At a time when many retailers are struggling to clear their shelves, clothing designer Volcom Inc. is expanding its product line.
The Costa Mesa-based company, which makes clothes inspired by surfing, skateboarding, snowboarding and music, said this month that it’s buying San Clemente sunglasses maker Electric Visual Evolution LLC for $25.3 million.
The acquisition will bring Volcom into sunglasses and goggles and give Electric the chance to expand its small clothing line.
“The timing felt right,” said Richard Woolcott, Volcom’s chief executive. “It gives us the ability to compete in categories that we currently do not compete in.”
The move was overshadowed on Wall Street by Volcom’s recent lowering of its fourth-quarter and 2008 outlook, citing the retail slowdown and its own expansion spending.
Volcom now expects fourth-quarter profits of $7 million to $7.3 million, down from an earlier forecast of $7.3 million to $7.8 million. Sales are seen coming in at $67 million to $68 million, down from $70 million to $73 million.
For 2008, Volcom said it sees profits growing 10% and sales by 18%.
The company’s stock has plunged since October, down about 50% last week on a market value of $500 million.
“I’m not entirely thrilled with the timing” of the buy, Mitch Kummetz, analyst at Robert W. Baird & Co., said. “Probably a better use of their capital would have been to buy back their own stock.”
Woolcott said he believes the combination of the two companies will help long-term growth by building on their similarities. The two share many of the same sales representatives and sponsor some of the same professional athletes, he said.
“You can’t plan when these things come available,” Woolcott said.
Timing aside, Kummetz said he liked the “combination” of the two companies. Both are hip and have a strong following.
Diversifying Products
Jeff Mintz, analyst at Wedbush Morgan Securities, said the deal will help Volcom diversify into more products.
The company has worked in the past year to widen its offering, including introducing women’s swimsuits, sandals and clothing for boys ages 4 to 7 years old.
“This acquisition provides strong growth opportunities for Volcom,” Mintz said in a recent report. “The eyewear category is probably the most important accessory category in the action sports world.”
And Volcom could help Electric develop the clothing side of the business, which is now about 15% of sales, Kummetz said.
“There’s an opportunity for Volcom to put some capital behind Electric and help them continue to take market share in eyewear,” Kummetz said.
Electric, known for its lightning bolt logo, makes sunglasses, goggles, T-shirts, sweatshirts, bags, hats, belts and other accessories.
Electric’s cofounder Kip Arnette has a pedigree in sunglasses: His father, Greg Arnette, started Arnette Optical Illusions Inc., which was bought by Bausch & Lomb Inc. and later Luxottica Group SPA.
Kip Arnette worked at Arnette Optical and left after the 1999 Luxottica buy to start Electric Visual.
Arnette and other Electric Visual owners could earn an additional $21 million in the sale to Volcom if they meet goals in the next three years.
The sunglasses maker employs 35 workers at its San Clemente headquarters, which will remain. The company’s executives will stay on and run it, Woolcott said.
Electric also has offices in France, Spain, Australia and New Zealand.
The biggest challenge now for Volcom will be facing the current retail environment, which has been tough on some sellers of Volcom garb, including its largest customer Anaheim-based Pacific Sunwear of California Inc.
The company expects its sales to PacSun to drop 10% in 2008.
“If we continue to see a weakening consumer and retail gets even more challenging that’s going to take it’s toll on Volcom’s business as well as Electric’s,” Kummetz said.
Volcom has taken a page from OC’s biggest surfwear makers, such as Huntington Beach-based Quiksilver Inc. and Irvine’s Billabong USA. Both have bought smaller edgy labels over the years in a bid to drive sales.
“You can leverage the infrastructure of the company and plug in smaller brands and take those brands to the next level,” Kummetz said. “That’s what Volcom intends to do with Electric.”
Volcom’s Woolcott said the company will keep its eyes open but has no immediate plans for other buys.
“If an opportunity comes up we will look at it,” Woolcott said. “But there is no time frame.”
