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Volcom records tough Q4, expects double-digit sales declines for Q1

By Tiffany Montgomery
February 19, 2009 4:48 PM

Volcom CEO Richard Woolcott described Volcom's fourth quarter results as "not acceptable" on a conference call today as the deteriorating economy took its toll at one of the industry's leading companies.

Sales were essentially flat at $69.6 million. The company recorded a net loss of $8.7 million, including impairment charges for its Laguna Surf & Sport and Electric acquisitions and a foreign exchange loss. Excluding the charges, net income totaled $3.3 million, a 53 percent decline from the same period last year.

Volcom is also predicting a tough first quarter, with revenues down 20 to 23 percent.

While there has been good news and bright spots in the business, Richard said they have been sporadic and not enough of them to connect the dots and say there's a turnaround underway.

Here are other details from the conference call:


Electric fourth quarter revenue of $3.8 million was "significantly" below the $5 million forecast. The company attributed the difference to the general weakness in the sunglass category at core retailers. The division recorded a loss as expenses became out of line as revenues came in under plan.

Costs have been cut at Electric and positions eliminated. Warehouse and shipping has been moved to Volcom's Irvine warehouse, and Electric is working with its suppliers to improve gross margins.

Richard WoolcottRichard, right, said Volcom is committed to the Electric brand, and that the soft goods line received solid feedback at trade shows.

Electric gross margins were 48.8 percent, lower than last year due to inventory liquidation.

Expense cuts

Volcom is expecting 2009 revenue to be below 2008 levels and has implemented across the board spending cuts, Richard said.

The company eliminated 28 positions domestically at Electric and Volcom and reduced salaries, including a 15 percent pay cut for Richard, a 10 percent cut for senior executives and additional reductions through the ranks.

Richard said Volcom will make more expense cuts in the future if needed.


The company is expecting revenue to decline 20 to 23 percent in Q1 to $62 million to $65 million. Because of the uncertain environment, the company will not release revenue and earnings guidance for the full year.

The company expects full year sales to PacSun to decrease. Sales to PacSun in the first quarter are expected to rise 35 percent, which Volcom called an anomaly due to an easy comparison from the first quarter last year.

U.S. Q4 sales

The U.S. segment includes sales from U.S., Canada, Japan and other international territories outside of Europe.

Total US sales: down 7 percent to $59.4 million

Men's: down 6 percent to $30.3 million

Girls: down 13 percent to $14.4 million

Boys: up 5 percent to $5.6 million

Snow: up 68 percent to $2.5 million

Creedlers: $654,000

Swim: $289,000

International revenue: up 11 percent to $12.5 million

Q4 sales to five largest customers: down 20 percent to $19.9 million

Q4 sales to PacSun: down 27 percent to $10.4 million

Q4 sales to rest of retailers: up 4 percent to $34.5 million


Total Q4 sales: up 7 percent to $10.9 million. In constant exchange rates, sales were flat.

Men's: down 2 percent to $6 million

Girls: down 9 percent to $2 million

Boys: $179,000

Snow: $2.4 million

Europe gross margins: 49 percent vs. 36.7 percent during the same period last year.

Currently, the company is seeing some stabilization in Western Europe, with the strongest countries being Austria, Switzerland, Norway and Germany. The United Kingdom, which Volcom just brought in house, continues to be tough, while France and Spain have stabilized. Eastern Europe has weakened, however, especially in Russia, the Ukraine, Czech Republic and Romania.

Now that Europe has been integrated in-house, Richard said the company is ready to tackle phase II of the project. That phase involves capitalizing on the brand and evaluating distribution.

Gross Margins

Total Q4 gross margins: 44.4 percent vs. 43.4 percent during the same period last year.

U.S. product gross margins: 42.7 percent vs. 43.7 percent, with the decline attributable to the promotional retail environment.


Jason Steris$27.1 million vs. $20.4 million. Excluding inventory from Electric, Volcom's retail stores and Europe, inventories were down 9 percent.

President Jason Steris, right, said Volcom entered the year with clean inventories after proactively liquidating inventory in the fourth quarter. Going forward, the only inventory risk the company is taking for at-once orders is in core, basic styles that can carry over to different seasons.

"We are banking on key styles with shelf life," he said.

Bright spots

Richard said some bright spots include the company's performance in denim, boardshorts and outerwear. In 2008, outwear sales grew 27 percent.

Retailers continue to say Volcom has solid sell through and a lot of brand loyalty among consumers, he said.


Richard said Volcom is trying to support retailers where possible with help managing inventory levels, merchandising and marketing. With bigger accounts that are challenged, Volcom is adjusting some timing of shipments and being more accommodating on some payment schedules.

Richard said Volcom does not plan to open new distribution this year, but believes there is room to grow with existing accounts.

With buying, Jason said retailers are gravitating toward basic styles with good price points that can be margin builders. Stores are also looking for new, exciting product to drive consumers into stores.

Richard said retailers are over the initial shock of the severity of the downturn and have now accepted the reality of the new economic environment and are managing their way through it.

When asked if the company is seeing more retail accounts in trouble, Richard said they haven't seen a big shakeout, but the next several months will likely be telling.

"It's too soon to tell if there is going to be a true shakeout at the core level," he said.


The company is working on integrating the newly bought Japanese distributor into the company and plans to work closely with the Australian licensee to enhance Volcom's presence there when the time is right, Richard said.

Volcom retail

The company will not open any new stores in 2009 and instead is focusing on improving the operations of its existing stores.

Balance sheet

The company ended the year with nearly $80 million in cash and no long-term debt. It generated $24.7 million in operating cash flow in 2008.


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