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Volcom, Inc (NASDAQ:VLCM)

Q3 2007 Earnings Call

October 29, 2007 5:00 pm ET

Executives

Hoby Darling - Vice President of Strategic Development and General Counsel

Richard Woolcott - President and Chief Executive Officer

Doug Collier - Chief Financial Officer

Jason Steris - Chief Operating Officer

Analysts

Jim Duffy - Thomas Weisel Partners

John Rouleau - Wachovia Securities

Eric Tracy - BB&T Capital Markets

Jeffrey Klinefelter - Piper Jaffray

Mitch Kummetz - Robert W. Baird

Jeff Mintz - Wedbush Morgan

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time I would like to welcome everyone to the Volcom, Incorporated, 2007 Third Quarter Financial Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session (Operator Instructions).

I would like to introduce Mr. Hoby Darling, Vice President of Strategic Development and General Counsel, Volcom Inc., to begin the call. Go ahead, Mr. Darling.

Hoby Darling

Thank you Sarah. Good afternoon, everyone, and thank you for joining us today to discuss Volcom's 2007, third quarter financial results. Joining me on the call today are, Richard Woolcott, Volcom's President and Chief Executive Officer, Doug Collier, Volcom's Chief Financial Officer, and Jason Steris, Volcom's Chief Operating Officer.

First, some housekeeping items before we begin. If you would like to be added to Volcom's e-mail distribution list to receive Company information or if you'd like to change your contact information, please contact David Stankunas at Pondel Wilkenson at 310-279-5975.

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 websites.

Please also note that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The Company's discussion today will include forward-looking information reflecting managements 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 institute forward-looking statements.

These forward-looking statements are based on management's current expectations, but they involve a certain 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 the Company's business.

Certain risk factors associated with Volcom's business are set forth in its form 10-K for the year ended December 31, 2006 and subsequently filed quarterly reports submitted on form 10-Q.

The Company disclaims any intent or obligation to update these forward-looking statements except as required by law. All are 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 Wolcott, our President and Chief Executive Officer.

Richard Woolcott

Thank you, Hoby, and good afternoon everyone. I am proud to announce that we have once again delivered solid financial results this quarter, and as we close in on the end of the year, we remain focused in on growing our business while maintaining the strength of the Volcom brand.

In terms of the third quarter, we met the top end of our revenues expectations with total revenues of $91 million, up 49% over last year. We also beat our earnings guidance with net income of $14.5 million, translating to diluted earnings per share of the $0.59.

Year-to-date our Company has shown strong growth, with revenues up 34% compared with last year, net income up 24% to $26.2 million, and EPS growth of 23% to $1.07.

I believe these results are a refection of our team's effort to promote growth while maintaining brand quality and integrity. Volcom is extremely well positioned and continues to experience solid sell-through at retail.

Our unique marketing initiatives and innovative products have kept us at the forefront of our industry despite the competitive environment. Many of the recent analyst surveys, magazine polls and channel checks once again report Volcom as one of the best, if not the best, performing brand in action sports.

We have had a number of home runs this year and I am proud of our team's accomplishments both here in the U.S. and Europe.

I would first like to talk about our biggest project this year, the successful launch of Volcom Europe. The third quarter featured our first full quarter shipping product in Europe and the results were on right on target.

Our European distributors are excited to be back with the Volcom mother ship and looking forward to the road ahead. Now that the first phase is done, we are currently working closely with our European team regarding the strategy for the next several years.

For 2008, we see the majority of our European growth coming from our existing account base. We plan to begin building our in store presence to our store-in-a-store concepts, racks and displays. We believe this will increase sales for 2008, but will really set the platform for 2009 and beyond.

With regards to territories of opportunity, we see a lot of potential across the board. Right now our top five territories include France, Germany, Austria, Spain and Italy. We are also strong in Switzerland and Norway.

We see opportunity moving forward in the U.K., Italy and Sweden to name a few. The eastern European countries, such as Poland, Hungary and the Ukraine, are just getting going and could be potential growth drivers down the line.

Finally we continue to build our infrastructure and hire personnel where needed. Right now, we currently have a team of 85 people working in Europe and both the U.S. and European teams are constantly in communication and meeting on a regular basis.

Moving on to our domestic business, I believe we have done a good job of diversifying our account base over the last 12 months, allowing the Volcom brand to reach a wide range of consumers, while keeping our core following intact.

Our core accounts, which often cater the most dedicated customers, continue to show solid growth despite a challenging economic environment and less than optimal weather conditions.

In the third quarter our business outside of our five largest accounts and outside of our European business, grew 26% and for the nine-month period it grew 28%. We continue to be encouraged by the positive results in this segment of our distribution.

I believe the biggest improvement we have had this year with the distribution strategy is lowering the concentration risk with any one customer. Our largest customer, PacSun was 27% of the business at the end of 2006 and now they are approximately only 17% of our overall business at the end of the third quarter.

The key here is that we have been able to grow our revenues and our earnings while the concentration risk of our largest customer has greatly decreased.

Let me take a now take a moment to further discuss our business with PacSun and how we are modeling our business with them for the remainder of the year. As most of you know, our business with PacSun has been long standing and they are one of our top customers.

We continue to believe that Volcom is a very important brand for them, and that sell-through has been good, but other the past year we have reported that our visibility into our business with PacSun has become increasingly limited, resulting in quarterly business that has been difficult to predict.

We believe it reflects the ongoing changes with in PacSun. While their team has expressed that we are one of their strongest brands, and we are performing well in their stores, this shift in PacSun's business has had an impact on our growth with them.

On our second quarter call; we estimated that our PacSun business would be down approximately 15% in the third quarter compared to the same period last year. Our PacSun business was in fact down 23% from the third quarter of 2006.

When analyzing our PacSun business, we believe that one of the reasons we're down is due to PacSun reducing inventories in their stores. This directly affects the amount of Volcom on the floor, resulting in fewer orders.

We've also noticed our girl's business is down, which we believe is due in part to change in their strategy to bring in more private labels within this business. However our men's business is strong right now, including a very successful polo and chino short program.

Given that we continue to be challenged by PacSun's change in strategy and ordering patterns, we are projecting our annual business to be down approximately 10% versus our original estimate of being down mid single digits.

This estimate therefore suggests that our fourth quarter PacSun business is expected to be down approximately 20% over the same period last year. Finally, I'd like to point out that even though we are going through a challenging time with PacSun, we are excited and committed to working closely with them.

We have a strong working relationship and we are focused on maximizing all opportunities moving forward.

An area of distribution that has been picking up steam this year has been our Volcom brand of retail program. I am very excited about this program and believe our stores are a great vehicle to showcase the Volcom story.

It's a healthy way to slowly grow our business in areas that are under distributed and these stores have also shown that they can serve as a solid distribution channel. We currently have five stores in operation and plan to open our sixth retail operation in Berkley, California in the next several months.

Our seventh store, which will be located in Waikiki, Hawaii, is planned to open in late spring of next year. We also opened three new license locations this year working with our international partners. These locations include Tokyo, Japan, Durban, South Africa and Sau Paulo, Brazil.

I would like to note that we have three additional international stores, one in Indonesia, one in Thailand and one in Hossegor, France. Our retail program has been performing well thus far and we are excited to continue opening additional locations in 2008.

Now let's turn our attention to product. Our product categories continue to perform well and the read so far for our spring 2008 collection has been solid. We believe we have the right product mix and instead of going into new categories, our strategy is to focus on our existing categories and strengthen what we are already doing. This is a very exciting time for Volcom design and we are more passionate than ever to put out the best product possible.

With that said, I would like to take a moment and highlight some of our categories. With the success of our initial swim launch we were excited to hit the road with our complete spring ‘08 collection. This line was well received at the Miami Swim Show, ASR Arms Expo and will begin hitting the stores in December.

The summer ‘08 collection also looks amazing and the sales team will be back on the road this week. Overall the swim program is well positioned and a great compliment to our girl's product. Since launching our Creedler footwear nearly a year ago, we have successfully established our distribution, strengthened our product mix and developed our in store presence.

I believe our Creedler division is solid and we are primed to capitalize on the strong foundation we have set up. So far, our strongest performing Creedler category has been the open-toed sandal program and we see a great deal lot of potential for growth for this particular category.

As for the closed-toe business, we continue to have sell-through in, the overall Volcom slip-on category has slowed. This slowing has had an impact on our projected slip-on sales, but our overall footwear category has grown from last year due to the success of our open-toed sandals.

As we move forward with our Creedler category, the focus will shift to the sandal category, which is where we feel we can better compete and continue to grow the business.

Turning to our kids and boys lines. We are very pleased with the support and enthusiasm we are getting for these new categories from our retailers and customers alike. We see this category as a great area for growth moving forward.

Another product category I'd like to highlight is our snow business. As many of you might remember, last year was a tough winter for most regions. Unfortunately, this has caused many of our retailer's outlooks to be more conservative with outer, wear pre-books. While outer wear is only 11% of our business, this category is expected to come in lower than we originally planned as a result of the prior year's poor weather conditions.

And even with the weak season and poor retail environment, our domestic snow business still grew 15% year-to-date over last year. I also believe that our Volcom outerwear is some of the best in the industry, both technically and aesthetically.

I’d know would just like to briefly touch on marketing. As many of you know our marketing and branding initiatives have been relentless. We pride ourselves on our athletes and grassroots programs, and we have worked hard over the years to establish ourselves as an industry leader.

Currently, our marketing programs are going full force and we have no intention on letting up. We really hit the scene hard this summer and fall with the promotional tours, in-store demo's, Let's Live movie premieres, the Rock 'N' Roll Tour, our Let the Kids Ride Free contest, advertising campaigns, and general marketing mayhem.

One recent highlight this fall was Ryan Sheckler's successful new show, Life of Ryan, on MTV. Ryan, who is one of our top skateboarding athletes, has been working hard on the show and it is slotted for a second season and we all look forward to the new episodes. Ryan was also on point this summer, winning almost every skateboard event he entered.

As we move into the holiday season our grass roots attack will be 110%, from the Hawaii House and our rock tour in Europe, to our recent hosting of the Damn Am Skateboarding Finals, last weekend, right here in our parking lot; our marketing troops are on it. For more information on what is going on, please check out our website at www.volcom.com. It has the highlights and upcoming activities.

Now I'd like to discuss the current business environment and how we think it will affect Volcom in the future. As we look forward, we are now faced with a new obstacle that has not been in our path before as a public company.

It appears that we are entering challenging economic times that will take patience and extra effort to work through. Due to the state of the economy, we have noticed a higher level of caution from our retailers than in past years and we must strategize accordingly. In order to adjust to this consumer slowdown, we will need to lower our revenue and EPS guidance.

While we certainly are not pleased to tighten our financial outlook, which Doug will discuss in a moment, we have always thought to operate in a straightforward manner, and communicate our challenges along with our successes.

I'd like to make it very clear this is not a reflection of Volcom's overall performance, but primarily a reflection of our decrease in business with PacSun and an inability to make up the lost closed-toe and outer wear business, due to the soft retail environment.

We believe the Volcom brand is extremely strong with in the marketplace and is positioned correctly for the long term. Ultimately, we are looking at this as yet another opportunity to grow stronger as a brand and as a company.

We have always been relentless in our pursuit to be the best in our operations, our products, marketing and the way we represent the industry. We are a very passionate group and look forward to charging ahead. As always, I would like to thank the entire Volcom family, our athletes, retailers and shareholders for their continued support and commitment to the brand.

And now, I would like to turn the call over to our CFO, Doug Collier to review our financial results for the quarter. Doug?

Doug Collier

Thanks, Richard and good afternoon everyone. Third quarter results were once again solid as the brand continues to perform well despite a tough retail environment. In looking at the details of Q3, our European operation had a significant positive impact on our results, as it completed its first full quarter as an operating business.

Due to the impact I will provide additional information about the European business, as I discuss our financial results. In order to provide clarity into our business we will report financial results today in three ways.

First, we will give consolidated results. Consolidate results include both our segment, and our European segment. Second, we will separately break out results from our U.S. segment. The segment represents our business in the U.S., our non-European international business primarily in Canada and Japan and our licensing relevance.

And third, where appropriate we will provide the separate results of our European segment. Please note that only our U.S. segment are directly comparable to our 2006 results. With that said, here are some details of the third quarter.

For the third quarter ended September 30, 2007, consolidated revenues increased 49% compared to $61 million in the third quarter of 2006. Revenues from Volcom U.S. segment were $65.2 million versus $59.9 million in the third quarter of 2006 representing an increase of 9%.

This lower than expected growth rate is due primarily from a decrease in business from our largest account, PacSun. Europe posted revenues of $25.8 million for the quarter. This compares to $1.1 million of revenue in Q3 of 2006 attributable to Welcome Distribution our subsidiary that is the direct distributor of Volcom products in Switzerland.

Getting into the details of revenue by product category, let me first provide a breakdown of revenue on a consolidated basis. Some of these categories show significant increases in revenues, due to our European operation shipping its first full season.

On a consolidated basis, our men's product revenue increased 72% to $41.4 million for Q3, compared to $21.4 million for the third quarter of last year. Girl's product revenue increased 15% to the $21.2 million versus $18.5 million in the third quarter of 2006.

Boy's revenue, which includes our kid's line for boys aged 4 to 7 increased 78% to $5.5 million, compared with $3.1 million last year. Revenues from our snow division increased 56% to $20.4 million for the quarter, up from $13.1 million in Q3 of last year.

In new product initiatives, revenue from our girl's swim line was $97,000 for the quarter, and revenues from our Creedler footwear line was $1.2 million. Since swimwear and Creeler were just recently launched, we don't have comparables for the same period last year.

Turning to the U.S. segment our results by product category are as follows. Men's revenue was $27.4 million, a 16% increase. Girl's revenue decreased 11% to $16 million. As Richard noted earlier, this decrease reflects a decline in our PacSun girl's business.

Boy's revenue was $5.1 million, a 69% increase. Snow revenue amounted to $14.3 million, up 11%. Girl's swim revenues were $97,000 and Creedler's revenues were $1 million. Looking at our revenue by distribution channel, on a consolidated basis, revenue from our five largest accounts decreased 12% to $21.1 million in the third quarter, representing 23% of total product sales.

This decrease is primarily due to decrease business with PacSun. For reasons mentioned earlier by Richard, revenue from PacSun our largest customer, decreased 23% to $10.3 million for the quarter or 11% of total product revenue, compared to $13.4 million, or 22% of our product revenue for last year's comparable period.

Excluding PacSun, revenue from our next four largest accounts increased 2.6% to $10.8 million. While this percentage growth is below previous quarters, year-to-date this business has increased 14%. Revenue from our non-top five accounts and not including Europe, which represented 48% of total product revenue for the quarter, increased 26% to $43.6 million for the quarter.

We continue to be encouraged by the strong growth from the non-top five accounts as they include core shops that tend to drive growth in other distribution channels. Moving down the income statement, third quarter consolidated gross profit, as a percentage of total revenue was 50.4% compared with 50.6% in the same period last year.

Gross margin for the U.S. segment was 48% versus 50.9 % in the third quarter of 2006. This lower than anticipated gross margin was due to larger than expected inventory liquidation during the quarter. Gross margin for our European segment was 56.4%, higher than originally planned due in large part to stronger than expected foreign exchange gains.

Consolidated, selling, general and administrative expenses were $22.8 million in the third quarter, of 2007 versus $15.3 million for the same period last year. As a percentage of sales SG&A expense was flat as compared to the same period last year, coming in at approximately 25.1% of total revenues.

On a consolidated basis operating income for the third quarter increased 48% to $23 million, compared with $15.6 million for the same period in 2006. Operating margin was 25.3% for the quarter, compared to 25.5% in the third quarter of 2006. The company recorded a provision for income taxes for the third quarter of this year using a 39.4% annual effective tax rate.

Consolidated net income for the third quarter of 2007 was $14.5 million, or $0.59 per diluted share, compared with net income of $10.2 million or $0.42 per diluted share in 2006. Turning to the balance sheet the company had $81 million in cash, no significant debt, and stockholder's equity of approximately $165 million.

Accounts receivable totaled $67.6 million, at the end of the quarter, compared with $34.2 million at December 31st, 2006. An increase of $33.4 million, or 98%. Please note that of this increase, $22.4 million is an incremental increase from the European segment.

For the U.S. segment alone receivables grew $11 million or 33%. The consolidated receivable balance at September 30, 2007 represents day's sales outstanding of 93 days. If we exclude Europe, DSOs are 71 days. This compares with DSOs of 66 days at September 30, 2006.

Inventory totaled $16.7 million at September 30, 2007, compared with $13.2 million at December 31, 2006,an increase of $3.5 million or 27%. Inventory at the end of Q3 includes $3.9 million of inventory related to Europe, accounting for a large portion of the increase for the nine-month. With Europe included our consolidated inventory turn rate calculates to nine times for year or once every 41 days. This continues to be well above industry averages.

I'll now turn to financial guidance for the 2007 fourth quarter and for the full year. In putting forth this guidance please bear in mind our comments on general caution from our retailers to the soft environment, our business with PacSun, which we are estimating will be down approximately 10% for the year versus our previous guidance of down mid single-digits, a less enthusiastic outlook on the outer wear business due to a challenging 2006 snow season and the slowing of the overall Volcom-ized slip-on category affecting our footwear business.

With this backdrop, 2007 fourth quarter revenues are expected to be between $70 and $73 million, or an increase of 20% to 30% compared to Q3 of 2007. This translates to EPS of between $0.30 and $0.32.

For the full year of 2007 we are therefore lowering our guidance to an increase of revenues of 31% to 33% over 2006, resulting in sales of approximately $270 to $273 million. We currently estimate EPS for the full year at approximately $1.37 to $1.39.

We are increasing our revenue guidance for the European segment for the second half of the year from a range of $29 to $31 million to approximately $32 to $33 million. Given third quarter revenues from Europe of $25.8 million, this translated to $6 to $7 million in the third quarter.

Because fall business is much greater than holiday business in Europe, the seasonality between Q3 and Q4 is expected. We expect the Q4 and full year 2007 annual effective tax rate to be approximately 39.4%. Fully diluted shared outstanding for the fourth quarter, and full year 2007 are expected to be approximately $24.5 million.

While we are not prepared to provide formal 2008 guidance on this call, we currently believe that overall, consolidated revenue and earnings growth of approximately 20% for 2008 is achievable. This includes our initial estimate that our 2008 business with PacSun will be down approximately 10% from 2007.

We intend to provide 2008 guidance when we report our Q4 2007 results. In putting forth this outlook we want to remind everyone of the complexity of accurately assessing future earnings and revenue growth, given the difficulty in predicting the sales of our products by key retailers, including PacSun, of ship from a licensee model in Europe to direct control of the territory, general economic conditions, changes in fashion trends and consumer preferences and sourcing costs.

With that, we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jim Duffy, with Thomas Weisel Partners

Jim Duffy - Thomas Weisel Partners

Thanks, hello.

Richard Woolcott

Hi, Jim.

Jim Duffy - Thomas Weisel Partners

A couple questions for you guys. The snow business, I was surprised to hear you cite that. I thought most of that was done in third quarter going back to my model it looked like you had $2.3 million in snow business in fourth quarter a year-ago.

Richard Woolcott

Yes Jim, this is Richard here. On the snow business, what normally happens is you know we do the majority of the pre-book and get into the season. We do the pre-book and then we jump into the actual snow season and most of the time, we see ourselves trying to find some fill-in business and maybe hitting a couple of key areas and extra fleece and beanies and that kind of stuff that can happen.

What happened this year, is we got our pre-books. Pre-books were a little bit short than what we had projected and in a normal course of business we could easily make that up if we had a more favorable environment with fill-in with fleece and other winter-type goods.

But as we go into this season and see what is happening with the soft retail environment, we just don't see that happening. That's why we do not think we will hit that overall projection that we had originally had.

Jim Duffy - Thomas Weisel Partners

Okay. And then Richard you spoke at the outset about being comfortable growing with your existing channels of distribution. Is that to say you are not looking to expand distribution at this point? I guess, related to that, what do you see is the opportunity to grow the domestic business with those existing channels of distribution?

Richard Woolcott

Hey, Jim, I think I was talking about Europe when I said that. For next year our domestic -- and that is really what we are looking at with our Europe partner, first focusing on our current account base and really building the in-store programs, very similar to the way we did here over the last couple of years. So that's the first opportunity over in Europe, is to dive into our current account base.

Jim Duffy - Thomas Weisel Partners

Okay.

Richard Woolcott

That was specifically for Europe.

Jim Duffy - Thomas Weisel Partners

I guess a question about the opportunity to grow the domestic business still stands. If we are thinking about Europe building on top of the US business, what should we think of as the great real estate for the US business?

Richard Woolcott

You want to?

Doug Collier

I think it's a little too soon to get into that. We did provide a little bit of a look into 2008 and we'll come back to you with more details on that for 2008 when we report Q4 next year.

Jim Duffy - Thomas Weisel Partners

Okay, but within that 20% you must have a component of which you think the US business will contribute? True?

Richard Woolcott

True. But at this time it's premature to get into that and we look forward to catching you up on that when we report 2007 full year.

Jim Duffy - Thomas Weisel Partners

Okay, I'll let somebody else jump in. Thank you.

Operator

Your next question comes from the line of John Rouleau of Wachovia Securities

Richard Woolcott

Hi, John, how's it going?

John Rouleau - Wachovia Securities

Good. You made the comment around gross margins, that you had more liquidations this quarter with expected margins. Just wondering about the inventory level and the content now. Will we see that may be continue into the fourth quarter? Where are you at in being comfortable with the content and level of the inventory?

Doug Collier

John, this is Doug we are real comfortable at the end of Q3. You can see those inventory levels were really in line there. When you pulled up the European portion, they looked really good. I think, going into Q4 we see some potential issues now that we have the potential short fall.

So I think, in looking at sort of the overall consolidated gross margin we see it being a little bit softer than Q4 of last year, but with that said, I think that we do resolve any inventory issues that we had in Q4 so that we start off 2007 clean.

John Rouleau - Wachovia Securities

In looking at Q3 and Q4 it sounds like maybe you have kind of dealt with the snow side of it and maybe now you are looking at potential reorders that might not come through because of the state of the overall environment. Is that accurate or is there still snow out there to be dealt with?

Richard Woolcott

John, this is Richard, the snow, the actual outerwear itself, that for the majority of that outerwear that is cut to order business.

John Rouleau - Wachovia Securities

Right. That's what I thought.

Richard Woolcott

But what we try to do if we you are going your snow season and that season is favorable, you always try to maximize the fill in business with the fleece, the beanies, and other types of more of the soft goods to kind of help ramp it up if there is business out there.

John Rouleau - Wachovia Securities

Got it.

Richard Woolcott

Now, right now our inventories are really clean and it's kind of a balancing act right now. We still want to have inventory in case there is that reorder business out there. But at the same time we don't want to have too much inventory and that's you what saw in '03, we've been very, very conscious of making sure that we are managing the inventory correctly and particularly because we are in the slower enviornment or this retail environment.

So you want two things. You want to maximize any opportunity out there that comes your way, but at the same time you don't want to be stuck with a large chunk of inventory at the end of the year. That’s kind of our strategy with it and so far we have really good balance right now. Feel good going into Q4.

John Rouleau - Wachovia Securities

Switching gears a little bit. I mean, you have always talked about the core and the top five and it's helpful to hear the different growth and what the segments you are doing. You got a layered kind on Macy's west and Dillards with the department store are not really sure. I don't think they are probably top five quite yet but may be they are twelve.

I'm kind of wondering where those are accounted for in those two groups. Maybe you can give us some idea of how big those are. I am trying to strip those out a little bit and see what the growth is minus some of that business at the department stores or some feel for that. That make sense?

Richard Woolcott

Doug?

Doug Collier

Yes, John without getting into too much detail, we can tell you they are not in our top five so they would fall outside that group.

John Rouleau - Wachovia Securities

So they are accounted for in the core?

Doug Collier

What we call -- we call that core our business outside of our top five.

John Rouleau - Wachovia Securities

Right.

Doug Collier

And that includes the ones that you're talking about. And our core business, whether it be the Froghouse, the Surfside Sports all the way on up, to some of our larger retailers. So, but in that group I think we were looking at them it makes up a large dollar percent and I think it's a really good sampling of where the majority of our growth and the strength of the Volcom brand where it's coming from.

So for us when we look at -- when we back out those top five accounts, we are studying that across the board and I think it's a really good sampling of where to brand, how the brand is positioned right now and how it's performing.

John Rouleau - Wachovia Securities

So if core was up 26% in the third quarter and you had out or backed out the department stores, then you see the rest of it up or something fairly similar to that or would it look different?

Richard Woolcott

John, at this time we have not been breaking those out. We look and the other what is important I think what we're looking at now is particularly in this general environment we are very focused on that grass roots component or that very, very core component to the brand and putting that effort, that marketing and support effort into that ground level.

Because we understand that, you know, the success of a brand long term is how it's performing at those key touch points with that core group of that customer and those stores that have the hard goods that really are the stores that are super connected to the board sports.

So our focus, from our marketing and our support teams, is to that group, and for the long term and I think that's why we have been successful over the last 15 years. No, there's no change in that focus and we're going be particularly sensitive to it as we go through this softer retail environment. So our teams are on it.

John Rouleau - Wachovia Securities

Fair enough. And than last question again I know you're not going get into next year a whole lot, but you mentioned an opportunity for you to fix your Europe. I remember just a few years back we pick that time up opportunity here in the US hence it is accelerated your sales growth and it ended up being a nice little boost and secured your place in retail but there was also a bit of a bump in terms of how much that costs and all that.

Should we be looking at that as kind of even an investment into next year or is that more seasonal in nature? Or how should we be looking at that?

Richard Woolcott

Well, I think that's a great question. And I think as we get into the next call we will be able to give more clarity on that. But one thing to remember is that we're working with our distributes over there and so in some cases the distributors will be sharing the cost with us as we're developing territories.

John Rouleau - Wachovia Securities

Right.

Richard Woolcott

We have general marketing costs, sales marketing costs, in-store costs, such -- those types of programs. Where we did it here we were responsible for the 100%. So it's a little bit of a different dynamic over there. We are looking what I can tell you is this is not going be a one-year ramp up.

This would be built into our strategy over the next couple of years over there in Europe and we'll be able to talk about that more on the next call. But so, you've got a happening over a period of time and then we've got support with some of our distributor partners over there too.

John Rouleau - Wachovia Securities

Okay. Thanks very much, good luck.

Richard Woolcott

Thanks, John.

Operator

Your next question comes from the line of Eric Tracy with BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

Good afternoon, guys.

Richard Woolcott

What's going on, Eric?

Eric Tracy - BB&T Capital Markets

Maybe just to extend a little bit on the PacSun situation, obviously, a tough guard in terms -- just in terms of the magnitude of the declines. Can you talk a little bit about, again, being your visibility if it is at all improving with them in terms of the overall Volcom brand going forward.

Understand that the girl’s is focusing on private label, but the guys continue to perform so well for them. I am trying to get a handle as to why such a sort of quick year-over-year pull back as opposed sort of above just more over proactive approach on year-end to diversify away from them.

Richard Woolcott

We can’t go for the first thing.

Eric Tracy - BB&T Capital Markets

In overall in the retail environment or something specific I mean merchandising strategy at PacSun taking place?

Richard Woolcott

No, I would say right now we are working as close as we can with PacSun and both of our teams are in constant communication. So, I don't see that as an issue. I think where we got caught up, number one is in that inventory change.

Where they strategically said we are going to pull back on inventories. Which means our orders are going to be effected. So that's the first thing. The next thing is the junior's business that we talked about. And that’s we have seen a particular slow down in our junior's business with them.

Now in terms of forecasting we're both working on the same number together but what we've had difficulties reaching those numbers, and those difficulties they range in what I was talking about and just, we think we're going to get the business and we get to a certain point and that business just we don't get to that specific number.

And that's why we have had to cut back, for the fourth quarter and the year-end. We just don't physically see ourselves at this point reaching the mid single-digits. I think part of it has been is a the one thing we've talked about before, ordering enclosure to the window.

Sometimes when those orders come in so close to the delivery window we see it's physically impossible for us to produce it in that short amount of time. So what I cant say is that on our end we are doing everything that we physically can to maximize the business.

And I can say between both teams we have -- there's a lot of good communication, we're working well together, but sometimes we're not going hit every single target that we're trying to do, because at the same time PacSun is adjusting what they are doing.

Now I've spoke with them about the long-term and we gave you a figure for next year, the negative 10% that's the first initial number that we've -- that we're working on right now. And I think what we'll do, down line, as we really want to see where do we balance out our business with PacSun and where are opportunities, moving forward.

But now what we doing is we are trying to maximize the Q4. We've given you what we think it's going be and we're getting the initial read for '08, which is the negative 10%. So, that is as much visibility as we have right now.

Eric Tracy - BB&T Capital Markets

Okay just two quick follow-up on that. I mean your sense is it is across the board inventory pullbacks from PacSun, or can you say it's specific to some of the larger brands that they're looking at?

Richard Woolcott

Gosh, you know what? In terms of product mix and what they're doing with other brands I don't know. I mean the only thing that -- a pullback we can re-quantity that pullback in the – in our juniors category.

Eric Tracy - BB&T Capital Markets

Right.

Richard Woolcott

And when you look at for the information that we have got public information on their strategies is that looks like it's how they're changing going into more junior labels private label. That's why our junior business is a part of the reason why our junior's business has been affected.

Eric Tracy - BB&T Capital Markets

Okay…

Richard Woolcott

And the men's business as we said is been really good. We have a really strong polo program right now and we got good chino short program. So we are having success in categories with them but I think we're just caught in-- they're changing -- they're going through their changes in their business and I think we're just caught in the middle of it

Eric Tracy - BB&T Capital Markets

Right.

Richard Woolcott

And we just got a we’ve got a work through it.

Eric Tracy - BB&T Capital Markets

And how do you think about as -- as you are going to work through in terms of again either layering in or sort of ramping up new product categories for one to help offset the junior's business weakness.

Two again expand distribution either with other wholesale, retail partners, again more accelerating Ramp up department source sort of a balance that ramping up brand management.

And then thirdly you mentioned briefly maybe just expand on it the retail company owned retail, feel like you have a good a test base in and you’ve got a sense of the success of those, and given the weakness of the wholesale channel in new again step on the accelerator little bit there to try control the distribution? Or has we think about that.

Richard Woolcott

No doubt I think those are great points and the one thing that I mentioned in my script was what we have -- and we have made a very, very, very conscious effort to work on concentration risk.

And I think if you look at what we've done, I remember speaking with everybody last year and you come town to the end of '06, and you look at our concentration risk with PacSun, our percentage of business was 27%.

And three quarters we’ve been able to go from 27% down to right now, for the third quarter, I believe we are at 17%. I mean that's a dramatic decrease in concentration with PacSun.

And we've been able do that working with our other channels of distribution, some of the new retailers we've been working with, bringing on Europe, looking at some of the new categories and then I look at like we have been all able to do that and successfully grow the business.

We've got also a strong bottom line. So I think that we've been very successful in moving in the right direction and we will continue to do that. I think '08 will -- we're going see that concentration become less and I think, hopefully after '08 into '09 our goal is --I guess to get the concentration risk of any one customer under 10%.

So, we're going continue to keep moving forward because we don't like having these concentration risks.

Eric Tracy - BB&T Capital Markets

Okay. And then maybe just lastly, despite of this weakness there are so have a nice balance sheet and inventory and in a cash position. Here Richard or Doug could you talk little bit about another uses of cash?

When, maybe, you kind of feel like, shares could be attracted potentially to put a buyback program in place?

Doug Collier

I think at this time we're going to look at all the options and make the best use for the Company and shareholders and I think anything that comes across, we will review. But no definite plans at this time.

Eric Tracy - BB&T Capital Markets

Great, thanks, guys.

Richard Woolcott

Thank you, Eric.

Operator

Your next question comes from the line of Jeffrey Klinefelter of Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Hi, guys.

Richard Woolcott

How's it going, Jeff?

Jeffrey Klinefelter - Piper Jaffray

Well. A few quick questions here, first of all juniors in core. I don't know if I missed this, taking away the PacSun business in your core subsidiary distribution, what is the trend line in the juniors business?

Jason Steris

Jeff, how's it going? It's Jason here. Are you looking for a percentage?

Jeffrey Klinefelter - Piper Jaffray

No, just curious in terms of growth and how it's tracking in that core. The reason I ask is coming out of the trade show, it seem there is a strong appetite for juniors in the west coast, life style sector, the board sport sector.

So I am just curious, in those core shops, when you are not dealing with the private label pressure, what rate is it growing or did it grow in Q3?

Jason Steris

Yes, I'll give you a general feel of the division and how it's doing. We're not breaking out that number specifically, but I think you're right coming off the last trade show and seeing our swim booth incorporated into our entire booth and with our product line with the girls it really was an added component to help just build on the entire program.

I think, if you look into the core level across the board, I'd say the juniors business I said steady. I think there's definitely been a little bit of a, I think, over the last five years, a big ramp up of that business but I think overall the business is steady but I don't see it growing at the rate in the core as it has in the last five years.

But I think there is a lot of exciting product in the market place from all brands. And I think, it's found itself in the core right now where X amount of space is allocated in those stores or just you had in the past so many years it was knew new and developing and now the allocated floor space within, each store, where now you are really competing against each brand for the floor space.

So it really comes down to, who has the best product. And then when you look at the swim program for us, on top of that I think that is more dollars for us within our current account base.

And overall I'd say, generally speaking there is a lot of excitement in the junior's business still and it continues to be successful at the core level.

Jeffrey Klinefelter - Piper Jaffray

Okay. In terms of other U.S. distribution, you have been asked this a couple different ways on the call but given the PacSun down 10%, down 10% potentially again next year. Can you give any flavor for your second largest customer, Zumi, for example or any other way to look at the growth concepts with in the surf/skate space, how your business is tracking there?

Jason Steris

As far as breaking out the other top five, we're not really breaking those out right now, but we talked a little bit about the Macy's business on the last calls and definitely see some opportunities there moving forward, as we continue to open some of their doors.

We are looking at opening the girl's business here in the fourth quarter, which is new to us. We'll be in about 26 of the Macy's west locations and about ten of the northwest. So that's growth opportunity for us.

And I think, looking back at some of the moves that we made this year with Dillards and a handful of couple other new accounts I think those are brand new relationships, we are just finding what product is working.

In our men’s division, juniors, boys, kids, Creedler’s, swim there is a lot of opportunities for us to ramp up as we moving forward and just finding what is working for the brand in the retail climate.

I think the new distribution that we have done this year; I think there is ample opportunity right there for us to keep working on.

Jeffrey Klinefelter - Piper Jaffray

Okay. And just a last couple quick questions. Doug, you mentioned that Europe was $25.8 million in the third quarter and that was versus for $1.1 million on a license basis since Q3 last year.

If we get an apples-to-apples number truing that up, should we go off a 6% royalty rate or how do we get a comparable number to last year?

Doug Collier

Yeah. The number is a little top, actually is not $1.1 that was not the royalty that was from our Swiss distributorship that we own. So last year, we would have the royalty revenue and then on top of we’ve got European business, because we owned that for the whole year we had the Swiss distributorship.

So it's a little tough to compare. I think someone brought up the point of the difference between the quarters for Europe and how was it in prior years, and the difference is just that we now own this business so it's tough for us to go back and look and how did they run things?

But with that said we have had good growth there and we’ve been ahead of our own targets. We're already going to be couple million ahead this year. So margins are better and the teams are doing great so overall this start been a real home run for us over there in Europe.

Jeffrey Klinefelter - Piper Jaffray

So margins are better to what extent?

Doug Collier

You know, I think on our last call we said that we were modeling Europe margins to be down a little bit softer than our domestic margins. They actually came in better for the third quarter substantially.

Now when you true that up for the back half of the year, they're going come down quite a bit in Q4 just because they are going to ship samples and things like that, but we did have some good exchange gains in there so they were pretty significantly better than we hoped.

Jeffrey Klinefelter - Piper Jaffray

Okay. And just last question, in terms of Asia Pacific and other markets to me looking for growth opportunities; can you remind us again what the structure is right now in the Asia PAC region?

Any opportunities to extend distribution of license agreements to go after bigger parts, particularly, of the Asian market?

Richard Woolcott

Jeff, this is Richard, here. Yes, I do think that there is opportunity over there but before we totally jump in another area outside the Europe, we really are focused on making sure that, we put all our resources on our Europe business right now.

Because even though we have come out of the gate strong now we’ve got to get ourselves ramped up for the more longer term strategies for Europe and looking at next year and beyond we actually have our European teams coming here the first week of November.

Again they're bringing their top key managers who will spend the week strategizing. So I think there are other opportunities around the world and we are looking at that international business and we're investing in it and working on it, but the first thing we mainly want to make sure we go 110% for Europe as we move into this next year.

Not because there are issues or anything wrong but it's still a young, fresh business and it's a big one and we want to make sure that we are on top of it 110%. So that's the first one. But we're always looking and we’re continuing to invest, but I don't thing anything significant in the near, near future right now.

Jeffrey Klinefelter - Piper Jaffray

Okay. One last question on Europe, you listed your top five accounts or top strongest accounts, and then three opportunities, could you give some break down today, Richard of your percent of revenues in those?

We have has that from other brands in the past it's helpful to appreciate your market share potential in those markets.

Richard Woolcott

Yes, we really aren't ready to break that out yet. Maybe as we move forward with we can look at that and start to kind of dissect the business, but as of right now when I look at the top five guys it's a majority of our business, those top five.

Particularly you have got France, Germany and Austria and then after that you’ve got Italy and so forth. But we could get back to you on the next call with that on how we want to dissect that. But those top five that's the majority of our business.

Jeffrey Klinefelter - Piper Jaffray

Okay, thank you.

Richard Woolcott

Thanks, Jeff.

Jeffrey Klinefelter - Piper Jaffray

All right, thank you.

Operator

Your next question comes from the line of Mitch Kummetz with Robert Baird.

Richard Woolcott

How's it going, Mitch?

Mitch Kummetz - Robert W. Baird

I have several questions still. Let me start with Pac. You said, girls down and guys up, could you say how much in terms of percent?

Jason Steris

Hey, Mitch. How is it going? This is Jason here. All right, if you want to know how much the PacSun business is up?

Mitch Kummetz - Robert W. Baird

Yeah. On the guy's side and how much it was down on the girl's side. I believe you've given numbers like that before.

Jason Steris

Just give us a second.

Mitch Kummetz - Robert W. Baird

Okay. While you guys are looking that up. In terms of your '08 outlook for Pac I know you guys have said you expect to be down 10% is that basically reflect a decrease on the girl's side? I mean would you expect the guy's business to be flattish to may be kind of tracking what you saw in the third quarter?

Richard Woolcott

As know Mitch, we don’t have we have not gone that deep with the team at PacSun, we just kind of got an overall first look at the business for the new year. After that we just don't have any information from them yet on how that will break down.

Mitch Kummetz - Robert W. Baird

Okay. Fair enough. And then as you've adjusted your outlook on the Pac business for the year which obviously reflects what happened in Q3 and what you expect in Q4, does that end up leaving you guys with any excess inventory on your part in terms of special make up product that was intended for PAC, or is that purely just an adjustment to what your outlook is and your willingness to build product for them?

Richard Woolcott

No, there's no extra product. I mean for PacSun, what we do is we don't go into production unless we've got the orders. It's not like we made stuff for PacSun and they're not going take it. That's not the case at all.

Mitch Kummetz - Robert W. Baird

I just wanted to clarify that. Okay and then a few things on Europe. Doug, you were kind enough to break out consolidated versus U.S., which allows us to break out the European business. You did it for sales and gross margin. Could you say what operating margin was for Europe in the third quarter?

Doug Collier

Yeah, I can give you both of those. For Europe your operating margin is about 37%.

Mitch Kummetz - Robert W. Baird

Okay.

Doug Collier

And what else did you want it for?

Mitch Kummetz - Robert W. Baird

I guess I can back that out of the consolidate.

Doug Collier

And the U.S. is about 21%.

Mitch Kummetz - Robert W. Baird

Okay. 21 for U.S. All right.

Doug Collier

Yes.

Mitch Kummetz - Robert W. Baird

And I went through break out on the product categories probably versus U.S. it would appear you did very little business, or shipped very little product in terms of boys and footwear in the third quarter.

Are those businesses that you're not really doing in Europe or the distributor is not doing them and is that something that you will be starting up with spring or at what point will you be starting up or am I reading that wrong?

Jason Steris

Hey, Mitch. This is Jason. I think you are definitely reading that correctly. The boys program was started this year and so, we are slowly ramping that up. It's a brand new category for them over there. It's an opportunity moving forward and just getting that off the ground.

And then, same thing with the Creedler program, being that we were a licensee before, we didn't offer those programs to them at the time. Those guys, the European team they do have the Creedler program in their spring, summer '08 range, which will be shipping in the first half of next year, and they are having good success with them as well.

Both of those are new programs and opportunity is moving forward.

Mitch Kummetz - Robert W. Baird

Just to make sure I have that correctly, you said, Creedler is in the spring, summer of '08. Is the boys also in spring, summer '08?

Jason Steris

That's correct, boys, not the kids, but the boys.

Mitch Kummetz - Robert W. Baird

Okay.

Richard Woolcott

Not kids. They're not doing kids yet. We first want to get the boy's ramped up and build that foundation and then look at the opportunities down line for kids, but we're holding off right now.

Mitch Kummetz - Robert W. Baird

And when you say that's available in the program, does that mean it's available to all of your distributors?

Jason Steris

For the most part.

Mitch Kummetz - Robert W. Baird

Okay.

Jason Steris

Yes.

Mitch Kummetz - Robert W. Baird

And a couple other items on Europe. Doug, I know you don't want to go out and say what you think the European business is going to do next year but is it fair to say that, the sales -- the break out between first half and second half on Europe should kind of track what the break out has been in terms of licensing income in the past.

Where if I look at licensing income over the 12 months ended Q2, it looks like, I think the number I had was 52% of that was in the back half of last year versus 48% of the back half of this year. Can I think of the revenue structure on the business now that you guys own it to be kind of a similar break out in terms of first half, back half to where the licensing income had tracked previously?

Doug Collier

I think, we are into this fairly new but that seems to make sense to us that it would continue do -- to be like that. We do have very little history but I think we do think it about it that way.

Mitch Kummetz - Robert W. Baird

Okay.

Richard Woolcott

And Mitch, with Europe they're a little bit different than the way the U.S. is structured from their seasons perspective. You've got that spring, spring which would be in their Q1 that's a heavy ship, and then they do a fall ship. So unlike, how we have spring and summer and fall and holiday.

Europe is a little heavier. They spring start ships and after then they've got the fall. So it really have two biggest – big seasons. And then they fill in from there.

Mitch Kummetz - Robert W. Baird

So, Q3 is the big start ship and then Q1 is spring?

Richard Woolcott

Pretty much, how much we've seen from just kind of studying it. I think, it will be easier, obviously a year from now when we have a track record. Because I think you also have to remember that, the business model we have now is not necessarily like the business model that the licensee did.

So, we are going to be investing more, on the pulse a little bit more, wanting to improve our operations over there, making sure we are delivering as close as we can to the start ships. And we just have a different engine because we have all the manufacturing expertise and relationships and tacking on of orders.

So hopefully, we can improve -- I mean our goal is to improve the way that we're doing business over in Europe, just because of the sheer size of what we've got in terms of manpower and production capacity.

Mitch Kummetz - Robert W. Baird

Okay. And then, last thing on Europe I know in the past, Doug you've said you are looking at a $0.12 investment in the first half and then you would expect profits in the back half to more than exceed that, given that the sales are tracking little bit better and the margins are better.

What sort of overall profit contribution to the earnings, do you expect in the back half from Europe at this point?

Doug Collier

Yes, all that is baked into our guidance that we've thrown out there that didn’t make sense. When we are doing more revenue and we're seeing the gross margin looking better than expected that overall it will do better than we thought.

Mitch Kummetz - Robert W. Baird

Okay. Two last items. On the Creedler’s business you have four quarters of business there where you have Creedler’s in the numbers. Could you say how much of that was slip-ons versus open-toe. I mean is it like 25/75, or something live that? How can we think of the slip-on portion of that business to get an idea or where this might go.

Jason Steris

This is Jason here. In our original projection, and where we came out, are two things, and I think that is what we talked about with it being a saturated category. And as we move forward into '08 and you can already see it in our line plans as we are building the program, we are really focusing on the sandal portion of the business and that will become the driver of the category.

We just feel, we are able to compete in the category, and it makes sense for the brand. And there is just a lot of opportunity for us. And then, we will wrap around some of the bedroom slippers, and things like that for holiday novelty items and what not.

But if I had to give you a sort of a rough number for this year, I'd say it's probably-- I'd rather get back to you on that so I don't give you a wrong number.

Mitch Kummetz - Robert W. Baird

Fair enough.

Jason Steris

We are definitely moving forward into more of the sandal program.

Richard Woolcott

The majority of the business is absolutely going to be in the open toe sandal business.

Mitch Kummetz - Robert W. Baird

Okay.

Richard Woolcott

And that is our niche, and like you said, we jumped into the category and now we have a year under our belt of seeing how the product reacts in the marketplace and also seeing the tweaking of our own designs internally.

And we have kind of found our niche and from a Volcom branded piece of footwear that open-toed sandal is where we belong and that's really what we're focusing on.

Mitch Kummetz - Robert W. Baird

And then lastly, and maybe you can get those PacSun numbers for me?

Jason Steris

I have them for you.

Mitch Kummetz - Robert W. Baird

You can give them to me.

Jason Steris

So, excluding Europe, the men's business was up 16% in Q3 and PacSun was up 2% on the men's side. On the girl's side excluding Europe, the girls business was down 11% and the PacSun business was down 53%.

Mitch Kummetz - Robert W. Baird

Okay and you figure most of that is private label or is it tough say?

Jason Steris

I think it's tough to quantify, but having two things with the private label and lesser inventories, those are parts of it.

Mitch Kummetz - Robert W. Baird

And last question. Doug, if I look at the Q4 guidance sales and earnings, and I kind of plug those into a model, it gets me to an operating margin that is down about 400 bits (ph) from last year, if I am doing the math right. Can you give us some sense kind of qualitatively; is it more gross margin more SG&A?

It could be a little bit of both with the European samples and European business isn't going to be huge in the fourth quarter, I would imagine that could be unprofitable in the fourth quarter, although I haven't worked through the math to confirm that. Could you going to give us a sense, is it half and half SG&A and gross margin or where does it shake out?

Doug Collier

So you are talking, overall consolidated for Q4?

Mitch Kummetz - Robert W. Baird

Yes.

Doug Collier

Okay, So, was it more attributable to being gross margin or SG&A?

Mitch Kummetz - Robert W. Baird

Yes, in terms of the contraction in operating margin that is implied in your guidance?

Doug Collier

Looking at this really quickly, it looks like it's more on the gross margin side. It's about 50/50 actually. You have some on the margin and on the SG&A side.

Mitch Kummetz - Robert W. Baird

That's very helpful. Thanks guys. Good luck.

Doug Collier

Thanks, Mitch.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Mintz with Wedbush Morgan.

Jeff Mintz - Wedbush Morgan

Hi, guys. How are you?

Richard Woolcott

Hi, Jeff. How are you doing?

Jeff Mintz - Wedbush Morgan

Well, I just a couple more questions on Europe. Not to beat a dead horse here. Can we assume that this slightly improved numbers for the fourth quarter on Europe are good early sell through? If not are you guys hearing good numbers on sell through there?

Richard Woolcott

Hey, Jeff, this is Richard. Well I think the first thing is just I know that the distributors and the retailers are thankful and excited that the transition worked. As far as actual numbers on the retail level, I don't have any reports on that yet. We will probably get that, as I said earlier we have the whole Europe team coming over at the beginning of November to strategize for next year.

What I have seen is now we are breaking down territories we are looking at our distributors. We are very organized in the way we are strategizing moving forward and I know that people are just excited that we shipped and the fourth quarter is just a fill in ship a little bit of stuff for the holiday.

Well, I think the real measure of the success will be as we go into spring and fall of '08, how much opportunity there is moving forward and really getting a read on how the products are moving through the retail base, but we'll have a read for the next call. It's still kind of soon because we just basically finished shipping.

Jeff Mintz - Wedbush Morgan

Okay, great.

Richard Woolcott

I hope that helped.

Jeff Mintz - Wedbush Morgan

Yes it help absolutely. Thank you. And then maybe a question for Jason on product, when you look at the European line versus the U.S. line, how much would you say in Europe is totally different than the U.S. and how much is just the same or a derivative of?

Jason Steris

Yeah, hey, Jeff. Yes, really a small part of the line is different anyway. For the most part they take about 98% of that lines and they will make tweaks on that stuff. They will beef up a sweater or do a heavier quilting on a jacket category or two, but for the most part all categories are pulls directly from our products. The only difference is that our line is much larger so they will take from our line and build a little bit of a smaller capsule.

Jeff Mintz - Wedbush Morgan

Sure. Okay. And then turning to the girl's swim category as we go into this spring, did PacSun take any of the girl's swim business last year? I guess my question, is there a risk to that business from the PacSun decline on the girl's side or is that more of an opportunity going forward?

Jason Steris

Yes, I can tell you that the last capsule that we did with them for the initial launch in summer, they did two styles or they did two, one top, one bottom two different colors, four units total and what we're looking at moving into spring 2008 is we have a follow-up package building on that same thing so, I think, we will comp those numbers moving forward.

And I think moving forward this is a lot of opportunity in that category in general as we become more of an established swim player. Does that answer your question?

Jeff Mintz - Wedbush Morgan

Absolutely. That's great. And then Doug, I just want to make sure that I have my numbers right. When you initially guided for Europe this year you guided $33 to $35 million and are you saying it will be $36 to $37 million full year?

Doug Collier

That is; yes, like $35.9 million, $36.9 million, something likes that. Yes.

Jeff Mintz - Wedbush Morgan

Okay. I will take that 100,000 and add it in. Thanks very much and good luck.

Doug Collier

Thank you, Jeff.

Operator

There are no further questions at this time. Are there any closing remarks?

Richard Woolcott

Just wanted to say thank you to everybody for being on the call and we are look forward to talking with you again on the next call. Thank you again guys and have a nice day.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Volcom Q3 2007 Earnings Call Transcript
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