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Executives

Robert Jaffe

Robert B. McKnight - Co-Founder, Executive Chairman, Chief Executive Officer and President

Richard J. Shields - Chief Financial Officer and Principal Accounting Officer

Robert Owen Colby - President of Americas Region

Craig Stevenson - Chief Operating Officer and Global Brand President

Analysts

Taposh Bari - Goldman Sachs Group Inc., Research Division

Maria C. Vizuete - Piper Jaffray Companies, Research Division

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Andrew Burns - D.A. Davidson & Co., Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Eric A. Alexander - Stifel, Nicolaus & Co., Inc., Research Division

Quiksilver (ZQK) Q4 2012 Earnings Call December 13, 2012 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quiksilver Fiscal 2012 Fourth Quarter Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I'd now like to introduce Robert Jaffe, Investor Relations for Quiksilver, who will host this afternoon's call. Please go ahead, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver Fiscal 2012 Fourth Quarter and Full Year Earnings Conference Call. Our speakers today are Bob McKnight, our Chairman, President and Chief Executive Officer; and Richard Shields, our Chief Financial Officer. Also joining us are Craig Stevenson, our Global Brand President and the Chief Operating Officer of Quiksilver, Inc.; and Rob Colby, our Americas Region President.

Before we begin, I'd like to briefly review the company's Safe Harbor statement. Throughout our call today, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding Quiksilver's business outlook and future performance constitute forward-looking statements, and results could differ materially from those stated or implied by these forward-looking statements as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the sections titled Risk Factors and Forward-Looking Statements in our most recent annual report on Form 10-K and on our quarterly reports on Form 10-Q.

All forward-looking statements made on this call speak only as of today's date, December 13, 2012, and the company undertakes no duty to update any forward-looking statements.

In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.quiksilverinc.com.

With that out of the way, I'd like to turn the call over to Bob McKnight.

Robert B. McKnight

Thanks, Robert. Good afternoon, everyone, and thanks for joining us today for our fourth quarter and year-end conference call.

I'm happy to report that we generated solid top line improvement for both the full year and fourth quarter of fiscal 2012. In fact, revenues for the year, in constant currency, grew 7%, increasing across all 3 brands, all 3 regions and all 3 distribution channels of wholesale, retail and e-commerce. We consider achieving sales growth in the current economic environment a major success, especially given the challenges in certain markets, particularly Europe and Australia.

In the Americas and Asia Pacific regions, markets where conditions are more favorable than Europe, our brands are growing well. In the Americas, growth of net revenues in constant currency for the year was 11% for Quiksilver, 12% for Roxy and 11% for DC. And in Asia Pacific, growth of net revenues in constant currency for the year was 13% for Quiksilver, 7% for Roxy and 24% for DC.

We're especially pleased with the sales growth at Roxy, which had a bounce-back year in fiscal 2012. Importantly, the sales growth was driven by the strength of Roxy's product offering, which allowed us to capture market share in our core channels.

A portion of our net revenues included increased clearance sales within our wholesale channel and discounting within our retail channel. These products carry lower margins, which led to a decrease in our gross margin to 46% in the fourth quarter from 52% in the fourth quarter of last year. For the year, gross margin was 49% compared with 52% for the prior year.

We made progress in lowering SG&A expense throughout the year, which decreased 5% to $236 million in the fourth quarter. We are also pleased with the excellent progress we've made on executing our 3 long-term initiatives, which include strengthening our brands, expanding our business and driving operational efficiencies. It is these core initiatives I'd like to expand on further.

Our brands are the heart and soul of our business, and ensuring that Quiksilver, Roxy and DC resonate deeply with our customers is our continuing mission. With all of our brands, products come first. Highly functional and innovative products are crucial to our brands. And in the fourth quarter, we shipped exciting, new, cold weather Quiksilver and Roxy products to new distribution in the non-coastal areas of the United States and Canada. And we continue to see a huge opportunity in this new market.

In the fourth quarter, the DC product line, which continues to grow in popularity throughout our 3 regions, had great success with a new collection designed by Rob Dyrdek, one of the most innovative minds in action sports footwear and apparel. The Holiday 2012 Dyrdek Collection, designed exclusively by Dyrdek, is inspired and driven by the DC legacy of classic athletic skate heritage.

Our marketing is based on our commitment to high-profile events and world-class athletes and continues to build brand strength across the globe and give us a real competitive advantage. In our most recently completed quarter, we hosted the 2012 Quiksilver Pro in France, which featured 34 of the world's top surfers taking unpredictable and challenging conditions near the French coastal town of Hossegor.

Quiksilver's most iconic athlete, Kelly Slater, won the event, his 51st ASP World Tour victory. The 40-year-old Slater, considered one of the greatest surfers of all time, defeated his Quiksilver teammate, Dane Reynolds in the finals to capture the top prize. Kelly is currently vying for his 12th world title, and it's probably -- it's going to be a really tough battle to the very end. By the way, you can watch it. It's probably going to be on tomorrow on the ASP website, live on the website, at the Banzai Pipeline in Hawaii.

Meanwhile, we created more buzz on the coast of France by opening our flagship store in St. Jean de Luz, site of our European headquarters. The 8,100-square-foot store includes all the Quiksilver brands, including technical products, apparel and footwear. The store, named Boardriders Campus 162, hosts art, music and workshop events and features more than 200 surfboards from our pro team riders.

In 2013, we plan to open another flagship store in Barcelona. Our new stores have a fresh look, and our plan for 2013 is to continue to introduce these new store designs throughout the United States.

Moving on to the second initiative of expanding our business, we continue to pursue opportunities to drive sales of our core brands with new products, new markets, new sales channels and new consumers. For the year, we recorded solid growth -- sales growth in our Americas and Asia Pacific regions, both on a GAAP basis, as well as in constant currency.

In Europe, sales were down in historical currency, however, up slightly in constant currency. Our team in Europe deserves tremendous credit for navigating the economic challenges in this region. Our brands are gaining market share and shelf space in the major retailers, though we were able -- also see many small retailers closing. We believe, for the foreseeable future, only the stronger, more well-recognized brands will survive in this environment in Europe.

Our emerging markets, including Russia, continue to be a bright spot to our European business. Our DC brand continues to grow at an impressive pace, with total sales up 12% in constant currency for the year. And our e-commerce business also performed extremely well, increasing 155% in constant currency for the year.

Regarding our third initiatives, driving operational efficiencies, we remain sharply focused on reducing costs throughout the company. In the third quarter of this year, we reduced staff, which resulted in significant savings to SG&A in the fourth quarter. Also in the fourth quarter, we closed several underperforming retail locations. We will continue to evaluate the performance and profitability of our retail stores as part of our commitment to reduce operating expenses and optimize our business.

We are looking to improve efficiencies and streamline processes and procedures. To that end, we recently completed the rollout of our new ERP system in North America and expect Europe to be fully up and running by this summer. We have begun the planning process for implementing the ERP system in Asia Pacific. In addition, we are in the process of globalizing our design and development function and strengthening our global supply chain team.

So looking back on fiscal 2012, I'm really filled with mixed emotions. I'm proud of the way we battled through a tough economy, and we accomplished a lot. Our retail performance improved, and all of our brands are in great shape.

The Quiksilver brand continues to be a solid performer despite economic challenges throughout the year and continues to take more and more market share. Roxy has been repositioned and is growing again, with excellent traction in the U.S. And DC was on fire and a strong contributor to our business.

Our athletes performed exceedingly well throughout 2012 and continue to be terrific marketing ambassadors. And I am pleased with the way we have controlled SG&A expenses and the progress we made rightsizing our staff. We brought on board a new CFO, who has done a remarkable job, and made other management moves which are paying dividends. However, as I mentioned earlier, the economy continues to play an impactful role on our business, and we are not pleased with our lower margins.

Our team is confident that we have and will continue to take the necessary steps to position Quiksilver as the #1 global outdoor sports company.

With that introduction, I'll now turn the call over to Rich to discuss our financial performance.

Richard J. Shields

Thanks, Bob. And thanks, everyone, for taking the time to join us this afternoon. I'm going to focus my comments on our fiscal 2012 fourth quarter performance compared to the fourth quarter of the prior year.

For Q4 2012, constant currency net revenues were $559 million, up $34 million or 6%. On a GAAP basis, we were up to $14 million or 3%.

For a geographical segment point of view, net revenues in the Americas region increased 12% to $279 million and were up 13% in constant currency. Asia Pacific net revenues grew 6% to $87 million and were up 7% in constant currency. European revenues declined 9% to $192 million, down 2% in constant currency and down 6% organically.

Looking within the constant currency European results, e-commerce revenues grew well, retail same-store sales were basically flat, and our DC brand net revenues posted a solid gain. The 2% fall off in Europe's net revenues was driven by the Quiksilver and Roxy wholesale channels. We have seen some of our smaller wholesale accounts close, but we continue to expand in large, multi-door accounts. Our team in Europe is managing the brands well with a long-term focus in a difficult economic environment.

As we mentioned last quarter, even though we are not posting the same European revenue growth that we have in past years, we are expanding in our major accounts and believe we are taking market share.

Moving from geographical regions to a brand perspective, again in constant currency. Quiksilver revenues by brand increased -- excuse me, the Quiksilver brand revenue decreased 5% to $200 million, driven by the erosion in the Europe wholesale business. Roxy brand revenues were up 2% to $135 million, led by growth in the Americas wholesale channel. And DC revenues were up 18% to $187 million. DC revenues were up in all 3 regions.

Moving to a distribution channel perspective, again in constant currencies. Wholesale revenues were up 4% to $430 million. Revenues in our retail store channel were up 4% to $107 million. Our retail same-store sales growth globally in Q4 was slightly positive. Our e-commerce channel generated revenues of $22 million, up 148% in constant currency and up 56% organically.

Fourth quarter net revenue results were mixed. On the positive side, the DC brand increased 18% and continues to grow well in all regions. We believe the ongoing opportunity to offer new consumers appropriate collections from this brand through careful expansion of product distribution is a significant opportunity.

Our e-commerce -- excuse me, our emerging markets generated revenues of $49 million in the fourth quarter, up 27% in constant currency from the same quarter last year. We plan to continue to make investments in these emerging markets, in addition to investments to support our growing e-commerce business. And as Bob mentioned, our results in Europe, while down modestly, reflect the strong performance given the economic circumstances there.

Q4 results also point to 2 areas of concern. First is that we need to be careful managing inventory in light of uncertain economic situations in some of our key markets. The second and related area of concern is the level of clearance sales and discounting we saw in Q4. We ended Q3 with past seasons' product representing 16% of our total inventory. We focused on liquidating this inventory in Q4. We had significantly higher volume and lower recovery margin on these liquidations than in Q4 last year. The volume and recovery of liquidating the past season's inventory had a meaningful impact on our Q4 gross margins.

Consolidated gross margins contracted by 600 basis points to 46% of net revenues compared with 52% in the fourth quarter a year ago. Gross margins decreased in all 3 regions. The gross margin erosion was driven by several factors, including increased sales of prior season goods in our wholesale channels, along with lower margins on those sales; increased discounting in our retail stores; increased sales to larger multi-door accounts who typically earn volume discounts that erode our margin; currency exchange rates; and the impact of decreasing sales in Europe, which has traditionally generated the highest margins of our 3 regions.

We ended Q3 with $65 million of past seasons' product in our inventory, representing 16% of our total inventory. We sold $40 million of that past seasons' inventory during Q4. We ended the year with $25 million of past seasons' inventory, representing 7% of our total inventory. That compares to $20 million in prior seasons' inventory on hand at the end of last year.

So we enter fiscal 2013 in approximately the same position that we entered 2012, regarding the level of past seasons' product on hand in inventory. The $40 million past seasons' inventory liquidation in Q4 was primarily in the wholesale channel and was at a lower margin than we experienced in the wholesale clearance sales in Q4 last year.

Q4 SG&A expense declined by $12 million, or 5%, to $236 million in Q4. The decrease was driven by reductions to marketing expenses, as well as other expense reductions implemented during fiscal 2012. These reductions were partially offset by increased e-commerce expenses associated with the growth in our online business.

As a percentage of net revenues, Q4 SG&A expenses decreased by 320 basis points compared with the fourth quarter last year. If restructuring and special charges are excluded, Q4 SG&A decreased by 270 basis points.

Quiksilver continued the process of rightsizing the staff and improving our retail store portfolio in Q4. Consequently, we recorded $4.7 million in severance and $3.1 million of lease termination cost during the quarter. These items are included in our restructuring and special charges and were partially offset by a non-recurring gain on a lease transaction.

Pro-forma adjusted EBITDA declined to $40 million compared with $54 million in the fourth quarter of fiscal 2011, driven by the decrease in gross margin, offset somewhat by the reduction in SG&A expense. In Q4 last year, our tax provision included a large credit related to the settlement of a tax audit in Europe and the release of tax valuation allowances in Japan.

Our fourth quarter 2012 provision includes benefits from the geographies where we posted statutory losses, as well as the final true-up to our full year-end provision. Our non-controlling interest transitioned to a net income benefit in Q4 this year as our consolidated entities that are not wholly owned recorded a loss for the quarter.

Moving on to the balance sheet and working capital. Revenue -- excuse me, receivables increased $37 million versus last year end. Wholesale days sales outstanding increased to 86 days, up 7 days compared with the fiscal 2011 year end. DSOs were flat in the Americas and up somewhat in Europe and the Asia Pacific regions. At fiscal year end, inventory decreased $3 million versus the end of the prior year. We held 103 inventory days on hand, down 16 days compared to the 119 days at the end of the prior year.

The discounting and clearance activity in Q4 contributed meaningfully to the year-over-year reduction in inventory days on hand. We ended Q4 with $25 million of prior seasons' product on hand, representing 7% of total inventory, which compares to 5% at the end of the prior fiscal year.

CapEx was $19 million for the fourth quarter and $66 million for the full fiscal year, both decreased substantially from the comparable prior year periods. Q4 2012 investments continued to be focused on our IT infrastructure and our retail stores. We ended the quarter with $154 million on our -- available on our credit facilities.

Lastly, we want to share some of our thinking for fiscal 2013. Bob outlined our 3 core strategic themes: brand strength, sales growth and operating efficiency. We want to share some of our internal plans regarding sales growth and operating efficiency.

We expect constant currency fiscal 2013 net revenue growth in the range of 4% to 7%, with that growth led, as in fiscal 2012, by the DC brand, the U.S. and our emerging markets and by our e-commerce channel. We anticipate our European operations will continue to face a difficult economic climate. Our revenue forecast assumes continuation of the current economic climate in Europe.

Regarding operating efficiency, we will continue to report adjusted pro-forma EBITDA, which excludes the impact of staff reductions and retail lease terminations. We expect to continue to execute our plans to act in those areas to reduce our SG&A expense structure. Excluding those restructuring and special charges, we expect to reduce SG&A as a percent of net revenues by at least 150 basis points in fiscal 2013.

We will increase our focus on strengthening our balance sheet and free cash flow and plan to decrease CapEx by at least 10% from the investment level in fiscal 2012, which was down over 20% from fiscal 2011.

With that, I'll turn the call back to Bob.

Robert B. McKnight

Thanks, Rich. We're pleased with the progress we are making on our long-term initiatives. While we continue to face the economic challenges around the world, we are focused on growing and strengthening our business and improving our cost structure.

Thanks again for joining us this afternoon.

Robert Jaffe

Operator, that concludes the prepared portion of the call. We're now ready for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Rich, I was hoping you could comment. I know you gave some good color on next year's preliminary thoughts on sales and SG&A, but how do we think about gross margins in light of -- I guess what was -- what would probably be a disappointing quarter that you just reported on gross margins?

Richard J. Shields

It is a disappointing quarter in terms of gross margin, and so I'll share with you that we're working -- Craig Stevenson and I are working carefully to make sure that we continue to build the systems and the process to increase visibility into our forward margins. And so I'm not going to go into quantitative detail about 2013 in terms of gross margin. But I think it's certainly happy to share our thoughts on certain of the gross margin components that will be part of the 2013 margins. When I think about input costs, input costs will not be significantly changed. What we see is that you've got some favorability in cotton, probably offset by unfavorability in rubber and leather. Labor, likely to be flat in total. We are seeing some increases in some areas in China, but we're also migrating to some others areas within China and out of China. So we probably think that labor will be about flat. We'll certainly see some benefit from vendor aggregation, as well as some benefit from style consolidation. In the current economic market, we really don't see an opportunity and have any plans to increase our retail pricing. The past seasons' inventory, we end 2012 with $25 million of past seasons' inventory on hand. That's up $5 million from the beginning of the year. So I think that, that's -- we're up modestly. And at the same time, we've increased our factory outlet store counts during the year. We opened 11 new factory outlet stores, so we've got a little bit of increased capacity within our retail channel than we've had in the past. I think it's difficult to forecast what recovery margins we'll be able to see on our wholesale liquidation, but we are working actively on tightening our buying controls. And in the end the story of Q4 is really that we overbought during fiscal 2012 and we had higher liquidations through the wholesale channel because of that. We will see, as I mentioned, a shift toward major accounts, both in the U.S. and in Europe. And in both those markets, the larger national accounts traditionally get volume rebates or other concessions that somewhat erode our margins. And at the same time, our e-commerce business and our retail business is growing substantially, and those have higher margins. And then the last point I would say is that I would expect that in -- as in 2012, the European region will probably be the -- will probably have higher sales and -- higher sales growth in the Americas and in Asia Pacific, and that those regions have traditionally had lower margins than our European region, so there's a little bit of mix shift there.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Again, just going back to the gross margin point, looking at the fourth quarter decline, can you just help quantify -- I mean, how much of that is really you guys just trying to clean out stale inventory that you held on out of the quarter versus just ongoing consolidations within your account base, particularly in Europe? I guess what I'm trying to understand more is how much of this is going to linger as you work through the challenging economic conditions, versus some of it being partly perhaps a one-quarter event where you're just trying to clean up some inventories?

Richard J. Shields

Well, I mean, as I mentioned, we entered 2013 with $25 million of past seasons versus $20 million at the beginning of the year. So we -- so when we think about Q -- when I think about Q4, the vast majority of the erosion of our gross margin versus last year is due to liquidation and discounting to move prior seasons' inventory, and we enter fiscal 2013 with $25 million of past seasons' inventory basically in line with where we were last year.

Taposh Bari - Goldman Sachs Group Inc., Research Division

And then just about -- a final question I had was on SG&A, just shifting gears. Clearly, a strategy on your part. How does that path -- as you try to get to that $400 million EBITDA goal for 2015, is that -- is SG&A -- or financial discipline, is that a linear path? I know there's a need to globalize the processes and strengthen the supply chain. Are there any investments that need to be made to help support that? Just trying to get a better sense of -- I know you gave, what, 150-basis-point guidance for next year, but does that accelerate over time? Or is that a pretty steady run rate?

Richard J. Shields

Well, let me answer that question 2 ways because you mentioned -- in our Q2 call, we reiterated the construct of our plan out through 2016 to get to our $400 million EBITDA target. So I want to speak to that, and then I'll immediately speak to your SG&A. So SG&A will not be linear. And so there's -- what you see us making is key investments that will allow us to reduce SG&A as a percent of sales. So when we read our press release and listen to the script, I think there's a number of those investments that you hear us focused on. When you -- when we talk about the fact that we've got restructuring during Q4, during Q4 we recorded $3.1 million in lease termination costs, as well as $6.7 million of asset impairments. We also booked severance during the quarter. So you see us making investments there in terms of rightsizing the staff, looking carefully at the evaluation of underperforming retail locations. And you also see us continuing to make CapEx investments around SAP, which we think is going to be a significant opportunity for us to, again, automate work that's currently being done in multiple locations inefficiently. So we are making investments. We're going to continue to make those investments. And the path on SG&A, to reduce SG&A as a percent of sales, will -- there will be investments that we'll continue to make, and we will continue to make progress about that. And we're committed to at least 150 basis points of production of SG&A, excluding the restructuring and special charges during fiscal '13. And then let me come back to one last point, because you started your question about EBITDA. EBITDA is going to be a function of all 3 of the core components that Bob spoke with. We want to be able to get to our EBITDA target with a conservative estimate of sales growth. That doesn't mean that we're not quite bullish about the ongoing opportunities with sales growth regarding DC shoes, regarding Roxy, regarding e-commerce, regarding our emerging markets, as well as the Quiksilver brand. But we want to make sure that we're managing SG&A relative to a more conservative forecast. But let's not take gross margin out of the equation. Bob mentioned also that we'll be making an investment with some new team members with our supply chain. And in past calls, Craig Stevenson mentioned the work that we're doing in terms of style rationalization, in terms of vendor aggregation, in terms of the global fabric library. All of those are things that we've shared that really start to come into focus really around the season of spring 2014. And so we believe that there's robust opportunities for improved performance in terms of margin as we focus on our supply chain as well.

Operator

We'll take our next question from Erinn Murphy with Piper Jaffray.

Maria C. Vizuete - Piper Jaffray Companies, Research Division

This is actually Maria Vizuete in for Erinn Murphy and we're just wondering if you can speak a little bit about some of the trends you saw in Europe throughout the quarter. Maybe if you could help us appreciate how the quarter progressed from maybe -- either a comp basis, or is there any regional highlights or challenges?

Richard J. Shields

Sure. So the -- and thanks, Maria. The -- if I think about the constant currency revenue growth in Europe, it was -- we had lower growth in the second semester than in the first semester of 2012, and basically the same growth between Q3 and Q4. The economic conditions remain difficult. The U.K. and Spain underperformed the region total in Q4, while Russia and Germany overperformed the total region results. And France, our largest market there, was basically aligned with the regional results. We saw the DC grow -- DC brand continue to grow, and we saw basically flat same-store sales comps. And as Bob mentioned, while we never hate -- we always hate to see any of our regions post losses, we're actually proud of the performance of our European team in light of the circumstances there.

Maria C. Vizuete - Piper Jaffray Companies, Research Division

And then just -- and maybe as we think about the promotional season in Europe, have you detected any changes? I guess, are retailers looking to take more markdowns earlier this year?

Richard J. Shields

I'll speak really to the spring/summer season. The spring/summer season had quite a bit of rain, and we did see shopping later in the season where you traditionally have discounts in full-price retail. We're off to a better winter season, with good snow earlier in Europe this year. And we did see -- especially some of our larger accounts, wanted to have some product markdowns. And we supported that with some markdown allowances as we traditionally do with our key accounts.

Maria C. Vizuete - Piper Jaffray Companies, Research Division

And then can you just talk a little bit about these last few days leading -- or few weeks leading up to Christmas? Can you share with us maybe any observations you have about the consumer and what kind of behavior you're seeing?

Richard J. Shields

Yes. I think that, that's probably better answered by people that are closer to sales. Rob Colby, you want to...

Robert Owen Colby

Sure. So we had a really strong November in our retail stores and then throughout the wholesale channel. It was promotional around Black Friday. But nevertheless, we were strong and ahead of plan for all 3 brands. As we get closer to Christmas, we expect to see solid numbers in the wholesale business and at retail. December's off to a slow start. I think everybody is seeing that. But we're really encouraged by November and feel good about the close of December.

Maria C. Vizuete - Piper Jaffray Companies, Research Division

And the last question I have, real quick, is can you just tell us anything you've maybe learned from your partnership with the DC brand and JCPenney? Maybe anything that surprised you, either on the upside or otherwise?

Robert Owen Colby

Yes, we've had really strong sell-through there. We're really pleased with the results there.

Operator

We'll go next to Jeff Van Sinderen with B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Just a follow-up on what you were talking about in terms of Black Friday and December. Do you think that the slowdown after Black Friday weekend this year so far has been more pronounced than last year?

Robert Owen Colby

It depends on the channel. I think that Specialty has been strong. We're hearing that the malls are maybe a little slower compared to last year. But as I said, I think that things are going to pick up in the back half of December.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. So it sounds like it's a little more back-end loaded. And then, Rich, or whoever wants to take this, I guess, just overall, when you think about your European business at this point -- I mean, it sounds to me like it's a mixed bag at this point. Would you say, overall, if you assess it for Q4, do you feel like it got incrementally worse? Do you feel like it's getting -- it's starting to stabilize overall? Or how should we think about the European business overall as we're heading into Q1?

Richard J. Shields

Well, I think that the -- we're not going to forecast economic circumstances, but I think that we'll talk about our team and our brand performances. So I think that we're proud of what we're doing there. We're -- we know that we're taking shelf space and believe that we're taking market share. We're certainly improving our relationship with key accounts. We did take some severance in Europe and are continuing to -- the rightsizing that we're doing with staffing is activity that we're doing in all the regions. And we're certainly being cautious about the Europe region, as well as others. So importantly, when -- what I mentioned before is that we did see a difference between first semester 2012 and second semester 2012, where the second semester growth was -- had stepped down a bit from the first semester. But between Q3 and Q4, we really haven't seen any deterioration between those quarters. And the European team is looking forward to getting to ISPO, the large trade show there. And we remain -- they remain committed to the cause, and their attitude is pretty good.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And then on the DC footwear business, it's great to see DC growing at the rate that it is. But just any incremental color you can share in terms of this shift that may be going on in terms of the cycle, away from traditional profile skate shoes, maybe to more -- toward more basketball-like profile skate shoes. Anything you're seeing there?

Robert Owen Colby

Yes. I mean, running is obviously -- lightweight running is on fire across all the core channels right now, and they're taking market share. We're performing well, but we're the biggest of all the skate brands. DC is. And some of the smaller brands are having a terrible time. We're not having a terrible time, but lightweight running is definitely making an impact there. Our business is -- it's growing dramatically in core accounts and in what we call Specialty retail. So yes, the slimmer profiles continue to sell, but their momentum is slowing. It's again the running category or lightweight running that's been on fire.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And then, Rich, I know -- you've given some sort of broad guidance for 2013, and it sounds like there's obviously some challenges that remained for Q1. I guess when you look at kind of your internal plan for 2013 at this point, any sense you can give us on when you think the potential quarterly inflection point in the P&L might be? Do you think that, that happens sometime in 2013, year-over-year improvement?

Richard J. Shields

I think that we'll show -- our intention is to consistently show progress. But I'll also share that we're -- when we think about kind of key items in marketing, we're going to be managing our marketing to an annual target, and that could create fluctuations quarter-by-quarter. But -- and that's why I wanted to make sure that we shared with you our intention, which is really around Bob's key point of operational efficiency. The way -- one of the key measurements we've got around operational efficiency is to make sure that we consistently see SG&A lower as a percent of sales once we've backed out the restructuring and the special charges. And that's really our focus.

Operator

We'll go next to Andrew Burns with D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

I was hoping you could comment on the current winter season product. It seems like weather's been better than last year but still mixed. How are you progressing through that current season inventory and, as it stands now, the likelihood for some of that being carryover inventory to the following season?

Robert Owen Colby

Yes. So it was a slow start in North America. As everyone's heard, the weather was unseasonably warm, particularly on the East Coast. But we've got snow falling and cold weather, and things are starting to pick up. Europe, we've got real nice cold weather, and we're off to a good start. So obviously, there is a little bit of a hangover from last year, but we saw and continue to see great bookings of our '13 and '14 range moving into this season. And we'll keep a close eye on the selling, but we don't anticipate any big issues.

Andrew Burns - D.A. Davidson & Co., Research Division

And Rich, in terms of the guidance and -- without specific gross margin guidance, is it fair to say that when you add your internal expectations up, you're expecting adjusted EBITDA to grow in FY '13?

Richard J. Shields

Absolutely.

Andrew Burns - D.A. Davidson & Co., Research Division

Okay. And last question, the -- you had some higher-cost debt that's callable now and going forward. And you continue to have, on an annual basis, a higher -- an unusual tax structure. Can you talk about some of the opportunities over the next several years to improve your EPS below the operating income line?

Robert B. McKnight

Sure. I mean, the -- I mean, maybe, as we walk down through the operating income line, I'll mention the 2 big chunks there. So let me start with interest expense. And so we've got 2 big blocks of debt. You've got the U.S. notes, that's $400 million that are due in April 2015; and then you've got the European notes, that's $250 million that are due in December 2017. Obviously, there's quite a bit of appetite in the market for high-yield paper. I think that as we improve our EBITDA in 2013, there could be opportunities for us to bring down our effective interest rate, but our real focus is to really drive EBITDA growth, and then that will provide the framework for us to consider any type of refinancing to lower the interest rates. And then if we move to tax, the tax rate is going to be difficult to forecast simply because that we've got large net operating loss carryforwards in a number of jurisdictions. And because of those, and valuation allowances, our annual tax rate is going to be very sensitive to the location of our earnings. And so the quarterly rate is probably going to move around a little bit because -- remember, the quarterly rate is always a true-up toward the full year forecast. But I think as we go through 2013, we'll -- we may be able to at least kind of range some things externally in terms of tax rate. But it's going to be quite sensitive to the -- what jurisdiction our earnings are in, and very sensitive to relatively small shifts between different subsidiaries.

Operator

We'll go next to Mitch Kummetz with R. W. Baird.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

A few questions. So first, in terms of your 2013 sales guidance, I mean, you guys know what your spring prebooks are. You're probably starting to get some color on the back half of next year, just kind of what's happening at retail today. So when we think about that 4% to 7% constant dollar growth, I mean, how should we be thinking about that in terms of first half, second half?

Richard J. Shields

I think it's -- Mitch, first, good to hear your voice. I think that -- we've shared that we want to be -- have a real focus on providing more visibility and more transparency. That starts off with us having -- sharing our internal plans. And we want to make sure that we're kind of focused on our annual goals in terms of revenue. So I don't think it's -- I don't think we want to move into kind of breaking that down by quarter or semester. But we'll continue to provide visibility around sales for -- from a sales channel perspective, retail, wholesale, e-com, from our 3 brands, emerging markets, as well as our regional segments and really try to make sure that we're providing as much visibility as we can into our sales.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's fair. On the gross margin, it -- I mean, it sounds like the big wildcard for 2013 is going to be recovery in the wholesale business, given some liquidations and things like that in 2012. I know you don't want to give us gross margin guidance for 2013, but can you talk about what the impact was on 2012? I mean, is there a kind of a number? I mean, the gross margin was down more than 300 basis points in 2012. Can you say how much of that was due to closeouts and discounting, just to give us some context of how we can think about that opportunity for 2013?

Richard J. Shields

Yes. The -- I'll just -- I'll come back to a couple of key themes. And to answer your question directly, the majority of the drain year-over-year is clearance and discounting. And the root cause of that is that we overbought and then we liquidated. And so I think that -- I mentioned that one of our key focuses internally is to make sure that we're managing the buy cautiously. We want to make sure that we're providing our sales teams the opportunity to take in season reorders and be successful. It's clear that the brands and the styles are resonating well. And at the same time, we want to make sure that we're being cautious. And as we look back at 2012, I think it's fair to say that we overbought and we liquidated. And that had a significant impact on our margins.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then lastly, on the SG&A, I'm trying to do the math here. I mean, 4% to 7% comp store sales growth. And when I look at FX spot rates, it doesn't seem to me that FX is really going to move that too much in 2013. Correct me if I'm wrong about that. But if SG&A is down more than 100 basis points -- I mean, you're looking at -- you're still expecting SG&A on a dollar basis to grow a little bit in 2013, right? And if that's the case, I mean, how are you thinking about those buckets? I mean, where do you think you can maybe save some money? And where do you need to continue to invest? It sounds like SAP or whatever is where you need to invest. But where are you looking to save money as you go through next year?

Richard J. Shields

So I'll start off with investments. And you're right, the investments that we've got next year, even though we're -- we had $66 million of CapEx in 2012. I mentioned that we'll be bringing that down. The CapEx will continue to get focused in retail stores and as well as our global IT systems. We'll be investing behind growth in emerging markets, and we'll be investing behind the growth of our e-com channel. As we move into major accounts and take broader opportunities there, there's opportunities for shop in shops, and we'll invest in that. When we think about cost savings, I think you'll see us continue to focus on staff rightsizing, retail store portfolio, as well as just taking the opportunity to make sure that we're reengineering processes. And we've talked about a number of those key processes like the global merchandising and design process. So we'll be looking at processes as an opportunity for us to be more efficient in process and, therefore, more efficient in terms of net revenue per employee. And we'll be taking -- and our expectation as we roll SAP out and have a better systems platform for the business is that we can be -- we can see the staffing benefit from automation as well.

Operator

We'll go next to Christian Buss with Crédit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if you could talk a bit about your product development and product introduction plans to avoid the excess inventory and the aged inventory issues that you had this past year.

Craig Stevenson

So, Christian, it's Craig Stevenson here. Along with the ERP system that Rich is talking about, we're also implementing like an integrated business process across the business that's really going to -- when we've bedded it down globally, it's really going to give us a lot more transparency into our demand forecasting on a truly global level, which will actually help us manage our inventory much better.

Christian Buss - Crédit Suisse AG, Research Division

Okay, that's helpful. And then a housekeeping question. The gain on the retail store closures, could you talk about where that was booked, in the SG&A or cost of goods or below the line?

Richard J. Shields

It's in SG&A, and then it's also -- if you look at your press release on Page #8, it shows up in the Q4 3-month column within the Restructuring and Special Charges line on that reconciliation of EBITDA to GAAP.

Operator

[Operator Instructions] We'll go next to Eric Alexander with Stifel, Nicolaus.

Eric A. Alexander - Stifel, Nicolaus & Co., Inc., Research Division

Standing in for Jim Duffy. He's traveling today. Looking at -- just a further follow-on to the gross margin. It looks like -- concerning the overbought position that you guys spoke to, do you get -- does that -- is it fair to say that second half '13's position's more favorable from a gross margin compare standpoint, meaning particularly easier?

Richard J. Shields

Well, I'll just -- I'll frame my comment around the -- we've made -- we're clear that the reason that we had $65 million of prior seasons' inventory at the beginning of Q4 is a function of being overbought. And we don't anticipate being overbought in 2013. And so we would hope that we wouldn't be in the situation that we had that type of volume of liquidation activity in 2013.

Eric A. Alexander - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's helpful. And then just to touch further on the SG&A line. I know you're talking that dollars modestly up year-over-year, it sounded like, and you went through the buckets. As we're thinking about cadence, it looks like, obviously, the fourth quarter of '12, you guys were down year-over-year on a dollars x special charges, et cetera. Should we expect that to continue in the first half of '13 and then we'll have some reinvestment into the brands and such that might start -- from an incremental standpoint that we'll start to see through as far as dollars increasing in second half '13? I don't mean to get too granular about this, but just trying to think about this. So...

Richard J. Shields

So when we think about investment in the brands and our marketing spend for 2013, as a percent of net revenues, we'll probably bring that down modestly from 2012. The timing of that brand investment will be, I think, pretty similar to 2012. In 2011 -- the comparison between 2012 Q4 and the prior Q4 is somewhat driven by a large marketing event in Q4 last year that didn't replicate in Q4 this year.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session. I'd now like to turn the call back over to Robert Jaffe for any additional or closing remarks.

Robert Jaffe

That concludes today's call. On behalf of everyone here at Quiksilver, thank you for participating. And we look forward to providing an update on our performance on our fiscal 2013 first quarter conference call. Thanks.

Operator

And ladies and gentlemen, once again, that does conclude today's call. We do appreciate everyone's participation.

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