I was amused to see an outwardly rebellious brand like Volcom (NASDAQ:VLCM) presenting at the buttoned-down CIBC World Markets' Consumer Growth Conference. Of course, given this two-time Motley Fool Hidden Gems pick's impressive recent growth, it's no wonder that Wall Street wants to hear more about the magic behind its success. I took a peek at the transcript from the conference.
Enter the Stone Age
Volcom CFO Doug Collier spoke in depth about the company's deep connection to its young customers. In a world where many young people (particularly kids enamored with the counterculture) mistrust corporate logos and branding, Volcom's trademark Volcom Stone appears to have made the grade as an acceptable part of rebellious youth culture.
Collier's anecdotes traced the Volcom Stone's appearance in very personal manifestations: tattoos, doodled art, and frequent stories of young people with bedroom murals featuring the Volcom Stone. (Regarding Volcom tattoos, Collier said, "We see this on a regular basis.")
If you're wondering who the typical Volcom customer might be, Collier pointed mostly to teenagers and young people, although some customers might be in their 30s and 40s. Given Volcom's non-conventional bent -- it also focuses on music and art in its branding efforts, and its motto is Youth Against Establishment -- Collier said that the company targets fashion-forward customers who tend toward boutique-style shopping experiences, like that of Urban Outfitters (NASDAQ:URBN).
The anti-brand
It's more than a little funny to contemplate Wall Street types pondering the significance of corporate logos in body art. Perhaps Collier's discussion of athletes as the brand's foundation, similar to Nike (NYSE:NKE), was more up their alley. Collier rattled off a cadre of athletes from the board-sports arena, including professional snowboarder, skateboarder, and Olympic gold medal winner Shaun White, as well as Rune Glifberg, Bruce Iron, and Bjorn Leines. (Of course, White, a.k.a. the Flying Tomato, seems to really get around when it comes to corporate alliances -- it looks like he's also hooked up with Volcom rival Burton, among others.)
However, Volcom's frequent departures from normal corporate methods include its marketing and advertising efforts. Its music- and art-related ventures are all part of its brand-building, helping the company spark word-of-mouth campaigns. Collier also mentioned what he dubbed "consistently inconsistent advertising." While Volcom advertises in more than 40 publications every month, nearly every one of those ads is different. Collier said that all the art and layouts are done in-house; the company doesn't use any agencies.
Getting into the nuts and bolts, Collier discussed not only the company's impressive growth in sales and earnings, but also its hefty margins. The company's maintained a 21% operating margin for the trailing 12 months, which Collier credited to Volcom's ability to gauge demand and produce its wares accordingly, sparing its inventory from the need for price cuts. Gross margin currently hovers around 50%, which Collier also attributed to solid demand forecasting, inventory management, and cost control procedures.
Very nice, but what now?
Given Volcom's impressive recent rise, shareholders may be wondering what the future holds. The company's rebellious attitude means it has to tread carefully on the path to greater growth and success.
Volcom distributes through high-growth Zumiez (NASDAQ:ZUMZ), as well as a more established retailer, Pacific Sunwear (NASDAQ:PSUN). But Volcom also distributes through mainstream retailers like Macy's (NYSE:M) and Dillard's, which doesn't seem to fit with its rebellious image.
Collier seemed aware of how distribution can affect the brand, and discussed the company's slow, steady "measured rollout" of Volcom stores. However, Collier also pointed to those stores as great avenues for Volcom to present its brand the way it wants to, and to peddle Volcom merchandise that other retailers might hesitate to carry.
Last summer, interested investors were able to get shares of Volcom at an absolute steal when Wall Street's sentiment soured. (Tom Gardner re-recommended Volcom for Motley Fool Hidden Gems subscribers after a couple of rough quarters. Those who bought after the wipeout have seen a 143% increase since.)
Volcom recently hit 52-week highs, trading at 39 times earnings. At 1.29, its PEG ratio certainly doesn't sound like a screaming bargain at the moment, either. Then again, observers expect that it will post strong, double-digit profit and sales growth over the next couple of years. It's also got a strong balance sheet and high margins. And hey, isn't there some kind of price-to-tattooed-fans ratio to consider?
As a bit of a rebel myself, I think Volcom's a great company with a lot of heart and soul. Fools wouldn't be amiss to wait for a price drop before jumping in here. But if you're trying to figure out whether the company's worth an investment in the first place, understanding the Volcom Stone, and Volcom's relationship with its customers, is a good place to start.
Totally radical further Foolishness:
- Last quarter, Volcom rode on.
- Revisit last summer, when Volcom got slammed.
- Early last July, I wondered whether Nike might get thrashed trying to enter the skate market.
Volcom and Zumiez are both Motley Fool Hidden Gems recommendations. Pacific Sunwear has been recommended by Motley Fool Stock Advisor. Try any of our Foolish newsletters free for 30 days.
Alyce Lomax owns shares of Urban Outfitters. The Fool's disclosure policy is too long to tattoo, but Fools have crazy loyalty for it all the same.
