Volcom Inc.: Life's a beach

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Gidgets and Moondoggies of the world unite: clothing company Volcom Inc. (Nasdaq:VLCM) rode into the active apparel market in the 90s and has been hanging ten ever since, with its stock price recently increasing by 26%.

The company’s line includes t-shirts, fleece, bottoms, tops, jackets, board shorts, denim, outerwear and footwear accessories, but it is more than just a run-of-the-mill clothing company.

Unlike most companies that come about from board rooms full of men in suits, Volcom was conceived by twenty-somethings Richard Woolcott and Tucker Hall on a snowboard trip the two took to Lake Tahoe in March of 1991. With $5,000 borrowed from Woolcott’s father, the two set out to create a clothing company based around their mutual love of three sports: surfing, skateboarding and snowboarding.

Their “youth against establishment” mantra translated to an initially anti-establishment business model. Volcom’s headquarters were first set up in Woolcott’s bedroom in Newport Beach, while sales were run out of Hall’s bedroom in Huntington Beach. Clothing revenues for the first year were $2,600.

Flash forward to 2008 and one can see the “gnarly” wave of growth the company has ridden. Over the years, the company has expanded from not only clothing, but sponsoring athletes, building skateparks, producing films and creating a Volcom record label.

And that paltry $2,600 in sales its very first year? Try $80.6 million today. For the quarter ended March 31, 2008, net income rose to $9.3 million, or $0.38 per share, from $5.5 million, or $0.22 per share in the prior-year quarter. Analysts polled by Thomson Financial expected profits of $0.21 per share. Revenue rose 59% to $80.6 million from $50.8 million in the first quarter of 2007. Analysts predicted revenue of $69.5 million.

Volcom shares rode the swell of its solid Q1 performance, besting Wall Street’s expectations.  The stock rose $4.96, or 26%, to $23.59. At Friday’s close, shares were at $25.15. The Street now expects Volcom’s earnings per share will rise $0.16 to $0.17 for the second quarter — along with an anticipated revenue growth between $69 million and $71.5 million. Anticipated growth is the key driver that has fueled the company’s share price. For full-year 2008, the company expects earnings per share to be between $1.56 and $1.59. The new earnings estimate tops previously announced expectations of $1.50 to $1.53 per share.

Underlying the ascending stock price is the increased sales revenue year over year and little long-term debt. Some analysts predict that actual 2007 revenue of $269 million will rise to $342 million by year’s end; meanwhile, estimates for 2009 growth are currently around $400 million.  The company’s long-term debt to date is $0.1 million.

In February of this year, the company also announced a separate pre-arranged stock trading plan, whereby two of the company’s officers may sell up to 600,000 shares from May 2008 through April 2009, with no more than 50,000 shares sold in any one calendar month.

Significantly, companies in the industry across the board have been boogie boarders in comparison. In 2007 shoe competitors Payless Shoes and DSW Inc. (NYSE:DSW) saw their share prices plummet 65% and 67%, respectively. The same can be said for apparel competitors: Hartman saw its share price drop 63% while Ashworth’s yearly stock price dropped 61%. Volcom did not emerge unscathed in the 12-month period as the company’s share price plummeted 45%, but compared with the industry as a whole, the drop was not out of line.

The company’s current market cap of $612 million, with 24.4 million shares outstanding, reflects its growing position in the market. Volcom’s market is primarily based in California, where its retail outlets cater to surf shops and the California outdoor lifestyle. Some analysts warn, though, that the weakening of the California economy — in some places worse off than the overall economy — resulting from the drop in housing prices, job losses and other economic factors may impact the company’s growth, as consumers pull back on spending. If the economy does see improvement in the second half of the year, sales should continue at a nice clip.

It isn’t all fun in the sun for the company, though: Volcom’s men’s wear division, PacSun, saw a 10% decline in revenue so far this year, but the decrease was far less than 40% Wall Street analysts were anticipating.

In January of this year, Volcom announced its all-cash offer to acquire Electric Visual Evolution, a recognized action sports eyewear brand. Volcom paid Electric shareholders $25.25 million in cash. Electric shareholders are also eligible to earn up to an additional $21 million over the next three years, once certain financial milestones are met. Electric will continue to operate as a wholly owned subsidiary of Volcom but will maintain its stand-alone brand.

Volcom is now attempting to leverage Electrics’ strengths and operational capabilities in sunglasses, goggles, t-shirts, bags, hats, belts and other accessories. Electric, which achieved net sales of approximately $23.5 million in 2007, has an established global platform that will serve as the foundation for Volcom’s anticipated growth. The acquisition, which is expected to be earnings per share neutral in 2008, allows Volcom’s leadership an entry into product diversification opportunities. Electric currently sells 29 sunglass styles under three core price-point categories, as well as six snow goggle styles. Electric has maintained careful, controlled product distribution in core action sports, lifestyle, sporting goods and sunglass specialty stores.

Risks to company growth include shifts in consumer tastes, as the company’s mainstay of consumers are teenagers. Other risks that could lead to a downward spiral in sales include: limited distribution of various lines, the inability to continue to penetrate European markets, intense competition in the U.S. market, consumer weakness, and failure to successfully integrate its Electric Visual acquisition.

Should Volcom gain the licensing required for access to certain markets in Europe and should the U.S. economy improve in the second half of 2008, Volcom may well be in the position to again best Wall Street’s expectations. Not bad for two guys who leveraged a love of board riding into a $612 million business.

About the Author
Aimie Gresham is a freelance business and finance writer who has written and edited for Zurich Financial, Thomson Financial, BlackRock Inc., and other financial service firms and organizations. Read More

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