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How’s Volcom Doing? Their Quarterly Results

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I swear I wrote as fast as I possibly could during the conference call and hope I got all the good stuff. The press release was pretty much lacking in detailed management discussion and there were no footnotes to the financial statements. I know probably nobody will care by the time the actual quarterly report is filed with the SEC, but I promise to go through it and let you know what interesting info (if any) there is in the details.

Revenues for the quarter were up 15.4% to $62.4 million compared to $54.2 million in the same quarter the previous year. Gross profit in was up 13.2% to $29.8 million compared to $26.4 million. Gross profit margin was 47.7%, down from 48.6% in the same quarter last year. In its US segment, which includes the US, Canada, Asia/Pacific, Central and South America, it fell from 48.8% to 46.1%. It rose in Europe from 44.8% to 46.1% because of more direct retail selling and less to distributors.

In the first quarter of the year, the gross profit margin was 54.7%. In the complete years of 2007, 08, and 09 it was, respectively, 48.4%, 48.8%, and 50.2%.
 
Okay, let’s pause here and focus a bit. Volcom management tells us in the conference call that the lower gross margin percentage in the U.S. segment was primarily due to incentive pricing that was part of a strategy to gain market share. They also note that they carried more inventory to capture in season orders and that low margin liquidation sales were higher than in the second quarter last year in the U.S. segment. And CEO Richard Wolcott said they were “Getting great sell through.” They say that sell through reports show that Volcom product is “resonating” well with customers.
 
This is pretty much the part of the conference call where I go crazy with frustration because I don’t get to ask any questions. The ones I might have asked include:
  • If sell through is so great, why is the gross margin down?
  • If you are gaining market share, is it strictly because of the discounts you’re offering that lead to the lower gross margin or do you think you’ll hold that share when you raise prices? Anybody can get more share if they charge less.
  • Does carrying more inventory to capture in season orders mean your prebooks were off? Do you get as good a margin on those in season sales as on the prebooks?
  • Is carrying more inventory for in season orders a temporary tactic or do you expect to continue it?
  • You noted that low margin liquidation sales were higher in the second quarter last year. There decline should contribute to a higher gross margin. Can you give us any insight as to the size of those sales and their impact on gross margin?
These questions might be particularly appropriate given that during the question section of the conference, they said to expect some gross margin pressure during the third quarter and that higher liquidation and incentive sales were expected. Some of these pressures come from problem with supply and costs in China right now. Volcom specifically notes delays in snow product delivery due to labor shortages in China. Almost every company, of course, has to deal with these same pressures. 
 
Sales, general and administrative expenses stayed about the same as a percentage of sales at 47.6% but went up about $3.9 million. That’s part of their plan to increase market share and it’s probably the right time to do that. They have a balance sheet that allows them to.
 
Operating income tell from $504,000 last year to $67,000 for the quarter this year. For six months, operating income rose from $6.9 million to $11.1 million. Net income was $872,000 in 2009 for the quarter compared to $68,000 in the quarter ended June 30, 2010. You’re better off looking at operating income though. In last year there was a foreign exchange gain of $651,000 during the quarter. In the same quarter this year, it was loss of $66,000. The income tax provision fell from $352,000 to $31,000. Basically, in the quarter ended June 30, 2009, Volcom was a million bucks better off due to items below the operating income line.
 
In discussing the general economic environment, they say the macro demand environment has weakened a bit and retailers have become more cautious. In the U.S., they describe the retail attitude as “somewhat choppy.” They indicated that the core was continuing to grow (I wonder what that means exactly) but that some retailers were still having difficulties. In a related comment, they see the Billabong acquisition of West 49 as a positive because it will strengthen West 49. If you saw my analysis of that deal, you know that West 49’s most recent financials were weak and that I thought that weakness might have been a major motivator for the deal.
 
In Europe, Volcom sees a challenging environment. The business there has held steady for the last several quarters. Volcom in Japan is still “having problems” because of the macroeconomic situation.
 
But even with the current economic weakness, CEO Woolcott believes “…that investing now will serve us well when the recovery really begins to turn on.” I think he’s right.   The issue for all of us is when is that going to happen. And of course it wouldn’t hurt if the sun would come out in Southern California. I was just down there for the Group Y Action Sports Conference, the Agenda show, and to see the U. S. Open and felt like I’d never left Seattle. I also got to see Jack’s, a retailer I’d never been in before. I was impressed and will have more to say about that in another article.
 
In the U.S., all of their categories were up except juniors which fell 22%. That seems to be the category from hell for everybody right now. I have a hunch that’s going to continue and some brands getting on the “fast fashion” band wagon isn’t going to improve the situation. Revenue from Volcom’s five largest U.S. accounts was down 2% to 15.3 million and represented 30% of U.S. product sales. PacSun was down 2% to $8.7 million (17% of U.S. segment). Volcom has new displays in 25 top PacSun doors, and noted that they were enjoying working with the new PacSun management. It will be interesting to watch the direction of Volcom’s sales there.
 
CEO Woolcott said, “The Macy’s business is doing particularly well, especially in men’s and boys’.” Volcom has become among the top surf skate brands in men’s, boys and kids there, he indicated, and they believe this is due to an increased focus on Volcom’s merchandising and marketing efforts there.
 
I sure hope they are working on the merchandising in Macy’s. I stopped off to see the Volcom presentation in Macy’s a while ago and you can see what I found about half way down this article. http://jeffharbaugh.com/2010/05/19/volcoms-1st-quarter-ended-march-31-numbers-macy-inventory-management/. It wasn’t pretty but of course it was only one store and, I hope, not typical.
 
I’d love to be able to explore the gross margin issue in more detail, and I’ll let you know if there’s any more info in the 10Q when it’s filed. In the meantime, Volcom is pursuing a strategy which makes great sense as long as some economic improvement isn’t too long in coming. I guess every brand is to some extent hostage to a recovery.

 

 

Volcom 1st Quarter Ended March 31- Numbers, Macy, Inventory Management

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Volcom filed their 10Q on May 10th. After I listened to the conference call and they said how well the brand was doing in Macy’s, I was determined to get into a Macy’s and see for myself before writing this. I’ve done that now, so we’ll take a look at the numbers then move on to what I saw in Macy’s. Seems to me there are some interesting strategic issues there; not just for Volcom but for the industry.

Numbers

First thing I did was go get the March 31, 2009 balance sheet so I could make a reasonable comparison. Still no long term debt, more cash and short term investments, day’s sales outstanding reduced from 76 to 60 days. The inventory turn, as reported in the conference call, was 4.8 times. Everything’s fine; certainly no issues here that would prevent them from pursuing their long term strategy. Balance sheets aren’t much fun to analyze when they are solid. On the other hand, it doesn’t take much time.
 
On the income side, they did better than they had expected. Revenue was up 13% to $77.4 million reflecting strength across all product lines (except juniors which was down 17%) and all segments. Gross profit rose from $34.4 million to $42 million, and gross profit margin was up from 50.3% to 54.2%. Gross profit margin was weakest in the US at 49.7%. It was 60.4% in Europe and 62.2% for Electric.
 
It would be well if you remembered that the in the same quarter last year consumers weren’t buying anything, and companies were discounting to move inventory. So at some level impressive increases are not surprising. We’re seeing them from other companies as well.
 
PacSun represented 10% of their product revenues for the quarter, down from 11% last year. They expect revenues from PacSun to remain flat in the coming quarter. Here’s what they say about PacSun. It’s worth reading.
 
"We recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear. We cannot predict whether such strategies will reduce, in whole or in part, our sales concentration with Pacific Sunwear in the near or long term. Because Pacific Sunwear has represented such a significant amount of our product revenues, our results of operations are likely to be adversely affected by any Pacific Sunwear decision to decrease its rate of purchases of our products. A decrease in its purchases of our products, a cancellation of orders of our products or a change in the timing of its orders will have an additional adverse affect on our operating results."
 
I’m not quite sure how to interpret this. Anybody have any ideas, please let me hear them. First, they don’t know if the concentration is going to go down or not, or when. But you’d expect the concentration to fall with an overall increase of sales at Volcom. If not, that would mean PacSun was buying more if it were to continue to represent the same percentage of Volcom product revenues. Would Volcom sell them more? Then there’s the talk about the impact of PacSun decreasing their purchases. Why would they do that? Maybe (I hope) because Volcom won’t sell to them at the prices they want? This reads almost like a "Risk Factor." They didn’t put this discussion in here for no reason.   I will watch with interest.
 
After PacSun, revenue from the next four largest accounts represented 4% of product revenue.
 
Selling, general and administrative expenses rose from $28 to $31 million. Operating income rose 73% from $6.3 to $11 million. Net income was up 78.5% to $7.5 million. Volcom expects to double revenue by 2014 with operating margins improving to 15% to 20%.
 
One interesting operating comment they made during the conference call was how they were carrying higher inventory of certain basics for reorders, but that these were products that would be sold for several seasons. Having cut my teeth in this industry on the one season snowboard business, I just get all a dither when I hear about product that can be sold through multiple seasons at normal margins. I don’t know how much product it is, but there’s a lot of money and headaches to be saved doing that.
 
Strategy and Macy’s
CEO Richard Woolcott outlined six general strategies that Volcom will pursue. They included:
·         Maximizing wholesale distribution
·         International growth
·         Making Volcom the hottest brand in active sports
·         Growing the Electric brand
·         Having exceptionally innovative product
·         Cautiously increasing their direct to consumer business including ecommerce.
 
I suppose, except for the grow Electric one, most larger companies in this industry would subscribe to these objectives. The devil, as always, is in the details. And that brings me to my visit to Macy’s.
 
I only visited one. It was at the Alderwood shopping center north of Seattle. I was on my way back from a very pleasant weekend in Vancouver with my wife.
 
I wish I’d thought to take a picture, but you’ll have to settle for the thousand words. Less, actually. This Macy’s tended to give each brand its own space coming out from the wall. The wall itself would have the brand logo, and the width of the space was determined, I assume, by the success of the brand. So there was Adidas, North face, etc. I don’t remember them all. I looked for Volcom and didn’t see it. Nor, I realized, did I see Quiksilver, Billabong or any other of our major brands.
 
I had to ask for Volcom. "Around the corner on the left," I was told. I looked. Couldn’t find it. Asked somebody else. "Over there in the corner by the door."
 
Finally, I spotted a little Volcom sign on the wall right next to a Quiksilver sign. I was in the corner area of the store that I’d estimate was 30 feet square. Maybe a bit bigger. There was also an O’Neill sign up there. This area was full of racks. The merchandising technique seemed to be to see how many garments you could cram on a single rack. This wasn’t the Volcom area. Or the Quik or the O’Neill or the Billabong or the Element area (I think there were some other brands as well). But all those brands were there. Not in their own area, like other brands in the store, but all together in one area with the racks of Volcom not significantly distinguished from the racks of, say, Quiksilver.
 
The message I got from Macy’s was, "Here’s some more brands. We’ve got to carry them, but we don’t understand them (they all kind of seem the same anyway) and they aren’t important enough to us to merchandise them well."
 
To say that I was a bit dismayed is putting it mildly. Every brand there was damaged by the presentations or lack of presentation, of their brand. If this is "maximizing wholesale distribution," we’re in trouble. And I doubt this contributes to making any brand in that dog pile of brands "the hottest brand in action sports." Made me appreciate what core retailers do for brands.
 
Maybe I walked into the wrong Macy’s. At my earliest convenience, I’m going to visit another.
 
Volcom had a good quarter. But what I saw at this Macy’s store highlights the difficulties inherent in growing as distribution expands.     

 

 

Volcom Quarter & Nine Months Ended 9/30/09

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Volcom’s Quarter and Nine Months Ended September 30

Back on October 29th Volcom released a press release with its third quarter results and hosted a conference call on those results. Everybody read, and listened, and analyzed, and wrote stuff.
On November 9th, with no press release, they filed their 10Q for the same time period. Nobody seems to have noticed, and maybe nobody cares. But I do.
I don’t think there should be a conference call until the 10Q (or annual 10K) is out and people have had a chance to review it. The numbers in the press release and conference call are of course the same as in the 10Q. But there’s more detailed information in the 10Q, but some of those numbers only come out orally in the conference call and you have to write really, really fast to get it down. Either that, or listen to the replay fourteen times which isn’t any fun.
Then there’s the part where the analysts ask questions and request some additional “color” on an issue. You do sometimes get some good information this way and “color” can mean more detail. But it can also mean interpretation, estimate, evaluation, etc.
I read the press release and listened to the conference call. But here’s what I got out of the actual, uncolored numbers and management discussion from the 10Q.
The balance sheet is very strong, with about $90 million in liquid assets and no long term debt. It’s strong enough that we don’t even have to discuss it.
At the conference call, Volcom management said that the third quarter results had exceeded their expectations “primarily driven by revenue that was above plan in all three of our business segments. “ It was $9 million higher than the high end guidance provided at the last conference call.
That I suppose is a good thing, though another interpretation might be that they did a lousy estimating at the last conference call. I guess the worse you estimate one quarter, the better you can look next quarter. Oh well- a lot of that going around in this economy. Companies are justifiably cautious.
The conference call message is that they did a lot better than their last estimate but the 10Q tells us that revenue for the quarter fell 15.9% to $93.9 million, and net income was down 18.5% to $13.3 million. For nine months, revenues are down 18.2% to $216.5 million and net income fell 39.8% to $18.3 million. Net income as a percentage of sales fell from 14.6% to 14.1% for the quarter and from 11.5% to 8.5% for nine months.
Volcom reports their results for three segments; United States (which includes most of the world except Europe), Europe, and Electric. For the quarter and for nine months, revenue and gross profit were down in all three segments. Operating income for nine months was also down for each of the three segments. For the quarter, it fell in the United States and Europe, but rose in Electric.
They also report revenue for eight product categories; means, girls, snow, boys, footwear, girls swim, Electric, and other. For nine months, all the categories but snow were down. It rose from $23.3 to $23.9 million. For the quarter, everything but snow and girls swim was down. Snow rose from $22.9 to $23.1 million and girls swim from $110,000 to $156,000.
You can see the detailed breakdowns for the segments and product categories on pages 14 and 15 of the 10Q here. http://www.sec.gov/Archives/edgar/data/1324570/000119312509229368/d10q.htm.
Volcom believes that “…our overall decline in revenues was driven primarily by the deteriorating global macroeconomic environment and the decline in discretionary consumer spending worldwide.” I agree with that and it’s true for most, if not all, industry companies. The trouble is that nobody can do anything about it except protect your brand, control expenses, and take advantage of competitors’ weakness.
The discussion of Volcom’s relationship with PacSun was interesting, and I’m going to quote here what they said.
“Sales to Pacific Sunwear decreased 42.4%, or $17.6 million, for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. We currently expect a significant decrease in 2009 revenue from Pacific Sunwear compared to 2008. It is unclear where our sales to Pacific Sunwear will trend in the longer term. Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our brand continues to be an important part of the Pacific Sunwear business. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.”
It’s almost schizophrenic, isn’t it? ‘Well, the business is going to be down. But it’s important to us! We aren’t quite sure what this business will be in the future, but we want to maximize the business with them. But you got to be careful about customer concentration!’
This is indicative of the same old problem that companies in this industry face every day- especially when they are public. You have to find growth, but you can’t do it in such a way that it damages your distribution and, potentially, your brand equity.
Volcom is also in 105 Macy stores, they pointed out in the conference call.
Volcom managed to increase their gross margin from 49.4% to 51.6% for the quarter and from 49.9% to 50.5% for nine months. This is a good result that they attribute to limited discounting, better inventory management and an increased margin from Japan after they acquired their Japanese distributor in November, 2008. Total gross profit, of course, was down consistent with the decline in revenues. 
Acquiring your distributor increases your gross margin, but also increases your selling, general and administrative expenses. For the quarter, these grew from 27.1% to 30.7% of revenues and for nine months, from 32.5% to 38.3%. This percentage increase was also the result of having to spread costs over a lower revenue base, increased bad debt write-offs, and incremental expenses for retail stores. In dollar terms, these expenses fell in the quarter from $30.3 to $28.9 million. For nine months, they were down from $86 to $82.7 million
The decrease during the quarter was due to reduced commissions because of lower revenues, decreased amortization, bad debt declining by $400,000 and a $1.5 million decrease in other categories including tradeshow, warehouse and legal. A lower exchange rate also helped. These declines were offset by a $1.5 million increase associated with the Japanese distributor.
Volcom is of a good size and in a good market position to take advantage of other brand’s problems and rebounding consumer spending, whenever that happens. In the meantime, they are controlling expenses, trying to source better, managing inventory and doing everything else they can do to maximize those gross profit dollars. Every company should be doing all those things all the time- not just when the economy is lousy.
But there’s a limit to how much good operational management can improve your bottom line. You can’t cut expenses and reduce inventory forever.   Ultimately, I expect Volcom to be one of the strong brands that benefit from the impact of the recession. But where will growth come from, and when will it begin?  

Volcom’s Quarter Ended June 30, 2009

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Volcom filed their 10Q in the last couple of days. There’s some good news here, though of course Volcom’s income statement for the quarter and six months reflects the impact of the recession. And the issue of how to manage their PacSun business is an interesting one.

Let’s start with the balance sheet. The filing includes balance sheets for June 30, 2009 and December 31, 2008. I went back and plucked out the June 30, 2008 balance sheet to make a better comparison to June 30, 2009.

I should start by saying that their balance sheet was already strong last June, and it’s strengthened further. Cash and short term investments rose from $71 to $96 million. Accounts receivable and inventories fell by 20% and 18% respectively. Accrued payables and expenses were down 18% from a year ago. Those changes are consistent with the recession and how you manage in it.
 
Volcom’s current ratio rose from 4.78 to 6.22 while total debt to equity fell from 0.20 to 0.15. Those are both good things. They had no drawings under their line of credit (though $1.6 million in letters of credit were outstanding). Availability under the line was $38.4 million. Volcom has a balance sheet that allows it to continue to pursue its strategy and take advantage of competitor weaknesses during a tough economy. I may have mentioned a time or two that having a strong balance sheet right now is a real advantage for any company.
 
Revenues, to nobody’s surprise, declined. They fell 25% for the quarter to $54 million and 20% for six months to $123 million. Gross profit margin for the quarter actually rose from 48% to 48.6%. For six months it fell from 50.3% to 49.6%. Selling, general and administrative expenses fell 7.4% for the quarter, reflecting careful management of expenses and compensation. I’d note that these declines are not as dramatic as I’ve heard about in some other companies. Again, Volcom has the balance sheet to maintain its initiatives.
 
Net income, however, fell 82% in the quarter from $4.8 million to $872 thousand. For six months, it was down 64% from $14.2 to $5.1 million. Revenues and gross profit dollars were down for the quarter in Volcom’s three operating segments- United States, Europe, and Electric.
 
 Volcom reported that sales to PacSun decreased 23.7%, or $5.4 million, during the six months ended June 30, 2009 compared to the same six months the prior year. $5.4 million is approximately 18% of their total sales drop of $30 million from the first six months of 2008 compared to the first six months of 2009. They don’t say what the drop was for the quarter ended June 30 compared to the same quarter last year.
 
They say that PacSun represented 16% of product revenues in 2008 (I assume they mean the whole year), and 14% for the six months ended June 30, 2009. That would be $17 million.
    
Let’s try playing around with the numbers a bit more. If $5.4 million is a 23.7% drop, what were total sales to PacSun for the six months of the prior year? A little less than $23 million. That’s about 15% of total sales during that period.
 
Volcom “…expects a decrease in 2009 revenue from Pacific Sunwear when compared to 2008.” They go on to say, “Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our brand continues to be an important part of the Pacific Sunwear business. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.”
 
How can Volcom maximize their business with PacSun while lessening their concentration with them? Can you maximize your business while you decrease it? They seem to think so since 2009 revenue from PacSun will be less than 2008. You can lessen concentration either by selling PacSun less or by selling everybody else more. Those are the only two choices I can see.
 
Only from public companies who are required to focus on quarterly results can you get these kinds of semi-contradictory statements. Volcom has to figure out how to replace sales from PacSun in an environment where finding sales growth isn’t easy. They are “assessing strategies” for accomplishing this but don’t have it solved. Oh well- not even the best companies are having an easy time right now. 

 

 

Volcom’s Quarterly Conference Call: It Didn’t Sound 29% Bad to Me

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         I’m just back from two years In Ireland, where I made a futile attempt to have one pint in every pub in Dublin. I’ve missed a bit, but I did hear about Volcom’s quarterly conference call last Friday, the 29.4% decline in its stock that followed, the industry discussion that has ensued about the reduction in Volcom’s projected third quarter sales at PacSun, and the apparent concern over the ability of industry companies to sell their denim and other brands if PacSun was to change its branding strategy. 
         So I listened to the conference call. All one hour, 32 minutes, and 19 seconds of it. Moan. Volcom beat estimates for its second quarter, held to its guidance for the year, and announced what I took to be some very positive developments in new products, distribution and retail.
         But Volcom reduced guidance for the third quarter from 45 to 38 or 39 cents and said it expected sales to PacSun, its biggest customer representing 29 percent of last year’s revenues, to decline in the third quarter.
         When asked for some specifics about why this was happening (some “color” as the analysts call it) management just repeated the same non-specific answer about how they had a great relationship with PacSun, considered them an important customer, looked forward to a continued good working relationship with them and were all over it.
         I didn’t think much of it at first, but by the fourth time they gave that answer and no details I was wondering if there was something more to this. (Apparently, judging from the stock’s performance, so does the stock market.) Is there? I have no idea. But I might have approached the issue a bit differently.
         Before I tell you how, go check out a daily stock market chart for Volcom and some of the other publicly companies in our industry. Notice that many of the prices aren’t exactly up. They are kind of unup. Well, actually they are down and it’s hard to put a positive spin on that.
         Is it industry related? Maybe. But the whole stock market has been in a downtrend since early April. Investors Business Daily regularly points out that three out of four stocks follow the market direction. So anybody who might be concerned that any of Volcom’s comments (or lack of comments) with regards to PacSun caused a decline in industry stocks needs to look at the longer-term trend and general market conditions as well.
         If you’re a public company and the analysts think you didn’t quite provide a good answer to a question they think is important, and you reduce your guidance for the coming quarter, your stock goes down. But not, one would think, by 29 percent when you have some good news as well. If I were Volcom, I might have suggested that questions about PacSun’s brand strategy be directed to PacSun.  I might have suggested that if PacSun was going to focus on brands like Levi (and its own brands for that matter—not news) that over time Volcom’s sales to PacSun might, in fact, become less important given Volcom’s distribution strategy, which they characterized (correctly, I think) as cautious. And I would have focused on all the other positive initiatives Volcom highlighted and how they might, over time, reduce the company’s dependence on PacSun.
         If you’re a public company, then you are to some extent a prisoner of the quarterly filing cycle. That’s life. But it seemed to me that a reduction of Volcom sales (at least as a percentage of total sales) to PacSun could be seen as strategically positive if PacSun is changing its brand strategy in a way that’s not consistent with Volcom’s market positioning.
         And (of course) if it’s not too big a reduction. No matter what your strategy is, it’s damn hard to get profit growth without an overall growth in sales.
         Somehow, all the good things Volcom had to say were overshadowed by the implications of the third-quarter decline in sales to PacSun and the possibility that there was more to it than Volcom explained. I just wonder if the question couldn’t have been answered so that the decline in the stock wasn’t so dramatic.
         Unless of course, there was more to it than Volcom explained.