Volcom, Inc. reported a substantial increase in total revenues for the fourth quarter ended Dec. 31 but weak margins and higher expenses resulted in a steep drop in the company’s bottom line.

In a significant development, the company announced in conjunction with its fourth quarter earnings release that it has signed a definitive agreement to purchase the assets from a licensee of the ten existing Volcom outlet stores, a move that management said was essential to preserving the health of the company’s direct business. In a conference call with analysts, Volcom President and CEO Richard Woolcoot estimated the acquired outlet businesses would contribute approximately $4 million to the company’s back half of 2011. 


Expanding on the acquisition, Woolcott added “…as a company, as you are growing, you have to (own) this channel to help with off-price goods. In the long term, it’s better to own it yourself – once the time is right to bring it in.” Woolcott said Volcom plans to add more doors to the outlet business in the future. The transaction is expected to be completed in the middle of 2011.

Regarding quarterly financials, consolidated sales for the maker of alternative-inspired clothing and footwear climbed a robust 22.4% to $78.6 million from $64.2 million a year ago, narrowly outpacing analysts’ projections.

Earnings for the quarter narrowed to $1.6 million, or 7 cents per diluted share, from $3.4 million, or 14 cents per diluted share, in the prior-year period. Much of the decline was due to a 20% increase in SG&A, which was related to “calculated investments in marketing and brand building.” Management added that some of the spike in SG&A was also due to the company’s venture into Australia. Gross margins for the quarter were 45.0% of sales, down 420 basis points from margins of 49.2% of sales in the 2009 comp quarter. Management attributed contacting margins to lower gross margins in the U.S. segment, which were somewhat offset by higher margins in the company’s Electric segment.

Most of the growth was spurred by very solid results from the company’s U.S. business, which accounted for nearly 70% of total sales during the quarter. Management noted that much of the strength within the U.S. segment, which includes the U.S., Canada and Japan, came from the company’s men’s product, which improved 21% to $31.6 million during the quarter. Boys revenue improved 15% to $6.2 million while the company’s juniors’ products, which has been a challenge in recent quarters, edged up 1% to $9l.6 million. Operating earning for the U.S. segment slipped by about half to $1.7 million from $4.0 million in the year-ago period. 

By distribution channel, management noted that revenue for the company’s five largest full-priced accounts (accounting for about 29% of total US sales) increased 19% to $15.4 million. Pacific Sunwear, Volcom’s largest customer, recorded revenue improvement of 31% to $7.9 million in Q4, representing about 15% of U.S. Volcom sales.
Revenues for the company’s Europe business were down 1.3% to $12.8 million while sales to the Australia region (acquired in the third quarter last year) were $5.1 million for the quarter.

Also of note was the company’s Electric brand, which was purchased in 2008.  Management called the performance of the higher margin Electric brand “the bright spot in our business throughout 2010.” Fourth quarter revenue for the Electric brand, which specializes in eyewear, improved 20.5% to $6.4 million on strong results from goggles and softgoods.
Electric recorded an operating loss of approximately $200,000, narrowed from a loss of $814,000 in the prior-year  period.

Regarding outlook, for the 2011 first quarter the company currently expects total consolidated revenue of approximately $83 million to $86 million (representing year-over-year growth of between 7% and 11%), and fully diluted earnings per share amounts in the range of 16 cents to 19 cents per share.

In casting its financial outlook for the full year, Volcom noted it expects total consolidated revenue of approximately $366 million to $371 million (representing year-over-year growth of between 13% to 15%), and fully diluted EPS in the range of $1.08 to $1.14 per share. As noted, the recently-acquired outlet business is expected to add approximately $4 million during the back half of the year.