VLCM Introduction

Volcom is no longer a publicly traded company.

I am leaving this post up simply because I can.

Volcom (VLCM)

Once You Feel The Stoke, You Change...

Without understanding this simple slang term, you can't really understand Volcom. I searched the Internet and built the most accurate definition I could:

Stoke, verb - stoked, stoking 1. To put coal or other fuel on (e.g. a fire, the furnace of a boiler). 2. To arouse or intensify (e.g. passion or enthusiasm).

Etymology: 17c: from Dutch stoken to feed (a fire).

Stoked, adj. (Slang) 1. Exhilarated or excited. 2. Feeling a very strong emotion (e.g. atingle, excited, fired up, thrilled, ready)

It is so much more than a word. It is a lifestyle, a way of living, a pursuit of something more. I found many definitions which included a drug reference, but this is totally inaccurate. The best way I can describe the feeling is "spiritual". Think of a time when you experienced something so pure and good, that it changed you. This is The Stoke. I remember the last time I felt it. I was at Cave Beach in/near Jervis Bay, Australia. 2.5 hours south of Sydney, another 20 min drive through a National Park , then a walk down a dirt path past a family of wallabies enjoying some sun. The path winds through some trees and comes out on a sandy beach embraced by cliffs on either side carpeted in lush green. I paddled out on crystal clear, glassy waters, in to perfect waves that seemed to line up for me. After a while I felt utterly exhausted, then I'd grab just the right wave and something wonderful and child-like would replace that exhaustion. That feeling lasted for days. Nothing could touch it, not even a busy work schedule which kept me from seeing daylight on most days. I guess it's a lot like falling in love. There is a place in side of me which remains a little bit empty, longing for that zen-like balance and acceptance of everything. Understanding this puts you on the road to understanding why Surfers appear to become addicted. In this write-up I'll speak mostly to surfing, but this can be found in the world of skateboarding and snowboarding (and skiing, which is on the comeback in a major way) as well. A side affect to this is a sort of bond between all those who know it. An unspoken community which naturallydevelops lifestyle, music, clothing, anything really which has to do with the spiritual search for The Stoke; whatever that might mean for each individual. Hopefully the idea isn't totally abstract at this point. Yes or no, I don't know if anything short of an experience can fully communicate it. If a picture is worth a thousand words, an experience is worth a billion, and I don't have that kind of time. I had to bring it in to this discussion, however, because we are about to look at a company which was founded by it, and caters to those that live in search of it. This is an important factor when investing in Volcom. It isn't a fashon company which is targeting a flipant age group. It is a part of a culture and is well positioned to not only pickup on trends in fashion (and other areas), but actually set them. I hope this becomes more apparent as you read on. So, on with the introduction... _{(For the first part of this introduction, I borrowed text liberally from the Volcom Investor Relations website.)}

Do What You Love...

During the March dumps [snow] of 1991, Richard Woolcott and Tucker Hall set off on a snowboard trip that would forever change their lives. Tucker had just been laid off of work and jumped in the car on a routine Tahoe trip to visit Nathan Fletcher and Mark Gabriel. After riding four days of fresh [powdery snow], Richard called work with the excuse that they were snowed in and extended his stay. For more than a week, they awoke every morning with two new feet of snow. It was their first real experience riding powder and the new obsession wouldn't stop. Two weeks later Richard quit his job to take some time off and snowboard. He and Tucker had also talked of starting a clothing company during the Tahoe trip but nothing was really final. Later that spring, the two came up with the idea of starting a riding company based around the three sports they enjoyed. With an initial $5000 from Richard's dad, they started the process. First the name and then the stone. Volcom was born. The Volcom idea would incorporate a major philosophy of the times, "youth against establishment". This energy was an enlightened state to support young creative thinking. Volcom was a family of people not willing to accept the suppression of the established ways . This was a time when snowboarding and skateboarding was looked down on. The U.S. was in a recession, there were riots in LA and the Gulf War. Change was in the air. Nirvana and Pearl Jam expressed it the best. For the first two years, Richard and Tucker traveled around the world on wild journeys with friends riding whatever they could. The business side of things was minimal. The headquarters were set up in Newport in Richard's bedroom and all sales were run out of tucker's bedroom in Huntington. The two knew nothing about how to make clothes but that didn't matter. It was all about spirit and creativity. Clothing sales for the first year were $2600.

...But Don't Forget To Get Paid For It...

We might not be here discussing Volcom if it wasn't for a wake up call from Dad, one truly fateful Saturday. He called with a simple message for his son, Richard Woolcott, one of the Volcom founders. He said, "Son, looking at your numbers, if you don't get your act together, you're going to be out of business in less than three months. I'm not going to help you or bail you out. So you better figure it out.". In this rare interview dated October 12, 1994 (prior to going public) Richard talks about that call and after, he told himself..."'Hey there's something special about Volcom, don't take it for granted and let's get serious about putting this thing together the way an apparel company needs to run.' There was the way we were operating, and then the way that the general market operates. The market is very, very competitive. There are a lot of very talented people out there running companies that make great product. In order to compete, you really have to put the effort in."

Going Public...

Cut to 2004. Volcom’s revenues have rocketed to $113.2 million, up 48% from the previous year, and showing a $24.6 million profit, which was 72% higher than 2003. They sported gross profit margins of 48.6 percent, on par with Quicksilver, one of the biggest and best in the industry. They had already established distribution and licensing agreements in Europe, Australia, Brazil, and Indonesia. It was time to take the next step in gaining market exposure at home and overseas. It was time to go public. President and CEO Richard Wolcott and Chairman Renee Wolcott announced they would own 21.3 percent and 20 percent of Volcom's stock respectively. Newport Beach-based Malcolm Trust will hold 20.7 percent. I've searched around and I can't seem to find any information on Tucker Hall other than he is no longer with the company but has a place on the board. Dad is sitting chair. Volcom also said the following people would join its board prior to the offering: Douglas Ingram, General Counsel at Allergan Inc., Anthony Palma, President and CEO of Easton Sports Inc., Kevin Wulff, President and COO of American Sporting Goods Corp., and (the most interesting to me...) Carl Womack, Vice President of Finance and CFO of Pacific Sunwear from May 1986 to September 1994 and as Secretary of Pacific Sunwear from November 1992 to October 2004. (Pacific Sunwear already made up 24% of Volcom's business and in 2006 would become a major part of the story when PacSun took a major beating and brought Volcom's shares down with it for about 50% of their value (in hindsight, a market overreaction.) Rather than sit back and panic, Volcom helped PacSun out and they both have climbed back out of the pit. Until writing this, I had no idea one of PacSun's own had left and now sat on the board at Volcom.) (I highly recommend reading through the management introductions on the Volcom website found here. ) June 30th, 2005, "Volcom IPO makes big debut". Volcom planed to raise just over $60mln, but ended up with closer to $90mln. Volcom said it planed to use $20 million from the IPO to pay off debt and spend the remainder on advertising, developing its infrastructure in Europe, and other purposes.

A Risk Realized...

As many smaller businesses have experienced, Volcom relied pretty heavily on just a couple primary customers. This can be a real risk when investing in small cap companies, and in this case, it was realized. In the summer following the first HiddenGems recommendation, Pacific Sunwear (a.k.a. PacSun), which accounted for around 30% of Volcomes business, hiccuped big time and, in spite of an impressive quarter, Volcom took a serious haircut (I love all these biological metaphors for a plummeting share-price). Volcom impressed me when they didn't panic, but instead worked with PacSun to work out the problems. HiddenGems made it's second recommendation at this heavily discounted price and it's been up and up ever since. If your interested in more detail, here is a Fool.com article on the matter. Volcom now distributes apparel through more than 1,100 different retail customers, including Pacific Sunwear(Nasdaq: PSUN), Zumiez (Nasdaq: ZUMZ), and Nordstrom (NYSE: JWN) - where it's childrens lines have been doing very well, and Its products are sold in more than 40 countries. While some of the risk is still there, it is greatly reduced. If anything like the PacSun issue occurs again, it would be a great opportunity for long term investors. The most exciting news, is that when a licensing agreement for distribution in Europe expired, Volcom decided it would rather take over sole control of its brand throughout Europe rather than renew. This should be happening throughout 2007 and in to 2008. I don't see why they won't continue this trend, if success full, in some of their other international markets when the time comes.

Conclusion...

In spite of turning a $5,000 investment in to a nearly $1 billion cultural phenomenon, Richard still reportedly hangs out in his trailer by his local surf spot, as often as possible, and uses the same makeshift desk he started with - made from a couple of filling cabinets and a door. The Company has matured internally but continues to run off the same philosophy it started with. The Volcom thinking now flows through its art, music, films, athletes and clothing. Just don't let the ambiance fool you, this is a well-run company. If you read about the board and key personnel, you'll find a LOT of expereince and talent and Richard holds a business degree from Pepperdine University. As I said at the beginning of this write-up, and as written in the last article I linked... "Volcom doesn't just market clothing -- it's selling a lifestyle, and it does so more aggressively than most old-school "lifestyle brands" could hope for. A visit to Volcom's website illustrates how close it is to its customers. Volcom sponsors athletes, runs tons of board-sports competitions, takes part in Volcom-branded concerts, makes board-sports-related films, and even has a Volcom music label. You might even feel hard-pressed to figure out exactly what it's selling, seeing how its website is more about the kids and the sports than the merchandise. In fact, in an interesting anecdotal aside, I ran across an article the other day that mentioned a teen with a tattoo of the Volcom brand symbol. That's some crazy loyalty." Recently Volcom even purchased a historical house on the North Shore of Hawaii. This prestigious property will house pro athletes on tour as well as be a permanent part of this important location to the surfing world. This sums up the approach in many ways. They don't just advertise, they are a part of the world they service. This is the strength of Volcom.

Competitors...

I've ranked these from top to bottom in order of how I feel their brand quality competes with Volcom.

• Quicksilver
• Billibong
• Rip Curl
• O'Neill
• Rusty
• Hurley (Mostly US) *
• Mambo (mostly Australia) *

_{* Hurley and Mambo are both very high-quality brands which just haven't made it to the same level as the rest. If they were, I would place them 2nd and 3rd behind Quicksilver.}

Surf History Incoming...

I saved this for last because it arguably goes even more off topic than the first part of this introduction. Here you will find more information about the origins of the company and it's key competitor. I think it also contains improtant information if your thinking about owning a piece of this rich culture, and should help put future events in perspective. For example, when the before-mentioned North Shore house was purchased, I read many investor's posts of dismay on what a waste of capital it was, as if it was as frivolous as a new corporate jet for weekend use by the CEO. Besides the fact that most of the founders are pros and enthusiasts, which bodes well for a critical point in the business, keeping in touch with their customers, I noticed something which pops up under several names, experience at Quicksilver, I consider this to be a very good thing, even if guys like Volcom founder Richard Woolcott down-play the significance of it. By the way, Richard not only worked for Quicksilver, but was sponsored by them when he was entered in to the National Scholastic Surfing Association Hall of Fame. He might still be with Quicksilver if he hadn't hit a sandbar while on a routine surfing photo shoot in Mexico, and broke his neck. Sadly, this ended his pro surfing career. Quicksilver is perhaps the oldest and biggest boarder-culture retailer (Rip Curl is up there too, but I personally don't think their products compare, even if I do own some of them). While Volcom is my personal favorite clothing company of this genre, Quicksilver is still right there at the top as well, and hold some lines which no one really competes with yet (e.g. Quicksilver has a high-end line. I bought one of these lined high quality wool jackets in Paris for about E280.00. Great quality, and quite dressy when a proper suit isn't required). So Volcom's guys have been in the business a long time and worked at a company which had been doing it right for 20 years before they founded Volcom. Allow me to get a little nostalgic again here. I think it is worthwhile to take a very general look at some surf history (for the die-hards, please cut me some slack for leaving out some stuff or understating/overstating parts) I'm going to keep it short, but it comes full circle... You see, I'm from Southern California. Hermosa Beach to be exact.... Surfing made it's way from Hawaii to the South Bay in the early 1900s when the place was still pretty much a couple of roads through sand dunes and wheat fields ('South Bay' is the local term for the area south of Marina Del Ray along the beaches of Los Angeles. We also refer to the area as the Beach Cities, but usually mean just Manhattan Beach, Hermosa Beach and Redondo Beach). In the 50s and 60s, Hermosa Beach grew to be the epicenter of the new surf world, thanks in part, to guys like Doc Ball, who was one of the first to photograph and publish the lifestyle. Big wave surfing was born-again in Hawaii but the guys were from Hermosa - Greg Noll's surf shop is still open there. Needless to say there is a lot of history in my home town (I'm not even going in to the ties to skateboarding and music.) One day in Torquay (pronounced 'tor-key'), Australia (about 2.5 hours south of Melbourne at the beginning of the Great Ocean Road), at a friendly Lifeguard (Lifesavers over there) competition, during a break, the Lifeguards from the Southbay (and Malibu) pulled out their balsa-wood surfboards and started riding the waves. The closest thing the Aussies had seen up until that moment, was their big heavy wooden boards mostly used in rescues. It wasn't long before the nation was hooked. In the early 70s Quicksilver and RipCurl opened their doors in Torquay. In 1973 RipCurl sponsored the first Rip Curl Pro Championship (3 years before the creation of the ASP which recognized the first professional world champ in 1976.) (I had the honor of going to Bells beach during the 2006 tournament, visiting Torquay, the surf museums, and even taking the longest board I could find in to the waters of Torquay.) I found a great history of surfing here if your hungry for more (It covers the early years, but not much past 1970 - see the ASP link above as well). I love this quote made by Mark Twain in his 1866 book Roughing It (according to the site).:"I tried surf-bathing once, subsequently, but made a failure of it. I got the board placed right and at the right moment, too; but missed the connection myself. The board struck the shore in three-quarters of a second, without any cargo, and I struck the bottom about the same time, with a couple of barrels of water in me." I should mention the site says Australia became hooked in 1915 at Manly, which is near where I lived in Sydney. This is the first I have heard this, and not what I saw at the surf museums, however, if you read through it, you'll find there are a lot of people involved and, in reality, the history is not as black and white as I might have made it sound. They mention Redondo on page two by the way. This was well before Redondo Beach and Hermosa Beach were founded, so I can only assume they refer to Rancho Sausal Redondo. Later a 1500-acre tract was bought and the development was promptly dubbed "Hermosa" (beautiful in Spanish).