace in 2016, is also locked in a legal battle with surf technology group Coastalwatch and Three Crown Investments over the disputed licensing deals which sparked the share price rout.

SurfStitch has been contacted for comment.

In February, the company posted its half-year results, revealing it had stemmed its losses to $5.6 million in the six months to December 31, compared with losses of A$13.6m in the same period in the previous year.

On Monday, the company downgraded its full-year outlook to an underlying loss of A$10.5m to A$11.5m, up from A$5m to A$6.5m as previously predicted.

"The work to transform our business model through improved operational capabilities, enriched customer engagement and a reduced cost base is going well," a spokesman said in a statement.

"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 for the group's underlying EBITDA."