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Volcom, Inc. (NASDAQ:VLCM)

Q4 2008 Earnings Call

February 19, 2009 4:30 pm ET

Executives

Hoby Darling - VP of Strategic Development and General Counsel

Richard Woolcott - CEO

Doug Collier - CFO

Jason Steris - COO

Analysts

Mitch Kummetz - Robert W. Baird

Sean Naughton - Piper Jaffray

Jeff Van Sinderen - B. Riley

Christian Munafo- Thomas Weisel

Jeff Mintz - Wedbush Morgan Securities

Brandon Ferro - KeyBanc Capital Markets

Claire Gallacher - Caris & Company

Operator

Good afternoon. At this time I will like to welcome everyone to the Volcom fourth quarter 2008 conference call. (Operator Instructions).

I will now like to introduce Mr. Hoby Darling, Vice President of Strategic Development and General Counsel for Volcom Inc. to begin the call, go ahead Mr. Darling.

Hoby Darling

Thanks Felecia. Good afternoon everyone. Thank you for joining us today to discuss Volcom's 2008, fourth quarter and full year financial results.

Joining me on the call today are Richard Woolcott, Volcom's Chairman and Chief Executive Officer; Jason Steris, Volcom's President and Chief Operating Officer; and Doug Collier, Volcom's Chief Financial Officer.

First, some housekeeping items before we begin. If you would like to be added to Volcom's e-mail distribution list to receive company information or if you'd like to change your contact information, please contact Evan Pondel at PondelWilkinson, at 310-279-5973. In addition please be advised that this conference call is being broadcast live on the Internet at volcom.com, as well as earnings.com. The playback of this call will be available for one year and maybe accessed on the Internet at both websites.

Also please be advised that today's call will contain certain non-GAAP financial information, reconciliations to GAAP for this information maybe viewed in our earnings press release, which maybe accessed at volcom.com.

Please note that all information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information, reflecting Management’s current forecast of certain aspects of the company's future, in particular statements about the future regarding our guidance, outlook for future business margins, financial performance, customer demand, growth and profitability all constitute forward-looking statements.

These forward-looking statements are based on Management's current expectations, but they involve a number of risks and uncertainties. Actual results could differ materially from those stated or implied by these forward-looking statements. The company disclaims any intent or obligation to update these forward-looking statements except as required by law.

With that been said, it's my pleasure to turn the call over to Richard Woolcott, our Chairman and Chief Executive Officer. Richard.

Richard Woolcott

Thank you, Hoby. Good afternoon, everyone. I would like to begin by expressing my appreciation for all of your support and patience as we navigate through these turbulent times. None of us could have ever imagined a landscape deteriorating the way that it has from just a year ago, however, this is our new reality and we must adjust and manage our business accordingly.

The economic environment has posed a number of challenges and I believe Volcom is rising to many of this with an underlying strength that speaks to the solid fundamentals of our business, the resolve of our team, and the overall power of our brand. This said our results for the fourth quarter were not acceptable. A variety of items impacted both the core Volcom business and our Electric business that we acquired about a year ago.

For the core business total revenues in the US were in line with our plan, but our results were below plan due to three main items; number one, a highly promotional environment that continued to impact gross margins; number two, we recorded a non-cash impairment charge of $1.4 million related to our two LS&S stores that we acquired in 2008; and number three, we experienced an unexpected and sudden currency devaluation in Canada against the US dollar, which generated a foreign currency loss of $1.4 million, related to our Canadian accounts receivable. This loss translated to approximately $0.04 per share in the quarter.

As for the Electric business, revenues were significantly below our plan, bringing the year well under our initial and reduced targets. The reduced revenue brought operating expenses out of line there by creating a loss and the continued softening of the business resulted in a non-cash impairment charge in the fourth quarter of $14.9 million.

Let me now spend a few minutes discussing how we are tackling these issues at Volcom and Electric. Our number one initiative today is to keep Volcom financially healthy in these turbulent times. Our balance sheet remains intact and well fortified to face the challenges ahead, and we generated more than $24.0 million in operating cash flow in 2008. These attributes alone give us an edge, but we recognize that more work needs to be done.

Since our annual revenues in '09 are currently expected to be down from '08 due to the challenging environment, a key element of our plan is to keep costs under the control so that we can remain a sound and profitable company. As part of this initiative, we recently reduced our domestic in-house workforce by about 8%, which accounts for a total of 28 employees that were part of Volcom Inc. and Electric.

Additionally, we have implemented a company-wide salary reduction that includes a 15% decrease for the Chief Executive Officer, a 10% decrease for the senior executive management team and additional salary decreases throughout our ranks.

Finally, we have further tightened our belts and implement across the board spending cuts throughout the company. Taken together these initiatives are expected to translate to meaningful cost savings for the company, with minimal effect on our long term strength, and should also reduce our consolidated SG&A for 2009 below that of 2008.

Let me now turn to Electric. It has been a year since our acquisition of Electric and it is important to know that we continue to be deeply committed to the brand and the team. From a product perspective Electric continues to introduce some of the most innovative sunglass and goggle designs in the industry. Whether its surf, skate or snow, skiing, motocross or NASCAR, Electric's product is well diversified. The team riders continue to get great exposure and innovation of the company is at an all time high.

The Electric shop kids program is now on a more traditional calendar and we are encouraged by the product's strong design. The entire fall 2009 collection looks great, and we received solid feedback from the recent trade shows. However, sunglass and goggles have not been immune to the current environment, especially at the core level, where Electric is most popular and more widely distributed.

Even though Electric still one of the most sold eyewear brands in the shops they are in, we are forced to face the realities of the economic slow down. As such, we are currently working closely with Electric to reduce cost, to accommodate the pressure on revenue. As I've mentioned we have reduced the Electric workforce, are implementing salary cuts and cutting back on general expenses where we can.

In order to become more efficient, Electric's warehouse and shipping has now been fully transitioned to our new Irvine facility and Electric is using Volcom's expertise to support in the development of their soft goods and accessories programs. And finally, Electric is implementing a number of programs with its suppliers to help improve gross margins. Again, our collective goal is to maximize the brand's potential, while keeping the company healthy and balanced.

Whether at Volcom or Electric none of these decisions to cut expenses and adapt to the new environment are easy. I applaud our management team for understanding the full scope of our needs and taking the necessary action. This is a sort of discipline and focus that we need to ride out this period and prevail as an even stronger company once the economy turns around.

Let me now shift my comments to discussing some of the other components of our business that are keeping our brand strong, our product offerings exciting, our distribution on point and our initiatives progressing. Let's start with the strength of the brand. Everything we do at Volcom supports the board sports lifestyle including our art, music, films, athletes and clothing.

Whether it's our Let the Kids Ride Free events or our creative website showcasing our daily happenings, it all helps to position our brand as a leader in the action sports industry. Our marketing efforts resonate deeply with our customers and this plays a major role in setting the tone for what we stand for.

During these tough times it has become clear that our efforts are having a positive impact on our overall business. We continue to hear from our retailers about our solid sell through and brand loyalty. From all corners of the world, these programs are paying off and I believe they are one of the main reasons, along with our products, to why Volcom is fairing better than most in this global slow down.

We plan to continue our attack in 2009 with many calculated marketing initiatives. It's not how much money you spend, but how creative you can be in tough times. Some highlights include our Blizzard Bizarre Snow Tour that mixes together our rock bands on snowboards on a two week, ride-all-day, rock-all-night promotional blips. The tour ran from January 22 to February 6 along the West Coast, and will soon be featured on Fuel TV and other media outlets.

We are also looking forward to the upcoming limited edition Volcom Entrainment, 7-inch Vinyl, and T-Shirt Co-op with legendary rock band Pearl Jam to celebrate next months rerelease of the multiplatinum album Ten.

And finally, we are proud to announce the recent launch of StoneYour.TV, our new web-based multimedia platform that is now live and can be viewed from our website. Along with these special events, we will continue to focus on our athlete tours and photo trips, contest and detail demos. We remain very focused on our marketing efforts and believe they are a vital part in keeping our brand at the forefront even in a down economy.

Now, another reason why I believe our brand continues to perform well at retail is the strength of our product. Three areas that continue to dominate for Volcom are denim, board shorts and outerwear. In the action sports industry, our denim has been ranked number one, and we continue to gain momentum. The new offerings for fall 2009 are even more compelling, and the reception has been excellent at the recent trade shows.

The same goes for our board shorts, which have been another important initiative. The design, color and technical aspect of our 2009 collection are the strongest they've ever been which is a result of our design and marketing teams dedication to build the best board shorts in the industry.

We launched our Proving Grounds campaign where our team riders put our board shorts to the test in print and video webisodes, broadcast from the Volcom House on the North Shore of Oahu. You can watch these webisodes at www.StoneYour.TV.

Turning to our snow category, our outerwear continues to get better in the sell-through in retail both here in the US and in Europe has been very good. The designs and technical performance are right inline with what our team riders are looking for, and we continue to round table with them for future collections.

Whether it's our Gore-Tex fabric or our patented or Zip-Tech technology, we are finding that our snow products continue to resonate well with our customers, while our retailers continue to show their support by backing our program. In terms of the business, consolidated outerwear sales increased 27% in 2008 which I believe is an exciting bright spot in today's environment.

We've also stepped up our Stone Age campaign, a grassroots initiative that provides core retailers access to products inspired by Volcom skater Geoff Rowley. So far these retailers are excited about the product with its distinctive orange hang tag, and the line provides an incentive for customers to shop with them, because they can only purchase Stone Age products at these select retail stores. We believe this product segmentation strategy is an important tool in keeping our brand strong at the core level as we grow our business in the future.

And finally, our Creedlers footwear, which has been edited to consist mostly of open-toed sandals have been gaining traction and spring looks to be our strongest season-to-date. Swim is also off to a great start, and is getting early sell-through at retail. These categories were initiated a few years ago and seem to now be coming into their own.

Now, let's discuss our distribution. We have always been fanatical about managing our distribution, and that is especially true today. Our retailers are being hit hard, and we are doing our part to help them through this period.

To do that, we are in constant communication with our retailers and our sales managers are on the road visiting stores. We are also helping manage inventory levels while working hard to minimize the pressure to discount. And most importantly, we are keeping an eye on receivables.

In terms of our independent shops, we are helping them with merchandising, marketing efforts and overall strategies on how to weather this storm. Many of the core shops are adapting to the new environment, and making the needed adjustments to their inventories. However, some are finding this environment very challenging, and we are doing what we can to support them.

In terms of our bigger retail partners, they too are being challenged and we are supporting their needs as well. From adjustments in timing of shipments to more accommodating payment schedules, we are working diligently will all of our retailers to get through this difficult period.

Now, in terms of new distribution, we do not plan to open a series of new doors to just boost our top line. It is absolutely imperative to the integrity of the brand to promote the right distribution over the long run. And today, we are looking for bright spots in our current account base, and believe there is room to grow with our existing group once we get some stability in the marketplace.

As for our Volcom branded stores, we are focusing our efforts this year on optimizing our current stores before venturing into new territories. We think it is more prudent to focus on these stores given the economic conditions rather than expand our Volcom retail presence at this time.

Let's now discuss our progress with some of our growth initiatives that gained traction in 2008. Looking abroad, Europe continues to face similar economic pressures that we are experiencing domestically. Now that being said, we feel good about our progress overseas. Phase I of our expansion plan in Europe is now complete with our headquarters established in Anglet, France, and our first full year of shipping product under our belt.

We successfully accomplished these tasks in 2008 with an operating margin of approximately 24%, and are now moving forward with a second phase of our expansion in Europe.

The root of this phase is to capitalize on the brands awareness and to evaluate future distribution opportunities. There is room to grow, and while our plans for 2009 have been tempered, we are still moving forward and well positioned to pursue opportunities, especially once the economy turns around. The recent acquisition of our UK distributor is also complete and dovetails with our expansion plans.

Looking at Asia, our brand awareness is getting stronger throughout the territory and with our recent acquisition of a Japanese distributor we are now able to fine-tune our offering and better support a retail base. Our initial strategy is to complete all areas of the integration and then we will begin strategizing new areas of opportunity.

We are also working closely with our licensee in Australia and are excited about enhancing our presence throughout the Pacific Rim, when the time is right.

There is no doubt that these are unprecedented times for anyone in business, but even with the economic chaos, the main strength of the Volcom brand shines through. Before I turn the call over to Doug, I would like to briefly review five key components empowering the company.

Number one our balance sheet remains strong. With a cash position of nearly $80 million and no debt, we are in a solid position to continue to weather the storm. Number two, we are delivering great product and experiencing solid sell through at retail. This holds true in our most important categories denim, board shorts and outerwear.

Number three, we are dedicated to supporting our retailers worldwide, whether it's helping them achieve superior product presentation or manage inventory levels, we are working through this tough period together. Number four, we are nurturing our growth initiatives started in 2008 and keeping those that have fallen behind in check.

Finally, we are managing our expenses in relation to how revenue and margins are being affected. Our main objective is to make sure these fundamentals stay in business. They must stay profitable.

Overall, I believe we have a strong business and we are prepared to do what it takes for long-term viability and success. As always I'd like to thank the entire Volcom family, our athletes, retailers and shareholders for their continued support and commitment.

\

With that, I'd like to turn the call over to our CFO, Doug Collier, to review our financial results for the fourth quarter.

Doug Collier

Thanks Richard. Good afternoon, everyone. 2008 was a difficult year for most companies in the consumer and retail sector; certainly it was a challenging year for Volcom. Despite the headwinds, our financial results for Q4 and the full year of 2008 indicate that we can withstand hard times and generate cash.

Some of the highlights for our year end financial statements include, consolidated annual revenue growth of 25% to $334 million, net income for the year of $21.7 million, including a large impairment charge and the Canadian FX loss, adjusted net income for the year of $33.9 million, excluding impairment charges and the Canadian FX loss, cash flow from operations of $24.7 million for the year, cash balance of nearly $80 million at year end, which is net of approximately $32 million used for three acquisitions, stockholders equity of #194 million after the impairment charge and Canadian FX loss, a 12% increase from a year earlier, and no long-term debt.

In addition to these assets on the balance sheet our most valuable asset is our Volcom brand, which is as strong as ever, with high awareness around the globe. Coupled with some of the best product that we believe we have ever developed, we entered 2009 with confidence, despite the difficult retail environment. Our strong brand, excellent product and large cash balance place us in a position to compete in the marketplace and successfully ride out this storm.

However, our strong position does not exempt us from having to adjust our infrastructure, control cost and decrease spending to adapt to and remain nimble in this difficult environment. As Richard mentioned, we have eliminated positions, reduced salary and cut spending throughout the company. We believe these changes will allow us to achieve solid profitability, while maintaining appropriate resources to capitalize on any opportunities that may lie ahead.

Now let's review some of the numbers for the fourth quarter, ended December 31, 2008. Total consolidated revenue increased 1% to $69.6 million, compared with $69.1 million in the fourth quarter of 2007. Let me now break down our Q4 revenue by each of our three business segments, the US, Europe and Electric.

First let's look at the US segment. This segment includes revenue from the US, Canada, Japan and most other international territories outside Europe as well as our domestic Volcom branded and LS&S retail stores. Total revenue from our US segment, including royalties, for the fourth quarter decreased 7% to $59.4 million, compared with $58.9 million in Q4 of 2007.

The break down of US segment's product revenue in Q4 by category is as follows. Our men's product revenue decreased 6% at $30.3 million for Q4, compared with $32.1 million in the fourth quarter of 2007. Our girls' product revenue decreased 13% to $14.4 million versus $16.5 million in the fourth quarter of 2007. Boys' revenue, which includes our kids line increased 5% to $5.6 million, compared to $5.3 million in Q4 of 2007. Snow revenue increased 68% to $2.5 million, compared with $1.5 million in Q4 of 2007.

We are excited to see continued growth in this core performance category as our snow products continue to be well received in the marketplace. As a side note, for the year, snow revenue increased 16% to $18.8 million.

Revenue from our Creedlers footwear line decreased to $654,000 versus $1.1 million in the 2007 fourth quarter. This decrease is attributable primarily to our transition away from the closed-toe, slip-on category.

Revenue from our girl’s swim line decreased to $289,000 versus $1 million in Q4 of 2007. This decrease is primarily due to the timing of shipments between quarters. For the year, girls swim has increased 53% to $5.6 million compared to $3.7 million in 2007.

International product revenue, which is part of our US segment and consist primarily of sales in Canada and Japan, and does not include licensing revenue, increased 11% to $12.5 million or 23% of our US product revenue for the quarter, compared with $11.3 million or 20% for the comparable period in 2007.

Looking at our revenue by distribution channel, revenue from our five largest accounts decreased 20% to $19.9 million in the 2008 fourth quarter, representing 37% of US segment product sales. In Q4 of 2007, revenue from our five largest accounts was $25 million and represented 43% of US segment product sales.

For the full year of 2008, revenue from our five largest accounts increased 6% to $94.1 million or 40% of our US segment product revenue. Revenue from PacSun, our largest customer decreased 27% to $10.4 million for the quarter or 19% of US segment product revenue, compared with $14.4 million or 25% of our US product segment revenue for the comparable period in 2007. This decrease for the quarter was in line with our expectations.

For the year, our business with PacSun increased 7% to $52 million. As a side note, PacSun represented 16% of total consolidated revenue for 2008. Excluding PacSun, revenue from our next four largest accounts decreased 11% for the quarter. This represented an increase of 5% for the year.

In Q4, revenue from accounts outside of our five largest accounts, which represented 63% of US total segment product revenue for the quarter increased 4% to $34.5 million. This group includes independent core stores which are particularly exposed to the challenging retail environment. For the full year of 2008, revenue from this group has increased 3% to $140.9 million, representing 60% of US segment product revenue.

Now, let's look at revenue from the Europe segment. Revenue from Europe increased 7% to $10.9 million for the fourth quarter of 2008, compared with $10.2 million in Q4 of 2007. This was in line with our expectations.

On a constant dollar basis, revenue was approximately flat compared to the fourth quarter of 2007. In Q4, the revenue by category in Europe is as follows. Men's decreased 2% to $6 million, compared with $6.1 million in Q4 of 2007. Girls decreased 9% to $2 million compared with $2.2 million last year. Boy's was $179,000 compared with $1.8 million last year.

Snow was strong in Europe as it increased to $2.4 million compared with no snow revenue in Q4 of 2007. Further, for the full year of 2008, snow increased 56% to $9.4 million. Finally, revenue from our third business segment Electric was $3.8 million for the fourth quarter. Revenue in this segment was below our guidance of approximately $5 million for the quarter. We believe this shortfall was the result of general weakness in the sunglass category, particularly at the core retailer due to the overall difficult economic environment.

Turning to gross margin on a consolidated basis, Q4 gross profit as a percentage of total revenue was 44.4% compared with 43.4% in the same period in 2007. In our US segment, Q4 gross margin on product was 42.7%., compared to 43.7% in Q4 of 2007.

As in the past few quarters, gross margin in the fourth quarter continued to be under pressure given the continued highly promotional retail environment. In our Europe segment, gross margin was 49% versus 37.6% last year. The increase primarily reflects the shipment of more whole-priced product during the quarter on a relatively low amount of revenue for the quarter. Please note that the business in Europe is seasonal, and revenue is concentrated primarily in Q1 and Q3.

Gross margin in the Electric segment was 48.8%. Electric gross margin in the fourth quarter was slightly lower than previous quarters, due primarily to higher than anticipated inventory liquidation and highly promotional environment during the quarter.

Selling, general and administrative expenses on a consolidated basis were $26.5 million in the fourth quarter of 2008, versus $19.3 million for the same period in 2007. The majority of this increase was from Electric, which was not included in our Q4 results in 2007.

The company reported a pre-tax, non-cash impairment charge on goodwill and intangible assets, amounting to $16.2 million. This charge was identified in connection with the Company's annual impairment task and relates to its 2008 acquisitions of Electric and LS&S, which had impairment charges of $14.8 million and $1.4 million respectively.

For the US segment total SG&A expenses increased 17% to $17.6 million, compared to $15 million in Q4 of last year. Including the $1.4 million impairment charge related to LS&S, total operating expenses increased 27% to $19 million. For the Europe segment SG&A expenses in Q4 increased 19% to $5.1 million, compared with $4.3 million in Q4 of last year, reflecting additional personnel and infrastructure in the territory. On a constant dollar basis SG&A increased 11%.

In our Electric segment SG&A expense, including a non-cash acquisition related amortization of $466,000, were $3.4 million for Q4. Including the impairment charge of $14.8 million total operating expenses were $18.6 million.

Consolidated operating loss for the fourth quarter, which includes impairment charge of $16.2 million was $11.8 million. US operating income for the fourth quarter, which includes impairment charges of $1.4 million related to LS&S was $4.8 million. The Europe segment operating income for the fourth quarter was $239,000 compared with an operating loss of $447,000 for the same period in 2007. Electric segment operating loss in the fourth quarter, including the $14.8 million impairment charge, was $16.8 million.

The company reported consolidated foreign currency loss in Q4 of $1.8 million. Of this was $1.4 million was related to our Canadian accounts receivable, as the US dollar strengthen an unanticipated 15% against the Canadian dollar during the quarter. On a consolidated basis the company recorded a provision for income taxes for the fourth quarter of this year using a 35.2% effective tack rate for the year.

For Q4 consolidated net loss, including the impairment charge of $16.2 million and the Canadian exchange loss of $1.4 million, was $8.7 million or $0.36 per share. Adjusted consolidated net income for the 2008 fourth quarter, which excludes the impairment charges and the Canadian FX loss, was $3.3 million or $0.14 per diluted share. In the fourth quarter of 2007, the company reported net income of $7.1 million or $0.29 per diluted share.

I would now like to discuss the strength of Volcom's balance sheet. At December 31, 2008 the company had approximately $80 million in cash. As I mentioned previously, this balance is net of approximately $32 million paid net of cash received in 2008 for the acquisitions of Electric, LS&S and the Volcom distributor in Japan.

Please note that as presented on the consolidated statement of cash flow, the company generated $24.7 million in cash from operations. Also the company had no long term debt at year end.

Consolidated accounts receivable increases $2.6 million or approximately 5% to $60.9 million at the end of the 2008 fourth quarter, compared with $58.3 million at December 31, 2007. The consolidated accounts receivable balance at December 31, 2008 represents days sale outstanding of 66 days, compared to 79 days at the end of 2007.

Consolidated inventory totaled $27.1 million at December 31, compared with $20.4 million the year before. The inventory at the end of Q4 includes $5.7 million of incremental inventory related to Electric, $1.2 million of incremental inventory related to our retail stores and $1 million of incremental inventory in Europe.

Excluding the incremental inventory from our newer businesses, inventory decreased 9% from a year earlier. For our US segment inventory turns calculates to 9.2 times per year or once every 40 days, well above industry averages.

Regarding the increase in inventory at Electric, please note that the eyewear industry requires available to sell inventory as a significant part of revenue is generated through replenishment business. Also, eyewear styles can be marketed for an extended time period, in some cases for as long as few years, thus the risk of obsolete inventory is less for eyewear than apparel.

Further it should be noted that the build-in inventory in our retail stores is related to the number of Volcom and LS&S owned and operated stores that were open for business. At December 31, 2007, we had six such stores, while we had 12 stores at the end of 2008. On a consolidated basis the inventory turn calculates to 7.2 times per year or once every 51 days. Again, this is well above industry averages.

I'll now turn to our financial outlook for the first quarter and full year of 2009. Forecasting revenue in this economic climate is understandably difficult. Although, Volcom brand continues to perform well at retail, many of our accounts are having difficulty projecting sales for 2009 due to the general slowdown in retail.

Also some retailers have delayed or reduced some orders. While we understand the situation, it is not a reflection on our brand, our company or our products. We have significantly less visibility than we have had in previous years. Therefore, at this time, we are choosing not to provide revenue and earnings guidance beyond Q1.

As Richard mentioned, we have reviewed all of our expenses and have made reductions in all areas of the company. We will continue to review our expenses and we are prepared to make additional cuts if needed. While we do not have sufficient visibility to provide actual SG&A guidance for 2009 at this time, we estimate that on a consolidated basis SG&A will decrease in total dollars as compared to 2008.

Please note that 2009 will include a full year of expenses for businesses that were brought on board during 2008. These include Volcom Japan which was acquired last November; LS&S, which was acquired last July; several Volcom branded retail locations that opened during 2008, and our new distributorship in the UK which incurred virtually no cost in 2008.

With the current business climate in mind, consolidated 2009 first quarter revenue is expected to be between approximately $62 million and $65 million, a decrease of approximately 20% to 23% compared to Q1 of last year. This includes anticipated revenue of approximately $38 million to $41 million from the US segment, approximately $20 million from our Europe segment, and approximately $4 million from Electric.

In Q1 we project that revenue from PacSun to increase approximately 35% compared to Q1 last year which was $6.9 million. Please note that revenue from PSUN in Q1 of 2008 was significantly lower than other quarters that year. Because of the low comp, we believe that the projected Q1 increase is an anomaly. It is important to note that we expect full year 2009 revenue from PacSun to decrease compared to 2008.

EPS for Q1 of 2009 is anticipated to be approximately $0.13 to $0.16. We expect the Q1 tax rate to be approximately 35.5%. Fully diluted shares outstanding for the first quarter are expected to be approximately 24.4 million.

In putting forth this outlook, we want to remind everyone of the complexity of actively assessing future earnings and revenue growth given the challenging economic and credit environment, the difficulty in predicting sales of our products by key retailers including PacSun, changes in fashion trends, and customer preferences, and sourcing costs.

The current economic climate will create a difficult short-term business environment. However, Volcom, with its worldwide brand strength, enviable cash position, and dedicated team of employees, athletes', sales reps, and distributors around the globe is positioned to steer through this downturn and emerge from it with a distinct competitive advantage.

With that, we'll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Mitch Kummetz within Robert Baird.

Mitch Kummetz - Robert W. Baird

Yes, thanks. I got a few questions. Doug, let me start with your first quarter guidance. I mean you gave some details on the sales side. Could you help us out a little bit on the margin side kind of what is your outlook for gross margin and SG&A in the first quarter?

Doug Collier

Mitch as you know, we kind of guide the revenue and the EPS number. I think, generally speaking, we are still in that tough environment. We are still seeing some pressure, so maybe the inventory situations out there with some of our retailers are getting a little bit better, but we are still definitely in that tough environment.

On the SG&A side, we have had some new business and we have done some things particularly in the first quarter, made some changes to our payroll both in terms of the number of people we have and doing some salary cuts. So, we've been fairly aggressive in looking at areas where we don't think will affect the long-term prospect of the business in cutting some expenses.

Mitch Kummetz - Robert W. Baird

On the SG&A side, you made the comment that you would expect it to be down in dollars for the year. Would you also expect it to be down in dollars in the first quarter versus last year first quarter, some of those cost cutting initiatives already in effect in the first quarter. It does seem like some of your incremental expense you mentioned, Japan, LS&S, Volcom stores, a lot of that doesn't really anniversary until next year or later in this year.

Doug Collier

Yeah. At this time, we are just talking about the year and again when we talk about it being down, that's net of these new expenses that we have in 2009.

Mitch Kummetz - Robert W. Baird

Right, okay. So that's if you net those…

Doug Collier

Or it will be enough for total '09 versus total '08…

Mitch Kummetz - Robert W. Baird

Okay. And then you had a foreign currency loss in the fourth quarter. Does the first quarter guidance assume a foreign currency loss there as well, and is that in the earnings outlook, or is that adjusted to take that out?

Doug Collier

That's something that we always look at. I think what really hit us in Q4 was just how drastic that drop was. I think from day one of October 1, to the end of the year the total drop was like 15%. We always plan currency a little bit, but we didn't anticipate that.

Mitch Kummetz - Robert W. Baird

I assume you are expecting some pressure to continue on your Canadian business in the first quarter. Then also, it looks like in Europe you have planned down roughly $5 million, I'm guessing is that largely from FX as well or is that just due to a general slowdown of the European economy and I would imagine that there might be some gross margin pressure on Europe as well from FX?

Doug Collier

Yeah. Definitely taking the currency into effect, I think if we look at Q1 '09, it's down. If you look at the guidance, we are talking its down, I think 20%, something like that and it's much lower than that if you do that on a constant dollar basis, it's down a couple points or something like that.

Mitch Kummetz - Robert W. Baird

Again, that would put some pressure on the gross margin in Europe as well I would assume?

Doug Collier

Yes.

Mitch Kummetz - Robert W. Baird

Then your sales guidance for the first quarter is down, I think you said 20% to 23%. I know visibility is tough in this environment. As you think about the full year, would you expect your sales to be down at around that level or not quite as much as what you are projecting sales to be down in the first quarter on a percentage basis?

Doug Collier

The thing that is really tough is that it's just so hard to get the visibility, talking with our retailers they are not sure whether the people are going to be coming into their stores, and so there's just not enough visibility to really predict at this point. So that's why we are comfortable giving Q1, but beyond that it's just really too tough to do something that we are going to be comfortable with.

Mitch Kummetz - Robert W. Baird

Okay. Then maybe just couple of last questions. You mentioned some of the cost saving items. Could you say, with the headcount reduction that you've undergone and the salary reduction as well, how much is that in dollar terms on an annual basis?

Doug Collier

We haven't quantified that. There are some things, you have got some severance things and things like that, but overall we just want to be impressive, we are taking this really seriously. We are looking at all areas of the company and we are cutting costs where we can, and some of those in where we've got to let people go and we have got to reduce salary, that is tough for us to do, but we think it's in the best interest of the company longer term. In other areas we'll cut cost, where we can show some performance this year without hurting the future viability for our growth and getting market share.

Mitch Kummetz - Robert W. Baird

And then lastly on the inventory I think you said it's down 9% if you strip out Electric incremental retail and then Europe. Is there any excess in that? Down 9% sounds pretty good. Are you guys sitting on any excess inventory coming out of Q4? And Jason could address how you guys are thinking about managing the inventory over the course of '09 and maybe where you would like to see it at the end of Q1?

Jason Steris

In terms of the inventory going back into Q4 a little bit, when we saw the business fall off there, we were in our purchasing process of spring and summer, so we definitely pulled back on inventory the level. And as we've spoken about in the past, we are usually planning any available at once inventory in our core basic programs that are carry-over styles that will either be some of your best selling styles, in season or not, they can roll into future season and so.

Anywhere we are betting on new business its going to be on those of styles. We feel really good about our inventory position right now and we are proactive with it. I think kind of going through, Q4 with the retailers and also our inventory, we have liquidated a lot of that stuff and we are coming into '09 right now with very clean inventories and also the same type of plan as we are going into summer and even with fall right.

We are out there prebooking our fall products and getting a good feel of the best selling styles and starting that whole purchasing process. So over the course of this year we will be planning our inventories more conservatively and then banking on those key styles with a little more shelf life.

Mitch Kummetz - Robert W. Baird

Okay. That's helpful. That's all I had. Good luck.

Doug Collier

Thank you.

Operator

Your next question comes from the line of Sean Naughton with Piper Jaffray.

Sean Naughton - Piper Jaffray

Quickly on Europe, it sounds like the business is getting pretty tough over there as well similar to the domestic side of things. Can you talk about some of the higher volume fixturing programs that you were doing over there and what sort of success that you've had with those to date? And then additionally any sort of color you can provide by geography? I know Eastern Europe had been performing pretty well for you earlier in the year.

Richard Woolcott

Hey Sean this is Richard. Just in terms of working on our merchandising presentations in our store in the store concepts, yes definitely, that effort and focus for the last year in terms of just brand presentation and helping with sell-through at the retailers that did participate in those build outs, it does help strengthen the business.

We are being a little more cautious this year as we go in, obviously, to watch expenses, but, working in areas that we can. So, anytime, whether it's in Europe or what we've seen here in the US, anytime you put that effort and spend those dollars with those types of programs, you do see an increase, not only in sales but in brand presentation, particularly because that's where the customer meets the actual kind of feel and lifestyle of the brand is on the floor, you know, when they walk into the retail store. And the better you present it, the better the overall performance is going to be.

So that was last year. Looking at this year, as you said, we are seeing pressure across the territories. Now, it's interesting in terms of actual countries, we've seen a little bit of strengthening on the Western Europe side and the weakest territories are now in Eastern Europe. Now, in terms of the strongest territories right now, that would be Germany, Austria, Switzerland and Norway. And then in terms of the territories being hurt the most by this slowdown and currency devaluation would be Russia, Ukraine, Czech Republic, and Romania. Also, just to kind of give you a little feel here, France, which is one, our biggest territories and Spain, they seem to be stabilizing right now.

Sean Naughton - Piper Jaffray

Okay. That's good to hear.

Richard Woolcott

Also, just the UK, I mean, UK definitely is being affected, particularly with, your know, how much it kind of plays in terms of the financial markets with the US. So, so even with our new change with the UK, we are happy with our new facility over there and strategy. But we are just dealing with a tough environment right now in the UK, but we think in the long run it's very good for us to have our presence over there, and we think its going to be a good territory for us when things turnaround.

Sean Naughton - Piper Jaffray

Right. And maybe Doug you can answer this. You talked about Europe at $20 million I have here. That's down just a little bit from the prior year. Is that mostly due to foreign currency, and what sort of currency rate are you using in your planning for Europe right now?

Doug Collier

I can tell you obviously we are using a lower rate than we were using last year. That's always tough predicting where that’s going to be, but we've been more conservative on that. If you take the $20 million of our guidance, I think that is down about 20%, something like that. It's a lot less if you do it kind of the constant dollar basis, where you know it's .just a little bit below.

Sean Naughton - Piper Jaffray

Okay. In terms of sell-through and then pricing pressures, I know you had to do a little bit of inventory liquidation, but in terms of your full price selling, have you noticed any difference in your product versus your opening price points versus some of your higher price points either within your denim or your board short outerwear programs?

Jason Steris

Hi, Shawn. This is Jason here. There's a couple of areas right now that I think where retailers are looking for in terms of their product mix. And the one area that I spoke about with Mitch a minute ago was kind of on that core basis program, and what you get with something there, and it's been perceived very well here with our spring '09 products is the styles that have a little bit of a margin builder for the retailers, with that initial markup being stronger than some of the other products that are in line.

So, I think something there. And again, those are sort of your entry-level price points, styles as well in that core basic groups. So, the entry-level price points with a stronger margin builder are always something that the retailers are looking for. And I would say right now more than ever, we are seeing our retailers gravitate towards those, you know, 'hey, this is my foundation of my buy. Let me layer those in across the key categories'. So I think that’s more important now than ever.

And then on top of that, just having exciting product in the stores is important too. You can't just get away with just the basics program to get you through these times. You go to have something there to draw that customer in, and that's where our prints, our artwork, our color, our innovation, our technology with the board shorts and things like that in some cases have been at the higher end of the price ,points and some of our better booking style.

So, I would say kind of that lower kind of entry lower foundation as sort of the -- again laying that framework and then on top of that just having that excitement to wrap-up that section and fine-tune the merchandising. So, does that paint the picture for you?

Sean Naughton - Piper Jaffray

Yeah. That was great. And then just lastly on some of the category trends, it looks like boys and snow was up. Were there anything specific within those two categories, timing of shipments or new product introductions or expanded distribution that drove increases in those particular categories?

Jason Steris

Yes. On the boy's side, we started the kid's line a couple of years ago, and then our first season for the 2T and 3T, which is our, you know, we expanded our sizing range for the kids line, it was first ship on that started in Q4 within the cut and sell product. So, we got a little bit of product expansion in the kids line. That has been very well received.

And then on the snow program, I think we just continued to gain market share there, and luckily we had a good snow season in a lot of the territories. Europe was strong. Canada was strong, the Midwest. I think overall, just that category itself has growth opportunity for us and we are just seeing the results of having a great line and good season and just an overall good program.

Jason Steris

Yeah. Sean on the note with the outerwear too from an internal perspective not just with the product end but also with the team riders and with the marketing efforts between US marketing teams and the Europe teams, we have really stepped up our efforts there.

I think we mentioned before one of the riders that has been with us for the long time is probably one of the best free riders in the world. Gigi Ruf is now with us 100%, so he's wearing the Volcom outerwear and the street clothes. And along with Gigi and Mark Landvik, and the rest of the outerwear team, we are getting a lot of coverage not only in all the movies but in all the magazines on a global.

So, there's definitely an increased presence in the whole Volcom outerwear program from the consumers perspective and I think that that is resonating into the retail environment and when the retailers are seeing sell through and then you see a new line that looks really good, like we just broke our next year's along here and SIA, the retailers gone, hey, this stuff is working, you guys are pushing the product, you guys got great team riders, it's got sell through, I want to order some more of this, it works for me. And as I mentioned, I think last year that that's why we see that large increase from year-to-year. I think it was 27% in our consolidated outerwear sale.

So, we are really excited about it. It seems to be a bright spot and the weather has been helping. So, it's encouraging especially in this environment.

Sean Naughton - Piper Jaffray

Great. Thanks for the detail and best of luck in 2009.

Richard Woolcott

Right. Thanks Sean.

Operator

Your next question comes from the line of Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen - B. Riley

Good afternoon. I wonder, are you thinking that there are other potential opportunities for you to make further expense cuts without sacrificing brand support and your future growth initiatives?

Richard Woolcott

Hey Jeff, this is Richard. In terms of the expenses and the infrastructure with the company, we had our plan, and we entered the new year and as the new year started to unfold and we are starting to see the effects of holiday and kind of where the retailers mindset was in just the general environment, we made as we have talked about a significant reduction across the board whether it be with the layoffs and salary decreases and expenses.

So, we have done that round, and now we are set up with our plan to move forward. I think in terms of your question, if we would look at another round of expense cuts that would be determined by kind of the re-bid we get in this environment moving forward. We have to get through the next couple of months. We have Easter coming up. We have got the seasons will change, that spring product on the floor.

We are starting to get a read on our back-to-school pre-books. So, I would say we would have to get a better read before we would make another move like that, and we are going to get that read in the next two to three months and we'll talk about it, we'll have another conference call at the end of April. So in another couple of months we'll update everybody on kind of the trends we are seeing from a revenue side in the market, and we'll adjust at that point if need be.

But I wouldn't say we wouldn't do that, but we just, we need to see how things unfold and right now we are comfortable with our plan and we are focus and we are ready to move forward.

Jeff Van Sinderen - B. Riley

Fair enough. And then In terms of how the retailers are booking orders or pushing orders out or canceling some are differing. So, I'm just wondering how you are thinking about that general trend and how that might be affecting your planning in terms of inventory and how you have product ready to go in season and so forth.

Richard Woolcott

Jeff, maybe I'll step in here and hand it over to Jason with inventory and planning on that end. I think the one type of visibility that we have right now is we are everybody is calming down in this new environment. I think when you are in holiday; people weren't sure how things were going to unfold.

Maybe people were still trying to be optimistic. People had different inventory levels but going through the process of Q4, going through holiday and getting through the first six weeks of this year, now what we are seeing and we saw this at the trade shows speaking with a lot of our retailer is that the retailer out there is going okay, I see -- I'm finding out the reality of what this environment really is.

And everyone is kind of accepting the fact that there's a slowdown. It's tough, and I have to adjust accordingly. And everybody is in that process right now in terms of the communication going back and forth, re-looking at their orders. So, we are in this process right now of adjusting for the environment and that's with our guidance that we are giving. That's in the way that we are looking at the year.

So, I think we have gotten through the first phase as a manufacturer and also for retailers that phase of accepting what not going on out there and adjusting.

And now it's really the sense of, okay, how do I move and be nimble going through this. Is it going to get better? Is it going to get worst? Are there going to be some bright spots? Are there some trends I have got to chase? I think the initial shock of this severity of the slowdown, I think people have gotten over that hurdle and now it's just how do I manage in this environment? And we are making changes in our strategies, and I don't know Jason if you want to talk about how you are approaching it now what you see with the retailers?

Jason Steris

Sure. Jeff, in terms of our inventory position right now, you heard it in Doug's script, our inventory is down 9%. We are clean of majority of our holiday inventory and right now we are sitting on spring goods, which we have planned down, and as we are getting into the summer season, we've also planned our inventories down in line with that. Then in terms of our next big purchase we are approaching is fall, and we are in that process right now of collecting orders. We have got our deadline in the middle of March and this is for both here domestically and in Europe.

And everyday we are gathering more information and learning about the retail base and the need for inventory. We are collecting our information, and planning accordingly in terms of those inventory levels. I'd say we are definitely planning conservative as we are approaching fall, but we have a little more time with multiple that season, with multiple start ships throughout the season. We have a 51, 61 and 71, so as we approach those purchasing needs, we can keep gathering more information and get through critical parts of the year, while making our buys.

And as I mentioned with Mitch too, we also place a little more risk on the carryover styles to try and lessen the amount of inventory that could go off price.

So overall, I'd say we are definitely conservatively planning our inventories and we are keeping a close eye too on just the inventory levels out there that accounts are going to be looking for. So we can maximize any opportunities where there might be some and we've also got some key categories that we are focusing on too, like the board shorts and the denim. Those are areas where we can get some reorders on some styles. We want to make sure we have the right inventory, and we are maximizing and at the same time not putting too much risk out there.

Jeff Van Sinderen - B. Riley

Okay. Good. I wonder if you can just touch a little bit on trends in your own retail stores, what you are seeing there and how you are putting that business in terms of promotional level and so forth?

Jason Steris

Having those stores has been really helpful for us in terms of getting daily sales journal of the retail climate whether it's in New York, or Colorado, the West Coast or Hawaii. I'll throw LS&S in there as well. We have got daily information of some retail feedback, not only at the style level, but in terms of the region. And we are seeing a similar trend in terms of the challenging environment, in terms of where our comps are, and what we are hearing from our retail partners out there. So I'd say it's definitely in line there.

As far as the revenue, in terms of our inventory, and we are constantly looking at that and fine-tuning our buys and just trying to keep our inventory levels appropriate for those stores and keeps that forward steps exciting and portray the brand in a way that we've built it.

We are definitely taking the conservative stance with those stores. As far as this year, we are probably not going to open any new stores we talked about and really just go back and focus on the operations of those stores and the buy plans, and the inventory and all that. I hope that answers your questions.

Jeff Van Sinderen - B. Riley

That's helpful. That's all I have. Thanks very much and good luck.

Richard Woolcott

Thank you, Jeff.

Operator

Your next question comes from the line of Jim Duffy with Thomas Weisel.

Christian Munafo- Thomas Weisel

This is actually Christian calling in. I just had a question on the sourcing side. I was just wondering if you could provide some perspective on what you are seeing there?

Jason Steris

Hi, Christian. This is Jason here. In terms of just what's happening over in Asia?

Christian Munafo- Thomas Weisel

Yes. I was wondering if you guys are seeing a little bit of a let up in some of the price increases that you've been seeing?

Jason Steris

There's a little bit of that going on. As the inventories are shrinking for the retail base and manufacturers, you definitely, we are seeing some of our agents being a little more flexible on price and not want to lose any business. They are fighting for their business over there too. We are seeing a little bit of that. So we are definitely maximizing the opportunities that we have over there.

I haven't seen any effects with any of the factories closing over there that you hear a bit about. We have long-term partnerships. A lot of long-term partnerships with the guys and they seem to be fairing very well. We have our teams over there often auditing the factories and keeping our team on the ground, so there's no surprises in terms of delivering product on time to our retailers.

So a little bit of opportunity over there. We are working closely with our European teams, some of our other licensees around the world, in terms leveraging and buying together, and with the margin pressure that there is on the back end with our retailers, we are doing everything we can to focus it on the front end.

Christian Munafo- Thomas Weisel

Are you coordinating sourcing between Europe and the US right now?

Jason Steris

Yes. In a lot of cases, we share the same line. And for the most part, the delivery dates are in sync and then you might have some styles that might be a little bit later in Europe, but for the most part, 85% to 90% of the line is the same line, and then in terms of the purchasing process, where we can in terms of delivery dates lining up, we'll buy together. So, that is something that we've been doing for about a year. And in every season we just keep fine-tuning it and getting that communication in that process even more dialed in.

Christian Munafo- Thomas Weisel

That’s very helpful. And then one last question. I am wondering if you are seeing any room for distribution expansion this year, very targeted I'm assuming, if there's any?

Jason Steris

For us right now in this challenging environment, we are very focused on our existing retailers. And for us to go open a bunch of new accounts right now in a year in a half and half time or so, we might wake up and say, what we were thinking. We want to be very careful with that.

We want to walk through this process with our retailers, maximize the growth opportunity where they are, but at the same time, really focus on just maintaining our business with our current account base, because even within that base there's still growth opportunity when things turn around, whether in our core accounts, with key categories that we might have opportunities or even at the level of a Macy's where we haven't penetrated all the doors. It could be a buckle where we haven't penetrated all those doors.

So, these are existing accounts that we are in, that we are not fully maximizing, so to open up any new accounts right now is probably not the smart thing to do. We are really focused on just going back to out current team, maximizing the business that we have and trying to maintain as much business in this environment.

Christian Munafo- Thomas Weisel

Okay. Thanks a lot.

Operator

Your next question comes from the line of Jeff Mintz with Wedbush Morgan Securities.

Jeff Mintz - Wedbush Morgan Securities

Thanks very much. Going back to the sourcing, Jason, I don't know if you want to talk to this as well, but kind of on the other side that, your pricing at retail, are you kind of seeing pressure from your retailers or desire to kind of pullback on the initial price of products and how are you handling that?

Jason Steris

Not so much. We are not really feeling too much of that retail price pressure. I think where we are feeling it more so is just having upfront margin with a particular retailer where they are looking for a little more built in margin to the overall bulk in business, and that's where we've been focusing our core products on in terms of giving those guys, hey, these are the best styles, and if we are all buying the best styles we are going to get the best price on them, and we can give you guys a better margin, and we can maintain or grow our margin.

It's the same styles we are doing in Europe and Australia. So those are the key basics that I keep talking about. So, back to your question, it's not so much on the price of the piece in the store, as it is just I think at the end of the day, when that retailer runs their report, we want the best margin on there possible for them.

Jeff Mintz - Wedbush Morgan Securities

Okay. And, obviously, the environment is impacting all the retailers, but can you or Richard, I don’t know if you want to take this one, talk a little bit about kind of the differences you are seeing between the core shop consumer and the mall consumer in terms of your product in those channels?

Richard Woolcott

Hi, Jeff. It's Richard here. I can say kind of overall, whether it be in that core distribution level or on the bigger level; I think everybody is really put to the test with the environment and how it relates to their business. And even though peoples' businesses are different, some of the dynamics are the same. It's like, okay, my revenue is slowing down. How am I going to deal with my inventory, how am I going to [reimburse] my store, how do I drive the customer into my store, how do I make sure, what Jason was talking about, I uphold that margin and so on and so forth.

So it's really, each person has these similar dynamics that they have to adjust in their business, because at the end of the day, whether you've got 20 stores, you've got one store, you've got revenue that is shrinking, and you've got to adjust your expenses and you have to watch your margin. And so, from our end, we are right in the middle of this as one of their main brands. And so, we are working together with each one of these types of distribution levels to figure out ways to move through this and be nimble in this environment.

And I think what you are seeing is there's a group of retailers that are reacting, they understand it, they make their adjustments, and they are going to be a better retailer for it and you have some retailers that are struggling. May be they didn’t prepare enough for this. We have seen it across the board not just in actions sports. There are people that are surviving it and then there are people who just don't have the means or the resources to get through, and we've seen people going bankrupt. Again, not just in our industry, but in general in the US.

So, it's almost like the strong survive and you've got to really be on your business. And with our relationships with the retailers, we are doing everything we can. And the good thing that I see that's going to come out of this, not only people who survive this are going to have stronger business model, but there is also going to be more of this like -- there is a stronger relationship building between manufacturers and retailers that are working on it.

And I think at them and say, our relationships with our retailers are the strongest they've ever been and we are understanding each others business and what our needs are and people are being -- we are trying to find compromises, because at the end there, we all want to protect our margin, we all want to protect the revenue that Jason has talked about, and we all need to keep some type of cash flow moving in a positive way and we want to be profitable.

The real question is how you do that through this type of environment. That's what we are all challenged with and these are interesting times for everybody, and it's the same pressure whether you are a big retailer or a guy who has got one store. And I hope that kind of gives you some color there.

Jeff Mintz - Wedbush Morgan Securities

Absolutely. I appreciate it. And then finally I guess on marketing, how are you thinking about, obviously marketing continues no matter how tough the environment is, but are you keeping marketing kind of at a similar percentage of a lower revenue base or do you kind of see marketing as something that is a little more sacrosanct in that and you kind of keep it and let it rise as a percentage because it's that important?

Richard Woolcott

That is a great question because I think from a strategic standpoint when looking at marketing right now, it's extremely important not only for the short-term but for the long term. And when we have gone through our process of cutting back, obviously you have to cut back across the board, but we have tried to be very careful when we look at marketing and to make sure that we have all of our core initiatives are in place, that they are strong enough to be able to accomplish their goals and to be effective out there in the marketplace to support our business out there.

So, we've looked at all of our expenses, but we are making sure that the fundamentals of what has built Volcom are still there. Because I think that when somebody were to ask why has Volcom been so successful, and I think a big part of that has been our creative way that we have marketed the company and communicated to our customer, and we don't want to lose that.

So, we are being careful there and I feel good. We have the question before about cutting expenses, and this is an area where I would be most careful to make sure that we continue to have long-term strength in the way that we communicate. So, I feel good about it right now even though we have made some cuts.

Jeff Mintz - Wedbush Morgan Securities

Great. That's helpful. Good luck in this environment.

Doug Collier

All right. Thank you.

Richard Woolcott

Thanks Sean.

Operator

Your next question comes from the line of Brandon Ferro with KeyBanc Capital Markets.

Brandon Ferro - KeyBanc Capital Markets

Hey, what's going on guys?

Richard Woolcott

Hey Brandon.

Doug Collier

How are you doing?

Brandon Ferro - KeyBanc Capital Markets

Hey, and Just to lighten things up a little bit, I tell doctors all time but regardless of the environment, the gear still, it's very sick and you do have a good snow category, burden has got nothing on you.

Doug Collier

Right on.

Brandon Ferro - KeyBanc Capital Markets

But anyhow on to business, Doug I think just to clarify the SG&A piece, should we assume SG&A is flat to up this year net of the new businesses and the cost saving measures? Is that what you were saying?

Doug Collier

No, no, no. What I'm saying is overall it's going to be down year-over-year, but in the 2009 numbers, you've got new incremental expenses in there that are in '09 that you didn't have in '08. So even with those new incremental expenses, you are going to be below the 2008 level.

Brandon Ferro - KeyBanc Capital Markets

Okay. Could you kind of like just broadly outline how we should think about those savings, maybe we're talking maybe in the low single digit in terms of millions?

Richard Woolcott

I think the thing that is difficult for us to really put, to nail that down for '08 and really it goes back to our revenue guidance beyond Q1. It's good there is so much uncertainty of what that revenue is going to look like, and now it ultimately going to drive where that SG&A is going to end up at.

That comes in sort of where we are thinking now. It's one number I think comes in a lot last and then hey, we're going to have to maybe do some cuts that we haven't done yet. If starts coming in a lot better, which we are not planning on, but if it did maybe there are things that we do that are on hold right now. So that's what really is going to drive where it ultimately ends up.

Brandon Ferro - KeyBanc Capital Markets

Okay. And then in Europe, I think you were saying your guidance revenue is down 20% in 1Q. FX has a big portion of decrease. Organically, are you just down low sing digits then in 1Q?

Richard Woolcott

It is something like that. It's about 20%. It's something like that. It's a lot less when you look at it on a constant dollar basis.

Brandon Ferro - KeyBanc Capital Markets

I know it's earlier right now, but I'm guessing there is some chatter out there in Europe as far as kind of the way the fall order books being received, and just given the extent that is a two order region or two season order basis out there. It was a weak 1Q '09 going to have an impact on 3Q? How do you see 3Q shaping up right now?

Richard Woolcott

Hey Brandon, this is Richard. It's still a little bit too early on that. Normally, we get the order files. Jason, are there order files the same over here as they are in Europe?

Jason Steris

Yes

Brandon Ferro - KeyBanc Capital Markets

Yes. So early March so and then you add that kind of trickles in a little bit more. So, we are probably about four weeks out to really getting better visibility in terms of that back-half and kind of when about this call and then we have got the call that that's going to be at the end of April. We are going to have a much better picture how things are unfolding particularly after we get all the fall orders in.

We'll have better visibility on the next call on that one, because right now they are on the road. We just did ISPO. I can say that the feedback in particularly going back to the snow, the feedback on the fall line and the feedback on snow and the feedbacks that we have gotten here at all these trade shows, and when I say all the shows, we started in early January. We did Surf Expo. We did ASR. We did SIA and then we went right to ISPO.

From those four, there's no doubt what we've heard, hey, you guys' brand is extremely strong. We have really good sell through for what the environment is. Your product has gotten better. We are excited about what you are doing for spring. We have already heard retail feedback from spring, particularly, with some of the styles like our board shorts and the Proving Grounds campaign that is working.

We've got wet stuff on swim, we have got wet stuff on Creedlers and then we backed it up with this fall line and we are continually now from fall getting this good feedback. We hope that all this good feedback and momentum will be able to maximize the businesses that account there for us. So we are getting our initial reads good and we have just got to wait to see how the numbers come in.

Its going to be reflection outside of how strong the brand is. It's going to be a reflection of how business is. And Jason and I were talking earlier just before the call going, probably as we sit here today; our company is as strongest as it ever has been across categories. When we look at all the initiatives that we've been working on and this goes back two, three years ago. We want to get better in this. We want to get better in that. We want to dial that in.

I just appreciate the fact that in this environment, we have got such a strong company and all this work that we've done puts us in a position we are in right now, because I really do think have the tools and the products and the resources to be able to weather this storm in the best possible way. And I feel good about it, and as we go through this next several conference calls we'll have a clear picture on the year, but right now it's still growing, we are not even two months into the year. We are just kind of getting our feet wet with it.

Brandon Ferro - KeyBanc Capital Markets

Two last ones quickly. Doug, can you maybe address what the UK revenue opportunity might be this year and/or next? And secondly, kind of the state of the score channel domestically, I am just wondering if you are concerned about the number of accounts or doors at risk right now or whether that number is peaking and things are getting better?

Doug Collier

As far as the UK opportunity, we have a lot of territories over in Europe and that's just one of the score or so over there. It's not a huge one. It's one that we do think we have a lot of opportunity. We have to establish our company over there. We have got the team in place now. We have got our new headquarters over there in Bristol, our headquarters basically an office. That's a pretty rough economy right there. They seem to be right there neck-in-neck with the US. So probably not huge upside for this year, but we are looking a little longer term. Get our team over there, get established and it's an important market. We have a big fashion team there, a big skate team. We are just excited to really have control of our brand in a key territory.

Brandon Ferro - KeyBanc Capital Markets

And then just domestically the core channel at risk accounts, how have that been changing?

Doug Collier

You mean as far as the credit worthiness and outside of it?

Brandon Ferro - KeyBanc Capital Markets

Sure. May be closures if you've been seeing them and things like that?

Doug Collier

I haven't seen a lot. I don’t know if I have really seen any particularly close. Definitely there are accounts out there that are in trouble that we are not shipping and they have got receivables that are fully reserved again. At this point, I don't think I've really seen any that are a surprise. There are accounts that have been on credit hold. We ship them on post-dated check or COD and things like that. And now the economy has gotten rough, they are in quite a bit of trouble. So far at this point nothing really new. People are paying a little bit slower and we are having to work with some accounts more, we are definitely seeing it, but I think it's just a degree. It hasn't changed too dramatically at this point.

Richard Woolcott

This is Richard. That's one of those when we talk about lack of visibility. I think that's part of one of this process, that's one of those hurdle we haven't gotten fully over yet and we haven't seen the true effects of it. As we get through the year. We get through Easter. We start to get through summer and back to school, if there is a shake out and unfortunately if there are stores that are going to go out of business, we are in that process right now.

We haven't seen, as Doug is saying, anything significant at all at the moment. We hope we don't, but I think we have to get through it, we have to give it time and see if people have been able to adjust their business and adapt to the environment. So it's kind of too soon to tell if there is going to be a true shake out at that core level. We have got our eyes on it, as Doug said, and watching those receivables and just being careful with it. I think we'll know more in the second half of the year.

Brandon Ferro - KeyBanc Capital Markets

I appreciate the time. Thanks.

Doug Collier

Thank you.

Operator

Your next question comes from the line of Claire Gallacher with Caris & Company.

Claire Gallacher - Caris & Company

Hi guys. Great. I just have one follow-up. I think all my questions were already asked. But, just to clarify, have you seen any kind of stability on the West Coast? I know on your last call you mentioned that California, and I believe you mentioned maybe Florida being your weakest markets juts given what is going on with the consumer in the general locations. I was just wondering if you've seen any stability with that customer at this point?

Jason Steris

Hi, Claire. This is Jason. It's definitely been. One of our tougher areas right now would be the West Coast, Southern California, [Norristown] area, even Hawaii. Being that we are coming out of January and not quite to Easter yet, I mean, this is a really, really difficult time normally in terms of just business. You know, we've got the comps to look at and all that, but I haven't really seen an increase kind of in this area. It seems to be the one area that still getting a little bit beat up.

So, we are hoping that it turns around here at Easter. A lot of the stores around here have transitioned well with getting through their holiday product and setting there spring floor sets, and we've had great snow here in the last couple of weeks that have kind o helped liquidate some of the snow and winter goods. So, I mean, the stores are set, they look good and the retailers are cautiously optimistic, but, I think we got to turn this corner for Easter to really answer that one for you.

Claire Gallagher - Caris &Company

Okay.

Richard Woolcott

Claire, I have a quick one on that. Even though it's early in the season, every day we get maybe a little bit of good news, whether it could be on the West Coast or shop, reorder this or something had sell-through or, hey, there is a certain board short back east did well. And, again, Jason and I were talking about it this morning on the way to work, there are bright spots out there, but they are sporadic, and we haven't had enough bright spots in a row where you can connect the dots and go, hey, we really see a change. We really see things turning around.

So, we are not there yet. But the thing that's encouraging is we do get little bright spots. We do get little pieces of good news, and the reorder or something tested well or, hey, it could be out in Colorado, hey, we just got an order in for your outerwear that was more than last year, you know, and for the next season. So we get these little hits here and there, and that's what keeps it optimistic for us and keeps us fighting.

But, overall, the environment is tough, but it's nice when you get a little bright spot or a piece of good information. And hopefully, there will be a point when there's enough of that feedback coming back where, okay, we are actually seeing things turn around. But we are not there yet, but we do get little bits of positive news, and it's encouraging. I hope that helps you.

Claire Gallagher - Caris &Company

Yes, it does. I was thinking if California specifically starts to stabilize as far as spending goes, I mean, that could certainly help your core store market anyway, which I know that’s still a big distribution channel for you guys. So, good luck and all the best for '09.

Richard Woolcott

All right. Thank you.

Jason Steris

Thanks Claire.

Operator

There are no further questions at this time. Mr. Woolcott, are there any closing remarks?

Richard Woolcott

Yes. I just want to say thank you everyone for your support and for being on the call today. We look forward to catching up again here in a couple of months. So, thank you and have a great one. Bye.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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