Volcom Management Convinces PPR to Pay for a Melting Ice Cube

Includes: PPR, VLCM
by: Retail Geeks

This week, it was announced that ING Prime Rate Trust (NYSE:PPR) entered into a definitive merger agreement with Volcom (NASDAQ:VLCM).

We've previously written about the consistently disappointing financial results and management team at VLCM. The company has seen its EBIT margin decline from 21.2% in FY 2006 to a miserable 7.9% (trailing 4-quarters through Q1 2011). The dramatic EBIT margin decline has continued at a time when many of its wholesaling peers were reporting record profitability in FY 2010 (click here to see our company Data Packet).

vlcm new
(Click to enlarge)

During PPR's conference call this week, Jean-Francois Palus made the following statement:

"And we expect the Volcom brand not only to recover historical record margins, but also to exceed these margins due to the synergies that we will develop that I mentioned, particularly sourcing."

Good luck with that, Mr. Palus.

In February 2011, VLCM management suggested that its goal was to deliver revenue of $550 million, GPM% of approximately 50%, and to return to operating margins of 15% to 20%.

No responsible analysis of the company's financial performance would have thought that these goals were achievable for VLCM. In addition, in our view, no responsible management team (or BOD) would accept PPR’s offer if they thought the company had a reasonable likelihood of reaching these longer-term goals.

PPR’s Co-CEO made an interesting statement on the conference call:

"And finally, starting in 2010, the company invested in structuring the company. And so, the reported to as compared to sales, the level of general and administrative expense had increased."

Has Mr. Palus actually looked at VLCM’s numbers? Bloated SG&A has been the primary reason of VLCM’s EBIT margin deterioration over the past 5-6 years. VLCM's SG&A% has increased from -28.5% in FY 2006 to -39.8% in FY 2010. This was not a one year anomaly as Mr. Palus seems to want to his investors to believe.

The fact is that VLCM has been one of the worst financial performers over the last 5-6 years in the wholesale apparel space.

That said, it appears that VLCM’s best managerial play over the past half decade was to convince PPR to pay a fairly aggressive price for what can best be described as a melting ice cube. And, VLCM management pulled this off without any strings attached:

Emmanuel Raymond – Nomura Asset Management
Are you offering any earnout to Volcom management?

Jean-Francois Palus – PPR SA
Oh, no, no.

Good work, if you can get it. Congrats to VLCM management and the company’s shareholders for finding someone (PPR) to, in our view, over-pay for a company that will struggle to make $0.80 this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.