卡洛馳 (CROX) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Crocs Inc. third-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. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this 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 in this call will be forward-looking statements within the meaning of the securities laws. These statements concern Crocs' plans, projections, expectations and estimate objectives for future operations. The Company cautions you that a number of risk and uncertainties could cause Crocs' actual 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. You are encouraged to read that section and all other disclosures appearing in our 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 these forward-looking statements to reflect the impact of future events.

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

Thank you everyone for joining our third-quarter 2006 earnings conference call. Q3 was a tremendous quarter for Crocs and needless to say we are very pleased with our results.

Sales for the quarter increased 192% to $111 million. Net income rose 214% to $22 million and diluted earnings per share increased 141% to $0.53 per share. As you can see, we significantly exceeded both internal and external expectations.

Our better-than-expected results were driven by strength across the board. I will go into more detail in a moment but it short we continued to experience strong sellthrough of our core products both in the U.S. and internationally and our new product introductions have outperformed our initial projections. We are very pleased with our recent performance and we are excited as our momentum has carried into the fourth quarter. Additionally our pre bookings for Q1 '07 are very encouraging.

During the third quarter we grew to over 9000 active doors here in the U.S. In sales of our core or classic footwear, the Beach and Cayman models continued to rise during the quarter. More importantly, however, our other models experienced continued growth in all channels of distribution and now make up approximately one-half of total product sales.

Today we sell more than 20 styles of footwear and we introduced a number of new products over the past several months. These include the Mary Janes, the Off Road, the Prima, the All-terrain of fall and winter shoe and the Silver Cloud, a new addition to our medical offering. The consumer response to our entire collection has been extremely positive and equally important our new product launches have allowed us to open new channels of distribution, increase our shelf space at our existing retail partners, expand our selling season and broaden our target demographic.

Looking ahead to next year, we have nine new models for spring that we believe will further diversify our product offerings, strengthen our retail tiering strategy and attract new customers to our brand.

In September we began shipping our new Collegiate product just in time for the start of the football season. As a reminder we are selling this footwear line through campus bookstores, local and national sporting good chains, department stores and specialty retailers as well as outside stadiums on game day. So you can get an idea of what the demand has been for this new product category, we sold approximately 1000 pairs at the Notre Dame/Penn State game alone and all game day events have exceeded our expectations.

This licensing program is not only building great brand awareness; it is helping smooth out the seasonality of our business. The early results have surpassed our estimates which bodes well as we look to add more schools and replicate this model with professional sports teams both here and abroad.

To review our Collegiate program, we ended the quarter with licensing agreements at 70 colleges and universities and believe the potential exists to add at least 10 more by year-end and 25 more during 2007.

Our licensing deal with Disney is also off to a strong start with products just now beginning to hit the shelves in time for the holiday shopping season. In fact some of the early shipments sold out before they even hit the shelves. The initial line will feature shoes with Mickey Mouse head shaped holes and will be offered in 12 colors in kid's and women's sizes. In 2007 we will introduce other styles with traditional Disney characters as well as develop new styles based on upcoming Disney and Pixar animated motion picture releases. Disney characters symbolize fun and magic and we think they are a particularly good fit for the Crocs brand.

Other important growth initiatives this year that are also contributing to our positive performance include our medical and industrial divisions. Crocs rx currently offers three styles all of which are approved by the American Podiatric Medical Association. Our medical products are sold in over 400 doctor's offices now throughout the U.S. and Canada and we have recently expanded distribution to 26 countries in Europe, Australia, Asia and the Americas.

With regard to our industrial division, we continue to gain important traction in the foodservice, medical and hospitality industries and more recently with freight and logistics companies. We are currently in tests with a number of companies in these markets and continue to see tremendous opportunities for these two groups both in the near and long term.

Now to our international results. Sales rose to $42 million, up 50% cent over last quarter and currently represent approximately 38% of our total business. We ended the quarter selling in over 6500 doors outside the U.S. Geographically, Europe and Asia outperformed our expectations as we opened new countries on both continents including Portugal, Poland, India and China and further expanded our presence in key markets such as the UK, Germany, Japan and Australia. We currently sell in over 70 countries either directly or through our distribution network.

The international market continues to be a significant growth opportunity for us and we are very focused on increasing our presence around the globe.

In the past month, we announced two acquisitions, Jibbitz and EXO Italia. Because the Jibbitz deal is not expected to close until later this year we will not be making any additional comments on the acquisition. However, I will reiterate that we are very excited to join forces with the team at Jibbitz and believe this represents a great high margin opportunity for us in the future.

With regard to EXO, we have been working closely with them for some time and they have been instrumental in the design of our nine new styles for spring 2007 which have pre booked very well. For more than a decade EXO has been collaborating with several leading branded consumer companies to produce high-quality foam-based footwear and we believe their expertise will be an important part of our ability to further diversify our footwear offerings and attract new customers to the Crocs brand.

On the manufacturing side, we continue to expand capacity around the globe. Of note, our Mexican facility is now running at over 400,000 pairs a month and is operating very efficiently. Over the past year, we have created a highly flexible global production base with facilities close to all our major retail markets and we will continue to add additional manufacturing capacity as we expand our operations around the world.

We ended the quarter with capacity of approximately 3.2 million pairs per month and expect that to rise by another 300,000 to 500,000 by the beginning of 2007.

Turning to marketing, the 2006 Crocs AVP tour concluded in mid-September. Everything about the tour from the attendance to the media coverage from the athletes' performances to the fans' enthusiasm exceeded our initial expectations. In all approximately 1.5 million people attended the 16 tour stops and another 63 million people watched the competition on NBC, Fox and FSN. We are excited to be back as the title sponsor in 2007 and look forward to kicking things off again next spring.

On a more grass-roots level to expand our event marketing activities which have been historically very successful for Crocs, our two new Crocs RVs have just begun to crisscross the country stopping and selling products at major events in order to further promote our brand. During the quarter we attended various sporting events, concerts and festivals and will continue to do so.

Additionally we are actively advertising on 22 university campuses around the country and we will be sponsoring upcoming ski and snowboard competitions in an effort to bolster our presence in that market. We will also continue with our national print campaigns and PR efforts which have generated over one billion impressions worldwide since the beginning of this year. I think it is important to point out that this figure does not include our coverage from the AVP Crocs tour which on its own created an estimated 1.8 million impressions for the Crocs brand.

Before I turn the call over to Peter to review the financials, I would like to personally welcome Ron Frasch and Marie Holman-Rao who were appointed to our Board of Directors at our annual shareholders meeting this past Monday. Both Ron and Marie have held senior level positions with several leading brands and retailers. I am confident that they will be great additions to the Company. Peter?

Sales for the third quarter were $111.3 million compared to sales of $38.3 million in the third quarter of 2005, an increase of 192%. For the quarter domestic sales rose over 106% to $69.8 million and international sales increased to $41.5 million from $4.3 million a year ago, a staggering increase of 858%.

Gross profit for the third quarter of fiscal 2006 was $64.8 million or 58.2% of sales compared to $22.2 million or 57.9% of sales in the third quarter of 2005. SG&A for the third quarter was $33.3 million or 29.9% of sales compared to $9.8 million or 25.7% of sales in the corresponding period last year.

Income from operations for the quarter was $31.5 million or 28.3% of sales versus income from operations of $12.3 million or 32.2% of sales last year. Net earnings were $21.6 million compared to $7.4 million a year ago and diluted earnings per share was $0.53 versus $0.22 in the third quarter of 2005. Our capital expenditures for the quarter were $7.4 million and our depreciation and amortization were $2 million even.

With regard to our balance sheet which remains very strong, at September 30, 2006, we had cash and cash equivalents equal to $83.3 million. This compares to $4.3 million in cash and cash equivalents at September 30, 2005 and $67 million at June 30, 2006. We are very pleased to have increased our cash position over $16 million during the quarter.

Our accounts receivable were $60.7 million at September 30, 2006 and our DSOs remained essentially flat to the second quarter at just under 50 days. Our days payable increased slightly and are now also at just under 50 days. We entered the third quarter of fiscal 2006 with inventories of $49.1 million compared to inventories of $40.8 million at the end of our second quarter. We are comfortable with these levels given our increase in sales, our global expansion and at 4.1, it slightly exceeds our current goal of having 4 inventory turns.

Now turning to guidance. For the fourth quarter ending December 30, 2006, we currently project net sales to range from 92 to $95 million and net income per diluted common share of between $0.40 and $0.43. For the full year 2006, we currently project net sales to range from $334 million to $337 million and net income per diluted common share to range between $1.50 and $1.53.

With regard to fiscal 2007, as Ron said, we are very optimistic about our growth opportunities and currently expect the top and bottom line expansion of more than 30%. Ron?

Thank you, Peter. Our year-to-date success with sales up 222%, net earnings up 246% and earnings per diluted share of 189%, reflect the successful execution of our strategy to build a global diversified business and brand. Here in the United States the ongoing demand for our classics coupled with the strong retail sellthrough of our new product introduction gives us further confidence that our brand recognition is growing, our market share is expanding and the lifestyle nature of Crocs continues to evolve.

Overseas we continue to witness the positive response to our footwear in every country we enter which underscores our belief that the early acceptance of our products is setting the stage for a very bright future in the international marketplace.

As we head into the holiday season, we are excited that our positive momentum continues but more importantly, we remain very optimistic about the great number of long-term opportunities we believe exist for the company. As I have said all along, our focus is on the future and we are committed to continually improving our efficiencies and investing in our business to ensure we maximize Crocs' full potential.

Operator, I would like to now open it up for questions.

(OPERATOR INSTRUCTIONS) Jeff Klinefelter, Piper Jaffray.

Congratulations, Ron and Peter and the whole Crocs team on another great quarter. A couple of questions for you. Ron, maybe just starting with your fiscal '07 general guidance and backing into a couple of specifics. In terms of how the business is evolving with some of your key retailers, I guess both U.S. and international at this point, are you seeing it evolve toward more of a combination of near-term reorder business and future bookings that gives you a little bit longer-term visibility? Given how quickly the business has been ramping is it giving you the ability to step out a few months and have a better feel for how some of those key retailers are going to be booking and then reordering maybe the following season?

Yes. As we have grown the business and attracted larger retailers, we have seen our pre books increase somewhat significantly so as I said, the first-quarter bookings are quite encouraging at this point. And I would expect that to continue that we will get more -- we will continue to get more visibility. But keep in mind that the model which we think rings well for our retail base is that we are open to buy all year long.

Okay. In terms of the new styles that are rolling out, the few for fall and then also for next spring, and as I understand it sort of segmenting the retail channels a little bit more specifically, shipping certain styles only to certain retailers, are you finding that this is resulting in for example a more on the wall displays of your product? Are they going in line? Are they planning to take them in line with the rest of the footwear assortments or is your intent to really try to keep this on a Crocs fixture or in a specific Crocs section of the store?

We have gotten more space so far at really all of our retailers. Certainly some of our models would lend themselves more to the wall or to be displayed like typical footwear would. But we think that one of the secrets of our model is that our shoes -- many of our shoes are very lightweight and they can be presented on Crocs fixtures. And so many of our new styles -- I think everything for the spring would go all-out on the floor which anything that's out on the floor seems to sell two to four times better than stuff on the wall.

Okay. In terms of -- maybe one question that I think a lot of people are curious about is trying to figure out how new styles coming online affect your core styles, some of your legacy styles like the Beach? Is there any sense you can look at some of your longest term retail customers and have any feel for what happens when you bring three to four new styles or more to a customer -- cannibalization? Is it too early to tell what kind of impact it has on those existing styles or are you still seeing space expanding on a net basis?

I think it is probably too early to tell. However we are seeing base expanding on a net basis really in every store that we are offering the new styles to. What's been really encouraging is our Beach and Cayman models even in markets where we have been for a while, the middle states down through the South really continued to expand through Q3. So will there be some cannibalization over time? Sure there will be but I think through all of next year and probably the following year Beach and Cayman will continue to rise -- the classics is what we're starting to call them.

One last just point in terms of the international doors, it sounds like it is growing very quickly. Anything that we should know in terms of the differences in productivity and/or the profitability of those international markets -- higher price points selling in? Any differences in terms of how fast it is turning and what the resulting model is by country?

It is a little bit too early to tell and we have really grown the last two quarters very quickly in the international market so the price points are substantially the same, maybe a little bit higher in some of the European countries. But really it is too early to tell how productive any given grouping of doors has been yet. We would expect over time it would be very similar to the U.S.

Congratulations again. Thank you.

Jim Duffy, Thomas Weisel Partners.

Good job. Very nice numbers. Peter, gross margins showed some nice sequential improvement. Can you maybe highlight some of the factors that lend to that improvement and give us a little bit of a thought process as to whether that is a seasonal aspect, whether it's some utilization or whether we should expect that gross margin to continue? How the balance of new products coming in would make things look for the early part of next year, etc.?

There is really three things that happened with the gross margin to cause that expansion. One is we continue to put more products on out through the directorship program straight from China; lowers our fulfillment costs here in the U.S. That increased to over 40% in Q3. In addition to that, we have been able to manage the shipping lanes much more efficiently. And then the third is that we have some leverage from the volume so those are the three.

So while we did have some upside potential this time, we still would continue to caution everybody to think about our margins in the mid-50s. We think that is where they will be over the long period of time although we may have some short-term upside.

Okay. Ron, maybe this is a good question for you. As you look out to '07 and your preliminary growth outlook, how do you expect the balance of contribution between the domestic and the international businesses in those numbers?

Are you talking about the margin percentages or --?

No, the preliminary outlook for '07, 30% plus growth. How should we think about that in terms of the contributing factors? More on the domestic side, an increasing percentage of that growth from international?

I think over the year we will see the international market take a little higher percentage than it did this quarter, so we will continue to grow on a percentage basis internationally. But we expect pretty strong growth from both international -- domestic and international in 2007.

Okay. Maybe I am getting too far ahead of myself on '07 here and you're not prepared to speak to this level of detail but any preliminary thoughts on seasonality out of Q4 into Q1?

No, we're not going to get into that at this point. We have given I think pretty good guidance for Q4. We still are a bit seasonal as you can tell by our projections for Q4. Most of our products still have holes in them, or flip flops or thongs. We have made some nice strides this year with the Disney program, college, some of our closed toe products are going very well for the quarter. That is why it has given us optimism for Q4. But like I say we still are a bit of a seasonal business.

So very nice contribution from products other than the Beach and the Cayman in the quarter. Can you provide a little bit of color on the strategy for the allocation of the new styles as we look into spring?

We have different tiers within our retail channel which we have tried to look at the consumer base that shops at each of our category of retailers and we are bringing out appropriate products for each one of those categories. So we have got some more active Crocs like all-terrain that would sell into the sporting good channels and we will have some more stylish shoes that will sell to fashion stores and department stores and higher end stores. And we might even sell some of our shoes at more of a gift type stores like some of the Disney product and such.

Okay, great. I'll let somebody else jump in. Again, nice job.

Mitch Kummetz, Robert W. Baird.

First question on the new product or the product outside the Beach and Cayman, I think if I heard you correctly on the last call that Beach and Cayman were about 70% of the mix and now you're saying 50%. So if I'm doing my math correctly, those styles have gone up from like $26 million to $56 million or doubled from Q2 to Q3. Could you talk a little bit about what are the key styles contributing to that big sequential increase?

We have got a lot of styles out there now certainly some of the initial launches or the initial shipments of our college stuff, we had an extremely strong summer with our flip-flop lines and we have both the adults line, men's, women's and kid's of that. We have got good strong sales in our professional line, a shoe called the Professional and we have a closed clog version as well selling to both consumers as well as to our institutional industrial channels. We've had goods sellthrough as I said in our medical shoes.

We began to sell our boot lines. I mean they are just all over -- there are so many new products now that it would make sense that the 20 some odd new styles are going to catch up with the two styles, the Beach and the Cayman.

Sure. You guys added a number of doors over the course of the quarter particularly internationally. Where would you expect those door counts to end or be at the end of the year?

That is a little bit difficult to say. I would say they would be up a bit at the end of the year because -- I think in Europe especially and in some places in Asia too is that some new doors will come on by year end for the spring. Some of the doors will come on to take product at the end of December for the spring and of course we are continuing to add doors in the Southern Hemisphere. We are having a nice start to the season down in Australia and South Africa. We are just beginning to sell into Brazil and other countries down in South America and Central America. So I think answers it.

Okay, that is helpful. Then, Ron, I know you mentioned that you are encouraged by the strong spring '07 pre books, but I know in the past pre books haven't meant that much to your business. Could you talk a little bit about what is happening there? Is there an evolution taking place where -- or could you say -- when you look out into next year how much of your business do you think will be driven by pre books? Or could you somehow quantify the impact?

As I said, over time the percentage will probably rise a bit as we become more complicated and we have 30, 40, 50 styles of shoes. Some of the larger retailers I am sure are going to want to pre book more of those to make sure they get them. I think for right now the reason we are seeing it I think is because we didn't get everybody all of the shoes they probably wanted this last season. They want to make sure they get into the queue early.

But that said, they still are being -- they are not ordering everything for the season. All of our major retailers expect us to be able to continue to deliver in season for those hot models or hot colors. It is higher but I don't think we have a target percentage at this point. That's really not our model.

Okay. And I've got a few real quick ones, housekeeping for Peter. First, on the tax rate. Tax rate continues to come down. I assume as the international piece grows as a percentage. Where do you see that coming in for the year?

For the year?

Yes.

We think in Q4 it would pretty much mirror what we have here today.

All right. SG&A was up a bit. I want to say that year-over-year it was up I think 23, $24 million and Q2 was up only 15. I know that there was more spending on the AVP tour but was there something outside of that?

Not, it was pretty much the biggest one. We also had a little bit of legal costs that we experienced in --.

Okay.

Some of the college expense for marketing that we described, we were in the 22 colleges.

Last question. Canada, I know in the Qs you break out Canada. You didn't on the call. Could you do that?

The reason we broke out Canada because it was so significant last time and we will -- it was about flat from Q2. I don't want to break out each country all the time unless we have to.

Great, thank you.

(OPERATOR INSTRUCTIONS) [Eric Mains], Cowen & Company.

It is Beth and Eric. Congratulations on the good quarter first of all. I guess I pretty much of two questions left. Peter, can you give us any sense of what your marketing spend as a percentage of revenue might be for this year and how you think about that for next year? And then also if you could give us your CapEx for this year and next year too?

Our marketing spend is in around 5% and we think we will continue in that range next year also. In our CapEx we see coming on in we are currently at almost $20 million year-to-date, $19.2 million year-to-date. We will probably have another $5 million here going on in for Q4 and we see that coming on down to just below $20 million next year from what we see.

Okay. I apologize I might have missed the comment in the beginning. Did you talk at all about distribution on both coasts and whether or not you were kind of seeing the same -- how do you refer to it, Ron -- kind of like fever spread? On the coasts that you have seen in the Midwest?

We look at indications all of the time. I think of note in Q3 is our Internet sales in California and I think California and Florida were one, two, which is saying that the people in California are paying attention to what is going on here. We still think it is somewhat early in those markets because we haven't penetrated well enough through our retailers and have enough retailers California probably. We are adding some now and we are doing the same thing in the East for both Christmas and for next spring. We are seeing the same level of the acceptance. It's just still relatively early there.

And I guess, when we think about distribution and the product allocation on a style basis for '07, is the business intelligence program still planning to be implemented in Q4 and do you plan to be able to talk about the distribution and product allocation on a more specific basis in '07 once you have the results of that fully checked over?

In general all of our system projects are on schedule. Our business intelligence program should be available to us in very early December on target so we will have greater information coming from that and with the product distribution we will continue to segment that for each of our channels and we do that up front.

Okay. Just a last question on the gross margin being above your mid 50s target longer term. What would we -- how should we -- it seems like you've got some additional levers in the near term, why should we be expecting a moderation in that especially as the new styles appear to be catching on?

Because we are spending additional monies in -- as I said we are always investing in the business for the long-term so we are spending more money in development of both shoe and other types of products so that spend will keep it around the 56, 57% range.

Okay, what are the other products that are getting the spending?

We're only going to talk about the footwear stuff today. We've got a lot of new footwear coming out. I think we have got 10 styles for fall and just some -- for the fall 2007 that are coming out under the Crocs brand and we have some other things we are working on as well.

Okay. Then a last question, did you guys say how the ballet slippers did?

Yes, they are selling quite well. We didn't, because of the demand for our classic and core products through Q2 we really didn't get them out much until the end of Q3 so now they are starting to sell in as a fall product which is also good for the seasonality aspect of the Beach.

So they haven't been in stores that long but they are doing well?

Yes.

Okay, thanks.

Angelique Dab, Nollenberger Capital Partners.

Good afternoon. I was wondering could you talk to some of the product extension categories that you believe could be incremental to growth going forward?

Product extensions other than footwear you're talking about?

Sure. Apparel, accessories, backpacks.

You know, we are launching an accessories line for Christmas of this year so you'll see it in the stores which is T-shirts, hats, armbands, socks, certainly that makes sense with shoes and we've had some pretty good early success in penetrating some of our existing retailers with that. That will coming out, but that's new. We will continue to broaden that line internationally through 2007.

We're not going to make any major announcements in apparel. Let's just say that you will see more activity in that area through 2007 and 2008. I have mentioned before that we are doing some development in padding and other things like that, sports padding, other types of padding. We will probably be making some more announcements on that on the next conference call or after year end.

Great, thank you.

David Furth, Provident Investment Council.

To quick questions. First of all in the past you've talked a little bit about the ordering patterns that you were seeing on the Website. How is that looking now?

I think what we talked about before is the classics were coming down 30%. The classics are continuing to decline where there's probably 25% of sales now would be the original Beach, Cayman lines. Customers are lapping up all the new styles.

It is that low, it is down to 25% now?

Yes.

Just the same question is maybe -- I don't know if you give any kind of indications about the potential in Asia?

I think the potential in Asia is mirrored by the potential in Europe but we had a good end of the summer season there in Japan and Hong Kong -- Hong Kong and Taiwan a little bit longer seasons so seeing continued growth there. We are adding door count throughout Asia, the Middle East. As I said we have really started operations. They are not overly sophisticated yet but we have launched operations in India and China and we see some good potential in both of those markets for the long term any way, not over the next year or so but maybe 2008, 2009. The Australian/New Zealand and the rest of the Southern Hemisphere over there is doing very well.

Okay. Are you opening some company-owned stores over there or it's primarily just regular retailers?

We have company-owned stores in -- we have two in Japan at this point, two in Singapore. One going to two in Australia and that's what we have their right now. Our plan calls for more in that region over the next six months.

Okay, great. Thanks a lot.

Ronald Rotter, RBR Capital.

Great quarter. I am just trying to get a better handle on the SG&A spend. Clearly there was the AV spend this quarter but the level of SG&A relative to sales still was higher. And I was wondering with that level of sales was there a lot of additional hires? Can you give us just some feel for going forward where we should see the SG&A run rate?

There's two parts to that. One is that we have increased headcount in SG&A around the world. We're building a pretty sophisticated global business. We have of course incorporated all of the public company expenses in there. We have increased our marketing spend and not only just in the U.S. but all over the world. Or at least kept up with the on a percentage basis with our sales and we still have some commission sales in places so if sales go up, we pay a little bit higher absolute number in sales expense. We would look at going forward to be in the 30, 31% range of SG&A.

Okay, great. So would that be a good number to use for all of next year 30, 31%?

Yes.

Okay, terrific. Thank you.

David Turner, BB&T.

Good evening. A question about the pricing dynamic. Obviously you are adding doors and with the new styles you are skewing the mix slightly -- maybe not so slightly but I was just curious how the revenues broke down between units shipped versus average price?

Our price, our average price, continues to be about the same maybe it has inched up just a little bit. It is very similar to what it has been.

This may have been asked before but I didn't hear the answer. Was curious about the order rate at your more mature doors, again, the growth is outstanding but I guess the retailers that have been with you longest, are they -- what have the run rates been like at those doors? And I guess maybe more importantly, does that serve as a proxy for a longer-term growth rate?

The order rate at our longer-term -- all of our doors are important but at our longer-term larger retailers have continued to be quite good through Q2. You can see that we grew in Q3 even more than we had expected so those order rates continued nicely. What is really encouraging is all of our doors are excited about some of the modifications to our existing products like the Beach and the Caymans and new colors an new styles as well as some new color offerings in our existing flip-flop lines and then some of the new flip-flops and bringing in some of the product we have for next year. We've gotten really good reception from really all of our existing customer base.

The last question, just curious if the success of the new product launches has any influence on your company-owned retail strategy? I know you're using the kiosks now but again does the success ultimately change the footprint of that? Do you go towards more of a brick and mortar or do you keep it where it is and the flexibility that the kiosk offers?

What the kiosks have done for us is they have really helped brand us in new regions and helped to drive customers really into our retail space and to help our retailers. We don't carry many of the products at our kiosks. We have some standard products. We have some of our flip-flop products which you might expect at a kiosk but we don't carry all of the lines. So what the kiosk workers' job is is to get consumers excited about the Crocs brand and then show them which stores carry all of the new styles.

So we've got people out talking to customers actively selling which has helped them -- which is helping our retail base. So we've got to keep the footprint about the same. We are opening some stores next year and we will have a more defined number in our January, February 1, call whenever that is going to be with how many we are going to roll out. But now we've got a few we're coming out with at concepts stores to -- brand building stores in key markets around the U.S. and abroad.

Okay, thank you very much.

[Austin Hopper], [AWH Capital].

Thanks for taking my questions. Earlier I think somebody said that you consider the business to be a bit of a seasonal business and data that I have seen from sports [goods] info suggests that sellthroughs in about 750 stores looks like they peaked in about mid-June and are now down about 75% from that peak. Are you seeing the same and does that suggest that maybe it is a little more seasonal than maybe you described it?

I think we have -- you have seen what we have done in Q3. We have given you guidance in Q4. So we think it is going to be about that seasonal. We are in 9000 doors in the U.S. and over 15,000 -- 15,500 internationally or globally so we don't sell just to the more seasonal businesses. The sporting goods stores probably would be a little more seasonal but the department stores, shoes stores, specialty stores in certain areas really pick up during holiday season, during gifting seasons. We even sell to a number of stores in the gift channel and then uniform stores which would probably sell more product in the fall and winter than they would in the spring and summer.

So we think we have characterized what the seasonality is for this year and as I said, we've got a lot of new products coming out that are specifically targeted at the colder weather months for 2007 and we have a number of them that are hitting the market for 2006 as well.

Great, thank you.

Let's take a couple more.

Patrick Lin, Primarius Capital.

Congrats on a great order again, gentleman. I was curious in terms of your capacity on some of the news styles, do you still have certain styles that are in shortage? For example I know Beth asked about the ballet shoes and see the Primas which are $29 are actually on eBay for $40. So just curious what the status is on your ramp up of new styles?

We have capacity. We might have shortfalls every now and again if a given model takes off quickly but as you know with our manufacturing model, we can ramp quickly and fix it within four to six weeks typically. Right now I think we've -- for where we are today, we have got pretty good capacity available for upticks in any one of our models.

So basically the short-term phenomenon you should catch up shortly on any particular styles then?

Yes, you know the eBay think with the Prima is probably they are just not in as many stores so some people are having a harder time finding them maybe. They are in the fashion stores and department stores. They are not all over the map the way some of the Beach products, Cayman products would have been.

I have kind of a off question here but I have noticed unusual selloff and trading activities with a lot of stocks with high short interest like NutriSystem, Hansons and then the last couple of quarters with Crocs, with like 50% short interest. And I am hearing that NASB is looking into some hedge funds that are manipulating these stocks specifically having (indiscernible) positions and pertaining to be long and then sometimes illegally unwinding their short positions. Have you heard anything on this?

No, not really. We try to stay here and run the business and let you guys worry about the short position.

Great, thank you.

[Sean Boyd], Westcliff Capital Management.

Thanks for taking the question. Just a couple here. On the international side you are at 6500 at this point. You guys have ramped it -- golly I don't know, 1500 a quarter here, three quarters in row. So on a revenue per door basis that is dropping pretty fast. Where do you anticipate that stabilizing? And the question is both in terms level of sales and also in timing? Is that one quarter out? Is it a year out? What can you tell us on that?

Stabilizing as far as sales per door, is that what you are asking?

That is exactly right.

As I said, I think as those markets mature, they will start to look very similar to door sales in the U.S. The international market is very complex. You've got very different type of doors in Italy or Portugal or Spain compared to Germany and UK and even the Benelux and France. So we might have many more doors in Italy but the sales per door might be higher in the UK because their stores are bigger. So I think over time the global mix will start to look very similar to the U.S. but it is not at that level yet.

Okay. Relative to how fast you are expanding the doors overseas, is that a year out, two years out? Can give us anything more detailed on that?

No, not really at this point. Let's see how they mature in through -- for this next season, there will be probably a lot of second seasons for many of the doors but it will really be the first season for many of the doors in Northern Asia and in Europe. We have grown very quickly in both of those markets.

Okay. On a different topic, on the medical sales, can you -- you guys mentioned a metric earlier -- I don't know if it was the number of doors or the number of physicians. Can you give me that metric again and what the growth has been there?

We have 400 doors now that we sell into 400 medical offices in the U.S. and Canada. We are selling primarily through distributors in other countries so we don't have all of the data yet for all of our new expansion with our medical products into other countries. We should have more clarity on that on the next call. But just suffice it to say that business is really growing nicely more quickly than we thought. The products are being well accepted by doctors and patients alike. We've got this new product with silver additive material which kills bacteria getting some initial nice sellthrough and we expect a nice press on that coming forward, going forward. So that could be a nice business for us next year.

Yes, definitely. Just roughly how many pairs a month are you doing on that basis?

We did close to $2 million for the quarter in Q2. Dollars, not pairs.

$2 million in the quarter?

2 million pairs would be good but we did $2 million.

Got you. Just number of pairs overall for the quarter?

6.8.

Great. Last question, Peter, options expense this quarter? Non-cash options expense?

Absolutely. That was $2.8 million pretax.

$2.8 million pretax. Great. Thanks a lot and keep up the good work, guys.

Jeff Klinefelter, Piper Jaffray.

I don't know if you wanted to comment at all on the current knock-off or copy environment either from the legal strategy side or what you are picking up from the channels? What you are seeing -- everyone has observations from different retailers but any progress or any changes in that strategy?

We are continuing to defend our intellectual property. The legal process takes a while but we are continuing to work through that still optimistic. All in all what we see out there in the marketplace is the consumers can tell the difference between the Crocs and the knock-offs. They like our product better. Any of our retailers that let's say that we couldn't get product to in the quarter because the demand was so high -- they have come back and want Crocs if they picked up the knock-offs. So we are continuing to work through that but -- that is it.

Just lastly how about in terms of patents that have been filed international markets versus the U.S. market?

We are filing patents on all of our new styles, just about all of the news styles if it is not patentable we won't but most of our styles are somewhat unique and we have filed in really in all international markets that make sense. We received additional patents over the last could of quarters in some other markets for our first models. That's just an ongoing process now.

Are there any differences that would the noteworthy in terms of the competitor or knock-off environment between the U.S. and international?

No, I don't think so.

Okay. Thank you.

Thank you. Thank you everyone and we are very pleased with our quarter here continuing to work hard to continue to grow this business. As I have said all along, we do everything here to grow a long-term, profitable, reputable business and we will continue to do that. I look forward to talking with you on the next call if not before that. Thank you.

This concludes today's Crocs Inc. conference call. You may now disconnect.