Volcom (VLCM)

I have finished my research on VLCM, finally. Tommorow, ideally I will initate 1/3-1/2 of my position in the stock. I am doing it because the company reports earnings on Feb. 14.

First this is my main concern with the company:


The United States and some of the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Under the provisions of the World Trade Organization, or WTO, Agreement on Textiles and Clothing, effective as of January 1, 2005, the United States and other WTO member countries eliminated quotas on textiles and apparel-related products from WTO member countries, including China.
As a result of the eliminated quotas, we experienced lower costs on our imports of finished goods for the first nine months of 2005, which increased our gross margin as a percentage of revenues and our profitability. On May 23, 2005, however, the United States Department of Commerce imposed temporary quotas on imports of three product categories (cotton knit shirts and blouses, cotton trousers and cotton manmade fiber underwear) from China that impact our business. These categories are now subject to quantity limitations. On May 27, 2005, the United States imposed temporary quotas on imports of four additional categories of textile and apparel goods from China (combed cotton yarn, men’s and boys’ cotton and man-made fiber shirts, not knit, man-made fiber knit shirts and blouses, and fiber trousers) that impact our business. These categories are also now subject to quantity limitations. These quotas expire on December 31, 2005. However, on November 8, 2005, the United States and China announced an
agreement to continue quotas on imports of certain of these and other categories of textile and apparel goods that impact our business through December 31, 2008, with slight increases in quantities each successive year. In response to these quotas, we are currently manufacturing less than our recent historical percentage of products in China and we anticipate that these quotas, so long as they remain in effect, will continue to force us to reduce the amount of these products we import from China. If we are unable to obtain sufficient product from countries not affected by the United States’ restrictions or tariffs or from domestic sources, or if the products we obtain from these other countries or domestic sources are of insufficient quality, it could materially adversely affect our gross margin and financial performance.



I know its alot to read but basically, quota's can screw with margins, and that would be a pretty big negative for the company.

One other concern I have is with PSUN (approximately 25% of VLCM's revenue). PSUN has been building inventory and may be forced to mark it down or delay order from VLCM, this worries me. This could hurt VLCM revenue in future periods.

My last concern lies with VLCM guidance. They are normally quite conservative. If we don't get 30% revenue growth projections, the stock could take a hit.

Other than that, this company seems pretty good all around. Inventory growth is outpacing sales but you can't read too much into that yet as the company is very young. Inventory turns remained flat Q over Q. I do not believe that they have a significant amount of markdown risk. Revenue and earnings growth is impecable, 37.6% and 52.5% respecitvely (based on net income growth as opposed to EPS).

As for the fourth quarter I see the company beating both revenue and EPS estimates. At the very least making $0.22 per share.

I am only initiating with a 33 - 50% position as earnings releases are very dangerous and I have only been exposed to VLCM for about a week.

Good luck out there, and lets hope for a VLCM pullback on Friday so I can BUY!