卡洛馳 (CROX) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Crocs Incorporated first-quarter fiscal 2006 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded.

Before we begin, I would also like to remind everyone of the Company's Safe Harbor language. Please note that some of the information provided on this call will be forward-looking statements within the meaning of the securities laws. These statements concern Crocs' plant, projections, expectations and estimates objectives for future operations. The Company cautions you that a number of risks and uncertainties could cause Crocs' actually results to differ materially from those described on this call. Crocs has explained some of these risks and uncertainties in the risk factor section of its annual report on Form 10-K and its other documents filed with the SEC and you are encouraged to read that section and all other disclosures appearing in the filings with the SEC. Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934. Crocs is not obligated to update its forward-looking statements to reflect the impact of these future events.

And I would now like to turn the conference over to the President and Chief Executive Officer, Ron Snyder. Please go ahead, sir.

Thank you very much. Welcome everyone to our first earnings conference call as a public Company. With me on today's call is Peter Case, who came on board back in early February and recently transitioned into the role of Chief Financial Officer. Peter joins us from Ashworth where he recently served as CFO. Peter is a great addition to the team and I look forward to working closely with him.

As many of you know, on February 13, 2006, Crocs completed its initial public offering of 11,385,000 shares of common stock at $21 a share. Upon completion of the offering, the Company received net proceeds of approximately $97 million. We are extremely pleased with the success of our IPO which was in fact the largest footwear IPO in U.S. history. This significant achievement would not have been impossible without the hard work and commitment from the entire Crocs organization in addition to the loyal support from our customers and suppliers. We thank you all and look forward to continued success as we begin this new and exciting chapter in our Company's history.

Now to our first-quarter results which represent a great beginning for the new fiscal year. Sales for the first quarter increased more than fourfold to approximately $45 million compared to $11 million a year ago. Net earnings including stock-based compensation expense of $1.1 million rose 210% to $6.4 million versus $2 million last year and diluted earnings per share inclusive of stock-based compensation expense was up 183% to $0.17 compared to $0.06 in the first quarter of 2005. Excluding the stock-based compensation, diluted earnings per share was $0.20 in Q1.

During the quarter, we continued to gain additional shelf space and open new doors within our current account base while at the same time increase our penetration in strategic channels of distribution. It is important to remember that the broad demographic appeal for our product, coupled with the wide range of uses dictates the need for this broad distribution strategy in order to better serve this large, our large and growing customer base.

We grew our U.S. door count during the quarter by nearly 900 doors and currently sell in 7300 retail locations across the country. We still believe we are significantly underpenetrated with our existing doors, and as we bring out new footwear models to the marketplace, we see the opportunity to expand our door count both here as well as abroad.

During the quarter, we introduced a new line of sandals or flip-flops, and also began selling our boat shoe into specific, high-end accounts. Early indications for both of these products are very encouraging, in fact, pretty much all of the doors that have been offered the new products have picked them up. In addition, we will be launching six new models in the second quarter and prebook trends on these are also excellent.

Throughout the quarter we continued to make meaningful progress expanding our business overseas and we remain very optimistic about our international potential. Since year end, we have added new distributors in the Middle East and Central and South America as well as established a Crocs sales office and warehouse in Puerto Rico to serve the Caribbean. We also expanded our presence in some of our key markets such as Japan, Hong Kong, Singapore, Australia and throughout Europe and ended the quarter selling in over 45 countries around the world. Our international sales currently count for approximately 10% of our total sales. We are still early in the process of building our business outside North America and we expect this percentage to grow significantly over time.

Our manufacturing strategy is integral to our business plan and to that plan we improved our operations in both Europe and North America during the quarter. While our new Company-owned facility in Mexico has taken slightly longer to get up to speed, we are quite optimistic this will be a world-class operation by the end of 2006 and be a big part of our success and strategy in years ahead.

In addition, a new third-party distributor -- a new third-party manufacturer in Romania came online during the quarter to help serve demand in the European market. We believe we now have adequate manufacturing capabilities to meet our needs and the needs of our customers.

We also enhanced our global warehouse and distribution capabilities with expansions in Japan, Singapore, Europe and Hawaii, and we are in the process of bringing on a new distribution center in Australia. While we continue to work with a third-party logistics supplier in Denver, we are in the process of implementing a direct ship program which we anticipate will account for more than 50% of all shipments by the back half of this year.

As previously announced on April 3, we received four patents from the U.S. Patent and Trademark Office, covering utility aspects applicable to a number of our footwear models and design elements of our Beach, Cayman, Nile, and Highland models. At the same time, we filed complaints in the U.S. International Trade Commission and the U.S. Federal District Court against 11 companies that manufacturer, import or distribute products that we believe infringe on our patents as well as our distinctive trade dress. We are obviously very pleased by the issuance of these patents which is a testament to the innovative footwear features we have developed and underscore the unique qualities of our products.

We also take the responsibility to protect our intellectual properties very seriously and we will continue to make every effort to defend our position in the marketplace both in the United States and around the world.

On the marketing front, we recently announced a three-year deal establishing Crocs as the title sponsor and official footwear of the AVP Pro Beach Volleyball Tour. Past title sponsors of the AVP Tour include top name brands such as Jose Cuervo, Miller Lite and Nissan. This year, we will be in the company of many other great brands including Bud Light, McDonald's, Xbox, Hilton, Gatorade, to name a few. We are very excited to begin our affiliation with this outstanding, high-profile tour which starting with the 2006 season will be called the AVP Crocs Tour and will feature more than 150 of the top beach volleyball players from around the world.

Also included in the sponsorship package are over 250 television spots including 52 network spots. The tremendous growth and demographic footprint of AVP makes this partnership an excellent fit to cross-brand and we look forward to a long and mutually beneficial relationship between our two organizations. This is a great opportunity to build our brand.

We will also be moderately increasing our advertising spend in 2006 as we continue to explore additional ways of building our brand equity both domestically and abroad. Again, I would like to reiterate how pleased we are with our start to fiscal 2006. And more importantly note that our positive momentum continues into the second quarter.

I would now like to turn the call over to Peter who will review our financials in more detail.

Thanks Ron. Sales for the first quarter were $44.8 million compared to sales of $11.0 million in the first quarter of 2005, an increase of 307%. For the quarter, (technical difficulty) sales rose over 250% to $33.8 million and international sales were up over 750% to $11.0 million.

Gross profit for the first quarter of fiscal 2006 was $23.7 million or 52.8% of sales, compared to $6.8 million or 62.4% of sales. The slightly lower than expected gross margin is attributed to two things. First, airfreight used to bring in product to fill holes in our product lines were appropriately capitalized in the fourth quarter of 2005 and relieved on sale of the product in Q1 2006. Based on our better inventory position at the end of Q4, a significantly smaller percentage of product was air freighted in Q1 and we expect the higher cost associated with such freight to decrease in future periods.

Second, our larger account base has increased our requirements to perform additional special handling such as ticketing and individual boxing of our product. This increased the cost to our third-party logistics supplier whose expense was passed on to us. Going forward, and by the mid quarter of Q2, we expect to satisfy much of these requirements overseas where the labor costs involved to process these units is significantly less and we are able to better leverage our direct ship business model.

Based on the aforementioned, we expect that for the three quarters remaining in fiscal year '06, we will improve our gross margins to the more historical levels and are forecasting them to be in the mid 50s.

SG&A for the first quarter was $13.7 million, or 30.5% of sales compared to $4.7 million or 42.6% of sales in the corresponding period last year. Income from operations for the quarter was $10 million or 22.3% of sales versus income from operations of $2.2 million or 19.8% from the prior year. Net earnings were $6.4 million including stock-based compensation expense, net of tax effect of $1.1 million compared to $2.0 million a year ago which included stock-based compensation expense, net of tax effect of $779,000.

First-quarter diluted earnings per share including stock-based compensation expense was $0.17 versus $0.06 in the first quarter of 2005. Excluding stock-based compensation expense, diluted earnings per share was $0.20 compared to $0.08 last year.

With regard to our balance sheet, at March 31, 2006, we had cash and cash equivalents equal to $67.9 million. This compares to $4.8 million in cash and cash equivalents at December 31, 2005. We ended the first quarter of fiscal 2006 with inventories of $40.7 million compared to inventories of $28.5 million at the end of fiscal 2005. It is important to note that our current inventory position consists of high-volume product, primarily our Beach and Cayman models. We're quite comfortable with the current inventory levels and believe that they will allow us to respond to demand during our spring season but also expect these levels decreased during the future quarters as we fully implement our direct ship business model.

Now turning to guidance. For the full fiscal year 2006, we currently project net sales to range from 200 to $205 million and net income per diluted common share to fall in the range of $0.77 to $0.79. Excluding share-based compensation, we expect diluted earnings per share to fall in the range of $0.87 to $0.90. We expect the full-year share-based compensation expense to approximate 8 to $8.6 million or between $0.025 and $0.03 per diluted share per quarter. We anticipate the breakdown to be relatively consistent across each quarter.

Our full-year earnings guidance is based on the previously stated projected gross margins in the mid '50s and our projected SG&A expenses to be in the very low 30s. For the second quarter ended June 30, 2006, we currently project net sales to range from 53 to $55 million and net income per diluted common share of between $0.21 and $0.22. Excluding share-based compensation, we expect diluted earnings per share to be in the range of $0.23 to $0.25. Our projected diluted shares which are based on several significant assumptions which can vary to be as of the end of Qs 2, 3 and 4; $40.5 million, $41.0 million, and $41.2 million respectively. It is important to note that the majority of expenses related to our recent signing of partnership of the AVP Professional Beach Volleyball Tour will come in the second and third quarters of this year.

I will now turn the call back to Ron for some closing remarks.

Thank you, Peter. Before we open up the call for Q&A, I would just like to take a step back and recap what a successful period the past 12 months have been for our Company. Fiscal 2005 was an incredibly important year for Crocs on many different levels. Financially, we significantly grew our sales and profits over the prior year. Revenues were up 700% to approximately $108 million and net earnings in EPS rose to $16.7 million and $0.51 respectively compared to losses in 2004.

During the past 12 months, we have made key investments in our operations and infrastructure in order to create a stronger platform for growth. This included increasing both our Company-owned and third-party manufacturing capabilities to better meet growing demand for our product, implementing a new ERP system to improve our efficiencies around the world, and adding key personnel to solidify our management team.

Strategically, we began the important steps towards diversifying our business by evolving our productline with the introduction of new footwear styles and the launch of non-footwear branded merchandise. We also significantly enhanced our marketing and advertising programs to support our expansion plans and further build brand awareness for Crocs.

Importantly our efforts did not go unnoticed as we received multiple awards and recognitions in 2005. This included Brand of the Year from Footwear News, Item of the Year from Footwear Plus, and IQ award for Best Innovative Product by the Boulder Business Report. On top of this, Dillard's just recently named Crocs New Vendor of the Year for 2005.

As you can see, 2005 was filled with many key accomplishments which strengthen our organization and set the stage for a strong 2006. This coming year we will continue to focus on successfully executing our growth strategy and building on the positive momentum we have created. Our plans call for increasing our penetration within our existing account base by gaining important shelf space for our new footwear styles while at the same time opening new doors within our current channels of distribution.

We will also be introducing several new models of footwear this year that will further diversify our productline, attract new customers, attract new customers and new retail partners and help produce a seasonality of our business. We anticipate ending the year with approximately 20 different styles compared to ten at the end of 2005, and only three at the end of 2004.

As we mentioned earlier, the international market is a significant opportunity for us in 2006 and beyond. We ended 2005 with approximately 1000 retail doors outside of North America and we expect to more than double that number this year.

In closing we are proud of how far we have come in a relatively short period of time and move forward excited about the many opportunities that still lie ahead. Crocs is a category defining product that is recognized for comfort and functionality, and other benefits derived from its proprietary Croslite material. With our broad demographic appeal and growing brand recognition, we are confident that we have a large market opportunity and significant growth prospects for the future.

Operator, at this time, I would like to open up for some questions.

Thank you very much. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Jeff Klinefelter with Piper Jaffray.

Yes, first of all, congratulations to everyone on a great start to the year. That is fantastic. A couple of questions, maybe first starting with the new doors, Ron, and talking about those 900 new doors, can you give us some sense, not specifically, but some sense in terms of the breakdown between new accounts, or just new doors with existing accounts to shed some light on what direction this is going here during the first half?

Yes, it was about 50-50, maybe a little bit skewed a little bit more 55 or so percent of existing store/door expansion.

Okay, any insights on or any specifics you want to share in terms of the new accounts you did open?

You know, we opened some fairly strategic accounts. We are now a little bit more heavily into this the skate and surf channel. We have had some good success there. We have opened some additional department stores in some areas that we needed penetration. Marshall Field's actually came on up in the Midwest. We opened some additional children's stores which are quite good, as you know, our shoes are very popular with kids. So we opened up some stores in that channel and some more mother-related stores for maternity and things like that came on for the quarter.

Okay, great. In terms of the inventory position, you talked about playing catch-up with some of your production. If we take a look at that $40 million inventory number, can you give us some sense for how that breaks down between your go-forward or existing styles and your new styles? Or put another way, how much of the build is in anticipation of those six new styles shipping out for Q2 versus your normal replenishment business?

Certainly some of it is for the new products that we're building for the quarter where we will be launching most of them, let's say four of them in all regions in the quarter, a couple will hold out for Europe, maybe until later in the year or next year. Asia is getting all six models as is the U.S. I would say that in general, most of the buildup has been in the high-volume product that we are seeing nice order flow on right now, but some of it is for the new products.

Maybe just a couple more. One would be in terms of the current environment for the product, most store checks as we go all across the country, it still appears that your core kind of two or three styles are responsible for most of the shelf space, they are represented with most of the shelf space and probably responsible for most of the sales volume. Can you give us some sense at this point as you look across your major customers and major channels what is the traction specifically, in terms of for example the flip-flop coming into those potentially up to 7300 new doors? You know, how many is it in and really ultimately, how many will it be in so that we can get a sense for the progress you are making at diversifying the assortment?

We are making very good progress and pretty much as I stated in the script that all of the doors, substantially all of the doors that we have offered the flip-flop to have taken it as well as the Islander, the boat shoe. However, that is a more defined group. We're bringing that out into higher end specialty stores and some higher end department stores. But the initial indications, the initial indications on the sandal, the flip-flop products, our Athens we call it, are quite good.

Okay, maybe just two last things, quickly. The knockoffs have been referenced in the media throughout the quarter. You do have your patents issued at this point. It appears that they are still retailers that have the direct knockoffs on their shelves. Can you maybe just give us a little bit more insight into the strategy, what you would expect in terms of the duration to clean that up? And then as a follow-up to that, at what point would you consider shipping some of your own product maybe into the next level down of distribution with one of your styles to maybe just head off competition directly?

First of all, on the lawsuits, we are not going to get into any specifics there, obviously. I feel that some of the -- we will see probably some of the knockoffs go away. We have seen that in some regions of the world already. They immediately go away once they look at the IP that we have. So it is kind of hard to say, the timing on it, but I would imagine over the year, people are going to have to either redesign something that doesn't look anything like or infringe upon any of our IP or just go away. Second question?

In terms of going into the lower-level of distribution?

You know, Jeff, we're constantly looking at that. It is not our strategy right now. We are going to stay with building our brand currently. We have maybe some of our new styles going forward which fit in a little in the mass channel or in the discount channel, but for right now, we're staying with or existing strategy.

Okay, and then just one last thing I will jump off and let someone else get on. The distribution -- the production capacity you have today sounds like one of the facilities is coming on maybe a little bit more slowly than you anticipated. We always hear about stockouts, which can be certainly the result of strong sales, but can you give us a sense for what is the true production capacity that you have currently and what are you hoping to build to by midyear?

Our production capacity right now is in the neighborhood of 2 to 2.2 million pairs depending on the mix. Some of the new styles have -- are a little bit more complex, they would either have gluing operations or sewing operations attached so that would be the 2 versus the 2.2 million. We don't -- we have bulge capacity, since we have seven manufacturing locations we have bulge capacity above that that we could bring on very quickly. But right now, I think that that is enough to meet the demand.

Okay, great. I will let someone else jump on. Congratulations.

Jim Duffy with Thomas Weisel Partners.

Hello everyone. Nice start. Ron, as we think about the growth in revenue from Q4 into Q1, what percentage of that would you say came from the new doors and what is the split between new doors and revenue per door, I suppose?

The new doors that we added, Jim, at the end of the year?

That's right. So as we look at the revenue growth between Q4 and Q1, how much of that growth was a function of more doors and how much was a function of your existing doors selling more product?

It was probably lesser the addition of new doors because we were just ramping new doors for the quarter, so it would probably have been a third or less that would have been new doors and the rest would have been -- it would have been expansion, though, in some of our accounts where they have added new stores or doors to their current store that adds new doors.

I see, okay.

It is kind of hard for us to tell that. We don't always get how many they are adding at any given time. We hear about it later.

I understand. And then as we think about kind of a revenue per door metric, what would the split be between just more productivity of the existing racks and kind of incremental shelf space in the stores or incremental styles entering the stores? I am trying to get a handle around what is really driving the growth?

We are definitely -- I don't have any specific numbers for you at this point, but what we are seeing is all of our major doors that have enough room, some of the stores we sell into are quite small so it is difficult to turn the entire store into a Crocs store. But any stores that we have room, we're getting additional space for our new products. Additional space and additional departments, if there are multiple departments for kids, women's, even some of our shoes are being classified a little bit as occupational shoes so we might even get in that department as well.

Okay, how much did the kids business contribute in the quarter?

It is still hanging in there at around the low 20%.

Is that kind of nudging upwards or --?

It is just probably staying about the same, maybe nudged up a little bit.

Okay, and you did not provide a contribution for your direct business. Is that something you're comfortable providing?

It was about 4%.

About 4%, all right. Peter, one for you. The inventory that is burdened with airfreight expense, how long do you expect it to be before that burns off?

I think we will see some of that in Q2 and we will burn a lot of it, the remaining balance in Q2 and by Q3 we should only have a small amount.

Okay, as you think about the business going forward, what is kind of the days inventory model that you would like to operate under? Where would you like to see inventory balances? You mentioned you would like to see them come down?

You know, I was thinking the Dell model at 400, huh? We think four turns is going to be appropriate for this year and as we keep going in with that direct model, direct ship, we think we can beat that.

Okay, very good. Thank you guys.

Hey Jim, on the direct, it was closer to 8. I actually meant close to 4 million.

Oh I see. Okay. Good. Thank you.

Mitch Kummetz with D.A. Davidson.

Thanks and let me add my congratulations as well. A few quick questions. Ron, you mentioned nearly 900 new doors for the quarter. Would you expect to maintain that pace through Q2, or is that going to taper off a bit? How many new doors do you think will come on stream this quarter?

Some of our existing stores are adding new doors, so we get that pretty much automatic, right, as we have enough stock and as they are bringing our new regions or whatever. And most of our if not all of our retailers are very excited about the productline so we are adding some there, naturally. And we're going to be a little bit careful in adding too many new doors because we want to take care of our existing retailers right now.

Okay. And then, you mentioned 8% on the direct business. How many kiosks did you end the quarter with and what is sort of the rollout plan there?

We ended with about 50 kiosks and what we do there is we look at regions where the product is not well-known, and we go open kiosks to really get out in front of customers and help drive the customers to retail.

And just to clarify, is that 50 kiosks domestically? Because I think you were at 40 at year-end and then 50 total including international, right?

Yes, that is 50 domestically. We actually opened up -- we have a couple of stores now we've got a store in Melbourne, a store in Singapore doing quite well and we probably have another 10 kiosks around the world.

Okay, and then just two last questions. You mentioned six new models hitting in the second quarter. Can you just elaborate on what those new models are and maybe the timing of their introduction? We're already a month into to the new quarter. Is any of the product out there or is it all coming later in the quarter?

Most of it is coming either in May or June. We have a new slide that is coming out, early indications are quite good. It is similar to the sandal we talked about, the flip-flop, it is just a slide instead of a flip-flop. Multicolored, comfortable. We have an off-road shoe that we have named the Off Road which is more of a hiking, sports maybe a little bit more of a male-oriented product. We have a very female-oriented product in a kind of a ballerina slipper, a flat. We have got a kids sandal coming out as well. And later, actually this is after the quarter, we have a Mary Jane, which is a multi-strap product that is coming out end of this quarter, start of next quarter.

Okay, and then lastly, I don't know if this is a question for you or Peter, in terms of sales for the quarter, how did that break out in terms of units shipped versus average selling price?

Well, we're not really giving out too much on the units shipped so far but our average selling price held at slightly above 15.

Okay, great. Thanks a lot.

Elizabeth Montgomery with Cowen.

Hi guys, congratulations on the quarter from me as well.

Thank you.

A couple questions and I apologize if I missed this, but could you give any more information on the direct-to-ship program? And I missed how much of back half revenues you thought that might be. And specifically, over how many of your retail locations or accounts would that actually be going to?

It will probably be about 50% of shipments during the back half of the year, Beth. And you know, frankly it is to as many as we can get it to, but it is a more efficient way of getting product in in higher volumes. But what it is, it is typically to the retailers that would have larger distribution centers that could handle a little bit more volume. So it would be probably only about a third of the doors, maybe 40% of the doors but probably 50% of volume.

Okay, and then could you also just clarify a little bit more about you said that gross margin was impacted by the larger account base, which required kind of more ticketing and things and your plan to shift that oversees beginning in I guess Q2? Can you elaborate on that?

Well what basically happened during the quarter was, we had a nice sales uptick for the quarter and much of that was from accounts that require more either labeling, bagging, some sort of process that takes the product out of its existing box because we had to do something to them and put them back in and ship them. So we had to do that because of the uptick just during the quarter. We had to do that with state-side inventory. Going forward, that inventory will be coming mostly from Asia but some out of Mexico and maybe even Canada where that could be done at the factory with lower-cost labor.

I see. Is there any particular type of account that requires more of that?

It would be the accounts with the larger DC, Nordstrom, Dillard's, Journeys, some of the accounts that have more sophisticated distribution centers.

Okay, great. Thank you.

Patrick Lin, (technical difficulty), Primarius Capital.

Hi, I wanted to add my congrats or I could say yippee I guess. But I wanted to find out just in terms of many of your doors, it seems like many of them don't have your full selection yet, and I am wondering, was a lot of this from the inability to fulfill all of your distribution's demand or is this a planned gradual rollout for all of the various doors in terms of styles? I noticed that in particular, the Islander and Athens II are just slowly trickling in right now.

Yes, part of that is that they are just being introduced for the quarter, and for some of the larger stores they have to get into their DCs and then get out so that takes some time. So that is certainly part of it. We're getting -- you're probably starting to see more and more Athens because that is going to be a widespread distribution strategy for that product, although the boat shoe won't be as highly distributed, it will go to more select accounts. So you would find them in Nordstrom and some higher end boat shops, and West Marine and Bass Pro and places like that.

So how would it be for somebody like a Zappos, which is I guess marketed as the world's largest shoe store in terms of not yet having these items? Is that a distribution center issue or is it still just a gradual rollout because you cannot meet their full demand yet?

I think that would be more of a gradual rollout in Zappos' case.

Great, thank you.

[Ross Levin] with Arbiter Partners.

Hi guys. Good quarter, it looks like. The reason I am calling, I'm looking at the seasonality here and trying to get a better feel for it. It looks like first quarter of last year, sales were something like -- sales in the first quarter were something like 10% or so of the year sales, and obviously it is now more like 25% of your current projection. Is that a function of sort of a slowing growth rate or have new products that you have brought on changed the seasonality of your business?

Are you talking first quarter to the first quarter? (multiple speakers) Yes, the first quarter of last year we were supply constrained. We shipped and we had a many less doors last year. The business was just really in the ramp. This year we do -- we would expect some seasonality and I think the models I have seen from analysts so far had us pretty well modeled with on a percentage basis in Q2, Q3 and Q4.

Fair enough, thanks.

(OPERATOR INSTRUCTIONS) Jeff Klinefelter.

Yes, just quickly a couple of things, guys. One, the kids product pricing, I think we talked in the past, Ron, about the pricing, the retail pricing potentially changing a little bit on the children's product. Is that happening and what impact is that having on your average selling price?

Yes, that did have an impact for the quarter. We decided to bring the kids down just for optics if nothing else, and that they were very much smaller than the adults use and still at the same price, so we brought them down to $25. It has been very well-received, and certainly have had a bit of an impact on our average selling, but there is also some other products that are selling for more, the Islanders and some of our other products and products that at retail of course well for more. So the average selling price stayed fairly close to what it was.

Okay, so the read on that would be that you are shipping those somewhere in the $12, $13 range?

We're shipping them at $12.50, yes.

Okay. In terms of the system, I know you are in the midst of if not having just recently completed a new system implementation. Could you just give us some more color on how that is going, what is kind of the downside protection are you running in parallel? Anything at all you can share on that?

No, we're not running in parallel. We came up April 1. We had a little bit of an impact just getting inventories built in at the end of last year and last quarter and the start of this quarter, but no stags really. We are up and running and shipping out of the systems. And everything is really going according to schedule. This is a very major implementation. We have gone essentially from a $30,000 system to an over $3 million system, so there was really no need to run parallel to the prior system.

Okay, going forward are there some things that we should be looking for in terms of additional implementations throughout the year, or what would be indications that things are getting backed up as a result of this? Just sort of trying to figure out what the potential risks are, if you implement something of this magnitude.

Yes, I think most of our international operations are smaller, so the implementations will be much easier, and they will already have been through the learning curve and have already put in all of the procedures and processes required to implement it. So we will be rolling out our international locations over the next six to nine months for the remainder of the year. We will be up and running fully by year end.

Okay, so at this point in Q2 there have been no shipping delays that you know of so far resulting from this?

I would say there were shipping delays in the first week, but now we are up full speed and shipping product very well.

Okay, Peter, one last thing. The AVP sponsorship, maybe I missed this, but how would we think about this in terms of loading into the SG&A line? How long are you expensing this? Is it over the life of the contract or is it all loaded this year? How do we look at that for modeling?

It's Ron. We are still -- just stay with the guidance we have given before, 4% or 5% for marketing. We're still comfortable with that.

Okay, great. Thank you.

David Turner with Branch Banking and Trust.

I was curious about if there is any visibility into how the order book looks for the product that is going to hit in the back half of the year? If I recall correctly, most of that was kind of a non-traditional styles, boots, and a lot of closed toe stuff. Has there been any traction with the non-traditional styles in new accounts or existing accounts?

We have got indications, Dave, that our major accounts and as even the smaller specialty accounts have so much success through the spring and summer, we'd even anticipate the same for them. But they are more hand to mouth. But some of the larger accounts we are looking at are Aspen, which is our closed clog. We will have a full fall, winter season for that product. Our boot line, the Georgie boots, that is the same thing. We will have product in stock this year, so we will hit that for a full season and some of our major retailers are picking that up.

And early indications on some of the closed shoes that I think you have seen more like a duck boot sort of looking product, early indications are quite good on those. As I said before, we don't require the huge prebooks on those. We get indications that they are putting them into stores and then we kind of do our forecast based on that.

Okay, and maybe a little obscure, but is there any difference in productivity between the kiosks that are I guess out of market versus the ones that are in markets that you currently ship? And I guess what I'm trying to get to is recognition of brand? Is there -- again, the divergence between the two? Is it marked? Is it notable or do they all kind of perform about the same?

No, it is notable. Where we are well-known in markets that we have been for a couple of years, sales are significantly more. What we see in new markets, every month, we get momentum in the new markets that are kiosks so in California, we're starting to see that. Some of the areas in the middle states that we weren't in, we're starting to see the same thing and a couple we have in the East, same thing.

And I guess that sets the stage for door expansion? And ultimately that is the goal is to get doors expanded. So good enough. Thank you.

Patrick Lin with Primarius Capital.

Hi guys, just two quick items. One, I think the article that talked about you guys getting the AVP Tour I think had the AVP President wearing some specialized shoes and I am just wondering what do we have to look forward to as far as those rollouts? And where would the distribution -- which stores would we likely see those new items first?

We're still talking to the doors that are going to get those, but we have product already in -- Crocs AVP products, low boats and such, but we're still negotiating with some of the doors, but they do want them.

Okay, great. The second thing is I got some kind of an e-mail alert that I think StreetEvents showed you guys having a lockup coming up next week and when I read the prospectus, I think only 913,000 shares were coming out of the 29 million shares. I was just wondering if you had any questions on that in the past and if I have the facts correct here?

Yes, there is a very small, very small number of shareholders that had very small amount of stock that it comes out next week. Any major shareholders are locked up all the way to the August date.

Great, thank you very much.

Thank you. Let's take one more question.

Ross Levin with Arbiter Partners.

Two quick items, one on the intellectual property front. You mentioned several patents that you had managed to successfully apply for and you are fighting some IP issues, I guess it sounded like from overseas markets. Is that mostly on the sort of design or architecture of your shoes, or is it -- was I correct in interpreting it that way? Or was this for the material, the Croslite material? And the second question would be when you guys are contracted to distribute into foreign markets, are those kinds of agreements similar in character to that which you have in the United States, or are these more like a licensing or something along those lines?

So first of all, the patents in foreign markets, most of them have -- most of the issues have been around our design, so they have infringed upon our design patents and it was obvious so they backed out of the marketplace. And the distribution in foreign markets, it is very similar to what we're doing here because what we have done is we set up Crocs offices in most of the major markets around the world and we have pretty good control over our distributors as well. Very hot products for the distributor so we keep an eye on them and we require them to build the brand in the foreign markets the same way we're doing here. We're not going into the lower end stores in any region that I know of.

And on that first question, the patents that you have successfully applied for, those are on the design of the shoes, is that correct?

Those are design patents.

Okay, thank you.

All right, well thank you very much. This is our first call. We are very pleased with our results for the first quarter. We very enthusiastically move into Q2 and Q3 of this year. As you know, our product is a very hot product for the spring and summer and we are expecting it to continue on into the fall and into next year. Thank you very much.

Thank you and that does conclude our conference for today.