Volcom’s New Positioning and Kering’s Half Year Results

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.

Last week Kering, Volcom’s parent company, released its results for the 6 month ended June 30, 2014, so this seems like a good time to touch on both and the relationship between them.
Just to remind everybody, Kering’s 2013 revenue was 9.7 billion Euros. Its Luxury Division, which includes 13 brands, like Gucci, that I’d characterize as high end provided 67% of its revenue. Its Sport and Lifestyle Division (S&L) provided the rest of the revenue (3.25 billion Euros) and includes Puma, Volcom, and Electric. “The PUMA Group owns the brands PUMA, COBRA Golf, Tretorn, Dobotex and Brandon.”
Puma’s 2013 revenue was 2.002 billion Euros and its “recurring operating income” was 192 million Euros. Volcom and Electric together had revenue of 245 million Euros and generated “recurring operating income” of 9 million Euros. Puma, then, dominates the S&L division.

2014 Results
Puma’s revenue in the first half of 2014 fell almost 6% from 1.474 billion Euros to 1.386 billion Euros. Volcom and Electric revenue were essentially unchanged at 113 million Euros. Puma’s recurring operating income for the half fell from 109.8 million Euros last year to 70.8 million Euros in the six months ended June 30, 2014. Volcom and Electric’s recurring operating income totaled 100,000 Euros this year after being zero in last year’s six months.
Okay, ALERT! See where it says “recurring operating income,” not just “operating income?”   Most companies seem to do this these days even though every year there’s typically some new nonrecurring item. And of course remember that neither “recurring operating income” nor even plain old operating income is net income. What is the nonrecurring item you might ask?
It’s our old friend the non-cash impairment charge representing a decline in the value and anticipated cash flow of long term assets. On page 58, footnotes 12.2 and 12.3, of Kering’s first half report, they tell us the following:
“Amid increasing pressure on the profitability of Action Sports industry players, and for the purposes of its consolidated interim financial statements for the six months ended June 30, 2014, the Group carried out impairment tests on the non-current assets of the CGUs for which it considered there was evidence of impairment.”
“These impairment tests led to the recognition of a €183.2 million impairment loss against the “Other
Sport & Lifestyle brands” CGU.” Other Sports & Lifestyle brands are Volcom and Electric.
On the positive side, Kering management tells us that the repositioning of Volcom and Electric is starting to work, with an “Improved first half at Volcom with market share gains; solid growth at Electric driven by sunglasses.” Volcom’s wholesale revenues were constant and retail revenues (14% of total revenues) “rose sharply.”   North America generated 64.2% of Volcom’s revenues.
For the June 30 quarter, Volcom/Electric revenue rose 2.1% from 51.9 to 53 million Euros. We are also told that Volcom’s quarterly sales were up 6%, which suggests that Electric’s revenues were down during the quarter.   But we’re also told, “Electric reported comparable-basis sales growth of over 20% in the first six months of 2014, powered by the brand’s major repositioning drive in the accessories market and the complete overhaul of its offering around new ranges of sunglasses, snow goggles and watches.”
I know it’s a bit confusing that Electric’s revenues can be down for the recent quarter when “reported comparable-basis sales” were up 20% for the first six months. Remember we’re talking about three months on one hand and six on the other. Also we don’t know what the difference between revenue and “comparable-basis sales growth” is.
Next, they tell us that “Volcom also registered solid growth in Japan and emerging markets but revenue trends remained negative in Western Europe.” They are hardly the only ones having a hard time in Europe.
We are also reminded that “… these brands’ businesses are extremely seasonal and their recurring operating income is much higher in the second half of the year. As of June 30, 2014, Volcom’s directly-operated store network (Electric does not have any directly operated stores) comprised 51 stores, including 10 in emerging markets.”
We aren’t told what the bottom line on Volcom and Electric is for the six months period. But as we saw above, these two brands had only 100,000 in recurring operating income during that time. Pretty clearly with a charge of 183.2 million Euros the brands lost money in the first half. Kering, with this write down, is recognizing that given the tough market conditions, it paid a bit too much for Volcom.
And that gets us to Volcom’s new brand vision. “Youth Against Establishment, I always thought, was brilliant as a positioning statement. It created a clear vision for Volcom and allowed it to be very successful in its chosen market. But, as ruling a niche always does, it made it difficult to expand beyond the niche. Kering had the resources to help Volcom do just that.
When Kering acquired Volcom I wondered, only half in jest, if Kering might, because of its expertise in luxury brands, somehow take Volcom upmarket and if we might see some form of Volcom products in boutiques. As far as I can tell that hasn’t happened yet, but going from “Youth Against Establishment” to “True to This” certainly creates the possibility.
“Youth Against Establishment” limited the market to, well, young people who perceived themselves as anti-establishment. “True to This” has no such limitation, and I like it because I see no reason it should alienate existing consumers.
The Transworld article reports that Volcom “…is looking to its roots to create a different angle from which Volcom is viewed by consumers and retailers…Co-founder and chairman of the board Richard Woolcott says [the new positioning statement] has been a part of the brand’s philosophy since day one.”
During the question and answer session of the conference call, one analyst asked about combining some parts or products of the luxury division with the S&L division. I took it to mean he was searching for some mutually supportive product opportunities between the two.
Kering management’s answer started with some comments about sharing the same value chain. This seemed largely operational to me. It was focused on the usual synergies and cost efficiencies we always hear about when a smaller brand is acquired by a larger company. I was a bit disappointed by that until they went on to talk about a gradual sharing of experiences and know how in areas like merchandising, design, and fabrics.
So far, Volcom and Electric have not achieved the growth and profitability Kering expected when it bought the brands for a pretty high price. Partly, that has to do with the economy, but it also has to do, as discussed above, with the market positioning both brands had and the difficulty of breaking out from that.
This is an old, ongoing, and increasingly complicated, issue for us. How do you expand distribution and your customer base without alienating your existing customer base? It’s an especially necessary thing to do when you’re part of a public company and have some level of pressure to grow.
As I’ve written, I had some concerns that Kering didn’t quite understand what it had acquired. Now, it feels like they’ve started to figure it out. If risky, the brand repositioning is a necessary first step to achieving some more growth and it feels pretty well thought out. I will watch with interest to see what kind of new products we might see from them and how they might be distributed. Volcom and Electric potentially have value to Kering well beyond what their relative size in the organization suggests. And Kering knows all about high end retailing.
That should be an effective combination.



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