Somehow it just does not seem too likely that Gucci's core customer base overlaps much with folks who call themselves "Wooly" and "T-Dawg", but France's PPR, which owns the esteemed Gucci label, is going to give it a go anyway. On Monday morning, the French holding company announced that it would be acquiring U.S. boardwear apparel maker Volcom (Nasdaq:VLCM), which was founded by the aforementioned Wooly and T-Dawg in 1991. (For background reading, see Using Consumer Spending As A Market Indicator.)
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The Terms of the Deal
PPR is paying almost $608 million for the smaller clothing company, giving Volcom shareholders $24.50 a share in cash, or a 24% premium to Friday's close. That puts a valuation on Volcom shares of about 1.5x trailing sales and about 10.5x trailing EBITDA - not exactly premium pricing for a once-hot stock.
Still, it is difficult to value a company like Volcom on a relative basis. Billabong is publicly listed in Australia and trades at an even lower valuation, Quicksilver (NYSE:ZQK) is struggling, and other once-popular boardwear companies like Vans and Ocean Pacific faded years ago and were acquired by the likes of VF Corp (NYSE:VFC) and Iconix (Nasdaq:ICON).
What PPR Is Getting
That "once hot" part about Volcom is the trick, though. While Volcom was a hot idea in retailing, the company suffered from slowing growth, fickle consumer tastes and more expensive sourcing. Now that the company has joined forces with Puma (another PPR brand), some of those issues may be easier to resolve. It is unlikely that Volcom will come back as a must-have brand (there are few second acts in casual apparel), but PPR may be able to make it a more profitable asset.
Still, it is an odd collection of assets that PPR has assembled. Gucci, Yves Saint Laurent and Balenciaga all go together well enough, but it is unusual to see a company successfully operate at such radically different price and fashion points. What's more, it's not like PPR has really managed Puma to great effect - the recession was hard on many casual brands, but Nike (NYSE:NKE) and Adidas (OTC:ADDYY) have nevertheless performed considerably better.
Whither Other Popular Brands?
The fate of a company like Volcom should not be forgotten by today's investors in companies Under Armour (NYSE:UA) or lululemon (Nasdaq:LULU). These are some of the hottest brands right now, and they carry a multiple to match. Now maybe both companies will succeed in developing a solid all-around brand and business that can stand the test of time.
The Bottom Line
History suggests that is very rare, though. Investors should consider, then, whether they are so eager for growth that they want to pay double or triple the multiples of Nike just to get the higher growth rates at UA and LULU. Growth stocks are a lot of fun during the building phase, but as names like Volcom, Quicksilver, Pacific Sunwear (Nasdaq:PSUN) and Hot Topic (Nasdaq:HOTT) have shown, that fun can end in tears once consumers tire of a certain look or a certain brand and move on to the next hot thing. (For more, see Consumer "Fads" That Haven't Faded.)