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Executives

Bruce Thomas - Vice President of Investor Relations

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

Joseph Scirocco - Chief Financial Officer

Craig Stevenson - Chief Operating Officer and Global Brand President

Analysts

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

Taposh Bari - Jefferies & Company, Inc., Research Division

Jennifer Black - Black & Company Inc., Research Division

Christian Buss - Crédit Suisse AG, Research Division

Diana Katz - Lazard Capital Markets LLC, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

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

William M. Reuter - BofA Merrill Lynch, Research Division

David E. Griffith - Roth Capital Partners, LLC, Research Division

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Quiksilver (ZQK) Q1 2012 Earnings Call March 8, 2012 4:30 PM ET

Operator

Please standby. 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 First Quarter Fiscal 2012 Earnings Conference Call.

Our speakers today are: Bob McKnight, our Chairman, President and Chief Executive Officer; and Joe Scirocco, our Chief Financial Officer. Also joining us are Craig Stevenson, our Global Brand President and the Chief Operating Officer of Quiksilver, Inc; and Rob Colby, 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 B. McKnight

Thanks, Bruce. Good afternoon, everyone, and thanks for joining us for our first quarter call today.

I'm pleased to report Q1 financial performance that exceeded our expectations when the quarter began on both top line revenues and bottom line profitability. In delivering another quarter of solid performance despite a number of challenging conditions around the world, we've again demonstrated that the diversification of our business remains a valuable asset in the pursuit of our long-term plans. Our 2012 business plan targets solid growth in each of our regions and continued growth in each of our brands. We cater to teens of both genders, and our products appeal to many age groups. We have fantastic long-term relationships with our wholesale clients while improving in our company-owned retail channel are driving strong sales comps in each of our global regions.

Our e-commerce business is rapidly growing driven by the teenagers who love our products, who live online and who are connected by the Internet and social media. And our 3 great brands, Quiksilver, Roxy and DC continue to resonate with consumers and grow in popularity. Even through the first fiscal quarter -- I'm sorry, even though the first fiscal quarter is historically our smallest seasonal quarter of the year, we're off to a good start, solid start to fiscal 2012, and we remain solidly on track to deliver our long-term plans.

Let me turn now to the high level of financial highlights from the first quarter. Revenues in the first quarter were $415 million, up 6% when compared to last year reflecting the improvements we've made to our global retail business, as well as the broad appeal for our products, all this despite the late arrival of winter in several key markets. And additionally, our e-commerce business continued its strong growth with revenues up sharply in each of our 3 regions. Gross margins declined 170 basis points to 50.7% of sales, the result of higher sourcing costs and an increase in the amount of clearance business.

The pro forma SG&A of $229 million was 90 basis points higher as a percentage of sales than the first quarter 1 year ago as we continue to invest in our long-term growth initiatives ahead of revenues. The resulting pro forma adjusted EBITDA in the first quarter was $20 million, which was better than our expectations when the quarter began.

I'd now like to take you on a brief tour of our regions providing some brand updates along the way.

Starting with the Americas. Our business continues to thrive. Sales in our owned retail stores comped up 11% in the first quarter, continuing a long string of solid same-store sales performance. Each of our brands performed well at retail, and we're especially encouraged by the continuing recovery of the Roxy brand, whose best performing categories in the first quarter were swim and sportswear. The Americas e-commerce business delivered strong performance through the holiday selling season and was up roughly 50% over last year.

Our business in Latin America also continues to expand in all 3 brands. And our business in Brazil, our largest market in South America, grew 13%. Our new store in Porto Alegre, one of the wealthiest and most diverse cities in Latin America, is scheduled to open later this month.

A few Quiksilver products and product lines generated particular interest in the quarter. First is a special collaboration with the National Football League and the National Basketball Association. We're very excited to bring to market boardshorts that represent NFL and NBA teams with authentic team colors and logos. It's important to understand that everyone wants to do business with the NFL because of its huge audience and loyal fan base. As a result, they can do business with essentially anyone they want to, and they picked us. Because -- why? Because we're the best of breed.

On this project, the NFL picked Quiksilver because we make the best boardshorts, period. They are not just cheap boardies with a logo. These are the real deal. These terrific boardshorts are made of our Diamond Dobby, high-performance fabric and contain all of the technically superior features that the world's best surfers wear in competition, just like we offer to our customers who are constantly looking for the most recent innovations and best constructions.

In January, we ran an exciting promotion in conjunction with the NFL Pro Bowl in Hawaii that allowed us to reach the vast NFL audience and feature some of its star players.

In other Quiksilver brand news, our Waterman Collection, designed for men who are past their teenage years, continues to thrive and again log solid sales growth through the first quarter.

Turning now to our overseas business. Our European region continues to deliver strong results despite the difficulties surrounding the ongoing sovereign debt crisis there and the late arrival of cold weather. Revenues in the region grew 4% in constant currency driven primarily by comparable store sales in our company-owned retail stores, which were up 9% over the first quarter last year. These strong results more than offset the impact of closing underperforming stores in the region over the past year and the warmer winter weather, which delayed sales at retail until January.

From a country perspective, our business in France, which is our largest European market, remained solid and grew mid-single digits in first quarter, while our business in Spain continues to be tough. The region includes several rapidly growing markets where we have been investing to expand our leadership in the action sports category. The most exciting is Russia, where our 15 company-owned retail stores and 17 licensed stores are fueling double-digit growth.

During a recent trip to Europe, I was able to again see, firsthand, some of our new stores, and they are absolutely amazing. Our new store in Chamonix in the French Alps is to the mountain while the North Shore in Oahu is to surfing, iconic and inspirational. Our store in Ericeira on the Portuguese coast is perhaps the best in the Quiksilver world, with a premier skate park that reinforces our position as authentic market leaders, and the very popular Paris Bercy Village is a collection of former wine warehouses that have been converted into really unique beautiful shops. Our multi-level store there affords us enough room to tell more complete brand stories for Quiksilver, Roxy and DC in a terrific setting. And construction is underway on our latest new Boardriders concept in Barcelona. We expect this location will also be a destination gathering spot for action-sports-minded people throughout the region, similar to the enormously successful DC Embassy that we opened last year.

While we share the widely held concerns about the state of the major European economies, we continue to strengthen our relationship with key customers who view us as the face of outdoor sports, and we are taking market share from weaker competitors.

Turning to our Asia-Pacific region, our business in Australia and New Zealand remains very challenging. In particular, Australia's economic recession created a highly promotional selling environment. In addition, a cooler-than-normal beginning to the summer season there has only compounded matters. Despite these pressures, we were pleased that revenues grew 8% in constant currency, and retail comps were up 3% in the Asia-Pacific region while the market trend for many of our peers has been to report year-on-year declines in sales. Our positive momentum continued into February as well. Wholesale revenues in the region grew solidly in the quarter. In Japan, retail comps lagged our strong wholesale performance although strong February comps indicated a return to growth in our Japanese retail business.

Our smaller markets in Southeast Asia were up sharply in the quarter. We've mentioned recently that we continue to invest in some initiatives ahead of revenues, which includes several opportunities in the Asia-Pacific region. Specifically in China for DC and in South Korea, we're investing in infrastructure, and we've added executives with strong industry experience to manage our business and drive growth in these 2 key markets.

As part of our 5-year planning process, we've identified and prioritized significant opportunities for cost reductions through further globalization of our operations. Early in Q1, we appointed Craig Stevenson to the corporate COO role, and we've tasked him with leading our global initiatives. These opportunities include an overall reduction on our global marketing spend, continued penetration by our Asian sourcing arm, QAS, improve global product alignment and consolidation of operating systems. These are very complex issues that will require careful planning. We'll provide periodic updates on these initiatives in the future as they progress.

The first quarter for our athletes and events marks the culmination of the men's professional surfing season, and the awards that follow, in addition to the beginning of the snow season. In that context I'd like to just take a brief moment to mention a few of our athletes who inspire us in our action-filled lifestyles and who helped us reach our important core demographic.

In November, Kelly Slater secured the 11th World Surfing Championship after a full season of dominating performances. The substantial press and attention that accompanied his title this year and his incomparable lifetime body of work included the top spot in the Surfer Poll Awards and a nomination for Sports Illustrated's highly coveted Sportsman of the Year. Kelly continues to be a fantastic global ambassador for surfing and for Quiksilver.

And speaking of ambassadors, Quiksilver's skate legend, Tony Hawk, continue to spread our global message in the first quarter as Tony Hawk and Friends Skate Show made its way to Mumbai in December. Tony hosted the first-ever halfpipe type skate demo in India for tens of thousands of adoring fans who support our business there, which soon will feature stores in a number of major cities including Delhi, Bangalore and Mumbai.

In February, Roxy surfer, Sally Fitzgibbons, entering 2012 as the second rank female surfer in the world, held off fellow Roxy rider, Sofia Mulanovich, to win the inaugural Australian Open of Surfing at Manly Beach in Sydney. After winning 3 of the 7 events on the Women's Tour in 2011, Sally is well-positioned to make a run at her first world title this year. And last week, 4-time world champion Quiksilver team rider and Quiksilver Girls brand ambassador, Stephanie Gilmore, kicked off the 2012 Women's ASP season in style by winning the Roxy Pro Gold Coast at Snapper Rocks in Queensland, Australia.

Turning to winter sports, Quiksilver DC and Lib Tech's snowboarder, Travis Rice, concluded the global world premiere tour for his movie, The Art of Flight in November. From New York City to Munich, from Tokyo to Sydney, crowds were amazed by this awesome production. The tour visited 42 cities and 20 countries after having secured more than 85,000 iTunes downloads since the film's September launch, more than any other action sports item on iTunes. So if you haven't seen it already, please download it. Go to iTunes, it's called The Art of Flight, put your headphones on and get ready to be absolutely amazed.

In January, we were all devastated by the tragic passing of Roxy's snow skier, Sarah Burke. A true pioneer in the sport of freestyle skiing and for women's representation in action sports and the Olympic Games, Sarah was injured while training in Park City, Utah. The close-knit community of peers and competitors rallied around her family and friends to provide support, and ESPN's Winter X Games coverage featured several forms of tribute to Sarah. Although her accident occurred during a routine maneuver in practice, her loss is a reminder that many action sports include elements of danger that challenge these unique athletes to push themselves to excel and continually evolve their sports. Sarah's passion for skiing lives on through the kids she has inspired by way of her dedication to her sport and her accessible and friendly demeanor. We are fortunate that the family of athletes we sponsor have been terrific role models and have done a consistently great job in helping us to reach consumers with the right messages.

So we've begun the new fiscal year encouraged by the opportunities in our business and also well aware of the risks. It's evident from each of our brands, in each of our regions and across each of our channels that there is momentum all throughout our global business, and we continue to operate at high level. To provide more color on our financial progress, Joe will now take you through our first quarter financial details.

Joseph Scirocco

Thanks, Bob. Good afternoon, everybody.

As reported, consolidated first quarter net revenues of $450 million were up $24 million compared to last year and grew 6% in constant currency. The Americas region, revenues were $205 million, up 6% compared to last year; while European revenues at $169 million, were up 4% in constant currency. Asia-Pacific revenues were $75 million, up 8% in constant currency.

As anticipated, and in the comments we made last quarter, consolidated gross margins contracted by 170 basis points to 50.7% of sales compared to 52.4% in the first quarter 1 year ago. A number of factors, both positive and negative, affected gross margins in the quarter. Margin compression was largely caused by higher sourcing costs, which we anticipated, and higher levels of clearance activity. Additionally, our European region was impacted somewhat by less favorable currency hedging contracts when compared to last year. That being said, our mix of business in Europe benefited from a higher percentage of retail sales and mix.

Overall, pro forma SG&A expenses, excluding special charges, were $229 million or 50.8% of sales. And as Bob mentioned, they were 90 basis points higher as a percentage of sales than 1 year ago as we continue to invest in long-term initiatives such as e-commerce and emerging markets. Also as a reminder regarding expenses, in fiscal '12, we are expensing an incremental $4 million to $5 million per quarter in non-cash stock compensation related to last June's equity grants.

We generated first quarter pro forma adjusted EBITDA of $20 million, down $9 million compared to the same quarter 1 year ago but higher than we expected when the quarter began. Our pro forma consolidated loss for the quarter, including interest and taxes but excluding the charges I mentioned a moment ago, was $21 million or $0.13 per share compared to a loss of $8 million or $0.05 per share in the same quarter 1 year ago.

Now I'd like to turn your attention to the balance sheet. Receivables at $322 million are 13% higher than for the same period last year in constant currency, primarily due to the timing of shipping compared to last year. On an overall basis, DSOs were 59 days, 1 day longer than last year. The accounts receivable aging remains healthy however, with a higher percentage of current accounts than last year.

Inventory at quarter end was $412 million, up 33% both as reported and in constant currency compared to 1 year ago. This increase is due to anticipated cost increases, including currency effects, along with the early receipt of spring summer goods. And it also includes some excess fall winter goods following the unseasonably warm start to winter.

We realize that inventory is high but for the most part, we planned it and communicated it in advance. For example, we knew about that 10% to 15% cost increases that were coming. Also as we said last quarter, we wanted to protect our supply and make sure that we were in stock to meet new orders. We believe that we are well-positioned as a result of the strategy, except we didn't count on the late start to winter. On a comparative basis to last year, keep in mind that we took a more conservative approach in 2010 when we bought last year's goods. We were, therefore, understocked in fall/winter of 2010 and 2011, and we believe that caused us to miss some business in some categories last year. And when we switched, our strategy from defense to offense about 1 year ago, we became a little more aggressive in our buys as we began to identify and invest in additional growth opportunities. In the end, we expect to normalize to a level that supports our growing business by the end of the fiscal year.

Turning to CapEx. CapEx was $16 million in the first quarter, down $2 million compared to 1 year ago and included continued investment in our retail stores and spending related to our ERP system's implementation, which continues on schedule and on budget. We ended the quarter with $646 million of net debt, up slightly from year end as we continue to require higher working capital levels until the second half of this fiscal year. Now that we have the first fiscal quarter of 2012 in the books, we'd like to again reassure investors that we remain focused on our longer-term plan that calls for substantial revenue growth and significantly higher levels of profitability. We'd now like to reiterate some of the important assumptions and drivers that we expect will characterize the balance of this fiscal year.

With regard to revenues, we continue to expect that each of our brands, Quiksilver, Roxy and DC, and each of our 3 regions, will grow in fiscal '12. Because we expect DC will be our highest growth brand on a percentage basis and because DC's fiscal 2012 strategy includes a significant back-to-school component, we continue to anticipate that our overall revenue growth will be higher in the second half of the year. As we've mentioned for some time now, keep in mind that increased sourcing costs began to impact on margins in Q3 of last year and that we will not anniversary those impacted margins until fall 2012. Additionally, we remind you that the hedging benefits that enabled us to offset some sourcing cost increases last year will not occur this year. Therefore, we are now buying goods in Europe with weaker currency than we did last year. And this will result in roughly 100 basis points of margin pressure overall for fiscal 2012. However, this is only a 1-year phenomenon as we have improved the rate for 2013.

And with regard to expenses, we continue to expect some reduction in SG&A spending as a percentage of sales in fiscal '12 compared to fiscal '11. So in summary, we believe we are firmly on the path to achieving our longer-term objectives.

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

Robert B. McKnight

Thanks, Joe. So in summary, we're very pleased with our solid first quarter results. Our top line growth was driven by continued strong retail performance with positive comparable store sales in all 3 regions. Demand for our products remain strong in both established and emerging markets. We acknowledge that our inventory levels are high, and we plan to normalize them to a level that supports our growing business by the end of the fiscal year. We're making good progress on the long-term growth initiatives in which we've invested. We've identified significant opportunities for cost reductions through further globalizing of our operations, and we remain well positioned and on track to deliver both revenue growth and profit expansion this year, the first year of our 5-year plan to increase annual revenues by 50% to $3 billion and to double our annual EBITDA to $400 million.

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] We'll take our first question today from Jeff Van Sinderen, B. Riley.

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

I know you mentioned that clearance activity was up. Maybe you can talk a little bit more about that. How much was the result of inventory being a little bit heavy? How much was kind of the promotional environment? Maybe what the toughest regions were and where the relatively strongest regions were?

Joseph Scirocco

Yes. Hi, Jeff. I would say that the stronger business was in the Americas region. Europe's economic troubles are well-publicized but the delayed start to winter there meant that business in November, December was very tough. So that got us off to a slow start with winter outerwear sales. Interestingly, as soon as it turned cold in January and as clearance period came up, our comp store sales in Europe in the month of January were up 29%. And that continued straight through the month of February as well. So we gave a little back on margin, obviously, but it was good to see that the demand for the product really is there. People love it, and European consumers delayed spending is what it appears to be. So as Bob said earlier, elsewhere in the globe, the Asia-Pacific markets are mixed with Australasia being tough, but India, Australian market, for the first time, we turned positive on comp store sales, first time in some while. So that appears to be a very good sign for us as well and that we've touched the bottom, and we feel like we're coming back there. So good things will come.

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

Okay. And then, so how should we think about your inventory levels at this point in terms of seasonal carryover merchandise, some of the stuff that maybe weren't able sell in Europe? And are there parts of that excess that you might need to clear through the off-price channel? Or how do you anticipate handling that?

Joseph Scirocco

Yes. Well, as we said, we were a little aggressive with our buyers. We came off a more cautious approach in the prior year, so we did have some excess. I would judge it to be somewhere in the range of say $30 million, $35 million. We expect to sell all of that through normal clearance channels during the course of the fiscal year and get back to a normalized level. We do expect it to impact gross margins to a certain degree, but it's relatively contained. I mean, maybe on the order of 50 or so basis points.

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

Okay, good to hear. And then maybe you could just give us a little more color on how fall and winter bookings have trended and maybe by brand and region would be helpful.

Joseph Scirocco

Yes, sure. Well, the order books are almost together. They're coming together, but as we've said, they are a little less indicative for brands like DC in which we do a lot more at-once business, and it's much less of a preorder business. That's very important in considering our second half because we have such a big back-to-school program with DC. But I would answer this way, based on the orders we have seen, we continue to believe that we can achieve our plans -- the original plan for the second half of the year. So just to remind everybody, we do expect growth in all of our brands for the fiscal year and in all of our regions. If I take them individually, we think about the Quiksilver brand as growing high single-digits in fiscal '12; Roxy as a mid-single-digit grower; and DC, a midteens growth. By region, we're thinking 10% or maybe low double-digits in the Americas; Europe, kind of a mid-single-digit number; and APAC, in the midteens. We have a lot of investment in Asia Pac and some promising things happening, especially in some of the emerging markets like Southeast Asia, Thailand, Korea and the DC business in China. So hopefully that's helpful.

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

Now -- it is. And so you said, I think in your prepared comments, that you do expect profitability to be up this year, correct?

Joseph Scirocco

Yes.

Operator

Next, we'll hear from Taposh Bari, Jefferies & Company.

Taposh Bari - Jefferies & Company, Inc., Research Division

I guess the first question I have was just on DC. So I was hoping -- I know you'd mentioned, given some color on this last quarter as well, but was hoping you can provide some more detail behind what these growth initiatives are going to be in the back half of this year that give you the confidence that you're going to see a sales re-acceleration? And if you could just kind of provide color as to which geographies those initiatives are going to be held in.

Joseph Scirocco

Sure. Well, DC in the back of the year, I guess the highest -- I'm not sure whether Americas or Europe will do the higher growth plan, but they're both double-digit growth plans and double-digit in the back half of the year in particular for different reasons. In Europe, we still have very substantial growth in the core channels with DC, and there is a definitive program underway already in which we've begun expansion into some of the sports channel. So stores like Intersport or Sport 2000, Go Sport, places like that where people have been buying Roxy, Quiksilver for years, that's how we've distributed there, we have an intentionally restricted DC products in those channels. In the U.S., we have other programs for product segmentation, market segmentation. I'm not sure we're prepared to fully articulate them at this time. But at the same time, our e-commerce business is growing, and so DC is benefiting from that. We have just launched this year, as Bob said, DC in China, which is not part of our joint ventures so that's for our own account. We expect growth there, and so there are all of these substantial new markets in across the globe, really, that's why DC is a double-digit grower.

Taposh Bari - Jefferies & Company, Inc., Research Division

Great. That's very helpful. And then if I could just ask a follow-up on the margins. So I think that your prior gross margin guidance for the year was 75 to 100 bps of contraction. Does that change given the inventory position that your exiting the first quarter with? And then kind of along those lines, the SG&A guidance that you'd provided was -- what leverage is that, excluding the stock comp $45 million of quarterly stock comp? So I guess, following up on Jeff's question, are you expecting profit growth or margin growth in 2012?

Joseph Scirocco

Okay. So I think the answer to your question as compared to although we didn't -- I think we didn't guide specifically on this, but we did imply that our -- last quarter, we implied that our gross margin would compress a little bit. And I would add to that, as a result of the excess winter goods, let's think about 50 to 100 basis points of additional contraction on gross margin for the year. The SG&A increases for non-cash stock comp are already in the numbers. Of course, that's added back to -- from an adjusted EBITDA standpoint. So when we report EBITDA and think about profitability, that's in our numbers already, and we do expect profit growth in the year.

Taposh Bari - Jefferies & Company, Inc., Research Division

Great. And then just a final question I have is kind of housekeeping. But Joe, can you just, I guess 2 pieces. One, where do you guys stand as far as a new CFO hire goes? And what are your plans? I think you had mentioned that you'll be there kind of worst-case through the middle part of the year? And then the second piece, last question I have is, if you could just help us understand, better help us understand the tax rate situation? Why is it so high? When is it going to normalize? And then what should it be a normalized basis eventually?

Joseph Scirocco

Sure. Maybe I'll answer the tax question, I'll leave the CFO questions to Bob, I think that's probably better. But taxes are kind of strange to think about as a rate. In the current year, I think we're saying the provision should be on the order $45 million or something like that. The cash portion of that will only be on the order of $20 million to $25 million. The balance would be provisional only, noncash. I mean, going forward beyond that, let's wait until next year as we see our mix of earnings and tax attributes, and we'll come back to you later in the year on that.

Robert B. McKnight

As far as the CFO search, we've retained a really senior-level sort of executive search firm in Russell Reynolds, and they have done a wide net candidate search. We've seen some really good candidates already. The search is underway. We'll tell you more about it when it's appropriate. The timing would be, I would say, in the next -- I don't know, 30 to 60 days I would say. And in the meantime, Joe's here, he's still the CFO and doing a great job, so -- but that's the update on the CFO search.

Operator

Next up, we'll hear from Jennifer Black, Jennifer Black & Associates.

Jennifer Black - Black & Company Inc., Research Division

I wondered -- I have a couple of questions, if you could first talk a little bit more about the detail in as far as Europe and Australia on the wholesale side of the business.

Joseph Scirocco

Sure, Jen. I mean...

Jennifer Black - Black & Company Inc., Research Division

And how you're planning, I guess, back-to-school on the wholesale side?

Joseph Scirocco

Yes. Well, I mean, we could kind of take a little walk around Europe and tell you that country by country, our business -- our biggest market there, as you know, well, it's France. And that's up sort of on the 6% range. The toughest market, being Spain, is down 4%. So that continues to be a bit of a challenge. The really exciting news in Europe is a number of these emerging markets. Germany is coming around for us, we're doing a lot more business there, Austria, even Scandinavia. But Russia is really the hot story for us in terms of 17 full-price stores and another 25 or so franchise or licensed stores. So that's doing really well, like high double-digit growth, like almost a 40% growth this year. That's on track to be a $50 million business over the course of the next few years. Elsewhere, the U.K. is still tough, but we've closed a lot of stores in the U.K. and have turned positive for the first time in a while this past quarter in the U.K. I think with respect to Asia Pac, Craig, you want to make some comments on Australia, our fair share of...

Craig Stevenson

Sure. Jennifer, I think it's what Joe said earlier, I think it's hit bottom there. It is still a challenged marketplace. We're finding a lot of growth in other parts of the APAC area though, like Korea, for example, is big opportunity for us. Our working comps were actually up 6% for Q1, so that was pretty good. Indonesia's continued good growth there, and our e-comm with really having a strong e-comm push. In all of them, that's looking like it's up, really good.

Jennifer Black - Black & Company Inc., Research Division

Okay. And I think this question might be for you Craig as well. I wondered what kind of progress you've made on the global sourcing? I think the last time I talked to you guys, it was around 25% of your sales, and I wondered what your ultimate goal was.

Craig Stevenson

The opportunity for us is really, at present and as we've said before, we're relatively regionalized supply chain at this point in time. So there's a lot of opportunity, I think, for us to really globalize our whole supply chain, right from M&D through production and to sourcing. I think as we continue to get more global continuity to our product mix and the significant cost benefits associated with the SKU reduction that comes from that is also a real opportunity for us to consolidate our distribution operations in Asia, which I think in turn will give us a much better inventory management. Our owned sourcing operations we have -- which we call QAS, at the moment, say, 40% of that were apparel sourcing, it is about what our penetration is, so we're trying to get that to over 50%, and we're heading in the right direction. And footwear, as you would already know, well, our footwear is already global sourcing.

Jennifer Black - Black & Company Inc., Research Division

Okay. Great. I just have one more follow-up. Then now, how did the launch of the Quiksilver Mountain Division at the Outdoor Retailer go in January?

Craig Stevenson

I think Rob could take that one, Jennifer.

Robert B. McKnight

Hey Jennifer, we had a really good show at Outdoor Retailer. We had a great response to the Mountain products, same thing in SIA. Retailers are really excited about it, and Roxy is pushing into that category of product as well and getting some great feedback. So we're really pleased with that.

Operator

Our next question comes from Christian Buss, Credit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if you could provide some perspective on the strength you saw in retail operations, what was driving that? And this -- with basic blocking and tackling or is there something structurally that you're doing that could help drive those comps?

Joseph Scirocco

Well, hi, Christian. We've done a lot in our retail stores over the course of the past year, particularly in the Americas region. We've also closed a lot of underperforming stores around the world, mostly in the U.S. and in the U.K. But it's everything, and that's all the blocking and tackling, it's all the merchandising, allocations, et cetera.

Craig Stevenson

Look, we've mentioned in previous calls, the allocation is a big thing. But in general, we really think that our product mix has gotten much better, our buying, in-store product mix and our allocations. So as much as it's blocking and tackling, I really think the product is much better.

Christian Buss - Crédit Suisse AG, Research Division

Okay. And as a follow-up, could you talk about the relative margins in your own retail versus the wholesale business?

Joseph Scirocco

Yes. I mean, this is always a tricky question because it gets into the question of how do you think about centralized and regionalized overhead. But if you take our stores and just measure them on a direct cost basis, direct cost against the 4-wall profit, we would think about like a 15% profit margin, EBITDA margin for the current year. That's driven by, obviously, a vertical gross margin. But without any allocations of overhead, you should think about a 15% level today, and we expect to get much better from there. We are investing in people and systems and the integration with our SAP and a whole variety of initiatives to help us do a better job there. And as Bob said, we've really invested in stores themselves and products. So I think that kind of sums it up.

Operator

Up next, we'll hear from Diana Katz, Lazard Capital Markets.

Diana Katz - Lazard Capital Markets LLC, Research Division

I was wondering if you can help us understand the benefit of mix on gross margins in Europe. What's the current percentage of retail sales in Europe versus U.S. and Asia?

Joseph Scirocco

In the U.S. market, Diana, retail comprises about 17% of our total sales; in Europe, it's more on the order of 26%; and in Asia Pac, it's like 35% to 40%. That's just a function of the entry points into those markets and the nature of the wholesale of customer base is much smaller in some of them. So we've gone in with retail, and we've built around them with substantial franchised retail. So because retail is tracking a much higher gross margin and is additive to the bottom line from an incremental standpoint, to the extent that the retail mix shifts, as it does in the first quarter of every year, it shifts much more to retail with holiday selling in there, and wholesale shipping relatively low, so it means that our margins and also our expense structure shift and reflect that in Q1 and also in Q3 to summer.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then, as part of your long-term plan, where do you want those retail percentages by region to be as a percentage of the mix?

Joseph Scirocco

Well, I mean, I think if we are on the order of 24%, 25% today, it could tick up slightly, but our big push on the direct-to-consumer front is in e-commerce. I mean, we like the notion of being asset lean and investing in the e-commerce platform. It's much more portable and that's where our people shop. It's where we interact with our consumers.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then given your top line in the quarter, came in above expectation, any change to your annual view of the top line? I think before, you mentioned kind of the mid to single-digit growth?

Joseph Scirocco

Yes. I think we don't have a significant change to it. I mean, there might be some shifting around between the quarters, but we -- yes, I wouldn't put to fine a point on that.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then, with Roxy, I just had a small question on prices. Are you seeing any price resistance right now? For example on swimsuits, bikini tops and bottoms are each $40, it seems pretty high compared to others at the mall, and I just wanted to know about price resistance and how Roxy is performing.

Robert B. McKnight

Roxy continues to uptick, and we're really happy about that. You guys all know that we had a tough couple of years. We're having a great year this year. Swim has been a very strong category for us. Over the last year, we've performed exceptionally well in all the channels of distribution with swim. And so we're not seeing price pressure when we come out with great products, And we think we have great products on the swim side.

Operator

Our next question today comes from Carla Casella, JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

My question is on the U.S. the retail stores. How many [indiscernible] for the year, and are there still underperforming U.S. stores [indiscernible]?

Robert B. McKnight

I'm sorry, I missed the question.

Joseph Scirocco

Hi Carla, I think you asked how many U.S. retail stores we closed in the past year and -- or do we still have some underperforming stores. Well, second question first. We do still have some underperforming stores. They're mostly mall-based stores that we opened in the 2006 through '08 timeframe. Collectively, their cash flow loss is relatively modest, it's a couple of million bucks maybe. We are closing a number of them this year. Probably -- I think we have a case -- so Bruce is handing me a note, saying in the U.S., we closed 15 stores in 2011, and we opened a handful. But of the 15 stores we closed and we'll continue to close, I don't know, 8 to 12 this year, they'll be closed on the basis of lease kick-outs or lease expirations, so we will avoid cash charges to the extent we can to execute those. I wouldn't look for a huge EBITDA pickup as a result of that, but the business will be more efficient, comps will seem better, and we'll be a little bit healthier when we do that.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. Great. And then, just one quick question on the inventory. When you have -- do you ever have to pick returns of winter merchandise?

Joseph Scirocco

We don't do that very often. That's very selective. It varies market by market around the world, we're in many, many businesses, but in general, we avoid them.

Operator

Mitch Kummetz of Robert Baird has the next question.

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

Yes. I've a few questions. Joe, you mentioned what your expectations were for the full year by brand, I was hoping you might be able to tell us how the brands performed on the first quarter.

Joseph Scirocco

Yes. Hi, Mitch, we always have this discussion. I mean, the brands in the quarter are a difficult conversation that we don't like to have because it's hard to draw a conclusion from them. They're so affected region by region by the timing of shipping and things like that. So we kind of stay away from that discussion. What I would say is based on the first quarter performance, I would say that we feel like we're well on track with our full-year expectations for the brands. And so just to repeat that, we think Quiksilver's a high single-digit grower, Roxy's a mid single-digit and DC is a midteen. Now the first quarter didn't shape up that way for each of the brands because of various factors, mostly the timing of shipments, that's what we think.

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

Okay. That's fair. On your retail stores, you gave the comp in the quarter, and I think you said Japan was up in February after being down in a quarter. Could you just give us a quick update by major geographic regions as to how the comps have come in for February, Americas, Europe, Asia Pac as a whole?

Joseph Scirocco

Well, I mentioned Europe as of 29% positive comps. I would say that generally speaking, in the Americas, comps are running sort of 10% or so for Americas. In Asia Pac, a tale of 2 markets. We're up sort of a mid-single-digit, probably overall. And I think that is fairly evenly split between the Australian and the Japanese market.

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

Okay. That's helpful. On your SG&A, I know that you're anniversarying Quick Pro New York, I think it was the fourth quarter last year. What do you guys benefit, from an SG&A standpoint by not doing that contest this year versus last?

Joseph Scirocco

Well, I mean it's part of a mix of spending, and includes spending on the order of $900 million a year in SG&A, so the impact on any 1 quarter of an event, however major, is not going to be the tale that tells it. Yes, we do have a pretty significant increase in noncash expense this year. We have about $15 million to $20 million in equity, stock comp, noncash, which is being amortized this year and will run out, if not the fourth quarter of '12, then early 2013. A lot of the expense is going towards e-comm where we're investing, and as Bob said, some of these newer markets like Korea and DC and China are really driving -- that's what's driving the cost. And those investments continue as do others, so the fact that we're saving a few bucks in New York, doesn't matter.

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

Sure. Just to clarify, did you say you're going to get SG&A leverage on the year, including or excluding that $15 million to $20 million of noncash stock comp? I wasn't sure of your comments.

Joseph Scirocco

We expect some SG&A leverage on the year, and that's consistent with our comments when we set the budget last quarter.

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

Got it. And then just the last thing on the gross margins. Maybe you just help me out, how shall I think about -- what was the input cost impact on the quarter? What do you think it will be all in for the year? And I think you said in last call that you expect gross margins to be flat in the back half, and I'm just wondering if that's still the case with the excess inventory that you're carrying over after Q1.

Joseph Scirocco

Okay. So a lot of detail there. I'll try to give you a summary answer. So on the general cost increases coming out of Asia, we think about 10% to 15% higher input costs, which began in the fall season of 2011 and which we will anniversary for fall of '12. In addition to that, we have a currency impact, which is on the order of 75 to 100 basis points on a full year basis, and that's an incremental cost of sales for us. It's solid in the middle of the year, and the impact on the first and the fourth quarter, you kind of have a blend because the inventory purchases took place across fiscal year end. So think about that as I say, 75- to 100-basis-point penalty to fiscal '12. I think what we are seeing for fall 2012 pricing, and this is kind of preliminary since we're in the middle of the buys right now, but it seems like pricing is kind of flat to up, low to mid single-digits. And in certain categories, it's a combination of somewhat better commodity prices this year offset by continued inflation in wages and that kind of thing. So hopefully, that's helpful. Overall, I did say we expect some compression in margin, gross margin as a result of these factors, and we think that should be on the order of -- whatever we said last time was with whatever Bruce? Around 100 basis points.

Bruce Thomas

100 basis points.

Joseph Scirocco

Yes. Okay?

Operator

Next, we'll hear from William Reuter, Bank of America Merrill Lynch.

William M. Reuter - BofA Merrill Lynch, Research Division

I'm curious whether you have set any intermediate goals on the way to your longer-term, 5-year plan of $400 million of EBITDA that you guys could share with us.

Joseph Scirocco

I mean, I think we will in due course, but not at this point in time.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. The second question I have is whether you expect to be free cash flow positive this year and what you would plan to do with that free cash flow.

Joseph Scirocco

Yes. Last time, we talked about this 1 quarter ago, we were approximating $50 million or so in free cash flow. Our basic assumptions are intact. We think it might be a little bit less at this point in time because we need some additional working capital for slightly higher accounts receivable in certain markets. I mean there are some markets, for example, we're in a cash crunch, we offered early payment discount options and things like that. Today, we're not pressured to do that. This is not in the U.S. by the way, it's outside the U.S. So we don't feel pressured to do that today. So that effectively extends terms to some customers. Also, the e-commerce business is accelerating. So as we head into 2013, we may need to carry a little extra inventory for that. But generally speaking, maybe somewhat less than the $50 million we talked about last year. And that cash flow will be used to continue the progress of reducing our net debt ratio.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then lastly, you highlighted in your press release the strong e-commerce growth during the quarter. I wonder if you could talk about how big your e-commerce is at this point, and I guess, where it can go and over what period time.

Joseph Scirocco

Yes. So e-commerce, just for perspective, in the sort of the 2010 era, it was about $20 million. I think we went up to about $30 million or so in 2011. And on a like-for-like basis, we would see that growth being more than double in fiscal 2012. I mean, if you want to know about some of the things we've done to get our sites prepped and to improve that. And Rob, do you want to make any comments about that?

Robert B. McKnight

No, so -- well, just from an Americas perspective, vertical e-comm is ahead of plan. It's growing just as fast as it was last year. And we're -- I mean, we're investing in the front end of that. We're investing in the back end. And the operations are really helping us give better and better service and be a better operator on the e-comm side. I think that, along with great products, fueling the growth there, so we expect that to continue. We're just going to get better at doing this.

Operator

Our next question today comes from David Chris Griffith, Roth Capital Partners.

David E. Griffith - Roth Capital Partners, LLC, Research Division

I wonder if you can just give us some little update on Quiksilver Girl.

Robert B. McKnight

Quiksilver Girls and Women's is off to a great start. We continue to see bookings growth on the wholesale side. It's selling through very well at e-Comm and vertical retail in the Americas region. We're really happy with the product. Our accounts are really happy with the product, and it's a big part of our Quicksilver brand 5-year plan.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And then there's been some discussion from Foot Locker of going more to a lifestyle strategy with CCS. And obviously, very early, but curious if that's a benefit to Quicksilver overall.

Robert B. McKnight

To the Quicksilver brand?

David E. Griffith - Roth Capital Partners, LLC, Research Division

More than -- to all brands.

Robert B. McKnight

The distribution plan, at this point, doesn't include...

Joseph Scirocco

I'm not sure I understand the question.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Well, I wonder if they talked about as getting away from just more of a skate mentality and really incorporating kind of a more action sports brands. And it seems like maybe there can be an opportunity there for all of your brands.

Robert B. McKnight

Okay. So I don't think that it helps or hurts us at this point. I mean, they're not currently a customer of ours.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Okay. Perfect. Very good. And then, Joe, could you maybe touch a little bit on what really drove the differences on the tax side for the quarter? If there's anything major you can point to.

Joseph Scirocco

The difference from what?

David E. Griffith - Roth Capital Partners, LLC, Research Division

From a statutory rate versus your effective rate given...

Joseph Scirocco

Oh, sure, sure. Yes, it's simple and it's unfortunate, but the situation is that in the Americas region, let's say, in the United States, which is the largest jurisdiction in which we do business, we incur not only the cost of the operating business, but we also incur all of the corporate cost of the Quicksilver group. So from a U.S. tax standpoint, we have a loss in the Americas region and a substantial tax carryforward

David E. Griffith - Roth Capital Partners, LLC, Research Division

United states?

Joseph Scirocco

In the United States. So what it means is, and we also pay a substantial amount of interest on bonds and stuff like that, all of that gets expensed in the U.S. We're running a loss, we have a net loss carryforward. And in that context, we are not allowed to anticipate tax benefits associated with those losses. So to make it really simple, we make money in France, we provide taxes. We lose money in the U.S., we get no benefit, which means that the net profit kind of, well, is relatively low and the net tax is relatively high, so we have this weird rate. That's why our annual tax bill is, from a P&L standpoint, is about $45 million although very little of that is cash. There's also another factor here, which is the continuing carryover effect of the rising NOL, net operating losses in the U.S. So just -- so the people wonder why did you build up this massive loss, in case anybody forgot, which I doubt, we do have these massive carryovers, which are behind us. But they're still on the tax books.

Bruce Thomas

Operator, I think we have time for one more call.

Operator

Okay. Our final question today comes from Adam Engebretson, Piper Jaffray.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Maybe you could -- is there any additional information you'd provide on quantifying either the amount or timing of the additional cost reductions that you have identified going forward?

Joseph Scirocco

I think, as Bob said, Adam, we'll talk about it prospectively, but we're just launching some of these initiatives.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Okay. And then maybe number two, given the kind of warm weather in the U.S. and Europe this year, how do you see that impacting your retailer orders for next season?

Robert B. McKnight

The snow business for us in the Americas is it looks like the pre book is coming in strong particularly on the DC and Roxy side, so we're happy with that. We've got a new structure in place, new management structure here that's really helping us move the needle. So we don't see a big downside there. We've got a couple customers who want to start the year with clean inventories. We're having discussions with them about dating. They're great partners of ours. And then we've got our Mervin brands, which are growing really nicely. We're very happy with that business as they continue to expand into the socket side of the business. But we're feeling good about it.

Bruce Thomas

Okay, thanks, Adam, and thanks, operator. That concludes today's call. On behalf of everyone here at Quicksilver, thank you for participating. I look forward to providing our Second Quarter fiscal 2012 Results in early June.

Operator

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

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