Volcom, Inc. (VLCM)

Q2 2010 Earnings Call Transcript

July 29, 2010 4:30 pm ET

Executives

Hoby Darling – SVP, Strategic Development and General Counsel

Richard Woolcott – Chairman & CEO

Doug Collier – EVP, CFO & Secretary

Jason Steris – President & COO

Analysts

Mitch Kummetz – Robert Baird

Christine Chen – Needham & Company

Jeff Van Sinderen – B. Riley

Claire Gallacher – CapStone Investments

Eric Tracy – FBR Capital Markets

Edward Yruma – KeyBanc

Jonathan Grassi – Longbow Research

Andrew Crum – Stifel Nicolaus

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Volcom Q2 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is recorded. I would now like to introduce your host for today’s conference, Hoby Darling. Sir, you may begin.

Hoby Darling

Good afternoon, everyone, and thank you for joining us today to discuss Volcom's 2010 second quarter financial results. Joining me on the call today are Richard Woolcott, Volcom's Chairman and Chief Executive Officer; Jason Steris, Volcom's President and Chief Operating Officer; and Doug Collier, Volcom's Chief Financial Officer.

First, some housekeeping items before we begin. If you'd like to be added to Volcom's email distribution list to receive Company information or if you would like to change your contact information, please contact PondelWilkinson at 310-279-5973.

In addition, be advised that this conference call is being broadcast live on the Internet at volcom.com, as well as earnings.com and may be available for playback for one year.

Please note that all information discussed on today's call is covered under the Safe Harbor Provisions of the Litigation Reform Act. The Company's discussions today will include forward-looking information reflecting management's current forecast of certain aspects of the Company's future.

In particular statements about the future regarding our guidance, outlook for future business, margins, financial performance, customer demand, growth and profitability all constitute forward-looking statements.

These forward-looking statements are based on management’s current expectations but they involve a number of risks and uncertainties. Actual results could differ materially from those stated or implied by these forward-looking statements. Certain risk factors associated with Volcom’s business are set forth in its Form 10-K and 10-Q.

The Company disclaims any intent or obligation to update these forward-looking statements except as required by law. All forward-looking statements from today's call are qualified in their entirety by the foregoing cautionary statement.

With that said, it's my pleasure to turn the call over to Richard Woolcott, our Chairman and Chief Executive Officer. Richard?

Richard Woolcott

Right, well, thank you, Hoby. And good afternoon, everyone. As we kicked off 2010, we had specific goals in mind that we believed would set Volcom on the right path to achieve our objective in the next five years. Some of our key plans for this year were to

attack and build market share were appropriate; gain floor space in our current distribution; expand our marketing initiatives to maintain and advance our brand message and to deliver great product, not only that sells in but also sells through, further ensuring Volcom is a good business partner for our retailers.

While the macro demand environment was weakened a bit and retailers have become more cautious, I believe Volcom continues to be well-positioned for the future. We have stayed focused on executing our strategic plan and I believe we had made solid progress so far this year. This enthusiasm is based on solid results that we are seeing in many of our key areas of our business.

The backbone of the Volcom business, which we consider to be the U.S. segment, has really gained momentum, especially our men’s and boy’s categories. For the first six months of the year, our U.S. segment revenues grew 15% and in Q2 were up 17%. Our men’s business alone in this segment has been very strong with 33% growth so far in 2010. We continue to gain market share as Volcom appears to be growing above market rates. Our product is as strong as it has been and we are building share at every level of distribution from the core shops to the department stores.

We have talked a lot about our focus on our board shorts program, which is a key category for this time of the year. Reflecting several years of work, Volcom today is among the top brands in this category and sell through reports show that our product is resonating well with customers. Our Proving Grounds campaign continues for the second year and has been very effective at unifying our message and promoting products in this category, including, our grown Creedlers footwear program.

Now, touching on Creedlers, we continue to see traction in both men’s and junior’s. The category has been doing well in the coastal regions with fashion styles hitting the mark for growth and several men’s styles that have become key sellers.

Another target category that has been showing strong results is our denim under the Volcom brand jeans banner. This program has received a lot of attention from a product and a merchandizing standpoint as well as a devoted road-tested denim campaign – marketing campaign. We are actively pushing our denim for the balance of the year to maximize in-store presentation and sell-through.

On the junior’s denim front, we have teamed up with American rock singer, song writer, record producer and designer, Jennifer Herrema, who is offering Volcom signature jeans that will be in stores this fall and holiday. There has been a lot of publicity about this collection and we are very excited to be working with her.

Now, in regards to our overall junior’s business, we believe we are beginning to see some stabilization in the category. This has been a tough area for Volcom as it has been for all of the action sport brands. We have revamped our junior’s team with a new Senior Director of Gross Design and Merchandizing and an additional Junior’s Sales Director.

Along with some other new team members, we are very excited about the ideas this revive group is bringing to the table and believe this will have a positive impact on our junior’s program. The new team has already had an impact on the fall and winter collections but the bulk of their influence will likely be seen in spring 2011 and beyond.

Also targeting the junior’s customer is our growing swim program that has performed well thus far in 2010. Some of you may have attended or heard about the Volcom Swim Fashion Show that was held at the Cooper Design Building in downtown Los Angeles just a few weeks ago. It was a great event and we had a tremendous turn out. Pictures and commentary of this show can be found on our website at volcom.com.

Let me now take a moment to talk about our distribution in the U.S. Overall, the retail landscape is still somewhat choppy. There are some bright spots at all levels of distribution but there also seems to be an inconsistent outlook for the balance of the year. Our business with core shops is generally doing well and continues to grow. However, there are retailers that are still having some difficulties.

In the past quarter, the East Coast seems to outperform the West Coast while some Gulf accounts have been hit by the impact of the oil spill. Hawaii looks to be a bright spot with tourism starting to come back and the central and eastern parts of Canada have been the strongest in the Canadian territory.

As Doug will report, growth in accounts that are not part of our largest five, grew 27% in the second quarter and represented 70% of our U.S. business. Now, while this group is not solely independent core shops, it does include all of our core business and is a good indicator that Volcom is taking market share.

It also appears that our specialty retailers are doing well at Volcom. The men’s and boy’s categories were top performers while junior’s is still somewhat struggling. Working closely with these accounts on marketing and in-store initiatives to help drive sell-through has been a top priority. Our men’s business for Zumiez and (inaudible) is up double digits for the first half of this year. And in PacSun news we have just completed rolling out Volcom displays across the nation in their top 25 Volcom doors. These displays look great and should help drive sales as the back-to-school shopping season gets underway. We are pleased that PacSun has strengthened their brand support and have enjoyed working with their new management team

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