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Headquartered in Costa Mesa, California, Volcom, Inc. (VLCM) is an apparel company focused on designing, marketing, and the distribution of premium quality clothing, accessories, and related products for youth. Volcom's outerwear products include t-shirts, fleece, bottoms, tops, jackets, boardshorts, and denim. Management is concentrating on offering quality products to both boardsport participants and those related to broader action youth-lifestyle sports. The apparel is exclusively designed to incorporate fashion, functionality, and athlete-driven artistic taste. The company also produces and sells both music under Volcom Entertainment and boardsport-influenced films through Veeco Productions. The company operates primarily in the United States (78.3% of revenues in 2006) and in over 40 countries internationally. The company's products are sold through in-house sales personnel, independent sales representatives, distributors, and online. The two operating segments are: 1) the Product Division (sales of music, films, clothes for young men and women, accessories and related products under the Volcom franchise) and 2) the Licensing Division (royalties from licensing the brand in the international markets including Europe, Australia, Indonesia, South Africa, and Brazil). Canada accounted for 11.8% of total sales, Asia-Pacific 3.6% and others 6.1%. The Product Division generated 98% of revenues and the Licensing Division 2%. Volcom Inc. (VLCM) was founded in 1991 by Richard Woolcott and Trucker Hall and was formerly known as Stone Broadwear, Inc. In April 2005, the company was reincorporated in Delaware and was renamed Volcom, Inc. On June 29, 2005, the company completed its initial public offering of 4,687,500 shares at a price of $19.00 per share and was listed on NASDAQ the next day. Wachovia Securities was the sole book-running manager for the offering. In January 2006, the company completed a secondary offering of 5,205,530 shares priced at $34.00 per share. Wachovia Securities was the managing underwriter with D.A. Davidson & Co. and Piper Jaffray acting as co-managers. Management's long-term growth strategy is focused on generating consistent top-line and earnings growth through building brand image, new product introductions, and distribution channel expansion, both domestically and internationally. The strategy has been successful as demonstrated by top-line and operating income growth. Net revenues have expanded at a robust 36.0% compounded annual growth rate (CAGR) over the last five years. In 2006, net sales grew an impressive 28.3% to $205 million, and operating income increased 13.6% to $43.6 million. For 2007, the company is expected to achieve net revenue growth of 34% to 36%. Management believes favorable economic conditions and the rising popularity of boardsports will continue to drive growth of the company's products in future. Management is focused on launching innovative products in order to accelerate growth, increase brand recognition, and gain market share. The brand reflects a combination of art and creativity as well as an action sports youth lifestyle. Volcom's products are well established within its niche and are known for the features of quality, athlete-driven taste, and performance. Two successful product launches are the Modulator Technology boardsport and Zip-Tech outerwear lines. In 2006, the company launched four ranges of summer jackets, belts & wallets by Haculla, a new Volcom Stone Suit, and three varieties of holiday jackets. In addition, the movie Hello JOJO!!! was released in January. Further, a full collection of bedroom slippers, vulcanized slip-ons, and a line of cotton wears for young boys between the ages of 4 and 7 were launched in December 2006. The company also launched women's swimwear, which has been very well received in the market place. Management has strengthened its position in the music, film, and art businesses by issuing new albums by the Riverboat Gamblers and Valiant Thorr. Also, the long awaited movie, Snow Movie Escramble was released during the year along with Lets Live. The company continues to build its featured art program through special product releases, Hitten Switches book tour, and various art shows around the world. In addition, the company is in the process of rolling out a line Volcom comic books, Volcomics, in five cities: New York, Los Angeles, London, Tokyo, and San Francisco. Management seeks to accelerate sales growth through these product extensions. The company's products are supported by a marketing strategy that addresses the action sports youth lifestyle. Volcom markets its products through films, print advertisements in boardsports and fashion lifestyle magazines, and the internet. The company also drives brand development by sponsoring athletes and athletic events (skateboard, snowboard, and surfing), promoting a multi-sport team rider program, organizing branded events, and selectively opening branded retail stores, specifically the 126 La Brea Volcom retail stores. During 2006, the company opened stores in Santa Barbara and San Diego. Management expects to open seven new stores in 2007. Volcom's distribution strategy selectively targets specialty retailers which can merchandise and support the Volcom brand along with providing superior customer service. Management is committed to enhancing the company's brand image through a selective distribution plan. The company enters into collaborative retail partnerships, especially with independent boardsport shops. The customer base of retailers includes 1,350 accounts, operating in 3,900 store locations. Management is augmenting distribution to branded retail outlets in the United States with the recent announcement of distribution agreements with Maurices (a national specialty apparel retailer owned Dress Barn) in the Midwest and Northeast and with Macy's West (subsidiary of Federated Department Stores). The initial stage included the distribution of men's products through 20 Maurices stores and 50 Macy's West stores, and boy's products through 20 Macy's West stores. The company now plans to add up to 25 additional doors to Macy's West. In addition, the company actively seeks feedback from retailers and sales representatives in order to identify ongoing trends, consumer needs, and preferences. Volcom primarily operates in North America with small exposure to other foreign markets. Sales outside the U.S. represent less than 15% of total revenue. Therefore, currency fluctuations do not have a material impact on the company's sales. However, management intends to establish operations abroad by acquiring some of the company's own licenses as the licensing agreements expire. The company maintains a debt free balance sheet and generates strong cash flow. As of September 30, 2007, cash and cash equivalents were $81 million, down slightly from $85 million recorded at the end of 2006. Management does not expect to pay a dividend in the foreseeable future. The company's strategy to expand the product base, to take the European operations in-house, to open new distribution outlets, and to develop other international businesses should result in continuing strong sales and earnings growth.
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