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Executives

Craig Stevenson - President of Quiksilver South Pacific and President of Quiksilver Americas

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

Analysts

Taposh Bari - Jefferies & Company, Inc.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Andrew Burns - D.A. Davidson & Co.

Jeffrey Klinefelter - Piper Jaffray Companies

Diana Katz - Lazard Capital

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

Jeffrey Van Sinderen - B. Riley & Co., LLC

Quiksilver (ZQK) Q3 2011 Earnings Call September 1, 2011 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I'd now like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations who will chair this afternoon's call.

Bruce Thomas

Thanks, operator. Good afternoon, everyone, and welcome to the Quiksilver Third 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. Also joining us is Craig Stevenson, our Americas Region President.

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 third quarter conference call. I want to begin by offering our thoughts and prayers to those people impacted by Hurricane Irene earlier this week. We're closer to the storm that we normally would be because, in fact, we are conducting our call from New York City this afternoon as we make final preparations for the Quiksilver Pro New York, which kicks off this weekend over in Long Beach on Long Island.

Given the distraction wrought by Hurricane Irene, we were unsure if the event could even proceed, but working closely with Long Beach officials over the past few days, we're excited to be able to report the event will move forward although we've had to adjust the format due to the impact of the storm. But to be clear, the Quiksilver Pro New York is first and foremost about being a surf contest and Long Beach has an incredible surfing history, tradition and spirit. We'd like to say that we're bringing the spirit and stoke of aloha to the Big Apple with this event in some ways similar to how Duke Kahanamoku brought surfing to Australia and the United States a century ago. And I'm stoked to say that the aloha spirit is in full bloom as we cooperate with the community and remain committed to holding a world-class ASP tour event at Long Beach. This way, together, we can promote the sport by bringing the best surfers in the world to this terrific community. We're looking forward to a fantastic event.

Turning now to third quarter. We're pleased to have executed well on our growth plan in the third quarter in delivering solid financial results. Revenues of $503 million in the third quarter exceeded our plan, and we're up 14% when compared to last year and represent a further improvement over the growth we delivered in the second quarter. We feel increasingly positive about our product offerings as sales are strong and retailers have given us rave reviews on our ranges for spring/summer 2012.

Despite global economic pressures, the product offering and brand equity of our 3 core businesses, Quiksilver, Roxy and DC, are strong and resonating with consumers around the world. The portion of our revenue generated by our emerging and developing markets is increasing steadily while our channel expansion for DC and category expansion initiatives, such as Quiksilver Girl and Waterman Collections and Roxy footwear, are delivering good initial returns consistent with our longer-term plans.

Let me now take a brief moment to highlight our brands. I'll start with Quiksilver, the biggest action sports lifestyle brand in the world. We always say that making great product is the key to our success, and I'm proud that we're executing well to plan on that front. Quiksilver product is very strong across many categories, especially in boardshorts and walk shorts. From a category expansion perspective, we are very encouraged by the initial success of the Quiksilver Girls line, which debuted for spring to great success and is on track for a strong follow-up in fall and holiday. In its initial year, the new Quiksilver Girls line, coupled with the Quiksilver Women's business, will generate $15 million and we expect it to be a major contributor of future growth.

Another expansion opportunity and ongoing success story for the Quiksilver brand is our Waterman's Collection. The Quiksilver Waterman Collection embodies a casual luxury of a coastal lifestyle founded on a strong board-riding heritage. Waterman targets the "surf inspired 30 year old plus" male who aspires to a richer experience within the trusted Quiksilver brand. We opened the first Waterman's Collection store recently in Newport Beach in Fashion Island to allow us to showcase the collection and offer consumers a more complete product experience. The Waterman's Collection, along with the equivalent premium collection in Europe, currently is a $35 million business that we expect will grow substantially in the future.

Looking forward, the winter holiday 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 continue to grow revenues well into next year. And in August, we hosted our spring 2012 market week for all of our brands in Huntington Beach headquarters. Shop owners, management and buyers from the most influential retailers and from a variety of distribution channels attended the event to place orders for the spring 2012 lines. We also conducted similar events in St. Jean de Luz in France and in Eraceira, Portugal, for our business partners in Europe and in Torquay, Australia for our Asia/Pacific accounts. Although our sales teams are accustomed to favorable feedback in response to new product launches, the marketplace is offering even greater praise for our terrific spring 2012 ranges.

Let's turn now to Roxy, the largest, most respected and most recognized girls' action sports lifestyle brand in the world. The Roxy business continues to build momentum as the brand's terrific spring/summer line has given way to an impressive fall and back-to-school offering that continues our strategy of returning Roxy to her roots. Our progress is evident as we succeeded in turning some of our challenges into strengths and some of our strengths into showstoppers. Beginning with our bread and butter over a year ago, we made a decision to embrace a year-round Roxy brand strategy. This initiative will enhance our design cycle so that Roxy becomes a true year-round brand. In this way, Roxy will be an influence on the active lifestyle associated with the beach, the mountain and the places the Roxy girl hangs out in between, which will really broaden our ability to share the Roxy D&A with a wider audience. This initiative will also improve our ability to supply both the northern and southern hemispheres with fresh new product all year round and will better leverage our global product efforts.

Our footwear business led Roxy's emergence from the past couple of years of challenge in the junior's market, so we're not surprised that this quarter continues to thrive. Footwear now represents roughly 15% of our Roxy business and has plenty of potential for further future growth.

Our previously challenged denim business has been inconsistent and lacked cohesion as a product category for Roxy. But in the third quarter, we launched a revamped assortment of denim products under the name Surf Denim, and we differentiated these pieces with better quality, improved finishing, unique washes and an incredible lived-in feel. Early response from the market has been extremely favorable.

And one of our last categories to recover when Roxy began to grow again was in sportswear and in particular, dresses. We are very encouraged by the new strength of our wear now dress business in this higher-priced environment. Our strategy for Roxy in dresses and other competitive lines was to provide our girl with better quality and a better value for a higher price. Our mantra is product always comes first then price. Based on our recent performance, the customer is telling us if we give her great quality, product and design, then price is secondary. And this strategy appears to be working particularly well for Roxy.

Looking ahead, Roxy's solid winter holiday bookings in the U.S. are up low single-digits over last year while the reaction to the new spring 2012 range has been even more generous than last year's very good response. And in Europe, Roxy's high single-digit growth and fall/winter order book is also a very good reflection of the continued positive momentum for the Roxy brand.

Turning now to our powerful and incredibly popular brand, DC. DC is dedicated to being the most sought after skate-driven action sports brand in the world. As we pursue this goal, we continue to see strong returns on the investments we're making in the DC brand. DC's continued impressive growth and strong forward orders in each of the regions around the world, especially in Asia, confirmed DC's expanding global traction. We continue to see solid revenue growth from core skate and surf shops, reflecting the success of our commitment to style, innovation and the brand's heritage. In particular, DC revenues from core shops in the Americas during the third quarter were up 35% compared to last year. In the specialty store channel, DC men's and boy's apparel experienced very strong growth. In other stores, we're taking advantage of some new shop and shop configurations that help display the terrific continuity of the brand.

We successfully launched the first focused DC apparel marketing effort in the third quarter with At Work, DC's new denim campaign. Retailers love the product and have given the marketing package very high marks after generating better than anticipated sell-through.

In addition to these successes in the more traditional DC categories, we're now experiencing a resurgence in DC women's and kids' lines. We're seeing a rapid shift from open toe footwear to closed toe styles recently, consistent with the upcoming change of seasons, and girls' high-end high tops are currently on fire, although vulcanized styles also remain popular.

Innovation has been a principal driver of DC's rapid growth over the years and our most recent technology-related launch is off to a fast start. Our Unilite footwear campaign, which features ultralight skate shoe designs at moderate price points, has a fantastic premiere in the market. Sales have been solid since the first shoes hit the shelves and retailers love the product's association with the creative Rob Dyrdek.

Core skate products that incorporate the new DC skate logo hit targeted accounts in third quarter and they've been selling out as many retailers couldn't keep them on the shelves. This realization of our evolving segmentation strategy has driven a rich reorder environment with our best core accounts.

We held the grand opening of the DC Embassy in Barcelona, Spain this quarter also. This unique industrial-inspired space includes large showroom areas designed to showcase DC's expanding product lines. The complex sits atop a 1,300 square meter skate park that will serve as the headquarters for the European members of the DC skate team.

Whether it's the development of great new DC products, the expansion of DC's business internationally and in the U.S. or the signing of the best skaters and riders to DC's talented global teams, retailers and consumers alike are taking notice of DC's substantial progress.

Now turning to our athletes, who we sponsor to embody our involvement in action sports and attract attention to our brands by wearing our products in and out of competition. Our amazing athletes are highly influential within these sports, and we're delighted that many of these hugely popular athletes channel some of their God-given creativity to become good contributors to our product design process. A few of these athletes have recently made some good news. I'll begin with legendary Quiksilver team rider and defending 10-time ASP World Champion, Kelly Slater, who just won the U.S. Open of Surfing in Huntington Beach, California and just this past week with [indiscernible] absolutely pumping, he won the tour event in Tahiti, vaulting him back into first place in the point standings as we arrive at the halfway point in the 2011 season. By the way, between Kelly, Jeremy Flores and Travis Logie, 3 of the quarterfinalists and 2 of the semifinalists in Tahiti were Quiksilver team riders, reflecting the quality and depth of the Quiksilver global surf team.

Australian Roxy surfer, Sally Fitzgibbons, won for the third time on the 2011 ASP Women's World Tour and capturing the women's title at the U.S. Open of Surfing. Sally has finished the year's ranking at #2 in the world for the second time in just 3 years on tour.

DC co-founder and World Rally Championship driver, Ken Block, released the fourth installment of his Gymkhana precision driving series and it rapidly became the fastest spreading viral video on the Internet with over 7 million views in its first 2 weeks. The entire Gymkhana franchise has now generated over 120 million views and has fueled the sales of DC's TeamWorks Collection, which includes shoes, shirts, hats and jackets inspired by Ken's rally car graphics.

I'd also like to mention that the Street League DC Pro Tour completed a second very successful season of skateboarding competitions this past week with the season finale in Newark, New Jersey carried on ESPN2. The tour attracted the world's best skaters, including Nyjah Houston, Chris Cole, Sean Malto, Ryan Scheckler, Chaz Ortiz, Shane O’Neill, Billy Marks, Paul Rodriguez and Mikey Taylor. Our DC team has been done a fantastic job of bringing pro skateboarding to the masses.

And finally, legendary freestyle snowboarder, Travis Rice, who rides for our Quiksilver, DC and Lib Tech brands will premiere his spectacular new movie called The Art of Flight next week in New York. Travis is a talented global ambassador for snowboarding and this movie, I can assure you, is a mind-blowing and visually captivating experience. You should all check it out.

These terrific athletes and fantastic events, including the Quiksilver Pro in New York, represent our close association with the action sports that inspire our products. They also bond us to our core demographic of teen and young-minded adults who live the lifestyle we represent every day. It's evident from our sales growth and future order books that there is momentum in our business and that we continue to operate at a high level.

Now to provide more color on our progress, Joe will now take you through our third quarter financial details.

Joseph Scirocco

Thanks, Bob. Good afternoon, everyone. As reported, consolidated third quarter net revenues at $503 million were up 14% compared to last year and were better than we expected a quarter ago, driven primarily by sales in the Americas region.

In the Americas, revenues were up 11% compared to last year with both wholesale and retail channels up double digits on a percentage basis. Our company-owned retail store comps were up 21% in the third quarter, while our e-commerce business grew 65%.

European revenues were up 2% in constant currency despite continuing soft markets in Southern Europe and in the U.K. Sales remained strong throughout our emerging and developing markets in Northern and Eastern Europe, with DC establishing particularly good traction in Germany.

Asia/Pacific revenues, as reported, were up dramatically but down 3% in constant currency, primarily due to the lingering effects of the various natural disasters on top of already weak consumer spending that we discussed last quarter. Although the economies in Australasia remained really tough, we're seeing good progress in the emerging and developing countries in the region such as Taiwan, Indonesia and Singapore. And Japan seems to be recovering a bit faster than we had originally expected. The region holds many good growth opportunities for our brands and we remain excited about our expansion plans there and convinced that our long-term outlook for the region remains intact. We recently appointed new general managers for our business in South Korea and for DC in China to further develop these important markets.

Consolidated gross margins contracted by 160 basis points to 50.7% this year compared to 52.3% in the third quarter a year ago. The margin compression was largely driven by our Americas business, reflecting higher sourcing costs and some promotional pricing. Gross margins contracted just 30 basis points in Europe and in the Asia/Pacific region as both were able to offset a fair portion of higher input costs with favorable currency hedging contracts in place for fiscal '11.

Overall, SG&A expenses were $221 million, up $12 million compared to the third quarter a year ago in constant currency. The increase in spending reflected higher levels of product development and marketing expense for our new growth initiatives, as well as higher non-cash stock compensation expense.

We continue to focus our attention on EBITDA as the key measure of our performance. We generated third quarter pro forma adjusted EBITDA of $53 million, essentially unchanged from last year.

Interest expense was $16 million in the quarter, down from $21 million last year based on our improved debt structure. Including interest and taxes, our pro forma consolidated income for the third quarter was $10 million or $0.06 per share compared to $13 million or $0.08 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 ongoing improvement in our capital structure. Receivables at $386 million are 7% higher than for the same period last year in constant currency. On an overall basis, DSOs were even with last year at 65 days. Inventory at quarter end was $365 million, up 24% in constant currency compared to a year ago. As we said last quarter, we bought inventory in advance to ensure a timely production and delivery. In addition, we have purchased slightly higher levels of currencies and inventory compared to last year in order to take advantage of end season selling opportunities and to support the higher pace of sales in our company-owned retail stores. Importantly, 80% of the increase in inventory is in current and future seasons goods. CapEx was $13 million in the quarter, up $2 million compared to a year ago and included planned investments in our retail stores and spending related to our ERP system implementation. We ended the quarter with $621 million of net debt. That's a 10% reduction from the $687 million of net debt a year ago. Cash on hand at the end of the quarter was $126 million.

As a result of our significant progress in improving our capital structure this year, our ratio of net debt to pro forma adjusted EBITDA for the 12 months ended July 31, was 3.1x compared to 3.4x a year ago.

As the end of fiscal 2011 nears, we'd like to reassure investors that we remain focused on growth and profitability and are taking the necessary actions to achieve our objectives even as we plan for fiscal 2012. In the meantime, we'd like to reiterate that we remain on track to achieve our longer-term financial objectives of generating annual revenues between $2.5 billion and $3 billion and at least $350 million of annual EBITDA.

And with that, I'll like to turn the call back over to Bob for closing remarks.

Robert McKnight

Thanks, Joe. In summary, we're really pleased with our solid third quarter financial results and feel increasingly positive about our product offerings and the strength of our brands, which are resonating with consumers around the world despite global economic pressures. We're seeing continued strong growth in emerging and developing markets while our category expansion initiatives are delivering good initial returns consistent with our longer-term plans as we're eager to bring the world's best surfers, as well as a great surf event to New York as the Quiksilver Pro New York runs at Long Beach on Long Island over the next 2 weeks. Thanks again for participating in our call this afternoon.

Bruce Thomas

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

Question-and-Answer Session

Operator

[Operator Instructions] Up first is Jeff Klinefelter, Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray Companies

A couple of questions. First, could you just repeat again for us the spring bookings numbers that you have kind of by major region and by brand. And then also, Joe, has there been any movement in the fall holiday book relative to 90 days ago when you last had a call?

Joseph Scirocco

Jeff, could you please repeat the last question?

Jeffrey Klinefelter - Piper Jaffray Companies

Yes, the last part of the question is just you -- Bob shared with us a few details on the spring order book. If you could just repeat that kind of by global region and brand. And then in terms of the fall holiday book, could you just share if there have been any changes in the levels of demand in the fall holiday book versus last quarter?

Joseph Scirocco

Sure. We have had no real changes in the fall book. And I think that what we indicate is we're up in all of the brands in both Europe and in Americas. The only thing down in fall/winter books is in the Asia/Pacific region, which we had anticipated based on last quarter's announcement. With regard to the spring books, our order books remain open, Jeff. We have final order deadlines generally by September 30. But what Bob was indicating is that the reaction is just very favorable across the globe. We're booking spring in both the Americas and in Europe and Asia/Pac. People are looking at the winter line, but the spring lines are being very well received across the brands, especially in DC, which is booking nicely.

Jeffrey Klinefelter - Piper Jaffray Companies

Okay. Just to clarify, I mean, given all the focus on Europe here in the last 90 days, there really hasn't been much of a change in terms of the demand profile or the order book rather for the European markets for any of your brands.

Joseph Scirocco

Our customers in Europe respect the order book and have every intention to fill it. And they typically do. We don't have much fallout from those orders at all. And in fact, despite the tough economies in Southern Europe and in the U.K., our business there is -- as you know, it's market leading, it's far larger than the direct competitors, and retailers are really depending on it.

Jeffrey Klinefelter - Piper Jaffray Companies

Okay. Another just couple of quick ones. The DC brand expansion in the mainland China, could you remind us again the timing of that and how you'd expect that to scale?

Joseph Scirocco

Yes, there's a couple of points. First of all just to remind people, our Quiksilver Roxy business in China, which is quite good and is about on the order of $40 million to $50 million business, is operated through a joint venture. So the results are not consolidated into our accounts. But if you looked at this on a pro forma basis and thought about this from a growth perspective, it would be quite meaningful to us over time. What we've just done is hired for the first time a general manager to operate or to lead us into the DC business in China, which is something that is really in its very early stages at this point. But we have a good guy. We're very confident in our future there. We think we have lots of opportunities. This again is separate from the joint venture. So as DC begins to build on the continent, it will be counted in our revenues.

Jeffrey Klinefelter - Piper Jaffray Companies

Okay. And then just lastly, in terms of the domestic business, your conflict in this quarter very, very strong and outperforming most of the rest of retail in the U.S. segment anyway. Could you talk at all about your trends in terms of any volatility you're seeing and more as a reflection of the overall United States market? Does that strength continue into August in the back-to-school season?

Craig Stevenson

Jeff, it's Craig Stevenson here, President of the Americas. Our performance in retail, we've comped up 20%, or over 20%, for the last 3 successive quarters. So we're very happy with that. It's -- I think, I said this last time we chatted, it's not just a reflection of our product. It's our operations, our retail operations, as well. As much as we've really been working on our product in all the brands, I think our back-end operations as far as replenishment, as far as regional buying has really, really added to our comps and you can see that continuing.

Operator

Up next, we'll take a question from Andrew Burns, D.A. Davidson.

Andrew Burns - D.A. Davidson & Co.

Just a question in terms of promotional activity. This back-to-school season has unfolded pretty aggressive, early promotional activity at the mall. I'm just wondering have you guys -- obviously, there were some great results in the last few quarters from your own retail stores. But have you had to think differently about how you promote in your stores, your own stores in any way?

Craig Stevenson

Andrew, it's Craig Stevenson again. I can probably feel that one too. Back-to-school for us really fits into our Q4. Q3 for us is really about summer. And whilst we've been really comping up our numbers revenue-wise up that we have had a little bit of promotional activity, which is -- which hasn't affected margin that much, only just a little bit.

Andrew Burns - D.A. Davidson & Co.

Okay. And maybe the next question for Joe, for -- could you just update us on the product cost environment where you stand? Obviously, headwind in the quarter and for the year, but with the volatility in cotton prices, just hoping to get an update there on how you think about it over the next 4 quarters?

Joseph Scirocco

Sure. Well, fall season, which we're into now, is really the first in which we've experienced the higher cost, and we've already bought goods for spring '12. So we're seeing the same trend relative to last year for spring that we've seen this past fall. I mean, beyond that I don't really know anything that you guys don't already know. Cotton prices, yes, seem to be volatile and have to a degree come down at the same time labor costs remain inflationary. So we'll see where that all balances out for fall. But we are able to raise prices. We have some opportunities to do that. We've done that for fall successfully. And let's see how the consumer shakes out over the holiday selling season before we kind of predict where we're going over the next 4 quarters.

Operator

Our next question today comes from Taposh Bari, Jefferies & Company.

Taposh Bari - Jefferies & Company, Inc.

I wanted to ask about the, I guess, the gross margin line, particular I believe with the 20% type retail comp in the U.S., I'm assuming you're getting some pretty good leverage there. So can you just, I guess, first remind us maybe how much more margin opportunity there is on U.S. retail business?

Joseph Scirocco

Yes, Taposh, we contracted gross margin of 160 basis points in the quarter. I mean, some of that is -- was expected and we've talked about it in the past quarters. But some of it clearly reflects a little bit more promotions. At the same time, we significantly exceeded our sales plan. And we're trying to strike the balance here between inventory control and management and margin. So on balance, we're pretty happy with how it came out. As I said, prices are increasing to offset cost of goods, and we're being pretty successful with that. So our outlook on this is really unchanged.

Taposh Bari - Jefferies & Company, Inc.

Okay, so -- so I guess the basis of my question is over the next couple of quarters is, I guess, 150 basis points of gross margin compression, kind of a fair ballpark range of expectations?

Joseph Scirocco

Our outlook for the full fiscal year when we last talked about it was to have gross margins roughly in line with those of 2010. So yes, that implies Q4 down a little bit. And I think that, that's still the case. But once you get into next year, I think it really will depend on the consumer environment, and the -- which we'll see develop over the holiday season. It's kind of premature to comment on that.

Taposh Bari - Jefferies & Company, Inc.

Okay. I guess, that kind of segues into my next question on price increases. Have you guys, I'm assuming you've already raised prices in some select categories. Have you seen any kind of -- do you have any kind of feedback in terms of any kind of resistance on those actions?

Joseph Scirocco

No more than anyone else. I mean, we have raised prices for fall and holiday, and spring '12 pricing will be the same. So we'll just have to see how much appetite the consumer has when the time comes.

Taposh Bari - Jefferies & Company, Inc.

Got you. Okay and then, I guess, the final question I have is on SG&A. It seems like that line came in slightly above what we're expecting. Is that, I mean, it seems like there is, I guess, some one-time, or not maybe one-time, but the incentive comp, et cetera. What's the kind of a fair, I don't know, whether you want to quantify in terms of dollar growth, but what's the good way of thinking about SG&A kind of going forward?

Joseph Scirocco

Well, we are growing revenue and at the same time, we continue to invest in our key initiatives. In some cases, we do that investment ahead of future sales. So for example, we talked about new general management in Korea and in DC China. Quiksilver Girls is growing faster than we had expected. For the full fiscal year 2011, we would expect Quiksilver Girls and Women's volume to be about $15 million with substantial opportunities. So we continue to invest in product development and marketing there. Our e-commerce business is growing very nicely. It's up 65% in the quarter. We expect to finish the current fiscal year with more than $25 million for our own account in retail in -- sorry, in e-commerce business. And then going forward into next year, that probably looks like it could nearly double in size. So in support of that, we're investing in site development and marketing. We talked about the great growth of DC. We've invested in Street League, with Rob Dyrdek, as an initiative, a marketing initiative. Roxy marketing is growing in cost to support the growth and the resumption of growth in Roxy brand. And there are a couple of other things, including some non-cash charges like stock compensation. Some of the expenses too, you need to realize are variable, even though retail is mostly a fixed cost when our U.S. retail comps are up 20% or more for 3 successive quarters. We do have higher in-store expenses. And even the e-commerce sales, come at the expense of distribution agreements and things like that, that are variable in nature, as well as commissions on the wholesale business. So I think that what we've seen so far is expenses roughly in line with last year on a percentage basis, and that will probably be the case at least through this year.

Operator

Jeffrey Van Sinderen of B. Riley & Co. has the next question.

Jeffrey Van Sinderen - B. Riley & Co., LLC

I think you said retail comps are running up more than 20%. But I don't know if you gave the actual number or if you did, I might have missed it.

Joseph Scirocco

21%.

Jeffrey Van Sinderen - B. Riley & Co., LLC

21%, okay. In your own retail stores, is there any more color you can kind of give us on the last -- what you've seen the last 6 weeks. It sounded like, from what Craig said, it was pretty much a continuation of the strength you've seen. I just wanted to clarify that.

Joseph Scirocco

It continues to be strong. I would say, in general, August got off to a little bit of a slower start than July finished. But it's been very weather dependent. It's been up and down a little bit. But it still has been double digits so far through -- well, it's double digits through August and then we'll see where we go in the autumn.

Jeffrey Van Sinderen - B. Riley & Co., LLC

Okay. And then I know you were talking about promotional cadence in some earlier questions. And maybe you could just clarify, when you were talking about that and you said promotions are up a little bit, was curious to know if you meant up versus last year overall? Maybe you could just give us kind of a sense of overall what the promotional cadence is versus last year and if that's changed at all in the most recent quarter and then going into what you expect this quarter.

Joseph Scirocco

Hey, Jeff, the way I would think about this is particularly, this is more of an issue inside the Americas. I think you should look at this in the context of the Americas' gross margin. And so if you take a look at that, you'll see the contraction in gross margin in the Americas region really bore the brunt of any promotions. The other thing to keep in mind relative to last year, we had very lean inventories last year. So promotions were less of a factor. And a year ago, we had just returned to growth in our retail comp stores. So we were doing well enough without substantial promotion. Keep in mind that we don't have very much department store business. So we have minimal exposure with regard to that kind of problem in terms of margin support and that kind of thing. And we have become a lot more core account-driven over the course of the past 2 years. So that's also enabled us to maintain margins, especially outside the U.S.

Jeffrey Van Sinderen - B. Riley & Co., LLC

Okay. And with those core accounts, have you -- what kind of feedback or what have you heard from them about back-to-school?

Craig Stevenson

It's still a bit early to tell. It seems to have opened up. It started off a bit slow but it's really started to kick in now and we expect it to just have a longer lead time, but we expect good results from back-to-school. And all the core accounts have really -- have got the same sentiment.

Jeffrey Van Sinderen - B. Riley & Co., LLC

Okay, that's great to hear. So it seems like a back-to-school for everybody.

Craig Stevenson

We're still selling a lot of spring, a lot of summer as well like again, the weather has kicked in again, Florida -- traditional areas, like Florida and Hawaii, Long Beach, Long Island where we are right now. So the weather's fantastic and along with that come the sales. So we're looking forward to some strong sales.

Operator

Next up, we'll hear from Mitch Kummetz, Robert Baird.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Let's see, I've got a number of questions. I'll try to get through these quickly. Joe, first on your Q3 performance by brand, could you just give us an update on that? Quik, Roxy, DC, up, down, flat?

Joseph Scirocco

Sure. I have to add the caveat here. We don't like doing this because on a brand-by-brand basis, quarterly we do have some impact of timing. But broadly speaking, Roxy was down just slightly in the quarter as a brand. Quik was up low-single-digits and DC was way up. It's in the range of 15% to 20% high.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Okay, that's helpful. And then on your fall -- I'm sorry, your spring/summer '12 pre-books. I know that you talked about the retailers have -- that's been favorably received. But any sense, especially in Europe, how retailers are just generally thinking about pre-booking product? Are they being more less aggressive on how they're going to order fall -- I'm sorry, again spring '12 versus let's say fall '11?

Joseph Scirocco

Spring '12 versus fall '11. I think that -- I think we would expect a continuation of a similar pattern there. But again, we're a little bit unique because in the action sports space, Quiksilver is the dominant brand as is Roxy, very large relative to the direct competitors and very important to the key account. So even though they may have weakness in parts of their business, they seem to be very supportive of our brands. DC has a lot of new channel opportunities in Europe. We have -- we've been very careful with DC distribution in Europe. We have not distributed thus far in any of the sport channel. So there are lots of new channel opportunities there that will develop, and we can expect higher bookings there as well, perhaps disproportionate to what market might show. And we also have introduced new lines. I mean, Quiksilver Girls, just as an introduction, and as I said earlier, $15-million business this year, we would expect that to grow strongly next year. So things like that can move the needle.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

And then on Q3 gross margin, America you said down 250. How much of that was the promotional pricing versus this -- the higher input cost? And then on the Europe and Asia-Pac pieces, you talked about favorable hedging there, FX hedging on your gross margin. How much of a benefit was that to the quarter for those 2 businesses?

Joseph Scirocco

It's a little bit tough to say with respect to the Americas. But we were down there about 250 basis points overall in the Americas region. I would say about half of that was attributed to cost and about half of it was attributed to mix of product, which included some promotions. In Europe and Asia-Pac, we had talked about this when these initial discussions came up about higher input cost. We had talked about the fact that we bought currency forward so our cost of goods for the back half of this fiscal year was essentially locked at a price that would secure our margins to a certain degree. And therefore, you only saw about 30 basis points of contraction in margin, both in Europe and Asia-Pac.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Okay. And on inventory, you mentioned that 80% of the increase was current future product. So what's the other 20%? Is that dated stuff? And how do you just generally feel about your inventory in terms of any excess product that you have? Is it kind of consistent where you've been in the past or is it more -- or is it better or worse?

Joseph Scirocco

Yes, we're not overly concerned about it. We do -- the balance of the increase from last year is obviously, prior season. But 20% is not a terrible amount to deal with, through our normal clearance channels, that's fairly typical. But we don't like the fact that we have consumed working capital. But it's -- we felt it was a necessary step in order to protect supply at a tumultuous time in the marketplace.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Okay. And then lastly, obviously, FX helped you on the sales side, both Europe and Asia-Pac. Anyway you can give us a sense as to how much, or what was the impact of FX on overall earnings in the quarter?

Joseph Scirocco

Yes, I mean, our press release tables include the EBITDA generated by -- or the earnings generated by Europe. I think we translated the quarter at $1.43 euros this year versus $1.25 last year. And in terms of the Australian dollar, we translated at $1.07 this year compared to $0.87 a year ago. So I haven't done that math but you could probably work that through.

Operator

Our next question today is coming from Jim Duffy, Stifel, Nicolaus.

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

Couple of questions -- hey, it looks pretty decent, right? Couple of questions. I may have missed your comments on this, are you still expecting fiscal '11 pro forma EBITDA flat or has that view changed?

Joseph Scirocco

We haven't commented on it, Jim. And we've got 8 weeks left in the quarter and would like to focus people on a longer term than just the next 8 weeks.

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

Okay. And then from a modeling perspective, Joe, you'd talked about $50 million tax provision for the year?

Joseph Scirocco

Yes.

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

What -- how should we be thinking about that now?

Joseph Scirocco

Yes, I think that's still about right. It may be a little bit lower. From a provisional basis, I would say $45 million. From a cash standpoint though, somewhere in the $12 million to $15 million range for the year. So most of that is accounting driven. It's just a function of our earnings in various jurisdictions. But on a cash basis, it's only $12 million to $15 million.

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

Okay. And then, Joe, by my calculation, you had about a 50 basis point hit to gross margin from adjustment to the allowance for doubtful accounts. Anything specific to call out there? Was that in the Americas?

Joseph Scirocco

The allowance for doubtful accounts is not going through gross margin. It's in the SG&A lines. And you're saying it computes to 50 basis points, I'm not sure how...

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

Okay. Are we looking at it quarter-to-quarter?

Joseph Scirocco

You're looking at the increase in reserve balances? Or what are you looking at?

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

Correct. So?

Joseph Scirocco

Yes, that's difficult to say because we've made our provisions at kind of normalized levels, and then there are charge-offs against it. I think if you want to follow up on that, we could probably take it off-line. But we have had no particularly unusual activity in those accounts over the quarter.

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

Okay. And then specific to Americas' SG&A, was there some incremental SG&A as a function of timing of SG&A spend in the Americas? Or I'm just kind of wondering why the lack of leverage there despite strong revenue growth, progress on the gross margins, 20%-plus comps, et cetera?

Joseph Scirocco

Well, it happens that of all of the global initiatives, we have a number of them are led by the Americas or are most pronounced in the Americas. E-commerce for example, the vast majority of our e-commerce business around the globe is done out of the Americas region. On the Street League promotions that we've talked about with Rob Dyrdek, we had accelerated some of those into the third quarter. So yes, there is a timing element. Quiksilver Girls is developed and marketed principally through the Americas region. So a number of these hit the Americas region particularly hard.

Bruce Thomas

Operator, we have time for about one more call here.

Operator

We'll go -- we'll take our final question today from Diana Katz, Lazard Capital Markets.

Diana Katz - Lazard Capital

Roxy sales are only downside slightly in the quarter. What's the remaining week quite left in the brand by-product had both for the sportswear? And how do you feel about your brand positioning now versus your fast fashion competitors?

Joseph Scirocco

You're asking within the categories of Roxy product, how we feel about the various categories?

Diana Katz - Lazard Capital

Yes. Is sportswear still a weak link at all?

Craig Stevenson

No, Diana. I think that we've really turned the corner now with Roxy sportswear. And in fact, I think for the first time in the Americas, fall had a significant increase year-over-year and we're really finding good comps in both our own retail stores and in the -- our wholesale business. So I think this turnaround of product and us rediscovering the D&A of Roxy has really helped our sales. For a while there, I think we chased that fast fashion, but I think we really went back to the lifestyle brand that we are, and we're starting to reap the rewards of that.

Diana Katz - Lazard Capital

Okay. Can you discuss some of the footwear trends that are driving sales for DC? And how big is DC Kids in Women's?

Craig Stevenson

DC, when you say DC Kids in Women's, are you talking footwear?

Diana Katz - Lazard Capital

Yes.

Craig Stevenson

Well, we've really -- DC Women's is probably -- Men's has probably double-digit growth for footwear, and Women's and Kids is probably more around the 30% to 40% growth of their numbers. So we're really happy with that. And that's probably a global phenomenon too. It's not just isolated to the Americas.

Diana Katz - Lazard Capital

What percentage of the mix of DC overall that was Women's and Kids?

Joseph Scirocco

Can you just give us a second on that?

Craig Stevenson

I'm not just sure on the global.

Diana Katz - Lazard Capital

You could tell me that off-line, that's all right. I just have a final question on European retail, has that turned the corner at all?

Joseph Scirocco

Diana, European retail is comping down. It's comping down in the high-single-digits range. And that's been the case. We see some strengthening on the horizon there. But as we said the economy is particularly in the major markets in the south of -- and then the U.K. had been tough. At the same time, we've been very proactive over the course of the past couple of years in terms of cleaning the portfolio of any stores or in-store shops that have not been productive. We have closed a number of them. We've absorbed those charges into our P&L without adjustment, I mean, without calling it out as a one-time charge.

Bruce Thomas

Thank you. Thanks, Diana. And that concludes today's call. So on behalf of everyone here at Quiksilver, thank you for participating, and we look forward to providing our fiscal 2011 fourth quarter and full year results in mid-December.

Operator

Ladies and gentlemen, that does conclude today's conference. The replay for this call will be available in approximately one hour. Once again, thank you for joining today's conference.

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