Volcom (VLCM) Earnings

For the essentials look up the press release here is where I think investors will be focusing.

Notes after the Q4 Earnings Release:

Fourth quarter gross profit as a percentage of total revenues increased to 100 basis points to 48.8% from 47.8% in the same period last year. Although gross margin improved for the fourth quarter, it was slightly affected by a generally soft retail environment in the first two weeks of December which affected our at ones re-order business of holiday clothing. The lower level of re-order business increased our year end inventory clearance.

-This is a very bad sign, it indicates that there wasn’t enough demand and they were forced to sacrifice GPM to the benefit of sales.

SG&A expenses as a percentage of sales declined 50 basis points to 26.3% of total revenues compared with 26.8% of total revenues in last years comparable quarter.

-This is a positive.

Operating income for the fourth quarter increased 45.7% and 9.3 million compared with 6.4 million for the same period in 2004. Operating income as a percentage of total revenues increased to 160 basis points to 22.5% for the quarter from 20.9% in the fourth quarter of 2004.

-The company did meet its annual goal of 24% operating profit margins-mark one to the positives.

Here is where things get tricky:

In 2006 we will begin to incur significant costs to set up new European headquarters in the Southwest of France. During the year we will also invest in building infrastructure and will hire additional personnel in preparation of sampling, selling and shipping the fall '07 season. As part of our European strategy we will set up an additional corporation in Switzerland which will hold the license for the Volcom trademarks in the European territory.

In 2006 we anticipate that we will incur approximately 2.5 million in expenses related to our European strategy which will not generate any additional revenue this year however this is an investment for potentially large revenue and earnings growth in the second half of 2007 and beyond. In addition we anticipate the corporation in Switzerland will allow us a reduction in future worldwide income tax expense.

-That 2.5 million will account for essentially $0.06 per share

Guidance:

For 2006 we are forecasting an increase in revenue of 24% to 26% over last year resulting in sales of approximately 198 million to 201 million. Taking into account the costs associated with our investment in Europe of approximately 2.5 million which will reduce EPS by $0.06 for the year we anticipate EPS on a fully diluted basis of $1.10 to $1.12 for the year. Additionally it should be noted that this EPS guidance includes non-cash stock-based compensation expense of approximately $900,000 which equals $0.02 per share.


--Now here is where I believe people are making a mistake. Consensus estimates called for $1.16 per share. Now if you add back both of these items to the low end of guidance, the full year amounts to $1.18. So in fact VLCM raised guidance in the call. For this reason I don’t believe the stock should have been hammered so badly.

For the first quarter we anticipate revenues will increase by approximately 25% to 26% over Q1 of 2005. As you know, Q1 has historic – has historically lower sales volumes than our other three quarters and a lower operating margin. This year Q1 will have disproportionately higher operating expenses which include the rollout of in-store display program which at the beginning of the year that Richard previously discussed. With these factors considered as well as the investment in Europe and non-cash stock base compensation we anticipate fully diluted EPS of $0.13 to $0.14 for Q1.

-This is where the company screwed up. This number is well below estimates but the problem with this is, it is the first quarter of the year for a retailer! Who gives a S#^T? They don’t make any money during this time anyway. The first quarter is the most inconsequential quarter for a retailer and a 15% sell off is unwarranted on this news.

BOTTOM LINE: VLCM earnings for Q4 were spectacular. VLCM projections for the year were good. VLCM projections for the first quarter were bad! So now I am stuck in a tough spot. I like this company and I think that the stock will go higher, but right now I think it is going to do a whole lot of nothing. I don’t anticipate the market being all that great and this stock could struggle until the Q1 earnings announcement, then I think the stock will get back on track. As for now I may start to add to my position as I don’t think there were any glaring negatives in this announcement. The biggest negative was that the company is spending now to build for the future. Not what Wall-St wants but in the end I think shareholders will be rewarded.

By the way on a full year basis this company will beat $1.12 unless SG&A just gets out of control. More on this later. For now I’m done.