SurfStitch backers in for a wipeout as third downgrade looms

SurfStitch will likely confirm its status as one of the worst performing sharemarket floats of the past few years.

Surfstitch founders Lex Pedersen, left, and Justin Cameron at the ASX listing. Picture: Toby Zerna

Online surfwear and action sports retailer SurfStitch will likely confirm its status as one of the worst performing sharemarket floats of the past few years as investors and fund managers brace for the company’s third profit downgrade this year and a wipeout of its already heavily weakened share price.

Shares in SurfStitch were placed in a trading halt yesterday pending an update from the company on its expected earnings for fiscal 2016.

Fund managers are punting on another downgrade to the retailer’s earnings, perhaps flowing from continued weakening of its US business and the costs of integrating an acquisition spree over the past 12 months.

SurfStitch said in a brief statement to the Australian Securities Exchange yesterday that it needed a trading halt on its shares until tomorrow as it provided the market with a “further update on its anticipated pro-forma EBITDA for the year ending 30 June 2016”.

In May, SurfStitch shares plummeted 60 per cent after it issued its second profit warning this year, and came on top of the shock resignation of SurfStitch co-founder and chief executive Justin Cameron in March.

Mr Cameron left to team up with private equity to make a potential takeover bid for the company but no bid has yet been sent to the SurfStitch board.

After the downgrade in May, the online specialist retailer scaled back earnings guidance to between $2 million and $3m before interest, tax, depreciation and amortisation against an original EBITDA forecast of $15m to $18m. SurfStitch booked pro-forma EBITDA of $7.7m last year.

At the time of the May profit warning, SurfStitch chairman Howard McDonald said the CEO’s surprise departure, transmitted to the board via a brief email, had left one of the businesses SurfStitch acquired “exposed’’. Under Mr Cameron’s watch, the company made a string of acquisitions, spending tens of millions of dollars, to grow its business in sports media and publishing and other related sports apparel ventures.

Late last year SurfStitch paid $23.7m for specialist global water board distributor Surf Hardware International and prior to that paid $21m for Stab, a leading online surf content platform, and surf forecasting network Magicseaweed. It also bought Garage Entertainment and Production for $15m.

SurfStitch, meanwhile, has had a torrid run on the sharemarket. It last traded at 40.5c against an IPO price of $1 in 2014.

However, the company is not alone. A collection of other retailers also suffered share price collapses soon after launching an IPO. Furniture retailer Temple & Webster witnessed a 90 per cent collapse in its shares as profit downgrades and management upheavals spoiled its December IPO.

Beacon Lighting shares dived nearly 30 per cent last month when it issued a profit warning and apparel group PAS and jewellery store Lovisa also triggered heavy share price retreats on the back of dour profit forecasts.