卡洛馳 (CROX) 2007 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 2007 earning 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 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 in this call will be forward-looking statements within the meanings of the security laws.

These statements concern CROCS plans, projections, expectations, and estimates objectives for future operations.

The Company cautions you that a number of risks 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 factors session 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 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 Security Exchange Act of 1934.

CROCS is not obligated to update the forward-looking statements to result the impact on future events.

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

Please go ahead, sir.

Good afternoon and thank you for joining us to discuss our third quarter results.

With me on the call today is Peter Case, our Chief Financial Officer; and John McCarvel, our Chief Operating Officer.

We are very pleased with our performance during the quarter as we once again exceeded our financial targets and posted strong results.

Importantly, we are increasingly well positioned to execute our strategy while our opportunities for growth have never been more compelling.

Let me begin with a few financial highlights.

Sales increased 130% to a record $256.3 million versus $111.3 million last year.

Gross margin rose 240 basis points to 60.6% and our earning per share increased 144% to $0.66 versus $0.27 in the year ago quarter.

The strength of the quarter was once again driven by robust global demand for our brands and products.

Consumer response to our extended footwear offering has been excellent both in the United States and our international markets.

Highlighted by Europe and Japan.

At the same time, our Jibbitz business is rapidly expanding with more SKUs and more doors being added each month.

To keep pace we are continuing to make important investments in our infrastructure, during the third quarter, we opened a new much larger distribution facility in Europe, increased production capacity, upgraded world wide IT systems and added personnel in key areas around the world.

To review with all of our various footwear brands that we now have 14 manufacturing facilities including five third party operators in China and one each in Italy, Romania, Bosnia, the Ukraine, and Florida and as of October, Vietnam along with Company-owned plants in Canada, Mexico, and Brazil.

We also have three Jibbitz facilities in China as well.

Production currently stands at approximately 6.8 million pairs per month with the ability to increase capacity to beyond 7.5 million pairs quite seamlessly.

We now have 15 Company operated distribution centers around the world serving our key markets and our head count is now approximately 5700 employees.

During the month of July, August, and December we shipped 13.8 million pairs of shoes.

This compared to 6.8 million pairs shipped in the same period of 2006.

Importantly, as we look out toward next year we are confident we have the bandwidth to meet the projected increases in demand and execute at an even higher level.

I will now review our results in more detail before turning the call over to Peter who will discuss the financials.

Domestically we saw a continuation of the positive trends from the first half of the year combined with very strong demand for our new fall product.

Sales of classic Mary Janes, the Athens, Cleo, and Capris performed well throughout the quarter as did kids Croclings, and Disney Mickey Mouse Crocs.

The Mammoth, our new fleet flying Crocs arrived on the shelves in mid-August and reaction from consumers was exceptionally strong.

With initial shipments selling out in key sizes and colors very quickly.

As we have moved into fall, sell through on the Mammoth has continued to gain momentum and we believe it will be a great performer for us during the Holiday season and the years ahead.

In fact, it has been our best selling shoe over the past two months.

Since the end of July we have added roughly 500 stores, and in a court with a domestic store count of about 12,500.

Looking ahead as our assortment continues to broaden, we now believe we have a beginner opportunity to expand the distribution of our Crocs branded footwear here in the U.S.

than previously thought.

In the first quarter we will open Foot Locker primarily with new Crocs product offerings and not classics, underscoring the success we are seeing with our product segment distribution strategy.

Also contributing to our record third quarter results, was the performance of our license business which continues to grow as a category and diversify with the retail launch of numerous sports and entertainment license products during the summer.

We have significantly expanded our Disney line with more characters and additional footwear styles while also increasing distribution both domestically and overseas.

Generally our collegiate program has recently grown and now features the Athens model along with newly designed Beach and Kayman and more than a hundred school colors.

Again our portfolio of high profile licenses helps mitigate the impact of knock-offs in the marketplace.

Turning to our international business, revenues increased 220% to $130.9 million for the first time representing more than half of our total sales at 51%.

Our performance continues to be driven by increased distribution and higher sell through of our products.

We are now in 16,000 doors internationally up from 15,000 approximately three months ago.

Many of which are just now beginning to carry a much broader assortment of offerings.

In Europe we are seeing a growing awareness and increased acceptance of the brand by consumers and this has translated into phenomenal growth throughout the continent with sales up over 375% from last year.

We are now in many of the leading retailers in the UK , Benelux, Germany, and Scandinavia to name a few and we have made great progress successfully penetrating most of the continent.

Even some countries in Eastern Europe.

Toward the end of the summer we began introducing many of our spring '07 styles like the Cleo, Capris, and (inaudible) and the reaction was very promising.

As we move into 2008, we will be rolling out the full assortment from the spring of '07 along with new offerings from our spring '08 line.

We expect this market to continue to grow significantly in the years ahead.

As mentioned earlier, we moved into a larger distribution facility in the Netherlands during the quarter.

While the process was time consuming and disrupted approximately $20 million in deliveries, most of which we will now ship in Q1 due to the fact it was spring and summer product.

We are now better positioned to support our aggressive expansion plans throughout the region.

We are also witnessing similar results in Japan with sales up 50% for the third quarter from the second quarter.

Like Europe, Japan's growth has been fueled by demand for our classics and our 2006 offerings, where our new styles only began shipping late in the season.

We are very encouraged with the acceptance of our brand in Japan and we are optimistic about our prospects there as we move into 2008.

Additionally Jibbitz is also gaining momentum in this key market.

As a result of the summer-only product assortments and the newness of our brand in both Europe and Japan we are experiencing some expected seasonality in these markets like we did in the U.S.

a couple years back.

Therefore, as expected, we have seen a slow down in sales as the weather has turned colder throughout Europe and in Japan.

Needless to say, we are working hard to mitigate this seasonality much the same way we have done here at home.

More importantly, based on our exceptionally strong prebooks, we will anticipate sales to be up significantly again in 2008 particularly in the first half of the year.

This is reflected in our strong growth targets for next year.

Now to the emerging markets, as you probably recall we opened Brazil late in the second quarter and we have been very pleased with initial results there.

Being it's the southern hemisphere, summer is now approaching and we are very optimistic about our growth potential this season and beyond.

In China our investments in sales and marketing are beginning to yield positive results with a number of pairs sold up meaningfully year over year.

We continue to execute numerous brand-building initiatives to further heighten awareness of Crocs throughout the country in order to maximize all or our opportunities leading up to, during, and after the Olympics in Beijing next year.

We are also continuing to increase our presence and infrastructure in India and have very high hopes for this market going forward.

With regard to our retail operations, we now have over 26 Crocs company-owned stores around the world including 19 in Asia, five in the U.S., two in Europe and one in Canada that are also approximately 30 franchise stores throughout Europe and Asia as well as another 30 large-format shop in shops in Asia.

Additionally we have over 130 kiosks around the world to help build our brand in key regions.

Here in the U.S.

in addition to our full price store in Santa Monica we will be opening two additional stores next month, one in New York and the other one in Boston, with another in New York and one in Chicago planned for early 2008.

In addition, we have opened four outlet stores to date with plans to open two more buy year-end.

Not to be overlooked, we do have a number of exciting things going on with our other brands and categories which I will quickly touch on.

First Jibbitz, which continues to gain momentum around the world.

We increased the SKU count to over 1200 -- up 100 from three months ago and compared to approximately 300 when we acquired the Company late last year.

We now sell through a retail network of over 13,700 stores versus 2,000 at the beginning of the year and while we do not break out sales contributions in this business I will say it has been growing very nicely while at the same time continuing to positively impact sales of our footwear.

At ASR in September we debuted a new line of ocean-minded sandals that incorporates Croslite in the footbed and announce the introduction of a limited line of apparel, both of which will be available the first half of next year.

Similarly, we will be introducing Croslite in a handful of bike footwear products, namely the adventure 3-in1 series sandals, we will also be launching a Crocs golf shoe collection which will incorporate our proprietary Croslite material integrated with golf shoe and sandal designs.

While still small we are very pleased that the early performances of our Mamba's and YOU by Crocs footwear lines as well as recent launch of our limited apparel offering.

Peter will now review the financials and I will come back for closing

Thank you, Ron.

Sales for the third quarter increased 130% to $256.3 million compared to sales of $111.3 million in the third quarter of 2006.

For the quarter, domestic sales rose over 78% to $125.4 million and international sales increased to $130.9 million from $40.9 million a year ago.

Revenue for Canada and Mexico was $11.4 million.

Revenue for Europe was $58.1 million, revenue for Asia was $53.9 million, and the balance of $7.5 million was from elsewhere in the world.

Footwear sales accounted for 87% of revenue and represented 13.8 million units for an average selling price of $16.29.

Sales of our classics represented 35% of footwear sales.

Gross profit for the third quarter of fiscal 2007 was $155.4 million or 60.6% of sales compared to $64.8 million or 58.2% of sales in the third quarter of 2006.

The increase in gross margin was primarily driven by higher percentages of total sales in Europe, Asia, Jibbitz, and also through our global direct sales operation.

SG&A for the third quarter was $77.2 million or 30.1% of sales compared to $33.3 million or 29.9% of sales in the corresponding period last year.

The increase in the SG&A as a percent of sales is a result of increased global marketing expense and our sensing additional opportunities in Brazil, China, and India and deciding to aggressively increase our investments in both personnel and infrastructure to position for strong growth in 2008.

We feel it is important to move quickly in these important countries to establish our brand.

Income from operations for the quarter was a robust $78.2 million or 30.5% of sales which is above our stated goal of between 26 and 28%.

Net earnings were $56.5 million compared to $21.5 million a year ago, and diluted earnings per share were $0.66 versus $0.27 in the third quarter of 2006.

Our EPA was helped by our improved year-ending forecasted tax rate of 30% which pushed our Q3 rate down to 28.6%.

The decrease is due to the continued implementation of our sophisticated tax structure.

With regard to our balance sheet, as of September 30, we had cash and cash equivalents equal to $76.6 million.

Our accounts receivable increased 165% to $160.6 million at September 30, from $60.7 million this time a year ago and our DSOs are 58 days.

With the third quarter our inventories, we ended with $195.3 million compared to $49.1 million at the same time a year ago.

Most of our increased inventory position from Q2 resides in both Europe and Japan where we struggle to keep up with their torrid growth and orders early in the quarter.

In addition we also built inventory in our Southern Hemisphere distribution centers as they are just going into their busy season.

We plan to continue to build inventory in Q4 to provide better global customer service which leverages our high velocity, high margin product.

Now turning to guidance.

For year ending December 31, 2007 we are raising our guidance and project net sales to range from 820 to 830 million and net income per diluted common share of between $1.94 and $1.98.

Consistent with last year, we are introducing initial guidance for 2008.

As Ron mentioned earlier, we are witnessing strong Spring year over year bookings which gives us confidence that next year is shaping up to be another period of break-out growth.

We are currently forecasting sales and earnings per share to increase between 35 and 40% with the growth weighted in the first half.

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

Thanks, Peter.

Through the first nine months of 2007 we have reported exceptionally strong financial gain with sales increasing 157% to $622.6 million and earnings per share increasing 188% to $1.55.

Clearly we are experiencing rapid growth with several markets; namely Europe and Asia developing even faster than we had anticipated.

The demand for our brand and acceptance of our products continues to reach new levels which gives us great confidence in our future prospects, and is reflected in our robust growth targets for next year.

Domestically, our diversified product offerings which now total more than 90 sales of footwear is selling well across the board while at the same time providing us with new distribution possibilities and a broader target market.

Overseas we are in the early stages of rolling our many of our recent footwear introductions and as the process ramps up in 2008 we are confident that the product segment distribution strategy we have implemented in the U.S.

will deliver similar success in our international markets.

We have created a solid portfolio including Jibbitz, Ocean Minded, Fury, Mambas, YOU by Crocs, Bite, apparel and accessories CrocsRx and Crocs Work product that further diversify our operations and take the Company in new and exciting directions.

Today we are more bullish than ever on the outlook for our Company and we are confident that our infrastructure investments over the past 12 months have created a stronger platform that will allow us to maximize our opportunities that lie ahead.

I will turn it back over to the operator to open it up for questions.

Yes, sir.

Thank you.

(OPERATOR INSTRUCTIONS) We will take our first question from Jeff Klinefelter, Piper Jaffray.

Please go ahead.

Congratulations, guys, on another great quarter.

Thanks, Jeff.

First of all getting a little more into guidance, 35 to 40% for next year is your preliminary guidance, and Peter you mentioned it would be stacked a little bit more toward the front end.

Could you expand on that a little bit more specifically with respect to Europe and what it sounds like are fairly strong bookings in that market, how should we think about the flow, the seasonal flow of earnings as we move into next year?

Peter, I would say that, let me answer for Peter.

Jeff, I would say that we will see more of the uptake in Q1 and Q2 because we come off of a fairly low quarter from last year, and our bookings, in both Europe and Japan, we were not able to fulfill the demand until the latter part of the summer we were only shipping about 50% of the orders in those areas which have now essentially gone out into Q1.

So we are fairly bullish on Q1 and Q2 of 2008.

So without giving you real clarity there I would just skew your models more into the first part of the year than the second.

Specifically what was Japan in the quarter revenue, you said Asia was $53.9 million.

What was Japan of that total.

It was very close to 30 million.

Okay.

So maybe just turning to the inventory, give that the inventory builds took place in the third quarter and you had this delay of shipments, maybe a little bit more specifically on that, is it that the orders were there and it took a little longer to ramp up the manufacturing so the inventory ended up there and that was too late to ship the orders at that time?

Yes, that is in essence what happened to a little bit of the build in inventory.

We very consciously have been aggressive in building inventory because we just haven't been able to catch the wave of demand for our product, primarily in some of the new markets in Europe and Japan, China, in Southeast Asia, and even some of the Middle East, we just haven't been able to get enough product into's these other markets and we even miss some opportunity here in the U.S.

as we went through a very strong summer season.

So we consciously built our inventory up in order to give us capacity for some of the new styles and actually it is a good thing we did because we are now having to divert some of the capacity to the Mammoth, to the (inaudible) to some of the other very strong models that we have designed and are introducing in Q4 and Q 1.

So this is similar to the end of last year, Ron, you went through this same thing where you built up your inventory at basics to open up capacity for new styles.

Yes.

This is a build of basics.

It is high margin products.

It is very high velocity product that we have got.

We felt we needed to put more on the shelf and then as you noted, some of that would have shipped at the end of the third quarter; however it has been difficult getting it through some of our channels there at the end of Q3.

Okay.

So if we were to look at that inventory composition total you would say the vast majority of it is in basic inventory or any other breakdown of composition we can just look at?

I think a majority of it is in the high velocity, classics and some of the other high velocity models that we have.

Just a couple of other questions, in terms of the fourth quarter, there's seasonality, given seasonality in the business and also I think Europe there's a little bit more seasonality in the order flow.

If there were to be upside potential, it seems you have the inventory to chase the business, where would there be upside in terms of category, or regional, global regional segments if it does materialize?

As I think you have noted we are an at once business.

So if the demand is there, we do have, we have product, we don't have probably as much Mammoths as we would like but we are working on that.

We see good potential in Asia, good upside potential in Asia.

We have upside in our licensing business if we can get the product out.

That has been very strong as we go into the fall season.

Also with, like I mentioned the Alecs and some of the other products we will see how they sell as we approach the Christmas season.

We do have inventory in most cases, in most places around the world to hit any upside.

So, we will be ready for that.

Okay.

And last question for me would be on Foot Locker.

That sounds like a Q1 ship a new domestic account.

Is this an all door program you will be starting in Q1 or how will we see that ramp up?

Because they have several thousand doors.

It will be an international story.

It is not just domestic.

We will obviously not open all of their multithousand doors in one month.

We will roll them out, but we have, we have designs to open a good number of their doors as we roll through Q1 and Q2.

Including we will have our licensed products in Champs.

Which sells more licensed products than anybody.

Okay.

Great.

Thank you.

We will take our next question from Jim Duffy, Thomas Weisel Partners.

Please go ahead.

Thank you.

Question as you look out to the guidance for '08.

Can you speak to the component of it which will be growth in the domestic markets versus growth in international.

How do you see that split shaking down?

We -- it will obviously be much higher in the international markets.

That's where the nice, the nice upsides.

We didn't hit, as I said the demand, we didn't hit nearly the demand that we had in Europe and throughout Asia, and really now in Brazil.

We are fairly new in that market.

I would say you could skew it much more heavily towards international growth; however, with the addition of Foot Locker and some other doors that we will be adding here in spring, really late this year and spring, in the U.S., we are going to continue to see nice growth here.

We will probably have about a 15% door add at least, 15 or 20% here in the U.S.

next year.

Okay.

Foot Locker is notorious for being demanding on terms with their vendors.

What type of margins will those sales come out with your business with Foot Locker?

They will be the same as all of our other accounts.

So, a very good relationship here to start with.

And we are excited to get started with them next year.

Remember it is primarily our new products.

We are not even launching the classic line into Foot Locker.

We will have all of our new products for some of the spring stuff from last year, new spring stuff from this year, and some other exciting new SWs we will be bringing out there.

So there is some in line product but you are also doing some SME stuff?

Yes.

Is that mostly color waves or will there be some new products specifically at Foot Locker?

They will have some new product that will initially be specific there, a model or two.

Okay.

And then on the inventory growth I'm a little bit perplexed by it.

You have been talking about being an at-once business and having a manufacturing platform that allows you to chase business.

There seems to be a disconnect that we are seeing in the inventory.

What am I missing here?

Jim, I think you are missing the fact that it is a large global distribution system that we now have.

We had to get product into various markets, the 15 some-odd Company warehouses and probably all distributors around the world, there are probably over 70, 75 warehouses, but those obviously aren't on our books but we had to build some of those warehouses as well we will be shipping in late Q4 and Q1.

So, what we felt this year, we have -- we have never caught the demand.

We have, our supply has never really caught the wave here, and we decided that with our higher margin product we will just put more on the shelves to make sure that we do have the capacity to build more of our new styles which some of the new styles, we are thinking could be fairly large contributors for next year and they're more complex products, more complex to manufacture, they take more capacity than one that has capacity available for that.

Okay.

Okay.

Then can you speak to what the growth of the U.S.

inventory was just to give us some sense for what's going on on this side of the ocean?

Growth where?

Of the U.S.

inventory?

It was probably only about 10%.

Okay.

Thanks.

I will let somebody else jump in.

We will take our next question from Elizabeth Montgomery, Cowen.

Please go ahead.

Hi, guys.

Can you hear me okay.

Yes.

I guess I have two questions and I apologize if I missed some of these.

But I wondered first if you could, I guess it is related to inventory.

Did you expect to, aside from the $20 million of European products that didn't ship because of the Netherlands, DC, did you expect to see some upside in this quarter in terms of revenue that didn't happen because of the logistical challenges of getting all the products out to the various DCs and distributors in some other way.

Yes.

We also, we also missed some shipments in Japan and China as well, and to a lesser extent some other markets.

So there's probably another 10 million or $15 million on top of that that we missed.

Okay.

And then I guess part of the, part of my question on Foot Locker already got answered but with the number of doors that you guys already have in the U.S., and then plans to open another 15 to 20% next year, what kind of -- what feedback do you get from some of your retailers like especially maybe some of the mom and pop family retailers that I think actually do pretty big kids business and moms business with you guys in terms of continuing to expand the distribution?

A lot of them say they're struggling to still get product.

Yes.

Obviously, one of the reasons we have taken a little bit more aggressive approach in our inventory build is to make sure we can service all of those.

I think with the number of products that we have now, I mean with over 90.

We are coming up with a number of products, really every month, we have gut SMUs out there, we have got a lot of licensing product.

So, frankly, we just needed more distribution capacity out there.

So, we have, we have got some new styles that would be very hot and some of the stores that we have just aren't big enough to carry -- well, this many products so we actually needed more capacity in our channel.

That's why we opened them up.

We are not, we haven't hurt much yet because what we do, and in all cases is to our, to our long-term strategic accounts, we take product to them first.

If they can't handle that additional load, then we offer it to others.

Okay.

And then can you just -- and I apologize if you brought this up in the beginning, can you speak to the fact that have you seen any deceleration in terms of the core sell through in the U.S., in the past say two months?

Certainly we have seen deceleration expected and the same deceleration we have seen in every year we have been in business which I guess isn't that many years.

But mid September to say probably mid November, have always been our slowest months.

We have shoes with holes in them like we have always talked about which is our classic line.

One of the things we did very well with our spring product, our flip flops and some of the other totally open shoes, flies and such that we would expect those to slow down.

That is being offset here in the U.S.

by licensed product and the Mammoth and the Alecs and some of the other products that just introduced for this, for this fall.

But in the, in our foreign markets we are still new.

We had launched with primarily our classics and some of our spring product.

We totally expected to have a downturn in those markets.

It has been in our plan the whole time, as we've guided to.

Okay.

Thanks a lot.

(OPERATOR INSTRUCTIONS) We will go next to [David Furst], Providence Investment Council.

Please go ahead.

Please stand by.

Please go ahead, sir.

Hi, guys, congratulations on the quarter.

I missed part of the call.

Did you, when is the international that was delayed on the shipments going out?

Does it go in the fourth quarter or the first quarter?

Since it was primarily spring and summer product as I said, it would, it has been moved into the first quarter for the most part.

That's why we are, we are very excited about our prospects as we move into next year.

And we even, in both Europe and Asia, we pretty much stopped opening accounts which we have now begun opening accounts now in those markets for shipments in Q1.

We're pretty bullish on that.

Okay.

So I mean that basically explains the slight difference between consensus and what your guidance for this fiscal year?

Yes, the, I think our guidance is up just a little bit over our prior guidance for Q4.

Okay.

Thanks a lot.

And we will take our next question from Shawn Boyd with Westcliff Capital Management.

Please go ahead.

Good afternoon.

This first question real quick here is on the fourth quarter and given the guidance now for the full year.

I am wondering if there is anything special going on with respect to the margins, to look at that guidance for the full year and what it implies for the fourth quarter.

We have got to bring the gross margins down a bit here or the operating expenses up.

Anything you can tell us about the build maybe going on in the fourth quarter on the expenses?

Yes, one of the things that we are doing is, so we are expecting pretty nice upside for next year.

So we are continuing to invest in some of the emerging markets that we talked about including, I guess, Europe and Japan are still emerging for us.

But when you look at China, India, Brazil, Southeast Asia, some of the other markets, we are continuing to put investment and infrastructure in to grow that, and we are continuing to invest in a number of the other businesses that I talked about, some of the new brands that we have, some of the things.

We have taken an approach all along, we have invested in the future of this Company so we are continuing to do that.

It impacts fourth quarter a little bit.

That's fair.

Most of that would be on the SG&A line than any significant kick up in cost of goods sold.

Yes.

Okay.

And then my second question is on the license revenues, can you just give us a feel for roughly how much license product was in revenues for this quarter and for the past few quarters because I know we have, anecdotally we have spoken about a big ramp kind of to come and I am just wondering where we are at now versus the past couple of quarters.

This is a stronger quarter but we actually don't break that segment out at this point, but this is obviously end of Q3, Q4 are the strongest quarters for that business for us.

So it is contraseasonal to the rest of our product lines.

Okay.

But just in general are we looking for license to be 10% of the models, 50%, some point out?

Anything that you can give us on that would be helpful.

Yes, we are not breaking that out right now.

Okay.

Thank you to.

We will take our next question from Robert Samuels, JPMorgan.

Most of my questions have been answered but you did mention 15 to 20% door growth in the U.S.

next year.

What's that growth number look like overseas?

Much higher.

It would be in the probably 40%, 30 to 40% range.

Okay and then, with regards to Foot Locker, will you be adding Jibbitz as well?

Of course.

Great.

Then just finally, can you just talk a little bit more about China and the opportunity that you see over there especially related to the Olympics?

Yes.

I just got back from there last week and we now have about 200 sales and marketing people there.

We are probably doing about 20 events a month of various sorts, some are around the Olympics, some are around festivals, the types of things we did here in the U.S.

We are very excited about the prospects that we have in China.

It is a great opportunity because there is so much of a focus on the, on the Olympics coming.

We think that we probably underestimated our opportunity there, early this year and that's one of the things we are ramping up for right now, making sure that we have the infrastructure and sales and marketing and warehousing and logistics to get products from China to China is not the easiest thing in the world to do interestingly enough.

But we have, we have put a bunch of infrastructure in place and are continuing to do that to take advantage of what we think could be a nice upside for next year.

Great.

Thanks.

(OPERATOR INSTRUCTIONS) We will take our next question from James Maher, ThinkEquity Partners.

Please go ahead.

Thank you.

Nice quarter, guys.

Just want to ask a follow-up question on gross margins.

We have been talking about longer term, you have been guiding to like the mid-50s.

We have been in the high 50s lately and now in this quarter above 60%.

Can you elaborate a little bit more on that and what might be the components of bringing that down and when we might start to see that or if that is still what you are thinking?

Yes, it is still, you know.

We are still guiding in the mid-50s as far as a longer term model.

I think I have always said in the short term we might have upticks if we sell more of our molded products, it has a little bit higher margin than products that's sewn and glued and such.

So as we launch new styles I would say that margins would trend down over time, over in the short term we are probably fairly comfortable for being a little bit higher than our guidance.

Okay.

Then I am assuming that the growth of Jibbitz is sufficient that that's been helping the gross margins in the short term as well.

Would you agree with that.

Yes, Jibbitz helps to grow gross margin and that's somewhat offset by investments we are making and development and a lot of these other business that we don't expect big upside from until probably midway through next year or so.

Okay.

Thanks.

All right.

And with no further questions I would like to turn the conference back over to the speakers for any additional or closing remarks.

All right.

Well, thank you very much.

We are excited about the quarter.

We are especially excited about our prospects for our fall product for the end of this year and then very bullish as we move into next year.

If anyone has any further questions, Peter and I will be available.

Thank you.

Ladies and gentlemen, that does conclude today's presentation.

Thank you for your participation.

You may now disconnect.