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Executives

Joseph Scirocco - Chief Operating Officer, Chief Financial Officer and Executive Vice President

Bruce Thomas - Vice President of Investor Relations

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

Steve Tully - President, Women's Division

Analysts

William Reuter - BofA Merrill Lynch

Mili Seoni - JPMorgan

Taposh Bari - Jefferies & Company, Inc.

Corbin Weyer

Sarkis Sherbetchyan - B. Riley & Co.

Christian Buss - ThinkEquity LLC

Sean Naughton - Piper Jaffray Companies

Jennifer Black - Jennifer Black & Associates

Diana Katz - Lazard Capital

Quiksilver (ZQK) Q1 2011 Earnings Call March 10, 2011 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. [Operator Instructions] I would now like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations, who will chair this afternoon's call. Please go ahead, sir.

Bruce Thomas

Thanks, operator. Good afternoon, everyone, and welcome to the Quiksilver First Quarter Fiscal 2011 Earnings Conference Call. Our speakers today are Bob McKnight, our Chairman, President and Chief Executive Officer; and Joe Scirocco, our Chief Financial and Operating Officer.

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

All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.quiksilverinc.com.

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

Robert McKnight

Thanks, Bruce. Good afternoon, everyone, and thanks for joining us for our first quarter conference call. I want to start by saying that I've traveled to Quiksilver facilities in Europe, Australasia and across the U.S. in the 11 weeks since our last earnings call, and I'm pleased to report that our product looks great, our marketing efforts are very evident and our employees are particularly energized and engaged. They have come to appreciate our expectations for improved performance as a company, and they continue to strive for higher levels of productivity, and the spirit of Quiksilver is evident in their enthusiasm and passion. It's a pleasure to see competitiveness in our people around the globe. It's a mentality that we try to install in all we do, and it's evident in our financial performance that Quiksilver's committed to improving our performance all around the world.

As such, I'm very pleased to report solid first quarter results that were in all aspects better than we expected when the quarter began. Revenues of $426 million in the first quarter exceeded our plan, and were up in constant currency when compared to the first quarter of 2010. This marks the first time in the last nine quarters that we've grown revenues and constant currency and demonstrates that previous revenue declines are abating.

Gross profit was higher this quarter than it was a year ago, demonstrating that our business is performing better. Gross margin expanded 110 basis points to a Q1 record 52.4% of revenues as we benefited from improvements in our U.S. retail stores and lower levels of discounting in the wholesale channel.

As we planned, pro forma adjusted EBITDA was $28 million in Q1 as we invested in new business initiatives such as our new Quiksilver Girls line, ahead of revenues generation. This result keeps us on track to deliver full year pro forma adjusted EBITDA roughly in line with fiscal 2010. And finally, our net debt at January 31 was $541 million, representing 2.7x pro forma adjusted EBITDA. That's down $237 million over the last 12 months and an improvement on more than one and a half turns of pro forma adjusted EBITDA, reflecting the enormous progress we've made in improving our balance sheet.

Taken together, this solid first quarter performance resulted from many factors. First and most importantly, we continued to develop and deliver innovative, fantastic quality products. Second, we're successfully reaching our consumer base with marketing campaigns that are creative and impactful. Third, we're listening to our customers, taking good care of them and involving them in the process of planning and designing our product ranges. And finally, we've established a standard business discipline of working hard and working smart, leading to very high levels of productivity.

We're seeing clear signs of improvement in many areas of our business and believe we are best positioned to capitalize on growth opportunities in our many markets around the world. It's great to have three strong global action sports brands.

In the Americas, revenues were up compared to the same quarter last year, and the work we've done to improve our U.S. retail store operations over the past 18 months is bearing fruit. The progress we've made is reflected by our solid double-digit positive comps in the quarter. And in wholesale, our outerwear and cold weather apparel and accessories were sold out for the season, and our Canadian business is strong for all three of our brands. We also continue to see strong growth in Latin America. Looking forward, when we finalize our order books for next fall, we expect to see growth in each of our brands compared to last year.

In Europe, revenues were up in constant currency despite the fact that the retail environment has been a challenge, particularly due to the adverse weather conditions this winter. With regard to a few of our important markets in the region, our business in France, which is our largest European market, was up over last year. Germany, Austria and Switzerland together have now grown for us to over EUR 70 million in annual revenues, which is now our third-largest trading area in Europe with more upside to come. Quiksilver, Roxy and DC are all growing strongly in those countries. Our terrific business in the Czech Republic continues to operate to plan, and our business in Russia is doing extremely well in both wholesale and retail, and there's good growth in the order book there.

Taken as a whole, we're pleased to note that in looking ahead, our winter order books encompassing all of Europe are up over last year for all three of our brands. I'd also like to add that the tremendous success of our flagship store in Capbreton, France has inspired us to replicate the concept store idea, so we have now locked in on a few new select retail locations: One in Paris in Bursing [ph], one in Chamonix in the French Alps to support our mountain and cold-weather strategy, and another near the epic surf breaks of Ericeira in Portugal. And by the way, we expect to open a similar concept store in Venice Beach, California before summer.

Our business in the Asia-Pacific region performed in line with our plan in Q1 despite the fact that retail has been tough there, particularly in Australia and New Zealand. Recent extreme weather conditions have not made it any easier on the already challenging environment, but we are maintaining clean inventories throughout the region. Additionally, our business in Indonesia, China, Taiwan and South Korea are all doing well, while our business in Japan is tough, and we remain on plan also in that market.

One side note, our Quiksilver Pro Australia's surf contest over the past two weeks was carried on live television by Australia's Channel One HD, providing us with exceptional coverage and enormous exposure for our brands across the entire Australian continent.

Let me now take a brief moment to highlight our brands. I'll start with Quiksilver, which as you know, is by far and away the biggest and most respected action sports lifestyle brand in the world. Quiksilver's global brand revenues grew in Q1 on a constant currency basis. The fall order book for the Quiksilver brand in the Americas and the corresponding fall-winter book in Europe are both up over last year, supporting our plan to grow revenues in the second half of the fiscal year. From a product perspective, Quiksilver's broad assortment of apparel, footwear and accessories continues to set the standard for the action sports industry. First quarter sales benefited from very strong demand for our winter sports and technical snowboard apparel. As retailers transition to warmer weather assortments, it's clear that our innovative technical board shorts, walk shorts, tops and items from our Waterman's collection will lead the way.

Regarding our new Girls line under the Quiksilver label, we have now begun spring deliveries of our Quiksilver Juniors line, and the early buzz is very encouraging. The new line was designed to appeal to the 18- to 24-year-old girl with a coastal mindset and independent spirit. Priced in the mid-tier range of the Juniors market, the new collection is now available at select surf specialty retailers, Quiksilver stores and online retailers.

Let's turn now to Roxy, the largest, most respected and most recognized girls' action sports brand in the world by a mile. The Roxy business has been building momentum recently by leveraging its size and its highly diverse range of product. At more than $525 million in annual revenues, Roxy is big enough to generate strong growth in some categories to make up for those portions of the business that may be more challenged. For example, the Snow business and casual footwear have been very good for Roxy, and the beginning of the spring season has already brought about strong demand for Roxy's iconic seasonal product categories like beach pants, board shorts, sandals and canvas bags.

Looking ahead, I am pleased to report that the Roxy business is stabilizing, and in fact, the fall order book in the Americas and the fall-winter order book in Europe have both come in higher than last year. These are solid indicators that Roxy should benefit from a recovery in the female side of the action sports apparel market. With its core in board shorts, Roxy's return to its roots has been clearly reflected in its spring and summer 2011 offerings that have restored the styling and color of our surf authenticity and iconic Roxy heritage. Retailers have told us that Roxy's strong spring collection has played an important role in giving them confidence in their larger fall orders.

Turning now to our powerful and incredibly popular brand, DC. DC's growth in the first quarter was better than expected, and we are very pleased with the strong forward orders in each of the regions around the world. DC has done a great job of positioning the brand for expansion in markets adjacent to their core skate heritage. However, it's important to understand that DC is dedicated to being the most sought-after skate-driven action sports brand in the world. DC's ability to connect with consumer is vital to this initiative, and the brand's digital marketing efforts were a big focus in first quarter. DC's Facebook Likes increased by 50% between November and January, and DC remains the number one action sports brand on Facebook. DC is also the number one action sports brand on YouTube with more subscribers than ESPN.

In December, DC and Ken Block's Gymkhana precision driving franchise continued to expand its reach and influence when the ultra-popular Gymkhana 3 video was recognized on YouTube's official list of the top 10 videos of 2010, and on the list of top viral videos of 2010 by adage. To date, the Gymkhana franchise of videos has been seen by more than 90 million people around the world.

In December, DC became the official and exclusive shoe sponsor of the very popular Monster Energy AMA Supercross series. DC has been a supporter of the motocross industry for some time and supports several of the sports-leading athletes, including the legendary Jeremy McGrath. This new partnership not only shows our support in helping the sport to continue to grow, but it's also a great chance for DC to interact with the most loyal and enthusiastic consumers in action sports. DC's participation includes an interactive booth in the pits where autograph signings are held, as well as commercials and branding in the arena. The popularity of the sport has never been stronger as Supercross attendance is up 15% just this year.

Turning now to our athletes. A substantial contributor to our success and our improved financial performance is our stable of athletes that surf, skate, snowboard, drive, paddle, hike and otherwise ride in the name of our brands. The athletes we sponsor not only embody our involvement in the action sports in which they excel, but they also attract a great deal of attention to our brands, and most importantly, they move product. We have assembled an amazing array of athletes who are particularly influential within their sports, and we couldn't be happier that many of these hugely popular athletes are actively engaged in product input and design, and they are working on their own style media in our marketing. They first joined our best-in-class teams because they see how we operate. They know we involve our riders in the specification and design of our technical products, and they know that our teams are all about family.

I'd now like to highlight a few of these athletes who have recently made news. I'll begin with the legendary Kelly Slater. At the tender age of 39, he's kicked off yet another season on the ASP Tour with a victory at the just-concluded Quiksilver Pro in Australia. Kelly continues to break his own records, becoming the first person to win at Snapper Rocks three times. Kelly continues to perform at the highest level the sport has ever seen and sets a wonderful example for our young surfers with his dedication to his craft and his love for the ocean. Kelly continues to be the perfect role model and spokesperson for Quiksilver and the sport of surfing.

I'd like to add that we recently added also Tiago Pires to our global surf team. Tiago made it to the semifinal round of the Quik Pro, only losing to the eventual champion, Kelly, and as a hero in his native Portugal, the first surfer ever to compete on the ASP Tour from his country. We expect that multilingual Tiago will really be instrumental in helping us to grow our business in Portugal as well as all over Europe.

We are delighted to have signed four-time defending ASP Women's World's surfing champion, Stephanie Gilmore. A popular native of Australia with a huge global following, Steph has joined the Quiksilver surf team and has become a brand ambassador representing Quiksilver's new line for women. Her addition coincides with the recent debut of Quiksilver's new global Girls line, targeting 18- to 24-year-old young females, and she is an absolute perfect fit as a spokesperson and a muse for this great new line.

We're also very happy to have added Chris Cole to DC's skate team. Chris is truly one of the best and most influential skaters of his generation. Chris is only the second skater to become Thrasher Magazine's Skater of the Year twice after DC's Danny Way, and he was honored with TransWorld SKATEboarding Magazine's "Readers Choice Award" in 2009. And in January, DC pro snowboarder Torstein Horgmo made Winter X Games history when he became the first snowboarder to land a triple backflip in competition. Torstein, whose performance won gold in the Snowboarding Big Air event, truly embodies what it means to be a DC athlete, pushing the progression of his sport through hard work, determination and drive to be at the top of his game. Torstein had an incredible season taking home the TransWorld SNOWboarding "Readers Choice Award" at the 12th Annual reader's (sic) [Riders'] [indiscernible] Poll Awards, and he also won the Winter Dew Tour Cup in Slopestyle.

And finally, I and the whole world of surfing are thrilled that Quiksilver will be bringing the sport of surfing and our entire stable of action sports influence to New York City this coming summer. In January, Quiksilver and ASP, the Association of Surfing Professionals, announced that Quiksilver Pro New York, set to take place on Long Island's Long Beach from September 4 through the 15th. The Quiksilver Pro New York will be the sixth stop on the ASP 2011 World Tour and the first-ever World Championship Tour stop on the East Coast of the United States. The surf contest will coincide with a series of events conducted by Quiksilver Roxy and DC in and around New York metro area that will comprise a major brand building effort as we host enthusiasts of surf, skate, art, fashion and music, who will gather in New York as summer comes to a close. We have more to say about this event and the other activities that will surround it in the coming months.

Just as our athletes are performing at higher and higher levels and the events we sponsor are attracting more and more attention, it's evident from the improvement in our financial results and the momentum in our business that we are now operating at a higher level.

To provide more color on our progress, Joe will now take you through our first quarter financial details.

Joseph Scirocco

Thanks, Bob. Good afternoon, everybody. As reported, consolidated net revenues at $426 million in the first quarter were better than the outlook we'd provided a quarter ago and were up modestly to last year in constant currency, driven by higher-than-expected sales in the Americas and Europe.

In the Americas, revenues were up 4% in the first quarter compared to last year, fueled by mid-teens growth in our Retail business. We were particularly encouraged by the performance of our full-price stores after having made a number of merchandising improvements over the past few quarters. Wholesale revenues in the Americas were a little ahead of plan and essentially unchanged from last year. European revenues were also higher than our prior expectations and were up modestly in constant currency compared to last year. DC had a terrific quarter in Europe as we continued the momentum of expanding the brands overseas. Our Wholesale business outpaced our Retail business in Europe during the quarter as unfavorable weather conditions during peak shopping periods disrupted typical holiday shopping patterns for some consumers, and in fact caused us to close some stores in the days leading up to Christmas.

As an aside, I’d like to add that in December, we conducted our debt road show in Europe, together with the president and the CFO of our European region. Even in the midst of a volatile bond market, investors really understood the power of our brands, the merits of our business plan and the strength of our European business with its company leading margin profile and solid cash flows.

Asia-Pacific revenues as reported, were approximately the same as last year, but were down about 8% in constant currency primarily due to weakness through the region, reflecting the same set of challenging circumstances reported recently by our peers and competitors.

We expanded consolidated gross margins by 110 basis points to 52.4% for the quarter which was a bit better than we expected. The increase was fueled by a very good performance in our U.S. retail stores where gross margins expanded significantly and our own retail sales comprised a higher percentage of the overall mix of sales.

Wholesale margins were also a bit stronger. Because of these factors, our America’s business delivered the largest improvement in margins, 290 basis points, while Europe’s margin also expanded in the quarter to a company best 58.9% of revenues.

Overall, pro forma SG&A expense excluding special charges were $213 million in the first quarter up approximately $13 million from last year, largely resulting from higher spending on product development and marketing for new initiatives such as our Quicksilver Girl’s line among others, as well as higher levels of variable expense.

As we mentioned during our call in December, we incurred pre-tax special charges of approximately $13 million in the quarter which included roughly $15 million in deferred debt issuance write offs, partially offset by a small gain on leases. The deferred debt issuance write offs were non-cash, non-operating charges that had no affect on our operations or financial covenants.

We continue to focus our attention on EBITA as a key measure of our performance and we generated first quarter pro forma adjusted EBITA of $28 million or about 7% of sales.

This level of profitability was in line with our expectations for Q1, which, as most of you know, is a seasonably low quarter for us as holiday orders are shipped before our fiscal year ends on October 31. Pro forma interest expense, which excludes the write-down of debt issuance costs, was $14 million in the quarter, down from $22 million last year. After interest and taxes, pro forma consolidated loss from continuing operations for the quarter was $8 million or $0.05 a share compared to a pro forma loss of $2 million or $0.02 per share in the same quarter a year ago.

I'd now like to turn your attention to the balance sheet for a few moments and in particular, the additional dramatic improvement in our capital structure. Receivables at $288 million are 11% lower than for the same period last year. On an overall basis, DSOs decreased by six days to 58 this year compared to 64 days in the first quarter a year ago. Additionally, inventory at quarter end was $310 million, up about 3% as reported, but essentially at the same level as last year in constant currency terms. CapEx was $18 million in the quarter, up $8 million compared to a year ago, with the increase driven primarily by spending related to our ERP system implementation.

And as Bob mentioned previously, in early December, we completed the sale of EUR 200 million of 8 7/8% senior notes due in 2017. We used the proceeds of the unsecured notes to repay approximately EUR 190 million of existing secured European term loans. Although leverage-neutral, this transaction extended our debt maturities, eliminated certain collateral obligations and relaxed the regional [indiscernible] (25:32) fencing that had restricted our ability to transfer cash among subsidiaries. We ended the quarter with approximately $541 million of net debt. That's a 30% reduction from $778 million a year ago. Cash on hand at the end of the quarter was $177 million. As a result of our significant progress in improving our capital structure this year, the ratio of our net debt to pro forma adjusted EBITDA for the 12 months ending January 31 was 2.7x compared to 4.4x one year ago.

Now let's turn our attention to our current outlook for the remainder of the year. For the full fiscal year 2011, we continue to expect slight growth in sales compared to last year beginning in the second half of the year. And as Bob said, we continue to believe we can achieve pro forma adjusted EBITDA, roughly in line with that of 2010. We are maintaining our pro forma interest expense estimate for the year at approximately $58 million, of which, this year's cash outlay is only expected to be $45 million to $50 million, and we currently estimate that our pro forma tax provision for the year will be just south of $50 million, of which, only $10 million to $15 million is expected to be in cash. With that, I'll turn the call back over to Bob for closing remarks.

Robert McKnight

Thanks, Joe. In summary, we're pleased with our solid results in the first quarter, and we're very excited to be rolling out an entire series of events in conjunction with the inaugural Quiksilver Pro New York contest in September. We are certain that these high-profile events conducted in the media capital of the world will generate fantastic buzz around our great brands Quiksilver, Roxy and DC. And as you've heard today, our business is in really good shape and we're well positioned for the future and markets all over the world. As we work our way through this transition year, we continue to plan for modest growth in the second half and acceleration of growth thereafter, which we now believe will be next year.

For the longer-term in the years to come, we expect to grow revenues annually in the mid- to high-single digit range on a percentage basis, driving dramatic improvement to our profitability and furthering our leadership position as the number one action sports lifestyle company in the world.

Thanks again for participating in our call this afternoon. Operator, that concludes our prepared comments. We're now ready for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Taposh Bari with Jefferies.

Taposh Bari - Jefferies & Company, Inc.

Quick question, I guess, for Bob on the international kind of opportunity. In the last quarter, you guys spoke about opportunity in Brazil, emerging markets, Eastern Europe. So can you just give us a sense of how big -- and also China as well, so can you just give us an idea how big those markets are for you today maybe as a percentage of sales and where you see those businesses going in the context of your five-year plan?

Robert McKnight

Okay, so -- well we do have fantastic emerging businesses in those markets you spoke of, China, as you know, is a joint venture, and we're doing well there and expecting good growth in the future. Joe's going to look up the percentage of business in the second here, but we -- and we have incubated a new group in the whole Latin America regions beginning about five years ago, which is really bearing a lot of fruit now, particularly in Brazil and Mexico in spite of drug war coming on. It’s actually doing really well also. So and then as we said, I visited Europe not so long ago, and one of the places I spent some time in was Russia. And our business in Russia is just amazing. We have a group of about 50 people that run the business over there. We're somewhere in the $20 million to $30 million range in revenues, very profitable and growing all the time through a combination of wholesale and retail business. So in those markets, we are somewhere in the, let's say, the $100 million to $120 million range right now, all of them combined, and we expect them to at least double in the next five years.

Taposh Bari - Jefferies & Company, Inc.

And then I just wanted to ask you about the East Coast initiatives that you guys are taking on. It sounds like some of your competitors are kind of taking on a similar approach. I'm just trying to figure out -- obviously, the East Coast has been an underserved market for obvious reasons, but I’m just trying to figure out kind of why now? I'm trying to get a better sense of the timing.

Robert McKnight

Well, we have our global franchises of events and sort of like three of them right now. We have the Quiksilver Pro in Australia, which is the first contest of the ASP season that just completed. Kelly Slater won. We have our Quiksilver Pro in Europe in September in Hossegor capital area, which is great for all of Europe. And we have the Eddie Aikau contest in Europe, which is a big wave thing in Hawaii, birth place of surfing, all that. We really felt we wanted to come in and do something in mainland America. And there are many, many events on the West Coast and no one has really focused on the East Coast. And we do more business on the East Coast than we do on the West Coast each year. It really is a center of surfing beach activity, close to a lot of metropolitan cities and there actually is really good surf in New York on Long Island. So we looked at the best time of the year to do that for surf. It coincides with Labor Day, end of summer. New York is the biggest media platform in the world. Therefore, we can garner a whole bunch of co-sponsors and partners in the deal. We can leverage our brands and have people come in and do augmented activities and events alongside of it. We're now finding out what a strong surf core culture there really is in New York. People are coming out of the wood work wanting to help, be part of it, participate. We're even going to have a little Wall Street surf contest, believe it or not. So I mean, it's really been fun for us in the planning and figuring out all the different events and how the whole two weeks are going to roll out, but we're really super excited.

Taposh Bari - Jefferies & Company, Inc.

And then just one final question for Joe. It sounds like, obviously, the quarter came in better than you were looking. It sounds like you're pretty confident in your fall order book. Comps look like they're pretty healthy in retail. So I’m just trying to understand why not increase your full year revenue guidance. Why only just reiterate here? Is it conservatism on your part or is there something else that we should be thinking about?

Joseph Scirocco

I mean, I think we all know the environment we're dealing in and the numbers are -- as we said, the fall order books as they've come in do represent return to growth in each of the brands in Europe and in the U.S., but we still view 2011 as a transition year. The growth initiatives that we're investing in, and we're investing pretty heavily, are expected to pay dividends in 2012 and going forward. So we still view 2011 as a transition year and are planning to continue to invest in these future initiatives.

Operator

And for our next question, we'll go to Todd Slater with Lazard Capital Markets.

Diana Katz - Lazard Capital

This is Diana Katz for Todd Slater. I was wondering if you could go into Roxy in a little more depth and distress how Roxy sportswear is now trending as well as some of the competitive -- what's going on in the fast-fashion markets.

Robert McKnight

Okay, well, obviously, the fast fashion continues, and it's not only here in America now, it's kind of all over. They have different players in the various markets. But definitely, with world economies having a tough time, girls in particular are buying more stuff for less money, just a product of having less available capital. And of course, all the sort of branded business, in the action sports business at least, has suffered from it. And Roxy being the biggest has probably suffered the most. But we see it now slowly but surely is sort of turning the course and that girls are getting kind of tired of this cheap quality in the fast fashion. Although Forever 21, H&M, Zara, all these people continue to do their thing. Roxy is now, as we said, the down slide has stopped and we see very strong bookings going into next fall and winter both here and in Europe, so really excited about that. And I think it's a process of not only maybe some of these girls getting tired of the quality in fast fashion, but also I just think we worked really hard on the presentations we have now at retail and Roxy. The goods are a lot more colorful. They're more very much more California-inspired. We're not trying to be sexy and all this sort of stuff. We're just going to be what it is for the young juniors customer. And those kids are on the floor now and they're performing already at retail, and the retailers are really excited about it and it’s showing up in the booking. So like I said, the spring line was well received. Americas business is on plan and the fall and holiday order books are positive both in the Americas and in Europe. So we think we're doing a good job there.

Diana Katz - Lazard Capital

And I was wondering in Europe, if you could talk about kind of your quarter-to-date retail results as the weather improved, have you seen a strengthen in the business there? And quarter-to-date in the Americas, has the strength that you're seeing in comps been maintained?

Joseph Scirocco

Yes, sure. Europe has actually gotten a little better compared to Q4, still challenging at retail and certain markets. And in the U.S., where we were up in kind of the mid-teens in the fourth quarter, with January being up like close to 30% actually and with healthy gross margins, we've seen that back off a little bit in February, but not very much. So it's still going well.

Diana Katz - Lazard Capital

And then finally, given the 110 bps of gross margin expansion in the quarter, can you discuss how you see gross margins progressing throughout the year? And do you now see more -- the gross margins may be stronger this year than you originally planned? Do you see more SG&A growth with the addition of your new concept stores?

Joseph Scirocco

Sure. So it's important to understand why gross margin overachieved in the quarter. And a lot of it came out of the retail sales improvement in the U.S. market. We have done a number of things to improve merchandising in the stores, although we have fewer stores and we sustained higher gross margins at retail and retail comprised a higher percentage of our sales in the Americas region. So that's what contributed. As we look at the full year, we have most of the year booked, I mean, we're booked through fall on the Wholesale business and we understand, we think, what's happening there. The rest is kind of up to the consumer as to how that plays out. For the full fiscal year, we continue to think that gross margin will be comparable to last year, and we'll see how things shake out towards the back half as we buy our winter goods in a matter of a month or so, and we'll see how it goes.

Operator

And our next question will come from Sean Naughton with Piper Jaffray.

Sean Naughton - Piper Jaffray Companies

Joe, I just have a quick question. On the results for the first quarter versus your guidance and given the fact that the top line was a little bit better, I would've expected a little bit better flow-through, given the revenues were about 340 basis points better than your guide. Understand you are investing in some new initiatives, but just wondering what changed potentially on the SG&A.

Joseph Scirocco

I mean, you're correct. The investments are coming, and we're proud of them with Quiksilver Girls and the mountain cold weather initiatives, site development on e-commerce and Roxy marketing, a number of things like that. I guess what was not anticipated but what we did record in the quarter or incur in the quarter were a couple of provisions on stores that we closed that we did not take as special charges we absorbed into the quarter. We had some severance charges and a variety of other accrued expenses. But yes, so our SG&A was a little higher than we had expected it to be.

Sean Naughton - Piper Jaffray Companies

And then secondly, on the Snow business, it sounds like it continues to be very strong. I know Europe is a lot larger than the Americas business. Is there anything that you're taking now from learnings that you had in the European business that you can apply to help the Americas business in 2011?

Robert McKnight

Yes, I think we've learned a lot obviously, and our business isn't as big as we would like it to be in the Americas compared to Europe. We have a design sort of hub in a laboratory over in Europe and they do from very technical all the way down to not-so-technical. We're learning more about how to cut garments for fits in Europe versus fits in America and Asia-Pacific. So all that comes into play. But we had a -- all in all, we had a great season in Europe because there was lots of cold weather there and lots of snow at a higher volume level than in the Americas, but the product we put out in America sold almost to the piece [ph]. So our inventories are clean. Retailers came to FIA and [ph] all that in a very good mood and they bought it up, and we have great increases for our Quiksilver and Roxy and DC for winter next year, and our Mervin business is off the chart. So we feel we're in a good place. We're learning a lot and we have this cold weather initiative, which we'll be talking to you a lot more about in the next few quarters, but we're really excited about that, which is really to bring sort of not-so-technical outerwear into the cold weather climate cities of America and across Europe. So we're really excited about that. And what did work really well last year and therefore a big push going into this year was the athletic -- athlete signature product in apparel and boots, in the boards. All that stuff works really, really well with our best-of-breed [ph] athletes. So that's working great.

Sean Naughton - Piper Jaffray Companies

Got it. And then just lastly, in terms of sourcing costs, obviously, the topic of the day for most people right now is, have you guys done any testing with price increases on your products? And can you share anything that you've learned about that on how elastic you think your prices are?

Joseph Scirocco

Well, we've done more than testing. I mean, we've raised some prices selectively as and where we could. The components of that vary widely by brand, category and region of the globe, but I think what we found is that it's normal and customary today. Everyone else is doing it. A number of our retailers have vertically integrated retail business, and they understand their own costs, so it's pretty much out there.

Operator

And our next question comes from Jeff Van Sinderin with B. Riley & Co.

Sarkis Sherbetchyan - B. Riley & Co.

This is Sarkis filling in for Jeff. Can you give us some more color on what you're seeing and hearing on denim sales and how you're seeing non-denim evolve, and maybe how we should think about your plans for denim versus non-denim bottoms for back-to-school?

Steve Tully

Yes. This is Steve Tully. The Denim business is a fairly small business for us, and we've heard about the challenges mostly for the holiday season in both genders in the denim cycling out there. So I would simply say it's a small business for us, but having said that, part of the push for Roxy's fall line was a denim offering, sort of a resurgence of the denim business for Roxy and we've had pretty good acceptance on that, but not a huge portion of our business. On the male side of the business, we've morphed into khakis and cords and other areas in long bottoms. Again, not a huge business, but a growing business for us on the male side.

Sarkis Sherbetchyan - B. Riley & Co.

And maybe can you elaborate more on the trends that you're seeing at DC and how you expect that business to evolve over the next couple of quarters?

Joseph Scirocco

Well, I mean, I think there are a number of trends around the globe. I’ll let Bob or Steve maybe speak to product. But essentially, remember that this was exclusively a Footwear business, almost exclusively a Footwear business when we started out. Our parallel offering in the U.S. now is up to probably a third or more of the line, and the same is true in Europe. Most of our growth in the future is planned out in outside the U.S. as far as new geographies. We see tremendous opportunities on the continents of Asia and also in Europe. And in America, it's really product categories and expansion. It's continuation of the apparel. It's getting into juniors offerings for DC, which we’ve focused so much on the men's side thus far.

Robert McKnight

Yes. I would just add to what Joe is saying, we've seen a resurgence in the technical footwear with DC and price points of $90 and $100 and above, and that business is very good. The casual footwear business for DC is also very good, selling girls' shoes in DC. And then in apparel, it's really more the iconic product categories that you would think of in DC, and those are, I think, like t-shirts and caps and fleece and those kinds of things. So that business is very good. And all in all, if you look at the things that Steve and Joe just mentioned with product extensions and apparel and geographical expansion, I mean, we've got in our plan that we think we can double the business in the next five years. So it's a growth vehicle for the company for sure.

Sarkis Sherbetchyan - B. Riley & Co.

And finally, with respect to growth accelerating in the second half of the year, how should we think about inventories for the second half as they relate to your in-season, non-free book business?

Joseph Scirocco

We think we're in good shape now on inventories. If you're looking to model as you get towards year end, what I would say is plan for maybe a slight increase, a couple of percent increase in inventory, which really just reflects conditions in the sourcing world and reflects some opportunistic growth for 2012 to some areas in which we need to build inventories to support future growth.

Operator

Our next question comes from Christian Buss from ThinkEquity.

Christian Buss - ThinkEquity LLC

I'm wondering if you could provide a little bit more color on the SG&A spending initiatives that you have underway. That was a bigger number than I was expecting, frankly. And I'd love to get some clarity on where the spend was?

Joseph Scirocco

Okay. Well, as we announced, we had planned to spend increased dollars on a number of initiatives that we have launched over the past couple of quarters, but for which we have no revenue to recognize at this point in time. For example, Quiksilver Girls, we've had now three seasons forward, developed and marketed, samples produced, all that kind of thing. Bob talked about the mountain and cold weather initiative and we have some investment in headcount and then people to get that done. On the e-commerce side, we have a very ambitious plan there over the next five years. We think this is one of the ways we can leverage our expense base, leverage our cost. And we think that can be 10% of our business longer term. So in front of that, we're investing in a new front end, basically, everything but fulfillment to give us kind of flexibility in the look and feel of the websites. We're investing in a new marketing website to better align it with the store platform. We have expenses going out on Roxy marketing, which were, I think, beneficial in terms of results for the spring season. We didn't talk about it, but there are a couple of incubator brands that we are investing in people and product development and that kind of thing. And then we had some unanticipated expenses that I called on earlier or spoke about earlier such as lease provisions. We took the opportunity to close a couple of stores in the U.K. and took charges for things like that and just a variety of other accrued expenses that were maybe a little higher than we had planned.

Christian Buss - ThinkEquity LLC

That’s very helpful. And then with respect to bookings, are you seeing a change in the cadence of bookings coming in? Can you talk to me a little bit more about how you are thinking about the expectation for bookings going forward?

Joseph Scirocco

Well, yes, I think there's some of that. But at the same time, we and our competitors, of course, are having to place buys earlier because there's pressure all the way through the chain. So we too are going to the market a little sooner to order goods, and that has some impact on our business going the opposite way. So yes, the trend you referred to is real, but at the same time, we have to buy goods earlier.

Operator

Our next question comes from William Reuter with Bank of America.

William Reuter - BofA Merrill Lynch

In your kind of broad guidance for flat gross margins for the year, I'm wondering if you can talk at all about what you're seeing for input cost inflation in terms of what the magnitude of that could be maybe kind of in the middle of the year and what you're expecting in the back half of the year, and I guess, if you could do that either just for the stuff that's more affected by cotton or what that might be overall given that cotton's kind of a medium size part of the business.

Joseph Scirocco

Again, Bill, probably the best we can do is to answer it somewhat broadly for you. I think we would say in general as we look to the second half of the year, which is really what we're buying and trading in now, we're seeing cost increases probably in the range of 5% to 15% depending on category. I think overall, probably 5% to 10% is closer to an average.

William Reuter - BofA Merrill Lynch

Okay, that’s useful. And I guess as you’ve started to have conversations with retailers, is it kind of your goal to try and push through the majority of those? And I guess, if you could talk about how your retail partners may have pushed back or how those discussions may have gone?

Joseph Scirocco

I think they went kind of as we expected around the globe different in different markets depending on conditions and depending on categories. In some categories, we felt we had the opportunity to increase prices more than in others, and so we took advantage of that. The estimates are -- the result of all of this is kind of in our numbers. And as I said, it's in there through roughly the fall season for the Americas, which means probably the first nine and a half months of the year. But, the real unknown is not so much on the cost side. It really is the consumer. That's the uncertainty.

William Reuter - BofA Merrill Lynch

And then, it sounds like your retail performance in the Americas was substantially better than it has been or I guess has shown improvement. Did you mention what the same-store sales of those stores was during the quarter?

Joseph Scirocco

Yes. In the Americas, it was kind of a mid-teens increase overall.

William Reuter - BofA Merrill Lynch

Okay. And then lastly, have you ever provided any fiscal year '11 CapEx guidance?

Joseph Scirocco

I think we did, but I would say for modeling purposes somewhere in the range of $75 million to $80 million. That number is a bit higher than it is typically for us, but it really has to do with some configuration changes in our campus facilities both in the U.S. and in Europe. And in addition, we are, as you might know, investing in a number of systems upgrade including an ERP system.

Operator

[Operator Instructions] Our next question comes from Corbin Weyer with Robert W. Baird & Company.

Corbin Weyer

This is Corbin calling in for Mitch Kummetz. First of all, I was hoping you could maybe speak to more specifically the brand performance for the quarter? I know you talked about, I believe, it was Quiksilver that was up constant currency maybe. I'm sorry if I missed it, and maybe talk specifically to Roxy and DC?

Robert McKnight

Sorry, say that again.

Corbin Weyer

If you could talk maybe the brand performance for Roxy and DC for the quarter. I know you guys touched upon Quiksilver being up in constant currency.

Joseph Scirocco

Yes, so we tend to not be very specific about brands within the quarter just because the timing of shipping and other things can really skew the numbers. But Quiksilver, just thinking about this all in constant currency, Quiksilver was flat year-on-year. DC was up kind of in the range of 15% to 20% and Roxy brand was down in kind of a 10% to 15% range.

Corbin Weyer

Are you still -- I mean, I think on your last call you had the guidance kind of DC, up high-single digit to low-double digit for the year; Quiksilver, low-single digits; Roxy, down a bit [ph]. Are you guys still thinking about the brands that way as they trend over the course of the year?

Joseph Scirocco

Yes, sure. Yes, I think, as we said, having given the first quarter numbers, we think that on the full year, all brands will be positive. I think, if we think about Quiksilver, Roxy brands up in kind of a low single-digit range, DC up in the mid-teens, and one thing to keep in mind as you look at this, there are some currency effects in our second half. If you just take a look at the euro in the third quarter of last year, it was trading down, and in the second and third quarter, you'll see Asia-Pac, Australian dollars quite a bit stronger this year than last. So you take those two factors into account.

Corbin Weyer

And then my final question is in regard to fall winter orders that are up. How does that kind of shake out across distribution channels, department store versus specialty and core?

Joseph Scirocco

On a global basis, it's hard to answer that question. Remember that 75% of the business that we do around the world is done in core shops and specialty shops, which includes our own stores. So when you think about the order base, I mean, it's largely weighted towards independents and specialty chains.

Operator

Our next question comes from Carla Casella with JPMorgan.

Mili Seoni - JPMorgan

This is Mili Seoni here for Carla Casella. How much of your product mix in your retail stores over last report you have in the department stores?

Joseph Scirocco

Welll, again, let's please de-emphasize department stores as a characteristic because it's a relatively small part of our business across the globe, and the question sounds like a really U.S.-centric question. So the mix of product in our retail stores, though, broadly overlaps the product selection in our wholesale offering. I mean, there is a limited amount of product that's done specifically for the -- for our own stores. But broadly speaking, it's the same line.

Mili Seoni - JPMorgan

And we heard that Bon-Ton is starting an exclusive sort of surf-skate type brand, Mambo. Are you seeing any other department stores doing their own private label in your space?

Robert McKnight

I'm sorry, who did you say was doing a line?

Mili Seoni - JPMorgan

Bon-Ton.

Steve Tully

This is Steve Tully. Not significantly. The easiest answer to your question, obviously many stores who have their own private label and have infringed on action sports over the years to a certain extent, but we don't see a significant trend there.

Mili Seoni - JPMorgan

And could you give some color on how much you would intend to raise pricing at retail or in wholesale and what would the timing be?

Joseph Scirocco

I'm sorry, I really think we've answered it. We've said that we have already begun to raise prices and we've now sold our fall lines, and price increases are in selectively.

Robert McKnight

And it's all -- all that is baked in the plan. And we've already given everyone guidance to the end of the year, so it's out there. We know that prices are going up and costs are going up, and it's all just like part of the landscape now.

Operator

And we'll go to our last question from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

I have a couple questions. You talked about the great opportunities for DC in Europe and Asia. And I'm curious to know what kind of opportunities you see in DC Women’s down the road? I mean, how big could it be if I should say when DC hits $1 billion? I mean, how would you see Women's? That’s the first question.

Robert McKnight

Well, I think we see Women's definitely being bigger. I mean, we know there's a huge opportunity there in the sort of Inland Empire with Urban, more moto inspired, more, shall we say, MMA-inspired product. We have, in Quiksilver and DC, definitely products that trend more towards beach lifestyle, beach culture, coastal, that kind of thing. I think DC then can start doing this stuff in the cities. And so we have really put a lot of effort into design and merchandising as of late in the DC Girl area, and it's really working. Again, we need to incubate that part of it and put it in the stores and get some sell-through and get the thing on the roll. But the product looks good, I think the intent is there. The look and feel and the vibe is definitely separate and different than what we do in Quiksilver and Roxy, so we're really happy with it. We don't talk a whole lot about it because it's just a young thing for us. We had it before, but it was kind of hodgepodge, and now we have it and it’s a real dedicated effort and SKU count and the look and feel and vibe and the color story and all that kind of stuff. So we have big aspirations for it. How big it'll be in terms of doubling the business in five years? Hard to say right now.

Jennifer Black - Jennifer Black & Associates

Okay. And then my second question is, how many countries are you currently shipping to online? And what's your plan from an international perspective to grow your online business?

Joseph Scirocco

Well, I mean, it's throughout Europe, North America, and I'm not sure how many in Asia.

Robert McKnight

They’re just now starting to get the thing online in Latin America. That's a hard thing to say. We sell to about 100 countries regularly.

Joseph Scirocco

Yes, we can get you an answer, but it's really -- the other element of this, Jennifer, is the vast majority of online business that we do for our own account is done in the U.S. Throughout the rest of the world, the websites are used primarily as a B2B to C kind of concept, so the majority of product that’s sold online outside of the U.S. is really for the account of our [ph] retailers. But we're developing this. And longer term, the way we look at it is, it should be 10% of our business and half of that should be for our own account. The rest of it would be for our wholesale customers account. But that implies like $100 million worth of incremental revenue to us over the next five years.

Robert McKnight

So that concludes today's call. On behalf of everyone here at Quiksilver, thank you for participating, and we look forward to providing our fiscal 2011 second quarter results in early June.

Operator

This concludes today's conference. Thank you for your participation.

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