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Executives

Hoby Darling – SVP, Strategic Development and General Counsel

Richard Woolcott – Chairman & CEO

Doug Collier – EVP, CFO & Secretary

Jason Steris – President & COO

Analysts

Mitch Kummetz – Robert Baird

Christine Chen – Needham & Company

Jeff Van Sinderen – B. Riley

Claire Gallacher – CapStone Investments

Eric Tracy – FBR Capital Markets

Edward Yruma – KeyBanc

Jonathan Grassi – Longbow Research

Andrew Crum – Stifel Nicolaus

Volcom, Inc. (VLCM) Q2 2010 Earnings Call Transcript July 29, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Volcom Q2 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is recorded. I would now like to introduce your host for today’s conference, Hoby Darling. Sir, you may begin.

Hoby Darling

Good afternoon, everyone, and thank you for joining us today to discuss Volcom's 2010 second quarter financial results. Joining me on the call today are Richard Woolcott, Volcom's Chairman and Chief Executive Officer; Jason Steris, Volcom's President and Chief Operating Officer; and Doug Collier, Volcom's Chief Financial Officer.

First, some housekeeping items before we begin. If you'd like to be added to Volcom's email distribution list to receive Company information or if you would like to change your contact information, please contact PondelWilkinson at 310-279-5973.

In addition, be advised that this conference call is being broadcast live on the Internet at volcom.com, as well as earnings.com and may be available for playback for one year.

Please note that all information discussed on today's call is covered under the Safe Harbor Provisions of the Litigation Reform Act. The Company's discussions today will include forward-looking information reflecting management's current forecast of certain aspects of the Company's future.

In particular statements about the future regarding our guidance, outlook for future business, margins, financial performance, customer demand, growth and profitability all constitute forward-looking statements.

These forward-looking statements are based on management’s current expectations but they involve a number of risks and uncertainties. Actual results could differ materially from those stated or implied by these forward-looking statements. Certain risk factors associated with Volcom’s business are set forth in its Form 10-K and 10-Q.

The Company disclaims any intent or obligation to update these forward-looking statements except as required by law. All forward-looking statements from today's call are qualified in their entirety by the foregoing cautionary statement.

With that said, it's my pleasure to turn the call over to Richard Woolcott, our Chairman and Chief Executive Officer. Richard?

Richard Woolcott

Right, well, thank you, Hoby. And good afternoon, everyone. As we kicked off 2010, we had specific goals in mind that we believed would set Volcom on the right path to achieve our objective in the next five years. Some of our key plans for this year were to

attack and build market share were appropriate; gain floor space in our current distribution; expand our marketing initiatives to maintain and advance our brand message and to deliver great product, not only that sells in but also sells through, further ensuring Volcom is a good business partner for our retailers.

While the macro demand environment was weakened a bit and retailers have become more cautious, I believe Volcom continues to be well-positioned for the future. We have stayed focused on executing our strategic plan and I believe we had made solid progress so far this year. This enthusiasm is based on solid results that we are seeing in many of our key areas of our business.

The backbone of the Volcom business, which we consider to be the U.S. segment, has really gained momentum, especially our men’s and boy’s categories. For the first six months of the year, our U.S. segment revenues grew 15% and in Q2 were up 17%. Our men’s business alone in this segment has been very strong with 33% growth so far in 2010. We continue to gain market share as Volcom appears to be growing above market rates. Our product is as strong as it has been and we are building share at every level of distribution from the core shops to the department stores.

We have talked a lot about our focus on our board shorts program, which is a key category for this time of the year. Reflecting several years of work, Volcom today is among the top brands in this category and sell through reports show that our product is resonating well with customers. Our Proving Grounds campaign continues for the second year and has been very effective at unifying our message and promoting products in this category, including, our grown Creedlers footwear program.

Now, touching on Creedlers, we continue to see traction in both men’s and junior’s. The category has been doing well in the coastal regions with fashion styles hitting the mark for growth and several men’s styles that have become key sellers.

Another target category that has been showing strong results is our denim under the Volcom brand jeans banner. This program has received a lot of attention from a product and a merchandizing standpoint as well as a devoted road-tested denim campaign – marketing campaign. We are actively pushing our denim for the balance of the year to maximize in-store presentation and sell-through.

On the junior’s denim front, we have teamed up with American rock singer, song writer, record producer and designer, Jennifer Herrema, who is offering Volcom signature jeans that will be in stores this fall and holiday. There has been a lot of publicity about this collection and we are very excited to be working with her.

Now, in regards to our overall junior’s business, we believe we are beginning to see some stabilization in the category. This has been a tough area for Volcom as it has been for all of the action sport brands. We have revamped our junior’s team with a new Senior Director of Gross Design and Merchandizing and an additional Junior’s Sales Director.

Along with some other new team members, we are very excited about the ideas this revive group is bringing to the table and believe this will have a positive impact on our junior’s program. The new team has already had an impact on the fall and winter collections but the bulk of their influence will likely be seen in spring 2011 and beyond.

Also targeting the junior’s customer is our growing swim program that has performed well thus far in 2010. Some of you may have attended or heard about the Volcom Swim Fashion Show that was held at the Cooper Design Building in downtown Los Angeles just a few weeks ago. It was a great event and we had a tremendous turn out. Pictures and commentary of this show can be found on our website at volcom.com.

Let me now take a moment to talk about our distribution in the U.S. Overall, the retail landscape is still somewhat choppy. There are some bright spots at all levels of distribution but there also seems to be an inconsistent outlook for the balance of the year. Our business with core shops is generally doing well and continues to grow. However, there are retailers that are still having some difficulties.

In the past quarter, the East Coast seems to outperform the West Coast while some Gulf accounts have been hit by the impact of the oil spill. Hawaii looks to be a bright spot with tourism starting to come back and the central and eastern parts of Canada have been the strongest in the Canadian territory.

As Doug will report, growth in accounts that are not part of our largest five, grew 27% in the second quarter and represented 70% of our U.S. business. Now, while this group is not solely independent core shops, it does include all of our core business and is a good indicator that Volcom is taking market share.

It also appears that our specialty retailers are doing well at Volcom. The men’s and boy’s categories were top performers while junior’s is still somewhat struggling. Working closely with these accounts on marketing and in-store initiatives to help drive sell-through has been a top priority. Our men’s business for Zumiez and (inaudible) is up double digits for the first half of this year. And in PacSun news we have just completed rolling out Volcom displays across the nation in their top 25 Volcom doors. These displays look great and should help drive sales as the back-to-school shopping season gets underway. We are pleased that PacSun has strengthened their brand support and have enjoyed working with their new management team

Turning to the department store level, we are also happy with our progress. The Macy’s business is doing particularly well especially in men’s and boy’s. Volcom has become the top – among the top surf, skate brand in men’s, boy’s and kids and we believe this is due to an increased focus on our merchandising and our marketing efforts.

Finally, I would like to discuss our direct to consumer business. Sales in our 10 Volcom branded retail stores has been improving as the stores are doing a great job showcasing both Electric and Volcom. We recently opened our 10th international licensed Volcom store in Calgary, Canada and the response has been fantastic. Our new volcom.com, which will include an ecommerce platform is now set to launch in Q3. We have delayed the launch just a little bit to make sure that the experience will be as strong as possible. I am excited to get this part of our business in motion and look forward to seeing how our consumers interact with the new platform.

Let me now take a moment and highlight our Electric business. During the downturn of the last year and a half, the Electric team continued to focus on strengthening both its product and marketing and that strategy is now paying off. The brand is strong, the product is outstanding, and the company is operating more efficiently.

In the second quarter, sunglasses performed very well in the North American core channels and other major accounts. The bag [ph] program continues to be a great new category and the soft goods penetration in both core and major accounts has been increasing. All three product categories, namely, sunglasses, snow goggles, and soft goods, should perform well in the coming months, backed by progressive print and online advertising, in-store displays, strategic marketing, and superior service. The fall product line-up includes several new sunglasses as well as the debut of three new snow goggles that address specific demographics and should help build momentum to positively influence bookings for 2011.

I’d now like to take a moment to talk about our global operations and will start with Europe. Generally speaking, the environment in Europe has been somewhat challenging but our Volcom business has held steady for the past several quarters. France, Germany, Austria, and Spain are top territories with German y and Austria showing some growth. Italy, Norway and Switzerland are holding steady while the U.K. is a notable bright spot. Eastern Europe is still having tough time and Greece is still struggling.

Our discussion in Europe has not changed significantly and our plans to maintain this distribution this year remain intact. As we have previously mentioned, we are experimenting with some new distribution in Spain and France but our primary focus now is less on expanding distribution and more on being increasingly productive in the doors that we are already in.

Turning to other international operations. Volcom Japan is still experiencing a soft economy at the macro level. Despite these conditions, we continue to make investments to modernize the organization, including an increase in back office headcount, a new ERP system, a third-party warehouse and new office space right in the heart of Tokyo. We have also initiated a visual merchandizing department during the second quarter and have begun making rounds throughout our distribution network. Our goal is to maintain our position at the core while achieving growth in other channels of distribution.

Our licensees have been holding their own in the territories around the world including Brazil, Indonesia, South Africa and Argentina. Last week, we announced that we are acquiring our licensee in Australia. This move has been in our sights for some time and we are excited to now have this team under the Volcom umbrella. This is an extremely important territory for the company and is the right time to strengthen our operations in order to better compete with the larger brands in this space.

Now looking ahead, we know our success will continue to stem from the strength of the strength of the Volcom and Electric brands as well as our obsession with product merchandizing and in-store presentation. Additionally, our marketing teams have been relentless in their many efforts to promote the brand. This includes to let the kids write free contests, in-store events, advertising, PR focus and music tours as well as new sponsored events such as the Volcom pipeline pro and the move money cup skateboard championships.

Finally, our team rider program is as strong as ever with world-class athletes supported by committed staff of managers and coaches. We are confident that this is the right time to make strategic investments in our sales and marketing initiatives as well as infrastructure in order to position our company for longer term growth in revenue and profitability. We believe that investing now will serve us well when the recovery really begins to turn off [ph]. We know we have a lot of work to do and we are prepared to attack the challenges ahead. We have laid our growth plan and intend to be unwavering as we pursue our objectives. I am very proud of what our team has accomplished so far and look forward to the months ahead as back-to-school kicks in the trade show season gets underway.

I would like to extend my sincere appreciation to the entire Volcom family, our team riders, retailers and shareholders for their continued support and dedication to this now [ph].

I would now like to turn the call over to Doug to review our financial results for the second quarter. Doug?

Doug Collier

Thanks, Richard, and good afternoon, everyone. The smooth economic recovery that many had anticipated has yet to fully materialize and the cautiously optimistic second half outlook for many retailers seem to have been dialed back somewhat. However, almost all of our retailers agree that the economic conditions have stabilized and for some business is improving.

At Volcom, we are still cautiously optimistic based on the solid Q2 results and key aspects of our business and the strength of our brands. In our U.S. segment, which accounts for 80% of consolidated revenue for Q2, business was up 17% for the quarter.

Revenue from our men’s division in this segment by far our largest product, volume product category, was up 38% for the quarter. Also in the U.S., business outside our five largest accounts was up 27% in Q2. This growth is generally well above that of our major competitors, which we believe indicates we have been successful in our thrust to gain market share.

At Electric, second quarter revenue was up a remarkable 41% as the sunglass category began to recover in retail as the Electric brand gained market share within its distribution. Looking at the bigger picture, we believe we are on track toward the achievement of our five-year plan. It is our belief that by the end of 2014 we can build consolidated revenue to approximately $550 million while maintaining a gross margin of approximately 50% and improving operating margin to historical levels of 15% to 20%.

The seven key drivers behind this plan are as follows

one, focus on exceptional and innovative Volcom product; two, achieve operational excellence throughout our organization; three, keep Volcom the hottest brand in action sports through effective marketing; four, maximize our wholesale and distribution; five, consciously increase our direct-to-consumer business including ecommerce; six, drive our international growth and increase our international presence to become a truly global company; and seven, grow the Electric brand.

I will now review our financial results for the second quarter ended June 30th, 2010, which, on a consolidated basis was in line with our previously provided financial guidance. For Q2, consolidated revenue increased 15% to $62.5 million compared with $54.2 million in Q2 of ’09.

Let me now break down our second quarter revenue by each of our three business segments: the U.S., Europe, and Electric. First, let’s look at the U.S. segment, which includes revenue from the U.S., Canada, Japan, and most other international territories outside Europe as well as our domestic Volcom branded and (inaudible).

Total revenue from our U.S. segment including royalties for the second quarter increased 17% to $50.8 million compared with 43.6% – with $43.6 million in Q2 of 2009. The breakdown of the U.S. segment product revenue in Q2 by categories is as follows. Our men’s product revenue increased 38% to $32.8 million for Q2 compared with $23.8 million in the second quarter of 2009. As we saw in the first quarter, we continued to see strong growth in this category. We believe this higher than market growth clearly indicates market share gain.

Our Junior’s product revenue decreased 22% to $9.4 million versus $12.1 million in the second quarter of last years. Junior’s continues to be a tough category for Volcom as well as for most action sports brands. We believe the infrastructure changes within our Junior’s department, which Richard discussed earlier, coupled with an updated product direction will stabilize this category and help us return to growth. Also, we continue to work closely with our retailers to build back our Junior’s business.

Boy’s revenue, which includes our Kids line, increased 20% to $5.2 million, compared with $4.3 million in the second quarter of 2009. This is another key category where we believe we continue to gain market share.

Revenue from our girl’s swim line was up 32% to $1.6 million versus $1.2 million in Q2 of 2009. Revenue from our Creedlers footwear line was up 9% to $1 million versus $927,000 in the 2009 second quarter.

International product revenue, which is reported as part of our U.S. segment and consists primarily of sales in Canada and Japan, and does not include licensing revenue, increased 14% to $14.3 million, or 28% of our U.S. segment product revenue for the quarter compared with $12.5 million or 29% for Q2 last year.

Looking at our U.S. segment by distribution channel, revenue from our five largest accounts decreased 2% to $15.3 million in the second quarter, representing 30% of U.S. segment product sales. In Q2 of 2009, revenue from our five largest accounts was $15.6 million and represented 36% of U.S. segment product sales. Sales to the top five accounts have trended much better in recent quarters and we have focused strategies for each account to maintain this momentum.

Revenue from PacSun, our largest account, decreased 2% to $8.7 million for the quarter or 17% of U.S. segment product revenue. This was generally in line with our expectation of flat compared to Q2 last year. In 2009, second quarter revenue from PacSun was $8.9 million, or 21% of our U.S. segment product revenue. Excluding PacSun, revenue from our next four largest accounts also decreased 2% for the quarter.

In Q2, revenue from outside our five largest accounts, which represented 70% of U.S. segment product revenue for the quarter, increased 27% to $35.2 million. In the second quarter of 2009, revenue from the same group was $27.6 million, representing 64% of total U.S. segment product revenue. Volcom continues to perform well within this diverse account base, which includes core riding shops, which are extremely important to maintaining the authenticity of the Volcom brand.

Now, let’s look at revenue from the Europe segment. In Q2, revenue from the Europe segment decreased 13% to $5.1 million compared with $5.9 million in Q2 of last year. Second quarter revenue decreased primarily due to the difficult macroeconomic environment in Europe during the selling season versus spring 2010 and a decrease in the FX rate used to translate sales in euros to U.S. dollars. Also, this year we chose not to move forward with a large retailer in Norway that accounted for a significant portion of revenue in that territory.

On a euro to euro basis, revenue in Europe decreased 9%. In Q2, revenue by category in Europe is as follows: men’s decreased 11% to $3.7 million compared with $4.1 million in Q2 of 2009. Junior’s decreased 25% to $1.1 million compared with $1.5 million in ’09. Boy’s was $148,000 compared with $124,000 a year earlier. Creedlers was $95,000 versus $69,000 and girl’s swim was $10,000.

Finally, revenue from our third business segment, Electric, increased 41% to $6.6 million compared with $4.7 million in Q2 of 2009. The overall sunglass category has shown some recovery in the Electric brand supported by innovative new product and progressive marketing programs has, we believe, clearly been gaining market share. Also the Electric soft kids program has advanced as synergies with Volcom continue to be realized.

Turning to gross margin, on a consolidated basis, Q2 gross profit as a percentage of total revenue was 47.7% compared with 48.6% in the same period of 2009. In our U.S. segment, Q2 gross margin on product was 46.6% compared with 48.2% in Q2 last year. This decrease was primarily due to incentive pricing, which is part of our strategy designed to gain market share during the spring and summer selling periods. Also, we are carrying more inventory in an effort to capture additional in-season reorders. Our low margin liquidation sales were higher than in Q2 of last year.

In our Europe segment, gross margin increased to 46.1% versus 44.8% last year primarily reflecting a greater percentage of sales directly to retailers and a lesser percentage of sales to territory distributors than in Q2 of last year.

Gross margin in the Electric segment grew to 53.9% compared with 52.8% in Q2 of 2009, primarily due to the lower purchase cost of sunglasses made in Italy as the FX rate of the euro dropped compared to the U.S. dollar.

Selling, general and administrative expenses on a consolidated basis were $29.8 million in the second quarter of 2010 versus $25.9 million for the same period in 2009. As a percentage of sales consolidated SG&A expenses were approximately 47.6% of total revenue for the second quarter of 2010 compared with 47.7% for the same period in 2009.

For the U.S. segment, total SG&A expenses were $21.4 million or 42% of revenue. In Q2 last year, SG&A was $17.9 million or 41% of revenue. This increase primarily reflects additional expenses related to marketing, in-store displays, and personnel cost as well as other programs to increase market share.

For the Europe segment, SG&A expenses in Q2 were $5.3 million compared with $4.8 million in Q2 of ’09. In our Electric segment, SG&A expenses remained flat year-over-year at $3.1 million.

Consolidated operating income for the second quarter was $67,000 with operating margin of less than 1%. In the second quarter of 2009, the company reported operating income of $504,000, and operating margin of 1%.

U.S. segment operating income for the second quarter decreased 24% to $2.5 million compared to $3.3 million last year, reflecting lower gross margin and increased expenses previously discussed. Europe segment operating loss for the 2010 second quarter was $2.9 million compared with a loss of $2.2 million in the second quarter last year. Electric segment operating income for the second quarter was $447,000 compared with a loss of $593,000 last year.

On a consolidated basis, the company recorded a provision for income taxes for the second quarter using a 32% annual effective tax rate. Consolidated net income for the second quarter of 2010 was $68,000, equal to breakeven per share. This compares with net income of $872,000 or $0.04 per diluted share in the second quarter of 2009.

Let me now take a minute to discuss the strength of Volcom’s balance sheet. At June 30th, 2010, the Company had approximately $110 million in cash and short term investments. We have no long-term debt; stock holders’ equity of $222 million; and a current ratio of 7:1.

Consolidated accounts receivable increased 4% to $50.3 million at the end of Q2 compared with $48.5 million at June 30th, 2009. The consolidated accounts receivable balance at June 30th, 2010 represents days sales outstanding of 65 days compared with 71 days at the end of the second quarter of 2009.

Consolidated inventory increased 15% to $34.8 million compared with $30.2 million a year before. As discussed on our last call, we are generally carrying slightly higher inventory levels of current products to fulfill potential in-season business. These products are generally from our season to season carryover programs.

On a consolidated basis, the inventory turn rate calculates to four times per year or once every 91 days. Inventory turns calculated to 4.3 times per year at the end of Q2 2009 or once every 85 days.

I will now turn to our financial outlook for the third quarter of 2010. Retailers continue to be cautious as they look forward towards the balance of the year. However, we feel confident that the strength of the Volcom and Electric brands and our strong sell through at retail will continue to allow us to gain market share.

With this in mind, we project consolidated 2010 third quarter revenue to be between approximately $102 million and $105 million. This includes anticipated revenue of approximately $62 million to $65 million from the U.S. segment, approximately $29 million from our Europe segment, approximately $9 million from Electric, and approximately $2 million from Australia, representing projected revenue for two months.

Due to the recent labor shortages in China, we currently expect some delays in delivery of our Snow products. Our guidance reflects these projected delays resulting in a push back of Snow revenue from Q3 to Q4 equal to approximately one million in the U.S. and approximately 1.5 million in Europe. This revenue push back is also expected to result in a push back of EPS of approximately $0.03 from Q3 to Q4.

In Q3, we project revenue from PacSun to be flat compared to third quarter ’09 at approximately $6.5 million. Consolidated EPS for Q3 of 2010 is anticipated to be approximately in the range of $0.47 to $0.51. We expect the Q3 tax rate to be approximately 32%. Fully diluted shares outstanding for the third quarter are expected to be approximately 24.4 million.

As described on our last call, our target consolidated gross margin for 2010 is approximately 50%. Projected SG&A expense on a consolidated basis for the year is expected to be approximately $126 million. Of this amount, approximately $3 million is attributable to the operations of Volcom Australia. For the back half of the year, revenue from Australia is projected to be approximately $7 million and we forecast the impact of the Australia acquisition to be earnings neutral for the year.

Also, in Europe, due to the uncertain economic environment during the selling period for the holiday 2010 line, we project revenue on a euro to euro basis to be up slightly compared to last year. Also, on a U.S. dollar basis, we project revenue from Europe to decrease approximately 9% for the back half of the year.

In putting forth this guidance, we want to remind everyone of the complexity of accurately assessing future earnings and revenue growth given the challenging economic and credit environment, the difficult in predicting sales of our products by key retailers including PacSun, changes in fashion trends and consumer preferences and souring costs.

As the economic environment continues to improve we believe that Volcom, with its worldwide brand strength, quality products, solid cash position and dedicated team of employees, athletes, sales reps and distributors around the globe is one of the best positioned action sports companies in the world.

Now, we’ll open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Mitch Kummetz from Robert Baird.

Mitch Kummetz – Robert Baird

Yes, thank you. Also got a few questions. May be starting with you, Doug, on your outlook for the third quarter, as I try to pencil all these numbers into my model, it looks like you would expect some gross margin pressure there. I think down year-over-year, is that accurate?

Doug Collier

That is. I think especially when you look at the U.S. segment kind of the comparison to last year that we saw in Q2 I think that’s kind of what we can expect for the rest of the year sort of quarter to quarter compared to last year.

Mitch Kummetz – Robert Baird

Okay. And is that a function of some of the things that impacted the second quarter in terms of incentive pricing and then may be some higher liquidation sales? Are you expecting higher –?

Doug Collier

I think we will continue to see that, yes.

Mitch Kummetz – Robert Baird

Okay. And then on your sales performance in the second quarter, I mean the guys business was up huge, what did you say 38% in the U.S.? Could you talk a little bit, may be Jason could talk a little bit about the drivers behind that. I know, Richard, you talked you talked about the board shorts program. I am just wondering how much of a contributor to that growth was board shorts. I mean how much growth are you seeing in that category? How important is that category for the second quarter and then what would be some of the drivers for the guys business? And in the back half I would assume denim will be a big part of that.

Jason Steris

Yes, hey, Mitch, Jason here. Definitely thinking about it the right way. When we kind of geared up for the first half of the year when we were booking in our spring and summer seasons the major focus around the men’s business was the board shorts and with our second year Proving Ground advertising campaign and just our overall selling package with our account base was much more aligned this year with the marketing and the in-store displays we just rolled out several sport short racks during Q2 and just really trying to connect the dots on that category.

So, we did see a significant increase in that specific category in terms of growth, but I think just across the board when you look at the entire men’s division, as well as the board short racks, we put a lot of focus and investment into the in-store real estate and that’s across the nation and I think we’ve been seeing a lot of the results and all the photos come through most recently of all the sections that we either updated or expanded on or put a new section and that’s just a part of our strategy of taking market share and expanding on our in-store real estate. So as we move into future seasons we’ve got a bigger space allocation in each of those stores. So predominantly that was based around the men’s program of having the right product, having the right selling tools and then having the – being in a position to expand on our in-store real estate, which was I’d say the big driver of all the components.

So, as we go into the back half, we are switching gears right now, we are switching over from Proving Grounds Volcom brand jeans which encompasses the Road Tested campaign and you will see that run through windows, sections. We’ve already got some of our freestanding sections in a lot of our stores throughout the website; we have the team rider testimonials on our website and working on some of our retailers. We actually have a major skate tour coming up here in the next couple of weeks, which is probably the largest skate tour we’ve ever done. It’s going to have about eight stops around the country.

At skate parks, we’ll incorporate some of the local shops at that point depending on the area. All Volcom brand jeans branded, the product in terms of pricing tiers we’ve expanded on that a little bit in that fall ’10 package for both men’s and women’s. So the product is at its best. The in-store presentation at its best. (inaudible) tied in and this isn’t just the U.S. this is other parts of the world are tapped into this. So, the global unification of this category is – probably coming together better than it ever has in the past and this is – I will just mention to this it’s our second year with the same Volcom brand jeans campaign.

So just kind of building on the success and just getting better at connecting the product, the marketing, and the sales teams for the selling and then all the way through to the sell through. So, overall, we are really excited.

Mitch Kummetz – Robert Baird

Okay, that’s helpful. And then last question, you know, Doug I appreciate the color you gave on Australia in the back half. Could you may be just elaborate a little more in that business, how does it look on an annual basis and can you give us sort of your sale number on a trailing basis? And how does the margins compared to kind of where your corporate average is now? And if you can say what you paid for it? May be talk a little bit about kind of what the opportunities are there to grow that business. I know you’ve been working pretty closely with that licensee over the last – I guess the last couple of years, you finally working closely with them since you started that license. But talk a little bit about where the opportunities are to grow that business.

Doug Collier

Yes, Mitch, maybe I will start off and then may be Rich can give you a little more color. We only get too far ahead of ourselves for like you said we’ve been working with them for quite a while so it almost seems more like a transition and you know really just a straight acquisition. But we are not all the way there yet. We got the deal signed and we look to be closing real quick here. I think if you look at the back half of the year, the seven million for the sort of five months I think that annualizes sort of around 15 million I think that that’s where the business is out right now.

As far the margin structure and all that, we’ll get into that one – start looking at next year. But I think, and Richard can expand on this a little bit, we think there is a great opportunity there when you are looking at it now being roughly it’s US$15 million business and where some of the competitors are over there, with our resource and unifying with them a little bit more, we think there is a – nothing but upside there.

Richard Woolcott

Yes, Mitch, this is Richard here and we are excited. We’ve been working with Australia for a long time sharing different product ideas, did a lot of fashion ford trends that start down in Australia. So, from a design aspect it’s a very important territory and both our teams have been very closely together particularly in the last 18 months in terms of integrating the product more with our design and production teams here. So, we feel like we are well on our way on that end. Our marketing teams have been very tied in with all the athletes that we share, a lot of the skate team – lot of our top skate team riders and surfers are coming from Australia. So there is a lot of benefit there.

And then just from the opportunity in that part of the world in particular I mean the business down there that we are doing, we are still relatively small to what the other competitors are doing down there and I think with the bringing it in-house and investing in infrastructure, marketing and sales and other product needs I think we can really help ramp up the operations there working together and that company down there just what it really needed was more support from the mother ship here and that’s what we are doing now and I think it’s going to have a positive effect in the years ahead.

And that other thing that we’ve been working on a lot in the last year was focusing on our budgets with them, working on a five year plan with them. Those are all set to go. And we’ve got an in-house international director ready to oversee the project that’s been working with Australia for the last couple of years. So, we are set up and we are looking – very looking forward to what the potential is in the future with Australia and just growing up at least [ph] and going forward.

Mitch Kummetz – Robert Baird

All right, great. Thanks. Good luck.

Richard Woolcott

Thanks, Mitch.

Operator

Thank you. Our next question comes from Christine Chen from Needham & Company.

Christine Chen – Needham & Company

Thank you. I was wondering if you could talk about some of the sourcing pressures that everybody in the industry is talking about both from a raw materials and labor perspective and when you think that might impact you guys and if you think you have the pricing power to pass that on to customers. And also wondering what your euro assumption for the third quarter outlook? Thank you.

Jason Steris

Yes, hi, Christine, this is Jason here. I will take the sourcing question and I will pass on the second question to Doug here. Yes, definitely a lot going on over in India, China and parts of Asia there with the sourcing challenges and the labor strikes and the wage increases and raw materials. And we are kind of looking at this as a kind of a two-step process for us. In Doug’s remarks, he mentioned we had some Snow deliveries and for this back half, we are really focused right now on making sure that we can deliver our order file on time within our booking windows to eliminate any major delivery issues or any quality issues.

So, really just walking this thing through with perhaps the more visits with our teams on the ground over there working closely with the factories and just really having a close connection with our teams right now, more visibility on anything that we have on open purchase for the back half and just gather there has been some strikes over there and some stuff that you don’t want to do in this back-to-school and getting into the holidays, just not be able to deliver on time. So, it’s kind of our first order of business is making sure that we minimize any hiccups with any deliveries and I feel confident at this point that we can get through any major issues.

And then in terms of moving forward and pricing pressure we have seen some price increases for our spring ’11 products, which is basically the line that we are launching here next week with our domestic sales meetings. And we got to make some tweaks to the pricing and raise it in areas where we think there is little more value added there and I think it’s all a balancing act. You can't just kind of take a percent running across every category. You need to look at each piece individually and your drivers and – but it’s definitely need to get worked in there and it has for spring ’11 line and I think if there is value and quality behind the product, I think there is room for us to make some increases where we need to.

So, that’s sort of the first order of business, which is maintaining our back half margin or maintaining our margins and really making sure that we can deliver our products on time. We do see pressure moving forward. I’d say for the back half there could be some added pressure within a new business that might come our way, whether it’s a new piece, but for the most majority of our purchases have been placed through holiday where we’ve got a fixed FOB price on that stuff, but there could be some new orders that could come through that could be in line with some of the more current rates and all that.

So, our teams are on it. We are – it’s probably the hottest topic here at Volcom right now and bigger picture, we are really doing our strategy of longer term diversity, central sourcing office strategy, our global subsidiaries and all the teams are going to rely on how well we can source and get product to market. So, it’s probably – it’s most definitely our number one topic over here and we’ve got our team of professionals working on it every day and we’ll keep you guys posted.

But so far I feel confident with the back half and moving into spring and we’ve been doing our pre-lines with our new products and there has been no major issues from our account bases like your prices look too high and so overall I feel we are in a good position but it’s definitely a challenge and it’s something to keep talking about it as we move through these calls together.

Christine Chen – Needham & Company

Sorry. I was wondering how big a deal is the delay of your Snow product move for your customers, moving out of Q3 into Q –?

Jason Steris

You know that – I am not as worried about that. It’s just a timing issue with the quarter and we closing in September and the majority of our products do ship in September and a lot time you getting that product in the first couple of weeks. We got a chunk coming in August, but you get of that usually the first couple of weeks of September, which gives you sort of until the end of September to get all that product out and with the shift that we have – there is few weeks shift in a chunk of our business or say the quantities and it puts a lot of pressure kind of on the tail end of the quarter, which – and that’s the work-in-process report we have today. So, there could be – we might be able to improve that a little bit. It’s just at this point the visibility that we have says there might be a couple of weeks shift, we’ll put it sort of at that end of September, which make it difficult to get out in the third quarter.

However, as long as we get that product to our customers, communicating with our customers, and we are able to complete the order file by the first couple of weeks of October we are going to be fine. And that’s just a small portion of the business too which Doug pointed out. I mean we have a major chunk of the business still coming in, in August. So, by the middle of September, we would have already shipped the majority of our orders. So, it’s a small piece of it but we just want to make sure we accurate guidance and when got something moving at us right now that says X amount of your business might come in a little bit late, we just want to make sure we are planning correctly. So, I don’t see it being a big alarming issue for our customers and with the recent weather around here and what’s going on it might come in late [ph], so it’s the right time regardless. So, overall we are feeling pretty good about it and we are communicating with our customers.

Doug Collier

And then, Christine, back to your first question on the FX rate, we’re expecting sort of for the back half of the year low double digit impact. It’s a pretty significant headwind going into the back half of the year.

Christine Chen – Needham & Company

Great. Thank you and good luck.

Richard Woolcott

Thank you.

Doug Collier

Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Van Sinderen from B. Riley.

Jeff Van Sinderen – B. Riley

I am just wondering if you guys can give us any more color in terms of the nature or the flavor of order trends you’ve been getting lately with the softer retail climate versus Q1. Are you seeing retailers pull back in terms of orders, cancel orders, just – and I guess anything else you can say in terms of what kind of the posturing and cadence has been there?

Richard Woolcott

Yes, hey, Jeff, this is Richard here. I’ll give a few thoughts and then hand it over to Jason. No, I don’t think it’s – I don’t – I just think it’s kind of toned down a little bit in terms of the way that we were thinking, retailers and manufacturers going into the year feeling that hey, let’s get through the first half of the year and I think we all were under the assumption that the second half of this year would be better than the first half and things would be improving at a – on a certain time period. And that time period was we all felt the back half would see an improvement and I think what we are all seeing now and particularly the retailers is they are going, hey, you know things are – they’ve gotten better, but they are not drastically better.

A lot of guys will say, oh, you know, my business is trending right around flat. Some guys are up a little bit and some guys are down. So there is not that big shift of improvement yet. It’s more kind of in that flat area, which if you look at all of our business that just happened, particularly with all the numbers Just in Q2, our business is way up, which is saying that Volcom, you can assume that Volcom is taking market share, Volcom has got the right product in the stores. It’s got the right marketing initiatives and it’s getting great sell through.

So, I think from Volcom’s perspective this is really good news and I think from the environment’s perspective out there it’s – things are a little bit dampened but we are still optimistic at some point in the future this economy is going to turn around. We know that, we are not sure when. And I strongly believe and I think it’s the tone that we really want to set in this call is that we strongly believe that we are going to be in a very good position for when the economy specifically turns on again and that was our objective going into the year. I am very happy with what I am – with the results that we are seeing and we just got to weather this environment.

It’s a little bit unstable at time and may be not what everybody would like to have happening right now, but so far I feel we’ve done a good job. I like where we are at and we are just going to keep working on the retailers and get through this. So that’s I hope kind of paints a picture. And Jason, do you have any additional thoughts there?

Jason Steris

Yes, I just add, Jeff that the one trend I think we’ve seen and more so in the men’s business is we have experienced some good reorder business, not necessarily the reorder business that’s on top of your already strong pre-book. I think just maybe the shift in how much pre-book we are getting and then how much in season business we are actually – we are getting within that season, just how the customer may be buying a little closer to the product need that he or she might be looking for. So – and that’s kind of been part of our strategy of making sure we have enough inventory upfront and to be able to fulfill those needs.

So, in terms of any sort of trend, I would say we are seeing I think we are still getting good pre-books, but I think there is definitely the little bit of the caution of hey, I am going to pre-book what I need here and make sure I get this covered, but I am going to probably order some more product in season on some of these core programs or some of these may be fast training items. So I think we are in a good position to capture that, which we did see in Q2 and I just think you know as we move forward, I think we will be positioned well for how we are seeing those orders come through.

Richard Woolcott

Yes and the one thing it’s probably – when we look at all of our business in Q2, the one thing that sticks out is that junior’s business is still struggling. And outside of the junior’s business, everything else – all the numbers we are looking at are positive and we are seeing good growth, we are seeing positive signs and from our perspective if we can just get that junior’s business turned around, I think that’s really going to help kind of propel everything else and it’s one of the reasons why we’ve revamped that junior’s department. We’ve got some great new people in place. And we are already starting to see some bright spots already on some of the programs we are working on.

But I think the action sports industry in general we’ve got work to do with that junior’s business and when that junior’s business turns I think it’s going to be beneficial for everybody not only just Volcom but for our retailers and everybody else involved. So that’s really the – one of the big focuses we have internally here is let’s continue to push everything else that’s working and let’s really focus and try to get a little more – get some better results from junior’s and I think that’s going to have another significant impact for us moving forward if we can get that positive. So that’s really what we are working on too.

Jeff Van Sinderen – B. Riley

Okay. So, is it fair to say that outside of junior’s your product is strong your sell-throughs are good, you doing well versus some of the other brands at your retailers. So they are sticking with you. They are continuing to order, so it’s not like we are in a situation where all of a sudden they are starting to cancel orders massively or anything like that.

Richard Woolcott

No, no, we haven’t seen that at all, no. I think it’s – I think that they are pleased with how Volcom is performing. Again, you just look at the numbers compared to what the retail comps are out there and our business is very strong right now and we’ve got good relationships and what Jason talked about with all the investment we’ve done with the in-store – the increase in the racks and the windows and the marketing initiatives, so I think we are hitting all the key points that we should be doing and we are getting sell through and I think retailers are pleased with how Volcom is performing right now.

Jason Steris

Yes, Jeff, I think you were trying to ask that one specifically in terms are we seeing any cancellations and we haven’t been seeing any major cancellations. We just haven’t seen may be the uptick in additional business that may be we had all hoped back on the last call. So we are not seeing a pattern of cancellations by any means.

Richard Woolcott

Yes, I think when we started it’s kind of a good way to look at it is when we started we had our plan, we had our growth plan and here it is, it’s set. And we built the company around that and then in the back of our minds we said well, hey, if the economy gets better, we might be able to do even above our plan. And I think right now that’s the one missing link of like hey, we are trending to plan, things are working. Our execution is what we wanted but that one little component of getting a little bit better business is what’s on plan just hasn’t really materialized yet. And I think we all felt that. We felt that that momentum was starting to happen after Q1 in a – I think Q1 was a period in time where everybody had optimism, everybody was building back inventories and it was – there was this kind of momentum to go into the 2010 okay here we go, we at ’09, let’s go into ’10, but I think the reality kind of changed a little bit. Things slowed down a little bit and the consumer wasn’t ready to continue spending.

You look at the housing market. You look at the – all the other indications, unemployment. It just takes time to – for that stuff to heal and it didn’t heal as quickly or hasn’t healed as quickly as we had all hoped. But in terms of where we are right now, I mean we are on our plan, we are excited, we are actually very I think – to see our execution work and see the results that we are seeing it’s very satisfying because it’s one thing to build a plan and go we are going to do this X, A, B, C, D, and E, but then to see the results actually happen and we are seeing in the growth, in the numbers right now outside of junior’s. That’s the one that we still got work to do on.

Jeff Van Sinderen – B. Riley

Right. It seems like you guys are doing pretty well in a retail environment that’s still tough out there. Can you talk a little bit more about what’s driving the (inaudible) Electric and also how you see that business going forward?

Richard Woolcott

Sure. Yes, the Electric we are very – we are excited to see what’s been happening with Electric over the last couple of quarters, definitely have seen business improve particularly in the growth in Q2, as Doug mentioned, that was over 40%. The main driver particularly in the first half of this year has been the sunglass business. And little bit to a smaller extent you’ve got the soft goods and the accessories taking hold now too. But I think what happened is a lot of the retailers began to feel more confident building back sunglass inventory.

And also in the sunglass business, you’ve got the spring – spring and summer are your strongest – is your strongest season for sunglasses and particularly that May-June delivery. So, that’s one of the reasons why we saw a big uptick in Q2 was because of the sunglasses.

I also think that there is a very strong demand out there for Electric. We are seeing really good sell through and also as long what we’ve talked about with Volcom, Electric too is taking market share out there. The team from looking at their business today, I think they’ve done a good job holding their expenses and also when we look to the future, I think there is a strong opportunity for all of their categories, goggles, soft goods, and sunglasses at all levels of distribution, so we are optimistic as we move forward. And we want to build on this momentum and going into the back half of the year we – talked on my – in my remarks about the goggle business in Q3. I think that’s going to be strong. And also back to school you’ve got some of the soft goods accessories, back packs and so on and so forth. So lot of good things as we move into the back half with Electric.

Jeff Van Sinderen – B. Riley

That’s good to hear. And then one last thing. I was just wondering if there is going to be any impact from West 49 being acquired on your business.

Richard Woolcott

In terms of impact in negative or positive or–?

Jeff Van Sinderen – B. Riley

No, I was just thinking I mean does it – with Billabong acquiring them does it – does that mean Billabong is getting to put more Billabong product and less Volcom product or –?

Richard Woolcott

You know, I don’t. I mean actually – when I look at that Billabong purchase I see it as a positive. I think it’s going to help strengthen that operation. In terms of West 49 we’ve had a – we shipped in the – we shipped our summer goods. We’ve had a successful shift. We had good sell-through out of the gates. We’ve connected with that customer up there. We do see that business growing, moving forward. We got a good relationship with their teams. We’ve been meeting not only up there, but their teams have been down here. And then obviously as we just talked about – now we’ve got the Billabong purchase and I do see that as a positive. I think that Billabong’s done a good job with their retails stores and we participate in those stores all over the world. We have a good relationship with them and at the end of the day if we do a good job promoting our product, building good product and keeping that connection with the customer hot, I think we’ll continue to see good growth in all of our distributions. So we are excited about the future of West 49.

Jeff Van Sinderen – B. Riley

Have you heard that they are planning to roll out more stores, more aggressively, just wondering if that (inaudible) will be part of the upside for you.

Richard Woolcott

For West 49?

Jeff Van Sinderen – B. Riley

Yes.

Richard Woolcott

No, I haven’t heard anything specific about a bunch of more doors. You know, no, I haven’t really heard that. So –

Jeff Van Sinderen – B. Riley

Okay.

Richard Woolcott

But I think just getting going, I think there is a lot of opportunity just within their door count for us right now as we prove ourselves and getting to more seasoned and start to figure out which categories are really working for that customer base up there so I am excited just for – with what they’ve got going right now and we just kind of started with them. So, there is a lot of opportunity just right there.

Jeff Van Sinderen – B. Riley

Okay. Good to hear. Keep up the great work and good luck this quarter.

Richard Woolcott

Thanks, Jeff.

Operator

Thank you. Our next question comes from Claire Gallacher from CapStone Investments.

Claire Gallacher – CapStone Investments

Thank you. If you could talk about ASPs kind of where they are trending now versus last year and where you think they are going there in the back half of the year. And then also if you could give us an update on the Stone Age line, how it’s performing and if you are changing, if it’s evolving over time, as you learn more about the line and how it’s performing with your customers.

Jason Steris

Yes, sure, Claire, this is Jason here. As far as the ASP you are talking about the spring ’11 comparison or just sort of just in general or–?

Claire Gallacher – CapStone Investments

Well, yes, I was thinking about maybe for the back half of this year and then as you go into spring as you are talking about–

Jason Steris

Yes, yes, well it’s – I’d say back half this year compared to last year I’d say those are – they are in line with the year-over-year comparisons. No major significant changes there. I mean we expanded a little bit on some of our core programs, which might have some of the couple of more SKUs and basically color waves and some of the entry price points. So may be a little bit there but I don’t think anything significant. I think where you will see any changes is just as we get more visibility on future cost with our sourcing cost and where those land and still a little too soon to give sort of a overall percentage of what we are seeing, but we see cost going up and with that we are going to need to make some adjustments and we are still sort of just fine-tuning all that as we are working on the 2011 products.

So, definitely going to be some percentage of an increase what we are trying to see in the pricing – about 5% to 10% increase kind of on a cost to goods at the FOB. Some of the stuff we are starting to see on future styles that have been coming in so we just got to look at – we got to look at each piece, you got to look at the volume of the piece, where it fits in the line, what the mark-up is for the retailer to MSRP that we have built in and kind of got to look at all the variables of that piece and just to make sure we are not just taking the actual percent and spreading it across and then I think we will know more on the next call once we have our spring ’11 completely finalized and our summer ’11 line we should have that all through the development cycle at that point too and I think we can give you probably a little bit better comparison of what we might see percentage wise. So, hopefully that gives you a little color on it.

Claire Gallacher – CapStone Investments

Yes.

Jason Steris

And then in terms of the Stone Age, I hand that over to Richard here.

Richard Woolcott

Okay. Yes, Stone Age is definitely an important part of our program, and it is evolving. It has come a long way since we just started it. I think here in the US in particular, it is very important to our lot of core retailers, and they are becoming more involved and putting more of the product in their stores. Some retailers – that is their highlight with Stone Age in their stores.

And to your point of we are running through this process, because we have to makes a line that is going to be able to perform for these retailers, you know, and have certain key pieces in there. So we’re getting better at it. The retailers, season after season, are becoming more accustomed to it and more guys are gravitating towards it. And I think on a global level what we’re going to see and even talking with the team over in Europe, they see a lot of opportunity for Stone Age over there, and I think around the world as all of our businesses become more sophisticated with different levels of distribution, I think Stone Age is going to become a more important part of our product mix. So, we are very happy with where it is at right now, and I think the opportunity that Stone Age is going to play is only going to become stronger.

It is going to be a very important part of our distribution kind of product mix as we move forward on a global level. So, for learning each season about what its weaknesses are and what it needs, but so far it is performing and I think retailers are happy with it.

Claire Gallacher – CapStone Investments

Okay, great. Well, thanks so much and good luck.

Richard Woolcott

Okay, thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Eric Tracy from FBR Capital Markets.

Eric Tracy – FBR Capital Markets

Yes, hi guys. Good afternoon. Maybe just on the guidance for Q3, it looks like sort of implied the midpoint of the top line and then the gross margins sort of similar to Q2 levels. It seems like that would imply G&A sort of building pretty significantly, and again maybe just talk to whether it is Australia or some incremental marketing spend, and if so sort of where and how we should think about that?

Doug Collier

Yes, Eric, this is Doug. Yes, we are bringing in Australia. So obviously that is going to be an incremental piece. It is not that big. You know, it is only going to be two months for Q3 and then with a form of quarter [ph] in Q4, something else to consider is just, you know, the level of revenue in Europe in Q3, you know, it was obviously much higher so you have associated costs with that as well.

So, you will definitely do – you have a pretty decent pickup in Q3 and that has typically been sort of the highest quarter for SG&A.

Eric Tracy – FBR Capital Markets

Okay. And then sort of on the Europe revenue guidance, it looks like implied it was down 4%, which assumes the sort of reacceleration sequentially from Q2 to kind of maybe just talk to whether that is sort of something assumed around the environment improving, or just the visibility that you guys kind of have in terms of further penetration or new distribution?

Doug Collier

I am sorry. What was your assumption there for…

Eric Tracy – FBR Capital Markets

I thought – did I hear correctly that it was $29 million for Q3?

Doug Collier

That is correct.

Eric Tracy – FBR Capital Markets

So, it seems down, less than Q2.

Doug Collier

Yes.

Eric Tracy – FBR Capital Markets

Actually you would be up if you didn’t, because I think snow is about 1.5 million coming out into Q4, right?

Doug Collier

Exactly, yes. And Q3, actually if you just looking at a Euro to Euro basis, I mean increases 5% to 7% something like that. And then actually in US dollars, I think it is going to be a bit of a decrease for Q3. Overall for the back half, it is looking like for Europe, you know, a decrease of 9%, 10%, something like that and then sort of a slight increase in euros. So some of the stuff going on there, you know, fall was actually a pretty good season for us, I mean it was up high single digits, it is the bookings there. Snow was a pretty good season, you know, it was up a little bit.

And kind of where we took a hit was on the holiday season, even though that is a relatively small season, you know the selling season for that was sort of right in the middle of Greece, Portugal sort of panic over there. So that sort of brought down in general the back half, otherwise it would have even looked better. That is sort of the background for the back half of the year.

Eric Tracy – FBR Capital Markets

So, I mean that is visibility to that relative to – and Q2 is such a small business quarter for the business, anyway it is not really [ph] of sort of what you…okay.

Doug Collier

Exactly, yes.

Eric Tracy – FBR Capital Markets

Okay. That is fair, and then you know, we talked about this a bit just in terms of the sourcing costs, maybe talk to Jason or Doug to the promotional cadence in the channel, and sort of how you think about driving demand from a pricing perspective, and sort of the levels of price increases that you may need to take as we look to FY ’11 to offset some of those higher costs?

Jason Steris

Yes, hi Eric. It is Jason here. When we were booking out our 2010 products, the spring, the summer, the fall stuff, the majority of that was set up in 2009 and sort of into that January trade show with the fall line. And in that particular time with that environment, we’re really trying to partner up with our retailers. We are working closely on programs to take market share and get the growth that we wanted with the section sellings, and kind of just connecting that whole package. So, I think the timing of all that was much needed for both parties. And I think we’re successful with that and then I think as we have already seen things stabilize with the business, it is something that we are totally weaning off of and you know working with our account base in may be different ways, but not so much with some of the incentive package that we may have done this year.

So I see this kind of falling back there, and in terms of, I think you asked about what the price increase is and how we are going to justify those, so to speak, is that kind of the other part of the question?

Eric Tracy – FBR Capital Markets

Yes, I think you said kind of 5% to 10% increase on cost, and said then just relative to the promotional cadence in the channel, sort of what you think about the price increases you will be able to take and sort of what you need, I guess?

Jason Steris

You know, as I was saying with Claire, we are just really getting in with – we have the majority of our products booked out for the back half and as we have been getting our spring costs coming through and building our line book, and getting ready for our sales meetings, finding where those prices need to lie, and I don’t see any major price increases, but there are definitely some adjustments that need to be made throughout some of the wholesale or with some of the MSRPs, where you might have margin builder in there for your retailer of anywhere from $4 to $8 depending on the SKUs. So some of those might come down a little bit, or the wholesale might come up or maybe it is a little bit of both.

We’re just going to have to massage a little bit. So it is not a shock I think to anyone party, whether it be the retailer or the consumer, you know, when your costs go up, your wholesalers are going to have to play a role in that. Our goal is to maintain our margins, and ensure that we can continue to deliver a quality product of value, and at the end of the day, we don’t want to jeopardize any of that quality and cut any corners on the product. So, I wouldn’t see anything major, and again I also think mention for we started our spring pre-line for spring ’11, and it hasn’t been an issue.

And even talking with some other retailers out there, everyone is making their adjustments and their tweaks and I think as we get probably on the next call, we will have little more clear like, we will have two seasons under our belt and we will kind of have a better, I think may be a clear percentage of our ASPs for you guys to clearly understand, because we’re just kind of in that beginning stage of going. All right, where does it fit and where does it fall. And I hope that it answers kind of answers your question there?

Eric Tracy – FBR Capital Markets

Absolutely, thanks guys.

Richard Woolcott

Thank you, Eric.

Operator

Thank you. Our next question comes from the line of Edward Yruma from KeyBanc.

Edward Yruma – KeyBanc

Hi guys. Thanks for taking my questions. I am trying to reconcile some of your comments, I have noticed, I think this is the third quarter in a row that you have had kind of 15% plus inventory growth and I know that some of that was deliberate as you guys attempted to kind of have in stock levels, but I also noted that you indicated that there was higher clearance activity year-over-year.

So, how do you think about your posturing and inventory as we go forward, are you pleased with the quality of the inventory, and are you expecting that you can kind of get that closer in line with sales, or how do we think about inventory going forward? Thanks.

Jason Steris

Yes, hi Ed. I think you are spot-on with the increase in the inventory, and our strategy as we entered this year, started our purchasing, and started our line plan building was to increase our core products program, just to make sure that we have got a little more shelf life for that product, knowing that there is going to be more in season business done, and more pressure put on the manufacturer to have goods and so within all that we definitely feel good about the quality of the inventory in terms of having more styles in the line in the core basics program.

The other piece of that is in terms of our strategy and what we’ve changed – in the past, where we had maybe ordered a particular style, maybe 4 to 7 times throughout a season sort of chasing the business, similar to maybe a retailer, how is retailer is now, we kind of work a little bit more with – we have recently put in a new planning department this year to really help with our forecasting and inventory planning. So more visibility and more eyes on it right now. But the point where I’m getting here is kind of lessening the purchase orders of each piece and focusing on more upfront buys, which is going to create more efficiency in the production lines. I think it is going to help us make sure we get our products on time and in a lot of cases it is going to help with your cost in terms of running 10,000 units on a piece and start ordering it seven times and doing the minimum each buy.

So kind of a twofold strategy, but that will be as part of achieving the ramp up with the inventories. So to your question, they are building. We feel confident where they are placed in the core styles, which is good quality inventory, and we’re positioned well as the business improves, and we are seeing across all of our distribution, even with packs [ph] in the past where there might not have been a lot of in season reorder business, just by the overall size of company, where everything was more of an SMU [ph] and the way that they are buying more regionally, they are buying of the ATS, and that has been helpful too.

So, I think having inventory and having the right inventory is putting Volcom in a great position, and we have always every season we evaluate that inventory and make sure that if there is any old inventory that we’re liquidating it, and I think that is what you saw a little bit in Q2, but we always want to keep our inventories fresh and turning, and it is the kind of the update on the inventory.

Edward Yruma – KeyBanc

Got you. And I think you had indicated Richard in your prepared remarks that you felt those, if you are seeing some signs of stabilization in the juniors business. I know you have cited that it has been a tough category for both Volcom and the action sports brands industry as a whole. So, I guess I’m just trying to understand, with juniors around 22%, is this a good level to rebase your juniors level, your juniors business on and when can we expect juniors grow, thanks.

Richard Woolcott

You know, that is a great point. I think – and that is a hard one to be exact on because you have kind of got to see a trend happen to feel that you are at the bottom. And that is going to take a couple of quarters, where you okay, the juniors business is starting to level off. And we feel like – we feel that we are at that bottom right now. Does it get worse? You know, it is hard to tell. But I do feel from what the teams, the information what we’re getting and what we’re seeing we feel that we are it does feel that we are somewhere around the bottom right now.

And in terms of the bright spots, the bright spots are going to be coming from our teams internally, making sure that we have got the right products for that particular retailer that is going to work on that retailers floor, and that is – it is just extra – it is kind of the extra effort and focus from designer merchant design teams in-house to be working with your particular buyers to put the right products in the stores, because if you don’t have the right product in those stores, you are not going to see the sell through your are looking for.

So it has got to be – you got to be spot-on and that is what we are working on now. We have seen some excitement in some of our retailers, and particularly with the buyers working with our teams, hey, this particular piece we feel good about it. Let us go. Let us bring that in at this particular date. So, we’re kind of – we’re just at that beginning stages of revamping our juniors business, and I think in the next couple of quarters, we will see, are we at the bottom? Do we still have a little bit of ways to go? I mean a lot of that is going to come down to now having the right product in the stores, and how successful the retailer and the manufacturer working together can be in driving that customer into those stores.

And so a lot of it has to do with marketing campaigns, by role [ph] marketing, you know, how you are getting your message out there to them. We have revamped all of that. So I feel we are on the front-end of it in terms of our focus and I think in this next, probably in the next back – this back half of the year, we will probably have a better read of exactly where the stabilization is at, but I think we’re starting it.

Edward Yruma – KeyBanc

Got you.

Jason Steris

Ed, I just want to add to them, our girls just got back from the Miami swim show. We had our swim fashion show the night before down there, and they did the weekend down there, and the reports back from all segments of retailers that our juniors swim line is very strong and the sell through we’re having this year has been excellent, and then just kind of building on that with the 2011 line of just having a great line, and some good momentum behind it.

Just when we talk about that juniors category, I mean that we have seen our parallel pie [ph] shrink a little bit, but our swim program continues to ramp up. So, we’re really pleased with the swim team and everything we got coming down the pipeline there. So just want to point that out.

Richard Woolcott

That is a great point, because it all kind of interweaves with our entire juniors program, and yes, when I look at the numbers you know for this year our swim program is up. It is up double digits, so it has got good momentum and as Jason said, we have that big – we did the Miami show before that. We had the big swim fashion show. We got a ton of coverage out of that in terms of the PR all over the blogs and in the magazines, coming out of the magazines, it was all over the blogs.

So we’re just going to keep, our heads are down. We have revamped that infrastructure. I think you kind of got to start at look at your infrastructure, look at your products, are you strong as you can be internally, then look at how you are presenting your product out in the market, and how you are communicating your brand message to that consumer. And that is everything we are working on right now, and we’re starting to see, obviously in the swim we are seeing success. And we’re starting to see some bright spots in the Cut and Sew too. So we will keep you updated on it. Everybody is working hard on it and the industry is kind of like an overall action sports. You know, we want to get those customers back in action sports stores buying our juniors products.

So everybody is in that same mode, which I think over time is going to be positive and productive.

Edward Yruma – KeyBanc

Got you and one final question for Doug. Doug, I know when you began 2010 you had indicated that one of the key drivers of SG&A growth was going to be higher incentive comp, given that comp line is coming in, are you going to be maybe a little weaker then you had expected given something of a pullback or at least caution on the part of retailers, are you still accruing incentive comp at the same rate as you had kind of expected to, and has there been any reversals. Thanks.

Doug Collier

Yes, I think we’re pretty consistent with our SG&A. I think we said 125 million at the beginning of the year, where we tacked on a little bit of that with the acquisition of Australia. With Europe it has come down a little bit. We’re pretty much in the same place that we are at with SG&A. Obviously, we tracked any incentives on the revenue as it is projected coming in. But for the most part the SG&A is in a pretty similar place across the board to the plan at the beginning of the year.

Edward Yruma – KeyBanc

Got you. Thank you.

Doug Collier

Welcome.

Operator

Thank you. Our next question comes from the line of Jonathan Grassi from Longbow Research.

Jonathan Grassi – Longbow Research

Hi guys. You guys did a nice job getting across kind of the message you are using to build momentum in the men’s line, can you quantify how much sales are being driven by increased sell through versus shelf penetration?

Richard Woolcott

John, maybe I will jump into that. I think you are talking about kind of the – the more in-store kind of space that we are getting with the racks and all that versus kind of the sell through.

Jonathan Grassi – Longbow Research

Right. Versus gaining space on the racks, and then also getting into more doors as well.

Richard Woolcott

Yes, right now, our main focus is to work with our existing account base. I mean we are in a lot of the key doors, and I think that there is a lot of opportunities in those existing doors. So that is really our main focus, and where does that growth come from. Obviously, we have – we are in some larger stores, but maybe we’re not in every single door. So we’re always kind of reviewing what those opportunities are too, but I would say for the more part right now that growth is coming from our existing doors, and us just doing a better job of driving sales through those doors, through our marketing, better product and obviously with our in-store because we did this year put a significant investment back into rolling out more racks and building our real estate.

I think Jason you talked about the board short [ph] racks. We have done some bigger displays, wall units and floor [ph]. We just rolled out our denim new campaign, road tested the campaign racks in the stores now. So, it is really just being more productive in our existing store base.

Jonathan Grassi – Longbow Research

Okay. And then do you guys still have more door opportunities at Macy’s or you guys kind of maxed out as far as how many stores you are probably going to be able to get in there?

Jason Steris

Hi, Jonathan, this is Jason. Now, we have not maxed out the doors. And we just found the doors that we are in right now, we really want to focus on our in-store merchandising, the overall presentation of our brand, and a lot of the doors that we are in are some of their doors [ph], where you might find the majority of the growth opportunity to becoming a bigger players in any one of those doors.

So, definitely door opportunity down the road, but I think for the amount of doors and we’re in right now, and getting the racks and signage, and whatever else needs to help complete that floor set, we have got our work cut out for us there and we have made significant progress this year, and that has helped drive those results. So, over time and based on the territory we will take some steps, but right now I think we’re going to continue to work as Richard said with our existing accounts, existing doors, where it makes sense.

Jonathan Grassi – Longbow Research

Okay, and then just finally, how many basis points that are not selling to the Norwegian reseller cost you guys in Europe?

Richard Woolcott

Well, I don’t think specifically to that, but it was a pretty significant part of the business in Europe, and – in Norway. In Norway is a relatively big category for us – a relatively big territory over in Europe. So, it was meaningful.

Jonathan Grassi – Longbow Research

Okay, thank you.

Operator

Thank you. Our last question comes from Andrew Crum from Stifel Nicolaus.

Andrew Crum – Stifel Nicolaus

Thank you for staying on, and answering all the questions. One quick one for you, I had (inaudible) in the top 25 stores is that a test, or is there the potential for a broader rollout over the next 12 months or so?

Richard Woolcott

Yes, those are the top 25 Volcom doors, so we kind of worked with them and choose which doors are performing the best with Volcom, and how should we spread it out. So we worked with their teams on that. And I think this is a start, I would like to see us do this in more doors, I think it is good not only for Volcom, but I think it is good for PacSun. So, as we move forward, these just got installed for back to school, so we will see how they perform and then we will get back with the teams, and talk about doing some more of these in stores with them. But we are really excited and I think it is going to be productive for both parties. So excited to look at this as we move forward especially in the next year or two.

Andrew Crum – Stifel Nicolaus

Great, given the investment has paid off with fixtures in the specialty channel, it seems like that that could be kind of what has turned the business around. So, good luck. Thank you.

Richard Woolcott

Okay, thank you.

Jason Steris

Thank you.

Operator

I would now like to hand the call back to management for final closing remarks.

Jason Steris

Okay. I just want to say thank you to everybody for being on the call today, and for your support through the first-half of the year and we look forward to chatting with you again on the next call in a couple of months. All right, thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now all disconnect. Everyone have a great day.

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Source: Volcom, Inc. Q2 2010 Earnings Call Transcript
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