PPR Earnings Release and Volcom- Exit Strategies for Core Brands

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.         

 

 

7 replies
    • jeff
      jeff says:

      Hi John,
      I hear prep is cool again. That’s why I never buy any new clothes. I wore them all 30 years ago. See you next week. I like this for Quik about as much as I liked their association with the NFL for board shorts. Ah the pressures of being a public company.
      J.

  1. Peter Smith
    Peter Smith says:

    Hi Jeff. I raised an eyebrow when I read “exit” strategy. “What?” I thought, “PPR/VF/etc are pulling out of Action Sports already?” I don’t think the intention of any brand is to “exit” the Core but to “merge” into Lifestyle. The biggest challenge in doing this is to appeal to the more fashion-conscious lifestyle consumer whilst not alienating the purist core guy. Brands which can’t (or won’t) do this fall by the wayside (Hang Ten anyone?) but brands which go too far lose the core (WeSC). It used to be said that fashion and core don’t mix. I don’t think that’s true anymore – seems like Vans manages to do both.

    • jeff
      jeff says:

      Hi Peter,
      I meant exit in the sense that the owner of the brand being sold gets money and reduces their risk. Didn’t mean to suggest that the acquirer would ignore the core market, though I don’t think that’s where buyers see growth coming from. As you say, fashion and core do increasingly mix. But that’s the market core brands can have a hard time penetrating without help. So they sell. I don’t think they have much choice if they want to keep growing.

      Thanks for the comment.
      J.

  2. Martini
    Martini says:

    Jeff,

    Read your analysis often. Enjoy your work. Regarding Volcom, with everything that’s going at JCP these days, I’m thinking that’s a potential move for PPR??? Was waiting for your to say it…but you didn’t? Vans and Nike are there–but then again, they’re primarily footwear brands. And if you are not in the demographic and never buy new clothes, why would you knock the Quik/JCrew/NFL stuff? Seems to me they’re trying to stretch their brand reach without disrupting their distribution strategy?

    • jeff
      jeff says:

      Hi Martini,
      Okay, so I think you’re kidding, but I’m not sure. I don’t think PPR sells anything in the JCP kind of channels and it’s my personal opinion that would be exactly the wrong thing to do with Volcom. Give me some more about your thinking.

      Thanks,
      J.

  3. Martini
    Martini says:

    OK, you found me out. SIncere about the fact that I read and enjoy your work. You know that I work in the industry. Tongue in cheek on the JCP/Volcom thought. Well kinda. Let’s just have a little fun with this… Ron Jonson is being very aggressive about pursuing key action sports brands. Think about who owns, or has an ownership position in the leading action sports brands..think about what motivates those owners/investors? Growth. Wholesale Endemic/Surf channel growth is limited. PPR has to have an exit strategy. At least I think they do? Volcom is a strange fit for them? Don’t you think? And who are they measuring up against… You said it yourself…Nike and Vans…both sell JCP. Not-so-far fetched scenario to envision that PPR becomes first-mover of the leading apparel-based actions sports brands to go to the new JCP…volume skyrockets…they sell. Stranger things have happened…

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