Costa Mesa-based Volcom Inc. has the momentum. But will worries about consumer spending show up in the company’s third-quarter results and bring slower growth down the road?
Company watchers are set to see how the quarter played out for Volcom on Wednesday, when the maker of snow, skate and surf apparel is set to release its earnings report, its second since going public in late June.
Analysts expect Volcom to post $48 million in sales, up 29% from a year earlier, according to Thomson Financial. Analysts expect about $5.6 million in profit in the period.
The apparel maker’s second-quarter sales grew at a torrid 47% pace.
Shares of Volcom, which hit a high of $37 shortly after its initial public offering, have fallen back to about $26 at a recent check. The shares went out at $19.
High gas prices and rising interest rates are starting to eat into people’s extra cash and making Wall Street nervous, said Wedbush Morgan analyst Vera Van Ert.
Worries aside, Van Ert said she expects Volcom to have a good showing when its third-quarter results come out.
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Volcom ski jacket: sales seen rising to 29% in second quarter |
“It’s a great brand with a lot of positive momentum behind it,” she said.
Another analyst, Claire Gallacher of Caris & Co., is on the side of those who follow the company with her projection of $49 million in sales for the quarter.
Even so, Gallacher called her estimate “conservative.”
“The brand is really hot right now,” Gallacher said.
Volcom, which has 180 workers, designs edgy clothes for surfers, skaters and wannabes. It is one of the hottest clothing brands.
Publicly traded rivals include Huntington Beach-based Quiksilver Inc., and Irvine’s Billabong USA, whose parent Billabong International Ltd. trades in its native Australia.
Chief Executive Richard “Wooly” Woolcott declined to comment ahead of Volcom’s earnings.
Volcom said during summer that it expects sales for the second half of the year to grow 25% to 30% compared to a year earlier.
The company has some difficult quarterly comparisons to beat as it gets bigger, analyst Gallacher said.
Plus, she said, the apparel maker got a big boost last year when one of its largest customers, Anaheim-based Pacific Sunwear of California Inc., increased orders. That rampup in sales started in the third quarter of 2004 and is expected to taper off, she said.
“It’s not that their sales are expected to slow because there’s less customer acceptance or consumer demand,” Gallacher said.
The recent pullback in share price is “in accordance with overarching concerns about consumer spending in the fourth quarter,” analyst Van Ert said.
Last week the consumer sentiment index fell more than analysts had expected for October, according to the University of Michigan. National retail sales in September were up a slight 0.2%, compared to a year earlier. That was less than what forecasters were looking for.
“If you look at a lot of consumer stocks, they’re down, especially in the past month,” Van Ert said.
Wachovia Securities and Piper Jaffray both recently upgraded Volcom shares to “outperform” from “market perform.”
Wachovia was lead underwriter on Volcom’s stock offering, with Piper Jaffray a co-manager.
“We believe Volcom is well positioned to benefit from the growing popularity of action sports,” wrote Wachovia analyst Joseph Teklits in a September report.
Action sports include surfing, skateboarding and snowboarding.
The sports have “evolved into a complete lifestyle” that kids and teens have taken to globally, Teklits said.
That popularity has helped fuel local brands, such as Quiksilver, which is on track to post sales of $1.7 billion in 2005.
“The opportunity is a very real one for (Volcom) to grow into a company the size of Quiksilver,” Van Ert said.
Volcom and shareholders sold $89 million worth of stock on June 30, with shares jumping more than 40% on their first day of trading. That made Volcom one of the best stock debuts of the year and gained the company national attention.
Volcom counts a market value of $630 million at recent check.
Like Quiksilver and others in the surfwear industry, Volcom said it plans to make a push in Europe with some of the money it raised in its stock sale.
Plans call for the company to take over its international distribution in the next three years by acquiring distributors or opening its own facilities. It currently licenses out distribution, but those agreements will be expiring, Teklits said.
“International distribution represents a major growth opportunity and remains one of the company’s areas of focus,” Teklits said.
Volcom’s European sales accounted for 28% of sales last year, he said.
Still, there could be some hurdles.
Quiksilver saw its shares fall sharply last week related to a European acquisition. The company warned that its 2006 earnings would fall short of expectations because of its integration of France’s Skis Rossignol SA, which Quiksilver bought earlier this year.
Volcom’s challenge will be to set up its own European operations and integrate them seamlessly, Gallacher said.
Done right, Volcom could see a big pay off.
“The opportunities there are huge,” Gallacher said. “The surf and lifestyle companies are very well accepted in Europe.”
