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Volcom conference call upbeat; financial outlook disappointing; the company will limit its sales to PacSun value stores

By Brandon Ferro
July 30, 2009 5:41 PM

Volcom once again struck a somewhat encouraging tone today during its second quarter earnings conference call. Most notably, despite the weak retail environment, the company is more pleased than ever with the strength of the Volcom brand at retail. Further, CEO Richard Woolcott noted that inventory levels at retail are as lean as they've been all year and that the next turning point for the industry will likely include retailers requesting greater amounts of product as opposed to less.

Despite many positive like these, the company's third quarter earnings guidance was disappointing when compared to average estimates of analysts covering the company. The shortfall reflected in third quarter earnings guidance is mostly due to an expected 65% decline in revenue with PacSun in the quarter as the company chooses to reduce the amount of product it sells to PacSun value stores.

Richard WoolcottKey takeaways from the conference call

The company is choosing to limit sell-in to value-format PacSun stores. Volcom has chosen to be increasingly selective about how much inventory it sells to PacSun doors that have been converted to a value pricing format as Volcom looks to manage the perception of the brand. Further, product that is sold into these stores is done so at less than full price, which also impacts sales. As a result of this transition, Volcom expects its third quarter sales to PacSun to decline by 65% vs. last year. This move could have long-term benefits to the company as it reduces the dependency it has on PacSun, which has historically accounted for 15%-25% of Volcom's sales and been its largest customer.

(Above: Richard Woolcott surfing last weekend during the south swell. Photo by Cari Church.)

The outlook for global retail remains weak and retailers remain conservative with their buys. Volcom noted repeatedly that retailers remain committed to being conservative with their buys heading into back-to-school. Retailers continue to place conservative pre-buys, chase business as much as possible in-season and push back receipt of orders to the latest possible dates.

Inventory levels at retail appear to be better aligned with consumer demand than at any point this year. Richard noted several times that retail partners are well past the panic mode they were in earlier in the year, when inventory levels were being cut as quickly as possible, and are more comfortable with the overall level of goods that they hold. The next step will likely be for these retailers to begin to buy more goods instead of less.

The Volcom brand is gaining share at retail. Woolcott also noted that according to ActionWatch data, the Volcom brand is gaining share in certain categories at core shops. Jason Steris, the company's President and COO, noted that product and presentation of the brand at retail is stronger than it has ever been. To drive share gains the company is tweaking its approach to advertising and even increasing spending in that area as well. The company's Proving Grounds house, designed to showcase the company's board-shorts and surf team, was cited as one example of brand building ingenuity leading to better share. Volcom will also be advertising during the upcoming X Games for the first time, highlighting the company's denim line.

Volcom is looking to add new accounts and distribution in Europe. The company noted that it is looking to add new doors and expand into new channels, especially specialty retail. Sport2000 (3,500 outlets in 25 countries) was cited as one new opportunity.

Electric's soft-goods business is gaining ground and is set to gain new distribution. As a result of its collaboration with Volcom's team, Electric's soft-goods business is gaining ground, especially in the backpack and luggage category. The company believes that an improving soft-goods line will help it add distribution domestically and in other regions and noted that the brand's existing distribution remains very limited.

Volcom has no interest in acquiring a Roxy-style brand. When asked by an analyst if the company is interested in doing an acquisition of a junior's specific brand to jumpstart the category, Woolcott noted that this was not the case and that the Volcom brand has and will remain committed to being a multi-gender.

More second quarter details

  • Total company revenue: -24% to $54.2 million above guidance of $47-$50 million
  • Earnings per share (EPS): down 80% to 4 cents, but above guidance of 0 to 3 cents
  • Gross margin: 48.6% vs. 48% last year
  • SG&A: -7% to $25.9 million
  • Inventory: +11% to $30.2 million (increase vs. 12/31/08)
  • Cash, equivalents and short-term investments: $96.2 million, with no long-term debt

U.S. results

  • Revenue: -28% to $43.8 million
  • Mens: -31% to $23.8 million
  • Girls: -27% to $12.1 million
  • Boys: -19% to $4.3 million
  • Creedlers: -5% to $0.9 million
  • Swim: -27% to $1.2 million
  • 5 biggest accts: -43% to $15.6 million
  • PacSun: -43% to $8.9 million
  • Next 4 largest excluding PacSun: -43%
  • Other accounts: -14% to $27.6 million
  • Gross Margin: 48.2% vs. 45.6% last year

European Results

  • Revenue: flat at $5.9 million
  • Gross Margin: 44.8% vs. 57.5% last year

Electric Results

Revenue: -27% to $4.7 million
Gross Margin: 52.8% vs. 56.8% last year

Third quarter guidance

The company said third quarter sales should range from $82 million to $85 million (average analyst estimate = $93 million) and earnings per share of 35 to 39 cents (average analyst estimate = 46 cents).

In putting forward subdued third quarter guidance, the company noted that the global environment for retail remained sluggish and that economic weakness continues to persist. Further, the company noted that it expects third quarter sales to PacSun to decline by 65%, largely due to the retailer's decision to turn nearly half of its locations into off-price value stores.

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