Volcom Inc. (VLCM), a leading designer, marketer and distributor of apparel, delivered lower-than-expected second quarter 2010 results that were in line with management’s guidance.
Despite growth in top line, quarterly net earnings plunged to $68 million (or break-even per share) compared with $872 million (or 4 cents a share) in the prior-year period due to rising costs and unfavorable foreign currency translation. Quarterly earnings also missed the Zacks Consensus Estimate of 4 cents a share.
Costa Mesa, California-based Volcom forecasts its third quarter fiscal 2010 earnings of 47−51 cents a share, well below the current Zacks Consensus Estimate of 62 cents.
Total revenue for the quarter jumped 15.4% to $62.5 million from $54.2 million in the year-ago period but missed the Zacks Consensus Estimate of $63 million.
Volcom projects a revenue target of $102−$105 million for the third quarter of fiscal 2010.
On a year-ago basis, gross profit grew 12.9% to $29.8 million, but gross margin contracted 90 basis points to 47.7% in the quarter, reflecting incentive pricing. The company continued with a high inventory to meet reorders and thus increase market share. Moreover, low margin sales were higher in the quarter than the year-ago quarter.
In terms of segments, revenue at U.S. (which includes revenues from the U.S., Canada, Japan and many other territories outside of Europe, as well as the company’s branded retail stores) surged 16.5% to $50.8 million, revenue at Europe grew 13.6% to $5.1 million, and revenue at Electric surged 40.0% to $6.6 million, compared with the second quarter of 2009. In the quarter, the Electric segment remained strong.
The company exited the quarter with cash, cash equivalents and short-term investments of $110 million and no long-term debt. At the end of first half of fiscal 2010, the company’s operating cash flow plunged 73% year over year to $4.4 million.
Volcom continued to focus on executing its five-year (2010−2014) strategic plan and remained on track at the end of the quarter. The company expects to achieve total revenue of $550 million, gross margin of 50% and operating margin range of 15%−20% by the end of 2014, on the back of an increase in market share, expansion of floor space, enhancement of marketing initiatives, and build brand image.
Volcom shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. However, our long-term recommendation for the stock remains Outperform.
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