Three Reasons Not to Miss the Volcom Boat

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In my previous article, I singled out Volcom (Nasdaq: VLCM) as one of my favorite growth stocks -- a fast motorboat that can help you whip inflation.

Is this boat sinking?
Recent news that Volcom expects sales to its largest customer, Pacific Sunwear (Nasdaq: PSUN), to decrease by 65% year over year in the third quarter might leave some wondering whether my fast motorboat has, well, sprung a leak.

Others might wonder what news will surface regarding other Volcom customers such as Zumiez (Nasdaq: ZUMZ), Buckle (NYSE: BKE), or Macy's (NYSE: M). Suffice it to say that the past few quarterly earnings calls won’t be nominated for any awards, and the stock hasn’t performed any better, declining 40% from a year ago. Nevertheless, I still firmly believe that there are sufficient reasons to stay on board and wait for smoother sailing.

Volcom’s European tour
For starters, the company continues to expand its operations worldwide. It's currently in the process of transitioning certain foreign operations from a licensee model to a direct-control model. The first and biggest step of this transition took place when Volcom turned the key to its European operations in mid-2007, after a licensee agreement expired. Last year, that European segment accounted for $73 million in revenue, or 23.5% of total worldwide revenue (excluding the company's Electric segment).

Europe is a big market, and I'm betting that revenue from this segment will represent a larger slice of the Volcom pie in the future. Year-over-year sales increased some 82% in 2008, much faster than the 4% gain in the U.S. For comparison, Europe accounts for 41% of total sales at rival Quiksilver (NYSE: ZQK), and Volcom's European operation is just a fraction of Quiksilver's European revenues of $933 million. So there's still plenty of room for Volcom to grow there.

Beyond Europe, Volcom is patiently waiting for licensee agreements to expire in South Africa, Australia, and Brazil in 2011, 2012, and 2013, respectively. The latter two, in my opinion, represent especially exciting opportunities to expand brand awareness. With direct control, the company will be free to ramp up investment and control its own destiny.

Quiksilver in quicksand
Turning back to Quiksilver for a moment -- that ship is certainly in rough waters! Quiksilver is a big boat, and big boats turn s-l-o-w-l-y. Management needs to deal with the "R" word like everyone else these days, and it was recently forced to borrow $150 million from Rhone, a private equity firm, just to stay afloat. The deal offers an interest rate of 15% (ouch), calls for two of Rhone’s people to join Quiksilver's board, and provides Rhone stock warrants to boot.

The result of all this is that Quiksilver will focus not on growth but on putting out fires and staying dry. Undoubtedly, Rhone will have its own ideas of how to run the business, meaning less freedom for Quiksilver co-founder and CEO Robert McKnight. The warrants will cause dilution, resulting in unhappy stockholders.

Unlike Quiksilver, Volcom is fortunate to have a rock-solid balance sheet (no debt and $96 million in cash and short-term investments) and a management team that is free to pursue growth unfettered and in its own way. So while Volcom may not immediately pick up market share, since Quiksilver and others will likely slash prices to liquidate costly inventory balances, this is a perfect time for Volcom to invest in product quality and brand awareness worldwide. The result is likely to be market share gains for many years to come.

O Captain! My Captain!
Of course, I wouldn’t want to climb aboard any boat, fast motor or not, if it didn’t have a worthy skipper. Fortunately, those of us who own shares of Volcom have Richard Woolcott, Volcom's co-founder and CEO, at the helm. I've studied his ways and seen what he's done with the company, and he's No. 1 on my list of reasons to buy this stock. And because he owns a large block of stock (3.3 million shares, or 13% of all shares outstanding), he's unlikely to swim away. For those who know his story, Woolcott is a competitive athlete to the core. He once recovered from a broken neck! I doubt minor setbacks such as reduced revenue from a key customer would reduce his spirits.

Don’t miss the boat
Three intelligent reasons to own Volcom today:

1. Expansion in Europe and beyond
2. Quiksilver in quicksand
3. Richard Woolcott at the helm

Now is the time to climb aboard the Volcom boat. If you wait until the weather looks clearer, you might miss this cruise altogether.