Quiksilver Management Discusses Q3 2013 Results - Earnings Call Transcript

Sep. 5.13 | About: Quiksilver, Inc. (ZQK)

Quiksilver (NYSE:ZQK)

Q3 2013 Earnings Call

September 05, 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

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

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quiksilver Fiscal 2013 Third Quarter Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded.

I'd now like to introduce Robert Jaffe, Investor Relations for Quiksilver, who will host this afternoon's call. Please go ahead, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver Fiscal 2013 Third Quarter 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, joins us as well.

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 meanings of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding Quiksilver's business outlook and future performance constitute forward-looking statements, and results could differ materially from those stated or implied by these forward-looking statements, as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the 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, September 5, 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 electronic form on our website at www.quiksilverinc.com.

With that, I'd like to turn the call over to Andy Mooney.

Andrew P. Mooney

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

This quarter's pro forma adjusted EBITDA growth of $4 million was largely driven by SG&A reductions of $18 million, excluding severance and other restructuring charges. With gross margins essentially flat compared with Q3 2012 at 49.4%, these cost savings more than offset our revenue decline of 3%.

I'll take you through progress to date on our profit improvement plan. Rich will then take you through our Q3 financials in detail. And we'll then open up for Q&A.

By way of reminder, the overarching theme of our profit improvement plan is focused with the objective being to accelerate progress against those 3 key strategies of strengthening our brands, growing revenues and driving operating efficiencies.

One of the key initiatives clearly has been to reduce costs throughout that organization. We're making solid progress against this initiative, which was clearly evident in the substantial reduction in SG&A in Q3.

The management team is now fully in place and the process of globalizing the key functions of product development, marketing and supply chain have considerably advanced.

In addition to global leaders in apparel, footwear and licensing, CMO and a global supply chain leader, we recently appointed Eric Kergolot as our global leader for retail stores and Nicolas Foulet as the global head of our e-commerce business. Eric and Nicolas have done an excellent job managing our EMEA brick-and-mortar and e-commerce businesses. And with this global shift, we plan to leverage retail operations, such as store design and store construction globally, as well as e-commerce, operations and marketing.

I'm excited about the world-class team we've assembled. They are capable of not only executing our profit improvement plan, but also managing a significantly larger business in the future.

I turn now to sales growth part of our plan. As evident in this quarter's results, revenue growth in the short-term will be difficult to achieve. However, our new product development teams are on track to significantly improve the product offerings of all 3 brands.

As a reminder, the earliest their efforts will bear fruit is fall 2014. And we're really looking at spring 2015 for the teams to hit full stride.

In the second -- I'm sorry, in the third quarter, sell-through of Roxy branded products remained strong. And as expected, sell-through of DC footwear, specifically in North America, remains challenging.

Quiksilver brand revenues declined 10% for the quarter, with revenues in the wholesale channel declining 16%. There were several reasons for this. We made the strategic decision to exit Quiksilver Women's earlier this year and are comping against prior year revenues of $2.5 million. This business, however, was essentially breakeven. Sales of Quiksilver products to clearance channels in North America also declined $5 million year-over-year.

The economic environment in Europe continues to be challenging, particularly in France, Spain and Italy. And this is a particular challenge for smaller, independent-sourced specialty retailers, and we continue to see store closures occurring in these countries. Although we continue to gain share on the remaining specialty accounts, nonetheless, the environment for revenue growth remains challenging.

On the positive side, a portion of the revenues lost as a result of the contraction of smaller independent retailers in Europe was migrated to larger retailers, such as Decathlon, Intersport and now Corte Ingles, and also to e-commerce. And we're performing well in both environments.

Our direct-to-consumer business also fared well in the quarter. Brick-and-mortar same-store sales were up 2% across our global network, along with a 33% growth in e-commerce.

Direct-to-consumer sales, which includes shop-in-shop formats in Southeast Asia, represented 30% of our revenues in Q3. Going forward, we expect to see direct-to-consumer sales increase as a percentage of net revenues, with a positive effect on margins, higher SG&A levels and an overall positive effect to the bottom line.

With regard to the potential divestiture of some of our non-core businesses, we're also very encouraged by the interest we've seen to date. We're making progress on product licensing having signed a first agreement for high-end sandals this quarter and hope to sign several more license agreements in the near future.

In summary, I'm very pleased with progress to date on cost reduction, globalization, brand rationalization and licensing and thrilled with the quality of the team we have in place. It will take time to deliver revenue growth, but I remain confident that we're heading in the right direction.

Having successfully completed the refinancing of our U.S. senior notes, we've improved liquidity and moved the debt out. Among other things, this will allow the entire management team, myself included, the ability to focus solely on executing our profit improvement plan and restoring our core brands to growth.

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. Third quarter net revenues were down 3% or $14 million in constant currency. The decline was primarily in the Americas wholesale channel, where revenues decreased $16 million or 7%; Asia Pacific region revenues decreased by $1 million; and EMEA region revenues increased $4 million, all in constant currency.

The revenue shortfall in the Americas wholesale channel was in the Quiksilver and DC brands. The decrease in the Quiksilver brand wholesale revenues was a function of product and channel decisions, including the discontinuation of the Quiksilver Women's line, lower production of customer-specific styles, lower sales to wholesale clearance accounts and decisions to curtail some royalty business. In the DC brand, we are continuing to work with key accounts to clear channel inventory and support improved sales into the wholesale channel.

There were some good news in the Americas region as well. Roxy brand sales in the wholesale channel increased 11%. We saw strong growth from our Brazilian operations. Americas retail stores delivered positive comp store sales growth in the quarter. And we closed another 8 underperforming retail stores in the Americas region in Q3. As a result, we now have 15 net fewer stores in the Americas region at the end of Q3 compared to last year.

Asia Pacific region revenues decreased by $1 million in constant currency, with modest erosion in the wholesale channel, mostly offset by growth in retail and e-commerce revenues. We saw revenue growth in all Asia Pacific markets, with the exception of Australia.

We were pleased to see our EMEA region return to revenue growth in Q3, with that region posting constant currency revenue growth of 3%. Positive comp store sales growth in the EMEA retail and e-commerce channels were partially offset by decline in EMEA revenues in the wholesale channel. The EMEA wholesale channel erosion was predominantly in the Quiksilver brand, while the DC brand drove double-digit percentage revenue growth in the wholesale channel.

The economic environment, as Andy mentioned, in Europe continues to be difficult and especially for our smaller wholesale accounts. In looking at our larger markets in Europe, Russia, U.K. and Germany, all had solid revenue increases, while France and Spain, each posted single-digit percentage decreases.

Moving to gross margins, which were basically flat, down 10 basis points year-over-year. We saw margin improvement in Quiksilver and Roxy wholesale margins, which were offset by margin erosion on DC wholesale sales. Consequently, our wholesale margins were flat versus Q3 last year.

The revenue mix shift toward retail and e-commerce was favorable to our Q3 margins. However, we had some modest margin erosion within both retail and e-commerce channels due to some increased discounting. We expect continued discounting on DC footwear product in the back-to-school and holiday seasons.

SG&A decreased by $9 million or 4% in Q3. The impact of cost reduction actions drove expense savings of $18 million in the third quarter, which were offset by $9 million of increased restructuring and special charges incurred in Q3.

Expense reductions were in the areas of employee costs, sponsorships of athletes and events, travel and entertainment, as well as other categories. These expense reductions were partially offset by increased costs in our e-commerce businesses, which generated 33% revenue growth in the third quarter.

We acted on our profit improvement plans in Q3 and continued the process of rightsizing staff and improving our retail store portfolio. As a result, included in SG&A is $13 million of restructuring and special charges related to severance and closure of underperforming retail stores. Q3 severance costs totaled $12 million, and severance was recorded in all 3 regions.

Q3 pro forma adjusted EBITDA of $56 million dollars increased by $4 million compared to last year. The improvement was driven by the SG&A reductions. It is worth noting that our pro forma adjusted EBITDA calculation, shown on Page 8 of today's press release, is impacted by the foreign currency gain and loss, which shifted by $6 million from a $2 million gain in Q3 last year to a $4 million loss in Q3 this year. The FX item is primarily the revaluation impact of certain non-euro denominated assets held by our European subsidiaries.

Moving to the balance sheet. The quality of our inventory improved as we continued to liquidate prior seasons' inventory. Prior seasons' inventory represented 9% of aggregate stocks at the end of Q3, down from 16% at the end of Q3 last year. In the Americas, we are down to less than 5%, and we will now focus more on Asia Pacific inventory clearance.

Regarding liquidity. In May, we expanded and extended the credit facility covering our U.S., Canada, Japan and Australia operations with a new 5-year credit facility. In July, we refinanced $400 million of senior notes that were due in mid-2015. And we now have no long-term debt maturing before December 2017, when our Boardriders notes are due. Consequently, at the end of Q3, Quiksilver had $152 million available under our various credit facilities, in addition to the $62 million in unrestricted cash. So we are well positioned from a liquidity and debt maturity standpoint to focus on our profit improvement plan.

With our second quarter results, we provided guidance indicating that we expected our pro forma adjusted EBITDA in the second half of fiscal 2013 would exceed the $91 million generated in the second half of fiscal 2012, assuming currency rates remain stable. We are pleased that even with the modest decreases in sales and gross margin that our cost reduction actions in Q3 generated pro forma adjusted EBITDA growth in Q3 compared with the same quarter last year.

As we look at the fourth quarter, we expect to see some of the same themes we saw in Q3. However, it would likely be helpful to point out one important difference between our current year's fourth quarter and last year's Q4 results. Revenue in Q4 last year was $559 million and reflected a $47 million increase from the third quarter last year. Growth in the DC brand contributed $20 million of that growth from Q3 to Q4 last year. Much of that $20 million growth from DC was in the North America wholesale channel, which in retrospect was likely too much volume for that channel to absorb. Based upon the current channel inventories, we anticipate the DC brand sales in the fourth quarter of this year will decrease by approximately 15% from the $166 million recorded in Q3 of this year.

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

Andrew P. Mooney

Thanks, Rich. Just to recap, we've made excellent progress in cost reduction, building a high-caliber executive team, globalization of key functions and clarifying the position of our flagship brands. We're also very much on track on SKU rationalization and development of licensing opportunities and pleased with the level of outside interest in our non-core brands. With the refinancing of our U.S. senior notes now complete, the executive team is focused singularly on the successful execution of the profit improvement plan and restoring our 3 flagship brands to growth.

Robert Jaffe

Operator, that concludes our prepared comments. We're now ready for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Andy, I guess, you're 8 months into the job now. First 2 quarters, mostly outside your control, were tough. It seems like you may be turning the corner here, margins up for the first time in a couple of years despite a sale decline. So -- I mean, do you feel like we are at an inflection here? Or should we expect a period of continued choppiness until maybe next fall once your team has more control over that gross profit line?

Andrew P. Mooney

Well, the -- over the last couple of quarters, I guess, the thing I have gained increasing confidence in is our ability to manage the SG&A down to peer group levels. We're making even more rapid progress on that than we had planned. I think we're also getting a handle on managing gross margins, as evidenced by this quarter's margins, given that we were also able to manage a percentage of prior seasons' inventory down simultaneously. I think we are going to continue to see some choppiness in the revenue lines, as again -- as kind of evidenced in this quarter and some of the remarks that Rich made about DC revenues as it relates to Q4. Really, the earliest that the new executive team can get their hands on the products' steering wheel, to put it in those terms, is fall 2014. And as I kind of said in my remarks, I would expect the team to hit full stride in spring of '15, but to really make a material difference in the quality of the product line for fall '14. So I would expect some choppiness on the revenue line between here and fall '14 at the earliest.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. And then, Rich, just to clarify on that fourth quarter guidance you provided, are you expecting adjusted EBITDA to be up in the fourth quarter? And how do we think about -- I mean, it seems like you have really good control over SG&A. Revenues are a bit of a wildcard. But how do we think about gross margins here? Are the -- is that SKU rationalization initiative actually taking effect? Is that what happened here this past quarter? And given that you have visibility into that sales decline, I would imagine that you're probably managing inventories very tightly into what's probably a lower margin channel anyway.

Richard J. Shields

So a handful of items to comment there. First is we stand by the guidance that we issued at the end of Q2 that we anticipate that our second half 2013 EBITDA will be above second half of last year. Obviously, we're pleased that we had a -- that we're able to turn the corner in Q3 and had Q3 earnings up over last year. And we anticipate that the second half will be favorable to the second half of last year. We shared the story about DC sales because I think that, that's a trend that's a little bit different than what you saw from -- sequentially from Q3 to Q4 last year. And then, obviously, in light of that, we're doing our best to continue to manage inventory down in the aggregate but also with a real focus on continuing to improve the quality of inventory relative to the percent that's prior season inventory.

Operator

We'll go next to Dave King with Roth Capital.

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

I guess, just first off, in terms of the Quiksilver, the decline at Quiksilver, and forgive the background noise. And so the revenue declines at Quiksilver this quarter, it sounds like some of that was due to planned changes and some of the reductions you've made in businesses to get out of, I guess. Can you talk a little about when you expect some of those revenue declines to stop, to be stemmed? And then, also, can you talk some more about some of the product development plans that you have alluded to for Quiksilver and the DC brand as well?

Andrew P. Mooney

Yes, we heard -- I think of it as somewhat of an iteration of responses to the last questions, and the revenue line will be choppy over the next few quarters, as I've said to the very least, until we get into fall '14, which would be Q3 of fiscal 2014 financial year. We -- from what I'm seeing in the product development process, I'm feeling very positive about the strength of the product line. Part of it is a function of just simply focusing on making fewer, better products because as we communicated on the profit improvement plan, our goal is to reduce our global SKU count in the order of 40%, and we're on track to achieve that degree of SKU reduction. That will have a number of benefits as we believe that the quality of the products will be inherently better. The FOBs that we can negotiate at the factory level as part of the profit improvement plan will be better, which we can either parlay into improved gross profit margins or into better price to value in the marketplace, which we believe would drive higher revenue increases. But you -- as I say, do not expect any kind of significant uptick on the revenue side between now and fall '14 at the earliest.

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

Okay, fair enough. And then, in terms of the revenue growth outlook then and as you think about the guidance you've outlined for $300 million in EBITDA a few years from now, at what point would you start to reconsider the low single-digit revenue growth target, if at all? And then, in doing so, would you start to look at more aggressive cost cuts to get there? And will that be needed? And just I wanted to hear your thoughts on that, Andy.

Andrew P. Mooney

Yes, I feel that we appropriately modeled the revenue growth conservatively for the plan because this is -- the story and the -- from a profitability perspective, the story is much more about SG&A reductions than it is about generating revenue growth. But clearly, if we are able to, and we believe we can, consistently deliver gross profit margins in the 50 -- with a 5 in front of it, from rather than a 4 in front of it, even though it was 49.4 this month. A lot of good things happened. But we're sticking with modest revenue projections that we had in the profit improvement plan at this point.

Operator

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

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

I think you mentioned that retail comps in your own retail stores were up in both the domestic or the Americas and the EU segment, if I caught that right. Can you give us more color on both of those segments in terms of merchandise margins, again, talking about your own stores, what the drivers were there?

Andrew P. Mooney

We continue to see healthy consumer demand. Apparently, we seem to be bucking the trend of teen retailers these days because we're seeing healthy consumer demand in our own retail stores, normal retail margins. We haven't really broken out the retail margins separately from our wholesale margins, but they're very healthy retail margins. We're not really using discounting to drive the top line growth in our retail or e-comm channels.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, that's good to hear. And then, in terms of what you're seeing in your EU wholesale business, maybe more on the quality of that business in that region, how bookings are trending, do you think that segment is turning the corner? I know you said you think revenues are going to be choppy overall, but just wondering about the EU segment.

Andrew P. Mooney

Well, I think what we're seeing in the EU is essentially both a transition from smaller independent operators to larger big-box formats, like Decathlon, Intersport I think are 2 good examples, and to e-comm. We're experiencing solid growth in e-comm. We're comping solidly in our own retail stores, and we're seeing growth in the bigger box formats. We're also exactly in line with the economic trends that are occurring in the EU. As Rich alluded to, we're getting growth in Germany. The country is experiencing growth, we are experiencing growth. We're getting declines in Spain and Italy and France as they continue to be challenging. We wish there was more surfers in Germany than there were in Spain, but we'll take any good news that comes out of that market right now. But I think generally, what you're seeing is a retail environment that's in transition. The good news is we're kind of poised to take advantage of that transition as it occurs. And if indeed the kind of smaller mom-and-pop operators continue to contract, we are experiencing share growth in perhaps a declining channel there. But the business is migrating to other formats, and we are able to take advantage of it.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then, correct me if I'm wrong, but I think you said that the Roxy business in the U.S. was trending positive. And then also, maybe if you can just touch on where you feel like you are in the process with DC in terms of product redevelopment? And then, are sell-throughs starting to improve with DC? Are you sort of troughing there? Just anything else you can add on DC and how the order book might be trending.

Andrew P. Mooney

Sure. So to answer the first part of your question, wholesale growth in Roxy in the Americas was up 11% for the quarter. So we feel very good about the sell-through performance of the Roxy branded products. DC sell-throughs in North America continued to be slow. Part of that is a function of trends in the marketplace. One of the big growth segments that we had that was part of the $20 million number that Rich alluded to in his remarks was -- were sales of women's multicolored high-tops. That trend has evaporated as quickly as it came, as these things tend to do. So that business will be difficult to replace. However, the men's business is performing fairly well. But I think the other aspect that really caused the kind of slowdown of sell-throughs in North America is that the men's product line wasn't particularly well-segmented across the various distribution channels. And that's one of the things that we're very much focused on right now. But again, that will take some time for us to really align the product line process to our channel strategy, closer to fall than it would be even to spring of next year.

Operator

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

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if you could provide a little bit of an update on where you are with the integration initiatives between the regions. In particular, I'd love to know where you are from a systems standpoint.

Andrew P. Mooney

Well, now that we have the global executive team in place, we're very far down the path of globalizing the key processes and functions. We have now -- footwear and apparel is now fully globalized in terms of product development. With the CMO and his team now in place, we are -- I would say, we're 3 to 6 months away from globalizing the marketing functions. The globalization of the supply chain is well advanced. So I would say that we're quite well down the path of globalization in terms of processes and totally down the path in terms of organizational structure. In terms of systems, we instituted SAP in North America last year with relatively minor hiccups. We instituted SAP in Europe last quarter with some significant impacts that impacted our Q3 results. Clearly, the rebound that we saw -- sorry, impacted the Q2 results. Clearly, the rebound that you saw in EMEA for Q3 is kind of evidence that we are over the hump of the major fixes that needed to be done on SAP. But as is the case with any SAP implementation of the scale, there are some minor glitches that we're still working through in Q3 in Europe. The last region to come on board that would essentially make us pretty close to being fully integrated from a systems point of view will be Asia Pacific sometime in the spring of next year.

Operator

We'll go next to Erinn Murphy with Piper Jaffray.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

I just wanted to follow up on an earlier question on Roxy and just the strength in the U.S. Could you maybe articulate a little bit more about where you're seeing some of that growth, if you're expanding space, is it new doors? And then from a product perspective, what seems to be working in the mix right now? And then, dovetailing to the kind of product or merchandise initiatives, as you kind of go deeper into the outdoor fitness piece of that line, can you just speak to any kind of early signs you're seeing about how that line's been tracking in the last couple of seasons, and kind of what are some of the longer-term opportunities there?

Andrew P. Mooney

Well, the Roxy product line in the Americas is selling fairly well across all the product categories. And it's largely focused -- continues to be focused largely on the core channel. We have expanded our distribution into sporting goods channels, with the addition of the Outdoor Fitness line. And that line is doing fairly well. What I'd say is, this is our second season of that product introduction, and we're learning a lot through each season. There are some aspects of it that are doing particularly well, neoprene pieces, for example, that are clearly closer to a surf DNA that are working really well with the consumer. Other component parts are not working quite so well. So we're incorporating all of that learning into the evolution of the line going forward. The Outdoor Fitness line hasn't even been introduced anywhere outside of the U.S. So we're looking forward to the introduction of Outdoor Fitness into the European retail theater in spring of '14. So we see a lot of growth in that segment to come. But the bulk of our growth right now is really kind of coming from our core channel, where the female consumer is responding very well to the breadth of the product offering that we have there, and online, of course.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

That's helpful. And then just again on the European landscape, I just want to make sure I understand, as you think about kind of the culling away of some of these smaller independents and more of the kind of Southern European exposed kind of regions, whether it's Italy, Spain, France, as you mentioned, how far into the process do you feel like we are in? I guess, the reason I asked, we've got other kind of retailers that have heavily exposure to that independent channel, again France and Italy, and they've been citing that for multiple -- 2 years now. And I'm just curious if you're seeing any kind of light at the end of the tunnel. Or do you feel like just because of the economic pressure there, there could be a kind of a continuation of just shuttering of doors in some of these more highly economic pressured regions?

Andrew P. Mooney

Well, there are 2 schools of thought in that. There's the -- 1 school of thought -- because many of our key players that we have in the management team in Europe have gone through these economic cycles before. And what they've experienced and relayed to me is that there is an inevitable contraction of the smaller undercapitalized mom-and-pop operations during any economic tightening. And then they inevitably reopen their doors when the economy starts to expand again. I'm a little less optimistic than they are because of the impact of -- largely of e-comm because I think e-comm in some ways is creating systemic pressure on those smaller independent retailers, which for us is actually somewhat of a blessing because it's actually less expensive for us to service e-comm retailers -- pure play e-comm retailers than it is to service remote onesie, twosies sub-specialty shops, particularly ones that by definition are kind of undercapitalized, have problems paying their bills, et cetera, et cetera. So I think as the economy rebounds, I think there will be some rebounding of the core base, but probably not at the level that it has done in past cycles. But I think the growth in e-comm is inexorable, both for our own branded channels and the e-comm arms of other larger, well-capitalized, multi-country players like El Corte Ingles or Decathlon and Intersport, as well as pure play e-comm retailers in Europe.

Operator

We'll go next to Eric Tracy with Janney Capital Markets.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

I guess, maybe to just a follow-up on that last point. Andy, as you think about the addressable market and some of the challenges from a top line perspective, is it -- how do you discern between be it the macro pressures and really category or channel-specific within the action sports sort of landscape? And I guess, what I'm getting at is, is it your view that it's a shrinking pie globally within this sort of subset? Or is it simply, you guys are being very proactive in rationalizing and getting the base right, and then ultimately, this pie grows again? Or is it the idea is to just simply take share from a shrinking pie?

Andrew P. Mooney

Well, it's a kind of a fundamental question, so I'll -- and it's one that we've been giving a lot of thought to. What we see happening is -- I wouldn't call it a -- it's not necessarily a contracting market; it's a transitioning market. I think what you're seeing is the, say, systemic pressure on some of the smaller independent accounts to -- by e-comm primarily. I would actually say e-comm is more of a systemic pressure on the kind of branded action sports, if we want to use that term, than fast fashion is. So -- and then, I think the second element of transition is that you're seeing -- as part of the systemic change, you're seeing that both consolidation within the sort of specialty channels into consolidation within the industry, fewer more professional players who are allocating their open-to-buy to fewer more professional brands. So I think I've mentioned on perhaps the last couple of calls, my viewpoint is that there will be consolidation both in the retail theater, but I think there'll also be consolidation in the branded theater. It's that the stronger, more professionally-run companies will continue to gain share in what has historically been a very fragmented industry. And then traditionally, what occurs when you're going through this type of phase is you'll end up with 4 to 5 major players who will all have significant footprints in the specialty channel, and we absolutely intend to be one of those players.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Okay. And I guess, within that sort of branded strategy, the evolution, I understand that there's some category extensions with Roxy. As we think about the Quik and DC, obviously, the heritage has been authentic products. As you think about the product development side, is it going to go back towards more technical, innovative offering within those lines or the core sort of state market? Or is it going to be a broadening to try to reach maybe a broader consumer?

Andrew P. Mooney

Well, these brands, even within the core channel, I think we all need to acknowledge that there's a tremendous amount of products being bought even within the core channel, as is the case with any core channel that are lifestyle oriented. We absolutely want to address the lifestyle component of our consumers on the product types the we offer. But there is really -- as I say, it's really a question of focusing down on what product types within which brand are really the ones that we can gain significant share on. We've kind of identified what those product types are within each of the bands. A classic example would be DC in apparel. We feel that the pants category for young men in apparel for DC is a category that we feel that we can make a lot of progress in. Similarly, shorts for Quiksilver. Quiksilver should be a very significant player in shorts beyond just boardshorts. There are any number of -- the shorts categories, that could go above and beyond, both within the core channel and beyond the core channel. So we've been very, very prescriptive about what product types that we really want to invest in, in the future as part of the brand rationalization process that we've been going through. The other trend that you're definitely seeing occurring in the marketplace, which again is why I said in my earlier remarks is that we see a kind of gradual transition to a higher percentage of the business being direct-to-consumer is that whenever we offer our brands kind of, to use the term in all their glory, we have a Boardriders retail concept in Europe, where we put all 3 brands together. It very much caters to both the core consumer and the lifestyle consumer. The results from those stores are very, very encouraging. And you're seeing a number of action sports players, like Vans would be a good case in point, continuing to invest in some form of branded retail. And we're definitely going to continue to do that wherever the economics make sense.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Okay. And then just last, turning to the SG&A side. Obviously, going very much according to plan, if not maybe ahead of schedule. How do we think about -- and even on the gross margin line, holding that up as well. So is there any chance that we see sort of a stepped up or reinvestment behind on the marketing side sort of allocating more dollars towards building the marketing to support the top line from those incremental saves, cost saves? Or should it really -- are we sort of inflected and really should be just a full kind of flow-through as we go forward?

Andrew P. Mooney

Well, as it relates to marketing, as was outlined in the profit improvement plan, we have been -- we have historically spent about 5% of revenues on demand creation, which is less than our -- less than industry peers. Industry peers would spend in the high single-digit, low double-digit realm. However, within the 5% that we have been spending, the lion's share of that has gone to athlete endorsement, events and headcount. So what we are -- what we have just made significant progress on over the last few months is a reallocation of the marketing mix to a downshift in athlete endorsements, a downshift in events, a downshift in headcounts. So we freed up within the current percentages significantly more demand creation dollars that we believe will have some potential to drive demand at a higher rate. But even within the model that we've developed, the $150 million profit improvement model, we have factored in taking up demand creation from 5% as a percentage of revenue to 8%, basically stair-stepping up a percent point per year. So that's why I consistently -- on the one hand, I consistently characterize the revenue growth as conservative, bearing in mind that we are planning to increase the fuel in the demand creation tank, along -- balanced by the cautionary -- continuing cautionary counsel that don't expect anything materially to happen on the revenue side until fall '14 at the earliest.

Operator

[Operator Instructions] We'll go next to Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

A few questions. First, Andy, I'm particularly interested in your comments in response to Taposh's question, where you said you believe you're getting your arms around gross margin. Can you explain a little bit more about what that means? What's behind that? What are some of the areas where you made progress that give you better controls there?

Andrew P. Mooney

Well, the issue on the gross margin side for our company has never been one of the delta between pricing and cost. The issue has been one of -- entirely of inventory management, so buying too much and then having to flush it through the clearance channel. So we are sailing much closer to the wind already, as evidenced by the quarterly reduction in our past seasons' inventory in terms of having too much inventory in our warehouse at any point in time. We believe that, that will be further -- we will see further improvements in that over the course of the profit improvement plan cycle through 2016 by reducing SKUs by 40%, reducing our factory base, putting in very effective global supply chain management processes. We believe that we'll be able to control our inventory buying process, demand planning process in a much higher level on a global basis than we were able to do in a regional basis. And philosophically, we want to sail closer to the vest. We want to manage capital alongside managing our gross margins.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Great. Rich, perhaps a good follow-up question to that, with the SKU rationalization agenda efforts underway to consolidate the supply chain, can we expect inventories to be a source of cash in the coming quarters, or do you see that further on the horizon?

Richard J. Shields

I won't get into quarter-by-quarter because I think that, as Andy mentioned, turnarounds have a certain choppiness to them. But over time, I do think that we've got the opportunity to bring the aggregate level of inventory down. We've got 143 days in inventory at the end of Q3. I think that, that's structurally too high. So both -- I think there's opportunities for us that we'll be working on both in reducing the aggregate amount of inventory and improving inventory turnover, as well as making sure that we continue to make progress on the quality of inventory measured by the percent of our aggregate stock that's prior seasons' inventory.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. A question on the DC business. I think you very adequately foreshadowed challenges for DC footwear in the U.S. Is the DC apparel business seeing similar trends? What's going on there? Is there a disconnect in what you're seeing in apparel from the footwear?

Richard J. Shields

Yes, Jim, there is. The -- when I think about the DC product line, the accessories business continues to be robust, when I think about hats, when I think about wallets and so forth, hoodies. And so, the apparel and accessories line or categories within DC is showing much better performance than the categories that we're concerned about that are within the footwear line.

Operator

And there are no further phone questions in the queue at this time. I'd like to turn the conference back over to the speakers for any additional or closing remarks.

Robert Jaffe

That concludes our call today. On behalf of everyone here at Quiksilver, thank you for participating, and we look forward to providing our fiscal 2013 fourth quarter results in December. Thanks, everybody.

Andrew P. Mooney

Thank you.

Operator

Thank you. That does conclude our conference. You may now disconnect.

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