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Tiffany Montgomery
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Volcom’s biz with PacSun, in Europe, etc.

By Tiffany Montgomery
October 30, 2007 5:47 AM

Volcom provided lots of interesting information about its third quarter business - including performance at core stores, PacSun and in Europe - and its outlook for the rest of the year on its earnings conference call.


The market didn't like the company's outlook though - especially since it lowered its guidance for the fourth quarter and the year. CEO Richard Woolcott also said the softening economy and the conservative view from Volcom's retail customers could impact business. Volcom's stock was down 25 percent in early morning trading.


Here are the details:

Revenue and earnings

Revenue up 49 percent to $91 million; Net income up 43 percent to $14.5 million.


The PacSun business

PacSun CEO Sally Frame Kasaks told me in an interview this summer the brands would be feeling some pain on the girls side as the industry's biggest customer switched to more private label goods. She wasn't lying. Volcom's girls business dropped 53 percent in the third quarter.


Overall, 17 percent of Volcom's overall revenues were attributable to PacSun at the end of the third quarter. That's down from 27 percent at the end of 2006.


Volcom CEO Richard Woolcott was pleased the company grew revenues and earnings while lessening its concentration risk with its largest customer.


Volcom's business with PacSun fell more steeply than anticipated. In the second quarter, Volcom estimated sales would be down 15 percent to PacSun in the third quarter and instead they fell 23 percent. For the year, Volcom expects the sales to PacSun to drop 10 percent.


Richard attributed the drop to the overall reduction in inventory at PacSun and the changes in the girls business.


On the mens side, sales grew 2 percent at PacSun during the quarter.


Europe

The third quarter was the first full quarter Volcom had in Europe since it built its own operation there. The company is concentrating on growing business with its existing retail customers by adding "store within stores," racks and in-store displays. The top five markets for Volcom are France, Germany, Austria, Spain and Italy. Also strong are Switzerland and Norway. The company sees opportunity in the U.K., Italy and Sweden. Down the line Volcom is looking at emerging markets including Poland, Hungary and the Ukraine. Sales in Europe totaled $25.8 million in the quarter.


Distribution channels

Business at core retailers and some department stores rose 26 percent in the quarter to $43.6 million. That figure does not include Volcom's five largest customers and European sales.

Sales to Volcom's four largest customers - excluding PacSun - rose 2.6 percent to $10.8 million.

Sales to PacSun fell 23 percent to $10.3 million


Footwear

Open-toed sandals are leading the way while vulcanized slip-ons have struggled. Volcom is moving out of the vulcanized niche to focus on sandals going forward. Footwear recorded $1.2 million in revenue during the quarter. It was a new category so there is no comparison to the same quarter last year.


Snow

Retailers ordered conservatively for the upcoming winter because of the tough winter last year and because of the softening retail environment. Richard said 11 percent of Volcom's business was in outerwear during the quarter, lower than planned. Snow sales increased 56% to $20.4 million for the quarter including Europe and U.S. In the U.S. snow sales increased 11 percent to $14.3 million.


Kids and boys

The company believes this is a good growth area. In the quarter, consolidated sales in this category increased 78 percent to $5.5 million. In the U.S., boys increased 69 percent to $5.1 million


Products

Volcom is focusing on strengthening existing categories instead of launching new ones. Girls swim has been well-received and is well positioned to head into summer, Richard said. For the quarter, swim sales totaled $97,000.


Volcom retail

Volcom now has five company-owned stores with a sixth in Berkeley opening in the next few months, followed by Waikiki in the late spring 2008. Three new licensed stores have opened in Tokyo, Japan, Durban, South Africa and Sao Paulo, Brazil.


Department stores

Macy's will pick up Volcom girls in 26 Macy's West stores in the fourth quarter and 10 stores in the Northwest.


Lowered guidance

Volcom lowered its guidance for the year because of its decline in business with PacSun and lower than expected sales of outerwear and closed toe shoes. In the past, Richard said Volcom would be able to make up sales from that lost outerwear and shoe business in other ways. But, the soft retail environment is making store owners more cautious about their orders, he said.


Volcom now expects fourth quarter revenues of $70 to $73 million, a 20 to 30 percent increase. Earnings per share should reach 30 to 32 cents.


For the year, the company expects revenues of $270 to $273 million, a 31 to 33 percent increase. Originally, the company had forecast 34 to 36 percent growth. Earnings per share should reach $1.37 to $1.39.


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