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Kayema Investment Research submits: Volcom Inc. (NASDAQ:VLCM) has an impressive sales growth record with increased revenues from $44.0 million in 2001 to $160.0 million in 2005. Revenues were $87.6 million for the six months ending June 30, 2006, an increase of $20.1 million, or 29.8%, compared to $67.5 million for the six months ended June 30, 2005.

Volcom designs, markets and distributes clothing, accessories and related sports products in the United States and internationally. Its products include t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim and outerwear. The company offers accessories for skateboarding, snowboarding, and surfing. It also offers other accessories such as hats, wallets, ties, belts, and bags.

Continued distribution channel expansion, both domestically and internationally, along with a strong new product effort should support Volcom’s 29% sales growth rate. In our view, the increase in revenues during those periods resulted primarily from increased brand recognition, marketing programs, product designs and product quality, and Volcom's relationships with retailers.

Volcom branded products are currently sold throughout the United States and in over 40 countries internationally by either Volcom or international licensees. As these license agreements expire, Volcom may choose to assume direct responsibility for serving these licensed territories. Volcom is currently establishing its own operations in Europe in anticipation of the December 31, 2006 expiration of a licensing agreement with its European licensee.

Volcom expects to experience a decrease in licensing revenues once the European license agreement expires. It expects an increase in selling, general and administrative expenses while building the necessary infrastructure and hiring employees to establish their own operations in Europe.

However, we anticipate product revenues will start to increase in Europe in the second half of 2007 once Volcom begins to sell its products directly in this territory. Gross margins will be much higher with direct selling as opposed to smaller license fee margins. In mid-2005 the company converted from an S-corporation to a fully taxable company, increasing the tax rate from 1.5% to 48.5%.

On July 28, 2006, Volcom announced that they expect a decrease in sales to Pacific Sunwear, their largest customer, for the three months ending September 30, 2006 compared to the three months ended September 30, 2005. They also expect relatively flat sales to Pacific Sunwear for the three months ending December 31, 2006 as compared to the three months ended December 31, 2005. The projected decrease is due to overall slower than expected sales by Pacific Sunwear.
We believe that this negative outlook has had its effect on the share price.

VOLCOM Inc. (VLCM)
Sector: Apparel & Accessories (Extreme Sports)
Market Cap (mm): $692.4
Price: $28.55
52-Week High: $41.40
52-Week Low: $18.24
Average Trading Volume: 3 Month (mm) 0.07
P/E: 26.3x

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Source: Volcom Aims For Direct Sales