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Volcom Shares Plummet 29%

Investors send the youth apparel maker's stock down after the firm says it expects sales from its biggest customer, Pacific Sunwear, to decline.

July 29, 2006|Leslie Earnest | Times Staff Writer

Volcom Inc.'s stock plunged 29% on Friday, a day after the youth apparel maker said it expected declining sales this quarter from its biggest customer, Pacific Sunwear of California Inc.

At one point during trading, investors sent the stock down to $18.90, below last year's initial public offering price of $19. Shares closed at $20.04, down $8.36.

It was a stunning comedown for the Costa Mesa company, a Wall Street darling since its first day of trading last summer, when its shares soared 41%.

On Thursday, Volcom reported a 41% increase in second-quarter earnings from a year earlier, exceeding analysts' expectations, and stuck with its full-year profit forecast.

But the company also lowered expectations for the current quarter, saying earnings would probably be 38 cents to 39 cents a share, compared with the 45 cents analysts were expecting. Volcom said it expected revenue from PacSun to drop in the current quarter from the same period a year earlier and to be flat in the fourth quarter. PacSun accounted for 29% of Volcom's revenue last year.

On Friday analyst John Rouleau of Wachovia Securities cut his rating on Volcom to "market perform" from "outperform," citing an "evolving merchandise strategy at Pacific Sunwear and what we believe could be a more conservative outlook from some of the smaller independent board shops."

"We have heard from many of our vendor contacts that PSUN is aggressively pursuing new brands and product and may be revamping its branded denim assortment around more mainstream fashion brands such as Levi," Rouleau said in a report.

"In our opinion, the bottom line on this story is that Pacific Sunwear is officially beginning to scale back its assortment of Volcom product. Whether this is the result of continued weakness in PSUN's total business, a deceleration in Volcom's business at PSUN or a strategic shift toward other brands, it really doesn't matter."

Anaheim-based Pacific Sunwear said Friday that it had not changed its strategy and that it maintained a "strong partnership" with Volcom.

"We continue to support the Volcom brand," spokesman Gar Jackson said. "In fact, they're in the front of our stores right now."

"We've always had a rotating brand strategy," he said. "We've introduced new brands over the past year, but we're by no means getting away from our California surf-skate lifestyle heritage."

He acknowledged that PacSun recently began selling the Levi brand. Other lines it has introduced in the last year include skate-themed Zoo York and the music-inspired Famous brand, he said.

Jackson declined to discuss PacSun's own performance; the company will report its fiscal second-quarter earnings Aug. 10.

Uncertainty involving PacSun is unnerving for the surf and skate apparel industry, which is populated with Southern California manufacturers that rely on the 920-store chain to sell their pants, hoodies, board shorts and T-shirts.

In a generally rising stock market Friday, other companies in the surf and skate industry also saw their shares dip.

Zumiez Inc. of Everett, Wash., which sells many of the same brands as PacSun, fell 95 cents to $31.03. Industry behemoth Quiksilver Inc. of Huntington Beach slipped 16 cents to $12.86. PacSun declined 29 cents to $17.17.

Volcom, in reporting its earnings Thursday, said net income jumped to $6.5 million, or 27 cents a share, in the quarter ended June 30. That compared with $4.6 million, or 24 cents, a year earlier. Sales rose 28% to $46 million.

For the year, the company said it still expected per-share profit of $1.12 to $1.14. Volcom also maintained its earlier revenue projection of $200 million to $203 million, which would be a 25% to 27% increase from 2005.

But unable to get satisfactory clarification about the PacSun sales slump during a Volcom conference call Thursday, investors were left to wonder what was happening, said analyst Claire Gallacher of Caris & Co.

"Because the company wouldn't address what's really going on with PacSun, you've got this huge haircut given to the stock price," said Gallacher, who maintained her "buy" rating on Volcom shares.

She said investors' response would be "a learning experience" for Volcom's management.

"You have a darling status a lot of time when you first go public -- high growth, a lot of profitability," Gallacher said. "Until management makes its first stumble, you get a pretty rich valuation. The darling status is being removed."

Analyst Jeff Mintz of Wedbush Morgan Securities in Los Angeles said he was shocked by how far the stock fell.

"Usually this kind of decline is in response to a significant change in numbers, earnings estimates, etc.," he said. "I can't recall a time a stock dropped this far without some numberrelated news or an acquisition."

On the conference call, Chief Executive Richard Woolcott said the Volcom brand was strong. The company is preparing to take control of its European operations and about to introduce new products, including clothes for younger boys, a full line of sandals and girls swimwear.

Volcom also is at a point at which it makes sense to consider other distribution opportunities, Woolcott said.

But when pressed, he declined to give details about why sales to PacSun were off.

"The business is down -- we've recognized that," Woolcott said. "We're spending a lot of time with the buying teams and management over there working on moving forward."

A Volcom spokesman declined to comment further Friday.

Mintz, who maintained his "buy" rating on Volcom's stock, said management should be more forthcoming.

"They have an obligation to their public shareholders now," he said, "and that obligation includes certain things such as providing some information on the business so the business can be understood."

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