卡洛馳 (CROX) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Crocs, Inc., fiscal 2009 first quarter earnings call.

(Operator Instructions).

I would like to also remind everyone that the conference is being recorded.

This call will end no later than 6 p.m.

Eastern time.

Before we begin, I would like to remind everyone that some of the information provided in this call will be forward-looking and accordingly are subject to the Safe Harbor provisions of Federal Security laws.

These statements concern plans, beliefs, forecasts, guidance, projections, expectations and estimates for future operations.

The Company cautions you that these statements are subject a number of risks and uncertainties described in the Risk Factors section of our 2009 Annual Report on Form 10-K as well as other subsequent filing with the Security and Exchange Commission.

Accordingly, actual results could differ materially from those described on this call.

Those listening to the call are advised to refer to our Annual Report on Form 10-K as well as other documents files with the SEC for additional discussions of these risk factors.

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 future events.

I would now like to turn the conference over to John Duerdon, Chief Executive Officer of Crocs.

Please go ahead, sir.

Thank you and good afternoon, everyone.

I'm glad to be here today speaking with you.

I look forward to meeting many of you in the months ahead.

With me on the call today Russ Hammer, our Chief Financial Officer.

I'll start the call today with a few remarks about the highlights of the quarter.

Then I'll hand over the call to Russ for a review of the quarter's results.

After that, I plan to give my thoughts on the Company and our future based on my observations during my first 60 days here as CEO.

Our Q1 2009 revenue of $134.9 million is up 7% from the quarter ended Q4 2008.

And it's down $63.6 million for quarter 1 of 2008.

We reported a net loss of $22.4 million in the first quarter of 2009 with a diluted loss per share of $0.27 compared to a Q4 net loss of $34.7 million or a $0.42 per share and a quarter 1 2008 loss of $ 4.5 million or $0.05 per share.

Selling, general and administrative costs are down 26% compared to Quarter 4 2008 and down 6.2% from the same quarter a year ago.

There's still a lot of work to be done to bring our costs in line with sales but we're making reasonable progress.

Our cash and debt position also improved this quarter over the same period last year.

Cash and cash equivalents came in at $50.9 million compared to $29.6 million a year ago.

During the quarter of 2009, we brought down our debt balance by $24.3 million from $47.7 million from $19.8 million.

We also successfully extended the maturity date of our credit facility from the second of April of 2009, to September 30 this year affording us the time and the cash we need to operate the business while we explore our options for future capital needs.

With our Spring 2009 styles were only recently introduced, they are gaining traction in the market.

We continue to see a wide coverage of our footwear in the media.

Highlights include profiles in Sunday magazines and prime time TV show.

We are currently marketing our spring 2009 products in highly visible publications as O Magazine and In Style, Parenting, Men's Journal and Outside magazine.

The Patricia product the new spring style recently ranked on Amazon's best footwear best seller list.

In fact, during the past few weeks, Croc shoes have been consistently in the top 25 best sellers in shoes on Amazon.Com, I think a good barometer of consumer interest in the product and in Crocs.

In addition, we have just launched the Prepare collection of shoes which allow athletes to recover faster after strenuous exercise an Aprs Sport Collection.

It has rapidly become one of the top sellers on our global website and also in Japan.

While we feel good about the continued strength of the Crocs plans, we still have a tremendous amount to do operationally to restore the health of this company and I'll address this further after Russ's comments.

I will now turn the call over to Russ Who's going to review the financial results for the quarter.

Russ.

Thanks, John, and welcome aboard.

Hello to everyone on the call today and thanks for joining us.

Let me begin by reviewing the Company's financial results for the quarter and then I'll turn the call back to John for his comments on our strategic direction.

As a matter of housekeeping, I want to make you aware that we provided reconciliations of a non-GAAP measures relating to SG&A expenses excluding foreign currency effects given in this call, on our Investor Relations section on our website and in our press release, for your reference.

We will provide comparisons sequentially and year-over-year to paint a clear picture of how our business is trending.

Total sales for the first quarter of 2009 were $134.9 million.

While this represents a decrease from the $198.5 in revenue reported in Q1 of last year.

It is an increase of 7% from Q4 2008 revenue of $126.1 million.

The first quarter of 2009, footwear sales accounted for approximately 94% of our revenue and represented 8.4 million units at an average selling price of $15.11 versus and average selling price in Q1 2008 of $17.12.

Core products which include Beach, Cayman, Kids Cayman, Athens, Kids Athens, Mary Jane's, girls Mary Jane's Mammoth and Kids Mammoth represented 42% of our unit sales.

And sales of our classics which include our Beach and Cayman models represented approximately 20%.

By channel, global wholesale revenue declined 45% compared to Q1 of last year to $95.3 million this quarter driven by dry depressed market conditions consumer demand and retailers operating with much leaner inventory levels.

Currently, on average, our key wholesale accounts have approximately 15 weeks of inventory on hand with quarter to date sell through rate of 21%.

Last weeks the key account sell through rates were the highest they've been in the last 12 weeks at 6%.

When compared with Q4 wholesale revenue, we saw an increase of 21% quarter over quarter due in large part to European wholesale performance, which was driven by lower returns and the transition to the spring selling season.

During the first quarter of 2009, revenue from the global retail channel increased 60% to $27.9 million which outpaced the 36% increase in the number of company operated retain locations from 213 at March 31, 2008 to 290 at March 31, 2009.

The increase has primarily been in US Outlet and Asia retail stores.

Compared to Q4 of 2008, revenue from our company operated stores declined 20% from $34.8 million in Q4 2008, which was driven by the holiday season.

We continue to see strong performance also in our internet channel.

Revenue increased from $11.7 million, a 46% increase over Q1 of last year.

Compared to Q4 of 2008, revenue was down 7% due to a pullback in North American internet sales after the busy Q4 holiday season.

This channel is complimentary the wholesale and retail channel and we intend to continue investing in this platform in coming quarters.

We now have ecommerce enabled sites in the US, Canada, Europe, Japan, Korea, Australia and Singapore and our overall conversion rate on sales has doubled since 2008 with a simpler website navigation, better merchandising and product availability.

This channel will assume increasing importance in our retail strategy.

By geographic region, Q1 2009 sales in our Asia market were up 7% over Q1 of 2008 to $39 million.

This increase was largely a result of increased retail sales in the region.

Compared to Q4 2008 sales in Asia were down 10.8%

The first quarter 2009 sales in our Europe market were down 49% to $28.3 million compared to the first quarter of 2008.

However, compared to Q4 of 2008, our Q1 sales in the Europe market were up over 200%.

We continue to be impacted by the strong presence of imitation products and parallel imports in this region and are vigorously defending our intellectual property rights.

On a positive note, we are encouraged by strong acceptance of our internet platform in the region and we expect this to be a continued source of growth in the region.

Sales in the Americas were down 37% from Q1 2008 to $67.6 million in Q1 2009.

Compared to Q4 2008, sales in the Americas declined 5%.

These declines were fueled in large part by the ailing economy, which as I said before, has led to reduced demand and retailers operating at lower inventory levels.

Gross profit for the first quarter was $49.7 million or 37% of revenue compared to $85.2 million or 43% of revenue in the first quarter of 2008.

Compared to Q4 2008, gross margin declined 11%.

Driving the gross margin was a drop in our average selling price as I noted previously.

In addition, as we reduce our global warehouse footprint, we are experiencing some short term cost inefficiencies attributable to the consolidation of our warehouse space.

We expect these cost inefficiencies will continue to weigh on our gross margin in second and third quarter as well.

We expect that the cost benefits related in this consolidation will become apparent in Q4 and into next year.

Our first quarter SG&A expense was $72.2 million compared to $68.8 million for Q1 2008.

We reduced SG&A by $25 million or 26% from fourth quarter of 2008.

Of this $25 million reduction, $17.7 million was due a management of our foreign currency exposure.

The remaining $7.3 million decline was a result of additional cost cutting measure, which I'll provide more detail on in a moment.

Foreign exchange losses including SG&A in the first quarter of 2009, was $3.4 million excluding foreign exchange losses on a non-GAAP basis, SG&A was $68.8 million or 51% of sales in the first quarter 2009, which was down $17.3 million or 20% from $86.1 million excluding foreign currency exchange losses in the first quarter of 2008.

Sequentially excluding foreign currency exchange losses, SG&A was down 8% in the first quarter of 2009 compared to the first quarter of 2008.

While we are please with the progress we've made on our cost reduction programs, we recognize this is an ongoing process and there is much more work to be done.

We continue to reduce SG&A and cost of sales through cost spend control, warehouse closings and centralization, workforce reductions and through process improvement which John will discuss more in a few minutes.

Our global workforce declined another 110 employees in the first quarter to end the quarter with less that 3,600 employees.

Of these 3,600 employees, approximately 50% are dedicated to our retail business and 21% to our remaining distribution manufacturing operations.

This represents a reduction in personnel of more than 1,700 employees or 32% of our workforce since December 31.

2007.

We also had a year-over-year decline in corporate sponsorships, but we anticipate that these expenses will ramp up again in Q2 and Q3, our busy seasons.

We continue to invest in our retail and internet businesses as we have added over 300 retail employees globally since December 31, 2007.

Included in our Q1 2009 SG&A was $20.5 million of retail related cost.

This cost includes salaries, space and other similar costs.

We increased the number of outlet stores globally to 41 compared to eight at March 31, 2008.

We ended the first quarter with 181 kiosks, 41 outlet stores and 68 full-price retail locations.

We also had more than 200 third-party owned stores for a total of approximately 500 global locations at the end of Q1 2009.

We reported a net loss of $22.4 million or $0.27 per diluted share for first quarter of 2009 compared to $4.5 million or $0.05 per diluted share in the first quarter of 2008.

Turning to the balance sheet, as of March 31, 2009, cash and cash equivalents were $50.9 million down slightly from the $51.7 million we reported at the end of 2008.

However, compared to the comparable 2008 quarter, we increased our cash by $21.3 million despite the fact that we reduced borrowing vendor, our credit facility, during this period from $42.8 million at March 31, 2008 to $19.8 million at the end of the first quarter 2009.

We made additional payments on the debt facility since quarter end and as of the date of this call, we have approximately $18.3 million outstanding.

Also at the end of the first quarter, we announced that a maturity date of our credit facility has been extended to September 30, 2009.

We're currently in discussions for a new borrowing arrangement and are considering other sources of capital for our ongoing needs.

We continued our disciplined approach to cash management.

Our accounts receivables decreased to $60.6 million at March 31, 2009 compared to $154.6 million at March 31, 2008 and our day sales outstanding decreased to 40 days -- 40.4 days in Q1 of this year from 70.9 days in Q1 of last year.

Our inventories at March 31, 2009 decreased to $131.2 million compared to $265.5 million a year ago.

Some of this decline is attributable to the $70 million in inventory write-downs during 2008.

However, $54 million of this decline came because we were able to move footwear inventory on hand with the remaining difference being the result of more efficient supply chain management.

We expect this decline to accelerate during our peak selling season in quarters 2 and 3.

Net capital expenditures, which include cash paid for fixed and intangible assets net of asset sales for the first quarter, totaled $4.4 million, an 80% reduction from the first quarter of 2008.

We continue to actively manage our capital expenditures and anticipate that our capital expenditure this year will primarily be dedicated to process retail and IT improvements that will allow us to more effectively provide quality and efficient customer service.

We announced a tender offer for employee stock option shortly after first quarter end.

The tender offer lowered the number of outstanding options that, if exercised, could dilute our stock thus increasing shareholder value.

The offer closed on September 30 with 2.3 million shares being tendered for us for a total cash payment of $121,000.

Accordingly, we anticipate recording a charge of approximately $16.3 million in Q2 related to previously unrecognized share based compensation expense for these tendered options.

Please note that this non-cash charge is not included in our guidance.

Turning to guidance, we expect to generate between $135 million and $160 million in revenue during the second quarter of 2009.

As I indicated earlier, we expect to have additional costs during the second quarter related to consolidation and reduction of warehouse space and accelerated compensation expense.

In addition, we'll have additional corporate sponsorship expenses in quarters 2 and 3 as we work through our peak selling season.

We expect a diluted cost per share between $0.31 and $0.15.

Due to uncertainties created by the global economic downturn, we will not be providing annual guidance at this time.

Overall, we continue to make progress, but there is much work to do on several fronts.

We lowered our inventory levels by more than half since Q1 of last year.

We continue to lower SG&A on a dollar basis through cost reduction efforts.

We have significantly improved our DSO, CapEx, and our overall asset management.

We secured an extension on our credit facility, reduced our borrowings and ended the quarter with over $50 million in cash and cash equivalents.

I will now turn the call back to John.

Thank you, Russ.

Before I get started I'd like to thank Ron Snyder for his service as our chief executive officer, my predecessor for the last four years.

Ron is still assisting with the transition process and has been a good asset to me as I learn about the Company.

When I first considered the possibility of joining Crocs, I obviously conducted a certain amount of research among the industry cognisenti, former colleagues, journalists, industry analysts, some of whom confidently predicted the eminent demise of the Company.

Crocs was a fad and it was over.

It had had its day.

It could no longer demonstrate a clear competitive advantage.

The brand was over distributed, heavily discounted, had too much inventory -- all the usual prescriptions for disaster.

At this point, as you can imagine, I wondered about reconsidering whether I was looking at the right thing here.

But it led me to consider at the same time what exactly is a 'fad.' A fad has been described as something that is very popular with a small group of people for short period of time.

And it occurred to me that is a snapshot had been taken of many well known brands at a similar point in time, they might also have been dismissed as fads.

Nike, for example, whoever would have thought of wearing athletic shoes to the office?

Reebok, what woman would wear those on 5th Avenue?

Coca-Cola started out as a tonic in a funny bottle.

Levis, the only place you can't wear those these days is the New York Yacht Club.

And finally, Perrier, who would pay $10 for a bottle of water?

And we could make many similar comparisons.

But I would submit that at some point in their development, each of these iconic brands were dismissed as fads.

So what made the difference?

What factors prevented these brands too from being consigned to the trash can of marketing history?

What led them to become some of the greatest generators of shareholder value in the history of commerce and industry?

Among many possible factors, I would isolate three -- imagination; leadership; and marketing.

It was about small teams of people who believed in the possibility of an idea who made a difference and had pursued this idea relentlessly.

It was that understanding and identifying with their consumers emotionally and being able to demonstrate competitive advantage in their product offerings.

I spent a good piece of my life developing brands and turning companies around and I feel that I have at least some of the credentials necessary to make Crocs an enduring brand.

In fact, Crocs current situation is not entirely dissimilar to the situation that I found when I first joined Reebok in the early '90s.

So what have I learned in the past 60 days?

Well, certainly we may have more inventory than we want to carry going forward.

But as Russ has indicated, it's coming down quite rapidly.

Yes, the brand is being widely distributed and it's being discounted in a number of channels.

But show me a shoe or a power brand today that is (technical difficulty), and yet at times our information systems failed to keep pace with a phenomenal demand for the product.

And yet, certainly, the SG&A costs are higher than we would like, but we're attacking that also.

These are matters that we take very seriously as a management team and we are committed to improving them.

But what I've also learned, there's about over 100 million consumers out there in 125 countries that absolutely love our product.

I've also found that the Crocs brand in only five years has become almost as well known and Nike and Adidas.

It is already an icon and whether people love it or hate it, they talk about it.

I've learned that we know a lot about designing and making ejection molded footwear and acquired an unrivaled expertise in materials technology and manufacturing techniques for making high quality, extraordinarily comfortable, fun, casual, footwear at affordable prices.

We believe Crocs are perhaps the perfect product for a recession or a world in which value and simplicity are rapidly replacing avarice and over-consumption.

I've learned too that women and kids love the products.

This is a key market for Crocs.

It is impossible not to smile when you see little children running about airports and malls in multicolored Crocs.

Crocs make people happy.

What a great quality for any brand and our kids business, by the way, is absolutely doing very well at the moment.

Finally, I found a company in which there are some great people who understand the brand and who are as excited as I am about the possibilities presented here.

Over the past two months, I visited a number of our key customers and I've been engaged in a bottoms up look at the Company which is still going on.

As a result, I'm realigning our business priorities for the next six months and certainly beyond.

Let me just go through them.

They are first of all the wholesale business, especially in North America and Europe.

We've lost volume in the past 12 months in these critical channels with our major wholesalers.

We have to rebuild those relationships with our customers and we've already started on that process.

Cash.

Russ has already described how we successfully renegotiated our banking arrangements which are modest, quite frankly, for the size of company.

We provided with a headroom to put in place new longer term financing.

Capital spending has been strictly controlled and our receivables are certainly among the best in the industry.

At the end of first quarter, typically one of the more difficult from a cash standpoint, we actually exceeded our cash forecast and, as Russ has told you, ended the quarter with cash of over $50 million.

We should expect to improve this as we move into our most active selling season.

Inventory.

We've discussed that.

I think it's probably our biggest single issue at the moment and there's one of the outcomes of overzealous production, perhaps, and decline in sales.

We must continue to reduce the excess inventory.

It's been an ongoing process and while good progress has been made, there is still a lot of work to do here and most critically to complete the process this year without damaging the brand and our relationships with key retailers.

Moving this inventory is not only critical from the point of view of cash management but the costs of holding the inventory is now one of the key factors driving up our cost space.

We intend to move this inventory responsibly into the appropriate markets in the next six to nine months or we'll scrap and/or donate it to worthy causes continuing a practice that through our Soles United program of which I think the Company is justly proud.

Our goal is to improve our inventory to three to four turns a year in the next 12 to 18 months.

Costs for us again, is [totaled up with what doing there].

We'll continue with our efforts to attack the fixed and variable cost space and bring it in line with our current and projected revenues.

It's an ongoing process that started more than 12 months ago which we intend to accelerate during the rest of this year.

Distribution.

Our products have been over distributed in a number of markets.

A key and immediate priority is to work with our wholesale account base particularly in Europe and North America to rationalize and set a focus on our distribution strategy.

Customer Service.

We're committed to improving the level of service to our retailers and loyal consumer base and will continue to invest in the systems and processes necessary to raise our performance to best in class industry standards.

We are catching up with our systems, which lack the enormous growth that we enjoyed in the earlier years of this company.

Finally, product.

Product is absolutely key.

At the end of the day, this is a product business.

We will successfully complete and sell in the spring/summer 2010 product line, which has a number of interesting new additions and some attractive updates to our core product line.

We have to step up the development of an exciting new line of products for the fall and winter season in 2010, which has typically been one of our weaker seasons.

The spring/summer collection for 2010 is going to be supported by a new advertising and merchandising campaign which we've entitled, The Feel Good Revolution, which we feel captures both the spirit of the brand and the mood of the market by spring 2010.

Our product strategy will continue to leverage the core qualities of Crocs brand --comfort, lightweight, colorful, and fun and to remain connected to the qualities that make Croc shoes Crocs.

At the same we recognize the opportunity to elevate and broaden the appeal of the Crocs design and our knowledge of ejected molded footwear into new products and markets.

We plan to also focus casual shoe collections at everyday prices for range of leisure and what I would describe as aprs sport activities and while our primary target in the near term will women and kids, we intend to progressively evolve the line to offer a wider collection of shoes which appeal to men and boys.

We intend to continue to develop shoes for two important vertical markets, the medical market and the work market, which have both been quite successful businesses for us.

We also recognize the need to more closely align our shoe collections with then needs of our retailers and the evolution of our channel strategies.

Direct retail is a key part of our business today.

It will remain a key element of our strategy and determine the correct balance between wholesale and retail in the strategic imperative which we will continue to evaluate.

It's a pretty full agenda, certainly.

The retail environment is tough and unforgiving at the moment and it's difficult to predict sales trends with any certainty.

For the rest of this year we will focus on the things which we can control in order to further strength in our balance sheet and improve the financial health of the company.

In view of the changes we are planning for the business and the difficulty in predicting consumer demand, we are now looking at returning to profitability next year.

We intend to concentrate on taking the actions necessary to get back on the fairway and to develop a deliberate path to sustainable future growth.

I'm excited about the possibilities for Crocs and my experiences in the past sixty days have done nothing to diminish my enthusiasm for the possibilities presented by this extraordinary and unexpected global brand, which I believe has the potential to deliver significant value for shareholders in the year ahead -- the years ahead.

Thank you, very much.

I'd like to open the session for questions.

Thank you, sir.

(Operator Instructions).

Our first question is Jeff Mintz with Wedbush.

Jeff, are you there?

I'm here.

Can you hear me?

Yep.

Hi, Jeff.

Can you hear me now?

Yes, go ahead.

Okay.

I'm not sure what happened there.

Thanks.

John, a couple of questions starting with your last comment about returning to profitability in 2010.

Do you see that as being a possibility of profitability for the full year or anticipate just getting back to profitability at some point during the year?

For the full year.

For the full year.

Okay.

Great.

And then a couple questions just on the various regions.

Obviously, Asia turned around significantly from Q4 into Q1 with a gain actually in revenues in Q1.

Can you just talk a little bit about what happened there and what led the turn?

I think there are a number of factors there.

I think that we have very good presence in Asia, first of all, and we've got to remember that of all the world's markets, the Asian market is probably a hell of a lot better than others and I think we've been able to take advantage of that.

We have a good marketing team over there.

We have a very good retail presence and a lot of that growth has come from our retail business and I think it's been very encouraging.

What's the numbers of points -- the retail points of sale that you have over there for your own stores?

Just hold on -- I'm going to turn through to get that number.

We have -- in total right now, we have in Asia 116 at the end of the first quarter.

Of which 65 are shop-in-shop, 44 are our own stores and then we've got a couple of outlet stores there.

We don't do much in the kiosk business there.

Okay.

Great.

And then in Europe, it sounds like you're really sort of battling kind of the knockoff issues.

What is the status of kind of your legal challenges or enforcement of your -- your intellectual property rights and what's the potential for that market?

First of all, we are continuing to enforce intellectual property rights there and secondly, it has been a very difficult market as you know and certainly at my expense and Reebok is the same.

It is very prone to knockoff because the price levels tend to be higher there.

So any product that gets released by multiple sources around the world often ends up in Europe.

So it has been particularly tough there.

I think we have done a very good job certainly of cleaning up market [share].

And I think -- we've changed the management team.

We've reduced costs there.

And I actually feel good about the possibilities for Europe in the coming year.

Okay.

Great.

We're coming back from a fair way back, but I think we're well positioned to start to develop that business again.

Okay.

And then, finally, in the US, can you just talk a little bit about what's happened to the wholesale distribution here?

Have you cut back on the number of customers, the number of doors and where do you see that going over the next 12 months or so?

We certainly took some pretty active steps, I guess, about a year ago -- 18 months ago to cut back on the number of doors that we were selling through.

I think that the demand that during the early days appears to have been so huge that -- and the product did get pretty widely distributed.

We have reduced that now.

We've got that much better under control.

The retail business and the internet business have both picked up pretty well in the Americas.

And it's going to take a little while to work our way through that strategy and I guess we're beginning to make progress on it.

Okay.

Great.

And then just a question, kind of a small question on the share count.

It looked like it jumped significantly or did jump significantly from Q4 into Q1.

What was kind of the driver of that?

Jeff, I don't think our share count jumped significantly.

I'm not sure what you're looking at.

Well, I mean I have it up 1.4 million shares between Q4 andQ1, obviously it's not a huge percentage but it's a pretty big jump in terms of just raw numbers.

The only thing, Jeff that would have changed on that would have been the awards that we put filings and some of the management that was hired and the management that was leaving.

Okay.

Did the tender offer, did that reduce the number of shares in this quarter or is that really going to hit in Q2?

Q2.

Q2.

Okay.

Well, thanks very much and good luck.

All right.

Thanks, Jeff.

You're welcome.

Thanks, Jeff.

(Operator Instructions) Our next question will come from Jeff Klinefelter with Piper Jaffray.

Yes.

Thank you, guys.

John, welcome and thanks for that very comprehensive overview.

Just a couple questions for you.

First off on your visibility into your second quarter top line guidance could you give us a sense for how much of that is prebooked versus how much you're leaving open for replenishment orders and maybe how you -- how that balance has evolved here over the last couple of quarters, really drilling down into the -- how you get to a confidence level of that range in this current retail environment?

Sure, Jeff.

This is Russ.

Let me answer that.

So right now the percentage of our business for spring/summer '09 selling season is prebooked versus our at once business is about 50% and we feel pretty good about that.

We've seen these sell through, as I mentioned on the call, of our new line really picking up here as the spring selling season have really gotten going in April and May in the warm weather is hitting all across the country and so we're feeling pretty good about that half of our business and that's traditionally about what we've run especially during our busy selling seasons of Q2 and Q3.

Okay.

And in Q1 you exceeded your top line -- your original top line forecast, which I'd imagine ended up being even stronger replenishment than you expected.

Was it primarily out of the strength of your own retail doors?

Was it the upside in Asia?

I mean, can you point to a few pockets of upside to buying that might be carrying over into Q1 or Q2 rather?

Yeah.

Well, Jeff, you hit both of them.

It has been our own retail business.

It was internet business.

And it was in our Asian business, which as John mentioned is heavily retail based.

In terms of retail doors that you're planning to open, obviously a key growth strategy for you.

Can you give us a sense for how we should think about modeling that going forward in terms of the preopening expenses required to get those open, in terms of how you have planned those to open throughout the balance of the year, is it going to be a consistent plan each quarter or are you taking a quarter by quarter wait and see in each market?

So, Jeff, that's a great question.

For the remainder of 2009, we're planning on opening up about another 34 retail locations globally and that breaks out as 7 retail stores primarily in Asia, 9 outlet stores primarily in the US, which we're already underway on and most of them are opening in Q2 and Q3 and I think we have one in Q4.

And we have 18 shop in shop slash kiosks so let me give you flavor of where those are located too.

Nine of those are in the US a primarily those are the outlets I referred to earlier.

22 of these are in Asia where we do very well with our retail and three of them are in Europe.

Okay.

Thank you.

The last question really focuses on the profitability formula.

Appreciate your comments on the distribution consolidation and that you'll really see the benefits in Q4.

But if we think about the gross margin SG&A, right sizing those for the current five-year business, I know that's not a big initiative to get both the gross margin rates back up and try to control expenses.

When -- is it Q4 when you see both SG&A and gross margin coming back into sort of the appropriate alignment with your current scale or can you give us a sense for the timing of some of your corporate expense cuts and when that would lead to that efficiency?

Sure.

So let me first touch on cost of goods sold area.

As I mentioned, we have inefficiencies right now in the consolidation of our warehousing.

We believe that we will end up with approximately five major distribution centers when we complete these actions in Q2 and Q3.

And so we will be in the US, Japan, China, Mexico and Europe and it's about a 50% reduction in both our square footage space and our distribution centers when we finish it.

And in fourth quarter, as you mentioned, Jeff, that's when we will see the cost impact in the reduction of these facilities and our cost of goods sold in our margins.

We do have cost inefficiencies as we are shutting down the multiple sites, for example, we have in the US and moving to one site that's in a duty free zone.

So we'll have those cost inefficiencies in quarters 2 and 3.

And those will impact us by about three points of the percent of sales in both quarters 2 and 3.

Then on the SG&A side, again, we've made very good progress there but the deleveraging of the revenue versus the SG&A cost has come down faster and we have more work to do as I said.

I mentioned the areas that we are focusing our SG&A reductions and we believe that we will see more significant reductions here as we go forward, however, that is offset in quarters 2 and 3 as you know of our sponsorship primarily driven by our ABP sponsorship where most of our expenses are in quarters 2 and 3 and that's another few million dollars that impacts it.

Okay.

Just want to feed you on your comment about being profitable, do you have a revenue target in mind in order to get profitability or does it depend on too many variables?

I think it does depend on too many variables, predicting revenues is like -- it's a difficult thing to do and so I'd rather not make a commitment about it at this stage.

Okay.

All right.

Thank you very much.

Good luck, guys.

Thanks, Jeff.

We will now hear from Reed Anderson with D.

A.

Davidson.

Good afternoon.

Hi, Russ.

Hi, John.

Russ, back on the sales piece, looking at ASPs being down almost 12%, is that kind of the right order of magnitude here over the near term do you think, A.

That's the first part of my question.

And secondly, is that more of a function of just kind of where the product mix is headed now?

Or is it a function of discounting?

Give us a flavor of what's driving this.

Well the primary factor driving that is as we were lowering our sales and were carefully selling in certain channels, we are discounting some of that product where that is being sold.

But again, those are primarily in international channels and select US channels.

That's primarily what's driving the reduction in ASP in quarter 1 over quarter 1 last year, the 15 over the 17.

Okay.

And then in terms of though looking out here if you look at your second quarter revenue range et cetera, I mean does that make sense if you see ASPs down that's order of magnitude over the near come here is a long thing?

We will see ASPs down in the second quarter.

You said we will see?

We will, yes.

Do you think it will be worse than the first quarter or roughly similar?

Similar probably, probably pretty flat through the first quarter.

Would you expect -- do you think you'd get to a point later this year where ASPs are close to flat or you think this will be a year we'll basically we're going to look at down ASPs the whole time?

I'm sorry Reed, flat from what?

Flattish, if we got -- if we end up in the fourth quarter of '09, do you think you'd get near where you were Q4 of '08 from the ASPs overall or do you think you'd still end up down?

I'm wondering if we'll see a recovery by the time we get back at the end of this year.

Yeah, I that our retail is growing as a larger percentage of our business and we do sell at full price there.

I think we're going to stay at almost flat year-over-year by the time we get to the end of Q4.

That makes sense.

I just wanted to ask because given what you're doing on the retail side and growing if you would.

And then to that brings up the question, if you look at retail on an apples to apples or same store, however you'd want to portray it but what would that have looked like?

Your retail business overall was up 60%, but what would it have been on a comparable unit or comparable store basis technically?

Our comps are down slightly in the first quarter in our kiosks, our stores and our outlets are almost flat.

In the second quarter we're comping up in all areas right now so that's very encouraging as we're entering our busy season.

Okay.

That's good.

And then back to the gross margin question.

You talked previously about, the warehouse consolidation component, you said it was about 3 points it sounds like.

But it seemed to me at least in the first quarter, I mean the big (inaudible) is ASPs.

Is that correct?

It's a combination of those, Reed, you're correct.

But they're similar in magnitude?

They are.

Okay.

And so if we dial that in as we think going forward, I mean, realistically, we're going to be looking at still year-over-year significant drop off in gross margin here for the balance of the year.

Does that make sense?

It does make sense in the second and third quarter especially as we're going through the consolidations.

Okay.

And then the last question I had was on the FX side, the foreign exchange, what is your thought because it a lot better I would have thought in the first quarter.

What are you doing there?

What should we -- how should we think about that piece on the P&L just over the near term.

We spent a lot of time focusing around the world where our inner company balances our and what tax issues are around those and we've significantly lowered the exposure we have in those areas by lowering our inner company balances significantly.

So we feel that we're in a better position to mitigate the FX on a going forward basis.

However, we do do business as we said earlier in 125 countries and we are exposed on that.

But we believe we've taken very significant action at reducing that foreign exchange exposure.

Okay.

That's it for me.

Good luck.

Thank you.

Thanks, Reed.

We will now hear from Mitch Kummetz with Robert Baird.

Let's see.

A few questions.

John, just going back to your comment about achieving profitability next year.

I now you don't want to put a sales target to it but is profitability predicated on sales growth in 2010?

Do you think you can get there with flat sales or even down sales?

No.

I mean I think, I'm not certain that where it showed -- our average citing sales performance next year and the intention would be to have a modest sales plan next year and to get there by hitting our margin and taking cost out of the business.

And then as far as the need to take costs out of the business, I mean it seems to me that that's the biggest hurdle to profitability at this point.

I mean I look at -- look at your SG&A line.

You were at nearly $370 million last year.

I mean that number was as low -- I want to say just it was just over $100 million two years ago, obviously, on a much smaller volume business.

But how much cost -- I mean dollar cost can you take out of this business.

Maybe, Russ, $72 million plus in this quarter, sounds like it's going up next quarter just due to the seasonal timing of spending.

It almost feels like a run rate of $300 million or so this year based on what it sounds like you're going to do in the first half so.

I mean how do we think about how (technical difficulty) you guys there?

Yeah.

We're there, Mitch.

I'm sorry.

Go ahead.

I've got it, if I was interrupted, so how do you think about that?

I mean how much cost can you take out of -- I mean continue to take out of this business?

So, Mitch.

Let me take that question.

We've made good progress on reducing our SG&A as we've gone through.

We've lowered 32% of our workforce.

We're underway.

But as John said, our inventory drives a significant amount of our cost structure, especially up in our margin and it also drives SG&A in certain areas such as the IT that support us, the operations that are supported, et cetera.

We're taking some pretty good actions here in the second and third quarters that are going to significantly impact that.

And then, it's kind of a catch 22.

As soon as your inventory is down to the level where you're warehouses are consolidated and your SG&A then can be impacted pretty dramatically by it.

So as John indicated in his comments, the inventory reduction is the key to our cost reductions.

Okay.

And we're going to be driving that pretty significantly.

We're also going to continue driving our cost reduction across all our disciplines including our administration et cetera, et cetera as we have.

The only thing I'd say just to add to that is, it's a big target.

Okay.

All right.

And then, Russ, on the options that were tendered, I think you said about $2.3 million.

So what is the impact on the P&L on a quarterly basis?

I mean it doesn't really hit the share count right?

These are all out of the money options.

I mean there's an SG&A expense reduction that goes along with this, right?

That's correct.

So it's a $16.3 million charge in the second quarter of future comp -- deferred comp expense that we will not be taking in a quarterly basis.

I've got to take a look at that, Mitch.

I can provide answers to all of you on that shortly here, but it's about $400,000 or $500,000, I believe because it goes over the life of the (inaudible-multiple speakers).

Okay And then a two last questions.

I mean I'm having a difficult time trying to model the tax rate and so I'm sure it's difficult for you guys as well, but how should we be thinking about that the second quarter and then on a go forward basis?

So, Mitch, obviously the tax rate is based on the provisions of where you make your money and where lose money and where you can do loss carry backs to recoup previous taxes paid and right now as you get to small losses in some countries that were taxed, you tax rate becomes pretty goofy.

Our tax rate that we started the year at, I believe you and I and others have discussed, have been around 31%.

It's probably not a good barometer to be using when we're at a loss in our US position right now.

Okay.

Our tax rate to be applying is probably a slight tax rate at this point in time.

Okay.

And then just a last question on the retail business.

You seem have some good success there.

Can you talk a little bit about the profitability of that business?

We don't provide profitability on those segments at this time, Mitch.

But I will tell you that we watch our retail business very closely.

We have hurdle rates for our kiosks, for our stores, for our outlets and as you know, we're not afraid to close them if they're not performing well and the ones that are doing well, for example outlets are doing very well and we're going to dial that up a little bit.

The advantage we have there is we do run the costs very tight and we do sell at full price.

Now in the outlets, obviously, we mark that down, but still, we're making significant margins in that area.

So we're still managing retail very closely.

We expanded retail in 2007 2008 globally very rapidly and we're expanding that pretty carefully.

We are tiling down that expansion, as I just went through a moment ago on the previous questions, in 2009.

And we're carefully examining it, but it appears to be a very solid channel because we, the consumer can see a full array of our products and the average consumer that visits our retail channel purchases three to four pairs.

So we do see very positive trends out of it.

So we're going to watch that very closely going forward.

Mitch, one of the key strategic things that we need to determine over the coming months is exactly what the mix is between retail and wholesale.

There's to getting that balance right is non-trivial and has quite big implications on how we move forward.

But one of the things that is clear is that the brand shows up very well when it's presented at retail on mass.

We've seen that in Asia.

Some of our stores look very good there.

We have a very successful store on Columbus Avenue, you can see it and it looks good and so I was when I first joined the Company was somewhat skeptical about retail, but I've become much more positive about it during our strategies since I joined the company.

Okay.

Good to hear and then, just a quick housekeeping, CapEx for the year?

As we said, we're not providing guidance Mitch.

We're reducing our CapEx at least 50%

Okay.

Over last year.

All right.

That's great.

I appreciate it.

Good luck.

Thank you, Mitch.

We do have time for one additional question.

We will now hear from Jim Duffy with Thomas Weisel.

Yeah.

Hello.

This is actually [Christian Mission] for Jim.

And I was wondering if you could talk a little bit about how you see seasonality of the business with greater reliance on retail?

Sure.

Well, seasonality has been a little different since the company had such explosive growth rates in 2005, 2006, 2007 and into 2008 in our seasonality.

But obviously, our third and fourth quarters are our bigger quarters.

We did have a peak season in 2007 with the Mammoth.

So -- but our second and third quarters are our peak seasons and will continue to be.

Okay and just circling back on Mitch's question about the tax rate, you said a slight tax rate for the full year or for second quarter?

It's very unpredictable right now.

For the second quarter, our tax rate we think will be a slight tax rate, 5% to 10% and that's all the guidance we can give at this time.

Okay.

All right.

Thank you, very much.

You're welcome.

Thank you.

Okay?

Okay.

And that does conclude our question and answer session, Mr.

Duerdon, and I'd like to turn the conference back to you for any closing or additional comments.

Okay.

Thank you.

I don't think I really have anything to add.

Thank you for joining the call.

I look forward to the opportunity to meet with some of you in the not too distant future and share with you more about the company.

Thanks so much.

And thank you, everyone.

That does conclude today's conference.

We do thank you for your participation.

You may now disconnect.