Volcom, Inc. posted strong sales and earnings gains for the second quarter, but the real story was a warning that Pacific Sunwear, the company’s largest customer, was not going to be providing the same level of top-line support in the future, forcing them to temper third quarter expectations. The news was met with a sell-off by The Street, as the stock fell 26.5% for the week to close at $20.04 on Friday. On a brighter note, the company is introducing three new product extensions with sandals, cut-and-sew kids clothing, and women’s swim in the near future.

For the second quarter, total revenues increased 28% to $46.1 million from $35.9 million last year. Men’s product revenues increased 20% to $25.4 million, while girl’s products increased 33% to $16.5 million and boy’s revenues increased 103% to $3.1 million. Revenue from the company’s top five accounts increased 26% to $21.9 million, accounting for 48% of product revenue, while revenue from core accounts increased 30% to $23.6 million. Product revenues in the U.S. totaled $36.8 million, up 28.2%, while International product revenues were up 27.9% to $8.7 million.

Second quarter gross margins were down 230 basis points to 49.8% of sales, compared to 52.1% of sales in Q2 2005. SG&A expense decreased 210 basis points to 28.7% of total revenues. Net income increased 41% to $6.5 million, or 27 cents per share, compared to $4.6 million or 24 cents per share in Q2 last year, hampered somewhat by a slightly increased tax rate.

Revenues from PacSun increased 26% to $13.4 million accounting for 29% of total product revenue. However, looking ahead, management expects revenue from PacSun for Q3 to decrease and for Q4 to be flat to last year. By mixing in the new product extensions, management feels they will account for the dropped revenues from the teen retailer.

The company anticipates total revenue will increase by 16% to 17% in the third quarter with diluted EPS of 38 cents to 39 cents for Q3. For the full year the company is maintaining its earlier guidance of a 25% to 27% revenue jump, resulting in sales of $200 to $203 million with EPS of $1.12 to $1.14 per fully diluted share.