Kering Reports on Volcom and Electric, Kind Of

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Kering’s report for the quarter ended September 30 included almost no information on Volcom and Electric. No analysts asked questions about either brand, but that’s pretty standard.

Historically, there’s been enough in the slides and prepared remarks that I can use some simple math to figure out things are going, but not this time. Here’s all they tell us.

“Volcom and Electric: softer Q3. Volcom nearly stable with strong resilience in wholesale, against still adverse action sports market in the US.”

That’s it. They note in the prepared remarks that Electric also suffered from some higher costs, but don’t tell us which costs or why and they confirm what they say in the above quote.

Growth, as reported, in the Sport & Lifestyle segment which includes Volcom and Electric, but is dominated by Puma, grew 8.4% to a billion Euros.

Shortest report ever I think.

Volcom and Electric Results for the Quarter and Half Year

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Let’s review. Volcom and Electric are in Kering’s sport and lifestyle (S&L) division which includes PUMA. In 2014, Kering had consolidated revenue of 10.038 billion Euros. The S&L division’s revenue was 3.245 billion Euros. Of that, PUMA was 2.99 billion Euros and “other brands” in S&L had revenue of 255 million Euro and operating profit of 10 million Euro (see chart below).

Other brand revenue in the S&L division (which I think is Volcom and Electric) rose in the quarter ended June 30, 2015 to 64.8 million Euros from 53 million in the same quarter last year. That a gain of 22.3% as reported. For the six months ended June 3, revenue rose 15.3% from 112.6 to 129.8 million Euros. You can discern from those numbers that the second quarter was better than the first.

The chart below from Kering’s report shows the results for the first half of both years. You’ll note that there’s a small operating loss shown even with the revenue increase and a 5% reduction in headcount.

Kering 6-30 report #1

 

 

 

 

 

 

 

 

In the conference call, we’re told there was a “…muted first half…” for Volcom and Electric. Trends improved in the second quarter with revenue up 2.6% based on constant currency. Volcom’s second quarter growth was reported to be 6%, also using constant currency. If Volcom revenues were up 6% in the second quarter, but Volcom and Electric together were up 3%, then I have to conclude that Electric was down. That’s what the financial report says.

“After a major repositioning drive in the accessories market and a complete overhaul of its offeringaround new ranges of sunglasses, snow goggles and watches during the previous two years, Electric reported strong sales growth in 2014. However, as substantially all of the brand’s sales are now generated through the wholesale distribution channel, its revenue declined in the first half of 2015, weighed down by wholesalers’ wait-and-see attitude during the period as well as by a less favourable delivery schedule.”

Sunglasses are a tough business.

The financial report refers to “…ongoing tough market conditions for Surfwear and Action Sports.”  Wholesale revenues rose 0.8% and store sales were up 6.6% and represented 15% of total sales. Those numbers are in constant currency. Volcom had 52 stores at the end of the quarter “…including nine in emerging markets.”

Talking just about Volcom, the report stated, “In North America – still the brand’s main market, representing 67.3% of revenue – sales rose 1.3% on a comparable basis. Revenue contracted in Western Europe and remained stable in Japan, although these effects were offset by extremely encouraging business development in emerging markets, particularly in the Asia-Pacific region.”

Well, that’s kind of it. As usual, there wasn’t a lot of information. Damn, it’s a tough market out there. I think Volcom can be more valuable to Kering than their revenues or results so far suggest because of who the customer is. I hope Kering understands that.

Volcom/Electric’s 2014 and First Quarter 2015 Results; Plus Some Interesting Market Data

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Kering, as you know, owns Volcom and Electric. Because the two brands represent a very small piece of Kering’s annual revenue, we don’t get much information on them. But I’ll give you what we’ve got and I also want to point you to some market data Kering provides in one of its documents.

Let’s start with the whole 2014 year. Kering’s 2014 revenues were EUR 10.038 billion. 68% of that revenue came from its luxury division with brands like Gucci. The remaining 32% is from its sports and lifestyle division (S & L) which includes Puma as well as Volcom and Electric.

Of total S & L revenue of EUR 3.245 billion, Puma accounted for EUR 2.990 billion, or 92% of the total. Volcom and Electric’s combined 2014 revenue was EUR 255 million and they earned an operating profit of EUR 10 million, or 3.92% of revenue. We aren’t told what the bottom line net income or loss after any allocations and taxes might be, and that’s normal. In the prior year, Volcom/Electric had revenue of EUR 245 million and an operating profit of EUR 9 million.

I want to share with you a document on Kering’s web site and some data it includes. If you go to this link, you’ll see a list of documents. Currently, the sixth one down in the list is the 2014 Reference Document. It has all sorts of information on Kering and its brands, and you can download it as a PDF.

Pages 44 through 46 is their Worldwide Sports & Lifestyle Market Overview. It contains some data on that market from a 2013 study conducted by NPD.   Let’s see if I can give you a link to their web site.  Here it is, I think. I get asked for solid market data pretty often and don’t usually have it. So you might check out the Kering’s market overview and see what NPD has to offer. I don’t know anything about NPD, and am just supplying you with the link.

Back to Kering’s 2014 Reference Document. Pages 54 and 55 provide a narrative of what went on at Volcom and Electric in 2014. Here’s part of what they say about Volcom.

“2014 was another difficult year for the action sports industry, however for Volcom it was an inflection point. Efforts made around the strengthening of products and marketing, adding top talent across the company, and implementing a global organization structure has led to improved revenue momentum in all regions. Volcom has experienced positive sell-through in wholesale distribution and has continued to gain market share in core retail accounts. Volcom also drove significant operational improvements through streamlining business operations, implementing a PLM (Product Lifecycle Management) system, and tightening SKU counts to improve product performance. Volcom expanded the reach of its e-commerce platform by launching sites in Europe and Australia. Branded retail was also a key focus for Volcom, with five net store openings particularly in France and the United States during the year.”

Talking about Electric, here’s what they say about the competitive environment.

“Competition in the action sports eyewear market (the main category at Electric) is characterized by two main ideas. First, both young and established endemic action Sport competitors are vying for a decreasing retail footprint of core shops along with non-endemic global brands. Second, many of the brands that are entering the market target lower margins and price points.”

It’s not like we didn’t know that, but it’s kind of sobering to see it acknowledged like that. I suggest you go read the full discussion for both brands. It’s not very long.

We aren’t given much on the first quarter either in the press release or conference call. Volcom and Electric were down 5%.  This was due to “weakness across certain U.S. wholesale accounts” as well as some delivery issues. I think, but am not sure, they are referring to the West Coast port slowdown.

That’s it. Hope you go take a look at the Reference Document.

Kering’s Annual Report and Some Thoughts on Volcom’s Role.

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Kering, the owner of Volcom and Electric, presented its annual results for 2014 last week and held the usual conference call. As regular readers know, I was impressed at the job Volcom did selling itself to Kering (then PPR) both in terms of the price they achieved and their timing. The deal happened almost four years ago.

Following the acquisition, I chronicled (as best I could given the limited information Kering provided on the separate performance of Volcom and Electric) what I’d call some apparent difficulties with integration and performance by the brands that I thought didn’t live up to Kering’s expectations given the price they paid ($607 million). It felt a little like Deckers’ purchase of Sanuk.

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Volcom’s New Positioning and Kering’s Half Year Results

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Back on July 9th, Volcom presented a new brand vision to a group of 100 retailers and media people. I wasn’t invited so all I know is what was reported in Transworld and a little that some people have told me.

Last week Kering, Volcom’s parent company, released its results for the 6 month ended June 30, 2014, so this seems like a good time to touch on both and the relationship between them.
Just to remind everybody, Kering’s 2013 revenue was 9.7 billion Euros. Its Luxury Division, which includes 13 brands, like Gucci, that I’d characterize as high end provided 67% of its revenue. Its Sport and Lifestyle Division (S&L) provided the rest of the revenue (3.25 billion Euros) and includes Puma, Volcom, and Electric. “The PUMA Group owns the brands PUMA, COBRA Golf, Tretorn, Dobotex and Brandon.”
Puma’s 2013 revenue was 2.002 billion Euros and its “recurring operating income” was 192 million Euros. Volcom and Electric together had revenue of 245 million Euros and generated “recurring operating income” of 9 million Euros. Puma, then, dominates the S&L division.

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Kering tells us Almost Nothing about Volcom’s Results

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Kering reported its earnings for the September 30 quarter last week. We learned very little about Volcom and Electric. It’s like trying to find out what’s going on with Ride when we review Jarden’s financials or Reef when we look at VF’s. They just aren’t big enough to require much disclosure. What I do believe is when there’s good news, more time is spent on the smaller brand’s results. To me, the lack of information speaks volumes. Let’s see what we can find out.

Remember that Kering (then PPR) announced the acquisition of Volcom back in May 2011 and paid $608 million. The last time Volcom, as a public company, reported a quarter ended September 30 it was in 2010. Their revenue in that quarter was $105 million. 
 
Volcom is part of Kering’s Sports & Lifestyle Division. That division includes, in addition to Volcom, Puma, Cobra, Tretorn and Electric (acquired with Volcom). That entire division reported revenue of 896 million Euros for the quarter. (If we use the exchange rate at September 30 2013, that’s about $1.21 billion). But Puma represented 825 million Euros, or 92% of the total. So, according to my careful calculations, Volcom, Electric, Tretorn and Cobra together for the quarter had revenue of 71 million Euros. That’s $96 million at the September 30 exchange rate.  That represents a decline of 7.9% from 77.5 million Euros in the same quarter last year for the entire division. 
 
So what do we know?  We know that Volcom, Electric, Cobra and Tretorn together had about $9 million less in revenue than Volcom (including electric) reported during the quarter than ended September 30, 2010.   I have no idea what revenues Tretorn and Cobra had and whether those revenues grew or shrank. Do your own guessing, but by way of example, let’s say they are just $5 million each during the quarter.  That would leave Volcom and Electric combined at $86 million. 
 
We are told in the conference call that Volcom’s revenues were up 2% compared to the same quarter last year so that suggests that Cobra and Tretorn were down. 2% if probably not quite the kind of growth Kering had in mind when they spent $608 million. Kering says Volcom benefitted from the introduction of shoes and “resilience” in apparel. Its sales were “solid” in the North American market. Electric, they say, is “refocusing” on accessories and that impacted its results. Resilience and refocusing are the kinds of words you use when things aren’t going all that well, though how a 2% increase represents resilience beats the hell out of me. 
 
I don’t know if Volcom’s 2% growth includes Electric or not. I think not, but remember that the $102 million Volcom reported in its last September 30 quarter before being acquired does. 
 
When Volcom was acquired I wrote an article that congratulated Richard Woolcott and the Volcom board of directors for selling at the right time and for the right reasons. There’s a lesson there for anybody building a company, and at least one of you is now going to get a call from me this week suggesting it’s time to sell. 
 
The Kering press release does not even include complete financial statements, and many of the numbers are adjusted to reflect a “constant group structure and exchange rates.”   It’s bad enough that in the U.S. they do the conference call before the analysts really have time to analyze the press release and before they see the 10Q. That Kering can get away with doing it before they’ve released complete financial statements at all just amazes me. You won’t be surprised to learn that most of the questions are “strategic,” which in this case means there’s not much else you can ask about. I have no idea why the analysts tolerate it. Conference calls are starting to feel like Kabuki theater. 
 
It looks like Volcom (including Electric) isn’t doing very well based on the few numbers we are provided. Interesting that nobody else has even raised the issue. Certainly they are nowhere near performing up to expectations at the time they were acquired. What happened? Don’t know. I imagine that Kering’s expectations didn’t help things. But I also think, as I wrote at the time, that Volcom had gone a long way towards filling the niche they had positioned themselves in, and growing beyond that has proven difficult.
 
 

 

 

Relaxed Fit

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Maybe a month ago, I was walking through a local mall visiting all the usual retailers to see how things looked. I stopped at a PacSun store and was attracted to a table with some Volcom shorts on it in colors I really liked. There was a sticker on the shorts that said, “Relaxed Fit.” 

I paused for a moment, looked around the store to clear my head, and then read the sticker again. Yup, it said “Relaxed Fit.”
 
There was a moment of mental paralysis, then the thoughts all poured out at once. “This must be some sort of cool marketing trick I just don’t understand, the stickers are there by accident- some clerk is screwing around with my brain (and it’s working), is this really where our market is going, there’s some kind of new trend I don’t know about, yes, that must be it, maybe it means to be fit and relaxed, Kering (Volcom’s owner) is making them do this, no, wait, somebody slipped something in my soda…”
 
I walked out of the store determined to pretend this had never happened. But three weeks later, in another mall in another city I made the mistake of checking again and there the shorts were with that same diabolical sticker. My attempt at denial was foiled.
 
But happily I was saved by my ever vigilant research department that sent me this New York Times article called “Three’s a Trend | Men’s Shorts That Are Loose, but Refined.”
 
“Loose, but Refined” is conceivably a perfect (and hopeful) description of Volcom owned by mostly high end fashion company Kering. Grabbing at straws as I am, I’ve decided to believe that Volcom’s “Relaxed Fit” sticker is just a bow to this fashion trend shaped by their large corporate owner. See, I don’t know a lot of surfers, skaters and snow sliders that need relaxed fit clothing.
 
Okay, I’ve had a little fun with this, and I’m sure Volcom isn’t the only one doing it. I suppose I need to recognize that all our customers can’t be teenagers and that body shapes change with age (not mine of course). Yet in our push for growth, we get further and further from our roots. The ASC conference the day before the Agenda Show celebrated the importance of authenticity, but I wonder just what kinds of customers we can make product for before we begin to lose it.
 
I hope Volcom can stay loose.

 

 

PPR’s Annual Report: How’s Volcom Doing?

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When a smaller company in our industry is acquired by a conglomerate, it often becomes difficult to follow how the acquired company is doing because the conglomerate isn’t required to release any details on that company’s performance. Think Reef after it was acquired by VF (though I imagine we might have heard more if Reef had been doing better). 

PPR, however, is telling us a bit about what’s going on with Volcom and its plans for the Sports & Lifestyle segment of which Volcom is a part. 
 
PPR is a French company with revenues of 9.7 billion Euros in the year ended December 31, 2012. The current exchange rate is about $1.3 to the Euro. So 9.7 billion Euros is around US$ 12.6 billion. It acquired Volcom in July of 2011.
 
PPR has two divisions; its Luxury Division and Sport & Lifestyle. PPR’s luxury brands, including Gucci, Bottega Veneta, and Yves Saint Laurent, contributed 64% of its revenue for the year, or 6.2 billion Euros. The remainder (3.532 billion Euros) came from its Sports & Lifestyle segment that includes Volcom and Electric as well as Puma, Cobra (golf) and Tretorn (outdoor footwear). 
 
The last complete fiscal year results for Volcom we saw before it was acquired was for the year ended December 31, 2010. In the complete year, in US dollars, Volcom reported revenue of $323 million. Operating income was $30 million net income $22 million. Keep those numbers in mind as we move forward.
 
Of the total Sport & Lifestyle segment, Puma revenue represented 3.271 billion Euros, or 92.6% of the segment’s total. That means that Volcom, Electric, Cobra and Tretorn collectively generated revenue of 261 million Euro. You can see that result on page 27 of this PPR document. Go ahead and look just so you know I’m not making it up.
 
At 1.3 Dollars to the Euro, that’s about US$ 339 million. That’s only 2.7% of PPR’s revenue for the year, so it’s not really significant financially.
 
There is a bit of confusion here. Page 40 of the full financial result (which you can down load here  (It’s the first item on the list after you click “documents” at the top) talks about “Other Brands” in the sport and lifestyle segment. That is, all brands in that segment except Puma. It specifically lists Volcom and Electric (but not the other brands) and says they had revenue of 261 million Euros and recurring operating income of 15 million Euros. But it seems to exclude Cobra and Tretorn.
 
I can’t tell, then, if the 261 million Euros in 2012 revenue is just Volcom and Electric or includes these other two brands. I suspect that it does.      
 
Compare those numbers for Sport & Lifestyle segment excluding Puma with Volcom’s numbers in its last year as a public company. Note that operating income is US$ 19.5 million and is a third less than Volcom’s stand-alone operating income in its last full independent year.   At best, Volcom has grown only a bit. If that 261 million Euros in revenue includes Cobra and Tretorn, Volcom’s year over year revenues could have fallen. In the fourth quarter, according to the financial report, Sport & Lifestyle revenues rose 7.6% on a comparable basis. But excluding Puma, comparable segment revenues were down 4.8% and totaled 64 million Euros. As far as I can tell Volcom (including Electric) is most of what’s left in the segment after you remove Puma. 
 
I would like, at this time, to renew my congratulations and admiration, expressed at the time of the deal, to the Volcom management team for the timing of their sale to PPR and the price they got.
 
In the conference call, we learn that Volcom held its gross margin, but that marketing initiatives had a negative impact on operating margin. PPR management also referred to a “…worsening economic context…” and a “…major reorganization of certain retailers, notably in the United States…” in the second half of the year. 
 
Puma’s recurring operating income for the year was down 13% while that of the other sport and lifestyle brands rose 9.6%. EBITDA fell 10.5% for Puma but rose 28.1% for the Sport & Lifestyle segment. Remember most of the improvement in the other Sport & Lifestyle brands results from owning Volcom for a whole year. Impossible to tell what they would have been without that.
 
In spite of the rising sales Puma’s net income fell from 230 million Euros in 2011 to 70 million Euro in 2012. PPR is implementing a Transformation and Cost Reduction program for Puma. This will involve clarifying brand positioning, improving product momentum, improving efficiencies in the value chain and revamping the organization. Apparently, the organization didn’t evolve as the brand grew and that caused some problems. I’d note that as this program of transformation and cost reduction proceeds, average head count at Puma has risen from 10,043 in 2011 to 10,935 in 2012.
 
It’s also interesting to see that for the year wholesale revenues, which accounted for 81.6% of Sport & Lifestyle revenue, grew by only 0.6%. We’re told, “The unsettled economic environment in Western Europe, coupled with the reorganization of Volcom’s distributor store networks in North America, weighed on the performance of this distribution channel during the year.”   Retail sales in directly operated stores (don’t know if that includes online) rose 17.6%.   
 
In the conference call, we were told that more Sport & Lifestyle acquisitions were expected after Puma had been turned around and that there would be a focus on outdoor. Puma is to remain the core of the Sport & Lifestyle segment.
 
Here’s what PPR wants to do with its Sport & Lifestyle brands:
 
“For its Sport & Lifestyle brands, PPR’s strategy is based on expanding into new markets while bolstering
growth in the most mature ones, developing distribution, launching new products that are consistent with each brand’s DNA, and continuing to identify and foster synergies between the brands, particularly in sourcing, logistics and knowledge sharing in the areas of product development, distribution and marketing. The objective is to regroup sports brands that have an extension into Lifestyle.”
 
There’s nothing wrong with that but it’s kind of generic and pretty much lists what all brands want to do. But as I’ve noted before, that’s all you can expect in a public document. No company wants to lay out its strategy in detail for its competitors. 
 
While Puma struggles and it’s not clear that Volcom is doing all that well, PPR management is looking at revenues from their Luxury Brands that grew 26.3% year over year, while Sport & Lifestyle was up only 11.9%. Recurring operating income from Luxury was up 27.6% but fell 12.1% in Sport & Lifestyle. EBITDA rose 26.6% in Luxury, but fell 9% in Sport & Lifestyle.
 
It’s enough to make a management team schizophrenic. The Luxury Brands that represent two thirds of your revenue are doing great. Sport & Lifestyle, where you obviously see potential and opportunity (or you wouldn’t have bought Volcom) aren’t doing so well. But you expect to make further acquisition in this segment and have an outdoor focus.
 
We’re only a year and a half from the acquisition of Volcom, and that isn’t long to integrate a company and bring the strengths of PPR to bear. Puma has obviously helped Volcom introduce its new shoe line. But Puma and Volcom seem to me to be very differently focused companies. And as I think about outdoor, I’m not sure that’s how I think of either of them.
 
When PPR bought Volcom, I suggested, kind of half seriously, that maybe PPR would turn Volcom into an upscale, boutique kind of brand and develop some appropriate products. I’m now up to maybe two-thirds serious about that.
 
PPR no doubt has noticed that everybody is interested in the youth culture and outdoor markets and think they should be too. Can’t blame them. But I come away from their documents and conference call with the sense that they maybe they aren’t quite clear on what the sport/lifestyle/outdoor market represents.
 
During the conference call, between the presentation and the question and answer session, there was a short video featuring flashes of most of their brands. There was a lot of action sports material in it. But occasionally when the skate or snowboard trick was bracketed with the golf shot, it felt like there a certain discontinuity in the whole thing. Maybe I’m reading too much into that, and it was perfectly appropriate for the audience. But I think PPR knows that they need to think about how the brands in their Sport & Lifestyle segment are positioned and, ultimately, why they are in the business if they can’t get growth and returns consistent with their luxury brands.

 

 

PPR Earnings Release and Volcom- Exit Strategies for Core Brands

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This article was occasioned by PPR’s release of its quarterly results, but that’s not really what it’s about. When PPR, or Decker’s or VF or Jarden releases earnings we’re interested in what happened mostly because we’d like to know what’s going on with Volcom, or Sanuk, or Reef, or K2/Ride. We never find out very much. 

Volcom is in PPR’s Sports & Lifestyle Division which includes Puma and Volcom (including Electric). Puma did 821 million Euro in the March 31 quarter and “other” brands in that division, which means Volcom, did 65.6 million Euro. That’s about $87 million at the March 31 exchange rate.
 
Maybe ten days ago, I wrote about Nike’s quarter, indicating it was kind of a waste of time for me to analyze Nike’s financials. Instead, I tried to focus on some comments Nike’s CEO made about sources of product innovation. The goal was to try and provide a little perspective that maybe helped smaller companies in action sports (or maybe it should be called active lifestyles?) think about how to compete and succeed in the eight hundred pound gorilla era. I think that approach is valid not just for NIKE, but for all the large companies that have bought up companies in our industry.
 
PPR management made clear in the conference call that they were disappointed in Puma’s results, and that they were working hard to improve them. At the time of PPR’s acquisition, there was speculation that Volcom might help Puma become “cool” and that we could see a Volcom shoe line created with Puma’s help.
 
At the time of the acquisition by PPR, Volcom was a company that was very strong in its market niche but, in my analysis, didn’t have anywhere to go. It was so closely identified with its niche it didn’t have the strength to break out of it. PPR, with about 4 billion Euros of revenue in the recently completed quarter, and the owner of such luxury brands as Gucci, Bottega Veneta and Yves Saint Laurent, didn’t buy Volcom for its 65 million Euros of revenue (1.6% of PPR’s total) and its growth potential in the “core” market. They didn’t buy it just to help Puma or to do Volcom shoes.
 
What do they have in mind? What do any of these behemoths have in mind?
 
At the most obvious level, PPR saw what VF has done with Vans and The North Face in its action sports segment and the associated growth rates and said, “We want a piece of that too.” If nothing else, you might expect that PPR will be interested in additional acquisitions in the space, perhaps in competition with VF.
 
Neither Nike, nor PPR, nor VF is interested in a brand that has no potential beyond the “core” market. It would just be too small to temp them. When the PPR/Volcom deal went down, I suggested, only partly in jest, that maybe PPR would expand Volcom into upper end boutiques. I (probably) don’t see any product collaboration between Volcom and Gucci. But I’ve watched brands like Nixon get some traction in that upper end market with some of their higher priced product, and I just wonder what’s possible. With PPR’s help, could Volcom open some stores that carried some new classes of Volcom product? Go and see what WESC is doing. 
 
A brand, like Volcom, that’s secure in its niche and roots has the potential to grow out of that niche without confusing its customers and destroying its market. It’s not a sure thing, and it’s not easy. It’s management’s challenge every day.
 
For better or worse, we created that opportunity when we chose to pursue growth across markets and expand distribution. We created a much larger market, but one we couldn’t take advantage of on our own.
 
Large, successful companies in action sports are small, inexperienced players in the broader fashion business. As Volcom discovered, even going public and shoring up your balance sheet doesn’t solve that problem.
 
I’m sitting here trying to think of companies who have smashed through that barrier without help. I’m not doing very well. Everybody who is thought to have the potential to go from core to fashion seems to be acquired.
 
That, I guess, is the strategic point I started to think about as I read PPR’s quarterly report and looked for information on Volcom. A successful exit strategy for an action sports brand owner, in general, will require a revenue size that is proof of concept and is big enough to be interesting to a possible buyer. There also has to be an indication that you can hope, with the right support, to move past the core market and into the much larger fashion space. You can see that’s an issue for hard goods brands.
 
In the future, then, when I review the reports of Nike, VF, Decker, Jarden, VF and any other big companies involved in our industry,  I’ll try and pull our trends and ideas that are more interesting than the change in the current ratio. More fun for me to write. Hopefully, more valuable for you to read.         

 

 

A Little More Information on Volcom’s Sale to PPR

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Often when a deal happens, all you know for sure is what’s in the press release. Typically that press release doesn’t offer a completely objective perspective about the process and motivations that lead to a deal. But if it’s a public company, and you’re willing to dig into mounds of fine print, sometimes you can find out a bit more.

That would be true with PPR’s acquisition of Volcom. Don’t get all excited. I don’t have any deep dark secrets to tell you. There’s nothing that would change my opinion that Volcom made themselves a good deal at the right time for the right reasons (in fact, this reinforces my opinion). But we’ll know a bit more about how and why the deal happened.

When I reviewed Volcom’s last quarterly report, I noted that a law suit had been filed as a result of the deal alleging that Volcom and PPR had done various bad things not in the shareholders’ interest. A second one was also filed but both are now being settled. We don’t know the terms, but one of the conditions was that Volcom amend its Schedule 14D-9 to include some more information on the deal. So we have the plaintiffs in those two lawsuits to thank for some of the additional insight.
 
From various documents filed as part of the deal, we know that the first contacts between PPR and Volcom management was on February 8th and 9th, 2010 where “…there were initial discussions about the businesses and histories of Volcom and PPR, as well as ways the companies might work together.” On March 11, PPR told Volcom they were interested in a potential strategic transaction. No purchase price was mentioned. There were ongoing meetings and conversations through April, but around April 28, Volcom told PPR that it intended to pursue its strategic plan “…rather than continue talks with regard to any potential strategic transaction…”
 
There was further contact on July 15 that lead to an informal meeting in Newport Beach, California between PPR CEO Pinault and Volcom CEO Richard Woolcott and President Jason Steris. Nothing happened and there were no further discussions for several months.
 
Meanwhile, on October 22 another company contacted Volcom and said they were interested in acquiring Volcom. Volcom had conversations with that company between October 25 and the end of December, 2010. Bidder A (as this company is called) signed a confidentiality agreement and proceeded with its evaluation of Volcom. On February 1, Bidder A informed Volcom that its review supported a price from the low $20s up to $25.00 a share.
    
It was December 16, 2010 when PPR contacted Volcom again about a potential strategic transaction. A confidentiality agreement was signed on February 1, 2011. Due diligence was undertaken for about two months and on March 4, PPR told Wells Fargo Securities (representing Volcom) that their analysis supported a price of $23.00. On March 17, Wells told PPR that Volcom was talking to other potential buyers as well.
 
PPR formally bid $23.00 a share on April 21. There were some additional meetings. PPR increased its offer to $23.50 on April 29.  The first offer was contingent, among other things, on CEO Wolcott’s “…entry into a new employment arrangement with PPR.” The second offer “…was not conditioned upon Mr. Richard Woolcott’s entry into a new employment agreement.”
 
I have no idea if that change has any significance at all. But the lawyers thought it was important enough to be included in the narrative so I’m just curious.
 
Now it gets interesting. On May 1, Wells contacted PPR’s representatives and told them their bid of $23.50 per share was not the highest. Bidder A had bid $24.00 earlier in the day. They recommended that PPR increase its offer before the Volcom Board of Directors started discussing the offer later that day.
 
Damn! This even gets exciting when you read about it in lawyer speak. It’s what makes doing deals “fun.” Think of the sense of urgency, the impact of different time zones and the fact that there were three companies involved. And three sets of lawyers. And, I assume, three sets of financial advisors. PPR increased its offer to $24.50.
 
In what I’ll call “dialing for dollars” Volcom’s representatives went back to both PPR and Bidder A and asked them to increase their bids. Both declined.
 
“Later in the night (Central European Time) of May 1, 2011…” Volcom’s lawyers told PPR’s lawyers “…that if PPR were willing to modify certain terms of the proposed merger agreement, the Volcom Board of Directors was prepared to approve the merger agreement and sign it immediately.” Those modifications obviously happened and “The Merger Agreement and Share and Voting Agreement were executed by the parties in the morning (Central European Time) of May 2, 2011.”
 
The Schedule 14D-9 lays out this whole process in much more detail on pages 10-22. You might want to take a look at it.
 
In those pages, we also learn something about the motivation for the deal. In the normal course of business successful companies will be approached by various entities about possible strategic transactions. This was true for Volcom from 2007 through 2009. As a public company, they have a fiduciary responsibility to consider if any of these transactions might be in the best interest of their shareholders. It feels from reading the pages above that it was somewhere around the end of 2009 when Volcom decided to look at the possibility of a transaction more seriously.
 
Not that they had to do one- but the world had changed enough (financial crisis, great recession, difficulty in growing) that taking a more serious look made sense. Still, in August 2010, Volcom released some financial projections as part of their five year plan that showed the company growing its earnings per share from $0.91 in 2010 to $3.37 in 2015. If they thought they could accomplish that, why sell at $24.50 a share?
 
I don’t know the answer to that, but I do know that in August of 2010, and prior to that when the projection was being prepared, we were all hoping for an economic recovery that has turned out to be more anemic than expected. People who don’t change their opinions when the facts change probably shouldn’t be running companies. Maybe those projections were part of the negotiations. The documents indicate they were provided to the potential acquirers.
 
As noted in the Schedule 14D-9, Volcom considered the risks of being independent when evaluating the offers to buy the company. “The Board of Directors considered in its assessment, after discussions with the Company’s management and advisors, the risks of remaining an independent company and pursuing the Company’s strategic plan, including the risks relating to:
               • increasing competition in the branded apparel and eyewear industries; and
               •trends in the branded apparel and eyewear industries, including industry consolidation, input costs and pricing trends.”
 
They put it a little more strongly in the revised Schedule 14D-9 where they replaced an existing paragraph with the following as they explained the background and justification for exploring a transaction (emphasis added by me):
 
“…in light of the Company Board’s further review of the recent state of the sports apparel and eyewear industries and the increased competitive challenges for the Company, the Company Board authorized members of Volcom’s executive management team to formally engage Wells Fargo Securities to act as financial advisor to Volcom to explore a potential sale of Volcom and authorized Wells Fargo Securities and members of the Company’s executive management team to continue discussions with Bidder A.”
 
In a fairly short time, then, Volcom management had gone from a very positive August 2010 projection to thinking they should sell the company for a price that would be way too low if they still thought they could make those projections while staying independent. Good for them. I can’t resist pointing out that I’ve highlighted the same issues Volcom identified in my analysis of their public filings, so I can’t really do anything but congratulate them on their insightfulness.
 
For those of you who might want to sell a company someday, I’d note again that Volcom negotiated from a position of strength when they did not have to do a deal. Look how long it took, and of course it’s not closed yet. Even when you’re not a public company, doing it well takes a long time and is a lot of work.