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Executives

Hoby Darling - SVP of Strategic Development, General Counsel

Richard Woolcott - Chairman and CEO

Jason Steris - President and COO

Doug Collier - CFO

Analysts

Mitch Kummetz - Robert W. Baird

Sean Naughton - Piper Jaffray

Christian Buss - Thomas Weisel

Jeff Mintz - Wedbush

Jeff Van Sinderen - B. Riley

Eric Tracy - BB&T Capital Markets

Brandon Ferro - KeyBanc Capital Markets

Ronald Bookbinder - Global Hunter

Volcom, Inc. (VLCM) Q1 2009 Earnings Call April 30, 2009 4:30 PM ET

Operator

Good afternoon. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Volcom 2009 first quarter financial results conference call. (Operator Instructions)

Thank you. Mr. Hoby Darling, you may begin your conference.

Hoby Darling

Thank you, Tiffany, Good afternoon, everyone and thank you for joining us today to discuss Volcom’s 2009 first quarter 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’d 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. A playback of this call will be available for one year and may be accessed on the Internet at both websites.

Please note that all information discussed on today’s call is covered under the Safe Harbor provisions of Litigation Reform Act. The company’s discussion today will include forward-looking information reflecting management’s current forecast of certain aspects of our 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 involve a number of risks and uncertainties. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company’s business. Certain risk factors associated with Volcom’s business are set forth in its Form 10-K for the year-ended December 31, 2008.

The company disclaims any intent or obligation to update these forward-looking statements except as required by law. All forward-looking statements from today’s call are qualified in their entirety by the foregoing cautionary statements.

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

Richard Woolcott

Well, thank you, Hoby, and good afternoon, everyone. I would like to begin by acknowledging our entire team for their efforts and positive attitude as we work through this recession. Managing our business in these difficult waters has not been easy; however, everyone is charging hard, and I’m extremely proud to see how well we’re all working together in such a demanding environment.

Economic conditions are still tough out there, but we’re beginning to get a sense that for the first time we’re seeing a more positive shift in the landscape. Retailers, as well as manufacturers, seem to have a better understanding of the scope of the downturn and have accepted new realities of retail. I believe the initial shock is behind us, and we’re all learning how to move forward with our businesses.

Our first-quarter results were slightly better than we had anticipated, which is a testament to our competitive edge, strong global brand and determination to weather this storm. However, now that we’re in Q2, we’re experiencing the full effects of last year’s financial meltdown.

For Volcom, we’re viewing Q2 somewhat as a transition quarter where several elements come to play. First, when summer orders were being pre-booked in the October/November 2008 timeframe, retailers were basically at a standstill trying to figure out how to move forward as the economy was deteriorating.

In the process, many retailers decided to pass on booking summer altogether or requested to cancel some spring orders to make room for summer orders. It basically came down to the issue that most retailers were over inventoried going into holiday and spring, and realized that they needed time to get their inventory levels in line with sell-through in the new environment.

Additionally, we noticed a more in-season approach as retailers began booking for back-to-school. The current trend shows more orders being booked later in the season, when compared to past years. Many orders that previously shipped in June, have now been pushed into early or even mid-July.

These factors combine to create a revenue void in Q2, some of which we believe will be made up in the back half of the year. We also believe the second quarter marks our low point for the year in terms of revenue and earnings. Doug will talk more about our revenue guidance for the second quarter in his remarks.

Now, even though business is still tough, we believe it’s an exciting time to be in the game. It’s a time to gain strength and seize opportunity. It also allows us the ability to fine-tune our infrastructure, dive deeper into the trenches, and evolve into an even stronger company for the future.

I’d now like to provide an update of the components of our business that are keeping the Volcom brand at the top of its game, our products better than ever, our distribution on target, and our initiatives moving forward.

First is the strength of our brand. Now, we have talked a lot about this on past calls, but I believe this is one of the most important factors contributing to our global success. We’re relentless in our marketing and branding efforts, and our teams are attacking on all fronts.

Our board sports focus is at the core of the company, and something that we live and breathe on a daily basis. It’s our passion, and it translates into everything we do, whether it’s our clothing, athlete programs, contests, our art, music or films.

I believe the brand is in a great position at the moment, and continues to resonate deeply with our customers. Just recently, we were ranked the number one board sport brand in the Taking Stock with Teens board sport categories for the third consecutive survey.

We also received six nominations for the upcoming 2009 Surf Industry Manufacturers Association Image Awards. These nominations include Men’s Apparel Brand of the Year, Men’s Board Short of the Year, Women’s Apparel Brand of the Year, Women’s Swim Brand of the Year, Women’s Marketing Campaign of the Year, and Environmental Product of the Year.

All of our marketing initiatives are integral to enhancing the strength of the Volcom brand, and we do not intend to let up our efforts for 2009. And no matter what happens while we ride out this recession, we will continue to focus on the fundamentals of keeping our brand exciting, and will always make decisions based on quality and integrity for the long-term.

To get a broader sense of what we’re currently doing, please visit our website at www.volcom.com.

Now let’s turn to our product. Our men’s line continues to perform well, particularly with denim. The 2009 product assortments are some of the strongest collections to date, and our spring and summer floor sets look great.

Improving our board shorts this year was a company-wide initiative, and I believe we now have some of the best board shorts in the industry. From a wide array of colors, new fabrications and technical features, we’ve been experiencing strong sell-through and major support from our retailers.

Taking a look at juniors, sell-through has also been good, ranking in the top three spots for most of our accounts. Our dress category definitely drove sales for spring, along with fashion tanks and casual charts. And now that summer has hit the floor, we’re seeing dresses turn even faster than they did for spring.

Meanwhile, our fall girls denim will be arriving in stores June 1, and accounts are excited about the new selection, in which we incorporated a variety of washes, including acid washes, tide bleached washes, deconstructed grunge looks, as well as a new railroad stripe offering in a range of pop colors.

Moving onto our new product initiative, I’m pleased to report that we’re gaining traction in both the swim and Creedler categories. Both product assortments have been well-received and are experiencing good sell-through, along with additional reorders. We believe both of these categories have meaningful long-term growth potential, and we plan to continue investing in them.

Now, let’s talk about distribution. Our retailers continue to feel the challenge of the economy, and we’re doing everything we can to support their needs. I’d like to stress that we believe our relationships are strong across the board, and if there’s any silver lining to these economic conditions, it’s the fact that we’re all in this together, and in many ways, our relationships have strengthened.

Activity at the core level has not changed much since we last reported our results. The environment continues to pose its challenges, but those shops that have been able to adapt to the slowdown are getting through this. And one initiative to support the core includes a strong focus of grassroots promotional campaigns.

For example, we’re hosting in-store meet and greets with skateboarder Geoff Rowley, and other team members to promote our Stone Age line exclusively carried by the core shops. So far, these events have been very successful, and the retailers really appreciate our efforts. We’re also helping our retailers by selectively extending terms and working to better merchandise our products by updating build-outs and window displays and hosting in-store product clinics.

With respect to our specialty and department store partners, there’s no doubt that they’re being squeezed by the economy, too. But at the same time, we’re confident in our ability to adjust and adapt to their changing needs while also protecting our margins and inventory levels.

And finally, our Volcom branded stores continue to provide an important revenue and marketing presence, as well as bring us closer to our consumer. And again, the near-term plan is to focus on our current stores, drill down, refine and manage until we’re ready to move forward and grow this initiative.

Now looking abroad, it appears that the economic downturn in Europe is somewhat stabilizing, and the fear of it getting worse seems to be easing. As we have reported before, Spain and the United Kingdom have been hit the hardest, as well as some Eastern countries. But, as you may recall, we acquired our UK distributor last year, and the transition has been going well. Our UK team is taking ownership of the region, and we’re already seeing positive signs with the new infrastructure.

With respect to our bigger territories, they seem to be holding their own. Our sales in France are stable, and sales in Germany remain strong, as well as in Austria, Switzerland and Norway. As in the US, retailers in Europe are generally reporting lower sales than they did a year ago. Core stores are doing better than the chain stores and fashion boutiques, mostly due to customer loyalty.

The winter season was a success with strong January sales helping to clear holiday stock. February and March sales were slower than normal, but with Easter later this year combined with some good weather, sales picked up again, especially in tees, fleece and accessories.

Our broader strategy across Europe is to continue to focus on cultivating our existing business before capitalizing on expansion opportunities. We’re keeping a close watch on our costs, while maximizing the strength of our brand at the core level. And overall I’m confident in our European team’s ability to manage the business and believe they’re tracking right on schedule.

Let’s now discuss Electric. The macro economic pressures are certainly playing a role in curbing Electric’s ability to maximize its sales potential. However, Electric did experience some bright spots in the first quarter, especially in the mid-Atlantic and Florida territories. We believe these regions received an extra boost from the spring break crowds, and we’re encouraged by the brand’s loyal following and product offering.

From a marketing perspective, Electric has also taken a more grassroots approach with their retail ride day campaign. These regional events are geared toward key retailers for product testing, regional retail support and employee appreciation. Other marketing efforts include Electric’s iPhone application, which received a nomination for Accessory Product of the Year by the Surfing Industry Manufacturers Association.

With respect to Electric’s product, the innovation and quality of their sunglass and goggle lines are at an all-time high. Electric had four product launches in Q1; the Velveteen, Hightone, CB4 and Type-1. The launch of the two women-specific frames in Q1, the Velveteen and the Hightone, were very successful, and for Q2 Electric is also in the process of releasing several additional tee styles for this important sunglass selling season.

Checking in on Electric’s soft goods, the brand is off and running with the launch of its fall 2009 line. This will mark Electric’s largest soft goods pre-book in the brand’s history. The line has tripled in size and expanded in scope with backpacks and luggage. Further driving the program is the rollout of 50 four-way displays for North America, which will help secure vital retail space.

In an effort to move the business forward, we’re working closely with Electric to find areas where we can better integrate both companies. For example, we now have the Electric soft goods and accessories program in-house at Volcom and have successfully integrated the design, production and shipping teams. Throughout the year we will continue to integrate backend operations where it makes sense and believe this will create additional efficiencies for the future.

Clearly there are a lot of opportunities for our growth initiatives, but staying focused on our current business and maintaining the financial health of our company is our number one priority.

Now before turning the call over to Doug, I would like to provide a quick synopsis of why I believe we’re well-positioned to emerge an even stronger company when the economy gets better.

Number one, the Volcom brand resonates on a global scale, and our presence continues to gain strength through our innovative marketing programs and our world-renowned team writers. Number two, our product is better than ever in look, design and overall quality. Volcom is drawing customers to the stores, and our team is relentless in their pursuit to ensure our product continues to experience strong sell-through.

Number three, we have excellent relationships with our retail partners across the board. And these are difficult times, but there’s a mutual understanding that we’re all in this together to push through this period and to help each other succeed. Number four, our growth initiatives are well-positioned to seize opportunities when the time is right, and finally, we’re financially strong with 85 million in cash, no significant debt, along with the fact that we continue to generate cash flow.

Now we know the year ahead will be challenging, but the strength of our business and brand will continue to prevail. I believe we’re operating with good balance, discipline and focus, allowing us to successfully navigate through this period of economic uncertainty.

Now when I think about Q2 and the position that we’re currently in, I believe we’re at a turning point and headed for better times. We’re now in an era of building back to business, and although there will probably be some additional rough spots I’m encouraged and enthusiastic about the future.

We have a terrific brand with extremely strong roots and a deep customer following. With our momentum, great products, our strong balance sheet, and a team that’s fired up, I believe we will continue to be an industry leader and grow market share in the years ahead. As always, I’d like to thank the entire Volcom family, our athletes, retailers and shareholders, for their continued support and commitment during these times.

With that said, I would like to turn the call over to Doug to review our financial results for the first quarter. Doug?

Doug Collier

Thanks, Richard, and good afternoon, everyone, when compared to our expectations, Q1 was a solid quarter with results slightly ahead of the guidance we provided in February. In general earnings for the quarter benefited from better-than-expected revenues across all business segments as the Volcom brand continued to perform well at retail.

However, as we compare these results to the first quarter of last year and make our forecasts for Q2, we’re reminded at the severity of the current economic climate. We believe that our lower revenue and earnings comps for Q1 and our dampened expectations for Q2 are the result of the current economic downturn and are in no way a reflection of the strength of our company, the quality of our products or the depth of our brand.

Volcom has positioned itself with the resources to take advantage of the current economic environment. The iconic Stone logo and the Volcom brand have an emotional connection to our customers, which we believe is unaffected by the recession.

Our product is industry-leading. Additionally, we’re armed with a rock solid balance sheet, flush with nearly 85 million in cash and short-term investments and no long-term debt. We’re globally diversified and continue to strategically increase our international footprint with recent brand control initiatives in Europe, Japan and the UK

We believe these attributes will ensure that we emerge early and strong when inevitably an improved retail environment develops. Additionally, we have a long-term vision and are executing a strategic plan that we believe will increase market share, build earnings and increase long-term shareholder value.

Now I will review some of the financial results for the first quarter-ended March 31, 2009.

Total consolidated revenue decreased 15% to 68.3 million, compared with 80.6 million in the first quarter of 2008. This was slightly above the high end of our guidance.

Let me now break down our Q1 revenue by each of our three business segments the US, Europe and Electric. First, let’s look at the US segment, which 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 first quarter decreased 14% to 42.4 million, compared with 49.2 million in Q1 of 2008.

A breakdown of the US segment product revenue in Q1 by category is as follows. Our men’s product revenues decreased 11% to 21.7 million for Q1, compared with 24.4 million in the first quarter of 2008. Our girl’s product revenue decreased 17% to 11.4 million versus 13.8 million in the first quarter of last year.

Boy’s revenue, which includes our kids line, decreased 11% to 3.6 million, compared with 4 million in Q1 of ‘08. Revenue from our Creedlers footwear line decreased 6% to 1.9 million versus 2.1 million in the 2008 first quarter. Revenue from our girls swim line decreased 15% to 3 million versus 3.6 million in Q1 of last year.

International product revenue, which is recorded as part of our US segment and consists primarily of sales in Canada and Japan and does not include licensing revenue, was 12.8 million, or 30% of our US segment product revenue for the quarter, compared with 12.8 million, or 26% for the comparable period in 2008. International revenue was flat as the additional revenue from the recently acquired Volcom distributor in Japan was offset by decreased revenue in Canada and other international territories.

Looking at our revenue by distribution channel, revenue from our five largest accounts decreased 12% to 13.9 million in the 2009 first quarter, representing 33% of US segment product sales. In Q1 of 2008, revenue from our five largest accounts was 15.8 million and represented 33% of US segment product sales. Revenue from PacSun, our largest customer, increased 22% to 8.4 million for the quarter or 20% of the US segment product revenue, compared with 6.9 million, or 14% of our US segment product revenue for the comparable period in 2008.

This increase for the quarter was about 900,000 lower than planned due to orders that were slightly delayed in the production process and were subsequently shipped in April. Please note that we believe this 22% increase for the quarter was an anomaly. We continue to plan our PacSun revenue down for the year. Excluding PacSun revenue from our next four largest accounts decreased 39% for the quarter. Similar to many of our other retailers, some of our largest accounts worked to reduce inventory levels from holiday and early spring purchases.

In Q1 revenue from accounts outside our five largest accounts, which represented 67% of total US segment product revenue for the quarter, decreased 14% to 28.2 million. While our revenue numbers have decreased year-over-year due to the weak economy, we remain a top-selling brand in all levels of our distribution. Further, we have developed strategies that we believe will enable us to increase market share in this downturn. Now, let’s look at revenue from the Europe segment.

Revenue from Europe decreased 14% to 21.7 million for the first quarter of 2009, compared with 25.2 million in Q1 of 2008. It is important to note that in constant dollars revenue decreased only 1% for the quarter. In Q1 revenue by category in Europe is as follows. Men’s decreased 14% to 14 million, compared with 16.4 million in Q1 of 2008. Girls decreased 12% to 5.4 million, compared with 6.1 million last year. Boys was 738,000, compared with 730,000 last year. Footwear was down 51%, compared to 512,000 versus 1.3 million last year. And girls swim increased 12% to 528,000 versus 473,000 last year.

Finally, revenue from our third business segment, Electric, decreased 32% to 4.2 million for the 2009 first quarter, compared with 6.2 million in Q1 of 2008. The sunglass category with higher priced SKUs continues to be significantly impacted by the tough retail selling environment.

Turning to the gross margin, on a consolidated basis, Q1 gross profit as a percentage of total revenue was 50.3%, compared with 52.4% in the same period in 2008. In our US segment, Q1 gross margin on product was 47.3%, compared with 48% in Q1 of 2008.

It is notable that gross margin in the US segment was relatively steady, despite the continued highly promotional retail environment. In our Europe segment, gross margin was 54.5% versus 58.3% last year. This decrease primarily reflects currency fluctuations related to the strengthening of the US dollar to the euro, compared to Q1 of 2008 and to a lesser extent the continued weakening of the UK pound, compared to the euro.

Gross margin in the Electric segment was 54.5%, compared with 58.3% in Q1 of 2008. Electric gross margin in the first quarter was lower than previous quarters, primarily due to higher inventory liquidation and the more promotional selling environment during the quarter.

Selling, general and administrative expenses on a consolidated basis were 28 million in the first quarter of 2009 versus 27.8 million for the same period in 2008. As a percentage of sales, consolidated SG&A expenses were approximately 41% of total revenue for the first quarter of 2009, compared with 35.5% for the same period in 2008.

For the US segment, total SG&A expenses were 18.8 million, compared to 18.9 million in Q1 of last year. The slight decrease in total SG&A was achieved due to company-wide expense cuts, offset by incremental expenses incurred in connection with the recently acquired distributor in Japan, four additional Volcom branded retail stores and two LS&S retail stores.

For the Europe segment, SG&A expenses in Q1 increased 7% to 6 million, compared with 5.6 million in Q1 of last year. On a constant dollar basis, SG&A in Europe increased 22%. This increase is primarily due to additional bad debt write-offs and expense associated with the UK subsidiary and the London retail store.

In our Electric segment, SG&A expenses were approximately flat at 3.2 million for Q1 ‘09, compared to the same period last year. Included in the SG&A was amortization of approximately 100,000 in Q1 of 2009 and approximately 600,000 in Q1 of ‘08. Net of amortization, SG&A increased approximately 500,000, primarily related to bad debt expense. Consolidated operating income for the first quarter was 6.3 million, compared with 14.4 million in Q1 of 2008. This represents an operating margin of 9.3% in the most recent quarter versus 17.9% in the first quarter of 2008.

US segment operating income for the first quarter was 1.5 million versus 5 million last year, primarily reflecting the lower level of revenue in the quarter. Europe segment operating income for the first quarter decreased 36% to 5.8 million, compared with 9 million in the first quarter of 2008.

On a constant dollar basis, operating income in Europe decreased 27% due to the decrease in gross margin and the incremental SG&A expense mentioned above. Electric segment operating loss in the first quarter was 915,000, compared with operating income of 381,000 last year. As Richard mentioned, we’re continuing to review potential operational efficiencies to further reduce costs and increase revenues.

On a consolidated basis, the company recorded a provision for income taxes for the first quarter of this year using a 35% annual effective tax rate. Consolidated net income for the first quarter of 2009 was $4.2 million, or $0.17 per diluted share, compared with net income of $9.3 million, or $0.38 per diluted share in the first quarter of 2008.

Let me now take a minute to discuss the strength of Volcom’s balance sheet. At March 31, 2009, the company had approximately 85 million in cash and short-term investments. As presented on the consolidated statement of cash flows, the company generated 6 million in cash from operations in the first quarter of 2009. We also have no long-term debt, stockholders equity of 195 million and a current ratio of 9 to 1.

Consolidated accounts receivable decreased 15% to 57 million at the end of Q1, compared with 66.9 million at March 31, 2008. The consolidated accounts receivable balance at March 31, 2009 represents day sales outstanding of 76 days, the same as at the end of the first quarter of 2008.

Consolidated inventory totaled 22.3 million at March 31, compared with 19 million a year before. On a consolidated basis, the inventory turn rate calculates to 6.4 times per year or once every 57 days, well above industry averages. For the US segment, inventory was $12.5 million, a decrease of 5%, compared to March 31, 2008.

The US segment inventory decreased despite incremental inventory from the newly acquired Japan distributor and four additional Volcom stores and two LS&S stores. For the US segment, the inventory churn rate calculates to 6.7 times per year or once every 54 days; also, well above industry averages.

The decrease in US segment inventory was offset by an increase in European segment inventory, primarily due to early receipts of some goods and an increase in Electric segment inventory as eyewear is a replenishment business and requires significant on-hand available to sell inventory.

I’ll now turn to our financial outlook. Forecasting revenue in this economic climate continues to be difficult. As Richard mentioned in his comments, we see retailers pushing order deliveries closer to when they actually need the product. This means some back-to-school orders that have historically shipped in Q2 are being pushed into Q3. Also, Q2 sales are the results of pre-booked orders that were placed during October and November of last year, a time when the retail business environment was rapidly deteriorating.

With this in mind, consolidated 2009 second quarter revenue is expected to be between approximately 47 and 50 million, a decrease of approximately 31% to 35%, compared to Q2 of last year. This includes anticipated revenue of approximately 39 million to 42 million from the US segment, approximately 4 million from the Europe segment, and approximately 4 million from Electric. Please note that the revenue in Europe is highly seasonal with revenue concentrated primarily in Q1 and Q3.

In Q2 we project revenue from PacSun to decrease approximately 45% to 8.7 million, compared to the strong comp of Q2 last year, which was 15.8 million.

Looking at projected business for the first half of 2009, we forecast that revenue with PacSun will decrease approximately 25% to about 17 million, compared to 22.7 million in the first half of last year.

Consolidated EPS for Q2 of 2009 is anticipated to be approximately in the range of breakeven to a $0.03 loss. We expect the Q2 tax rate to be approximately 35%. We project total consolidated SG&A to be less than in 2008. Fully diluted shares outstanding for the second quarter are expected to be approximately 24.4 million.

In putting forth this outlook, we want to remind everyone of the complexity of accurately 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 consumer preferences, and sourcing costs.

The current economic climate will create a difficult short-term business environment. However, Volcom with its worldwide brand strength, quality product, 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 will open the call for questions..

Question-and-Answer Session

Operator

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

Mitch Kummetz - Robert W. Baird

Let’s see, I got a few questions. Richard, both you and Doug made a comment in your prepared remarks that some of the shortfall in Q2 can be made up in the back half of the year. Could you to some extent quantify that? I mean, how much of an impact on the top line is a delay in these back-to-school deliveries?

Richard Woolcott

Hey, Mitch its Richard here. I can’t really quantify it because we’re not really breaking anything out for the back half of the year. But what I can say is that what we saw when those pre-books were coming in for back-to-school and just in the mentality of the retailers right now is they’re really trying to narrow in their inventory levels as close as possible to the date when the customers are coming into the stores.

Where typically people would start to get up back-to-school in Q2 and get the floor sets all ready to go, where now I think particularly right in this environment they’re going, I’m going to be a little more conservative with my back-to-school and push as much as I can to the in-season timeframe. And also, just see how things begin to unfold as back-to-school starts, and then, try to do more of a fill-in business too with may be your tees and your fleece and work with inventories that are on hand that the manufacturers have.

So I think we’re still in a conservative environment right now. It’s really a wait and see for back-to-school. But that’s what we saw with the orders that we did get, and just talking with retailers. The best news is I think they’re working through the situation where they were over inventory, coming out of holiday and even with spring. I think they’re now flushing out that chunk of inventory where they’re a little more comfortable with how the environment is and how the consumer is spending right now, as compared to what their inventories are.

Mitch Kummetz - Robert W. Baird

And then, to the extent that retailers may want to chase business in the back half based on now writing pre-book orders, how are you looking at managing the outlines business in terms of managing your inventory to supply what demand might show up in terms of AO?

Jason Steris

Hey, Mitch, this is Jason, I’ll take that one. In terms of how we planning our inventories right now, we’re definitely planning conservatively, we did that for spring. I think you see the benefits of that in our margin a little bit. Going into summer, the same thing, and as we go in the back-to-school, we have gotten a much more read of what the appropriate levels of retail are in terms of the inventory needs.

So we’re definitely taking all the information into consideration as we build our at once stock, and we’re definitely playing that down on the conservative side and being cautious with the types of products that we’re putting a little available to the sell-in, which would be our core basic styles.

And then in terms of the lead time, shorter lead time products, your T-shirts, and some of your basic fleece, those are the styles that we can chase. We can also build at once supplements on programs working closely with some of our manufacturers on just having fabric availability on certain core items that we can shorten up that lead time.

So, we’re positioning ourselves with key categories that we know we have shorter lead times on and we can chase, and at the same time, our sales team and everyone has got their ears to the ground and just constantly every week getting the information whether it is time to push the button on certain programs or when to react, but being very cautious in terms of having excess inventory that could put us in a situation later where we might have to do excess inventory off price. So, we’re being conservative definitely, but we have opportunities.

Mitch Kummetz - Robert W. Baird

All right. Okay, and then, just a couple of other questions. One, on the guidance, Doug, if I assume the high-end of both ranges, sales and earnings, so 50 million in sales and breakeven on the earnings, and if I apply kind of a normal gross margin to that maybe in line with last year or a little bit worse, I would guess you would expect the gross margin to be down a bit with maybe some currency pressure on Europe.

I am getting an SG&A number kind of in the 23, $24 million range to get breakeven on the earnings, which would suggest SG&A down 4 million plus or so from a year ago. I mean, how do you get there? Is that a function of the variable component of SG&A, maybe sales commissions coming down with sales coming down, or is that a function of cost-cutting? Can you just kind of help me understand that?

Doug Collier

Well, I think you have both of those elements in there. Obviously, if the top-line is going to come down, that’s going to affect the commissions. But it also has the cost-cutting initiative that we did at the beginning of this year across all of our business segments. So, I think both of those come into play.

Mitch Kummetz - Robert W. Baird

And I know you don’t really want to speak to the back half, but if you’re benefiting in the second quarter from cost-cutting initiatives, I’m guessing I should assume that that will carry forward into the back half as well, and you would expect to see SG&A continue to trend down year-over-year?

Doug Collier

You know, we’re not talking about the back half yet. I mean, that would seem to make sense at this point, but I just as we get into it, we’re going to see what that top-line does and just kind of stay flexible on that.

Mitch Kummetz - Robert W. Baird

Okay, and then, lastly, on the FX, it sounds like your European business held in pretty well in constant dollars, and your gross margin was hurt by the FX. Could you put a dollar amount on the impact of currency on the quarter, and how you’re looking at that? I mean, it’s not going to have much of an impact on Q2, because you don’t do much of a European business. But how do you think that FX plays out, and then, just what the overall impact was on the first quarter?

Doug Collier

Yes, I can tell you it was almost all about margin degradation that we saw was due to FX, not just with the euro, as compared to the dollar, which is the dollar is what they’re buying most of their products with. But also as we brought on the UK distributor, and have more exposure to the pound, that has more impact as well.

Operator

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

Sean Naughton - Piper Jaffray

A quick question for I think Richard and yourself, Doug. You guys both talked about seeing potentially some signs of stabilization. Can you talk about exactly what you’re seeing and what gives you that additional confidence out there in the market that we may be kind of potentially hitting some sort of a bottom or an inflection here?

Richard Woolcott

Hey, Sean, how are you doing?

Sean Naughton - Piper Jaffray

Good.

Richard Woolcott

Richard here. Yes, this is something that we’re here every day in the trenches with our sales teams. We’re very close to our retail-based talking with retailers, being out in the field, and there’s a sense that there’s a change going on. You know, since that meltdown in October going through holiday, even going into this year, those are some pretty scary times in terms of a lack of visibility, and almost what I call like a panic, and then, everybody was in a defensive mode because they really didn’t know where the bottom was or really how to adjust their businesses or their strategies as things were basically falling off a cliff.

And now what I’m kind of seeing is I think there’s a more calm tone out there where people are adjusting their businesses. They’re adjusting their strategies. They’re getting comfortable with things, you know with the environment. And I think Easter, although it wasn’t a hit a homerun Easter, I think it gave a bright light out there with consumers going back into the stores, and so I almost feel like there’s a calmness and a flattening out.

Like as you said, we have reached this kind of bottom level where a lot of mentality was in a defensive mentality where I think people right now are going into the offensive mode. They’re more looking towards the future going, okay, how am I going to build my business back? How do I partner with my manufacturers? What kind of strategies are we going to work together? What products am I going to be need? I am going to need from these guys? What are my inventory levels going forward? How am I going to stimulate my consumer?

And so that’s how we’re all thinking right now. We’re really looking forward, and it is positive and there’s optimism out there. And for me, that’s a good read in the first stage, and then, we translate that and build that into our business strategies, and eventually, that translates into a financial kind of roadmap in the future and hopefully, seeing a building back of the business and building back our sales and getting into a kind of new level of doing business.

But I would say right now there’s a feeling of things are turning around, and we’re optimistic and we’re going to keep fighting. And so that’s kind of what we’re seeing right now. And it’s resonating across all the boundaries whether it’s in sales, how the marketing guys feel? How our retail teams feel. And it’s just a little more optimism out there, and I think that’s the first sign of a recovery. So, I hope that -

Sean Naughton - Piper Jaffray

Yeah, I know that’s great.

Richard Woolcott

We painted you a little picture.

Sean Naughton - Piper Jaffray

Yes, great, and then, I guess also on PacSun, a bright spot, a little bit below plan, but still pretty solid in the first quarter. Obviously, the second quarter is going to be a little bit more challenging due to some of the pull forward business you guys had last year. Any main reason that you’re seeing some of the sales declines on a year-over-year basis with Pac outside of just the general environment, and some of the comp declines that they’re having in their stores?

Jason Steris

Hey, Sean. This is Jason here. Yeah, if you look at that business over the first half, like Doug mentioned in his remarks. We have a plan down 25%, and I think when you look at that, and where PacSun is planning their inventory levels right now. It’s on track with the environment and the overall business.

So, we feel good about our product assortments in there right now. The relationship is strong. We’re retailing well. I think the inventory levels are appropriate with where they need to be for this time. And we don’t see anything kind of off there in any way whatsoever.

Richard Woolcott

And actually, just recently, Sean, we’ve been talking to our specific teams that work with PacSun, and they’re seeing little upticks with PacSun coming back, going hey, we need to get back into some of these specific styles of T-shirts. And let’s dive into some of these areas where we’re seeing some bright spots. So, we’re also kind, of even with the pre-booked business and everything with PacSun, on top of that we’re seeing some bright spots on top of that. Even just as recently in the last couple of weeks. I mean, that’s encouraging, and it kind of goes along with thinking of – I think this is a two-part process.

You’ve got the retail environment out there that has got to work through inventories that were built up in holiday and spring. So, you’ve got to take time to flesh that inventory, and then, it gets to a certain point where it’s like, okay, gosh, you know what, I’m going to really need to look at my inventories moving forward, because I might be missing out in certain categories as I had gone through that process.

So that’s kind of where we’re at now is making sure that the right inventories and the right product and the right assortments are out there as we move forward. Particularly, in the back-to-school, and then, I think even more so as we get into this holiday season. We’ve got our teams are on the road right now with holiday.

So I think everybody is kind of in a transition mode right now. We’re seeing some bright spots, even on top of our pre-booked business with PacSun.

Sean Naughton - Piper Jaffray

Okay, and then, lastly, on the gross margin line, you’ve had gross margin above 50% before, and obviously, with the European business and the addition of Electric, and some of the direct-to-retail initiatives you guys have going. Is that a goal longer term to potentially reach that 50% gross profit margin, again at some point?

Doug Collier

Hey, Sean. This is Doug. Our goal is to have that gross margin be as high as possible. And we’re really pleased to see it over 50% this quarter. And I think that’s a key metric for us, and we’re going to battle for that to get it as high as we can.

Sean Naughton - Piper Jaffray

Okay. And is there anything holding you back specifically on that right now? Is it a combination of additional markdown support, or some higher sourcing costs that are going into that? Are there any puts and takes within the margin that are hitting you a little bit harder than they have in the past?

Jason Steris

Hey, Sean. This is Jason, again. You know, I think you hit it on the head the two components that we’re dealing with would be the off-price products, whether it’s a markdown or having excess inventory that you’re liquidating, which if you look at that margin for Q1, compared to Q4, then you can see that inventory levels are getting in line. There’s less liquidation sales happening in that business.

So, that’s one of the main drivers of the margin erosion, which as we plan our inventories more conservative, and get a better feel for the inventory levels, we’ll be able to hopefully manage that process a lot cleaner on the backend.

And then on the front end, we continue to focus on our sourcing teams with our sourcing teams out there, focused on the best quality, delivery, price. You know those are three goals. And we’ve got good teams out there right now, but we’re always looking to improve that picture. And we’ve actually for some of our key categories right now, we’ve found some new vendors to help strengthen some of that area.

So it’s an ongoing process, the whole sourcing side of things. The good news is, we’ve got a very good, proven team of manufacturers that continue to deliver quality on time at good prices. So, you don’t want to disrupt that, but you also got to see what else is out there, and we’re always in that process.

So, as Doug said, we’re going to fight and try to push that margin up as strong as possible. And we’re working on both those components, especially in this environment with the sales coming down. It’s like we’ve got to fight hard on that margin line, and all the teams are working relentlessly on it.

Operator

Your next question comes from the line of Christian Buss with Thomas Weisel.

Christian Buss - Thomas Weisel

I had a question, sort of a follow-up on Mitch’s question, about where the SG&A expense savings could be coming from. I’m wondering if you could provide a little bit more detail about the domestic channel, where you see the opportunity for cost savings.

Doug Collier

Well, at this point, I mean, Christian, we said we thought on a consolidated basis our SG&A would be down this year, as compared to last year. We’ve gone across all our business segments, and had to make some hard calls early in this year, including layoffs, salary cuts, things like that went into every department, every area of their company to see where we could find efficiencies. And so I think that’s what we’re going to see is if that plays out through the rest of the year, that’s where we see the cost savings coming.

Christian Buss - Thomas Weisel

Okay. And I guess I was a little bit surprised to not see it come down more in the US in 1Q. I was wondering sort of was that just a timing issue of some of these changes?

Jason Steris

Well, it’s a little bit of that, and that’s where a lot of our new businesses are with Japan. That’s a whole new operation in Q1 that was not there at all in Q1 of last year. I think we had four more Volcom retail doors, Volcom-branded retail doors and two LS&S doors. So, those can add up to some, when taken in total some costs, and we completely offset those with other cuts. So, those costs are part of the US segment.

Christian Buss - Thomas Weisel

Okay. That’s very helpful. Thank you.

Jason Steris

Very incremental.

Operator

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

Jeff Mintz - Wedbush

Maybe for you, Jason, to follow up on something you were talking about earlier about shipping coming closer to use. Does that kind of put you in a position where you’re planning for fewer reorders just in terms of pure volume, especially on seasonal goods?

Jason Steris

Yeah, absolutely, Jeff. I mean, the history we have on reorder, is pretty obsolete at this point, as some of the other sales trends are where it is kind of a new approach of figuring out what’s the pre-book, and a lot of that’s laid out with a lot of the foundation-type styles that people are comfortable with booking and the seasonal stuff, the marketed styles, the must-have type pieces, and then, what we’re seeing now when we’re planning our inventories is just, hey, let’s be really cautious.

Over the last two quarters, I think we have been able to gauge sort of a percentage read of what that number is. But we’re being very cautious with it and making sure that we’re putting it in just our core groups that we talk about usually every call, just a core basics program that has a little more shelf-life. We carry them over from time to time.

What we’ve also done in the last couple of seasons is we will get out there, we’ll launch our line, and then, we could come back a month and a half later with a supplement package of maybe a shorter lead time type style. It could be T-shirts and fleece or another color way and a basic item, where we’ve given the retailers a little more time to get a little more sales read of the current environment and come back and show them some more product.

And I think I mentioned with Mitch with T-shirts, and some of our fleece programs, we can turn that stuff really fast, and we’re constantly evaluating our categories where we could use a little more reorder business. So, it’s a full touch and go, and we’re looking and our sales teams are looking at it, working closely with the production teams. They’re constantly talking what about this, maybe some more of these, and we want to maximize every opportunity out there. And I think we can do it, but we also got to be cautious with it, and I think we’ve got a good plan. So, we feel pretty good about things.

Jeff Mintz - Wedbush

Thanks. That’s actually very helpful, and then, on the production issues that led to some late shipping to PacSun, did those impact other customers as well?

Richard Woolcott

No, it was one PO. It got stuck in customs for a couple of extra days. It missed the March window, it has gone out in April, and that was an isolated PO. So, all-in-all we’ve been really good with our inventory, with our deliveries so far this year. So.

Doug Collier

Yeah, we’re talking just a couple of days off.

Richard Woolcott

Yeah, it just got stuck in customs. It was kind of on the cusp of the month there. So, it didn’t make the quarter, but it made the cancellation window and we’re in there, so.

Jeff Mintz - Wedbush

Okay. Great, and then, Doug, can you just talk a little bit about where you expect to see inventory at the end of the second quarter? I mean, now that we have anniversaried the acquisition of Electric, which I know had a big impact on inventory, where do you expect inventory to be kind of relatively up or down at the end of Q2?

Doug Collier

Yeah, well, Jeff, I mean, we don’t guide specifically to inventory, but I think if you looked historically, we’ve done a real good job managing that, when you look at our inventory turns in days. And so, I think that’s something we’re continuing to do, even and especially as Jay was talking about earlier in this environment, we’re going to be even more cautious about that. Look at more stuff we can do in season and quick turnaround products. So, I think you’re going to just see us continue to really keep our eye on inventory.

Jeff Mintz - Wedbush

Okay. Is the Electric business kind of the replenish – you know, the need to do replenishment, is that kind of continuing to boost the inventory? And are you adding new styles that will continue to increase the need for more replenishment inventory?

Richard Woolcott

Yeah, it definitely does skew the inventory a little bit, because they do have to carry the inventory, especially in their proven styles, the ones they have been carrying for several seasons now, and they know that that’s a proven performer for the brand. As newer styles comes in, I don’t think you can take quite as much risk on that. You’ve got to get it in the market, and then, I think it goes out there, and once you see some success with that, and it’s going to be sort of in a program and you think it will carry on for awhile, then you would stock up a little bit with it.

Jeff Mintz - Wedbush

Okay. Great, and then, just a quick question on interest income. Obviously, it came way down, and that I’m sure is a result of lower interest rates. Anything you’re doing on the short-term investments that might help boost that a little bit for the rest of the year?

Doug Collier

There are some things that we’re looking at. I think at this time, it’s gotten a little bit better. But I think we’re a little more concerned about preserving our cash than actually maximizing it. It is starting to get better now. There are some CDs that are federally guaranteed that we’re looking into. We’ve actually moved some stuff into some short-term investments with a little longer term, so it’s not strictly classified as cash. So, yeah, we’re playing around with it a little bit, but we’re being fairly cautious as well.

Operator

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

Jeff Van Sinderen - B. Riley

Good afternoon. I guess one of the questions I had was in terms of manufacturing sourcing. Are you guys seeing any break on pricing there, and then also, how does that play into your strategy to do more at once, more with short lead time product?

Jason Steris

Hey, Jeff, this is Jason. I will take that. Yeah, I mean, what we’re seeing out there, yes, you know, there are some opportunities out there. And it’s people’s business, as the businesses are coming down, the volume for certain businesses out there, we’re seeing a vendor base that do not want to lose business, and in some cases, they’re willing to work with certain companies that may be a better price on certain programs, just to kind of keep the wheels moving, keep their teams intact, keep certain, they’ve got x amount of factories that they own or employees that they have.

So, they’re looking at their whole businesses as a whole, too, going okay. It’s important for us to weather the storm as everybody else is, and we might have to work at it a little bit less, too.

So we’re seeing some of that, and working closely with our teams over there. Our production teams, our design teams continue to go over there. Even though we cut travel back within the company, we thought it was important to have our teams over there and be on the ground to see the opportunities firsthand, if there’s stuff happening over there. So, as I said, before, with the sales volume coming down, it’s really important that we focus on that margin, and it’s a huge initiative for us this year is to improve and strengthen that margin in comparison to last year. So, I mean, that’s our goal right now.

And that was a two part question.

Jeff Van Sinderen - B. Riley

Yeah, it was. I guess the other part of it was just thinking about doing more sort of in season business, with a shorter lead-time -

Jason Steris

Yeah, yeah, got it. Yeah, and then, on the in season stuff, mostly what we’re doing is we’re chasing T-shirts and fleece, and then, what we’ll do with our core program is we’ll do projections on that stuff with our manufactures and make sure they’ve got the availability to turn that stuff in a quicker cycle than we would typically do on a regular pre-book.

So we might lay a foundation and say, hey, this could be a potential backup order. We don’t know if it’s going to happen for sure, but hey, let’s be ready. Let’s have the grey goods or the fabric availability or in some cases maybe you even make stock. It might go to Europe or it might come here. Just kind of playing with all the opportunities, the possibilities to kind of maximize that sales window, if we should see a little spike in it. So, cautiously approaching it, but at the same time, we have got a well thought out plan.

Jeff Van Sinderen - B. Riley

Okay. So, it doesn’t necessarily hurt your margins to do more of that business? Is that what you’re saying?

Jason Steris

To do more of the -

Jeff Van Sinderen - B. Riley

To do more of the in season.

Jason Steris

No, no, I mean, if you’re wondering if we’re airing a bunch of stuff in or that, we’re not.

Jeff Van Sinderen - B. Riley

Okay. I guess one of the other things you guys brought up in your prepared comments was that you felt like you had an opportunity to increase market share. I’m just wondering, what all you’re focusing on there to increase market share in this economy.

Jason Steris

Hey, Jeff. This is Jason, again. I’ll start that one off. I mean, there’s a couple of areas, where we’re really focused on right now, where we’re seeing opportunities. We talked about a little bit on the last call, with the Board shorts category. And with our new products that’s out there right now and our marketing campaign, we’re definitely seeing that we’re gaining some market share in the Board shorts category.

We see it also in the Creedlers division, with the sandal business out there. We’re seeing it with the swimwear. We’re seeing it, particularly with the outerwear as we went through the tradeshow season. Both SIA and ASR, with our fall and our snow pre book, that snow portion of the business was a definite bright spot, and that’s both globally, both Europe on a global program, so to say.

So, this is kind of like the key categories that we really focused on here internally, in terms of just ramping up the products, ramping up the marketing programs, made company initiative programs. And then, when you look at other programs that we have, such as the Japan business, the UK business, working with Electric and their soft goods program, we brought that team in-house now working directly with two people that came over here to work with our design and production teams to enhance that program, get it on the calendars and focus on the product and help with the overall selling strategy. So, we’ve got a lot of seeds planted right now that have growth potential that we’re taking some market share.

Richard Woolcott

Yeah. No, Jeff, this is Richard. I think these are initiatives we’ve been looking at. Kind of in our past calls, we’ve talked a lot about focusing internally and looking at our existing categories, and really diving into them and going, okay, hey we’ve got these categories off the ground, but there’s a lot of potential in the marketplace for these categories to grow. And it’s taking time, but, I would say, in the last probably six to 12 months we’re really starting to see things turn and particularly some of the areas that Jason just talked about.

Just recently with the outerwear, on a global level and the Board short initiatives, we were making board shorts in the past and having good success. But now I mean, just this season, the launch that started in the holidays, I think we had a 11/1, 12/1 launch, and all the way through this year, I mean, we really have gained traction in market share and excitement out there.

And so our strategy was look internally, look at the categories that we’re participating in, but we can grow in and put our efforts in that, and it’s paying off. It’s exciting for us, because it’s all wrapped around the sports that, our foundation sports, such as our denim and our outerwear and our board shorts, and then, our two new initiatives that are really encouraging would be that one is the Creedlers business, that sandal business.

We’re waiting in there with the open toe and the closed toe and poked around. What do we need to focus on? We took a step back and we need to focus on these sandals. We brought in a team of more people in-house to work on it, and we’re seeing the results, and we’re seeing it on the floor. We’re seeing it at sell-through.

So these are exciting initiatives for us and ones that we’re not going to let up on, and I think we can be dominant players in these categories.

Jeff Van Sinderen - B. Riley

Okay.

Richard Woolcott

These are the areas that are real exciting for us today because of all the effort we’ve put into them over the past couple of years.

Operator

Our next question comes from the line of Eric Tracy, BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

Just maybe, Richard, a follow-up on your sort of beginning comments on feeling like you’re reaching an inflection point. Maybe what is the inflection point in terms of the destocking of retailers? Should we assume based on sort of the visibility that you have heading into Q3 that that’s sort of when we get there?

And then secondarily on that, maybe just an update on the independent channel where you feel like most of those retailers with credit easing, should there be kind of limited downside risk there from a liquidation or bankruptcy in some of those names?

Richard Woolcott

Yes, so the first one was kind of you were talking about kind of at that bottom point right?

Eric Tracy - BB&T Capital Markets

Yes.

Richard Woolcott

In inventory. Well, I think that on a general level everybody had to go through this process of how do I work through my existing inventory because existing inventories are too high, and I think that’s what made people really nervous. All of us. Because like we knew we said, okay, there’s too much product in the marketplace. How are we going to work through that, and then also, gain confidence within the manufacturers and the retail partnerships to kind of move forward? Okay?

So there’s a step process as I talked about. Now, I think that people are a lot more comfortable. They have had time to go through this process. I think they’re more comfortable, and they’re really looking at, well, how do I kind of build back the excitement within my product mix, within my store, with my inventories and how can I better partner with my manufacturers? And now we don’t have time to do that. Where before there was confusion, and it was almost like this chaos out there as things were in a nose dive. Where now I don’t see that type of confusion anymore or that chaos, it is more of that optimism of like, all right, here we’re. We have weathered this first part of the storm.

We’re at the bottom. And you know, I cannot predict is it going to get worse. I mean, I hope it does not get worse. I hope there’s not outside factors out there that do something to make another tremor out there. But what I see right now it is stabilizing. It is like all right, now how do we move forward? And that’s when we do look at the back half, we see it as a building back effort on both parts, and I think there’s optimism out there. I think the retailers, they feel the same way. They’re ready to move forward.

So we’re going through a whole process right now. And I believe we’re through the first process and we’re on an offensive process now. And that’s why I feel it is the bottom. And this is more of a gut feel. This is working with retailers and working with our management teams every day we do this, 10, 12 hours a day, every single day. And when, you know, the tides start turning, you feel it, and you keep getting these little reads and these little bright spots. And that’s what in my prepared remarks, that’s really the point I wanted to get across was, there’s an inflection point right now.

Now I think your second part of that was, how is the core retailer doing? And that’s a big question for all of us as we move forward. And I feel like there’s a stability at the core level. I think that there’s probably some retailers that are still challenged by the economy and how it has affected their business. Some people might be sitting on debt and trying to work through a large, whatever, a payables situation. But for the most part what we’re seeing out there’s people are going more into the offensive mode.

That’s not to mean that we all could still have some challenges ahead of us. But I feel that mood in the retail base. We have had a number of conferences lately where manufacturers and retailers are getting together at a number of functions just in the last six weeks. And you can feel like, hey, we’re going to get through this, and that’s really the optimism that’s going on out there.

So the state of the core retailer, I think it is improving, but it is hard to tell because we don’t know their businesses exactly. But I do see optimism out there. I do think they have worked through their inventories. They’re communicating with the manufacturers. We’re communicating with them, and we’re banding together to weather this storm. And I think these next six months are important. I think back-to-school is going to play a big role like a lot of us – we’re looking at Easter going, hey, are we going to be able to make it to Easter together? I think for especially retailers, a lot of them did make it to Easter.

Now we’ve got back-to-school, and that’s all, how is that going to play out? Is the consumer going to open up their wallets and come back in and freshen up their wardrobes for back-to-school? And if that happens, then I think we’re going to be on a roll. And I’m optimistic as we go into holiday and into next year even more so. But I think we just have to work through it, and we just come to work every day with a positive attitude and just keep fighting. And so far I feel we’re doing pretty good out there.

Eric Tracy - BB&T Capital Markets

Okay. And maybe just one more just in terms from a pricing perspective, particularly within the mall, we have heard some just the irrational sort of promotional cadence of some of the more traditional retailers and impacting some of your key partners in the mall, and then, having to sort of come to vendors, particularly those that are more widely distributed and try to get some extra margin. Is that just again a reaction to the near-term thing, or is that something you feel like holds on a go-forward basis?

Jason Steris

Hey, Eric, this is Jason. I mean, kind of what we’re feeling out there, seeing is that the inventories are getting more in line out there. And I think what we went through in Q4 where you saw a lot of that, it seems to be leveling out a little bit. Definitely Q1 was still a work through the old inventory quarter, and I think, as we look towards the back half and even look at what’s happening out there right now, I mean, just speaking for Volcom and our products out there, we feel good where we’re priced, and we feel good about our inventory levels. So, I see it moving in the right direction for sure.

Operator

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

Brandon Ferro - KeyBanc Capital Markets

I had a question for you guys on inventory. Doug, would you mind telling me ex the new businesses domestically what inventory might have been down at the end of the quarter?

Doug Collier

Yeah, I think we talked about that. I think if you’re talking overall consolidated if you pulled out the new business down, it’s been down about 15%.

Brandon Ferro - KeyBanc Capital Markets

Okay, I guess I missed that. Would you say that’s a decent barometer, maybe how we should think about combined 2Q, 3Q revenue being down this year, versus last year instead of just looking at 2Q guidance?

Doug Collier

No. I don’t think so, because the inventory, I think as Jason talked about has changed a lot, how there’s going to be a lot more in-season business. I think the model. I think Jay went into some real good detail about that, how that’s different now. And so it’s not really all about pre-book and how that’s going to wind up with your inventory. So, I don’t think that’s necessarily going to be a real accurate gauge.

Brandon Ferro - KeyBanc Capital Markets

Okay, and then, on the SG&A side, I know you don’t want to extrapolate maybe the savings that are embedded in your 2Q guidance through the rest of the year, Doug. I think on the last call you talked about you’ve got some SG&A spending on hold and you might consider releasing it if the environment improves. I am just wondering if that’s still the case? Maybe what those spending plans might total, what kind of projects they might get invested in the back half of the year if things were to stabilize or improve?

Doug Collier

Well, I think it’s sort of similar to what we talked about when we did our cost-cutting. I mean, the things that we tried to avoid as much as we could where things that were directly related to the brand, things that were directly related to sales. It was going to really impact the end customer. Those are the kind of things that we did have to cut some of those things in some areas, but we tried to hold off on that.

So I think it would just make sense that if things were to change, and again, at this point we think the SG&A is going to be lower than next year. We don’t have great visibility into the back half of the year. But those are probably some of the things that we would look at.

Brandon Ferro - KeyBanc Capital Markets

Okay. On the international front, I think Europe was down 1% ex-currency in the first quarter. What are some of the bigger drivers that might make that go up or down as we think about the third quarter this year?

Richard Woolcott

Brandon, you’re talking about in Europe?

Brandon Ferro - KeyBanc Capital Markets

Yeah. I think you said ex-currency in the first-quarter revenue was down about 1%. Yeah, I was just wondering what might be some of the bigger drivers that would change that materially in the third quarter, either up or down, on a relative year-over-year basis?

Richard Woolcott

Yeah, well, the one thing we talk about is our business in Europe. We have the big quarters Q1 and Q3.

Brandon Ferro - KeyBanc Capital Markets

Yeah.

Richard Woolcott

So obviously for Q3 you’d see that come into play. I think right now just looking at the European business, and I’ve had a lot of conversations lately with sales team and our CEO over there. I mean, really what they’re looking at is just doing the best job you can with an environment over there that’s still somewhat unstable. We have seen it level off. It’s not as bad as we thought it was going to get. But I don’t think we’re out of the woods yet over there.

The real focus is, hey, let’s do the best job we can to maintain not only our presence, but our costs, our sales, just our whole strategy over there and ride through the environment. We’re kind of on a wait-and-see mode in Europe right now. Like okay, are things going to continue to level off? And, I think once that happens and there’s more stability across the more larger countries, then we’d go into more of that kind of Plan B mode in looking at strategizing on our executing our growth initiatives, and some of the other things that we’ve got in play.

But right now it is, hey; let’s just manage the business correctly through an unstable environment. And that’s really the strategy right now, and we’re doing that as you look at the comparisons from this Q1 this year to the Q1 last year just from a dollar to dollar basis just being flat. I mean, that shows that we’re weathering the storm fairly well. And we just want to continue to monitor it over there and see how it plays out.

Brandon Ferro - KeyBanc Capital Markets

Okay. As far as Chick’s goes, and then, Dick’s takeover of Chick’s, does that process given you’re distributed there potentially expedite maybe some of the conversations you would have had with Dick’s down the road? I mean, does that give you an opportunity to play into Dick’s earlier than you would have? Are you even interested in that?

Jason Steris

Hi, Brandon, this is Jason here. I would say probably by them taking that over, yes, it would have accelerated the process maybe a little bit. Yes, with those Chick’s locations being converted into the new Dick’s stores, we’re participating in those. And as far as the rollout of any additional doors, I know our team would just be looking at all the opportunities on a case-by-case basis.

The first thing we have got to do is to look at the location and see if it makes sense, look at the Volcom penetration in that region, and it is on a case-by-case. It is similar how we have dealt with other accounts in the past whether it is a Macy’s or somebody just making sure that there’s room for more Volcom in that territory. But first and foremost, we want to make sure we maximize our growth potential with our existing account base, and we will just carefully look at it. But definitely there’s opportunity.

Operator

Your next question comes from the line of Ronald Bookbinder with Global Hunter.

Ronald Bookbinder - Global Hunter

The increase in the allowance for doubtful accounts, could you give us some color on where that was coming from? Was that mainly US independent retailers?

Doug Collier

I’m sorry Ron, this is Doug. Where we saw some increase where I specifically mentioned was in Europe and in the electric segments. In Europe, we had one specific Eastern European distributor that we had to reserve for. So, that was a bit of a big chunk of the amount that we talked about. And yes, at the electric segment, there was one big retailer that they were dealing with that filed for bankruptcy and we had to reserve there as well. So, it was just a couple of isolated accounts and distributors.

Ronald Bookbinder - Global Hunter

Okay. So, that should be behind us for now?

Doug Collier

Yes, I mean, I think we have a lot reserve. I think in our total A/R balance consolidated we have on gross it is like over 11% reserved. So, we’re looking at all those. I think our reserves are appropriate at this time.

Ronald Bookbinder - Global Hunter

You all use factoring agents, correct?

Doug Collier

We do not, no.

Ronald Bookbinder - Global Hunter

Okay. So, the independent retailers, you take the risk of those A/R’s ending less?

Doug Collier

We do, yes.

Ronald Bookbinder - Global Hunter

And so, it didn’t have much of an impact there from an increase in doubtful accounts? They’re pretty much sticking to paying you guys, and you’re not seeing much trouble there?

Doug Collier

Well, I think the advantage that we have Ron, is that our brand is selling through really well, and obviously, to continue for us to ship them, they’ve have got to pay us. So, I think even some of the ones that are even a little more challenged were probably, I think, we believe we’re getting paid probably a little bit faster than maybe some other people.

Operator

There are no further questions at this time. I would now like to turn the call back over to Richard Woolcott.

Richard Woolcott

Okay. Well, I just want to say thank you for everybody that was on the call and listening and thank you for the support, and we look forward to speaking with you again on our next call. So, thank you, and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Volcom, Inc. Q1 2009 Earnings Call Transcript
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