Volcom, Inc. saw much of its second quarter growth from significantly larger orders from Pacific Sunwear, its largest customer. The order increases began in the second half of 2004, and the company expects the back half of the is year to be somewhat more difficult given the high comparable numbers last year. PacSun currently makes up roughly 25% of Volcoms business.
Revenues from Volcoms men's products totaled $21.1 million compared with $14.3 million in the same period last year. Revenue from girl's products were $12.4 million versus $8.5 million in the second quarter of 2004. Boy's revenues totaled $1.5 million compared with $1 million last year.
International product revenue growth outpaced U.S. growth, with International sales, which consist primarily of sales in Canada and Japan, representing 19% of product revenues for the quarter compared with 14% of product revenues for last year's comparable period. Volcom is currently focused on expanding international distribution, primarily in Europe where the company has taken the initial steps to establish its own operations.
The company is seeing strength in denim, with good back-to-school bookings in mens, juniors, and the boy's category. The company is also seeing “a lot of good activity” with zip fleece, specialty t-shirts, sweaters and some of the knit categories.
The second quarter gross margin increase was due in part to the temporarily favorable trade environment with China caused by the removal of quotas. Management noted that this situation may not continue through the remainder of 2005. Moving into the back half, Volcom has accelerated its receipts of holiday merchandise to beat the embargoes in the pipeline. In addition, Volcom has resourced Q4 and Q1 '06 products in countries outside of China, like Macao, Vietnam, Thailand, and India.
The increase in SG&A expenses resulted in a 90 basis point decline in operating margin to 21.3% for the quarter from 22.2% in Q2 last year. Excluding a litigation charge, operating income would have increased 190 basis points to 24.1% of total revenues. The SG&A increase, coupled with a sharp increase in the companys tax rate, led to the decline in net income.
Volcom management stated that as the company develops infrastructure to support growth, SG&A will probably increase as a percentage of sales. Volcom is also incurring more expense as a public company as well as expenses that are related to development in Europe.
Because of the PacSun increases in H2 last year, VLCM management currently anticipates total revenue growth for the second half of 2005 to be between 25% and 30% compared with the last six months of 2004. Full year revenue growth compared to 2004 is expected to be between 34% and 37%.
| Volcom, Inc. | |||
| Second Quarter Results | |||
| (in $ millions) | 2005 | 2004 | Change |
| Total Sales | $35.9 | $24.4 | +47.1% |
| Product Revenues | $35.5 | $24.0 | +47.9% |
| U.S. | $28.7 | $20.4 | +40.7% |
| International | $6.8 | $3.6 | +88.9% |
| Licensing Revenues | $0.4 | $0.4 | -3.4% |
| Gr. Margin | 52.1% | 49.9% | +220 bps |
| SG&A | 30.8% | 27.7% | +310 bps |
| Net Income | $4.6 | $5.1 | -9.5% |
| Diluted EPS | 24¢ | 26¢ | -7.7% |
| Inventories @ Qtr-End | $11.8 | $5.6* | +109% |
| Accts Rcvbl @ Qtr-End | $21.6 | $16.7* | +29.8% |
* at Dec. 31, 2004
