Volcom CEO Discusses Q3 2010 Results - Earnings Call Transcript

 |  About: Volcom, Inc. (VLCM)
by: SA Transcripts


Good day, ladies and gentlemen, and welcome to the Volcom Q3 2010 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Hoby Darling. Please begin.

Hoby Darling

Thank you, Shawn. Good afternoon, everyone, and thank you for joining us today to discuss Volcom's 2010 third 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 the Volcom's email distribution list to receive Company information or if you would like to change your contact information, please contact Rob Whetstone at PondelWilkinson. In addition, please be advised that this conference call is being broadcast live on the internet at volcom.com, as well as earnings.com. A playback will be available for one year and may be accessed on the Internet at both web sites.

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 due to risks and uncertainties associated with company's business. Certain risk factors associated with Volcom's business are set forth in its Form 10-K as per the year ended December 31, 2009, and 10-Q for the period ended June 30, 2010.

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 statements.

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

Richard Woolcott

Alright, well, thank you, Hoby, and good afternoon everyone. As we approach the end of 2010 I am pleased with our progress so far this year and believe we have been successful in implementing our strategic plan. And while the pace of the economic recovery has been slower than what we had all envisioned, we have stayed focused on our core strengths, kept our brand performing well at retail and have built a global foundation from which to grow in the years ahead.

Our results for the third quarter are a reflection of this focus and brand building efforts. Both Volcom and Electric continue to show strength across virtually all product categories and regions. Our initiatives to gain market share have generated revenue growth, and have enabled us to build stronger relationships with our retailers. And as we increase our market share we are being diligent to ensure our moves support our business and align with our financial objectives we have set for the next several years.

We have been mindful of not to take on too much at one time, and are constantly re-evaluating our strategies to make sure that we are on the right track. Some of these strategies include, devoting resources to building our brand on global basis, trading great product that performs well and resonates with our customer, working closely with our retail partners to constantly improve the Volcom in-store experience, and expanding our distribution opportunities by taking on new territories while continuing to invest in our existing markets. We have successfully advanced these initiatives while operating in a tough environment and I am proud of our team's efforts as we look forward to continuing our attack as we close out 2010.

Let me now take time to review our business. The strength of Volcom was evident on many levels this quarter. One area that really shined is our marketing. So much of the Volcom magic comes from our branding efforts, and I am impressed with how our team continues to deliver new and exciting initiatives.

Here are a few highlights from the quarter: in skateboarding news, the Volcom Street Pro at the Maloof Money Cup was a great success with airings on Fox TV, and as well as having over a 127,000 viewers online watching the event live. We also just completed our Wild in the Parks skate series with the championships that ended in early October in Arizona. This was our 8 year with the series, and the events are still free to all participants. And finally, the Volcom brand Jeans Tour which just finished was also a huge success, representing our biggest skate tour to date with over 20 riders participating with more than 20 retailers across the country. This was tied to our Give Jeans A Chance program, where prizes were offered for donating jeans to the homeless.

In snowboarding news, we just released our newest snowboard movie 9191, starring legendary rider Gigi Rüf. We showed the movie in large format with the major marketing tour that include 20 stops in 11 countries in 28 days. The movie has received rave reviews, and was awarded best score on ESPN.com.

And finally, in surfing news, the Volcom Annihilator Boardshort campaign kicks off this November. In conjunction with this launch we are excited to announce the release of the Volcom Annihilator web series in early November, which will feature some of our top team riders, including Bruce Irons and Dusty Payne. And, coming up in January we will be hosting the second annual Volcom Pipe Production, which should be another great event to get 2011 underway.

From a brand standpoint, Volcom was once again ranked as the number action sports brand in the Piper Jaffray 20 semi-annual taking stock with team's survey. This was Volcom's 6 consecutive survey where we were ranked number one in action sports.

Now turning to our products, we continued to post strong revenue gains in core categories, such as Men's and Boy's quarter increasing 21% and 32%, respectively over last year on a consolidated basis. I am also happy to report that most of this year's ad ware has already shipped and is now on the floor at retail. The product is looking great and feedback has been strong.

Our Junior's business looks to be turning the corner as sales in this category are showing some improvement. This is very encouraging as Junior's has been a tough category for many brands in action sports. We have talked previously about our revamped Junior's team, and I believe all of their efforts are beginning to payoff.

From a distribution standpoint, our core business continues to be strong with solid growth this quarter. This is an important channel for Volcom as this group includes influential retailers that cater to board sport participants and aspiring enthusiasts. Also, it appears as though inventory levels with many retails are more in line with sales creating re-order potential as retailers chase the in season business.

At the specialty level, Men's and Boy's continued to be top performers and we have equally high expectations for growth in other categories, such as Swim and Creedlers. Our largest account PacSun, posted good results with Volcom in the third quarter as they continue to put their focus behind brands.

Finally, we continue to strengthen our presence at the department store level, and are mindful of the necessary commitment to make this initiative a success. This includes direct action from our merchandizing groups to ensure the best assortment and presentation of Volcom products. We are making steady progress and are pleased with the results, thus far this year.

Further reinforcing our direct to consumer strategy, this September we launched our eCommerce initiative featuring a balanced mix of Volcom product. We launched online, quite methodically making certain we had constructive conversations with our retailers to gain their support for this initiative. The launch took a few months longer than originally planned, but we believe the extra time allowed us to do it the right way.

I'm exited to note that things are progressing well, and we look forward to fine tuning the program as we head into 2011. Another bright spot this year has been Electric, and Q3 was no exception. Great product and consistent sell through has elevated Electric to become one of the fastest growing segments of our business.

Revenues for Electric increased 29% to $8.9 million up from $6.9 million in the same period last year. As we have mentioned before the Electric team continued its marketing and product push during a tough 2009, and that strategy is now paying off. Additionally, in-store service and close working relationships with core and major accounts have provided continued support for Electric. Market share gains were seen in all four categories of sunglass, snow goggles, soft goods and bags. Also, Electric has increased its in-store fixture program to support growth and brand momentum.

I'd now like to take a moment and discuss our international business. Europe has had its share of challenges this year, but our teams have done a good job managing the business through the shaky environment. After a tougher than normal summer due to poor weather, the fall season has performed better as cooler weather helped drive customers back into stores. Generally speaking France, Switzerland, Germany and Austria are still our strongest performing territories, while UK, Italy and Spain have stabilized. On the other hand, Greece and Ireland are still struggling.

As we announced several weeks ago, we have made the move to go direct in Spain as this is an important territory for Volcom. We are exited about this initiative as we have seen our business improve when we take control of the territory. We plan to began shipping directly to our retailers in Spain in the second half 2011, after the spring season has been shipped by a previous distributor. You will recall that we are also direct in France, Switzerland and more recently in the UK.

Our total door count in Europe has remained stable throughout the year, with new openings making up for accounts that have shut their doors. One bright spot has been the new shop and shop concepts that we have installed in several accounts in France. We think this is viable strategy for possible growth in the future. Also some sport chains have demonstrated interest and we are evaluating these opportunities. And finally, Streetwear boutiques could also be an opportunity as Volcom gains broader market appeal.

Turing to other international operations, Volcom Japan is experiencing the same sluggish environment as in the past several quarters; however we have maintained a stable business and are moving forward with investments aimed at taking the brand to the next level. We have recently hired a new sales director for the country, and look forward to his contribution to help improve our current wholesale business while simultaneously pushing forward on new direct to consumer initiatives.

Now heading south for Australia, our business is gearing up as we head in to summer. Since the takeover, we have begun investing in our infrastructure, marketing and advertising and in store merchandising. We also are encouraged to see that retailers have been responding positively to the increased assortment from Volcom, and that sell through is picking up. We still know we have lot of work to do, but I am confident with the right strategy, discipline and investment we will gain market share and position Volcom as one of the top brands in the Australian market in the years to come.

Now before I turn the call over Doug to review the financials, let me also address some other key moves that we believe further affirms our commitment to building shareholder value. As you know, we have a healthy business that generates good cash flow. Our balance sheet is rock solid with more than a $105 million in cash and we have no long term debt. In evaluating our capital structure, the Board of Directors has determined that a special cash dividend of $1.00 per share is a good means to return the value we have created to our shareholders.

As we look towards the balance of the year, I believe we are well position to finish strong and begin our attack on 2011. Our company is healthy and focused, and our teams are prepared to do what it takes to continue to strengthen Volcom at all levels of the business. We are a performance driven organization, and measure each initiative with the potential benefit whether targeted for the near term or longer term.

Now with our financial objectives in place, all of our decisions will be aligned with these targets allowing for alterations when opportunities arise where the environment changes. And while we do not underestimate the work required in achieving these goals, I am assured daily that we have the right team in place to keep Volcom and Electric as leaders in action sports.

As always I'd like to thank the entire Volcom family, our athletes, retailers and shareholders for their continued support and dedication to this (inaudible). I'd now like to turn the call over to Doug who'll review our financial results for the third quarter. Doug?

Doug Collier

Thanks, Richard and good afternoon everyone. We are pleased with our results for the third quarter, which are generally in line with the consolidated guidance provided on our 2Q conference call. As Richard mentioned throughout 2010 Volcom has leveraged its strong brand positioning and solid balance sheet to implement initiatives that will drive additional revenue and earnings both in the short and long term.

Specifically, our strategy has been to gain floor space and market share throughout our account base. Along with increased focus on marketing and promotions, these initiatives have included incentive programs to improve retailer margins in order to ensure continued strong quarters for Volcom products. We have seen positive results from these initiatives.

In our US segment we've seen significant increases in our Men's and Boy's business. Also in the US segment, revenue among our core retailer base was up significantly, both in Q3 and year-to-date. Which we believe indicates that Volcom is gaining market share in these retailers.

As we expected, the strategy to gain market share has adversely impacted our US segment gross margin. We anticipated the shorter term impact of our strategy and are curtailing certain incentive programs and moving it to next year. We believe this will help us recover some of the lost gross margin, while maintaining our market share gain. While our strategy to take market share has negatively impacted our gross margin in the US wholesale business, our diversification strategy has helped provide a positive growth margin impact. These include historically higher gross margins at Electric, in Europe and in our growing direct to consumer business.

As stated on previous calls, it is our belief by the end of 2014 we can build consolidated revenue to approximately $550 million, maintain a gross margin of approximately 50%, leverage our SG&A expenses and return operating margin to historical levels of 15% to 20%.

I will now review our financial statements for the third quarter ended September 30, 2010. For Q3 total consolidated revenue increased 11% to $104.7 million compared with $93.9 million in Q3 of 2009. Please note the Volcom licensee in Australia was acquired August 1. Excluding revenue from Australia, consolidated revenue increased 9% in Q3.

Let me now breakdown our third quarter revenue by each of four business segments: the US, Europe, Electric and Australia.

First let's look at the US segments, which includes revenue from the US, Canada, Japan, and most other international territories outside Europe and Australia, as well as our domestic Volcom branded and LSNS retail stores. Total revenue from the US segment including royalties for the third quarter increased 14% to $64.5 million compared with $56.8 million in Q3 of 2009.

A breakdown of the US segment product revenue in Q3 by categories is as follows: Our Men's product revenue increased 29% to $31.5 million for Q3 compared with $24.5 million in the third quarter 2009. We continue to see strong growth in this important category, and we believe that the higher the market growth indicates continued market share gains. Our Junior's product revenue decreased 2% to $10.7 million versus a $10.9 million in the third quarter of last year. While Junior's are still a tough category for us, and for most action sports brands, Q3 is by far the best comp we have achieved since Q3 at 2008. We believe this could indicate an inflection point for our Junior's program.

Boy's revenue increased 24% to $5.8 million compared with $4.7 million in the third quarter of 2009. Boy's represents another key category where we believe we continue to gain market share.

Snow revenue was down 3% to $14.9 million, compared to $15.5 million in Q3 last year. Increased outer wear shipments to many our core snow dealers were more than offset by reduced shipments of snow accessories, including snow specific lease to a few of our larger retailers.

Revenue from our Girl Swim Line was $180,000 versus $65,000 in Q3 of 2009. Revenue from our Creedlers footwear line was up 105% to $280,000 versus a $136,000 in the 2009 third quarter.

International product revenue which is reported as part of our US segment and consists primarily of sales in Canada and Japan, and does not include licensing revenue increased 21% to $22 million or 34% of our US segment product revenue for the quarter, compared with $18.2 million or 32% for Q3 last year. We are pleased to see this growth as transforming into a truly global company is an important pillar of our five year plan.

Looking at our US segment revenue by distribution channel, revenue from our five largest full price accounts decreased 5% to $13.7 million in the third quarter, representing 21% of the US segment product sales. In Q3 of 2009 revenue from these accounts was $14.4 million and represented 26% of the US segment product sales.

Revenue from PacSun our largest customer increased 5% to $6.9 million for the quarter, slightly above our plan representing 11% of the US segment product revenue. In the 2009 third quarter revenue from PacSun was $6.6 million or 12% of our US segment product revenue. Excluding PacSun, revenue from our next four largest full price accounts decreased 13% for the quarter, primarily attributable to lower revenue from Junior's and to a lesser extent from snow products.

In Q3 revenue from outside our five largest full priced accounts, which represented 79% of total US segment product revenue for the quarter increased 20% to $50.3 million. In the third quarter of 2009 revenue from the same group was $41.8 million, representing 74% of total US segment product revenue.

Revenue growth in this diverse account base has been strong throughout the year, and we believe indicates continued market share gain, and reflects the strength of the Volcom brand at the core board retailers.

Now let's look at revenue from the Europe segment. In Q3 revenue from the Europe segment decreased 5% to $28.7 million compared with $30.2 million in Q3 of last year. On a euro-to-euro basis revenue was flat in Q3. This was primarily due to the weak economic environment in Europe, as well as unfavorable summer weather conditions which slowed reorder business.

In Q3 the revenue by category in Europe is as follows: Men's remained relatively flat at $15.7 million compared with $15.6 million in Q3 of 2009. Junior's decreased 16% to $4.8 million compared with $5.7 million in '09. Boy's increased 55% to $1.5 million compared with $927,000 a year earlier. Snow decreased 16% to $6.5 million compared to $7.7 million last year. For 2010 we projected snow revenue in Europe will increase slightly as compared to last year. Creedlers was $83,000 versus a $101,000, and Swim was $85,000.

As Richard just discussed, revenue from the Electric segment increased 29% to $8.9 million compared with $6.9 million in Q3 of '09. The Electric business has been an out performer this year, reflecting a number of product and marketing initiatives that we believe are resulting in market share gains.

Finally, revenue from Australia totaled $2.6 million for August and September. This acquisition has enabled us to make the needed investments that will drive future market share gains and generate future earnings that the Volcom brand deserves in this region.

Turning to gross profit on a consolidated basis, Q3 gross profit as a percentage of total revenue was 49.6% as compared to 51.6% in the same period in 2009. In our US segment Q3 gross margin on product was 45% compared to 49.4% in Q3 last year. This decrease reflects several factors, including some strategic initiatives to gain market share such as pre-book discounts, as well as higher revenue and marked down allowances. Additionally we experienced slightly higher inventory liquidation during the quarter, as we thought to better align inventory levels with current in season demands. Also we began to see cost creep up for some in season orders and FMU products due to increases in manufacturing, freight and raw material costs.

In our Europe segment, gross margin increased to 55.7% versus 52.9% last year, reflecting better pricing on fall products. Also in Q3, the higher margin fall products made up a larger portion of the product mix as compared to last year. Gross margin in the Electric segment grew to 61.3% compared with 59.7% in Q3 of 2009 primarily due to product mix that included more high margin goggles, and a significant improvement of gross margins on soft goods.

In Australia, gross margin was 45% for Q3. When this territory is fully integrated we project gross margin in Australia to be near 50%. Selling general and administrative expenses on a consolidated basis were $33.9 million in the third quarter of 2010, versus $28.8 million for the same period in 2009. As a percentage of sales consolidated SG&A expenses were approximately 32.4% of total revenue for the third quarter of 2010 compared with 30.7% for the same period in 2009.

For the US segment, total SG&A expenses were $22.9 million or 35.5% of revenue. In Q3 last year SG&A was $19.3 million or 34.1% of revenue. As we have discussed on prior call 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 Europe, SG&A expense remained flat year-over-year at $6.3 million; on a year-to-year basis expenses increased 7%. At Electric, SG&A expense was $3.6 million compared with $3.2 million for the Q3 of last year. And in Australia, SG&A expense was $1.1 million.

Consolidated operating income for the third quarter was $18 million with operating margin of 17%. In the third quarter of 2009, the company reported operating income of $19.7 million and operating margin of 21%. US segment operating income for the third quarter decreased 30% to $6.4 million compared to $9 million last year, reflecting the lower gross margin and increased expenses previously discussed. Europe segment operating income for the 2010 third quarter remained flat year-over-year at $9.7 million, on a euro-to euro basis operating income increased 5%. Electric segment operating income for the third quarter was $1.9 million compared with $911,000 in the same period last year. And in the Australia segment operating income was $85,000.

On a consolidated basis, the company recorded a provision for income taxes for the third quarter using a 32% annual effective tax rate. Consolidated net income for the third quarter of 2010 was $13.1 million equaled to $0.53 per diluted share, this compared with net income of $13.3 million or $0.54 in the third quarter of 2009.

Let me now take a minute to discuss the strength of Volcom's balance sheet. At September 30, 2010 the company had approximately a $105 million in cash. We have no long term debt, stock holders equity is $240 million and a current ratio of 6 to 1.

Consolidated accounts receivable increased 17% to $81.1 million at the end of Q3, compared with $69.8 million at September 30, 2009. Consolidated accounts receivable balance at September 30, 2010 represents day sales outstanding of 91 days, compared with 88 days at the end of the third quarter of 2009.

Consolidated inventory increased 65% to $37 million compared with $22.4 million last year. Given the retailers general reluctance to pre-book at historic levels, we have been carrying more inventory to capitalize on potential in season business. Also we made earlier and bigger buys on select styles due to longer lead times in China and to take advantage of volume pricing. Many of these buys were made at the beginning of the year, when we get higher expectations for the back half of the year. This has resulted in excess inventory that we intend to liquidate in the next several months.

On a consolidated basis the inventory turn rate calculates to 4.6 times per year, or once every 80 days. Inventory turns calculated to 5.8 times per year at the end of Q3 2009, or once every 63 days. Separately today, and as Richard discussed we also announced that our Board of Directors has approved a special cash dividend of $1 per share payable on each share of the company's outstanding common stock, including any unvested shares of restricted common stock. The special dividend will be payable on November 19, 2010 to stock holders of record at the close of business on November 8, 2010, with an ex-dividend date of November 4. The aggregate amount of payments to be made in connection with this special dividend will be approximately $24.4 million.

I will now turn to our financial outlook for the fourth quarter of 2010. We project consolidated 2010 fourth quarter revenue to be between approximately $76 million and $79 million. We currently anticipate revenue of approximately $52 million to $55 million from our US segment. Please note that this includes approximately $3 million from the liquidation of additional inventory in Q4. We also anticipate approximately $13 million from our Europe segments, approximately $6 million from Electric, and approximately $5 million from Australia.

In Q4 we project revenue from PacSun to increase 17% to approximately $7 million compared to $6 million in the fourth quarter 2009. Considering the additional inventory liquidation, Q4 gross margin is projected to be approximately 45%. Consolidated EPS for Q4 of 2010 is anticipated to be approximately in the range of $0.04 to $0.07.

Given this Q4 outlook, full year 2010 revenue is projected to be in the range of approximately of $321 million to $324 million, and full year EPS in the range of approximately $0.89 to $0.92. Our consolidated gross margin for 2010 is approximately 49%, a point lower than on our previous estimate due to additional inventory liquidation. Projected SG&A expense on a consolidated basis for the year is expected to be approximately a $128 million, which is a $2 million increase from the guidance given on our last call This increase is primarily attributable to CapEx fluctuations in our international subsidiaries over the back half of the year. We expect the Q4 tax rate to be approximately 32%. Fully diluted shares outstanding for the fourth quarter are expected to be approximately $24.4 million.

In putting forth this outlook we want to remind everyone of the complexity of accurately assessing future earnings and revenue growth, given the challenging economic and credit environment the difficulty in predicting sales of our products by our key retailers, changes in fashion trends and consumer preferences, and sourcing costs. As the economic environment improves, 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 will open the call for questions.

Question-and-Answer Session


(Operators Instructions). Our first question comes from Mitch Kummetz with Robert Baird.

Mitch Kummetz - Robert Baird

Let’s see, I’ve got a few question. First, Doug, could you say how much of the inventory, let’s say inventory is about 15 million, how much of that increase is excess inventory that you expect to be liquidated in the fourth quarter, and do you expect all of that to be liquidated in the fourth quarter? Does some of that carry over into the first half of next year?

Doug Collier

Well, we've got some inventory that carries over into next year but sort of the issue on inventory that we've got that we plan to get rid of in Q4 is about 3 million.

Mitch Kummetz - Robert Baird

So that's 3 million of about a 15 million increase. So, what's the balance then? Is that just you guys carrying more inventory for in-season business and do you feel comfortable with that inventory or how should I think about the balance of the increase?

Jason Steris

This is Jason here, I'll cover that for you. Just kind of two parts of the inventory right now, that overall build and first part being the, when you look at our style and our skews right now in the line compared to last year, we've increased the amount of carryover style that we have on our line. It’s just anticipating more in-season business and carrying more inventory throughout the year to maximize in-season business, a lot of which of what we talked about in the past of having little bit less pre-books and doing more in season business. So, we strategically added more styles into the line to fit that category, and then within those styles just by having more of those styles we've actually bought more of those products in terms of the punishment style mainly because we've been doing bigger buys on each one of the our purchases to maximize the production efficiency.

In the past we might do anywhere between six to nine purchase orders on the particular style throughout the season. In this sourcing environment right now, I mean, you'll be lucky to get some of your smaller later major POs delivered. So, our team has been really focusing on the planning aspect and putting larger buys upfront to secure the selling space, the projections on the raw material side of things, as well as just making sure that we can deliver our product on time, and also in some cases getting better pricing with some of our volumes.

So buying more upfront and also having more of those styles and skews is a pretty big chunk of that overall inventory build and to you question, a lot of that carries into spring and then in the summer and we are confident in the inventory that moves forward. And then in terms of the excess inventory, historically, we have never really carried anything over that, we didn’t feel was a good shelf life and being consistent with that we anticipate some excess inventory in Q4 here and we are going to put it behind us. And that would be the non-carryover part of it.

Mitch Kummetz - Robert Baird

And Doug, on the fourth quarter guys, gross margin piece of it, I think you said 45% right?

Doug Collier

That’s correct.

Mitch Kummetz - Robert Baird

So that’s about a 420 basis point drop from last year. So how much of that drop is reacted to clearing excess inventory?

Doug Collier

We have just included I mean with that 3 million in there, we are always going to have some inventory liquidation every quarter, but this is when you take that 3 million and put that in, and we are not going to make much off that obviously, if anything. So, that lowers it.

Mitch Kummetz - Robert Baird

Is that the biggest peace there in terms of the gross margin coming down and maybe can you address some of the other factors that are weighing on the Q4 gross margin in terms of higher cost or anything whether its labor freight materials. There has been a lot been discussion in the last couple of days about higher freight costs, so maybe could you elaborate on that as well as how that relates to your gross margin guidance?

Jason Steris

Hey Mitch, it’s Jason. Yeah I mean, it’s definitely a big chunk of that margin erosion is due to the inventory liquidation, but kind of what we saw a bit in Q3 and what we talked about a little bit its just you know coming out of this year and are taking market share strategy, you know we have had some incentive programs for retailers whether there’d be some pre-booked discounts, a little more mark down allowance than maybe we have done in the past, just working with our retailer partners and making sure that we’ve got that best selling product on the floor at all times and we are maximizing that inventory turn on the floor. And then the one another area that sticks out a little bit would just be with some of the NCs and styles that we might do with one of our larger accounts on (inaudible) where cost might not have been locked in on those styles and your getting a little bit more of that real-time manufacturing costs with the increase in raw materials freight and kind of that overall manufacturing costs being a little bit higher on something that we might do and NCs a new style on.

So, you know that’s the three areas and then on top of that, the bigger piece would be the liquidation, but those are all some of the pieces, and we talked a little bit about, on the last call just so that we move into next year, you know we are really trying to focus more on kind of pulling those incentives back down and focusing on our margin and building that backup. And we feel as we move into, we are out on the road right now pre-booking spring. We just finished spring and we are out with summer right now and we don’t have the similar discounts in place. So, we are really trying to focus on improving that margin as we move into next year.

Doug Collier

Yeah. And one other thing that note on that is that the consolidated number that we gave you and your revenue levels for the seasonal business in Europe and in Electric, that revenue is going to be much lower in Q4 than in Q3. It will have a big impact on a consolidated gross margin.

Mitch Kummetz - Robert Baird

And a last question, Jason, you alluded to being one on the road bookings spring, summer, your spring book is complete. Could you talk a little bit about how that looks and especially in light of curtailing some of these incentives and to what extent are you able to raise prices on spring product?

Jason Steris

Yeah, absolutely. So we got through spring, through kind of a trade show month of August and September, and we had good shows, we had good response to our product. We instep our pricing a little bit for spring ‘11 and brought it up probably a little bit higher for summer and then kind of going into fall we will be bringing it up a little bit more, but so it's kind of looking at the year from season-to-season or just slow inching things up a little bit based on the cost structure that we're getting back. And for spring, overall we got a good response not only our product but just our selling package and what we're offering to retailer and the support and overall we’ve got a great marketing program planned and the initiatives that we have in place for next year and the product was received very well across all divisions. So, I wouldn't say there was any negativity in terms of maybe not having the pre-book discount. And all the strategy is we want to make sure the expenses that we're putting into the business are going to push the brand through and maximize the sell-through on the floor. And you’re going to need to put certain dollars in the marketing initiatives and things to drive that business.

So, at the end of the day you are going to get the best margin, on the retail standpoint, you’re going to get the best margin with the brand, with the best sell-through. So, as we kind of look towards next year, just making sure we’ve got all of our expenses aligned with the best strategies to drive sell-through. And then on summer we have just been out on the road now for a couple of weeks. We did a good couple of weeks of our free lines with our top 10 accounts and then the reps have been out there for about a week and a half and the response is actually really good for summer too, it’s usually typically a little bit shorter window, quicker pre-book, but the response has been great on the board shorts, the annihilator program and then our juniors line for summer has had probably one of the strongest responses that we have had in sometime overall and that’s the line that we sized down quite a bit and really tightened up the package and focused on categories, and so far so good out there. We are pleased to see and I think we are going to get those orders then we should be on right track.


Our next question comes from Jim Duffy with Stifel Nicolaus

Jim Duffy - Stifel Nicolaus

The question around the input costs for next year, a big topic of conversation. I am just trying to get my arms around what type of visibility you have in your product costs for next year. I presume you know spring by now. Do you know the costing out to summer and fall at this point?

Jason Steris

Hey Jim, this is Jason here. Yeah, our changes got back from China in the last couple of days and we are wrapping up all of our fall costing and getting ready to catalog that season up for up and coming sales meeting in December. We’ve got good visibility of all those costs and they are going up. So, I don’t think that’s any big surprise. And you know we are seeing anywhere between 15 to 20% increase on FOB. And I think our strategy there is going to be to, I mentioned on the call just a minute ago with Mitch, we brought our prices up a bit for spring, we interest them up a little bit more for summer and I think when we get into this fall season right now, I think the entire industry is going to be faced with of [labeling] prices on our products for fall, somewhere around 10 or 15%. And you know, it’s really going to go back to the quality of the product and the value of the piece, and maybe selling a little bit less but maybe selling more at a higher price and selling better products. And I think in this environment right and the consumer, you know the way consumer is responding to purchases out there, I think we are going to be okay.

Jim Duffy - Stifel Nicolaus

Well, it’s good you have visibility at this point. So at least you know your cost. As you dialogue with retailers, are you getting different response by channel? Are some types of retailers having a harder time coming to grips with this or at this point do they all you know kind of know its coming and are prepared for your price increases?

Richard Woolcott

Hi Jim, this is Richard here. I think that is a great question and it’s something that over probably the last six months, we have a lot of industry get-togethers that include manufactures and retailers together, and that’s been a big topic about the price increase. And I think in this situation probably the biggest point is the communication between the parties and so everybody understands as is in talking about the situation we are in and what's coming down line. And from what I have seen the retailers understand it, they understand what's happening overseas from a production costing standpoint and what manufacturers are faced with, and so, I haven't seen any real pushback. I mean everybody is in this together and as long as we communicate and then also as Jason said delivering strong product and whether it would be to the actual garment or our branding efforts or in-store efforts and give that customer the best experience possible. Here she hopefully at the end day is going to be willing to pay a little bit more for a good quality product. But retailers are in the know, we've been talking about it in our industry get-togethers. We're all in it together, we’ve got to work on it in a positive way as we move forward and it’s just that’s the reality of it out there and we’ve got to do our best job on moving forward with it.

Doug Collier

And I’ll just add, I mean a lot of our retail partners I mean, they are private label business, they're dealing with the maybe on with the same thing on the sourcing end, so no big surprise to anybody.

Richard Woolcott

I think the biggest thing is we've got to keep our industry, we got to keep ourselves healthy whether you are a manufacture or a retailer, for this industry to continue to grow and to go and move into the future in the right way. We've got to keep each component of it healthy. And manufactures have to stay healthy and retailers have to stay healthy. So, we're in it together and again as we were born to give the right experience to the customer, I think we're going to be okay.

Jim Duffy - Stifel Nicolaus

Final question, and I'll let somebody else jump in. Given some of the supply chain challenges some brand vendors are experiencing, are you seeing any change in the retailer ordering patterns. Are any of them pulling orders forward or are ordering further out just to ensure they get delivery in time for seasons. Is that inflating your pre-book at all?

Doug Collier

That's good question, Jim. I mean, on our end, we're ordering sooner just to ensure that we can deliver a product on time and we've seen lead times move out from solid 30 days in lot of cases and mostly around fabric availability and making sure that there is cotton availability and all that. In terms of our retailers, giving us actually orders sooner we really haven’t moved our calendar up too much to create that early order, tax to get the orders earlier, our game day in terms of when we will get on the virtually the same. So, in this case it’s really just put more pressure on us to order our production a little bit sooner.

So, it’s something that we are looking at right now in terms of our calendars, but at the same time you don’t want to get up there too early and you want to stay focused on working with it. I think the calendars that we have right now are in a good place, and with some of bigger accounts, we have had some of our conversations of just making sure that if there is a particular product or something that they are looking for or say there is a flow program on something that we are disappearing for the new lead times. So, that’s mainly what we have been seeing there.


Our next question comes from Eric Tracy of FBR Capital Markets.

Eric Tracy - FBR Capital Markets

If I can just kind of follow-up on input cost question, as we think about next year, when just to confirm, I think you said so raising prices up 10 to 15% and I just want to think through kind of the dynamics in the channel sort of a competitive landscape, if you feel like the competition would sort of rationally follow suit, and you said you have been in these meetings, sort of industry meetings in betting this, but just sort of your sense of the promotional gains in the channel in some of the competitive dynamics that maybe support or would challenge some of those price increases.

Richard Woolcott

Yeah Eric, this Richard. I’ll start and then hand it over to Jason. I think again I think everybody is in the same boat and you bring up a good point of like, I think hopefully we all move together in the same direction and you don’t have a situation where you’ve got a couple of companies that have raised their prices and you got a couple of companies that don’t and that it makes for an comfortable situation at retail. So, I mean for us, from what I hear people are just like hey we got to attack there’s just like everybody else. In our end, we’ve got to be prudent the way that we run the business and with costs are going up so we’ve got to methodically raise our prices over a period of time to deal with this situation, and how other people do it, that’s their business, but hopefully the industry moves in the same direction together and from what we are hearing and seeing we think so but we can only control, what we control. So that’s about where we are out. With that, Jason, do you have anything to add on that.

Jason Steris

I think, that covered for you Eric?

Eric Tracy - FBR Capital Markets

It did, but again just to confirm it was the kind of plan, the 10 to 15% price increase?

Jason Steris

Yeah, and just to be clear on that we are still in the final stages of fine tuning our fall season, and that’s just an estimate right there of what we are seeing based off of the increased FOBs right now, and every category has a different makeup in terms the fabric, the duty, the particular raw material. So, it’s not black or white, we are going to need to find the balance and from asset and you know and tweak MSRPs and margin builders and certain wholesales and we really got to study it. I'm giving you what I know right now and in the next few weeks here we have till December, the first week of December to wrap up our catalogs, and this is what we're working with right now but I can tell you we're going to be raising our prices and it's just going to be a balancing as we've finesse each style and each division. Some divisions might be different, there might be more sensitivity, some boys or girls and so we kind of just got to look at all that.

Richard Woolcott

Yeah, I think Jason that's important point because when you look at it on the floor you probably going to have some thresholds where we wouldn't make sense for environment to go above the certain price. So we've got our work cut out for us but we're on it and we've already started it and we'll are just going to continue to fine tune as we go through the process of these, each season in terms of just how we are looking in each category in price environment.

Doug Collier

And I think long term, I think right now there the cotton prices have shot up and due to the shortage of the arms and that could be a short term issue and on six months, eight months, I mean who knows what the next cog could be. We got to take all that consideration in. I think with every decision that we make here, we make sure it's a long term decision and for making any major adjustments to categories that we feel that there is value behind each piece. So, we'll find the right balance for sure.

Eric Tracy - FBR Capital Markets

And Jason brought up the cotton piece and I guess the visibility that you might have through the supply chains, you think about I know you source you are going to buy and finish goods and maybe that cost of cotton and sort of what maybe your suppliers are saying in terms of how they locked in, how that maybe flows through? Could also what visibility or how for out you kind of have visibility to that?

Doug Collier

Yeah. Sure. One particular category, a big part of our businesses are t-shirts and we have locked in 2011 with our vendor for scaling our t-shirt projection on the majority of the year to just make sure that we had cotton and that would be cotton coming from the US here, and that was a little bit easier to do in terms of getting good visibility and confidence that we are going to be able to cover that category with the availability and the timing and all that. It’s a little more challenging overseas, but working through each one of our vendors, we’ve also given projections on the categories that they do and it’s just there is so much going on over there and just with the lead time on it is the bigger issue is, is making sure that we can deliver all those products on time that we are buying, because I think with some of the shortages we are seeing anywhere from 30 to 40 extra days lead times on the fabric. So, just making sure that we get the cotton is probably the bigger issue in terms of over the price right now. And right now we are working with some really good vendors that we worked with for a lot of years, some of these guys for 10 years and like I said, our team was just over there with our plans for next year and ensuring that stuff is going to be there for entire year. It’s something that you’ve got to stay over there constantly and make sure you get visibility of it, and that’s something we are going to be doing throughout from now until next year. Just making sure we have got our teams over there on the ground and makings sure we are focusing on our delivery dates.

Jason Steris

I think for now, I feel on the short term we are going to be okay. And we will be able to ride this out and it’s some fading time and everyone’s in it. So, I think you’ve just got to make sure you got the right visibility and just being aggressive with each one of these programs that’s out there.

Eric Tracy - FBR Capital Markets

And then last, can, you maybe just touch on the special dividend, Richard, as you think about various alternatives you have in terms of driving shareholder value, sort of thinking through it, investing in the business, acquisitions and sort of miss be it buybacks or dividend, is that the most superior return at this time or just how we should think about that?

Richard Woolcott

Sure. Well, we’ve had major cash build ups over the course of the last couple of years with the company. We have no long term debt and we’ve had a lot of questions come up, hey what are you guys going to do that, your cash. And in terms of looking at it all, I mean in terms of the operation and the strategy that we have with the company right now building the Volcom and Electric brand, we do need some cash to do that just like we did with bringing Spain on board and bringing Australia on board, but there is not a huge cash out laid for us to grow the business. I mean just the operations themselves can fund the business like we’ve been doing whether it be in-store build outs, you know additional advertising and stuff like that. So we don’t have a major cash need to grow the company right now, and even if we did do or even after we have done dividend we still had a lot of cash in the bank if a particular acquisition were to come up that was exciting that made sense. So, we are still flexible and nimble and we still got a war chest even with this dividend.

So that’s kind of our thinking on the acquisition. We don’t have anything on our radar right now outside of the investments to build Volcom and Electric. And in terms of now we are looking at the other options in terms of the cash dividend or a buyback just in the meetings with the board we really felt like giving back. Investors at this time seemed the best use of that additional cash. And particularly from a timing standpoint the tax benefits that you have this year for dividend, that another one was driving factors of doing it now in 2010 versus somewhere down the line. So, we took a long time thinking about this and felt this was appropriate to give, you know to share in the success that we've had with the shareholders that are believing in Volcom and have been patient with us.


Our next question comes from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen - B. Riley

I guess my first question is really one, on clarity on the gross margin and your expense levels thinking about next year. I assume you are still and I think you mentioned that you're still planning to leverage next year and obviously there is lot of moving parts in gross margin and I'm wondering are you thinking that the leverage will come from a combination of gross margin being up on a net basis, on a consolidated basis next year and SG&A being down as a percentage or is it more weighted on SG&A being down more and maybe gross margins are flattish on a percentage basis? Any more color you can give us on that?

Jason Steris

Jeff, we're not really ready to dive into 2011 just yet, we got to spend a lot of planning on that and we have a good picture of what we think it's going to look like, but we saw after more to do and finalize that and get approval from our board and all that kind of stuff. Bringing on these head longer term, we've talked about what our plan is for 2014. So, it's going to be a combination of all those things and we are realizing one of the important things to meet our goals is we're going to have to start leveraging that SG&A moving forward.

As far as the gross margin is concerned, well, we do have some sort of negative impact in the US segment, I mean a lot of the areas where we are building our business going forward has been high margin businesses in Europe and in direct to consumer and the Electric, great margins there. So, what all that’s going to look like in 2011 we are not prepared to talk about that yet, but longer term I think that’s definitely the goal of ours.

Jeff Van Sinderen - B. Riley

And then, since you just mentioned the EU region and there are some high margin opportunities there, maybe you guys can just touch on where you see the biggest potential gains being made in the EU region? Obviously there’s a lot going on in that area in certain countries in terms of, they’ll put their political situation and what they are doing with, what’s happening with spending in taxes and all that sort of stuff, so maybe you can just comment on that and what you are seeing? Obviously Germany is a stronger area right now. Maybe you can just mention UK, France and so forth.

Richard Woolcott

Yeah Jeff, this is Richard here. Well, I think that as I said we have got our kind of power countries, such as our top ones, we have got France, Germany, Austria, we’ve got Switzerland, we are just brought in Spain. I think that’s going to be a good opportunity for us moving forward once we really get it in-house as we said we are going to be shipping back half in next years and our distributor will take care of the first half of the year. So kind of taking a step up in talking with the management team there, we had a conversation with them last week. First of all, we are starting to see some stabilization over there, it really was mimicking what was happening in US but it was delayed a bit and now they feel they are just, things are stabilizing they feel like they are starting to see the light at the end of the tunnel. The good news is that Volcom is a strong brand over there, we are seeing good sell-through, we saw some good sell through in fall. We had the weather co-operated for us there, and there is excitement around the brand in a lot of the key territories and there is room for growth in the distribution that we're still in and we are focusing in our in-store shop within shop contest our build-outs looking at marketing initiatives and we're looking at each country separately to see where their needs are and where the brand is from a distribution level and even from a connection with the consumer in terms of how well they know Volcom and what kind of marketing we're going to need in that particular territory and then all the way down to product categories, which product categories are working, which ones are maybe new in the scene such as there is a lot of room for boys. There is room for the stone age.

So there are a lot of moving parts but there's a lot of opportunity when you kind of break down each country, whether it be like you said the Germany, Australia group, the France Group we do good business in Italy, UK has come back, so it was fairly optimistic. We still need to get through some of the rough spots, because there are some countries that are still struggling, but overall the teams fell good with the plan moving forward and the investments and the returns from whether it be product, our categories, marketing and our teams that are on the ground.

I know it feels encouraging. We just got to give it time and it’s a good business. I think it can be a lot bigger over the period of the next couple of years and we are going to take I one step at a time with each one of those countries.

Jeff Van Sinderen - B. Riley

Okay good and then maybe, since you touched on the store in store program, can you comment a little bit on where you are in that whole cycle of store in store rollouts in the US and how we should expect that to evolve over the next couple of quarters?

Richard Woolcott

Well, it’s interesting because there is a variety of those concepts for each kind of different scenario. I mean, you've got the big build out which could just be your floor action wall units, then you've got these store in store concepts where you go in and you build a bigger section, almost like a Volcom store within a store and then you got to figure out who's going to manage the inventory, or how the dynamics work in that, and that can be different. Up to what we just did recently, we've got a very successful license store that we just opened in Canada, where it's kind of your pure licensing agreement. And that's working well. And then you've got the things where we own the store outright.

So there is all sorts of different models that you can use. And I think you need to be open and flexible with it. And the bottom line at the end of the day is you want to have as much representation as possible out there in the retail environment, that's got a good experience, that presents the product well, and then also that's working with your retailers. So there is all sorts of models that you can do. And we're finding all creative ways here in the US, we're talking about it in Japan, we're talking about different ways to do it over in Europe. And you can learn from each one. One might work really well in this territory in Europe, doesn't mean it's going to work well the same way in Japan because maybe there is a different way to do it in Japan.

So I think the concept itself a better of this kind of this representing the brand at the next level out of retail is that's really exiting right now for us on a global level. And we're continuing to add to it. I don't if that answered exactly for you, but I think you can look at this on a global level with different types of scenarios.

Jeff Van Sinderen - B. Riley

So it's something it's sounds like you're learning from it, and going forward the deployments could actually be even more productive than some of the earlier deployments?

Richard Woolcott

Yes, for sure because I think these different countries have a different way to do it. And you might do it one way in Europe and go, "oh my gosh, let's take that back over here and maybe adjust it a little bit." So yes, we are definitely picking up more and more ways to approach the future in terms of how to present your product out there working with your retailers. And no, we are excited about it.


Our next question comes from Paula Torch with Needham & Company.

Paula Torch - Needham & Company

I just wanted to switch gears quickly and ask about Women's. What has the department store response been to the Women's product? We have been noticing that you are getting some more penetration in Bloomingdale's for example. So I was wondering if you could give us a little bit more color there on how much penetration you are getting and how many doors you may expect to be opening by year end?

Jason Steris

Yes, you are spot on, on the Bloomingdale's. We have been doing quite well in there and pretty new account for us. We are in about 11doors right now, and in terms of new doors moving forward not quite sure if there if is there anything on the horizon at this point. However, we've really just been focusing on those 11 doors and making sure that we had the right presentation; right sell through to take that next door expansion there.

In Bloomingdale's for the Junior's right now, it's probably our greatest success in terms of performance. Macy's has been more difficult for us right, our door count has been reduced over the course of this year, kind of quarter-by-quarter. And I think the bigger issue there right now which has kind of been the action sports, I don't think the consumer right now is really responding so much to the action sports customer, and price has been a bit of an issue too. So we are working really close with the Macy's team.

We do have some success in some key areas that are working. Over time I think we will build it back when that Junior's customer responds a little bit more to action sports, and in the meantime we have a great relationship with them, and we do have some success and some good doors, and some other local doors that are maybe surrounded a little bit closer to the action sports industry itself. And then I think we've talked about Nordstrom's in the past, and last year they had actually stopped carrying action sports. So that's kind of the other department store there.

So overall I see Bloomingdales is our bright spot for the partner store business. And as we move into next year, like I said our teams going to focus on what they can from product and programs to try build that Macy's business back over time.

Richard Woolcott

Paula one thing to note is that what we are seeing, and Jason we've talked about it before just seeing some bright spots in our Junior's business at the quarter level. And then just recently, one of our sales people came back and was on the road and have two different larger accounts ask for branded Volcom T-shirts for their Junior buys, which was telling us that kind of what Jason was saying right now is we have seen that Junior's customer kind of take on other opportunities that are out there in the marketplace and maybe back off a little bit on action sports over the last couple of quarters. But what we are hearing from our buying team is now buyers out there are coming back asking us for branded T-shirts for Junior's, which I think is a really good sign that that customer is slowly coming back to action sports. And that's really what we're looking for in the long term.

And our bigger strategy for Junior's is to make sure that we're completely on our game, we have the right product, right merchandizing, right marketing in the stores and out there on the front line, so when that customer does come around we're ready to go, and Volcom is front and center.

So I was really encouraged the other day when I heard that two different bigger retailers wanted a Volcom branded and T-shirt. That's really the start of maybe a trend where the customers are looking for action sport Junior's product. And they wouldn't be asking us for those T-shirts if there wasn't a demand for it, or if they weren't seeing something.

So I thought that was encouraging, and eventually if we do get back into that trend I think it will go back into the department, and other department stores will pick up on it and go, "hey we've got girls coming in asking for more action sports branded product and we better get on it." So I mean that's what we're looking at long term and hoping that that trend comes back around. And if it does, we will be ready for it.

Paula Torch - Needham & Company

So I just wanted to ask also quickly given the time about Denim, just as a category has sort of seen a little bit of pressure. I was wondering if you could give us your thoughts on the category and your business in particular anything that you're doing differently that you can share with us to differentiate yourself, and how do you feel about your inventory position in Denim for the balance of the year, and maybe you can also update us on Junior's.

Jason Steris

Yes, so for Denim for us it's been a major driver for our categories for sometime. In last couple of years we really increased our marketing, and our messaging, bringing product into the whole road tested campaign with Volcom brand jeans. And we have had a very successful business over many years with most of our account payers, especially at the quarter level when you look at some of the sell through reports, whether it's the action launch report, or anything we do have a pretty significant piece of that market share. So we have got a very healthy business over a long period of time, and a dominant player in the denim category.

What we saw this year was probably a bit of over inventoried in marketplace. Lot of the mall channel went on sale pretty early, I think due to just having a lot of inventory out there. And it seems likes it's been a little bit of a slow category, not what we everybody had expected, and just a lot of inventory and a lot of availability out there.

We have actually still seen very good sell through from mostly our core accounts that may not be competing our price as much. And we are still seeing a good business. We have got lot of our program, particularly on the Men's side which is carryover products. So in terms of inventory we are stuffed with good shelf life. And knowing that it is a little sluggish right now, I think for us we will continue to market it and continue to be behind it. Its not a flaks in the pan category for us, its referred to as our backbone on the many occasions. And we will continue to focus on it.

One area where we have seen kind of shift a little bit in terms of sell through is with the Chino pants, in our Slim Chino program, and might see us shift a little bit, some of our marketing towards that. But we will definitely stay rooted with the Denim program, as we move forward and you will see that for us on an on going basis.

Richard Woolcott

Yes, and Paula to add to that, even talking with our retailers too, they've even said, “hey we want our store to move forward with Denim an important category for us and for you guys, but maybe we will shift a little bit of dollars to be another pants such as the Chino.” But from what we are getting from retailers they by no means are getting out of the Denim business. Its just, "hey lets just adjust it to where the customers demand is at this time." And so we are just making adjustment as we go into next year, but we've got so much invested in Denim, and so do our retailers that we will continue to be supporting that and driving customers to our Denim program. But probably not as much from a volume standpoint as before because it switches a little bit into another category, which is very typical to what we have seen.


Our next question comes from Edward Yruma with KeyBanc.

Unidentified Analyst

This is [Charlotte] for Edward. So I have two quick questions. On the inventory can you just clarify the $3 million in terms of the excess inventory, does that represent the entire amount that needs to be liquidated, or will there be some expectation of the carryover into the following quarter? That's the first question. The second, in terms of the snow business, last call I think you mentioned a three stance shift in the snow on an EPS basis from 3Q to 4Q as a result of just delivery delay. So just wanted to clarify if that's still accurate and reasonable to be thinking of it that way? And also in terms of the timing of the delay was that wider than you originally expected because you mentioned 30 to 40 days as opposed to a couple of weeks, so if you could clarify that, that would be great.

Jason Steris

In terms of that $3 million at this point in time that's the forecast that's based on looking at our inventories, what we're anticipating new business to be going into the holiday season. I mean, holiday obviously hasn't started yet, and it's still a projection at this point when we kind of look at what the inventory is that we feel has the shelf life and that's part of the carryover program. It's easy to separate that stuff, but the $3 million right now it's still an approximate figure for us in terms of we're still outselling it to our regular accounts. We've got some in season business to do, and it's just our closest estimate right now that we can kind of paint the picture for you guys to help with modeling out the gross margin and all that. So it's probably in that range, I would say.

And if business is a little bit better in holiday and picks up then maybe we can improve that picture. But at this point it's all projection. And then I'm going to pass on the other question to you Doug.

Doug Collier

On the snow we actually did a little bit better than we thought on some of those delays. In the US we got that million. Some of that product was late, but we were able to get some other styles in and pretty shift from stocks for big demand out there for the snow product, so that one probably made up most of that.

In Europe a similar situation, but we didn't get back quite all of that. I'd say of that $1.5 million that we expected to be late, it was probably we got back half of that. In the balance of Q4 guidance it was probably a little higher than we would have expected in Europe.

Unidentified Analyst

And are you experiencing any of those delays as a result of the labor shortages and other issues in China. Are you seeing that impact other product categories? I guess I am just trying to get a sense of how comfortable you are with hitting those deliveries across product categories going into holiday?

Jason Steris

Going into holiday, I think we are going to be okay with our deliveries. I had mentioned earlier our team just got back, they were over there for 10 days, just the home stretch making sure holidays on track, first delivery for spring is coming in on time and the finalizing those fall costs. So it's a 3 point mission trip there. In terms of any thing substantial or material at this point in time we feel good about our deliveries.

Richard Woolcott

The other thing [Charlotte] which is good and what we have talked about internally is, we have this build with carryover inventory in case there was anything that would come up, even when we are going into the beginning of next year with some delays or late deliveries, we have got inventory on hand to fill demand, if that demand is there.

So I think when you look at last year compared to this year, I think last year with our inventories we were so cut to order and even underneath our orders that there was business out there that we couldn't fill because we didn't have the inventory. For this year we have got extra inventory, so if we do have extra potential business in season, we have got the inventory. And if we did run into any problems with late deliveries, even going into early next year at least we have got core good product that can fill it in the mean time. So that's one thing when we look at our inventory, "hey we have got it in case we nee dot if there's anything that pops up that we don't know about right now." So, its nice little cushion to have as we go into these times, particularly as you go into next year with Chinese New Year and all that. So we feel pretty good to be able to fulfill the order that we have right now.


Our next question comes from the (inaudible) with Jefferies.

Unidentified Analyst

Just one quick question related to the shop and shop investments that you're making. I guess this physically was taxed on. Can you just talk about how that strategy is evolving? How many do you have, I think you mentioned that you had about 20 last quarter, how many do you have now? What the plan and maybe just give us more color on how that relationship is evolving. It sounds like they are investing more behind third party brands; just give us some more color there. Thanks.

Jason Steris

We have 25 of those in store shop and shops that we put in kind of right just before back to school and the overall Volcom presentation in those stores looks really good. Our sell-throughs been strong in those accounts and we managed that inventory kind of on a store-by-store basis with those individual locations in the particular sell-through versus kind of the overall chain buy and that's kind of been the new process of doing business with them and its been successful and we look forward to doing more next year. Nothing is concrete at this point but we're going to always try and do more of those as we move forward and I think with this first batch, then doing it with a couple other brands sort of a test pilot and we're still working on our budgets for next year and kind of gearing up for all the stuff in to next year is the plan but in the back of our minds, its something that we'd like to do more over there. We're successful, so why not build on it.

And then kind of moving into the overall business, yes I mean it definitely feels like there has been the return back to brand particularly on the men side, our business is good for Q3. It was up 5%, our men's business was up much more than that. Our growth business has been down and then driver would definitely be on the men side of things.

We got the Q4 planned up 17% and within that men has grown substantially. So overall, we're pleased with the business, the relationship is strong, working closely with their teams on all marketing product initiatives and we're seeing a little bit more ATS business or at once business off of our ATS. We're with them throughout this year which is something that is kind of new to the business. So kind of having that on hand inventories has been helpful for that case.

And then even on the junior side, although it's been down, we have had some bright spots throughout even in Q3 some of those results of being down 2%. We had a decent piece of business through PacSun on some programs that our team work done, on kind of a faster SME program. So with the right product and the right mix and the right strategy there is definitely juniors business to be done there. And we're attacking it on all levels. So, we're pleased so far.


Our next question is comes from Jonathan Grassi with Longbow Research.

Jonathan Grassi - Longbow Research

I guess, can you just talk about the Electric business and I mean, obviously it's kind of long here, I guess what channel are we seeing most of the strength in? Where do you think the greatest opportunity lies for the business? And I guess if you can give us an idea of kind of the market potential for the product, that'll be great.

Richard Woolcott

Yes. Jonathan, this is Richard, I'll jump in here with the Electric business. So I think first and foremost the majority of our business we're doing is in our core shops across the country. We have increased our category now with the soft goods so you have got good sunglass business and business you can get all year in the sunglass division.

Starting last year, we have really ramped up the goggle business and now you are seeing all those deliveries now in Q3 and that's been a very strong business and a lot of opportunity for the Electric brand now as you go and look through distribution and all you mountain stores and not only in the US but also in Europe too.

And then you have got the soft goods program which is like you fleece, your beanies, t-shirts, a little bit of cotton sale and then a piece of that is bag program that we have been very successful with the back packs over the course of the year. So we now have these three very, or actually we call them four soft goods and bags, goggles and sunglasses. Each one of those categories is really performing well right now and that's where we're seeing a lot of success in growth and kind of that momentum and then from a distribution standpoint, I think there is a lot of room to grow at the core we are getting, we are having success of that specialty level. You got sports stores there and then there is lot of distribution that we're not in yet particularly I think in the sunglass hut business. We're still in just a 100 doors there and they have more doors. More opportunity there as you move into the future and so do a lot of other retailers too.

So what we have tried to do is focus on those key categories and focus on the distribution channel that we we're are already in and just go get more market share we are putting in a lot more of the display cases for sunglasses and for goggles and then we're landing the racks too for the soft goods and then we are also seeing a lot of opportunity and success in the soft goods in the bigger aspects of the change.

So just a lot of momentum across the board. I think the real root of all that is the product is good. We have got strong sell through. There's good demand for it, good branding and you know the customer wants Electric and we've just got to do the best job possible to deliver that quality product on time but the brand's really seeing some movement right now and we just got continue to manage it correctly and I think the opportunity is, it can become a much bigger company if we do our job right. So I think we are on the right track right now.

Unidentified Analyst

Okay great and then just going back inventory real quick, did the inventory increase include any additions from bringing in Australia?

Doug Collier

You've got a slide there that's really not the issue that we're talking about so Sarge, we liquidate it. Yes, I mean there was some incremental amount there. The inventory situation is pretty good in Australia.

Richard Woolcott

Hey John this is Richard, I think the part of that, the inventory that we have this year that we talk about the liquidating, part of that is when we were getting ourselves ramped up at the beginning of the year looking at the back half, we just had a little bit of a higher expectation that the economy and then that consumer spending especially in our environment with consumer goods and apparel was going to be stronger than it actually is today.

And I think the majority of the people as we started this year thought that the economy would bounce back in the second half of the year and our strategy in the beginning was, we're going to go after market share and we're going to have extra inventory to fulfill demand when it happens.

And we got our market share and we have been able to fill the demand up to the point whatever that demand has been and we just gotten a little bit left over because we thought it was going to be a little bit better and I don't think its too much. I think its manageable and we've got good products from moving forward and its really a reflection of what our strategy was in the beginning was in the beginning was, we're going to be more aggressive, then we'll go get market share.

And in order to do that, you got to have a little bit more inventory, and it was a lot different than our strategy was last year. Last year was, hey, we're going to hunker down, we're going to be really tie our inventory and if we loose some business, that's okay, because we don't want to have any extra inventory.

So when you kind of compare the two strategies, its two different strategies. Whereas when we went into this year was almost the opposite, it was like okay. We're strong, we got momentum, we got cash in the bank, well lets go get market share. And it was kind of two different ways of looking at the market and this is the excess, this is kind of a little bit of cost of that strategy of having little extra inventory.

Doug Collier

Yes, to your point, yes we did bring on a couple million dollars of inventory in Australia that are incremental, so it would have come down without that. Yes, this is a fair point.


And your last question comes from Adam (inaudible) with Piper Jaffray.

Unidentified Analyst

Quick question, first regarding the juniors. Do you see that as, there's kind of any change in consumer trend back to the action sports or do you think you guys are just out there with a better product offering due to some hires you made recently?

Richard Woolcott

I think that's a really interesting question. It's kind of a little bit maybe too soon to really tell that if it's a Volcom thing or an action's sports thing. I know that our teams are working hard to better product offerings and have differentiation out there. I know a lot of the other people in the action sports industry are really working hard on their product offering. So I think as a group in action sports, all the manufactures together I mean, collectively we're doing a best job possible to make action sports exciting so we get that customer back to action sports.

Now they are coming back because of Volcom or they'll be coming back because they want to be back in action sports, may be it's a little bit of both. I mean I would hope that it is a little bit of both that they are more excited about our industry again and may be have worked through their desire to have some of these other opportunities that are out there such as the fast fashion. So I don't know Jason how do you look at it? I mean we don't have a tiny information yet. We're just starting to it.

Jason Steris

I think that's a good point. I think the one thing, I just think when you look at what we're doing now and what we've been doing. I think we got may be a pass by, by some of the product out there and whether its in our industry or outside of our industry and really focused right now I am bringing great product to market and exciting that customer and making sure that we're connecting well not only on product and price but lining with our marketing strategies and communicating with our customer.

And this has really brought our teams together to really strategize and make sure that we have the right connection, the right product mix and its staying exciting and relevant to what's happening and not looking back on sell through report and what might have worked in the past and really just moving forward and letting our teams design great product and have kind of seen with injection of the new team and our line building strategy, and our pricing tiers geared towards our distribution and just the product coming to life and just seeing the excitement through it is going to excite the girl customer out there and I feel like we're on a really good track right now with the product.

And that's what we can control right now and I feel as we're out there showing summer right now. We have had a really great response to product and I think that our fall line is going to be really the efforts of the new teams work from kind of start to finish there and what I have seen so far there looks really strong as well.

So I think on our end I think we have done everything we can to make sure we have got the right product mix and the right program to go and even compete and then I think even to Richard's point earlier on the recent request on some girls t-shirt in some of our accounts. I think with right product from this industry, we can win back over that customer.

Richard Woolcott

So yes it's going to take effort from Volcom, it's going to take effort from the other key manufactures in action sports and then effort from the retailers in terms of the in-store experience and all three collectively making that destination exciting for the consumer. When that all comes together, and there is enough energy and that consumer's mind set is ready, when she is ready to come back in that store, that's when we're really going to see a real up tick and if you look at the juniors market, however long it was when it exploded, that's exactly what happened.

You had a number of manufactures presenting great product, retailers got behind it, magazines got behind it, movies were being made about, down to blue crutch and all that momentum together really helped to explode the juniors market and if that happens again I mean what Jason said for us we can only control can't control. We just want to be ready for when those things come back together again because we've seen things are cyclical. They come back around I think that action sports is a definite viable category for the junior's market. It's been a little bit out of fashion and we know fashion comes back around. We just all of us, our industry, our retailers, we're all going to be ready for it when it happens.

Unidentified Analyst

Got it. That makes sense. And then real quick, regarding Australia business, is that something where you kind of hit the run, running at full speed or do you see that kind of ramping up overtime and is there a certain point when you see that kind of at its max capacity going full speed?

Richard Woolcott

I think it's going to be a step-by-step process. First things first, is we're now in there actually we've got our teams over there right now. And we're going to go back to the basics from making sure we have the right product, making sure we have the right marketing and advertising and time that product making sure that we have the right presentation in the stores and having the strongest connection possible with the consumer and then slowly building from there.

I don't think you're going to see a big giant ramp up right away, but I think with anything if you take time and do it correctly, Australia is the key market, very important on a global level not only from fashion but with athletes and trends and tourism. I think over time we can be a significant player there and I think there is good business to be done over there. But it's going to take time and you got to do it step-by-step and one thing that we are successful at as we know how to build the brand and deliver great product and to grow the right way and we're going to take that strategy to Australia.

Doug Collier

The one thing I might add to that is we had one of our executive spend an entire year down there, started about a year and half ago something like that. So a lot of maybe some of the bigger issues they had around product and infrastructure and things like that. We actually worked with them before the acquisition thing corrected a lot of those things and some of the like the key maybe areas for improvement I think are already been accomplished and so it's kind of weakened the process, where we can build from this. Some of the work has already been done even before the acquisition.


I am not showing any other questions in the queue at this time.

Doug Collier

Okay, well I just want to say thank you to everybody that's been on the call and for the support this quarter and we look forward to talking to you soon and having a good holiday. So everyone have a great day. Thank you.


Thank you ladies and gentlemen, thank you for your participation in today's conference. This thus concludes the conference you may now disconnect. Good day.

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