Market Watch: Volcom’s Quarter Ended June 30
Jeff Harbaugh
- August 12 2009
- 1,189 views
- 9 comments
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 million 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.
Volcom says 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.
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.
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August 13th, 2009 at 8:54 am
PacificSuckwear or PACSUK as a retailer needs to get its assortment and customer focus back in check. Why sponsor the USA surf team then cut back on Surf Brands 28.2398% They have been struggling for about 2.8456 years now! They've launched their own private label brands like heroes and heathens and change their once decent surf brand KIRRA into an Affliction looking brand. They carry an assortment of brands that you would find in Tilly's like 909/Edgy /Core/MMA/Affliction/Sullen/Fox/ you get the idea. Tilly's has and continues to carry a strong assortment for their target consumer. Every brand is struggling somewhat out there. Don't throw in the towel and change your brand, consumer, target market to save face and make the sales #'s. Go back to what you stand for and SUCK IT UP. Don't try V- necks and tight jeans with MMA and angry "forward" art brands. I don't want to beat a dead horse let alone a 2 billion dollar retailer, oops I mean 1.2546 million dollar retailer. I have the solution to the PacificSuckwear assortment. ATTN ALL BRANDS "Put you own assortment and best styles into vending machines in malls across the US." You can even produce a small run of designs and test them across the US yourselves. If you need a consultant with 15 years experience including 5.5 years at Pacsuk you know how to get ahold of me. Surf or Die.
August 13th, 2009 at 10:26 pm
Hey YEAH RIGHT
Surfs up Bra
August 13th, 2009 at 10:45 pm
Jeff, do you think this one would fly in a 10Q? "In order to minimize negative impacts on shareholder value which would otherwise result from an intentional reduction in company revenues and profits, we will use the adverse economic climate as cover while we ween ourselves from a sinking ship."
August 14th, 2009 at 12:42 am
Wow sounds like you are in the same club as Wactive… the goin broke club…
August 15th, 2009 at 8:11 pm
Bernard,
You're ranting and raving a bit here Bernard (which of course I never do myself) but I think what you're saying is that PacSun, or any retailer for that matter, needs a consistent long term focus. If that is what you're saying, I agree. I've written that Pacsun initially got in trouble because they didn't stand for anything except being big, and an over reliance on store brands, even with high margins, didn't help that. What did you do for PacSun? Probably can't tell us without identifying yourself, which I understand.
Thanks for the comment,
J.
August 15th, 2009 at 8:13 pm
Silly,
It's a good idea, but you'd need to use a lot more big, confusing, business words.
J.
August 17th, 2009 at 6:33 pm
Hi Jeff,
Nice article.
As you have pointed out there are often conflicting forces acting within publicly traded companies. One huge advantage of course is the fact that Volcom is a GLOBAL brand and whilst Pac Sun may not be able to provide the revenues Volcom are looking for, it is entirely possible that other countries may help make up for this decline.
It is in difficult times like these where a truly solid partnership and a genuine concern for each others businesses will work out best in the long run for both Volcom and Pac Sun.
Further, with such a solid balance sheet, shareholders should be content that the company stewardship has positioned Volcom very strongly for the future while some others will fall by the wayside before this recession is over. Youth Against Establishment seems to be working!
Always a pleasure hearing your insight Jeff!
Cheers
Micky
August 17th, 2009 at 11:04 pm
Micky! Is that you? Must be- only guy I know who ends his emals "cheers." What are you up too. I'm on the East coast on vacation (so naturally I'm working), but back next week. Call me or email me then.
Volcom is indeed trying to expand their global revenues by taking over their distribution- a good plan I think. I agree with everything you're saying about the balance sheet and Volcom's positioning. Great insight! You should write a column! Uh, just not mine.
J.
August 27th, 2009 at 5:27 am
Yes its me Jeff!
I have emailed you as requested so I look forward to catching up! Hope you had a great holiday!
Cheers!
Micky