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Volcom, Inc. (NASDAQ:VLCM)

Q1 2008 Earnings Call Transcript

April 30, 2008 4:30 pm ET

Executives

Hoby Darling – VP of Strategic Development and General Counsel

Richard Woolcott – President and CEO

Doug Collier – CFO and Secretary

Jason Steris – COO

Analysts

Mitch Kummetz – Robert W. Baird

Jeff Klinefelter – Piper Jaffray

Eric Tracy – BB&T Capital Markets

Jim Duffy – Thomas Weisel Partners

Jeff Mintz – Wedbush

Jeff Van Sinderen – B. Riley

Operator

Good afternoon. My name is Therese and I'll be your conference operator today. At this time, I'd like to welcome every one to the Volcom's Q1 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions)

I would now like to introduce Hoby Darling, Vice President of Strategic Development and General Counsel for Volcom to begin the call. Go ahead Mr. Darling.

Hoby Darling

Thank you, Therese. Good afternoon every one and thank you for joining us today to discuss Volcom's 2008 first quarter financial results. Joining me on the call today are Richard Woolcott, Volcom's President and Chief Executive Officer; Doug Collier, Volcom's Chief Financial Officer; and Jason Steris, Volcom's Chief Operating Officer.

First, some housekeeping items before we start. If you'd like to be added to Volcom's email distribution list to receive company information or if you'd like to change your contact information, please contact Evan Pondel at Pondel Wilkinson at 310-271-5973.

In addition be advised this conference call is being broadcast live on the Internet at volcom.com as well as earnings.com. A playback of this call will be available for one year and may be accessed on the Internet at both sites.

Please note all information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the company's future. In particular, statements about the future regarding our guidance, outlook for future business, margins, financial performance, customer demand, growth and profitability all constitute forward-looking statements. These forward-looking statements are based on management's current expectations but they involve a number of risks and uncertainties.

Actual results could differ materially from those stated or implied by these forward-looking statements. Certain risk factors associated with Volcom's business are set forth in its Form 10-K for the year ending December 31, 2007, and subsequently filed quarterly reports on Form 10-Q. The company disclaims any intent or obligation to update these forward-looking statements except as required by law. All forward-looking statements from today's call are qualified in their entirety by the foregoing cautionary statements.

With that said, it's my pleasure to turn the call over to Richard Woolcott, our President and CEO.

Richard Woolcott

Thank you, Hoby and good afternoon everyone. It's been an exciting start to the year with our first quarter exceeding our expectations. When we provided our financial guidance for the quarter in February, we had a pretty good snapshot of Q1. However, as you can see, we are well above our projections. This was primarily due to an early Easter holiday, a better than planned quarter with PacSun, accelerated orders from Q2 to Q1, better than planned business from Electric, and Europe coming in above plan.

Given the current slow retail environment, I believe these results are a reflection of the power of the brand and the relentless effort and passion from our team. As we mentioned on our last call, we have broken down our growth strategy for 2008 into five key categories. Central to this plan is a strategy of diversification that focuses first and foremost on maintaining brand integrity, increasing shareholder value and promoting the right balance within the company as we continue to grow.

I'd like to now give an update on how things are going in regards to our core growth initiatives. Our first core initiative is to maintain the strength of the Volcom brand. I honestly believe that that strength of our brand is becoming increasingly evident as we post strong financial results in a tough retail environment. In early April, results were revealed from the 14th Semiannual Taking Stock of Teens national survey by Piper Jaffray showing Volcom as the top board sport brand. This is the seventh time in the last eight surveys where Volcom has either been the number one or number two brand. This survey of nearly 700 teenagers showed that in the board sports category, Volcom represented 43% mind share, up from 20% last fall and 8% last spring indicating a mind share with our core customers.

In the March issue of Transworld Business, the latest action watch survey posted its 2007 overall results revealing sell-through rankings of 100 top core specialty stores. Volcom was ranked number one for both the men's and women's apparel category. And as I mentioned on our last call, Volcom was also number one in both men's and women's apparel in the latest bared [ph] board sport quarterly report.

I'd also like to point out that Volcom has received six CIMA [ph] award nominations with the winners being announced now month down in Cavo [ph] at the CIMA annual surf summit. Our nominations are as follows. Men's apparel brand of the year, men's board short of the year, environmental product of the year, women's apparel brand of the year, women's swim brand of the year, and women's marketing campaign of the year.

Now, whether it comes from external reports or our own channel checks, we believe the Volcom brand is very healthy. As we've said, everything we do is in support of the brand from our athlete programs to our let the kids ride free events. This quarter, we came out of the gate strong with a number of team happenings, tours and evens, and I feel very good about our momentum so far in 2008. To get a detailed review regarding our marketing efforts, please visit our Web site at Volcom.com.

Turning now to our products, our second core initiative is to continue to strengthen and diversify our product line as well as develop new product categories. Today, Volcom can be broken down into 16 categories, including men's, girl's, boy's, snow, girl's swim and footwear. This quarter, we added the full product line from Electric which included sunglasses, goggles, soft goods and accessories. We believe this acquisition was the right move versus trying to enter these categories with a Volcom brand. It lessens the potential dilution of Volcom and leverages the strength of what Electric has created over the past eight years.

We now have two ionic logos under one roof, the Stone and the Bolt, both are which are deeply engrained in action sports and have products that stand for quality and creativity. Doug will go into the first quarter growth we see in each product group, but let me take a moment to talk about our overall collection.

I believe one of the reasons we are faring well in these tough times is because our products continue to resonate with our consumers even when they may have limited dollars to spend. Our goal over the last year has been to make sure that we are designing the right product to maximize opportunities in every category every season. The spring product that's in the stores now is selling well and is a reflection of this effort. I also feel good about the fall line that will begin shipping May 1 and our holiday collection, which the rep force is currently on the road selling.

Our third growth initiative is to slowly diversify our U.S. distribution by nurturing our newly opened accounts, growing with our existing accounts as they open new doors and expanding our own retail program. As we have discussed, we are very pleased with our current distribution platform in the U.S. and believe it represents a well-rounded group of retailers from the core independent shops, specialty retailers and department stores. We believe that our retailers represent the brand well and provide growth opportunities going forward.

I'd like to point out that our distribution makeup is basically unchanged from what we have discussed on our last call. Our base among the core independent board sport retailers is solid and we're always working with them to support the brand and their representative enterprises. Some of the core shops we've worked with for years are indeed feeling the pressure of the slowing economy, so we're doing what we can to help them. These core shops are the life blood of our industry and we have a long history of mutual support and partnership.

We also are working closely with our larger retailers such as Zumiez and PacSun. And we believe that for 2008, there is room to grow with our current account base. And growth should come in two ways. First, as the retailer expands or open new doors, we have the opportunity to add door count. Second, in the existing doors, the entire Volcom line is not yet 100% represented providing opportunities for additional product placement in these locations. We also believe that the strong success and sell-through of the brand could help the retailer get through these tough times.

As buyers become more cautious about what they plan to bring into the store, we believe they will look at who is selling through and adjust their buys accordingly. And this could be an added bonus for Volcom as we continue to be one of the top-performing brands in the market.

Turning to our Volcom stores, we currently have six stores open in the U.S. and are planning approximately four more stores in the U.S. for 2008. The next three stores are set to open this summer and include Soho, New York, Boulder, Colorado, and Waikiki, Hawaii. We're still finalizing the fourth location.

Internationally, we have opened one new licensed store this year in Indonesia and reopened the Volcom store in Hossegor, France last month, which is now under our control. We currently plan to open another store in Europe and one more licensed store in Thailand this year. By year-end, our total international store count should be approximately nine stores, of which seven will be licensed. Two in Europe, two in Thailand, two in Indonesia, one in Japan, one in South Africa and one in Brazil.

These stores provide us with the ability to control our own destiny from a retail standpoint and are great showcases for both Volcom and Electric. We plan to build this program slowly to make sure we not only pick the right locations while being sensitive to our current retailers, but also to allow us the ability to continually improve operations and become more efficient. Overall, I'm very proud of our stores and I believe we have a good plan in place for 2008.

Our fourth initiative is to expand our geographic reach by continuing to grow our brand in Europe as well as investing in other key international territories. 2008 will mark the first full year of Volcom Europe operating 100%. So far, we have come out of the gate strong where we were able to deliver our spring goods ahead of schedule. This is a good sign in two ways. First, our distributors and retailers wanted the goods early, which gave us the opportunity to get on the floor at the beginning of the selling window. And second, it showed our ability to deliver ahead of schedule and fulfill demand. Now, this is important as it builds confidence with our customers for the future.

Volcom continues to be one of the top-selling brands in Europe and the read so far for spring has been good. However, we're hoping the weather becomes a little more favorable in the weeks ahead as Europe has experienced a somewhat slow spring season. In speaking with management, we believe Volcom is in a good position due to the strength of the brand and we believe we're on track to reach our targets for the year. The key point here is that we already have the majority of our bookings in for 2008 with the exception of holiday which is usually not a big season.

Now, in regards to other key international locations, we are currently working with our Australian and Japanese teams to better penetrate and position ourselves in those markets. They are important territories that have deep roots in action sports and will help strengthen the brand as we develop into a truly global company.

And finally, our fifth growth initiative is to diversify our company across categories and markets to potential strategic acquisitions. In January, we acquired Electric Visual, a young, powerful brand primarily focused in the sun glass and goggle arena with a strong following in the board sports culture as well as Motocross and NASCAR. Electric also has a growing soft goods and accessory business. With this acquisition, we now diversify our company across two strong brands.

We've devoted a lot of time working closely with the Electric team this quarter and I want to share a few more details about their business and activities. Electric sunglasses offer – the Electric sunglass offering currently comprises 29 sunglass styles in 213 SKUs and the company currently has six goggle styles and 63 SKUs. All of the sun glasses are made in Italy and designed with strong styling and function.

In the first quarter, five new sunglass styles were launched including the Killowatt, the Bibidahl, the Honeyrider, the Mayday and the VHF. Another three styles are expected to be launched in Q2, including Tech XL, the Detroit and AirHart [ph].

In terms of distribution, electric sunglasses and goggles are sold in core action sports, lifestyle, sporting goods and specialty – and sunglass specialty stores such as Zumiez and Sunglass Icon which are aware the company continues to add doors. This year Electric will begin targeting top Motocross accounts in the U.S. and Canada with a plan to possibly add up to 50 new doors.

Right now, the company is in approximately 25 total – 2500 total domestic retail doors. On the global stage, Electric is growing in popularity and building a strong following. Along with its offices in Orange County, we have Electric offices in Australia, France, Spain, Canada and New Zealand. Additionally, we have distribution in over 15 other countries including Japan, Korea, Indonesia, Vietnam, Hong Kong, Singapore, Philippines, the UAE, South Africa, Maldives, Venezuela, Brazil and the countries of South America.

Now, from a marketing perspective, Electric is deep in the trenches much like the Volcom marketing teams. Their primary focus is in action sports with the sponsorships of top athletes such as Andreas Wig in snowboarding and Rakiraki [ph] in surfing. However, they also work with athletes outside our core board sports group such as NASCAR driver Kyle Busch who's been on a roll lately with recent wins at the Sprint Cup race in Talladega and last month in Atlanta.

The integration between our marketing teams is off to a great start. For example, Electric is now the exclusive sunglass and goggle sponsor of Volcom's let the kids ride free events. For more information regarding Electric marketing, please visit their site at electricvisual.com. And overall, I'm very excited about this acquisition and I'm impressed with the energy and effort from Electric's management team. The integration is going well and our teams are in sync. I also believe that Electric has strong growth potential in the future.

As you can see, it's been a busy first quarter and I'm proud of our team's effort to pull together and execute when times are tough. Our success this year is contingent on careful execution and continued attention to every detail of the business. While we are focused on operational excellence, we are also striving to move the business forward in a manner that is appropriate and relevant to our brands and company. The retail environment is still showing signs of weakness and we need to be on our game to weather this storm and emerge stronger and ready to capitalize on better days when they arrive.

These are times that test the strength of our brand and our teams' perseverance and I'm confident that we're on the right track. Our company is healthy, we have ample financial resources, a multilayer growth plan and a team that is relentless in their attack. As always, I'd like to thank our entire Volcom family, our athletes, our retailers and shareholders for their continued support and commitment to the brand.

And now, I would like to turn the call over to our CFO, Doug Collier to review our financial results for the first quarter. Doug?

Doug Collier

Thanks, Richard, and good afternoon. Despite a soft retail environment, we're pleased to have exceeded our first quarter plan across all three of our business segments. The U.S. segment was stronger than expected, driven primarily by a shift of some Q2 customer orders into Q1 due to better than anticipated overall retail demand. This includes business with our largest customer PacSun.

In Europe, our customers and distributors also requested early shipment on some orders. Additionally, our sales and earnings benefited from the impact of the strong euro and a stronger than anticipated gross margin. Finally, Electric Visual, the newest addition to the Volcom family exceeded expectations. In its first quarter under the Volcom umbrella, Electric was profitable versus an anticipated EPS loss of $0.01 for Q1. Even in these challenging times, both Volcom and electric brands continued to perform well at retail and maintain a powerful connection to their end customers.

Now let's go through some of the details of the first quarter. For Q1, total consolidated revenue increased 59% to $80.6 million compared with $50.8 million in the first quarter of 2007. This is ahead of our previously provided estimate of $69 million to $70 million. We are now reporting our revenue for each of our three business segments, the U.S., Europe, and Electric.

First, let's look at some details for the U.S. segment revenue. Please note that this segment includes revenue from the U.S., Canada, Japan, and most other territories outside Europe, as well as our Volcom branded retail operation. Total revenue for the first quarter including royalties from our U.S. segment was $49.2 million ahead of our February guidance of $43 million to $44 million. This increase was driven primarily by a shift of some Q2 customer orders into Q1 including approximately 600,000 of orders from PacSun due to better than expected retail demand.

We have experienced such shifts in the past, but they were not in our Q1 plan due to the current soft retail environment. We believe that some of our customers had better than expected demand for our products in March due to Easter falling about two weeks early this year. We believe this resulted in some customers requesting early shipment of their April buys in order to maintain appropriate levels of Volcom products in their stores.

Product revenue in the U.S. segment increased 2% to $48.7 million compared to $47.8 millions in Q1 of 2007. Also in the U.S. segment, royalty income decreased 59% to 567,000 compared with $1.4 million in last year's first quarter. This increase in royalty income was expected due to our taking direct control of the brand in Europe and the related termination of the prior license agreement.

A breakdown of the U.S. segment product revenue in Q1 by category is as follows. Our men's product revenue increased 2% to $24.4 million for Q1 compared with $23.9 million in the first quarter of 2007. Now, as anticipated revenue from our girl's product decreased 17% to $13.8 million versus $16.5 million in the first quarter of 2007. This decrease was expected and discussed on our call in February.

The decrease in girl's revenue was primarily related to the overall decrease in business at PacSun for the quarter. Outside of PacSun, our girl's business increased 1% for the quarter. Boy's revenue, which includes our kid's line for boys age 4 to 7 increased 24% to $4 million compared to $3.2 million in Q1 of 2007. Boy's continues to be a strong growth category for the U.S. segment.

Revenue from our Creedlers footwear was approximately flat compared to last year at $2.1 million for the quarter. Revenue from our girl's swim line increased 115% for the quarter to $3.6 million. Last year's strong initial reception to the swim line has resulted in strong sales in Q1 and we continue to see this as a growth category in the future.

International product revenue, which is reported as a part of our U.S. segment and consists primarily of sales in Canada and Japan and does not include licensing revenue increased 5% to $12.7 million or 26% of our U.S. segment's product revenue for the quarter compared with $12.2 million or 25% for the comparable period in 2007.

Looking at our revenue by distribution channel, revenue from our five largest accounts decreased 16% to $5.8 million in the first quarter, representing 33% of U.S. segment product sales. Revenue from PacSun, our largest customer, decreased 34% to $6.9 million for the quarter or 14% of U.S. segment product revenue compared with $10.4 million or 22% of our U.S. segment product revenue for the comparable period in 2007.

Our business with PacSun in the first quarter was slightly better than anticipated, primarily reflecting the shift of approximately 600,000 orders from Q2 to Q1. Excluding PacSun, revenue from our next four largest accounts increased 5% for the quarter. In Q1, revenue from our other non top five accounts, which represented 67% of total U.S. segment product revenue for the quarter, increased 14% to $32.8 million. We continue to be encouraged by the strong growth outside our five largest accounts as they include independent core stores that are geographically diverse and tend to cater to influential customers that can drive growth in other distribution channels.

Now, let's look at revenue from the Europe segment. As a reminder, comparisons to the prior year are not yet useful as this segment did not begin full operation until Q3 of last year. Product revenue from Europe totaled $25.2 million for the first quarter of 2008, ahead of our stated plan of $21 million. This can be attributed to earlier than expected deliveries to our distributors and retailers as well as a stronger than anticipated euro during the quarter.

Also, please note that the revenue in Europe is seasonal and is concentrated primarily in Q1 and Q3. In Q1, the revenue by category in Europe is as follows. Men's was $16.4 million representing 65% of the segment revenue. Girl's was $6.1 million representing 24%. Boy's was $730,000 and 3%. Creedlers was $1.3 million and 5%. Girl's swim was $473,000 and 2%, and the other product categories made up the remaining 1% of Europe's segment revenue for the quarter.

Finally, revenue from Electric was $6.2 million compared to our initial projection of $5 million. We are pleased that Electric is ahead of plan and that the relationship is off to a successful start.

Turning to the gross margin on a consolidated basis, Q1 gross margin as a percentage of total revenue was 52.4% compared with 52% in the same period in 2007. Consolidated gross margin on product sales was 52% in the most recent quarter versus 50.6% in the comparable period last year.

In our U.S. segment, Q1 gross margin on product decreased 280 basis points to 48% compared to 50.8% in Q1 of 2007. U.S. segment gross margin in Q1 was lower than last year primarily due to the soft retail environment resulting in additional discounts and increased liquidation sales during the first quarter.

In the Europe segment, gross margin was a strong 58.3%, reflecting the seasonal full price sales in Q1. Gross margin in the Electric segment was also 58.3%. We're encouraged by the initial high eyewear margins reported by Electric.

Selling, general and administrative expenses on a consolidated basis were $27.8 million in the first quarter of 2008 versus $18.3 million for the same period in 2007. As a percentage of sales, consolidated SG&A expenses were approximately 34.5% of total revenue for the first quarter of 2008 compared with 36.1% for the same period in 2007.

For the U.S. segment, SG&A expenses in the first quarter increased 20% to $18.9 million compared with $15.8 million in Q1 of 2007. For the Europe segment, SG&A expenses in Q1 were $5.6 million compared to $2.5 million in Q1 of '07. Please note that during Q1 of 2007, Europe was still in its startup phase. For Q1 of this year, Europe was a fully operating business.

In our Electric segment, SG&A in Q1 was $3.2 million which includes noncash acquisition related amortization of approximately $600,000. Consolidated operating income for the first quarter increased 79% to $14.4 million compared with $8.1 million for the same period in 2007. Consolidated operating margin was 17.9% for the quarter compared with 15.9% in the first quarter of 2007.

For the U.S. segment, operating income in the first quarter decreased 49% to $5 million compared to $9.8 million for the same period in 2007. Operating margin for the U.S. segment was 10% for the quarter compared to 20% in the first quarter of 2007. This drop in operating margin was expected as we continued to allocate resources to growth, product and brand-building initiative. This allocation of resources was made despite revenue growth for the year that is projected to be lower than historic levels due primarily to the anticipated soft retail environment.

In the Europe segment, operating income for the most recent quarter was $9 million compared to an operating loss of $1.8 million for the same period in 2007. The operating in margin – the operating margin in Europe was 36% in Q1 of this year. In the Electric segment, operating income for the first quarter was $381,000. Again, this includes noncash acquisition-related amortization of approximately $600,000.

On a consolidated basis, the company recorded provision for income taxes for the first quarter of this year using a 36.5% tax rate. Consolidated debt income for the first quarter of 2008 was $9.3 million or $0.38 per diluted share compared with net income of $5.5 million or $0.22 per diluted share in the first quarter of 2007.

Turning to the consolidated balance sheet at March 31, 2008, the company had approximately $72 million in cash, no significant debt and stockholder's equity of approximately $186 million. Consolidated accounts receivable increased $33.6 million to $66.9 million at the end of the quarter compared with $33.4 million at March 31, 2007. The consolidated receivable balance at March 31 represents day sales outstanding of 76 days.

It should be noted that of the $33.6 million consolidated increase, $31.3 million was an incremental increase related to Europe and Electric. Excluding Europe and Electric, AR increased of $2.2 million or 7% compared to March 31, 2007. Further, day's sales outstanding for the quarter is 64 days excluding Europe and Electric.

Consolidated inventory totaled $19 million at March 31 compared with $11.2 million a year before. The inventory at the end of Q1 includes $5.2 million of incremental inventory related to Europe and Electric. Including Europe and Electric, the inventory churn rate calculates to 7.8 times per year or once every 47 days. Even including our new businesses, this continues to be well above industry averages.

I'll now turn to our financial guidance for the second quarter and full year of 2008. In putting forth our guidance, please bear in mind our comment on the general caution we are hearing from retailers given the overall soft retail environment, our continued estimate that PacSun business will be down approximately 10% for the year, the contribution of Electric to our 2008 projections, the shift on a consolidated basis of approximately $7 million of orders from the second to first quarter, and that Europe will be fully operational for the entire year versus primarily in the second half of 2007.

Please note that the business in Europe is seasonal with revenue concentrated primarily in Q1 and Q3, shipment of low-margin samples concentrated primarily in Q2 and Q4, and a relatively steady run rate of SG&A expense throughout the year. In considering these points, consolidated 2008 second quarter revenue is expected to be between approximately $69 million and $70 million or an increase of approximately 20% to 21%. This includes anticipated revenue of approximately $57 million to $58 million from the U.S. segment, approximately $5 million from our Europe segment and approximately $7 million from Electric. In Q2, we expect revenue from PacSun to be up approximately 5% compared with Q2 of 2007.

EPS for the second quarter of 2008 is anticipated to be between approximately $0.16 to $0.17. For the full year of 2008, we now project consolidated revenue of approximately $343 million to $347 million, an increase from our previous guidance of approximately $339 million to $344 million.

Broken down by business segment, this includes projected revenue of approximately $241 million to $244 million in the U.S., approximately $73 million to $74 million in Europe, and approximately $29 million from Electric. The U.S. segment estimate includes a projected year-over-year revenue decrease of approximately 10% with PacSun.

As we stated on our last call, in 2008, we will incur approximately $2 million of incremental expenses as we transition into our new warehouse facility in Irvine, California. Of this incremental amount, approximately $1 million is noncash depreciation expense of capital equipment that has been purchased and paid in full. We expect to be fully transitioned to our new warehouse by the end of 2008. At this time we'll close our existing warehouse facility and we project to realize full operational efficiencies. This new warehouse is expected to meet all of our domestic warehouse needs for the next 10 years.

EPS for the year is now expected to be in the range of approximately $1.56 to $1.59 versus our previous EPS guidance of $1.50 to $1.53. It is now anticipated that Electric on a consolidated basis will be accretive in 2008, a change from our previous estimate that it would be earnings neutral for the year. We expect the Q2 and full year 2008 tax rate to be approximately 36.5%. Fully diluted shares outstanding for the second quarter and full year of 2008 are expected to be approximately $24.5 million. In putting forth this outlook, we want to remind everyone of the complexity of accurately assessing future earnings and revenue growth given the difficulty in predicting sales of our products by key retailers including PacSun, changes in fashion trends and consumer preferences, sourcing costs and general economic conditions.

With that, we'll open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Mitch Kummetz with Robert Baird.

Mitch Kummetz – Robert W. Baird

Hey, guy, thanks. Good quarter.

Richard Woolcott

Thanks, Mitch.

Mitch Kummetz – Robert W. Baird

Let's see here, got a good number of questions. I'll try to hit some of the important ones. Hey, Richard, you were talking about – you said your orders are basically except for holiday. I don't know if that comment was specific to Europe or across the overall business. Can you talk a little bit about …

Richard Woolcott

That was specific just to Europe.

Mitch Kummetz – Robert W. Baird

Okay.

Richard Woolcott

Yes, just to the Europe business.

Mitch Kummetz – Robert W. Baird

I would assume that your fall order book is complete at this point, or pretty close to, right?

Richard Woolcott

Are you talking for Europe?

Mitch Kummetz – Robert W. Baird

I'm talking about just overall.

Richard Woolcott

Overall, for the most part. You still have some of those stragglers that are coming in. We've got – generally overall, we've got a good readout going into fall here in the U.S.

Mitch Kummetz – Robert W. Baird

And what is your sense of the business looking at that fall backlog? You made the comment about in tough times retailers tend to stick with their best-performing brands which obviously you guys are one of those. Can you give a sense as to how that order book looks?

Richard Woolcott

I think the order book looks pretty good. At the same time, I think that there is that conservative outlook going into the second half of the year. I think now what we've noticed is that the retailers are in this slowdown 100%, where before when they were pre-booking going into spring last year, it was kind of on the edge of hey, it's starting to slow down but not sure yet and that kind of environment. Where now I think that you're on a level platform of, okay, we're in this slowdown. There's a new way of doing our pre-books. They are trying to be conservative. We're still seeing coming in, it looks good. I think again it lends itself to the strength of the brand and to the sell-through that we're seeing. But, we're in a tough environment out there and we've just got to work through this environment. And so, it's a little bit of a different time that we see right now. We've got our sleeves rolled up and we're powering.

Mitch Kummetz – Robert W. Baird

Okay, and then on the PacSun business, a little better in the quarter than expected and obviously weakness in girl's was a drag in your overall growth business. Can you talk a little bit about guys versus girls at Pac, how much was girls down at Pac? And then, you are projecting a 5% increase in Q2. Are you expecting a big turn in the girl's business in Q2 or is that more on the guy's side or a little bit of both?

Richard Woolcott

I'll start for a second and hand it over to Jason. I think, when we look at the PacSun business and last call we had it was 40% down and we've actually come in a little bit better at 34%. What we saw there was we got a polo program on the men's side that's doing well for them and actually they had come back and said, hey, can we get back into that program. That was that shift at PacSun from Q2 going into Q1, which for us I think is very encouraging to see that we've got that type of sell-through in that Q1. So that was kind of our first read of like, hey, things are a little better than what we had planned. And now going into Q2, and even going into the second half of the year, we are seeing a better picture for our women's. Not only for our men's, but also women's, I'll throw it over to Jason who can elaborate on that.

Jason Steris

How's it going, Mitch?

Mitch Kummetz – Robert W. Baird

Hey.

Jason Steris

In the Q1 as you had mentioned, our girl's business was down significantly compared to the men's. And as we go into Q2, we see men's being the driver again being positive with girl's business being down a bit in Q2. But the encouraging news that we're seeing right now working closely with PacSun team is we get into the back half. We are just finalizing our fall buys on the junior side for Q3 and we got a lot of really good programs in the works right now, sweaters and fleece and some T-shirts. And we're actually coming back around positive on the girl side. So, we're seeing the back half of the junior side really coming around for us right now.

Mitch Kummetz – Robert W. Baird

That sounds great. Jason, while I've got you on the line, can you talk a little bit about the swim business. We've seen some pretty impressive stats on your swim business for the first quarter. Can you talk about what impact that's having on the girl's business in general for you through the spring season?

Jason Steris

Yes, absolutely. First of all, we're really excited about being in that swim category now. And this year has been our first full year now to have the season with the spring line and a summer line. So having that two seasons under our belt now, I think we've had a successful launch with it. We got good feedback. We had good sell-through and really finding our strengths in the program as we're going into 2009 designing right now. Some of the key standouts for us have been our unique custom Volcom prints that you see a lot of stuff on whether it's back packs or board shorts and transcending that into the swimwear or just the right fits and the right quality. And then in terms of leveraging the sports wear program, we are just tying that back into those key prints and the Creedlers as well along with some of the accessories we have in that merchandise package.. We've really seen an overall collection and a boost to our overall juniors business. We're really excited. I think the team has done a really good job putting that line together. So far, the response has been really good across all distribution levels from the PacSun all the way down to the Molly Browns.

Mitch Kummetz – Robert W. Baird

Okay, great. One last question for Doug. You've got three quarters of Europe under your belt now being direct there and clearly the margin's been very good, although Q1 being a high-volume quarter. You've updated your sales outlook for Europe for the year. Do you have enough information at this point to give us some sense as to where you think that operating margin might come in for the year?

Doug Collier

Like you said, it's really seasonal business. You're going to have a real strong performance in Q1 like you saw and then you go into Q2. I mean, you can look we're only projecting $5 million in revenue. I don't think the SG&A really comes down much with that. You've got samples in there in Q2 and Q4. So Q2's obviously going to look a lot different. So, you're going to have to kind of average that out. You've got strong Q1 and then a whole completely different look in Q2 and then same with the back half of the year.

Mitch Kummetz – Robert W. Baird

Do you think this is kind of a mid-20s operating margin business at this point?

Doug Collier

I think we're just going to have to keep going forward with this. We haven't shipped (inaudible) we're in sort of third quarter. We're going to have to get this a little more into the back half of the year to see where that comes out of.

Mitch Kummetz – Robert W. Baird

Okay. Great, thanks. Good luck.

Doug Collier

Thanks, Mitch.

Operator

Thank you. Your next question comes from Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

Yes, congratulations, guys, on a nice start to the year.

Doug Collier

Thanks, Jeff.

Jeff Klinefelter – Piper Jaffray

Couple of questions here. First of all, on the pull forward, you quantified that for us on PacSun. But could you quantify that kind of in total? I mean, was the million beat in Electric also pull forward? What was the total quantity of pull forward versus just sort of exceeding your plan or are you not looking at it any differently?

Doug Collier

I think the pull forward across the board is about $7 million. And then the sort of exceeding the plan and kind of tacked on at the end of the year is about $3 million, and that's on a consolidated basis.

Jeff Klinefelter – Piper Jaffray

Okay. And then, so in Q1 with your gross margins down year-over-year, you talked about some pressure on disposition of some excess inventory. Could you give us a little more color on where those pockets of inventory were and how are you feeling going into the second quarter? I would imagine pretty well given your beat on the top line. Is there anymore inventory sensitivity going forward?

Jason Steris

Hey, Jeff, this is Jason here.

Jeff Klinefelter – Piper Jaffray

Hey, Jason.

Jason Steris

Looking at that domestic gross margin, the two things that we saw is we did feel some pressure from our current account base, just since we've become a larger partner for some those guys and some of these tougher times and then the other thing just liquidation sales with some of our off-price, we just felt being a little more proactive with our inventory levels a little sooner in the season and that was primarily due to getting rid of the spring product just before we closed the quarter and moving forward with clean inventories.

Jeff Klinefelter – Piper Jaffray

Okay. Just a couple of other questions. One, could you quantify, Doug, for us that euro impact. You said the Euro had a positive impact on margins in the first quarter.

Doug Collier

It had a positive impact both on the top line and then as you go down and translate that over the net income. On the top line we saw it added $2 million to the quarter and which we can add on to the year.

Jeff Klinefelter – Piper Jaffray

Okay. Great. In terms of Europe being a very important part of your growth strategy, could you give us any more specific details on sort of country performance or major market performance over there or how you see that unfolding through the balance of the year as key opportunities in that piece of international?

Richard Woolcott

Hey, Jeff, this is Richard here. I think with Europe and what we've seen in the past, you've got kind of your anchor countries over there which would be your France. You've got Germany, Austria, Italy, Spain, then next you'd have like your northern territories like your Norway. You've got the UK and the Portugal's in that. But in the heart of that, you've really got your France and your Austria and Germany heart, and then your Italy and the Spain. That's kind of the heart of the majority of the business. And we just look now to make sure that we continue to maintain the strength in those territories. And I see a lot of potential for us whether it be in terms of what type of product that we're delivering from our product, from what we just saw in Q1 in terms of the timing. This was really for the first quarter of a new year, we came out relatively earlier than what our licensee was doing and we saw it had a positive impact in terms of people wanting that product earlier. So I think in terms of just efficiencies, understanding those territories, understanding what product needs they have, I think we can gain strength just by working on the fundamentals. And then eventually, then on the flip side of that, you're always looking at kind of new territories, where could you plant seeds that down line will grow into more of a powerful territory. I see that a lot like up in those kind of Northern Scandinavian countries. So there's a lot of opportunity out there. We just got to go step-by-step and make sure that we focus on the basics first.

Jeff Klinefelter – Piper Jaffray

Okay. So there's no particular country that really drove this pull forward. I know France is your biggest country. But is there any –

Richard Woolcott

No. No. It's across the board. It's not just one area. It's just, I think you've got your general percentage breakdown of sales and as you said, France is a big part of our business. Everybody contributed to it.

Jason Steris

Hey, Jeff, this is Jason here. I could add to that a little bit. I think this is the first spring season where we had the ability to deliver that spring product on time to the distributors and their accounts, and people were just really excited about that to get a head start on the season to maximize the selling window. So I think there's an overall excitement with the performance of the production teams and getting the product to those guys on time. It was across the board.

Jeff Klinefelter – Piper Jaffray

Okay. One last thing guy, in terms of Q2, if you're going to have any kind of upside surprise in Q2, what do you see your greatest opportunity sitting here today with the current retail environment?

Richard Woolcott

That's a great question. We've talked about this amongst the team here. And I think it's really going to come down to the consumer out there. And if these next couple of months and getting into back-to-school, the other student we talk about is what the government's doing with the tax rebates and that injection of capital back into the economy, what kind of effect that has for the actual consumer spending. So I think the upside is really if it that consumer loosens his/her pocketbook and wants to go out and get back into the stores and start buying a little bit more, that possibly could translate back on to our end of the business of, "Hey, whether it be reorder business or hey, do you guys have any of my future orders in stock right now, I'd like to fill up again." Kind of the scenario we saw with Easter being early. But I think this time because we don't have a change in the holiday season, it's really going to come down to the consumer if they're ready to walk back in the store. And I think you look at PacSun and we've got – we're training [ph] right now at Q2 at 5%. If that business gets better, you could see a bump there. I don't want to get ahead of myself. So I'd say with our biggest customer, if that consumer starts buying, it could happen there and with our small account. But again, I mean, I don't want to get ahead of ourselves. I think the mood out there is tough. I think we're very fortunate as a brand to be experiencing the type of business that we are right now. And we're working really hard to make sure we're covering all aspects of the business. But I would say overall, this is a step-by-step process to get through this slowdown and we've got to bump along. And if there's an opportunity that presents itself, we're going to attack it and see if we can act on it.

Jeff Klinefelter – Piper Jaffray

Okay. Great.

Richard Woolcott

I don't want to get ahead of ourselves. It's pretty tough out there.

Jeff Klinefelter – Piper Jaffray

Okay, appreciate it. Thanks guys. Good luck.

Richard Woolcott

Okay.

Operator

Thank you. Your next question comes from Eric Tracy with BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

Hey, guys. Let me add my congrats as well.

Richard Woolcott

Thank you, Eric.

Eric Tracy – BB&T Capital Markets

Maybe Doug, if we could just dig a little bit on the margin in Q2, a little bit of follow-on some of the other questions, maybe Europe relative to the U.S., obviously going to be samples flowing through. Can you give us a sense of just sort of what your expectation from a gross margin in Europe is? Obviously well above in Q1. But just on a go-forward basis for Q2?

Doug Collier

Well, for Q2, yes, it's not going to be anything close to what Q1 was. You've got samples coming through there on a much lower revenue base, part of which we have acceleration from Q2 into Q1. And on an operating level, you've got – I think we had $5.5 million, something like that SG&A in Q1 and that doesn't go down a lot. It's the seasonal nature of that business in Europe. You're going to have great Q1. It's going to come down in Q2. Q3 goes back up and back down in Q4. That's just something we have to get used to as the business operates that way in Europe.

Eric Tracy – BB&T Capital Markets

And the assumption that the U.S. gross margin, does these continued pressures as you work through some of the inventory and/or just markdown activity?

Doug Collier

Yes, I think that's fair to say that.

Eric Tracy – BB&T Capital Markets

And then maybe either Jason or Richard, talk just a little about diversification being such a big piece of the distribution strategy going forward. A little bit on the department stores, some color there, how comfortable you are with the existing accounts and the potential to pick up some additional door growth in '08.

Jason Steris

Eric, this had is Jason here. I'll walk you through some of the newer accounts that we've been working with for about a year now. Starting with the Macy's team, we've been working with for a little over a year now for both men's and the boy's. We continue to share a good relationship with those guys. They're actually here today pre-lining our holiday. We're working as closely with them on finding the needs of that customer with the Volcom brand. It's no surprise that it's a bit of a struggle out there. But I think within the environment that we're in, we're seeing good success with our brands. We're communicating well with everybody. Maximizing each opportunity that arises.

And as far as additional door counts, I think we're still – right now, we're in about 106 of the 194 doors. So there is opportunity there. But, I think for right now, we're still trying to focus and maximize within the current doors just our floor space and presentation there and our overall sell-through and just build on that relationship kind of within the existing account. I don't have any specific timeline to expand beyond that at this point.

On the girl's side, which we started here, primarily with the spring '08 launch and we've seen some good success there coming out of the gates which has been really exciting. Dresses, knit-tops, T-shirts and all that have been doing really well. So some exciting news there on the junior side which is brand new for this spring and I think that that would be an opportunity where we could roll out some of the more doors as we get into the back-to-school and the holiday, catching up with the men's program because we're less doors for girl's there.

Kind of going into the dealers program, again continuing to work closely with those guys on the product mix. With all these new stores, they're new for us. Getting that brand awareness to that consumer and finding the right product mix for that consumer has been the first and foremost goal for everybody and our sales team is working close with the buying teams and their planning managers (inaudible) that floor set. I think we're making really good momentum with them. Just continue to focus on those current doors and maximize every opportunity. And then lastly, would be the kind of talking a little about Zumiez and Tilly's, some of our bigger specialty chains which again we're working close with and doing good business within what's happening in the economy out there. I think, again, back to the strength of the brand and the relationships we have with those guys, but the Volcom brand seems to be doing really well at that specialty chain level to that department store level. We're pleased with our results right now.

Eric Tracy – BB&T Capital Markets

Great. Thank you.

Jason Steris

Does that kind of cover what you were looking for?

Eric Tracy – BB&T Capital Markets

Absolutely. That's great.

Richard Woolcott

If you have any specific, I'd be happy to kind of jump in to any other thoughts you have there.

Eric Tracy – BB&T Capital Markets

Okay. No, that's very helpful. And then, maybe just on an addendum to that is, obviously had success with the Chick's chain and I would guess that Dick's now is probably interested in carrying Volcom product. Is that, Richard, a longer term thing of even thinking of about getting into a bigger box sporting goods type play or how do you view that opportunity?

Richard Woolcott

We haven't really even kind of addressed that yet. We did meet with both teams, the Dick's and the Chick's teams, when that transaction happened. We're just focusing on our Chick's business right now. So, that's something that we just haven't put on the table or really looked at. It's kind of too soon to even really say much about it.

Eric Tracy – BB&T Capital Markets

Let me just lastly on Electric, talk a little about sort of the upside, where that came from and the quarter and then going forward. It seems like the business is pretty stable throughout the year. No seasonal huge shifts there. Maybe talk a little about that, both.

Richard Woolcott

I think with the Q1 numbers with Electric, we actually finished the transaction about the third week of January. So to get – for our team and their team to really put pencil to paper and make sure that we've got the best accurate figures and forecasting possible, I think it's going to take a little bit of time. I think we had a good lead going into Q1 with Electric. And obviously, we got a bigger bump than we thought. I think over time, our forecasting with them and our two finance teams working together, obviously within times, that we become – with both groups working together, we're going to be more accurate. There I think, number one, you've got a strong brand that performs well in the market. And then you've got a new relationship that you've got to – takes time to get to know one another and understand each other's budgets and really understand their business too. It's a little bit of a different business than what we're in. But we're very, very happy with the way that the integration is going and the sell-through at retail. I think most important is just their management team and how well both of our teams are working together. That's always biggest fear, you're getting in bed with somebody else. And it is like, okay, are we going to really be able to work together after the transaction is complete? Fortunately, we're both on the same wavelength as the two teams now integrate. So that's kind of where I think our relationship with Electric. I think it's going to get better in terms from the financial end and forecasting and reporting and all that kind of stuff. And then for the remainder of the year, you're right, they've got a pretty consistent flow of business. They've got a lot of new product going into the pipeline. We are starting to work on our soft goods program with them and getting them on calendar. We might see a little benefit there towards the end of the year. But I think moving more into '09 in terms of the soft goods opportunity, That's when really I think that our expertise coming from apparel can really help Electric is moving forward in years ahead. So far so good with that whole operation.

Eric Tracy – BB&T Capital Markets

Okay. Great. Thanks, guys. And best of luck.

Jason Steris

Thanks, Eric.

Richard Woolcott

Thank you.

Operator

Thank you. Your next question comes from Jim Duffy with Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

Thanks. Hello, everyone.

Richard Woolcott

Hey, Jim.

Jim Duffy – Thomas Weisel Partners

Hey, great start with both Europe and Electric. I'm sure you are very pleased with that.

Richard Woolcott

Thank you.

Jim Duffy – Thomas Weisel Partners

On the European side of things, it sounds like the margin was a positive surprise in the first quarter. Certainly some of that was volume. And I understand you aren't sure where gross margin is going to net out in Q2. But, when you look at that business, are you going to hold the SG&A constant there or do you see a good start here as an opportunity to pull forward some investments that you had been contemplating for that business?

Richard Woolcott

Jim, I don't think that really changes the plan too much at all. I think on the margin, we saw – it was a little bit better than we expected. A lot of the sales upside – or part of it was from the currency exchange. We're just real pleased with that business. I don't see any – we're going to change the plan significantly for the rest of the year just because of the Q1 performance. We will also get through Q2 and that's going to – you really have to look at each half of the year in total because the business is so skewed to the front quarter in each half of the business.

Jim Duffy – Thomas Weisel Partners

Sure. So as you're looking at the business, I mean, do you consider '08 to be an investment year or are you looking to take profitability when it's there if the business is running at a plan?

Richard Woolcott

You're talking about Europe, Jim?

Jim Duffy – Thomas Weisel Partners

Yes, that's right.

Richard Woolcott

Well, I think you're working both ends of it. You want to be profitable, but at the same time it's very important for us to be investing over there, our marketing initiatives, particularly our in-store programs, and again it's got to be balanced within the SG&A. But this is an important investment year for Volcom over there. What we do in the next couple years is going to set a foundation for us in the future. So these are very important years. That was one of our strategies right when we get with management going into '08, "Okay, let's grow within our existing account base and what are we going to need to do to cement ourselves in these stores and get more of a presence?" And so we're investing in it our in-store and investing in our marketing and our branding and our product infrastructure too.

Jim Duffy – Thomas Weisel Partners

That makes a lot of sense. You are off to a good start (inaudible) with some investment and that will – you will be reward with a lot of loyalty, I would imagine. Doug, you mentioned in response to Jeff's question, FX helped on both the revenue and the margin. I think you said it was a $2 million benefit. Was that the number?

Doug Collier

The $2 million benefit was just on the revenue.

Jim Duffy – Thomas Weisel Partners

How much was it to the margin?

Doug Collier

The margin, you know what, the FX side wasn't a huge part of that. It was just in general that it was better than expected, a little bit better.

Jim Duffy – Thomas Weisel Partners

Are you guys at the point where you're doing anything from a hedging standpoint?

Doug Collier

Not at this point. I mean, other than that, we've got cash over there and we have assets over there. Not as far as actual hedging arrangements and that's something we're looking at right now.

Jim Duffy – Thomas Weisel Partners

To the extent that U.S. dollar remains weak, it should continue to be a benefit for you?

Doug Collier

It has been so far.

Jim Duffy – Thomas Weisel Partners

Richard, you mentioned tough times with some of the independents. If you kind of take out the distribution that you've added in the past year, is that something that you're seeing in the numbers with some of those chains? And are you seeing regional disparities in some of your performance?

Richard Woolcott

Well, I think, Doug, when we took out the top five customers, we still had 14% growth rate. Overall, there is still a healthy feeling at that that when I talk about the other, and that's the outside of our top five accounts. But I think people, whether it's your smallest core account or medium-sized change, people are feeling the pressure out there. It doesn't mean it is all negative. Particular territories have been doing well than others. There are bright spots in all of this, in this scenario. Some accounts are up for us for a month and then some accounts you talk to and maybe they're flat or they're down. It's kind of all over the place. But generally, there's definitely the environment is more difficult out there. But I think the good retailers that are smart with their business, that are investing in the future, that are excited even in down times, I still see optimism out there, those are the retailers that are going to get through this. The other ones that are struggling a little more or maybe not having that optimistic attitude, maybe they're going to – they might not make it. So even though it's a challenging time, I think it's also – it can be a positive time too for everybody to get more focused on their business, get better at their buying, making sure what products are coming in. Hit home with their consumers. Even though it's tough, sometimes this can be very healthy for an industry too. So overall, it is tough out there. But people are optimistic. And we do see bright spots. I don't want to come off too pessimistic because, obviously, you can see from our business, our business is – we're off to a great start. I think that's probably the biggest key for us here at Volcom, is that we're very appreciative that our momentum out of the gates was strong for '08. It gives us that confidence, as we charge into these next quarters. And there's retailers out there too that are having success. So it's kind of mixed and everybody's just got to plug away at it.

Jim Duffy – Thomas Weisel Partners

You mentioned that for some of those that are struggling, you're working with them and partnering with them. How is it you go about doing that? Is it more favorable terms or –

Richard Woolcott

You know, the one that is I believe is probably the most effective is where you're partnering with them to get customers in their stores. So we'll do a little bit more gift with purchase. In-store counter card. Doing little autograph signings like – I think we mentioned on the last call, we did – we had a little promotion with – this is one of our bigger retailer, with PacSun, where we did autograph signings with Ryan Sheckler and did a Sweepstakes where you could win – we had five grand prize winners could come and go shop and dine and go skate with Ryan. So, you've got it on that end and then we had another Sweepstakes where, for our quarter specialty stores where even shop kids and customers – the shop kids could sign up and the customers on the Web site could sign up and go stay at our pipeline house this winter. And then we've got a gift with purchase where we'll give stuff away, buy a board short and get a T-shirt for free or something. So we're trying all sorts of promotional events and marketing themes, just to create excitement. That gets the consumer in the store and hopefully that translates to more business. So it's kind of across the board. And it's really looking at your core retailers. They're the most important ones at the foundation. And they're the ones that really keep the culture in tact from a board sport. They're the ones selling the hard goods and the ones either out at the beach or at the core skate shop or the shop at the mountain. So they're really important to our industry. So not just Volcom, but the other manufacturers are doing what they can for them too because they're the life blood of what makes up our culture.

Jim Duffy – Thomas Weisel Partners

Very good. Thanks, guys.

Doug Collier

Thanks, Jim.

Richard Woolcott

Thank you.

Operator

Thank you. Your next question comes from Jeff Mintz with Wedbush.

Jeff Mintz – Wedbush

Thanks very much. I'll add my congratulations as well.

Richard Woolcott

Thanks, Jeff.

Jeff Mintz – Wedbush

Can you talk a little about – I know you guys only have six stores open. Can you talk about what you're seeing in your own retail stores in terms of traffic and sales? Are you seeing any kind of consumer slowdown there or is business there continuing as strong as, say, last year?

Doug Collier

Jeff, you know what? That is a great question. It's one of the reasons that we are excited about that, our retail stores, is that we do get a first read reaction of what happened over a weekend or if you have a certain holiday or you're going into a certain season that, not only getting feedback from our reps and the other retailers, but also we can get feedback from our store managers at the Volcom stores. In terms of last year to this year, yes, we see sales were different than they were last year. So, even our stores, they are affected by the slowdown. What we did see in our stores, which was evident with that Easter coming early is when right before and kind of after the Easter Holiday we saw a spike in our stores, which basically was telling us that – and it was reassuring what we were hearing from our other retailers we were seeing in our own stores. What we see in our own stores is almost parallel with what's happening in the market and the feedback that we're getting. But, it just gives you – it kind of confirms what we're hearing and what we're seeing. So it's a nice read. We don't have a lot of them. But they're in some key locations, so we can get a general read.

Jeff Mintz – Wedbush

Okay. Great. That's really helpful. And then, Doug, just a couple questions on Electric. Can you talk a little bit about where you are in the integration costs? Have they been in line with expectations? And also, if you can quantify the accretion that you now expect to see from that business in '08.

Doug Collier

Yes. For the integration is going really well. We have got a finance person onboard and the team here is working well with them. There's going to be more accounting costs, things like that. But not a lot. And then, the accretion, it's going to be pretty small this year. But a lot of that is driven by the acquisition, amortization. I think we had around $600,000 for just the part of Q1 where they were onboard. That's going to be about $2.2 million for the year. So you've got to get through that just to get sort of earnings neutral, so that we're able to overcome that and be a little bit accretive, the real good sign for that acquisition and working with that team.

Jeff Mintz – Wedbush

Okay. Great. And then on the SG&A in terms of Electric, is there kind of pattern of SG&A through the quarters similar to Volcom or do they have kind of a different level of – not really level, but different pattern of spending?

Doug Collier

I think it's pretty, pretty even.

Richard Woolcott

Yes, I can't think of anything off the top of my head that would cause it to be sort of peaks like, that would cause it to peak or anything. Their sales are pretty steady, so the commissions and all that's going to be the same. So, off the top of my head I can't think of anything that makes it spike too much.

Jeff Mintz – Wedbush

Okay, great. Thanks very much and good luck.

Doug Collier

Okay. Thanks, Jeff.

Operator

Thank you. (Operator instructions) Your next question comes from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen – B. Riley

Good afternoon. Nice work on the quarter.

Richard Woolcott

Thanks, Jeff.

Jeff Van Sinderen – B. Riley

My first question is – and I don't mean to single anyone out, but is there anything noteworthy about how your guy's business is trending at PacSun versus Zumiez? If you can also comment on business trends or business development with Nordstrom?

Jason Steris

Hey, Jeff, this is Jason. How's it going?

Jeff Van Sinderen – B. Riley

All right.

Jason Steris

So in terms of our PacSun men's business versus our Zumiez business, I don't want to get into too much detail on that question, really I can tell you that we work on some of the similar styles, where there's success, the chino program is something we do with PacSun. That's a program to outstyle and that's working across the board from our core guys on up to Zumiez as well. Obviously they're in a lot of the same malls. So they want to kind of strategize their buys as much as they can too. That's something that we just don't really get too involved in. Just work really close with their buying teams to make a good floor set for Volcom. Overall, the success for both teams has been really good. I think there's been a good balance of – there's a lot of the SMU business that comes up for either party, making sure that everybody gets the proper support to get the Volcom product that's going to best suit their customer, but not have all the same products in the same mall. So, I think a lot of that's attributed to the buying teams and our sales managers working through each season and finding that balance there. But, from what both of the stores tell us, Volcom's doing really well for both Zumiez and PacSun on the men's side. If you have any really specific questions, maybe I can better answer that for you. But that's kind of a general feel of what's going on.

Richard Woolcott

Jeff, this is Richard here. Part of our strategy internally is for both – when you've got two big customers like that, you want to have as much as you can to have product differentiation in each store. So, you kind of have your men's group that's working well with PacSun and then you have a men's group that's working well with Zumiez and you want them to have their individual flavor, so you kind of differentiate the experience in both stores, so both stores are independent of one another. I think that's probably the most important part of the strategy when working with big retailers, is that they have product that's specifically they feel is for their customer and that is different than their competitor down the street. And I think it lends itself to that where PacSun is more narrow and deep, and Zumiez merchandises with more products across the board.

And then all the way down to our little specialty group, we haven't really talked too much about this on the calls, but we have a line called Stone Age which is specifically for our small specialty retailers that they have just exclusively for them that aren't in the bigger chains that gives them their own kind of Volcom flavor in their store that helps drive customers in there too. So it's a kind of a complicated balancing act. But it's important to balance your product across your distribution channels, so everybody has got something unique for their customer.

Jeff Van Sinderen – B. Riley

Okay. Good. And then on Nordstrom, anything noteworthy there?

Jason Steris

Our girl's business is doing well with Nordstrom right now. Our men's business and boy's business continues to be performing well. But, yes, one standout, just talking with our girl's sales manager, our girl's business in there is actually doing really well. And again, that's been one of our accounts for some time now, one of our first specialty department stores. We share a great relationship with those guys and just planning accordingly and doing good business with them.

Jeff Van Sinderen – B. Riley

Good to here. And then as far as, what you mentioned in terms of Europe starting out slowly for spring, just wondering I guess what the magnitude of that situation is. You mentioned we probably need better weather for that business to pick up in the near term. Do you think there's any risk of potential near-term order cancellations or deferral because of a slow start there?

Richard Woolcott

You know, Jeff, I haven't heard of any – I haven't heard of that. I actually talked to our CEO a couple days ago about what was happening over there. So far so good. I mentioned on the call that we've got all our orders in except for holiday which is very encouraging when you've got that much vision of your whole year already booked. And holiday's small and they'll be attacking that soon. But I have not heard of any type of canceling of orders or anything like that. So, I think it's a typical scenario where you've got a later spring that's coming a little bit later and you just got to work through it. That's about as much information as I have. I haven't heard anything in terms of any cancellations or anything like that.

Jeff Van Sinderen – B. Riley

Fair enough. Thanks very much and good luck.

Richard Woolcott

All righty. Thank you.

Doug Collier

Thanks, Jeff.

Operator

Thank you. And at this time, there are no further questions. So I will now turn the call over to you, Mr. Woolcott, for any closing remarks.

Richard Woolcott

Okay, well, thank you. I just want to say thanks to everybody for being on the call and listening and for all the support. I look forward to catching up again on the next call. All righty. Thank you.

Operator

Ladies and gentlemen, thank you for joining today's Volcom's Q1 2008 conference call. Thank you for your participation. You may now disconnect.

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Source: Volcom, Inc. Q1 2008 Earnings Call Transcript
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