A Retailer for Your Watch List

Volcom (Nasdaq: VLCM  ) hasn't been able to be a nonconformist in this tough economy, having delivered a decent third quarter with a side of downer guidance. That's an all-too-familiar story these days.

Third-quarter net income increased 12.4% to $16.3 million, or $0.67 per share. Revenue jumped 23% to $111.7 million. Unfortunately, Volcom "noted recent, significant changes in the weakening U.S. retail environment as well as the overall global economy."

Volcom now expects revenue to increase only 0% to 3% in the fourth quarter, with earnings expected to be $0.17 to $0.19 per share. It now expects 2008 earnings of $1.42 to $1.44 per share, as opposed to previous guidance for earnings of $1.50 to $1.53 per share.

The pinched consumer is bound to make things very difficult for many companies in the coming months, and Volcom's obviously not immune. I also see some elements that raise red flags, such as inventory rising at a faster rate than sales (up 55%, in fact). On the other hand, Volcom has generated $9.3 million in free cash flow in the first nine months of this year, and it was running negative last year at this time.

In recent months, I've been very down on consumer-facing stocks that I find particularly risky, especially in a major recession -- Bare Escentuals (Nasdaq: BARE  ) , Hot Topic (Nasdaq: HOTT  ) , and Talbots (NYSE: TLB  ) spring to mind. So believe it or not, I do happen to like Volcom for the long term, and I prefer it to similar retail stocks like Pacific Sunwear (Nasdaq: PSUN  ) and Zumiez (Nasdaq: ZUMZ  ) , or Abercrombie & Fitch (NYSE: ANF  ) , whose Hollister concept can be viewed as part of the board-sports fashion niche. I just feel Volcom brings a rare authenticity to the table, and that shouldn't be underestimated.

Volcom really seems to know its youthful demographic; it has engaged, founder-led management; and it has plenty of cash and very little debt. Although there is some risk that its skate/surf customers could decide it's a "sell-out" one day, it works hard at its "Youth Against Establishment" image.  

Volcom's price-to-earnings ratio of 8 sounds downright silly to me; then again, a single-digit P/E ratio is another way it's conforming with many other retailers these days. There's probably no urgent rush to pick up Volcom shares -- after all, we'll probably be dealing with weak consumer spending for a while -- but I continue to believe Volcom's still a great stock for the long term (and for bargain hunters' watch lists).

Surf's up: Check out some Volcom articles from the Foolish archive.

• In August, there were wipeouts left and right.
• I was still stoked about Volcom in July.
• Volcom was a Black Friday bargain stock last year, but it's seen even more markdowns since then.