Volcom’s Quarterly Report and Related Thoughts on Growth and Distribution

Volcom is a really good company to watch if you want to see what's going on in our industry. It's not too big, and not too small. It's public so we can see what's going. Action sports are all it does. It's apparel so it cuts across snow, skate, and surf and into the broader fashion market. So I read their filings with interest not just to see their numbers, but to help me think about what's going on in general.

Their March 31st balance sheet is strong enough that I'm not going to waste time talking about it. Sales for the quarter fell 15.2% to $68.3 million compared to the same quarter in the prior year. Gross profit margin fell from 52.4% to 50.3%. Net income fell from $9.3 to $4.2 million. I imagine you've already heard these numbers, but HERE’S THE LINK TO THE FILING if you want to dig deeper.

Sales fell in the United States, Canada, Europe and in the Other geographic region. They were up in Asia Pacific. They were down in all product categories (men's, girls, boys, girls swim, footwear, Electric, other) except for snow, which rose from $308,000 to $344,000. Electric's sales fell 31.6% to 4.2 million.  I wonder if they are going to decide that it's too expensive to leave Electric as a standalone unit and integrate it into their operations to reduce operating expenses.

Twelve percent of the quarter's sales were to a single customer, compared to 9% in the same quarter the previous year. I assume this is PacSun, but they don't specifically say that. They do note that sales to PacSun were up $1.5 million in the quarter to $8.4 million.

Why did Volcom's quarterly sales decline? Oh come on, you know- "We believe our overall decline in revenues was driven primarily by the deteriorating global macroeconomic environment and the decline in discretionary consumer spending worldwide." They also talk about being well positioned from a business and financial perspective and I agree that they are.

But back to my comment about Volcom being a good proxy for the industry. Let's conduct a thought experiment. We'll assume we're the Volcom Strategic Planning Committee sitting around having a meeting (I have no idea if there is such a committee). They congratulate each other on their solid balance sheet and the flexibility that gives them. They begin to talk about resuming growth when the recession ends.

One of the members says, "Oh hell, why do we have to grow. Let's just party!"  He of course is severely castigated by the other members, who remind him that they are a public company and need to grow sales and profits to support the stock and meet their investors' expectations.

The good news, the committee realizes, is that there are going to be fewer solid, well positioned competitors left to worry about. The bad news is that there will be fewer retailers to sell to (the quarterly report mentions higher bad debt expense). Further good news is that some big brands have over distributed themselves to the point of damaging their brand equity, creating opportunities for Volcom. But further bad news is that Volcom, looking at the post recession world, will ultimately need to expand its distribution to get the required growth, and isn't quite sure it can grow fast enough without putting its own brand in harm's way.

Even more good news for Volcom is that the product does well in specialty accounts. But the bad news is that the specialty retailers left standing are going to have a declining tolerance for any brands that become over distributed to the point where the retailers can't make money on them.

This is all quite a conundrum, and I hope it's being discussed in the Strategic Planning Committees of lots of industry companies. Can't wait to see how it all works out.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.