SURFSTITCH SHARES THUMPED AMID COSTS BLOWOUT

SHARES in online action sports retailer SurfStitch Group (ASX:SRF) have taken another hammering, the second in as many months, after tough market conditions and higher costs appear set to push the company to a loss in FY16.

SurfStitch shares went into freefall this morning, crashing 60 per cent to a record low of 42c - down from their $1.03 close on Monday.

The latest shares slide comes just two months after a fall of more than 40 per cent in February when the company failed to give the market any profit guidance for FY16.

Today it revealed that pro forma EBITDA (earnings before interest, tax, depreciation and amortisation) in FY16 will be between $2 million and $3 million. This compares with forecasts of up to $18 million at the company's AGM last November.

The result is likely to wipe out the company's interim net profit of $5.7 million recorded in the first half of FY16, and likely deliver a full-year net loss for the company.

More than 31.5 million shares changed hands today as SurfStitch investors were further spooked by revelations that the company faced tough market conditions in the US, and that its acquisition strategy is not going as originally planned.

This is despite assurances that it was achieving double-digit revenue growth across all markets. SurfStitch says gross margins have been hit by higher advertising costs, but it also warns that it has been forced to make 'considerable' investment in its online platform and systems as part of its transformation program.

SurfStitch has been moving to rebrand all of its businesses under the Swell banner, which was acquired from Billabong Group (ASX:BBG) in 2014.

Shareholders would also have been concerned over the language used by the company in its trading update, released to the ASX this morning.

"Following the surprise departure of former CEO Justin Cameron, as announced on March 10, a focus on implementing the transformation program, integration of the companies acquired over the last 12 months has been slower than anticipated," says the company. "This has resulted in benefits in 2H FY2016 being lower than anticipated."

Cameron (pictured right) resigned as CEO in order to pursue a possible private equity buyout of SurfStitch. There has been no news on that front since then, although the latest share price fall makes a takeover considerably more attractive to an opportunistic predator.

SurfStitch created a buzz around some key acquisitions this past year, including Garage Entertainment and its associated company TMG. These came on the heels of the buyout early last year of surf content network Magicseaweed and online publisher Stab magazine.

Joint-CEO Lex Pedersen (pictured left) says there has been 'solid testing and validation with the businesses acquired over the last 12 months but integration has not been as fast as expected'. 

"These businesses present exciting content and advertising opportunities which will underpin our long-term competitive advantage, but the benefits will not flow through into our results until FY17 and beyond.

"Also, in line with recent experience of a number of retailers in North America, SWELL USA has faced some challenging trading conditions in the second half and as a management team we are implementing a number of initiatives to mitigate their impact."

Joint-CEO Justin Stone remains 'absolutely confident' the company is on the right track towards becoming a 'global destination' in the action sports and youth lifestyle markets.

"Considerable work has been completed on the SWELL rebranding with a global research and brand communications agency to ensure a clear and unambiguous brand strategy," he says.

"The launch of the vertical product program has gone live in Europe, and will be followed by the US and Australia in July."

Meanwhile, SurfStitch has appointed a new COO, Mike Sonand, to help bring its integration plan to fruition. Sonand was previously COO at Charles Parsons Group, and CEO of M Webster Holdings and Globe International.

"Mike is a valuable addition to the SurfStitch executive team given he has strategically implemented consolidation initiatives, has held executive roles at CEO, CFO and COO levels and has strong financial skills," says SurfStitch chairman Howard McDonald.

"He has significant retail sector experience with operational responsibility in North America, Europe and Asia. We believe he will work effectively with our team to deliver on the strategic plan for SurfStitch."