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SurfStitch headed for a loss, names new CEO

Surfwear retailer, SurfStitch, expects its pro-forma EBITDA for FY2016 to be a loss, somewhere between $17.3 million to $18.3 million.

It’s the second time the online retailer has slashed its earnings guidance in as many months. The company originally forecast full-year earnings before interest, tax, depreciation and amortisation of at least $15 million but revised that down to $2 million last month.

While trading conditions are unchanged, revenue is expected to be $20.3 million less than originally forecast due to an issue with a licensing deal, the company said in an announcement to the market today.

SurfStitch expects to return to profitability and be cash-flow positive during FY2017. 

Appointment of new CEO
SurfStitch has appointed Mike Sonand as group CEO with immediate effect. Sonand joined the company in May 2016 as COO and was previously the COO of the Charles Parsons Group and CEO of M Webster Holdings and Globe International. 

Current joint CEOs, Lex Pedersen and Justin Stone, who stepped into the role after the surprise resignation of Justin Cameronwill assume new positions with Pedersen named director – business development and Stone, director – global support. 

SurfStitch chairman, Howard McDonald, said in his first month in the role Sonand had already made a significant contribution. 

“Mike has already had a very positive impact on the leadership team and has spent a considerable amount of time visiting all the businesses in the group. He has already demonstrated a firm grasp of the company’s immediate priorities and growth initiatives. Justin and Lex, who are both very supportive of the appointment, will now focus on delivering outcomes in their new roles,” McDonald said.

Sonand has had an extensive career in the retail sector both in Australia and internationally. In 2010 as CEO of M Webster Holdings, a vertical fashion retailer with the David Lawrence, Marcs and Jigsaw brands. Also on his resume are roles with Pacific Brands, Just Jeans Group and Myer.

“I am very excited to be given the opportunity to lead the Surfstitch Group, a highly innovative business with an engaged and talented team,” Sonand said. “There are both major opportunities and challenges and one of my first priorities is to establish an operating and management framework, which Lex’s and Justin’s new positions are a part of, that I believe will restore the business to a position of strength. I am fully focused on rebuilding value for shareholders.” 

New non-executive director appointed
Sam Weiss will join the SurfStitch board as a non-executive director effective from July 1, 2016. Weiss has more than 20 years of experience in senior management and director roles with broad industry expertise in technology, retail and e-commerce companies in Australia, North America, Europe and Asia. He is currently chairman of Altium Limited, 3PLearning Limited and online retail marketplace Ensogo Limited.

Update to the market
A spokesperson for SurfStitch said the company is unable to elaborate on the details of the licensing agreement beyond the announcement made today due to legal reasons. Here is what the company said:

As a result of events in 2H FY2016, SurfStitch Group Limited has formed the view that it should record an amendment in 2H FY2016 to its treatment of a transaction that occurred in 1H FY2016. The transaction related to the grant of a perpetual licence to a third party to use the Company’s content contained in its subsidiaries – SurfStitch, Garage Entertainment, Rolling Youth and MagicSeaweed.

In 2H FY2016, the Company entered into a set of agreements with the same party effective 15 March 2016 for the provision of various services including access to software and hosting the SurfStitch online store, and which extended the payment terms of the perpetual licence agreement.

An in-depth review of the business has been undertaken including these subsequent contracts. As a result of this review and recent information that has come to hand, the Company believes in substance an amendment to the original contract has occurred in 2H FY2016.

The effect of this is that $20.3 million of revenue will be reversed and reflected in the full year results.

Other than as set out above, there is no variation to the update relating to trading conditions in 2H FY2016 announced on 3 May 2016. However, the impact of the above charge means the Company now advises that pro-forma EBITDA for FY2016 is likely to be a loss, in the range of $17.3 million to $18.3 million.

The Company is in the process of discussing these arrangements with the third party but the outcome is uncertain although it is not expected to affect pro-forma EBITDA in any material way.

As the Company advised on 3 May 2016, FY2016’s performance has been adversely impacted by challenging trading conditions in key markets, near term investment in the Company’s platform and processes and the slower than anticipated integration of the companies acquired over the last 12 months.”

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