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Details about Volcom’s retail strategy

By Tiffany Montgomery
July 25, 2008 6:41 AM

Volcom CEO Richard Woolcott shed some light on Volcom's retail strategy in the wake of its announced purchase of Laguna Surf & Sport during a conference call with investors yesterday.


Laguna Surf and SportRichard said the company has watched competitors purchase multi-brand stores and thought it was an interesting idea as Volcom looked to expand its retail presence.


So when the Laguna Surf & Sport opportunity came along, Volcom thought it was a good first step because Volcom has had a long-term relationship with LSS and it's in Volcom's backyard.


Richard said he can see Volcom opening one or two more LSS stores, but the acquisition does not signal a big, in-depth strategy to open more multi-brand stores at this point. The first priority is to integrate LSS into Volcom's retail team and see how that goes.


The plan right now is to keep the same brand mix currently in the LSS stores, Richard said.


Laguna Surf & Sport is expected to add $900,000 to Volcom's total revenue in the back half of the year and will be earnings neutral. The acquisition is expected to close at the end of the month.


Other details from the call:


Financials


Revenue and earnings exceeded guidance, but the company lowered its profit estimates for the full year because of the tough economic and retail environment.


In the second quarter ended June 30, revenue rose 25.6 percent to $72.5 million.


Net income fell 22.5 percent to $4.8 million


Total gross margins fell slightly to 48 percent vs. 48.2 percent in the same period last year. In the U.S., gross margins fell to 45.6 percent vs. 48.7 percent as the soft retail climate led to increased discounting and inventory liquidation.


Also, as Volcom becomes a larger vendor for some of its bigger retail customers, the customers are looking for increased IMUs. In addition, as retailers shift more to in-season orders as opposed to pre-booking orders, retailers want improved margins on reorders.


Volcom had $71 million in cash and no debt at the end of the quarter.


U.S. results


This segment includes revenues from Canada, Japan and other international territories except Europe.


Revenue with Volcom's five largest customers rose 15 percent to $27.5 million.


Revenue from PacSun rose 17 percent to $15.8 million, led by a 66 percent increase in men's product sales.


Revenues from other customers, including core accounts, rose 5 percent to $32.1 million.


Japan and Australia are managed by a distributor and licensee, respectively, but Volcom is working more closely with those groups. It recently hired a new general manager to oversee the Japanese business. And a key Volcom executive from corporate offices here is spending a year in Australia to work with that team.


Europe


Volcom does not have a full year of results since it took the operation in-house so these figures do not have year-over-year comparisons. The business is also seasonal, with the bulk of the sales in the first and third quarters.


Revenue was $5.9 million, $900,000 ahead of guidance mostly due to currency exchange rates.

 

Electric


Revenues totaled $6.4 million, which was $600,000 below plan. Volcom said the soft retail environment in North America and Europe was to blame, as well as rainy weather in Spain and France in April and May.


Electric's gross margin for the quarter was 56.8 percent.


Retail


The company opened Volcom stores in Soho, New York and Boulder, Colo. during the quarter. It plans to open a Bruce Irons signature store in Waikiki and a Volcom store in Las Vegas this year. By the end of 2008, it will have 12 U.S. stores. Internationally, it will have 11 stores, nine of which are licensed.


Production pressures


COO Jason Steris said the company is seeing pricing pressures in Asia, including currency and labor changes and increases in raw material costs due to high oil prices.


Volcom has mostly been able to maintain its costs this year because of previous pricing agreements, but the company is looking to possibly shift some production to factories in other countries such as Vietnam, Cambodia and South America next year.


To counter the production cost increases, Volcom is looking to cut expenses in other areas such as drop shipping more product to large customers to reduce warehouse expenses, sharing more styles with international partners and looking for other synergies with the Electric and European business.


Guidance


Volcom said retailers are being very cautious about the back half of the year. In general, retailers are placing smaller pre-season orders and are looking to do more in-season business.


In the third quarter, Volcom expects revenues to rise 20 to 21 percent to $109 million to $110 million. That includes $69 to $70 million in the U.S. segment, $8 million from Electric and $32 million from Europe. Business with PacSun is expected to rise 65 percent, largely due to a weak showing in the third quarter last year for girls and continued strength in men's.


For the full year, revenue should reach $344 million to $347 million. By segment, revenue will reach $241 million to $243 million, $76 million to $77 million for Europe and $27 million for Electric. Business with PacSun for the full year will be up slightly.


Full year earnings per share guidance has been reduced to $1.50 to $1.53 per share vs. a previous guidance of $1.56 to $1.59.

 


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