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Quiksilver (NYSE:ZQK)

Q1 2013 Earnings Call

March 07, 2013 4:30 pm ET

Executives

Robert Jaffe

Andrew P. Mooney - Chief Executive Officer, President and Director

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

Analysts

Taposh Bari - Goldman Sachs Group Inc., Research Division

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

Jennifer Black

Erinn E. Murphy - Piper Jaffray Companies, Research Division

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

Darla Shay

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

David M. King - Roth Capital Partners, LLC, Research Division

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Quiksilver First Quarter Fiscal 2013 Results Conference. [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.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver First Quarter Fiscal 2013 Earnings Conference Call. Our speakers today are Andy Mooney, President and Chief Executive Officer; and Richard Shields, Chief Financial Officer. Bob McKnight, our Executive Chairman, is here also.

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 actual results could differ materially from those stated or implied by those 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 section titled Risk Factors in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q.

All forward-looking statements made on this call speak only as of today's date, March 7, 2013, and the company undertakes no duty to update any forward-looking statement.

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 an electronic form on our website at www.quiksilverinc.com.

With that out of the way, I'd like to now turn the call over to Andy Mooney.

Andrew P. Mooney

Thank you, Robert, and good afternoon, everyone, and thank you for joining our call today.

But before sharing my comments, I'd first like to acknowledge Bob, who's here today. Bob has hosted more than 100 investor calls over 25-plus years, leading Quiksilver as a public company, a pretty remarkable milestone. He's done an incredible job over that time, building Quiksilver into a global company with over $2 billion in revenues. My goal, of course, is to build on that foundation, strengthen the company, grow it and continue to make it more profitable.

As this is my first conference call as CEO, I'd like to begin by sharing some initial thoughts about our company, our brand and the opportunities. Our brands, as you know, are among the most recognizable and sought-after brands in action sports. Over the last 60 days, I visited all major business units around the world, met with the global management team and held a weeklong summit with the senior leadership group to begin development of a detailed operating plan to guide the company as we move forward.

I anticipate delivering that operating plan to our Board of Directors in April. We will share highlights of the plan and related financial outlook over the next few quarters.

While we continue to develop the plan, I believe it's appropriate to share its key theme, which is focus. The 3 core strategies we consistently communicated: strengthening our brands, expanding sales and driving operational efficiency, will continue to guide our efforts. Bringing focus to our organization will accelerate progress against these 3 strategies, and we began to take steps to do just that.

We will increase our focus, energies and resources on our 3 flagship brands of Quiksilver, Roxy and DC. Within these brands, we will further focus on critical product categories. To that end, we have clarified the brand positioning and gender focus of each brand, with Quiksilver being a male brand for surf and snow; Roxy, our flagship brand for women; and DC, refocused on skateboarding and snowboarding.

We announced the closure of the VSTR brand last month and have passed the management of the Summer Teeth brand back to its owner, surfer and marquee Quiksilver athlete Dane Reynolds. At the category level, we are focusing down on priority categories within each brand and evaluating ultimate business models for peripheral product categories. And we've clarified what sports will provide the inspiration for each brand.

Over the last few weeks, we reduced the number of athletes under contract to free up resources to better promote those athletes who can best drive our brand and product messages effectively. A key athlete should be household names, known well beyond the universe of core fans.

We continued to close underperforming retail stores in the first quarter and recorded asset impairments on others.

More recently, we made significant organizational changes with these strategies keenly in mind. Specifically, we have appointed Tom Hartge as Global Head of Footwear and named Kasey Mazzone as Global Head of Supply Chain. Tom is highly regarded in the footwear world, having spent 28 years at Nike, where among his many accomplishments, he has helped lead Nike's highly successful running shoe business. Kasey brings more than 20 years of global supply chain experience across multiple product categories and distribution channels. She also brings extensive expertise gained on leadership positions at Land's End, American Eagle, GAP and Levi Strauss. These appointments are part of a larger senior management reorganization, which includes Pierre Agnes, President of Quiksilver Europe, taking on additional responsibilities as Global Head of Apparel, and the recruitment of a Chief Marketing Officer.

Until the CMO position is filled, I will function in that role. These moves are designed to centralize our core global business processes under the leadership of experienced world class executives and are part of a key powerful ongoing evolution from 3 entrepreneurial regional teams operating independently to 1 global team operating cohesively and efficiently.

Turning now to our first quarter financial results.

Rich will go into details in a moment, but as an overview, I'd say that our Q1 revenue performance reflects a mix of favorable and unfavorable factors.

In the Americas, revenues were negatively impacted by retail store closures and delayed shipments from the wholesale clearance channel. That being said, we did not generate the wholesale inline volume we wanted or the e-comm sales we expected.

The DC shoe business in the Americas had higher returns and markdowns than anticipated, indicative of slower sell-through.

In Europe, sales were likewise impacted by retail store closures and we saw slower velocity in the wholesale channel. We continue to believe that our European team is gaining market share in a challenging economic environment.

Our e-commerce and emerging market revenues continued to grow but at lower rates than we saw in 2012. Gross margin improved modestly, largely due to e-commerce from retail channels, which held up better than our Wholesale business.

We made progress reducing SG&A, which was down $5 million versus the first quarter of last year, despite additional investment in our growing e-commerce business and comping against certain expense credits in last year's first quarter.

Pro forma adjusted EBITDA was down $7 million compared with the first quarter of last year. Over $5 million of that reduction was due to foreign currency translation.

To sum up, we took a number of actions to improve our operational performance over time. But we got off to a slow start for 2013 and will need to better focus on execution in order to achieve our goals for 2013 and beyond.

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

Richard J. Shields

Thanks, Andy, and thanks, everyone, for taking the time to join us this afternoon.

2013 first quarter net revenues were $431 million, down 3% or $15 million on a constant-currency basis. The revenue decline was focused in the Americas region, where revenues decreased $17 million or 9%.

Asia-Pacific revenues decreased 1% and European revenues increased 2%, all in constant currency.

In the Americas, the $17 million revenue shortfall was largely in the wholesale channel, where revenues decreased by $15 million and decreased for all 3 core brands. Wholesale revenues of Quiksilver and Roxy brands were both negatively impacted by the timing of shipments into the clearance channel, which shifted toward Q2 this year. These key brand revenues were impacted by higher returns and markdowns as well a slower sell-through in some key accounts.

Revenue in the Americas company retail store channel decreased slightly. Modest Q1 positive comp store sales growth was offset by the impact of having 17 fewer company retail stores as we have continued to take the opportunity to step away from underperforming retail locations. The positive side of the retail store closures is that we saw the 4-wall profitability of the Americas retail channel increase meaningfully. We were disappointed that 2 of last year's growth engines in the America region had sluggish sales in Q1. Our Americas e-commerce business was basically flat, and our Brazilian operation revenues were off modestly.

Moving to Europe. Revenues increased $3 million or 2% in constant currencies. Wholesale sales in Europe were down in the Quiksilver brand and essentially flat for Roxy and DC. Retail was positive with a net increase in company retail stores, partially offset by a slight decline in same-store sales growth.

Robust e-commerce growth made up for the shortfall in the Europe wholesale channel.

Looking at the major markets within the European region, again in constant currencies. Revenues in Spain had the most difficult comparison. French revenues fell only modestly, and we saw some very positive revenue results in Germany, Russia and in the U.K.

Turning briefly to a brand perspective on the Q1 revenue performance, again in constant currencies. Global Quiksilver brand revenues decreased 7% or $13 million. Of the $13 million shortfall, $11 million was in the wholesale channel, and wholesale channel revenues fell by about 10% in each region. So we're disappointed with the way the Quiksilver brand performed in the first quarter.

Roxy global brand revenues decreased by 7% or $9 million. $7 million of that $9 million shortfall was in the Americas wholesale, and most of that Roxy wholesale sales shortfall relates to the timing of clearance shipments. So we're less concerned with the Roxy brand performance in the first quarter.

Global DC brand revenues increased by 1% or $1 million. Americas wholesale revenues for this brand were down by $3 million, which was somewhat offset by DC growth in the other 2 regions.

Moving on to gross margins, which improved by 30 basis points and reflect some positive and some offsetting factors.

Gross margin improvements for Quiksilver and Roxy brands were primarily driven by improved vendor costing and also somewhat by the timing of clearance shipments. DC brand gross margins decreased meaningfully, driven by increased returns and markdowns, most notably in the Americas region. The revenue mix shift from the Americas towards Europe helped our margins. Likewise, the mix shift from wholesale toward retail and e-commerce channels was positive to margin.

SG&A decreased by $5 million or 2%. Our global e-comm business, which generated a 39% revenue growth in the first quarter, had $5 million in SG&A versus Q1 last year.

Bad debt expense increased by $4 million, which is less driven by unusual charge-offs this year and by a net credit last year in the first quarter. The SG&A growth in e-comm, combined with the increased net debt expense, partially offset the cost savings from staff reductions and closing underperforming retail locations over the past year.

Moving on to inventory. We ended Q1 with $7 million more in inventory than in Q1 last year. The quality of our inventory improved as we have $23 million left from prior season inventory than a year earlier.

As I mentioned, we pushed out some clearance shipments from Q1, and no shipments in Q2 will help both our days on hand as well as inventory aging.

Quiksilver continued the process of rightsizing staff and improving our retail store portfolio in Q1. Included in SG&A is $3 million of restructuring and special charges related to a number of actions taken during the first quarter to close additional underperforming retail locations and to rightsize our global staff. Severance was recorded in all 3 regions in the first quarter.

The foreign currency line of our income statement swung from a gain of $2 million last year to a loss of $3 million in Q1 this year. This relates to the revaluation of intercompany receivables, which are denominated in foreign currencies. This $5 million difference in foreign exchange contributed to the decrease in EBITDA.

Q1 pro forma adjusted EBITDA of $13 million decreased by $7 million compared with the first quarter of last year. This decrease is fundamentally the $5 million swing in the foreign currency line and the $4 million of incremental bad debt expense, along with the aggregate impact of lower sales, higher gross margin and reduced SG&A.

CapEx was $13 million in the first quarter compared to $16 million last year. Our investments continue to be focused on our IT infrastructure, and to a lesser extent, on retail stores.

We anticipate going live this quarter with the SAP implementation for our primary European locations.

Regarding liquidity, at the end of January 2013, Quiksilver had $114 million available under our various global credit facilities, and we are in compliance with the applicable covenants on our debt and our credit agreements. With that, I'll turn the call back to Andy.

Andrew P. Mooney

Thanks, Rich. To sum up, we're pleased with the progress we're making on our long-term initiatives but disappointed with the first quarter performance.

I'd like to thank you again for joining us this afternoon.

Robert Jaffe

Operator, that concludes the prepared comments. We're now ready to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Up first is Taposh Bari, Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Andy, I guess this being your first call as CEO, I wanted to ask you, I guess the first question, you come -- you have a background that has some pretty big consumer companies, Disney and Nike, coming to Quiksilver, a much smaller company. So I guess to start, can you just maybe give us some more color as to why you decided to join this company versus a larger company? And also, in light of that question, if you could address some of the parallels that you see from your experience at Nike and Disney, what they did right and what you think -- how you think you can apply that to Quiksilver?

Andrew P. Mooney

I mean, I think there's any number of analogies between the brands that are -- make up Quiksilver's portfolio and the 2 companies I spent, really, the last 30-plus years with. The 3 core brands of Quiksilver's portfolio, Quiksilver itself, Roxy and DC, each of them has a high emotional quotient that consumers really care about these brands, and that they are global in their orientation. But I think the other really strong analogy is that, and it's my belief, strong belief, that the brand equity has built up over time one product at a time. And really, brand equity is the culmination of great product equity. And great products create great brands over time. It's a cumulative effect, really. And that's why I really think that the upside will rest with these 3 companies, is that I think by focusing our organization on really making the right products in the right categories, I think, can lend tremendous opportunity.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Great. I mean, it might be a little preliminary, but can you give us a sense of timing? I mean, what kind of progression should we expect? I know, obviously, this stuff is never linear, but how long do you think it's going to take before you can really get your stamp on this business?

Andrew P. Mooney

Well, I'd break it into 2 component parts. I mean, as was referenced in the call, myself and the team are in development of a plan for presentation to the board in the month of April. That will have a complete financial overlay as to the decisions that we're in the process of making right now. And really, with focus being the overarching theme. The -- I'd separate my comments into kind of 2 sections. One is around the SG&A side, which is very much a work in progress. A number of steps have been taken to date that is evident in the financial results. The plan is intended to accelerate progress against those SG&A reductions. And depending on how quickly they can be actioned on, some of them will be actioned on this year, and others will be actioned on over the next 12, 18, 24 months. It really depends on, as much as anything, kind of contractual limitations to doing as opposed to operational limitations. The revenue side, myself and some of the new team members like Tom Hartge on the footwear side who's here, I think, all of 3 days himself, we've started to, I would say, mildly intersect the spring '14 product line. But really, the product lines can't be significantly affected until fall of '14. So there's certainly a time lag, I believe, on the impact of the strategic decisions and the product process, and the human resource decisions on the product process. But we're going to rapidly accelerate as fast as we possibly can on the cost side of the business in the interim.

Taposh Bari - Goldman Sachs Group Inc., Research Division

And just a quick question for Rich, if I may. The debt on the balance sheet, can you walk us through -- I mean, the credit spreads are pretty tight right now. It seems like there's an appetite for high-yield. Give us -- any point -- can you give us an update on what you plan to do in terms of refinancing that debt? And then the last question I had was the guidance. It seems like it was submitted this time versus last quarter, the 4% to 7% revenue growth and the 150 basis points of SG&A leverage. Is that off the table now? How do we interpret that?

Richard J. Shields

Thanks, Taposh. First, talking about debt and liquidity, as I mentioned, we've got $114 million available on our global credit facilities. When I think about the debt, we've got the U.S. senior notes, they mature in August 2014 -- excuse me, the U.S. ABL, the asset backed credit facility that expires in August '14. We've got the $400 million of U.S. senior notes; they mature in April 2015. Then you've got the European senior notes, that's $270 million. They mature in December 2017. So we don't really have any significant short-term maturities, but we are -- I am well aware that the -- the market for high-yield debt is wide open and that rates are quite favorable. So I think we will continue to kind of monitor that and ask the question whether it makes sense for us to refi and how soon. So that's on our radar screen as well, and the market's open, and so I think that we'll look carefully at the time when we would choose to refinance. And then regarding your question on guidance. In our Q4 call, we shared a couple of forward-looking metrics. We talked about the revenue growth, constant currency of 4% to 7%. And we also talked about CapEx, and we talked about SG&A leverage. I don't -- didn't have -- I don't plan to update that quarterly unless we have something meaningful to say. I would suggest that, as Andy mentioned, we're going to the process as an internal leadership team of putting together a plan under Andy's leadership. And if that plan, when we announce it, would change the expectation that we've established regarding the 2013 performance, we will communicate it at that time.

Operator

Next up is Jeff Van Sinderen, B. Riley.

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

Andy and Rich, I guess the first thing I really wanted to focus on is any more color you can give us on how your retail stores are performing in Q2 so far? How was the Wholesale business trending? Any data points you can give us there? Maybe you can just remind us of the booking window and sort of where we stand now on Wholesale.

Richard J. Shields

Yes. So when we look at our e-comm business so far through Q1, it's stepped up pretty well. The retail comps are kind of -- it depends on what region you're looking at, but generally, they're positive. So I think that we're feeling the benefit of some uptick in Q2. I mentioned that we postponed some wholesale clearance shipments out of Q1 into Q2. Largely, that just deals with a situation that we have a late start ship date in January for our spring product, and so we were shipping our inline product. And because we were shipping our inline product, we delayed some of the shipments on our current products, so we'll see that happen in Q2. So I think that, generally, we're feeling that Q2 is within the range of what we expected. When we think about the fall booking season, I think that we've got some good signs and some signs that we'd like to see more positive. Obviously in Europe, we're -- the entire industry is facing some headwinds there, and I think that our outlook on the fall kind of reflects those types of headwinds. So that's within what we had originally planned and what we've been buying inventory for, so I think that we're in decent shape there. So I think that -- and then I think on a couple of specific product categories, when we think about our outdoor wear, booking trends seem to indicate that that's resonating quite well, and the training wear as well.

Andrew P. Mooney

I would just add to that that we have -- I think we have building momentum in the Roxy, an underlying momentum, I would say, in the Roxy brand. And so that's very much product-driven. In fact, today, we launched the Diane von Furstenberg collection within Roxy, and it's -- we were very optimistic about the success of that collection and it's exceeded -- wildly exceeded our expectations so far, which kind of reiterates my earlier point about this very much being a product, this is a product-driven business. And whenever I think we bring products of that quality to our own retail stores, our online stores, wholesale environment, we perform remarkably well. I think Quiksilver is kind of holding their own and on track in a very difficult economic environment, particularly in Europe, and but also in Australia and other markets. And then DC is a little slower than we anticipated, and I would also attribute that to product. Unfortunately, in this case, on the negative side is that products is not selling through at the rate that we anticipated and it's really not a brand issue, it's really just a seasonal product issue that we will -- that we already made progress and corrected going forward.

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

Okay. And then just as a follow-up on DC, there's been quite a bit of talk of just kind of a shift in the athletic footwear space. I'm just wondering if you have any thoughts on that, if that's partially playing into some of the product changes that you're making or the product issues, I guess, that you're encountering in terms of sell-through.

Andrew P. Mooney

I'm not really sure about what shift you're alluding to.

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

Okay. Yes, it just -- I mean, it generally has to do with -- I mean, if you listened to sort of what Tilly's –- or not Tilly's, what Zumiez says in terms of their footwear business, that there's a little bit of a shift, I think, away from some of the traditional skate shoes, perhaps into some other segments that are more basketball oriented or basketball profile or running profile. I'm just wondering if there's any internal discussion about that, and maybe there's a way for you to evolve your product to perhaps better suit the demand of the market right now.

Andrew P. Mooney

No, I would -- well, I would completely concur that the fashion trends, which heavily influence the athletic footwear market, have tended towards fairly genetic silhouettes, and companies like Vans and Converse have benefiting greatly from that. We believe really that our products are performance-oriented products. And I think that future lines will present themselves as much more bold and performance-oriented than the current line is, because that is -- that's really the origins of DC as a footwear company. And it's an area where we can feel we can really excel in.

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

Okay, good. And then -- I don't know if -- I know you're still working on your plan, but is there anything else you can give us in terms of what we should think about for SG&A levels this year? How much more you think you might able to take out? Any color you can give us or is it just too early to go there?

Andrew P. Mooney

Okay. It's really premature to kind of go on in specifics on the SG&A side, especially for this fiscal year. As I really mentioned in the remarks, our goal is to make the presentation to the board, to have that presentation approved and supported by the board, and communicate the financial implications over the next couple of quarters.

Operator

Next, you'll hear from Jennifer Black, Jennifer Black & Associates.

Jennifer Black

I love the collaboration that you did with DVF and I was just curious to know, this is my first question, if you're planning to do more collaborations with all 3 brands. I'm not asking what they are, I'm just asking if that's a part of your plan.

Andrew P. Mooney

Well, the short answer to that question is yes, and particularly with the designer and the artistic community. This has certainly been my experience with both Nike and Disney, is that success begets success, is that when you have a very successful collaboration, as we believe the DVF collaboration will be, it encourages other noteworthy designers and brands in the marketplace to team up with our brands. And so we're definitely actively looking for those type of collaborations, and hopefully the DVF success will encourage that.

Jennifer Black

Great, fantastic. And then I also wondered, Andy, if you had any comments about the segmentation strategy. How is that going?

Andrew P. Mooney

Do you have -- as it relates to a specific brand in question or just general?

Jennifer Black

Well, for example, DC at JCPenney.

Andrew P. Mooney

Well, the -- I think increasingly, the larger accounts, whether it's JCPenney or Kohl's, Famous Footwear, et cetera, I think increasingly we're going to have to move to fully segmented lines. We're essentially unique to each account, custom-made for each account, which I think is becoming more the norm for the industry because in that way, we can make the best use of our resources to meet the expectations of both the consumer and the retail in that particular store, and the volume warrants that type of dedicated attention. It really ends up being a more effective model than creating an umbrella segmentation strategy for a class of channel, that really moving to an account-specific model is the best way to go.

Jennifer Black

Okay, great. And then I guess last, I was just curious if there were any surprises, positive or negative, when you traveled all over the world and saw all the components of Quiksilver.

Andrew P. Mooney

Well, I think the -- on the positive side, we've had 3 very industrious regional teams doing work in isolation. So one very micro example is the fact that we create product categories -- product catalogs in each regions that are essentially different from each other from the ground up. So we believe that there's lots of -- any number of ways to create efficiency in the organization and actually enhance the overall quality of the output from the teams by more global collaboration and creating some collaborative tools. And really, I think what we're moving towards is fundamentally changing the orientation of the organization from 3 regional independent units, which operate entrepreneurially but relatively inefficiently to a global team that does work once in one region, does it well and then the other 2 regions pick it up. We've essentially moved to that model in product creation with centers of excellence. Boardshorts, for example, are done in Huntington Beach while the world outerwear is done in Europe for the world. But we believe we can do that Center of Excellence model for any number of activities in marketing, for example, in website design, for example. I also was very encouraged by the progress I'm seeing in the Roxy brand. I think the outdoor fitness line is a very well put together line. I think that team has really found a sweet spot in terms of the communication in the product line development. I think those were the positives. I think the negatives really can reveal themselves in Q1. DC is a little weaker than I anticipated coming in, but I really see that as being just -- it's really a seasonal product line weakness. It's not anything more fundamental than that, and that by refocusing on our core consumer and really refocusing on the product, that we can really rebound and continue to grow again there quite nicely.

Operator

From Piper Jaffray, it's Erinn Murphy.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Andy, maybe just a question for you to start. I mean, just leveraging on your former experience and what you've learned in your first 60 days, how would you describe the health of the Action Sports lifestyle across the major markets that you visited? Are you seeing in any other markets a maturation of that lifestyle or are you just seeing continued growth? Maybe just kind of elaborate on how you're seeing that lifestyle matriculate as you go across the globe.

Andrew P. Mooney

Well, I think the lifestyle is fundamentally healthy and continuing to grow. The reality is that it has grown outside the channels that we traditionally operate in. And that our challenging opportunities, both to keep those channels that we grew was healthy and continuing to grow on vibrant -- and I say fundamentally healthy. Those are the partners that brought us to this level. But the reality is that other brands, entire companies like Hollister are basically trading off the ethos and the lifestyle of Action Sports and really our entire industry, all the brands within it and all the retail partners within it are not -- unable to capitalize on that. So that is the both the challenge and opportunity is how do we continue to grow our 3 brands and foster the growth within the core channel that is so fundamental to us.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Okay, maybe asking it different way, I guess, by major sporting category, whether it's surf or skate or snow, or even outdoor with some of the new opportunity you're having with Roxy there, are you seeing any of those specific segments, I guess, emerge as bigger opportunities whereas some may be starting to see some signs of just more maturation or you still seeking fair growth across the kind of major 3 to 4 segments that you operate across?

Andrew P. Mooney

I think growth is all a function of engaging the consumers' interest in the product. I see this industry very much like I see any other industry, which is the industry continues to grow if it continues to offer products to consumers that excite them and expand the universe of opportunity. If you look at our core industry of surfing, in boardshorts, the length of boardshorts is moving shorter. That would suggest that more people could the wearing boardshorts than ever before. It's just a question of offering those boardshorts to a wider audience. How, in fact, can we do that in interesting and creative ways?

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Okay, that's helpful. And maybe just a question to both of you, as well as Rich to piggyback on. As you think about kind of now having the head of global supply, how should we think about the progression of the centralization of the supply chain over the next several years and where are really the biggest buckets of SG&A opportunities within the specific initiative as you centralize that supply chain?

Richard J. Shields

Well, I think you'll see an acceleration of that initiative with the recent addition of Kasey Mazzone, who joined the team this week as our global head of supply. I think we've been talking about those centralization of some of the supply and working on that. And at the same time -- and we'll see some initial rewards from that work for the spring 2014 line. What I would just say is that the lion's share of the opportunity, when I think about style rationalization, when I think demand aggregation, when I think about vendor consolidation, still remained be done. And we're quite confident that with Casey's leadership in that function within the company that would both bring together the various areas throughout the world that we're doing supply chain management, that there'll be SG&A efficiency to be had in that consolidation. And importantly, there will be some substantial gross margin opportunities, or at least a reduction in vendor pricing to be had. How much of that we decide to flow into gross margin and how much of that we decide to allow to adjust the prices to continue to drive sales will be one of the questions that we'll be looking at as we manage that initiative forward.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Okay. It's really helpful, Rich. And I guess last from the regional perspective, I didn't hear too much during the prepared remarks on the Asian -- or the Asian performance. Could you maybe just speak a bit more on a granular basis by major regions within Asia, kind of how that performed during the quarter? Where are some of the biggest opportunities in that region going forward?

Richard J. Shields

So when I think about Asia and a look at the major markets there, Indonesia has been a very strong growth market for us. It was up in double digits. Japan was positive in the lower end of single digits. And the Australian market was a bit down. But within the Australian market, I'm quite pleased to see improvements in gross margin and retail in our own wholesaler retail channel there as we really focused on maintaining price points and not chasing the discounting that's happening in that market. So while we saw some falloff in the Australia, New Zealand market, we saw a margin that specifically in our retail stores improved. And altogether, the Asia Pacific region was down 2% on constant currency.

Andrew P. Mooney

Well, I would add too that we are only scratching the surface in mainland China and only beginning in India. Those 2 markets are essentially untapped and that will be part of our focus in the presentation to the board.

Operator

Andrew Burns, D.A. Davidson is up next.

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

I was hoping you'd start and provide a little more detail on this narrowing of the brand focus and whether the exit of some of the previous initiatives, whether it's QSW or I guess collectively, how much of a headwind top line growth that presents here in the coming quarters? And then also, what kind of SKU count reduction are we looking at, at this point in time with these changes?

Andrew P. Mooney

Well, the -- I guess I'll begin with the kind of peripheral brands that we've announced is that the VSTR closure and the passing of Summer Teeth back to its owner and so for Dean Reynolds, marginal top line impact and positive bottom-line impact. Within the 3 brands that we have, say, for example, in Roxy and in Quiksilver, we were doing skate products that were generating marginal revenue. And after all costs were attributed to those categories in terms of athlete endorsements, et cetera, et cetera, we were losing money on. Similarity in DC, we were in the surf category. So exiting surf in DC and skate in Roxy and Quiksilver was relatively a very, very easy decision to take, both strategically and financially. The narrowing of focus of Quiksilver to men's was a more complicated decision but one that we feel very good about in that 1/3 of the revenues that were attributed to Quiksilver, women's and girls, QSW, all Quiksilver Women's were done within our own retail stores. So we were literally taking a Roxy or a Quiksilver Men's SKU off the peg, replacing it with a Quiksilver Women's SKU. So it was 100% cannibalistic. So for 1/3 of the revenues, absolutely no concern that we'll replace those immediately. The remaining 2/3, if you break it down between QSW and Quiksilver Girls, in QSW, it really was what I would describe as an older coastal lifestyle line that, a, was not really simpatico, we believe, with the action -- active Action Sports orientation of the brand. And again, when all of the costs were kind of loaded into the business, we were losing money on it. So again, closing Quiksilver Women's, absolutely no financial impact that we saw and we believe there will be upside from just focusing, narrowing the focus of the team. Quiksilver Girls was the only, as I said, kind of trickier part of it. But it even within Quiksilver Girls, in categories like fleece or tees [ph] where really the silhouettes were being differentiated by logo application, it's arguable that some of those sales were, in fact, incremental. When you go into categories like swimwear, it was impossible to tell the difference between a Quiksilver Girls swimsuit and Roxy Girls swimsuit. So we believed even within the wholesale channel, much of those sales were cannibalistic, plus, again, once you start loading the costs up to the subset of the business that was truly viewed as incremental, the profit was just not there. So it was a difficult decision to make emotionally because we had a lot of -- we have 30-some people who had given their all to make that a success and they had done well driving top line, but the bottom line wasn't there, and we really needed to focus with both the Quiksilver brand and the Roxy brand. Because longer-term, particularly with Quiksilver Girls, if we were ever to make Quiksilver Girls into a really significant brand with some really significant volume, increasingly, it would have just simply sat right on top of Roxy and cannibalize it by process, so it was a very strategic session taken by the team.

Richard J. Shields

And I'll just add 1 item there just for timing. Those decisions and that communication was not in Q1, it's part of our Q2 results.

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

Okay. And then, Andy, as you look at the distribution strategy across the brands and the 40,000-plus stores, including wholesale, can you just discuss your initial assessment of the channel strategy and some early areas where you could see some refinement or changes?

Andrew P. Mooney

Well, I think it really -- it really somewhat varies by brand and somewhat varies by product category. But part of our strategic review was to look at the range of product categories that we were in and were there options to look at ultimate business models in those product categories. And one of my favorite examples that I used a few moments before the meeting is beach towels. I mean, consumers don't really look to surf shops to buy beach towels, yet the Quiksilver and Roxy brand, I believe, could sell a lot of beach towels. So that as kind of indicative of a product category that we should license and use the revenues from the licensing model to either improve our margin -- improve our margin, I'll just stop there. So I think you really have to look at each brand, each product category and geography. A category like pants, which is an important category to DC and possibly to Quiksilver or underwear, which is another example. There's potential to do volume in both our existing channels, but there's a potential to do volume by partnering into other channels. Our key really is to provide our core partners with highly differentiated, unique and desirable products. But to take categories that are not brand defining, in the case of beach towels being a good case in point, to optimize the revenue potential of those categories for the company to fund demand creation back into our core channel and to fund product development to make the products the absolute best that they can be.

Operator

Our next question will come from Christian Buss, Credit Suisse.

Darla Shay

This is actually Darla Shay on for Christian. How should be thinking about your retail stores and portfolio? Sort of, what are your long-term views and how should we be thinking about the impact to revenue? And if you could give us some geographic detail on that.

Andrew P. Mooney

Well, that's quite a big question. So I'll attempt to answer the part of it that we have -- that we are building into the plan, which is -- and it really varies dramatically, I think, by region. If you look at North American, we will continue to prune underperforming stores, mostly in mall environments but see an opportunity to increase our outlet stores that are -- that allow us to both get rid of wholesale inventory but that are fundamentally profitable. And I think for even the most valuable of brands -- take Ralph Lauren, for example. That -- having a solid brand enhancing outlet experience is just as important as having a good inline retail store experience. So a scenario in North America might be to prune inline stores and increase outlet stores. The scenario in Asia-Pacific is likely to be entirely different, where increasingly there's an opportunity for Mona branded stores for all 3 of our brands, but particularly Quiksilver and Roxy by partnering with well-capitalized partners in places like greater China, India, throughout all of Asia Pacific, for that matter. So we could have a fundamentally different strategy there. We have very successful board riders, multi-branded stores in Europe, we'd like a few more of those. Again, I think a strategy for retailing in Europe would lead to more prune to have fewer, better stores in Europe and high street in key city locations and also a few more outlet stores to both make sure that we don't have any wholesale hiccups in our inventory and increase our profitability and cash flow. So really quite different by region. But all of these strategies, as I mentioned, are really being woven into our comprehensive plan for presentation to the board.

Operator

From Robert Baird, we'll go to Mitch Kummetz.

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

Yes. Just a couple of questions. Andy, I want to go back, you were talking about your Center of Excellence model and you mentioned that you'd already rolled that out from a product standpoint. Can you remind us when that was and the product that's out there now or the product that showed up in the first quarter, does that already reflect a Center of Excellence model?

Richard J. Shields

We've been migrating toward that model for some time. If you roll the clock back 1.5 years ago, you've got more than 20 locations in the company where you're doing product design, so it's been kind of an evolution toward 2 large centers of gravity and centers of excellence around product design and merchandising. And those 2 centers being the corporate headquarters here in Huntington Beach and also the European headquarters in France. So I think it's been an evolution, and -- but I think with the new organizational structure that Andy has announced will be able to push forward for the completion of that.

Andrew P. Mooney

[indiscernible] Well, I think along with the center -- we have already achieved SKU reductions with the Center of Excellence model, so we're getting higher volumes over fewer SKUs, which hopefully will lead to either better margins or is leading to better margins or higher-quality products in the marketplace, so forth. But we also agreed, completely agree as a management team, that we need to continue to aggressively reduce SKUs even post the Center of Excellence model, and SKU reductions of significant magnitude.

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

Okay. So how quickly can migrate that model across other functions within the organization just beyond product? I mean, are you starting that process? Is that part of the centralized global operation strategy?

Andrew P. Mooney

We are going to do it as fast as we possibly can. I see 2 key players and 1 yet to be hired. And Kasey Mazzone will begin -- has begun this week to consider how to design the supply chain. Her organization -- when we talk about centers of excellence, we're really talking about the merchandising and design function. KC's function is really the supply chain component, sourcing production, all of that organization. She's -- again, 3 days on-the-job, but that is her sole focus. Tom Hartge, what we're looking at, instead of having again 3 independent groups of footwear design and development teams with no leverage across anything that we do, we are hoping to both be able to gain leverage across that organization, again, particularly on the sourcing side and the innovation side and make improvements there. Pierre Agnes has already made a lot of steps with this on the apparel side. Apparel was really out-of-the-blocks [ph] first on this through the Center of Excellence model. And then I'd say finally will be the CMO role, which is in search mode at the moment. But there's also, I think, a great deal of efficiencies that can be made in creation of marketing materials, point-of-sale material, retail store design, any number of things that we believe is -- we believe that we can get leverage over almost everything that we do and it's really only -- it's really only apparel product design and development that we've taken the first big step.

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

Okay. And then just lastly, a quick housekeeping question for you, Rich. You referenced this shift in the timing of deliveries, mostly to the closeout channel. Could you tell us with the actual sort of dollar impact on sales was for the quarter, which I assume would then shift into Q2, and then also either kind of the gross margin or gross profit standpoint, granted that those sales were lower margin sales given where -- what channel they were being sold into?

Richard J. Shields

So that's predominantly in U.S. wholesale. I think plus or minus $9 million, so I mean $9 million-plus or minus $1 million there. And the margin implication of that is it will be slightly positive in Q1, and I think that it will -- it won't be that big of a pickup in Q2 somewhat because Q2 naturally has a little higher revenue.

Operator

We have time for 1 further question today. That comes from Dave King, Ronson (sic) [Roth] Capital Partners.

David M. King - Roth Capital Partners, LLC, Research Division

One of my questions have been asked at this point. But maybe asking the question about SG&A that we got several times in a different way. I think, Rich, when we spoke last, you had talked about target of -- targeting and SG&A ratio, SG&A sales ratio 150 basis points or more lower than where we were in 2012, 2013. Is it fair to assume that that's still kind of your target? Is it too early to tell? Is it stay tuned for more presentations? How should we think about that?

Richard J. Shields

Yes. So SG&, I'll comment 2 things. First, SG&A in the quarter, we were down $5 million, and that's why we saw increased SG&A with e-comm. E-comm growth and e-comm growth globally was up 39%, and so there's a certain amount of SG&A that goes with that e-comm growth. So we're about that portion of SG&A. I mentioned that bad debt had a swing of $4 million, which is really kind of more a function of some unusual credit to one last year, and we actually saw a cost reduction of $9 million in terms of the number of initiatives that we've taken in closing retail stores and also staff reductions year-over-year. So we are seeing the input -- we are seeing some of the results of the early action we've taken on SG&A. When we provided guidance at the end of Q4, as you mentioned, we said that we would target to have a minimum of 150 basis point reduction in SG&A in 2013 relative to 2012. I'm not going to update guidance quarterly. As I mentioned before, as we communicate the financial implications of the plan that Andy's going to be presenting to the board later this quarter, that if we need to have an update to our guidance, we will do it at that time.

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

And then it sounds like from your other comment that you'd update if there was something materially different. Since we didn't get that update today, it's fair to assume that there's probably no change.

Richard J. Shields

No. Just to be clear, we'll -- if I'm not having the obligation to update guidance until we proactively go out and update guidance, and we'll decide when we update it. The guidance we provided was intended to be annual guidance. I'm not going to move into a position of providing quarterly guidance. So the only thing that you should hear is that we are not updating guidance, and I'm just doing that to be clear, not to be argumentative there.

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

And then Andy, I realize you're only 60 days in and it may be too early to tell what impacts longer-term the efforts to revise organizational structure will have on the revenue, but any big picture you can just comment on how you balance that? Making cost cuts with what impact that would have on revenues, and it sounds like from your comments earlier on QSW that it's more of a profit driven function than anything else, but maybe you can just provide some more color there in how you think about things.

Andrew P. Mooney

Well, first and foremost, I think revenue growth will come from great products. They always keep coming back to that core idea. So really having an organization that is singularly focused on doing that with the right caliber of people and the right positions to do that, I think that's more than anything else what's going to drive top line growth. And I think the addition of Tom Hartge in the footwear side and the appointment of Pierre Agnes in the apparel side are 2 moves that I feel really confident in and will assist on that area. In terms of the cost-cutting side, we have the -- from a cost perspective, we have more than enough infrastructure to deliver the product that we need in the marketplace. It's just really a question of making it more efficient, streamlined, and the highest caliber organization that we can possibly have. So I'm not concerned that any of the costs that we've made will have any detrimental effect on the top line. Quite the opposite.

David M. King - Roth Capital Partners, LLC, Research Division

And not damage the brand, though, then, in your opinion?

Andrew P. Mooney

Well, I would argue the opposite way is that having fewer, better products is better for the brand than having more kind of -- more average products. Again, I'm also very much a believer in less is more on the products side. That's really breaking through with some larger volume items in every single brand in every single category is the best approach from both the brand perspective and a financial perspective.

David M. King - Roth Capital Partners, LLC, Research Division

Absolutely. And then -- that helps. And then I guess as we think about the description you gave, for example, on DC and moving some of the skate stuff under DC and how you think about QSW, are there other smaller brands within it? Say, like a Waterman Collection? Or other things where I guess -- maybe asking it differently, how do you think about some of these other brands that you have within this, like Waterman, for example, how it fit with the Action Sports kind of culture that you have? Because I think that that you commented, for example, on QSW that it's a little bit of an older demographic. It sounds like some of the other stuff you guys still have decided to maintain may fit that as well. How do you guys think about that fitting in?

Andrew P. Mooney

Well, the decision in QSW was both because it was strategically out of sync with the Quiksilver brand, but also financially it was not contributing. So as I'd say that was a relatively easy decision to take. On Waterman, there are elements of Waterman that are rooted in activities like paddle boarding, for example, even though it may be an older demographic and than a surfing demographic are completely simpatico with the brand. And there's any number of great items within Waterman. And semantically, I view Waterman as a collection, not as a brand. It's really just a subset of the Quiksilver brand. So there is any number of items within Waterman that are completely in the sweet spot of what this brand should offer. There are some items in there that are not, and we've identified those and we will evolve the line to more accurately reflect what we believe are the core values of the brand as we move forward. But that -- we're not throwing that baby out with the bath water because we believe there is a core idea in Waterman's and a core activity, in the case of paddle boarding that we can really build a significant, sustainable business on.

Operator

And at this time, I'll turn the conference back over to our speakers for any additional or closing remarks.

Robert Jaffe

That concludes today's call. On behalf of everyone here at Quiksilver, we thank you for participating and we look forward on providing our Q2 results in June. Thanks, everybody.

Operator

And again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.

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