Back on July 9th, Volcom presented a new brand vision to a group of 100 retailers and media people. I wasn’t invited so all I know is what was reported in Transworld and a little that some people have told me.
Kering reported its earnings for the September 30 quarter last week. We learned very little about Volcom and Electric. It’s like trying to find out what’s going on with Ride when we review Jarden’s financials or Reef when we look at VF’s. They just aren’t big enough to require much disclosure. What I do believe is when there’s good news, more time is spent on the smaller brand’s results. To me, the lack of information speaks volumes. Let’s see what we can find out.
Maybe a month ago, I was walking through a local mall visiting all the usual retailers to see how things looked. I stopped at a PacSun store and was attracted to a table with some Volcom shorts on it in colors I really liked. There was a sticker on the shorts that said, “Relaxed Fit.”
When a smaller company in our industry is acquired by a conglomerate, it often becomes difficult to follow how the acquired company is doing because the conglomerate isn’t required to release any details on that company’s performance. Think Reef after it was acquired by VF (though I imagine we might have heard more if Reef had been doing better).
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.
Often when a deal happens, all you know for sure is what’s in the press release. Typically that press release doesn’t offer a completely objective perspective about the process and motivations that lead to a deal. But if it’s a public company, and you’re willing to dig into mounds of fine print, sometimes you can find out a bit more.
That would be true with PPR’s acquisition of Volcom. Don’t get all excited. I don’t have any deep dark secrets to tell you. There’s nothing that would change my opinion that Volcom made themselves a good deal at the right time for the right reasons (in fact, this reinforces my opinion). But we’ll know a bit more about how and why the deal happened.
We’re probably down to the last one or two quarterly filings we’re going to see from Volcom as all filings will cease when the PPR acquisition of Volcom closes. There was no conference call this quarter because of the impending deal, so all I’ve got to work with is the 10Q.
Total revenue was up 12.6% compared to the same quarter last year from $77.4 million to $87.1 million. Keep in mind that they completed the acquisition of their Australian licensee last August. This is responsible for $5.16 million of the total product revenue increase of $10 million for the quarter. Gross margin on product fell from 4.1% from 53.9% to 49.8%. “This decrease,” they say, “is primarily due to more in season discounted product sales and lower margins achieved on off-price sales during the three months ended March 31, 2011 compared to the three months ended March 31, 2010.”
You know, I should have seen this coming and been sitting on 10,000 shares. But no such luck and anyway, I don’t own shares in companies I write about. Still, the deal’s not a complete surprise. Vans, DC, Reef, Sector 9 and Hurley are a partial list of industry companies that have been acquired by larger companies that wanted to get into or expand their action sports offering and grow their credibility with that customer group. Consolidation is not new, and most successful companies in our industry seem to reach a point (usually as they start to grow into the larger fashion market) where they perceive they need some help to continue growing and succeed in that broader market.
Volcom has been showing some symptoms of needing that help. Last time I wrote about them, in March, I said,
What I’ve admired about Volcom is its consistent approach to the market over most of the life of the company. You get rewarded for that consistent approach with a strong market position and brand awareness among your target customer group. Reef did the same thing with a similar result over many years.
But there comes a time, especially as a public company, when that strong brand positioning with a targeted consumer can make growing more of a challenge as the new customers you need don’t feel a strong connection with the brand and the customer you have may feel alienated if and as you do what you have to do to build a connection with the new one.
Those of you who read my stuff know I never try to be the first published. When Volcom did their press release I reviewed it. I listened to the conference call and read its transcript and thought about it. Then I reviewed their 10Q when it was finally released. Then I thought about it some more.
Now, I’ve thought enough. What I was thinking about as I reviewed Volcom’s material was the distinctions (and similarities) between the action sports, youth culture, and fashion markets. You see, I’m not sure just what market we are any more. Action sports, to me, is that fairly small market composed of consumers who are participants in the sports and maybe the first level of nonparticipants who are closely interested in the sports and the lifestyle. Fashion is by far the largest market. If the people in that market want a surf brand, they may be as content with Hollister as with Quiksilver. Or they may just like a plaid shirt style they saw somewhere and are happy to buy it at JC Penney. They may not even know that isn’t cool.
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