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Quiksilver (NYSE:ZQK)

Q2 2012 Earnings Call

June 07, 2012 4:30 pm ET

Executives

Bruce Thomas - Vice President of Investor Relations

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

Richard J. Shields - Chief Financial Officer

Robert Owen Colby - President of Americas Region

Craig Stevenson - Chief Operating Officer and Global Brand President

Analysts

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

Andrew Burns - D.A. Davidson & Co., Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Diana Katz - Lazard Capital Markets LLC, Research Division

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

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

Kevin Coyne - Goldman Sachs Group Inc., Research Division

Christian Buss - Crédit Suisse AG, Research Division

Michael Karapetian - Janney Montgomery Scott LLC, Research Division

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Operator

Please stand by. 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's Second Quarter Fiscal 2012 Earnings Conference Call.

Our speakers today are: Bob McKnight, our Chairman, President and Chief Executive Officer; and Richard Shields, 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 statement. 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 and in our quarterly reports on Form 10-Q.

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, and good afternoon, everyone, and thank for joining us today for our Second Quarter Conference Call. I'd like to begin by welcoming our newest member of our senior management team, our new Chief Financial Officer, Richard Shields. We're delighted that Rich has joined the Quiksilver family. And even though he's only been with us less than a month, he hit the ground running, and we're looking forward to the many valuable contributions that Rich will make to the future success of Quiksilver. So welcome.

Turning now to our business in Q2. I'm proud of the Quiksilver team's performance in the second quarter amidst inconsistent economic conditions around the world. While some of our emerging markets have shown strong progress, some established markets, particularly in Europe, have been impacted by regional economic uncertainty. Despite the pressure on our business caused by this uncertainty, our brands have held up well, and we're pleased to have grown our revenues across all 3 brands in all 3 regions and in each of our channels of distribution. This was, however, a challenging quarter for our business from a margin perspective. As we communicated back in March, we entered Q2 knowing that a number of factors would negatively impact margins in the quarter. And as the quarter progressed, a few of those dynamics became more impactful than we expected. Importantly, some of those headwinds diminished as we move into the second half of our fiscal year.

Let me turn now to the high level financial highlights for the second quarter. Revenues in Q2 were up 5% when compared to last year in constant currency reflecting that we have broad appeal for all 3 of our brands, Quiksilver, Roxy and DC, solid growth in our emerging markets, revenue growth and positive comparable store sales in each of our geographic regions and continued strong growth in our e-commerce channel.

Gross margins declined to 49.2% of sales. Our 2012 internal plan anticipated a number of headwinds that would adversely impact our Q2 year-over-year gross margin comparison. Our actual margins were, however, somewhat below our plan. SG&A of $224 million was up approximately $7 million compared to the second quarter a year ago. The resulting pro forma adjusted EBITDA in the second quarter was $39 million, which, as we anticipated, was well below last year's second quarter results.

Rich will take you through a more detailed look at our financial performance in a few moments. But first, I'd like to provide a brief update on our 3 flagship brands. Let's start with Quiksilver.

Revenues in Q2 for the Quiksilver brand grew 4% compared to the same quarter a year ago in constant currency. This growth was fueled by strong sales of warmer weather goods including boardshorts, Amphibians, walk shorts, hats and tank tops as temperatures began to rise in connection with the arrival of spring. During the quarter, we stepped up our collaborations with a major North American sports links, product for additional NFL teams, shipped into wholesale marketplace, and sell-through was exceptionally strong in tourist destinations. NBA boardshorts will follow with some teams introduced this summer and a deal with the NHL has been recently signed, and Canadian NHL team boardshorts will be shipped in Canada this fall. We're also expanding the program into Australian football leagues. These collaborations allow Quiksilver to reach new customers, new accounts and new channels of distribution while delivering authentic products that are designed using already existing resources.

Revenues in Q2 for Roxy grew 5% compared to the same quarter a year ago in constant currency. The Roxy brand continues to build momentum in their sportswear category through growth driven primarily by dresses, beach pants and light sweaters. Roxy footwear and the Roxy Girl line also performed well in the quarter. On the marketing front, Roxy launched the company's first ever global social media campaign in February called Let The Sea Set You Free, inviting girls from all over the world to tell us why they are Roxy Girls via social media platform. The Roxy bus went on tour within retail locations and giving girls the opportunity to film themselves on-site with Roxy. As measures of the programs reach, we received over 5,000 entries from more than 70 countries.

DC revenues in Q2 grew 13% compared to the same quarter a year ago in constant currency. This performance was driven by strong growth across men's, women's and kids footwear categories. Top sellers included products at both the high end and lower end of the price point spectrum. From a channel perspective, DC had a particularly strong quarter in department stores, and we continue to enjoy solid online revenue growth through our own sites, as well as those of our customers. Focused on the innovation and technology that the DC brand has always been known for, DC launched the Cole Light S in the second quarter, designed and tested by DC teen skater, Chris Cole. The Chris Cole Light S is a better shoe for a better skater. With its cleaner design, this more advanced skate shoe features DC’s super lightweight, Unilite technology and it became one of our best sellers immediately upon its launch. The second quarter for our athletes and advance includes important early contest in the men's surfing schedule, a significant portion of the women's pro surfing schedule and the kickoff event in Street League skateboarding. In that context, I'd like to take just a brief moment to mention a few of our athletes who inspired us and have helped us reach our important core demographic, as well as a couple of key events we sponsor.

First off, the successful worldwide tour in support of his hit movie, The Artist Life, our own Travis Rice won the first annual Red Bull Supernatural Backcountry Snowboarding Competition in British Columbia. This contest featured the world's 18 best snowboarders in a series of events aimed at determining the best all-around freestyle snowboarder on the planet. And Travis has certainly demonstrated that he deserved that title. Four-time world champion and Quiksilver team rider, Stephanie Gilmore is at the top of the women's ASP world title race. Once again, after winning 2 of the 2012 seasons first 3 events, including the Roxy Pro Gold Coast, and finishing second in another. And immediately, behind Steph in the standings is Roxy team rider's, Sally Fitzgibbons, who began 2012 on fire by winning ASP 6-Star events at the Australian Open of Surfing and Hunter Ports. Since then, Sally is running a close second to Steph in the 2012 Women's ASP world title race after winning tour events at Bells Beach and in Rio.

We recently hosted several key events in the world of competitive surfing and skating that attracted large audiences and successfully spread the brand story. In March, the Quiksilver Pro and Roxy Pro Gold Coast surf contest played to a capacity crowd at Snapper Rocks with the world's best surfers putting on a spectacular display of high-performance surfing. The event’s backdrop with our Best of Board riding campaign, which highlighted the collective strength and appeal of our 3 brands' team riders. And as I mentioned a moment ago, Quiksilver team riders, Stephanie Gilmore, won the Roxy Pro after edging out Roxy's Sally Fitzgibbons in the semifinals. On the men's side, Quiksilver team rider, Kelly Slater, advanced to the quarterfinals of the Quiksilver Pro, and it continues to be the single largest attraction in the sport.

Back on the domestic soil, the Street League Skateboarding DC Pro Tour kicked off its 2012 season at the Sprint Center in Kansas City. Between the packed arena, live coverage on ESPN2 and a huge online audience, the event provided valuable exposure for the brand and the sport. The contest's format was modified this year to reward performance under pressure and 17-year-old phenom, Nyjah Huston, our newest addition to the DC skate team, won the championship in a dramatic duel with Bastien Salabanzi, the tour's first European qualifier. And while we're on the topic of broadening the appeal for our brand, there may be no better pitchman for our brand than DC team skater, Rob Dyrdek, who is arguably action sports' most popular television personality. In addition to creating and hosting the Street League DC Pro Tour on ESPN2, Dyrdek's Fantasy Factory and Ridiculousness weekly TV shows are continuing hits on MTV and MTV Europe, and Dyrdek's new cartoon series, Wild Grinders, premiered in April on the Nicktoons network ranking as the highest-rated telecast of the week for kids and boys aged 6 to 11.

Collectively, these athletes and events and promotions reflect our heritage and authenticity while attracting more attention to our brands, helping us to appeal to a wider audience through television coverage, the internet and social media. When you think about it, we have a great foundation for social media. These dynamic athletes and high profile events that I just mentioned are good indicators of the reach of the sports we embrace and our position in the action sports community, which is increasingly consumed and connected by social media. As an authentic active participant in this community, we're now increasingly attracting our progressive consumer base to use our website as the hubs of their interaction. We naturally attract our target audience to our social media pages and websites through athlete interaction, our events, our media and our product. The best athletes in our industry are all very active in social media, and we have the best lineup in action sports. And through the performances of these athletes, our marketing team develops fantastic media assets to make the social media environment even more attractive. Our goal over time is to further establish our social media sites as the go-to meeting places where those who are passionate about action sports will listen in and join the conversation.

Okay. Now to provide more color on our financial performance, Rich will now take you through our second quarter financial details.

Richard J. Shields

Thanks, Bob, and thanks, everyone, for taking the time to join us this afternoon. Consolidated second quarter net revenues were $492 million, up $14 million or 3% compared to the second quarter of fiscal 2011, and up 5% in constant currency. From a brand perspective, Quiksilver brand revenues were $209 million, up 1% compared to last year and up 4% in constant currency. Roxy revenues were $135 million, up 3% compared to last year and up 5% in constant currency. And DC revenues were $131 million, up 11% compared to last year and up 13% in constant currency.

We were specifically pleased with the Quiksilver and Roxy brands' growth in the American region wholesale channel as this is a key barometer of brand momentum. Moving to a geographic perspective, revenues in the Americas were $221 million, up 5% compared to last year. European revenues were $196 million, down 6% compared to last year but up modestly in constant currency terms as economic headwinds in Europe hindered our wholesale growth. In the Asia-Pacific region, revenues were $74 million, up 27% compared to last year and up 24% in constant currency. Asia Pacific revenue growth reflects improved performance in Japan where revenue comparisons anniversaried the second quarter last year, which included the aftermath of the natural disasters that struck Japan in March 2011. Importantly, we had good growth in Japan and good growth in the Asia-Pacific region outside Japan as well.

Next, moving through a distribution channel perspective. Wholesale revenues were down 1% compared to the same quarter a year ago, over -- up 2% in constant currency. Our wholesale business in the Americas and Asia Pacific demonstrated good growth across all 3 brands. Our company-owned retail stores generated comp store sales growth of 6% for the quarter on a global basis, and our e-commerce business enjoyed another good quarter delivering strong growth across all 3 brands and in all 3 regions.

Summarizing our second quarter revenue performance. We're pleased that revenues were up in all 3 brands, up in all 3 regions and up in each of our distribution channels. The DC brand, the Americas and the Asia Pacific region and our e-commerce channel led the revenue growth. We're quite proud that our European team was able to report modest revenue growth in constant currency while other companies are reporting decreasing sales in that region.

Consolidated gross margins contracted by 550 basis points to 49.2% of sales compared to 54.8% in the second quarter a year ago. Gross margin in Q2 2011 was a company record as end of season inventory clearance activity was unusually low in that quarter and certain royalty revenues, which carry very high gross margin flow through were more concentrated in the second quarter last year. These factors work together to make Q2 of fiscal 2011, a tough comparison with respect to gross margin. In contrast, as mentioned in our earlier conference call, this year, we entered the second quarter with more substantial levels of prior-season inventory, caused largely by the recent weak winter season. Consequently, we liquidated more product in the clearance channel in Q2 this year.

To summarize, the Q2 year-over-year margin erosion was caused primarily by higher inventory clearance activity this year, the timing of certain royalties last year, higher sourcing costs and unfavorable impact of foreign currency exchange rates. SG&A expense of $224 million was up $7 million or 3% compared to last year, with approximately $3 million of the increase due to higher non-cash stock compensation expense. Other year-over-year SG&A variances include increased expenses in our growing e-commerce business and higher depreciation expense, as well as decreased spending in the wholesale selling cost and some reductions in the marketing area.

Second quarter pro forma adjusted EBITDA of $39 million was down $23 million compared to the same quarter last year. Our 2012 internal plan anticipated a meaningful decline in EBITDA compared to Q2 of last year, driven by the anticipated gross margin contraction. Our actual EBITDA performance was, however, somewhat below our internal plan. Our pro forma consolidated loss for the second quarter was $3 million or $0.02 a share compared to pro forma income of $17 million or $0.09 a share in the same quarter a year ago. On a GAAP basis, the net loss was $5 million or $0.03 a share compared to a net loss of $83 million or $0.51 a share in Q2 of fiscal 2011. The net loss a year ago included a $74 million non-cash goodwill impairment charge related to our businesses in Australia and Japan.

Moving onto the balance sheet and working capital. Receivables increased $29 million versus last year. Our wholesale days sales outstanding metric increased by 6 days compared to Q2 of fiscal 2011 due to the timing of some cash receipts, the elimination of our early payment discount program and some credit term support for certain wholesale customers, as well as sales -- higher sales to our distributors. The accounts receivable aging remains basically consistent with prior periods. Inventory at quarter end was up $69 million versus last year. Our days sales and inventory metric was up 8 days compared to a year ago. The DSI increase was driven by higher inventory held for clearance and early receipts of goods to support our anticipated strong back-to-school season. We anticipate that our days sales and inventory will end fiscal 2012 below the level at the end of fiscal 2011.

CapEx was $18 million in the second quarter, up $2 million compared to a year ago and included continued spending related to our ERP system implementation, which continues to be on schedule and on budget, as well as continued investment in our retail stores and our e-commerce platform. We ended the quarter with $690 million of net debt, up $45 million from last quarter. Working capital management will be a larger area of focus for the company going forward.

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

Robert B. McKnight

Thanks, Rich. While we face some considerable challenges, we're pleased with the quality of our business in the second quarter, especially considering that economic conditions around the world remain uneven. In times like these, we appreciate the diversification in our business. It's reassuring that each of our brands, each of our regions and each of our sales channels are growing. We can now finally turn the page on a challenging first half of the year that included a number of unknown headwinds that particularly affected our gross margin. We expect the second half of fiscal 2012 will compare favorably to last year as we anniversary higher input costs that we began to see in Q3 of 2011, and as we begin to deliver goods for our highly anticipated back-to-school season, particularly for DC. We also expect to reduce inventory levels in the second half as we anticipate a successful fall season and largely conclude the clearance activities we identified a quarter ago.

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] And our first question comes from Taposh Bari with Jefferies & Company.

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

I guess the first question is I think last quarter, you've spoken to a $50 million free cash flow outlook for the year. I'm just looking for an update on where that stands now?

Richard J. Shields

We haven't provided detailed guidance on the P&L on cash flow. The one comment we would have is that we continue to focus on managing inventory on receivables on the balance sheet, and the cash flow will be a continued focus for the company.

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

Okay. And then I guess as far as the gross margin outlook, without getting into too specific of details for the back half, it sounds like, obviously, product costs helped in the back half, but can you just walk us through FX? Clearly, the euro under pressure here plays a role in the gross margin outlook?

Richard J. Shields

So thanks, Taposh. When we think about gross margin, let me first comment and maybe just reiterate a couple of things that we mentioned regarding gross margin for Q2. So the higher discounting that we identified, that's about a 200 basis points erosion year-over-year. And as Bob mentioned, we think a good piece of that is behind us. The royalties item is about 200 basis points erosion year-over-year as well. That's a onetime item relative to Q2 last year, and the higher input cost will start to anniversary again. When I think about gross margin sequentially from Q1 to Q2, Q1 2012, we were at 50.7. We're at 49.2 this year. So I think that our framework -- the framework that we've got and it's been discussed in the last call, is that profits are going to be more back end loaded in 2012, and that continues to be our outlook.

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

Okay. And then the last question I have is just as far as DC goes, JCPenney just obviously announced that DC is going be entering that account for back-to-school. And you also, I think, last quarter, talked about expanding DC distribution in Europe. Just hoping you can kind of elaborate more on the strategy there in terms of distribution, both here in the U.S. and in Europe. What's the -- if you could just -- if you're willing to elaborate on the relationship with JCPenney, whether that's going to be a multi-category type of rollout, any other details that you wanted to share and also just the actual distribution strategy for DC going forward. It sounds like you need to start to kind of broaden the distribution in order to start to really ramp up that revenue base and getting it closer to your comp group?

Robert B. McKnight

Yes, Taposh. So DC continues to expand distribution as demand in a lot of channels where we don't currently sell. And our overall global segmentation strategy, I think, positions us well to succeed in those channels. So we are going to continue to roll out distribution globally.

Operator

Our next question will come from Andrew Burns with D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

On the gross margins, I was hoping to get what the delta was. You said that second quarter gross margin came in a bit below your expectation. Was that the delta Europe [ph] up there or more clearance activity?

Richard J. Shields

Probably more on the clearance side.

Andrew Burns - D.A. Davidson & Co., Research Division

Okay. And then in terms of talking about gross margin comparing favorably to last year for the second half, you're guiding there for gross margin improvement year-over-year, is that fair?

Richard J. Shields

No. I'm just commenting that several of -- as Bob mentioned in his comments, that some of the gross margin challenges we faced in Q2 become less impactful as headwinds when we get into the second half of the year. Specifically, we'll start to anniversary against the higher input costs as we move into the second half of the year. And then likewise, the royalty items would be in the rearview mirror as well.

Andrew Burns - D.A. Davidson & Co., Research Division

And so with all the turmoil in news flow from Europe, have your internal expectations for that region slowed down relative to where they we're at the start of the year?

Richard J. Shields

Well, I think that everyone's -- anybody that's got a significant block of sales in Europe has to be somewhat concerned about the economic turmoil there. We're proud that our European group was able to post a gain on a constant currency basis in Q2 '12 versus last year. And obviously, we're concerned about the economic situation in Europe.

Andrew Burns - D.A. Davidson & Co., Research Division

Okay. Last question. Just on Roxy brand growth. Could you dive into that a little bit more in terms of is a lot of that growth same account growth? Or is there some new accounts being added, owned retail versus wholesale. Just some of the drivers of the Roxy brand growth?

Richard J. Shields

I think the key that we would note there is that Roxy has strong growth in the Americas across all 3 channels. Likewise, strong growth in Asia Pacific across all 3 channels. When I mention channels, I'm talking about wholesale, retail and in terms of e-commerce. So I think that we're quite pleased with Roxy. Rob, did you want to add anything about the specific products?

Robert Owen Colby

The sportswear, girls products and footwear are performing exceptionally well in the Americas for Roxy, they're taking market share from competitors in the core channel or specialty channels, as some refer to it. We're regaining the #1 spot there. We're really proud of the team, and they're continuing to pick up speed.

Operator

And next question comes from Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

Can you give me your sales update and closed plants for the remainder of the year?

Richard J. Shields

I'm sorry, we couldn't understand your question.

Carla Casella - JP Morgan Chase & Co, Research Division

Are you giving store openings or closings for remainder of the year?

Richard J. Shields

In the -- I don't have all the details with me for the -- in the second quarter, in the U.S., we closed 4 stores, and we opened one store in Brazil during Q2.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And then [indiscernible] for the rest of the year?

Bruce Thomas

I'm sorry, operator, I think we're going to have to go on to the next question, we can't [indiscernible].

Operator

The next question comes from Diana Katz with Lazard Capital Markets.

Diana Katz - Lazard Capital Markets LLC, Research Division

Can you start with kind of delving a little bit more into Europe and discuss what you're seeing by country and by brand there?

Richard J. Shields

I don't think we really want to get into the details by country. I'm not sure that, that's going to be valuable. I guess the item that I would post or things about Europe is that the management team in Europe and here in Huntington Beach is taking a cautious approach and trying to make sure that we mitigate our risks in Europe. And then specifically, what that means is that we're looking carefully at our accounts receivable. We do have credit insurance in place in the European region. We're trying to make sure that we repatriate cash in Europe back to U.S. dollars so we're not at risk there. We're taking a good review of the buy plans for Europe to make sure that they're in line with our forward sales forecast and then lastly, we're looking carefully at expenses, not only in Europe but globally. And then specifically, in Europe, we're also making sure that we keep a close eye on hedging.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. As for the fourth quarter, you had given some guidance that gross margins would be flat in the back half. Is that still a possibility?

Richard J. Shields

I hate to say this but after being here 3 weeks, I'm really not kind of quite familiar what the guidance was, and I don't want to comment on guidance that I wasn't familiar with.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. Can you comment on the inventory, it fell off 24% year-over-year. Can you comment on the quality of that inventory? Have you cleared through all your excess products? Is that inventory clean? And then can you also comment on the inventory and the channels of your competitors?

Richard J. Shields

Well, in terms of the quality of inventory, I think we're pleased with the quality of the inventory. When we look at the percent of inventory that we have at this prior season, it's about 14% of our total inventory as prior season's inventory. That's right where it was at the end of Q2 last year. So I think that we're feeling that the quality of inventory is in good shape. That percentage has come down from Q1. And that's as Bob mentioned, we have had a real focus on clearance channel liquidation in the second quarter. So I think we're feeling good about the inventory.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then you gave a global comp. To start, you had provided a comp between the Americas and Europe, can you give us your retail comps in Americas and Europe?

Richard J. Shields

I think that may have been in the press release, but it wasn't in my comments, and I don't have that information with me.

Operator

And the next question will come from Jeff Van Sinderen with B. Riley.

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

I guess one of the areas I was trying to figure out was in terms of the margin pressure, was there more clearance and markdowns of regular price in the regular channel? Or was the clearance pressure just in the off-price channel? Maybe you could just give us an order of magnitude there?

Richard J. Shields

I think it's predominantly in the off-price channel.

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

Okay. And then just as we're thinking about second half, in terms of revenues and profitability, I think you said you expect to be up. I'm just trying to understand how you get there, maybe you can drill down a little bit more on international, what you're looking for in your retail comps in the second half and some of your international markets where you perceive some softness, things of that nature, and maybe you could just give us a sense of what the comparisons are there in some of those markets to last year?

Richard J. Shields

So I think that when we look at Q1, Q1 was up 6% in constant currency. When we look at our April quarter, we were up again in constant currency. I think that the same type of sales initiatives that drove us to have a gain in the second quarter, strength in DC, strength in e-comm, strength in the U.S. market, kind of across brands, good performance in Asia Pacific, and doing, I think what we believe, much better than the competition in Europe but facing the headwinds there. Those will be the same planks of the growth platform that we would anticipate would be successful in the second half of the year as well.

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

Okay. And then if we can just drill down a little bit more on inventory. Is there a number that you're thinking about, that you feel like it's still excess inventory at this point? And then, I guess you talked about being through that at the end of the fiscal year, maybe you can just give us a sense of what that excess consist of at this point?

Richard J. Shields

I think the key point is that in the seasonal curve of business, there's always going to be some inventory surprises. Part of that is planned because we want to make sure that we've got product for the factory outlet stores. I mentioned that on a percentage terms, the inventory that we've got with the prior season is basically spot on where it was, as a percent of total inventory in Q2 last year. And then it's moved down meaningfully from Q1 '12 to the end of Q2 '12, because of our inventory clearance. So I think that we feel good about the inventory in terms of its quality. At the same time, inventory is heavier in aggregate than we would like. Part of that is because we have stocked up for a strong back-to-school season. But in general, in terms of working capital management looking forward, the management team here is going to be focused on making sure that we look to have just generally lower inventory and faster inventory velocity to free some cash off the balance sheet.

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

And I'll let someone else just jump in. Just in terms of your longer-term multi-year plan, wondering if there's any change to that given the softness in some of the markets like Europe, or are you still targeting the same $3 billion in revenues and profitability that you talked about previously? Or do you think it takes longer to get there?

Richard J. Shields

So when I think about the 5-year plan that's been discussed here, there was really kind of 3 core themes in that plan. First was revenue growth, second was migrating to a global infrastructure and that would drive increased profitability. We're continuing to focus on those 3 themes. But with the European economic situation somewhat more uncertain, the management team is more focused on delivering the $400 million EBITDA target through more effective cost controls and less being dependent on revenue growth.

Operator

And next question comes from Mitch Kummetz with Robert W. Baird.

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

A few questions. You guys made a comment on your prepared remarks that you're very pleased with how Quiksilver and Roxy performed in U.S. wholesale and the growth there. Could you just elaborate on that? Maybe give us some numbers or percentages behind that to give us a better sense as to what the growth was?

Robert B. McKnight

After coming off of a pretty tough winter, we had, for both Quik and Roxy, really strong spring summer sales and sell through. The margin, as I think, Rich pointed out, in the Americas, was pressured by that tough winter. But we've recovered with the spring summer selling for both brands. The order book is up for both brands looking at the back half of the year. And as I think I said earlier, Roxy is gaining share in the core market. Quiksilver is gaining share in the core market, and our retailers are really happy with the margin sell-through.

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

And can you speak a little bit to the order book? I can't remember if you guys did on the last call, but can you give us a sense either how the fall orders are shaping up, either by brand or by region or both if you care to do that?

Robert B. McKnight

For the Americas, we are happy with the look of the order book and feel like we're in line.

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

Okay. Anything on the European order book? Anything you could say on the European order book for the back half?

Richard J. Shields

Yes. The European order book I think is -- it kind of supports the inventory that we've got on order. But other than that, I don't think we want to comment. And the fact of the matter is, that the certainty, I think, for the entire industry, the certainty of an order book in Europe is probably less certain than it has been in the past. That's the industry comment, not a Quiksilver-specific comment.

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

Sure, understood. Just a couple of last items. Could you maybe speak to -- your Asia Pac business is very strong in the quarter. You talked about Japan and some business outside Japan, but can you specifically talk about Australia and what you're seeing there now?

Craig Stevenson

Yes. I think that the Australian business, we think it's bottomed out, which our comps who were striving on our own retail stores starting to comp up, whilst the wholesale business do remain to be challenged, I think once we see comps in our own stores starting to trend up, it's pretty good. Japan is very healthy and has bounced back as some of the guys have previously stated. And we're looking at solid growth in Southeast Asia, good profitability there. And then also emerging market and South Korea is very, very strong and moving forward.

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

Okay. And then last question, just in terms of housekeeping. Rich, how should we be thinking about taxes for the back half of the year?

Richard J. Shields

I'm currently not prepared to discuss taxes for the back part of the year.

Operator

And moving on to Kevin Coyne with Goldman Sachs.

Kevin Coyne - Goldman Sachs Group Inc., Research Division

Just to clarify, on the gross margin, it seems that by saying compare favorably to the tough comps over a year ago, that we should at least be thinking of it flattish, but I just want to reconcile that with the use of the discount channel in the back half, shall we be thinking flat and then adjust a little bit more of the discounting, or it be kind of compare favorably include that discounting?

Richard J. Shields

So when we think about gross margin, again, I think the key pieces to think about when we comment on Q2 are really around -- Q2, I mentioned that our -- we've moved inventory from a heavier percentage of goods that were prior season back down to kind of the same levels that we had last year. And so I think that the discounting and the need for any discounting will be more modest in the second half of the year than it has been in the first half. The royalties item, which I mentioned, was a couple hundred basis points in Q2 is behind us. And then, as Bob mentioned, we start to anniversary against the input cost. So I think, for the second half the year, we would expect to see, with some of those key items behind us, margins compare -- have a better comparison against the prior year.

Kevin Coyne - Goldman Sachs Group Inc., Research Division

And just turning to inventory again. It seems like, as you bring it down, if we look back at 2010, it was running more in the $270 million range. Is that how we should think about where you're going, or is it -- is there a need to keep it in the 300s?

Richard J. Shields

Well, my target around inventory is going to be a function of our sales velocity as well. So the metric that I mentioned in my comments was that in terms of a days sales and inventory, that we actually moved up in Q2 versus Q2 last year. And I mentioned in my comments that when we get to the end of this year and have moved to the back-to-school season and headed into the end of October, then I would expect on a days sales inventory that we would be at or below the level that we're at last year on that metric.

Operator

And next question comes from Christian Buss from Crédit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if I could get a little bit of a status update on the systems initiatives you have underway, particularly on the sourcing on the ERP side.

Craig Stevenson

Yes, Christian, no problem. So we basically implemented SAP in the Americas. And so we've got all brands operating on SAP in the Americas at the moment. And the actual implementation that we've done there, we're ecstatic about. I mean, it's been an awesome implementation, no problems. And we've just initiated the kickoff for the European implementation and hopefully there, we'll go live December within Europe. And then we'll roll out at APAC. Any other questions regarding SAP or do want me to get into more detail there?

Christian Buss - Crédit Suisse AG, Research Division

No, that's very helpful.

Richard J. Shields

And on Bob's comments, he mentioned that the SAP implementation is both on schedule and on budget, and I think that's a pretty strong statement about Craig's leadership of the project.

Operator

And next will be Eric Tracy with Janney Capital Markets.

Michael Karapetian - Janney Montgomery Scott LLC, Research Division

This is Mike Karapetian on for Eric. Just going back to the inventories real quick. Just wondering if you could flush out how much of the increase has been driven by price versus units?

Richard J. Shields

There is some impact in terms of the higher input costs that are playing into the inventory growth. We think that the input -- the increase in the input costs are in the 10% to 15% range. And then also, you've got a little bit of currency noise driving that as well.

Michael Karapetian - Janney Montgomery Scott LLC, Research Division

Okay, great. And then lastly, just to go back to Europe real quick. I think, last quarter, you discussed a plus mid-single-digit number for the year. I just want to know if we should still be thinking about that the same way, obviously, given what's going on and that were just a little bit farther along in the year?

Robert B. McKnight

Yes, I think that we mentioned that we're happy that our European group was able to post a modest gain in sales on a constant currency basis year-over-year, and we're hopeful they'll be able to continue to do so.

Operator

And next question comes from Adam Engebretson with Piper Jaffray.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

If you think about some of the incremental door growth or opportunities that DC coming up here, can you tell us how you think about potential channel conflict between your existing wholesale doors and your own retail doors? Will that be exclusive products or is that something that we'd see potentially in other places of the mall?

Robert B. McKnight

We have a pretty robust product segmentation in place with DC. And so you'll see different products in different channels to make sure that there's [indiscernible] in the business and healthy competition on the price side.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Okay, that's helpful. And then maybe also, can you talk about your expectations for the domestic back-to-school environment. Last year was very promotional. Do you expect that -- and not just for you guys but across them all, do you expect that to repeat, or do you think that will be maybe a less promotional this year?

Robert B. McKnight

We hope it'll be less promotional because we've got a big back-to-school plan and a big order book that we're in the middle of shipping right now. So hopefully, it'll be a very healthy season.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

And then lastly, sorry if I missed this earlier, was there any color on quarter to date, retail comp trends?

Richard J. Shields

No, we're not going to provide details on comps.

Bruce Thomas

Operator, we got time for one more caller.

Operator

And that call comes from Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I was asking about your store closure plans for the remainder of the year?

Richard J. Shields

Carla, I appreciate that. I'm not sure that, that's the detail that we're going to be getting into.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And then can you just give us the status of Quiksilver Girls?

Robert B. McKnight

Sure, yes. Well, we just opened our first store up in Malibu on Tuesday night. We had a great store opening. The store looks fantastic. The wholesale business is healthy and growing. We are also obviously selling it through our e-commerce channels or vertically e-commerce channels, as well as our traditional wholesale account base. We're growing distribution there. We think it's a great product. We love the marketing message, and we have a lot of faith in that. It's a big component of our 5-year growth plan for the Quiksilver brand.

Bruce Thomas

Okay. That concludes today's call. On behalf of everyone here at Quiksilver, thank you for participating. And we look forward to providing our third quarter fiscal 2012 results in early September.

Operator

And that does conclude today's conference. Thank you for your participation today.

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