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Michael Vellucci, MII, Potential Long, 4 October 2005
Today’s Agenda
• Corporate Profile
– Background; Key Statistics; Stock Chart
• Thesis Points
– Market Growth; Brand Image; Management– Market Growth; Brand Image; Management
• Risks
– Relationships, Brand Erosion, B-Cycles
• VAR
• Questions
Youth Against Establishment
Corporate Profile – Background
• Based in Costa Mesa, California
• Formerly Stone Boardwear, incorporated in 1991 in OC the “epicenter of boardsports culture”boardsports culture”
• Design, market, distribute premium quality young men’s and young women’s clothing
• Focus solely on the boardriding sports -surf, skate, snow
Youth Against Establishment
Corporate Profile – IPO
• Stone Boardwear, Inc (1991)
– Reincorporated April 2005 in Delaware
– IPOed July 2005 for net $72M
• Underwriters: Wachovia; D.A. Davidson & Co.; • Underwriters: Wachovia; D.A. Davidson & Co.; Piper Jaffray
– Uses:
• $48M to facility upgrades, marketing / advertising, other corporate purposes; $20M to existing stockholders; $4M to Europe
Corporate Profile – Key Stats
• Market Cap: 672.91M
• Profit Margin: 12.45%
• Enterprise Value: 678.53M
• Avg. Daily Vol (3 Month): 213,148• Avg. Daily Vol (3 Month): 213,148
• EBITDA: 32.28M
• Compounded Annual Growth of 32.6% (2000-2004) from 36.6M to 113.2M
• No Long Term Debt
Youth Against Establishment
Corporate Profile – Stock Chart
25 Jul, $37.10
Youth Against Establishment
24 Sept, $24.40
Thesis Point A – Market Growth
• Growth prospect for the board sports market
– Surf, Skate, Snow has moved into the mainstream (video games like Tony Hawk Pro mainstream (video games like Tony Hawk Pro Skater and SSX Tricky)
– Appeals to a much greater audience
– Before market was something of a coast phenomena but has spread inland
Youth Against Establishment
Thesis Point A – Market Growth
• Growth prospect for the board sports market
– ESPN’s X-Games; Snowboarding is now a medal event at Winter Olympics medal event at Winter Olympics
– From 1998-2003 participation in boardsports has increased 8.3%, whereas traditional sports have declined 5% (from Board-Trac, independent market research firm)
Youth Against Establishment
Thesis Point Ai – Volcom Growth
• Volcom’s own growth initiatives
– Looking to expand reach outside of traditional boardsports
• Nordstrom’s (to push premium image)• Nordstrom’s (to push premium image)
• Motocross and other extreme sports
– Looking to move into footwear, watches and sunglasses
– European accounts – movement in oversea markets
Youth Against Establishment
Thesis Point B – Brand Image
• For apparel companies, the logo and image are crucial– Volcom has been able to steadily increase awareness and image
– Eroding Hurley, Quiksilver, Billabong
– Volcom’s presence despite age • Quiksilver – 1976
• Hurley – 1979
• Billabong – 1982
• Volcom - 1991
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Thesis Point C – Management
• Management’s proximity to the audience
• Qualified Leaders:– Founder/President/CEO – Richard Woolcott –professional surfer sponsored by Quiksilver professional surfer sponsored by Quiksilver and worked for ZQK; NSSA National Team; US Surfing Team
– Co-Founder/VP of Marketing – Troy Eckert –also professional boardrider
• Passion for the sport, for the culture, for the lifestyle
Youth Against Establishment
Today’s Agenda
• Corporate Profile
– Background; Key Statistics; Stock Chart
• Thesis Points
– Market Growth; Brand Image; Management
Youth Against Establishment
– Market Growth; Brand Image; Management
• Risks
– Relationships, Brand Erosion, B-Cycles
• VAR
• Questions
Risks – Retail Relationships
• Pacific Sunwear of California Relationship (PSUN):– Accounts for 27% of revenue
PacSun
Zumiez
Tilly's
Nordstrom
Other
– Largest single contributor to Volcom’s revenue
– Main distributor of apparel
– If this relationship were to turn sour, Volcom would be put at an extreme disadvantage in distributing their clothing in US
Youth Against Establishment
Risks – Brand Erosion
• Much of the apparel industry is focused on the logo and image
• If Volcom fails to maintain its edge on the boardsports market or fails to continue boardsports market or fails to continue developing innovative tools for the boardsports we could see rapid corporate decay
• Margins: Operating Margin 21.5%; Industry Average 11.4%
Youth Against Establishment
Risks – Business Cycles
• A economic contraction could adversely influence the apparel industry
– loss of discretionary household spending could shift consumers to substitute goods and could shift consumers to substitute goods and away from premium brands such as Volcom
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VAR
• Spoke with– Joseph Teklits, Wachovia
– Philip DeFelice, Wachovia
• Surf Shops in Southern California– Huntington Surf Shop– Huntington Surf Shop
– Hansen’s Surf Shop
• General perceptions of Volcom as a brand
• Pacific Sunware Management – still waiting to hear back
• Zumiez Relationship – need to research further
Youth Against Establishment
Questions?