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Executives

Robert Jaffe

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

Richard J. Shields - Chief Financial Officer and Principal Accounting Officer

Craig Stevenson - Chief Operating Officer and Global Brand President

Robert Owen Colby - President of Americas Region

Analysts

Diana Katz - Lazard Capital Markets LLC, Research Division

William M. Reuter - BofA Merrill Lynch, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

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

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

Christian Buss - Crédit Suisse AG, Research Division

Quiksilver (ZQK) Q3 2012 Earnings Call September 6, 2012 4:30 PM ET

Operator

Good day, and welcome to the Quiksilver Fiscal 2012 Third Quarter Financial Results Conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Robert Jaffe, head of Investor Relations for Quiksilver. Please go ahead, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone, and welcome to the Quiksilver Third 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 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 fact and are considered forward-looking statements within the meanings 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 our -- and in our quarterly reports on Form 10-Q.

All forward-looking statements made on this call speak only as of today's date, September 6, 2012, and the company undertakes no duty to update any forward-looking statement. 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 now turn the call over to Bob McKnight.

Robert B. McKnight

Thanks, Robert. Good afternoon, everyone, and thanks for joining us today for our third quarter conference call. Today marks a personal milestone for myself as I take part in my 100th earnings call for Quiksilver. As I look back on 25 years of helping lead and define this great company, I'm more excited than ever about our opportunities to create memorable products, captivate our customers and seize global opportunities to make Quiksilver, Roxy and DC the most demanded action sports brands in the world.

Turning to our business in the third quarter, we made solid progress and remained focused on our 3 long-term initiatives, which can be summarized -- best summarized as follows: strengthening our brands, expanding our business and driving operational efficiencies. Our entire team has been working diligently on implementing these initiatives during this transformative time. Let me expand on each of these a bit more.

Brand identity is one of the most important elements of our business, and strengthening our brands is critical to our continued growth. This includes all of our market initiatives, including our extensive base of team writers, global and local events, advertising, promotions and product development. During the quarter, Roxy’s Let The Sea Set You Free social media campaign with an enormous success with Roxy gaining more than 300,000 Facebook fans in just 2 months. In June, 3 winners from the contest were picked from more than 5,000 entries across 83 countries, creating an immeasurable excitement and buzz about Roxy and making Let The Sea Set You Free its most successful digital campaign ever.

Also in the quarter, Roxy launched its outdoor fitness line, which is projected to do about $6 million in sales in its first year. We believe this line broadens Roxy's customer base and further extends the brand into a market that complements the active females that enjoy the Roxy attitude and aesthetic. We are really pleased with this new line's positive reviews.

Meanwhile, DC pumped its presence in the quarter with the 2012 DC Street League pro skate tour, which was founded by iconic DC personality, Rob Dyrdek, and included 2 wins in 3 events by DC rider, Nyjah Houston. DC made another major marketing splash as Ken Block's Gymkhana FIVE video went viral on the Internet, attracting an astonishing 25 million views in the first month, making the white-knuckle adrenaline ride through the streets of San Francisco one of the Web's most shared videos this summer.

Nothing strengthens the Quiksilver brand like the success of our surf team riders, and Stephanie Gilmore did just that in the quarter, winning her fifth ASP world title in July at the Roxy Pro in Biarritz.

While our brands are some of the most sought after in action sports, we can never take our business for granted and need to continue to inspire consumers around the globe. All of these events and initiatives during the quarter helped to reimburse -- to reinforce and differentiate the Quiksilver, Roxy and DC brands.

Turning now to our second long-term initiative. It is critical that we continue to expand our business by brand, by geography and by channel. Despite weak economic challenges in Europe and Australia, 2 of our key markets, I'm pleased that we were able to grow our business in each of our 3 major brands, 3 distribution channels and 3 geographic regions. We're very pleased that our European team was able to report modest revenue growth in constant currency, especially given that others in our space are reporting lower sales and, in some cases, significantly lower in this region. France, Spain and the U.K. are important markets for Quiksilver and are struggling with poor consumer sentiment, high unemployment and challenging economic conditions. At the same time, other markets in our European region have been steady, and emerging markets, such as Russia, have shown continued strength and growth.

In Asia Pacific, another market facing difficult economic conditions, our comparative performance was gratifying as we posted high single-digit sales growth. In emerging markets such as Indonesia and Korea, we're seeing continued strong sales growth, which is encouraging.

In the Americas, we reported low double-digit sales growth, and I'd like to mention that Brazil has been a particular bright spot. Sales of DC shoes increased by 16% in constant currency during the quarter as back-to-school demand for the brand continued to drive solid growth and support what we believe is a prudent channel segmentation strategy. Our e-commerce business had a strong quarter also as our consumers continue shopping online for convenience and selection. We consider an effective online strategy paramount in the expansion of our business, and in the third quarter, we were pleased to see our online sales more than double. We have been working to increase customer conversions on our website by, among other things, investing in our e-commerce platform and the rest. Compared with last year's Q3, we saw solid increase in conversion metrics.

Regarding our third initiative, driving operational efficiency throughout our business, we are focused on both our cost structure as well as building our global IT systems. We made difficult decisions in the third quarter to eliminate approximately 70 positions. We believe this will translate to annualized savings of approximately $6 million. Regarding IT systems, we kicked off the rollout of our new ERP system in Europe. We expect to streamline key activities into best-in-class global processes as we realize the benefits of the new system. We are committed to a disciplined budget process for 2013. Going forward, we will remain at an assertive approach to cost reduction and to hitting our financial targets.

And now I'd like to turn the call over to Rich to discuss our financial performance.

Richard J. Shields

Thanks, Bob, and thanks, everyone, for taking the time to join us this afternoon. For Q3 2012, consolidated net revenues were $512 million, up $9 million, or 2%, and up $38 million, or 8%, in constant currency compared to our third quarter 2011. In constant currencies, Quiksilver brand revenues were up 4% to $194 million, Roxy revenues were up 5% to $132 million and DC revenues were up 16% to $168 million. We're specifically pleased with the Quiksilver and Roxy brands' solid growth in the Americas wholesale region as this is a key barometer of brand momentum. DC growth of 16% in Q3 and 10% year-to-date reflects continued global penetration of this powerful brand.

Moving to a distribution channel perspective, again in constant currencies, wholesale revenues were up 5% to $370 million. Revenues in our retail store channel were up 7% to $119 million. Our retail same-store sales growth for the third quarter was positive 4%, and we generated positive same-store sales growth in both our full-price stores as well as our factory outlets. Our e-commerce channel captured revenues of $23 million, up 180% in constant currency and up 80% organically.

From a geographical viewpoint, revenues in the Americas were $286 million, up 10% compared to last year's third quarter and up 12% in constant currency. Asia Pacific revenues grew 9% to $72 million and were up 13% in constant currency. European revenues were $154 million, down 13% compared to last year but up modestly in constant currency and down 5% organically. Based upon our feedback from key accounts in the region as well as reports we see regarding apparel sales trends in the region, we believe we are increasing our market share in Europe.

We're pleased with the balance in our constant currency revenue performance, both for the third quarter and year-to-date. In each of our 3 major brands, we saw sales growth, as well as sales growth in our 3 major distribution channels and our 3 major geographical regions. Emerging markets revenue growth is a key growth initiative for us, and these markets generated revenues of $35 million in the third quarter, up 39% in constant currency from the same quarter last year.

Consolidated gross margins contracted by 120 basis points to 49.5% of sales compared to 50.7% of sales in the third quarter a year ago. Gross margins improved in the Asia Pacific region where lower levels of discounting were matched with better year-over-year comparisons in product costs. In Europe, product discounting, currency exchange rates and a higher sales mix to major accounts contributed to lower gross margin despite improved product cost.

Gross margins in the Americas were basically flat as improved product costs were offset by additional discounts and a sales mix shift in the department stores and national account.

Q3 reported SG&A expense of $226 million, includes $3.9 million of severance and restructuring expenses in the third quarter. Excluding those nonrecurring items, SG&A was essentially flat in dollar terms and decreased 50 basis points as a percent of net revenues compared with the same quarter last year. As Bob mentioned, we reduced headcount in all 3 regions during the third quarter, which drove the severance expense.

Pro forma adjusted EBITDA declined to $51 million compared with $53 million in the third quarter of fiscal 2011. The decrease was primarily due to gross margin contraction, which I noted was focused in Europe.

Moving on to the balance sheet and working capital. Receivables increased $13 million versus last year. Days sales outstanding increased by 4 days compared to Q3 of fiscal 2011 due to the elimination of our early payment discount program, some credit terms support for certain wholesale customers as well as higher sales to distributors. Inventory at quarter end was up $26 million versus the same time last year. We held 136 days of inventory on hand at the end of Q3, up 2 days compared with a year ago. The increase is predominantly focused in Europe where we have some carryover inventory from the prior fall season, additional retail stores and the growth of e-commerce in that region. 16% of our global inventory is prior seasons’ merchandise. We will focus on moving these goods in the upcoming fall season through our own factory outlets as well as through wholesale discount channels.

CapEx was $13 million in the third quarter, consistent with the third quarter of last year and included continued spending related to our global ERP system implementation, which continues to be on schedule. In addition, we continued investments in our retail stores and our e-commerce platform.

We ended the quarter with $117 million available on our global credit facilities.

Lastly, a few comments regarding our Europe region. Europe generated $700 million in revenues last year. It is a large and profitable component of the Quiksilver global operations. Reported year-to-date fiscal 2012 sales have decreased 5%, although constant currency year-to-date sales are up 2%. Operating revenue for this region is down versus 2011 last year predominantly due to currency translation and gross margin erosion. Our management team, including our strong leadership in Europe, is taking prudent steps to manage this region in light of the poor economic environment there. Specifically, we are reducing expenses, monitoring inventory purchase plans, working closely with key accounts regarding their sell-through, being diligent in credit review decisions and liquidating excess inventory and reviewing our bank relationships. As I mentioned before, we believe we are taking market share and strengthening our relationships with key accounts in the region during this difficult period.

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

Robert B. McKnight

Thanks, Rich. So as you can see, we're pleased with the balanced revenue growth in the quarter as well as the progress we are making on our long-term initiative. While we continue to face the economic challenges around the world, we are focused on growing and strengthening our business and improving our cost structure. Thanks again for participating in the call this afternoon.

Robert Jaffe

Operator, that concludes the prepared comments. We're now ready for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] So we will take our first question from Diana Katz with Lazard Capital Markets.

Diana Katz - Lazard Capital Markets LLC, Research Division

I wanted to start with the Asia Pacific region. Great gross margin expansion in the quarter. Do you think that is a turn in the gross margins here and we'll see gross margin expansion going forward? And in terms of sales, a little bit of a deceleration from the second quarter. Was there anything in particular in the quarter that impacted sales here?

Craig Stevenson

Diana, Craig Stevenson here. I can take that one. Yes, our retail comps are looking pretty good. We've got double-digit growth in retail in Australia and single-digit growth in Japan, which we think is pretty good. Overall, our order book looks pretty good with a low single-digit growth forecast for next year. So we're not putting as much through our outlet stores, and we're expecting better margins through our full-price stores.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then in terms of the sales trend, a little bit of a deceleration in the quarter. I mean, still very strong, but a little bit of a deceleration. Was there anything in particular in the quarter here or...

Richard J. Shields

I think -- well, this is Rich. Thanks, Diane (sic) [Diana]. Well, I'll point out that the Asia Pacific region, we think, has strong growth potential moving forward. Well, definitely, when we take a look at the growth that we're seeing in Japan, we believe we're well positioned in Japan. Korea is going to be a strong market for us; Taiwan, a strong market for us. Indonesia continues to grow very quickly. And while the Australasia, meaning Australia and New Zealand, has faced economic headwinds, we're -- we feel comfortable with our performance there. So is it -- I wouldn't look at the Asia Pacific just as Australia. You've got the Northern Pacific region and you've got very strong growth there as well. And we look at the opportunities there as multiyear sales growth opportunities.

Diana Katz - Lazard Capital Markets LLC, Research Division

Great. And then in Europe, maybe you could elaborate a bit country by country kind of what you're seeing out there?

Robert B. McKnight

So the difficulty really is in the U.K., France and Spain. And those are 3 big businesses for us, so that harms us. In the meantime, we've made up for all or most of that in the other regions that are growing and continue to be positive. In the North area, excluding Germany in that, Portugal, Italy, still very strong businesses for us. And then we also have the emerging markets, such as Russia, that are doing great. So all rolled up in the numbers Rich gave you, but we're very pleased in light of very, very tough over there in the last year. We had a horrible winter with weather, or actually lack-of-snow kind of weather. So it put that business behind the 8 ball. And then this summer has not been nice at the beach, a lot of rain up and down the coast of England, France, Spain and Portugal. So it's just been a very -- and -- plus the economy that we all read about every day, the unemployment in Spain, all these things are beating away at the European market. So we are really thrilled with the way we have -- we've continued to prosper in that region. And I think it's just because the brands are strong, a really good product. We're seen largely as a unique sports brand across the European continent. And we have a group there that has been in business for a long time, and they -- they're close to our customers and have done a great job.

Richard J. Shields

I got one other item there. I think that a key barometer of what we're seeing in Europe can be seen in light of the same-store sales growth in Europe. We've got positive, single-digit, same-store sales growth in that region, both for Q3 and year-to-date, and I think that, that speaks to the strength that our brands have in that region. And I'll also point out that while we have seen some of our smaller, independent, core accounts face financial difficulties and fold, we've actually strengthened our relationship with key accounts like Corte Ingles in that market, and those large national accounts are really leaning on the leading brands as core opportunities. So I think that while we're facing difficult economic headwinds in Europe, I think that we're actually strengthening our relationship with the key multi-door accounts, and I think that our retail same-stores growth probably demonstrates the power of the brand and the execution that we've got in the region.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then lastly, on the Americas, maybe you could update us on how DC is doing in some of the new distribution hubs here?

Robert Owen Colby

Yes, so we launched in the mid-tier channel in this back-to-school season, and we're in-store selling and selling very well. We're really happy with the performance. We're really happy with the decision that we made.

Operator

Our next question comes from William Reuter of Bank of America Merrill Lynch.

William M. Reuter - BofA Merrill Lynch, Research Division

I'm curious with some of the initial -- if there were any initial sell-ins of large product lines, particularly in the Americas. And in department stores may have driven some of the strong revenues in those -- in that region.

Robert Owen Colby

Yes. So we just opened up a mid-tier channel, footwear and apparel. And like I said, we're planning a big business there and we're performing ahead of plan. We're really pleased with the performance there of DC.

William M. Reuter - BofA Merrill Lynch, Research Division

Can you talk at all about how much that might have -- just the initial sales there may have driven the quarter?

Robert Owen Colby

I'd rather not comment on that.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then in terms of your improved inventory levels overall, it sounds like Europe continues to be somewhat challenging. I'm curious whether your inventory levels in Europe are now where you want them to be and subsequent discounting would probably just be due to the environment, not to inventory levels.

Richard J. Shields

Well, this is Rich. Thanks, Bill. I'll comment on generally on inventory overall and also a bit on Europe specifically. At 136 days of inventory on hand, I think there's opportunities for us to kind of better manage that area of our working capital, and that'll be a multiyear initiative to bring that number down. Europe is facing a couple of unique situations. There was a fairly poor and late winter last year, so there's some inventory in the -- both in the -- both as an industry and the channel and also a bit of our inventory that we've got to work through there. And then the current season kind of faced a lot of rain and kind of late sales in the region. So I think inventory overall, I think is an opportunity. Inventory in Europe is an opportunity. I wouldn’t look at Europe being -- having challenges that are difficult to work through if we've you got a large number of retail accounts there and are -- that we can move that inventory through.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then just lastly, Asia Pacific was very strong. You called out some emerging countries that were helping drive that growth. How are some of the more mature countries doing over there?

Craig Stevenson

Obviously, Australia is quite challenged at the moment just with the retail environment, same as New Zealand. But overall, like Rich just said, Japan, Indonesia and Southeast Asia are really quite strong for us. Thailand is a good business, and we're really looking for great things out of Korea. So when you look at APAC as a whole, it's really -- and to this point, Australia makes -- Australia and New Zealand really do make up or have, to this point, made up a big part of the turnover. So we're really looking to the emerging markets, the whole of that APAC region, to kick start, and we're very positive looking towards that.

Operator

And we will take our next question from Erinn Murphy of Piper Jaffray.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Yes, I just wanted to elaborate actually on the first question just on Europe a little bit. If you could just maybe dive in a little bit more on that perspective between those 3 major markets, France, Spain and the U.K. Are you seeing any changes or have you -- did you see any changes in trends as you exited the quarter? We're hearing from a few other brands that they were starting to see some improvements or just sequentially less -- or sequentially better towards kind of that July-August time frame. Are you seeing any of that in those markets?

Richard J. Shields

We saw -- I'll mention a couple of things. First, we saw a consistent, positive same-store sales growth through the quarter in our stores. And so that's favorable. We're seeing our -- we're seeing customers be more cautious around their order book, and that's appropriate. But I think that we feel good about the market and feel good about our traction in the market.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Okay. And I guess just on your comment on kind of how you're changing or strengthening your relationship with Corte Ingles in particular. Can you talk about some of those your changes you've made? Is it changes in the selling model? Or is it just how you're being positioned on their floors? Just curious about what's happening with that channel specifically.

Richard J. Shields

Well, and so when we look at major accounts in Europe, the -- a bit, we're seeing a couple of things. First is we're seeing an ongoing ability or willingness for them to come invest behind brands that they know we’re going to thrive and survive, right? And that includes both how they're managing their inventory buys where some of the smaller brands are kind of getting chased off and then we get a chance to take a larger floor position. Likewise, in terms of the relationship in terms of building out shop-in-shops and building out floor displays, that's working well. And so I just think that when you look at those major brands who are looking at Quiksilver as the dominant player in our space, and they want to invest behind the company that's got the strength and the product and the team to continue to drive sales there. So, well, I mean, difficult economic headwinds are times that kind of chase up some of the also-ran players. And the fact of the matter is that we believe that we will emerge from this difficult period in Europe actually with better market share and a stronger position with the national accounts.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Okay, that's helpful. And then just as a follow-up question. Curious, if you were to look at your merchandise mix regardless of brand, regardless of geography but just splitting the mix between apparel and footwear, are you seeing any changes in terms of how the consumer is spending his or her dollar? I mean, we're seeing a lot of newness in apparel. We're seeing that's where there's a lot of traction in retail right now. I'm just curious if you're seeing that as well within your mix, so kind of more of a distortion towards apparel and potentially even away from footwear. Are you seeing any of that?

Craig Stevenson

I can take that one. No, you really do have to put it towards a brand. Like DC, for example, is a very strong shoe category for us, and we're building our apparel business with DC. And particularly in Europe, there's a real huge opportunity there. And vice versa with Quiksilver and Roxy. I mean, we already have a strong, really profitable business with Roxy footwear. It's -- just in the Americas alone, it's some $50 million. And there's a real opportunity with Quiksilver to build that footwear business and follow that Roxy model. So I think you really do have to take each individual brand on its own merits because they have come from different places.

Operator

And we will take our next question from Mitch Kummetz of Robert Baird.

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

I have a few questions. Let me start. I think you guys, if I heard you correctly, you made a comment on Asia Pac that the order book was pretty good. I know you're anticipating low, single-digit growth next year. First, I just want to confirm that that’s what you said. And if so, maybe you can give us a little bit of color on the other regions in terms of kind of where the order books stand and sort of what type of growth you might be anticipating.

Craig Stevenson

Yes. So again, strong growth in Japan. Pretty soft in Australia, back to my previous comment for the last few questions, and looking for solid growth in Indonesia, Southeast Asia and, I feel, emerging market of Korea. So again, overall for the region, I did say that low, single-digit growth is our forecast.

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

And so how are you thinking about Europe and the Americas for next year? Just can you maybe comment on how the order books are setting up there and what type of growth you're anticipating?

Robert Owen Colby

Yes, in the Americas, as you know, we're in -- deep in selling spring right now and getting great reception for the Quiksilver line, which has had a great show and had a bit of magic. Same thing with Roxy. And DC is continuing on its trends. So we're feeling really good about the continued growth of all 3 brands, but I'd say that Roxy is the team that I'm most proud of. And it's absolutely gaining market share in every channel that they're in. Again, and it's good to see them get back out there.

Richard J. Shields

And then in Europe, I mentioned that Q3 and year-to-date, we're up modestly this year. When we look at the order book for next year for Europe, we're thinking it's down low single digits.

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

Okay, that's very helpful. And then, Rich, how should we be thinking about the margins on Europe? I mean, just all in, operating margin was down about 7 points on the quarter, and that seems to be a combination of discounting and FX. I would imagine those 2 factors continue to impact the business at least over the near term. I mean, should we be thinking about similar margin deterioration over the near term in terms of the European business?

Richard J. Shields

Well, the answer to that is that depends. And, well, the reason I say that is that the situation in Europe could go a number of different ways and we're monitoring it closely. I mean, if we kind of stay with the existing FX rates, then I think that the margin ought to be kind of running about flat. But things -- if Greece leaves the Eurozone, I mean, we may need to do some repricing. So -- and things hopefully can get better in Europe. So -- and I'll tell you that the situation in Europe is something that we're monitoring closely. And to ask me what's going to happen with margin in Europe is asking me to forecast what's going to be the economic situation and the currency rate on the euro. So we're managing it in near term.

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

Okay. And then 2 last quick ones. On the new DC distribution, I know you guys don't want to comment on the volume you picked up. But is it fair to say that Q3 is the quarter where you pick up the most volume from the sell-in of those new doors? Or would you expect similar benefit in the fourth quarter from that?

Richard J. Shields

No, the -- when we think about channel expansion and we think about product segmentation, that's not something that we look at it as a onetime item. I mean, I think that all of the brands have -- we have questions for all the brands about what are additional peripheral opportunities we've got with new markets. So we don't look at that as a onetime event. And as Rob mentioned, I think that we're pleased with the decision we made and we're pleased with the execution in moving DC into some of the mid-tier channel.

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

Okay. And then the last thing. I know that you guys are not going ahead with the New York City WCT event this year versus last year. Can you say how much benefit you see on the SG&A line for not taking on those expenses this year? And, I mean, is that just kind of pure cost savings on your end, or does that get redeployed in other areas?

Robert B. McKnight

So we look at marketing and demand creation in the aggregate as we plan out the year. And so the demand creation and marketing get allocated to athletes, to events, to media, to social media. And so when we look at the plan for 2012 and as we're going through our planning for 2013, we've made targets about the investment that we can make in demand creation and in advertising, and we march toward that plan. So whether a specific event or athlete or media placement happens or not is all part of the mix as we manage toward an aggregate number.

Operator

[Operator Instructions] We will go next to Jeff Van Sinderen of B. Riley & Company.

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

It sounds like back to school has been generally solid for you overall. Maybe you can talk a little bit more about the discounting levels versus last year in terms of what you saw this year in your wholesale and retail segments. And maybe you can just delve a little bit more into the comps, kind of which shakes up behind the comps or transactions, up or down, UPT. I'm just trying to get a sense of what's driving that. That would be a good place to start.

Robert Owen Colby

Yes, so back to school was good. It was great for DC. It was great for the other brands. It's been good weather. But it's been not particularly promotional in our retail channels. We've seen strong margins there comparable to what we were seeing last year. And our factory outlets are actually improving because of just a better mix of products and more discipline behind our inventories earlier in. So -- but we were still delivering the kind of performance that we planned on. So it's been a great back to school. I think the only product category that we had a challenge with leading up to back to school was swim, women's swim. That was the only challenging area. Everything else performed great.

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

Okay, good. And then maybe we can just shift to SG&A. Is there anything more that we should think about in terms of cuts there? I guess what should we expect for SG&A going forward in terms of directional shifts, if any?

Richard J. Shields

Hey Jeff, this is Rich. Good to hear your voice. The -- so Bob mentioned kind of core -- 3 core themes that we're focused on: strengthening the brands, building the business and operational efficiencies. Those are not a quarter-to-quarter strategy statement. Those are going to be multiyear statements. And so we'll be continuing to look at organizational efficiency, cost structure opportunities and kind of trying to rebalance some of our costs as we migrate away from what I would categorize as perhaps subscale regional processes and some back office areas toward global processes. And Craig Stevenson has talked about that in the past about some the key themes of our globalization: moving toward global IT, moving toward global product design, moving toward a centralized supply chain. So we think that all those have opportunities to better leverage costs in the SG&A area.

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

Okay, great. And then lastly, I just wanted to ask you, any thoughts -- now that you've seen -- you're in -- you've been in the magic and so forth, any thoughts on what you -- how you think holiday is going to play out for you? Or just in general, what you think the backdrop is going to be for holiday this year?

Robert Owen Colby

Our bookings have been strong, and we're shipping on time, so we're expecting good performance.

Operator

And we will take our next question from Christian Buss of Crédit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

Yes, well, I was wondering if you could provide some more color on the cost restructuring and where you've made cuts. And also, what the cadence is of the expected benefits there.

Richard J. Shields

So Bob mentioned that we did report some severance during the quarter. That was approximately 70 people. That would equate to an annual ongoing benefit of about $6 million a year. That happened across regions and in various regions depending on the region and various functions. So obviously, there is a piece of that, that impacts Q3. But it gets overshadowed by the actual severance that was booked, and then that becomes a full year benefit next year and a full quarter benefit in Q4.

Christian Buss - Crédit Suisse AG, Research Division

Okay. And then just a quick housekeeping question on the restructuring charges. Where are those allocated between cost of goods and SG&A?

Richard J. Shields

Majority of them deal with people. That would naturally roll into SG&A.

Operator

And that does conclude today's Q&A session. At this time, I'd like to turn the call back to our moderators for any closing remarks.

Robert B. McKnight

On behalf of everyone here at Quiksilver, thank you for participating. And we look forward to providing our fourth quarter fiscal 2012 results in December. Thanks, everyone.

Operator

And this does conclude today's conference call. Once again, we would like to thank everyone for your participation, and have a wonderful day.

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