卡洛馳 (CROX) 2009 Q3 法說會逐字稿

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

Welcome to the Crocs, Inc.

Fiscal 2009 Third Quarter Earnings Call.

(Operator Instructions) I would also like remind everyone that the conference is being recorded.

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

Eastern time.

I will now hand the call over to Jennifer Almquist, Crocs' Director of Investor Relations.

Please go ahead.

Thanks.

Good afternoon, everyone, and welcome to our third quarter earnings conference call.

Happy to have you with us.

On the call today are John Duerden, Crocs' President and CEO, and Russ Hammer, Crocs' CFO.

Earlier this afternoon, Crocs announced its third quarter 2009 financial results.

A copy of the press release can be found on the Company's website, www.crocs.com.

Reconciliations of the non-GAAP measures mentioned in the press release and on the call today have been provided and can be found on the Investors Relations section of Crocs' website and in this afternoon's press release.

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 Safe Harbor provisions of federal securities laws.

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

Crocs cautions you these statements are subject to a number of risks and uncertainties described in the Risk Factors section of our 2008 annual report on Form 10-K, as well as other subsequent filings with the Securities and Exchange Commission.

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

Those listening to this call are advised to refer to Crocs' annual report on Form 10-K, as well as other documents filed with the SEC for additional discussion 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 call over to John Duerden, Chief Executive Officer of Crocs.

Go ahead.

Thank you, Jennifer, and welcome, everyone.

When I first spoke to you in April of this year, the end of the first quarter, I frankly didn't expect to be sitting here today announcing that we have become profitable again for the first time in 12 months.

And I would say that I am very proud of the work that the Crocs team has done to get us here ahead of schedule.

And although the $0.25 in earnings contains an unforecasted tax benefit of $0.16 a share, the remaining $0.09 results from solid execution of our recovery plan.

By the way, I don't wish to minimize the lengthy effort required to identify and secure the tax benefit, and I'd like to give credit here to some smart guys in our tax department who planned and worked on this for some time, and who demonstrate the in-depth strength and resourcefulness of this management team..

I think most gratifying in these results is the top line.

We are reporting revenue of $177 million versus the top end of our guidance of $160 million.

This represents a small growth over the prior year, but it has been achieved in very difficult markets in which certainly in Europe and the United States we're still cleaning up distribution and regaining the confidence of our major customers.

And also at a time when the Company is experiencing significant change in many areas of the business.

Our Asian business continued to grow at a healthy 7% in the quarter.

When we couple this improvement in sales with significantly improved gross margin, continued reductions in our cost base, and further reduction in our impaired inventories, I think we can derive some modest satisfaction from this quarter's results.

The strategy seems to be working.

Even excluding one-time items and higher than normal sales of impaired units, we were still profitable and continue to make meaningful progress towards our goals.

There is still much work to be done before we can declare victory, certainly.

While we still have obstacles to overcome, I believe that these results underscore the extraordinary resilience of the Crocs brand and the solid progress we are making towards our goal of returning to long-term sustainable growth and profitability.

Most critically, I believe that it underlines the determination of this management team and everyone in the Company to be successful.

Let me now review a few of the highlights in the quarter and then Russ will walk through the numbers in detail.

Our third quarter revenue increased compared to last year and is a sign of the continued brand strength through our peak selling season and into the fall season.

Our direct to consumer, that is the retail and Internet channels, increased 44% this quarter compared with the 2008 third quarter, reflecting our continued retail investment and the high level of consumer appeal of these particular channels.

Direct retail is a valuable new source of business and it's also a means of managing our inventory more effectively.

In addition, having our own retail outlets provides us with direct access to the consumer, allowing us to present the full breadth of the product line at full retail prices.

Both of these channels will play a key role in our future marketing strategy.

We are now able to leverage our positive experience in these channels into our wholesale channel, deploying merchandising teams into our key accounts and presenting broader collections of products.

In many cases, these in-store merchandising activities have resulted in dramatic increases in sell-through volume in those stores.

On the cost side of the equation, we are progressively realizing some of the benefits from our recent initiatives leading to improved gross margins and resulting in lower SG&A, and Russ will walk through the specifics in a minute.

But I should point out, this quarter we were profitable at the operating margin and at the bottom line.

That said, as we move into our traditionally weaker season, the fourth quarter, these profitability trends will be difficult to maintain.

Recovery is not always a straight line, particularly in a traditionally seasonal business like ours, and we must also continue to invest in those systems and processes which allow us to improve our level of service and will permanently reduce our cost base.

In addition, we've got to sustain our focused marketing programs necessary to strengthen the brand, support our wholesale channel, and continue with our direct retail expansion.

Although Q4 may not repeat some of the successes of Q3, I am pleased to report particularly encouraging worldwide pre-bookings at wholesale of our spring-summer '10 product line led by the new Crocband Collection.

Of particular significance, year-over-year, spring-summer '10 wholesale pre-books in the Americas are up by 130%, Europe by more than 30%, and Asia continues to perform well with pre-bookings at 61% over the same period last year.

In addition, I believe we are making good progress in regaining momentum in the critical North American market, which I will speak about in a minute.

We have re-established relationships with a number of important accounts.

We have launched a major and increasingly successful program to regain the independence.

Our retail and Internet businesses continue to gain strength.

But before I delve into the operational highlights, I'll turn the call over to Russ, who will walk you through the financial details.

Russ?

Thanks, John.

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

Before I give the details, I'll point out that as I've done in the past, I will provide year-over-year comparisons for context.

However, where it makes sense to do so, in order to provide clarity on our progress, I will also provide some sequential comparisons as well as channel and geographic breakdowns to provide additional clarity.

We were very encouraged by our third quarter performance which exceeded our initial expectations.

On a GAAP basis, third quarter net income was $22.1 million, or $0.25 per diluted share, and included a tax benefit of $14.4 million related to a change in our tax structure that I will discuss in more detail shortly.

We also have exceeded our revenue targets again this quarter, the third quarter revenue coming in at $177.1 million, or an increase of 2% over third quarter of last year.

Our revenue included approximately $11.5 million of impaired product sales as we executed against our plan to work through the inventory that we wrote down back in the third quarter of 2008.

Somewhere into the second quarter we sold much of this product in our consumer direct channels above the impaired value, which positively impacted the gross margin by 229 basis points.

Now, looking at revenue by channel, we again saw robust year-over-year revenue increases in our Company-owned retail and Internet platforms.

Revenue generated by Company-owned retail was $53.9 million in the third quarter of 2009, up nearly 40% from $38.6 million in the third quarter of 2008.

Internet revenue increased 61% over Q3 2008 to $16.1 million in Q3 2009.

Combining revenue from Company-owned retail and Internet, our direct-to-consumer revenue, constituted 40% of our total revenue in the third quarter.

As we have mentioned on previous earnings calls, we believe that the success in these consumer direct channels is largely driven by our ability to better merchandise our whole product line to the end customer, whereas, only a portion of the portfolio is currently represented in the wholesale channel.

That said, we have also learned some key merchandising best practices for our own retail stores that we're now sharing with our wholesale accounts in an effort to strengthen relationships with our key wholesale customers.

John will touch more on this in a moment.

As a matter of housekeeping, we ended the quarter with 310 Company-owned retail locations worldwide, up from 262 in third quarter 2008, a flat to the 310 we reported in second quarter 2009.

One of the changes we've made to our retail strategy has been to close certain kiosks that do not meet our financial hurdle rates and our location strategies.

We are instead selectively opening more branded stores.

The reason for this is twofold -- first, we have found that wholesale reception to having a branded store, even in the same mall or retail location, is much more favorable compared to having a kiosk in that same retail location.

Secondly, we believe that the branded store strengthens our brand image and our perception as being an enduring brand.

As a result, we have lowered the number of kiosk locations and added retail and outlet stores for this quarter.

Broken down into store type, we had 116 kiosks, 62 store-in stores, 49 outlet stores, and 83 full price retail locations as of September 30, 2009.

Now, revenue from our wholesale channel declined 15%, or $18.4 million to $107.1 million during the third quarter of 2009.

Some of this decline is due to intentional efforts by the Company to reduce the number of wholesalers, particularly those in the US that are selling our product.

By geographic region now, third quarter 2009 sales in Asia continued to be strong, increasing 7.5% over third quarter of 2008 to $68 million.

This increase was again driven by strong retail and wholesale channels in the region.

Asia Q3 '09 sales represent 38% of our global revenue.

Our Asia 2009 spring-summer pre-book orders are up 61% over this time in 2009.

We continue to see this as an area of long-term opportunity for the Company.

Sales in Europe increased 2% too $29.9 million in the third quarter of 2009 compared to the third quarter of 2008.

We have seen some encouraging growth in this region in both our retail and Internet channels, which together increased more than 100% this quarter, compared to the third quarter in 2008.

This growth was partially offset by continued challenges in the European wholesale channel.

During third quarter '09, sales from our Europe region represented 17% of our global revenue.

Our European spring-summer 2010 pre-books are up over 30% over the same period in 2009.

While this was a good revenue quarter for our European operations, we still face significant challenges in this region.

Also, as a reminder, fourth quarter seasonality has traditionally been much more pronounced than in other regions.

We're still taking strategic actions in this region that we expect will benefit the business in the long run.

Revenues from the Americas region were down 2.8% from third quarter 2008 to $79.3 million in third quarter 2009.

Americas Q3 '09 sales represented 45% of our global revenue.

We were particularly encouraged this quarter by the robust growth in the Americas consumer direct channel, which represented 54% of total Q3 regional sales.

Our Americas wholesale channel continued to be challenged this quarter.

However, we are encouraged by our Americas region spring-summer 2010 wholesale pre-books, which are 131% higher than this time last year.

We take these as encouraging signs for 2010.

Now, a few more housekeeping notes.

Q3 2009 footwear sales accounted for 95% of our revenue, and represented 9.5 million units for an average selling price of $17.69 versus an average selling price in Q3 2008 of $19.33.

Our new products which represented 27% of Q3 '09 units had an average selling price of $21.54.

Core products, which include Beach, Cayman, kids Cayman, Athens, kids Athens, Mary Jane, girls Mary Jane, Mammoth and kids Mammoth represented 34.7% of our unit sales.

And sales of our Classic, which include our Beach and Cayman models, represented 15.7%.

These trends continued to indicate that the consumer preference for both our new product portfolio as well as our core and Classic products.

As you know, in Q3 2008, we impaired a portion of our inventory that we believe would not sell, or sell at a discounted book value.

Since that time we have been executing on a strategic plan to thoughtfully reduce our inventory while being careful not to harm our wholesale customers.

We successfully executed against our strategies to sell these shoes we impaired in 2008 primarily through our global consumer direct channels.

We will sell many of these shoes at higher prices than we had initially anticipated.

The effect this quarter was not as dramatic as in Q2 of this year.

However, for purposes of ascertaining the steady state of the business, we are disclosing the effects of our revenue average selling price and gross margin in the quarter.

During the third quarter of 2008, we generated $11.5 million in revenue from the sale of impaired units, bringing total 2009 impaired unit sales to $53.5 million year-to-date.

Because we were able to sell these products at prices substantially higher than the realizable value we had previously estimated, the effect was accretive to our gross profit during the quarter by $9.6 million, or $41.5 million year-to-date.

Excluding impaired unit sales, our average selling price was $18.52.

During the third quarter we lowered the number of previously impaired inventory units on hand from $2.4 million to $1.2 million units.

We are nearly 90% complete in our plan to successfully sell this inventory.

As with any business, we expect to always have a small quantity of end-of-life units in inventory.

We expect impaired unit sales to be a relatively small portion of our business going forward.

Gross profit now for the third quarter of 2009 was $89.9 million, up from $2.4 million in the third quarter of 2008.

As I mentioned probably, in the third quarter 2008 we impaired a portion of our inventory that we believe would not sell or would sell at a discounted book value.

As a result, we recognized charges totaling $70 million in our cost of sales in Q3 2008.

In addition to the impact of impaired units, as I mentioned previously, the Q3 '09 increase in profit margin over Q3 2008 was driven by cost savings resulting from the consolidation of our warehouse base in the US, supply chain rationalization by sourcing higher import duty products from our Company-owned NAPTA duty-free manufacturing facility in Mexico, and from favorable changes in product mix primarily driven by our consumer direct channel.

While we're still in the process of strategically consolidating our worldwide warehouse footprint, our preliminary cost-saving estimates for the back half of 2009 are approximately $10 million.

For 2010 we estimate these cost savings to be approximately $18 million.

These estimated savings are dependent on certain variable factors including success of our direct ship program in volume.

Our third quarter SG&A expense was $77 million compared to $104.4 million in Q3 2008, as a result of currency swings and ongoing cost reduction efforts.

Year-over-year we experienced a $15.6 million swing in currency gains and losses, especially in Q3 2009.

We reported a net gain on foreign currency translation of $1 million, and in Q3 2008 we reported a net loss of foreign currency translation of $14.6 million.

In the quarter we also incurred $4 million in one-time non-run rate cost inefficiencies primarily related to closing on productive agencies and distributors.

We have made good progress on our strategy to right size and reduce our wholesale SG&A cost structure to align with reduced channel revenue.

SG&A as a percentage of revenue has declined from 59.9% during Q3 2008 to 43.4% in Q3 2009.

This marks the third consecutive quarter of sequential declines in SG&A as a percentage of revenue.

We are continuing to manage down our total SG&A cost structure while prudently investing in our consumer direct business, in our systems, in our product and marketing support.

We look forward to sharing our progress with you in future earnings calls.

Consumer direct SG&A now represents nearly 40% of our total SG&A spend.

Included in our Q3 2009 SG&A was $27 million of retail related costs including salary, space and other retail related costs.

We also had $3 million in Internet related SG&A costs.

As our turnaround strategy evolves, we continue to look critically at our business assets and our future value to our ongoing business.

As a result of our ongoing assessments this quarter, we incurred $1.7 million in impairment charges related to the write-off of obsolete molds and tooling, certain IT systems that have been replaced in the quarter, and other tangible and intangible assets for which we foresee no future value.

During Q3 2009, we recognized expense of $2.2 million included in the operating income related to donations we made for our Crocs Cares program, with a corresponding gain related to the donation of $800,000.

You can see from the tables in our earnings release that the related expense is recorded as item operating income, but gain is reported below the line.

We donated approximately 563,000 pairs of shoes in the quarter.

We are very proud to have the spirit of giving back as part of the Crocs culture and reputation worldwide.

We went into the third quarter 2009 with GAAP operating income of $9 million compared to an operating loss of $136 million in the same quarter 2008.

We are very encouraged by these quarterly results and are pleased to see that our cost-saving initiatives are starting to show some long-term benefit.

As disclosed earlier, we reported a one-time tax benefit of $14.4 million this quarter.

This benefit had multiple components which are broken out more specifically in our 10-Q filings this afternoon, and was driven largely by the culmination of an 18-month project to restructure the Company's international operations and cost-sharing arrangements.

Going forward we anticipate this strategy change will lower our tax expense by approximately $7 million annually.

On a GAAP basis we reported net income of $22 million, or $0.25 per diluted share for the third quarter of 2009, compared to a net loss of $148 million, or $1.79 per diluted share in the third quarter of 2008.

GAAP third quarter 2009 net income includes a one-time tax benefit of $14.4 million related to a change in the Company's corporate tax structure, and a $1 million gain from foreign currency exchange fluctuations, offset by $2.2 million in impairment and restructuring charges.

Now, turning to the balance sheet.

We continue to execute strong asset management and leverage the strength of our balance sheet.

We ended the quarter with $76 million in cash, a 47% increase from $51.7 million at December 31, 2008.

Notably, our cash balance remained relatively flat from Q2 to Q3 of this year despite paying off the remaining $17.3 million in debt we had on our books as of June 30, 2009.

It is important to note that cash generated from operations in Q3 2009 was $21.9 million, despite paying off the debt.

Our disciplined approach to asset management resulting in day sales outstanding receivables at 34.2 days, down from 37.5 days during the third quarter of 2008.

As of December 30, 2009, our accounts receivable balance was $65.8 million.

Net capital expenditures which includes cash paid for fixed and intangible assets, net of asset sales for the third quarter totaled $6.1 million, a 67% reduction from third quarter of 2008.

Year-to-date our net capital expenditures were $20.2 million.

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

Our inventory balance at the end of the third quarter was $113.7 million, down 20% from December 31, 2009.

Compared to second quarter this year, units in inventory were down despite a slight increase sequentially on a dollar basis.

This slight increase is due to the fact that our fall line typically has a higher carrying cost in inventory.

Notably, we kept our inventory turns to three, which is industry norm.

As you know from our press release in late September, we have secured a net asset-backed revolving credit facility which provides for up to $30 million in revolving loans.

This facility provides us with some additional liquidity and flexibility as we execute against our strategic initiatives and facilitate the Company's turnaround.

As of the end of September we had minimal borrowings against this line primarily consisting of loan transaction fees, and we are in compliance with all loan covenants.

Now, turning to guidance, we expect to generate between $110 million and $115 million in revenue during the fourth quarter, and expect a diluted loss per share between $0.20 and $0.15, excluding any one-time charges, charitable contributions and FX changes.

Like last quarter, guidance includes the effects of impaired unit sales for the fourth quarter.

As a reminder, our business has historically been weighted more heavily toward spring-summer from a seasonality perspective given design and functionality of the majority of our footwear styles.

Overall, we are very encouraged by the continued progress we have made this quarter.

We exceeded our sales expectations again this quarter led in large part by our consumer direct channels.

Our spring-summer 2010 global pre-bookings are strong and are significantly higher than they were last year at this time, which is certainly an encouraging sign of improved channel health going into 2010.

We continue to see improvements in SG&A and gross margin.

In short, we are delivering against our commitments and against our strategy.

Good progress.

However, there is still much work to be done.

To discuss this in more detail, I'll turn the call back over to John.

Thanks, Russ.

I'll give you a quick operational update and progress on some of the items in our turnaround, and then we'll open up the call for questions.

I'd first like to talk about what we're doing to improve our wholesale operations in North America.

Earlier this year you will recall that we had set as one of our highest priorities recovering our position in wholesale in North America, especially in the United States.

It is critical in my view that the Crocs brand is strong in its home market, and we have attacked this issue vigorously on several fronts -- cleaning up our distribution, improving our in-store presence, reducing our inventories, restoring our relationship with a number of important accounts that we had lost, and implementing a specific program to restore our business with a key independent retailer.

We have made good progress in a number of these areas and I believe the success of our spring-summer pre-books is an early indication that we are regaining traction in the critical US wholesale market.

This again was reflected in a small increase in Q3 sales and US pre-bookings, as Russ has already indicated, for spring-summer '10 I the United States are up by 60%.

I am also pleased to report that the difficult European market is beginning to respond to the actions we are taking there, and I am even more delighted to say that our Asian business remains strong, as we have already indicated, with upside opportunity in the future.

I would like to talk for a moment about product.

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

It is a business in which Crocs has been a key innovator, even if it has not always been appreciated by the fashionistas out there.

But product remains at the center of our future strategy.

We are redefining our point of view, we are creating fewer, more compelling collections, which will draw heavily on some of our most successful styles in recent years.

Crocs now is introducing 20 styles that have sold more than one million pairs each, and Crocband is well on its way to becoming the 21st.

And we have two other products in the wings for spring-summer '10, the Yukon and Electro, that we expect to join that exclusive club shortly,

We will continue to innovate around these four styles which reflect the brand's DNA -- comfortable, affordable, colorful and fun, while at the same time bringing fresh ideas to the market.

We are also working on a more compelling line for our 2010 fall-winter collections, which has always been a light quarter for us, but we hope we will mitigate some of the seasonality we have historically had in this business.

And over the past few years we have successfully introduced several products that can be worn comfortably in colder conditions, like the Mammoth.

And more recently the new fall styles for women, the Gretel, Lydia and Lily Winter.

For girls, the Dawson, Powder Boot, kids Polar Blitzen.

For boys, Teton, kids Santa Cruz Corduroy, kids Blitzen, and kids LJ Plaid.

And for men, the Linden Boot, Santa Cruz Suede, Blitzen Corduroy, as well as our Kids (inaudible) by Crocs and the Jibbitz Shoe Channels.

We've put a big effort actually into improving our product line for this fall and that will continue and be increased for fall '10.

We are increasing our investment in product design and development capabilities in people, technology and marketing.

Product is key to our future.

I'd like to talk a little bit about our consumer direct business, which has really exceeded our expectations.

It is clearly an exciting new element in our strategy and one on which we will continue to build.

The mix between retail and wholesale is somewhat distorted by the recent decline in the wholesale business.

In the future, we expect to move both of these businesses in parallel, but the mix between the two has important strategic implications for the Company.

We are currently evaluating our strategy here and we intend to progress the expansion of our retail business deliberately, adhering to strict financial disciplines with respect to return on investment and operating metrics.

The ultimate mix between retail and wholesale with also the allocation of costs between gross margin and operating margin from that which I have previously indicated.

Our longer term goal, however, continues to be an operating margin in the mid-teens.

Internally, we have made significant investments in establishing the systems and processes that we believe will provide better customer service going forward.

Our IT-related undertakings alone are substantial.

We are currently implementing four new systems.

They are new state-of-the-art warehouse system, a new order management system, a new e-commerce solution, a new point of sale software for our Company-owned retail stores.

Implementing all four of these systems simultaneously is not a small undertaking, I can assure you.

However, I believe these are needed and valuable steps for the Company that will provide us with a cost savings, the customer service and revenue enhancement opportunities that we need to successfully grow the Company in the future.

We expect a complete installation of these systems during 2010.

The last point I'll touch on here relates to our cost savings initiatives.

Russ has already covered many of the cost savings that we have underway.

There are, I know, additional opportunities that we are exploring, and we will pursue these aggressively to provide us with the flexibility we need to succeed in this industry.

And we'll give you more details on where we expect those cost savings to come from as we get into next year.

I think you have heard throughout this call, we believe we have made a lot of progress in a number of areas.

That said, we are still in the midst of a pretty sizable turnaround, that as we outlined back in March, will last through next year.

And because there is still a lot of work ahead of us, particularly with regard to reducing our expenses, we will not be able to leverage our current operating platform to drive profitability during our lowest volume quarters.

Longer term, we are confident with the steps we are taking to reduce costs and reinvigorate our top line will help mitigate the seasonality of our business and increase the earning power of this Company.

With that, Russ and I will now take questions.

Thank you.

(Operator Instructions) And we'll go first to Jeff Klinefelter with Piper Jaffray.

Yes, congratulations, guys, on a great quarter.

Very nice job on the turnaround.

I wanted to ask about your bookings that you mentioned.

Very, very strong numbers for next spring.

I would imagine a part of this is the result of a greater percent of your spring-summer business moving into pre-book versus replenishment in season.

But could you put in perspective how we should be thinking about that in terms of overall growth of the Company going into the spring-summer season?

Go ahead.

Sorry, Jeff.

Yes, we certainly are encouraged by the pre-bookings, and that does reflect the higher percentage of our bookings than last year, certainly, and I think in other years previously.

I believe the pre-booking part of our strategy is a critical element.

We have in fact emphasized that through ourselves as of this year and through the terms and conditions that we provided to our major wholesale accounts.

And I think that it has obviously numerous benefits to us in terms of being able to pre-plan our manufacturing and also reduce the logistics cost of moving the product to the wholesaler.

So, we are encouraged.

We set out to do this and I think we appear to be successful.

John, just thinking about -- I know you're not prepared to get real detailed about 2010, but since you've joined the Company I think you've had different views of the return path toward profitability, and it seems that some of those -- certainly many of those have accelerated.

How do you view next year in terms of your ability to deliver profit at this point for the year versus at some point during the year, given this current run rate of revenue?

I think I would say, Jeff, I'm going to stay with the prediction that we made previously that we will be profitable at sometime during next year.

I think we have got some encouraging trends, but, you know, this is a tough market out there.

We still have quite a few actions to put in place, and the Company is still going through a transition phase, frankly.

So, I don't want to stick my neck out at this stage, and I'd stay with the previous prediction, that we will be profitable at some point during 2010.

Jeff, it's Russ.

I'll just add that I think with all the four major system implementation that we have going on, and the impact they have on us through well into second and third quarters next year has an impact.

Once those are all fully implemented and the learning curves are over and the efficiencies are coming, I think that's when we are going to start to see the return to the full year profitability, which will really be after we end 2010 and start into 2011.

I would add, Jeff, just to that very briefly that when you're looking at turnarounds and sort of testing the temperature, I would say that it's a lot more fun to be at a sales meeting recently than it was six months ago.

The guys are getting their tails up.

Yes, I'm sure.

John, you also addressed that the mix between gross margin and SG&A as it relates to your growth of retail, or balance of retail and wholesale, and I know that there is a distinct difference in profitability depending on how far you go with retail.

At this point, at the current run rate, you shared some relationships between your target gross margin and SG&A last quarter.

How do you see those playing out now into 2010 at this point?

Well, you recall that originally I said that we would hope to have gross margins in the sort of mid-40s with our SG&A costs at about 32%.

If you ask me to give a prediction based on current activity, I would say that we should have gross margins in the low 50s and probably SG&A probably somewhere around 36%, 37%.

And that's driven almost exclusively by the mix, the cost that we are adding in the business as we grow the retail business, and we're taking cost out of the wholesale business.

We have some further way to go in taking cost out.

There are a number of corporate costs we can attack more vigorously.

But actually getting a firm handle on that mix is a little difficult except that I think it will be more in line with the prediction that I just gave you than the one I gave you three months and even six months ago.

And, again, Jeff, that's a longer term goal that we are striving to.

But as John said, as we continue to add cautiously in the consumer direct channel, it changes higher margin, but does have higher SG&A with it, which -- but we still see the ability to get to that mid-teen operating profit as a very achievable goal long term.

Okay.

Just a couple of quick things and I'll let someone else get on.

The Asian business grew single digits this quarter.

Nice growth but slower growth than last quarter on a year-over-year basis.

Could you just shed some light on what's happening there?

Yes.

A big chunk of our business, as you know, is in Japan, and the Japanese market, I think, pretty well across-the-board is having a pretty rough time at the moment.

I noticed some of our competitor companies or our colleagues in the industry is having a tough time in Japan.

We have a substantial, well-grounded business in Japan, but it's not growing as fast as it was.

And we really only just started to build our distribution in China, so we're not yet seeing China taking up some of the slack.

But I expect the Chinese business to start growing faster, and then eventually we will start to grow, I believe, at a high rate.

Okay.

And just lastly, you split out your kind of three buckets of the product, new products, core and Classics and the percent of total that they each represent.

Could you just run through that one more time?

Well, did you give those numbers?

Yes.

I think Russ gave them to you.

I can tell you what the pre-orders are for next year in the United States, if you like.

I'll just cover that briefly since I have the number here.

Of the pre-orders in the United States business, 45% are new product introductions, which is quite healthy, led by Crocband, 35% are carryover products, and 20% are what we would call core products, which is the Beach, Cayman, kids Cayman, Electro and Olivia.

So, that gives you a forward look.

Russ will tell you what it was in the last quarter.

So, Jeff, to answer your answer, the core business was 39% from a unit basis, Classics were 18%, and kids were 29%, and new products were about 30%.

Okay, great.

All right.

Thanks, guys.

Congratulations.

Thanks, Jeff.

We'll go next to Mitch Kummetz with Robert Baird.

Yes, thank you.

A few questions.

Let me attempt to ask Jeff's first question about pre-books a different way, because obviously your reporting has very impressive pre-book numbers, but it's hard for at least me to put that in the proper context.

Could you either give us a dollar number to those pre-books or maybe mention what pre-books were as a percentage of your spring-summer sales for 2009, just to provide some context as to what those increases really mean?

So, Mitch, let me -- well, we're not going to provide any dollar guidance for 2009 -- for '10, I mean.

Overall, our spring-summer '10 is up about 50% over last year, if you look at it globally.

And you have to remember in first half last year, especially in the US wholesale market, the retailers were in an extremely tightened down mode, take down their inventories, very cautious.

The economy was -- and I think there is a combination of, A, their confidence with us has certainly improved.

We've gotten channel inventory levels down, we've worked our merchandising programs with them, we've had personal customer visits with all of them, and we're starting to gain back the trust and confidence.

And I think number two is our retailers are starting to get a little healthier as well.

Okay.

And then on your SG&A, so it was down around $26 million for the quarter.

Russ, you mentioned that it sounded like about $16 million of that was a swing in FX?

Right.

What is your expectation for that in Q4?

I'm guessing you would anticipate a benefit to SG&A on FX again, right?

Right.

Well, we don't guide FX, but I think what you're referring to, Jeff, was the FX hit that we had last year in Q4 in SG&A.

Right.

What was it in Q4?

Can you remind me what it was in Q4 last year, what the hit was?

Yes, let me get that for you here.

Okay.

And while you're doing that, when I look at SG&A last quarter, it was down $9 million, and in think in the queue you called out a few specific buckets, like legal and marketing and salary, where you saw some pretty big decreases, and then that was offset by some new stores.

What were some -- X-ing out the FX for Q3, where did you see -- what were some of the bigger buckets, like legal or marketing or salary where you saw the dollars come down?

So, where we saw the dollars come down beside legal and marketing are, we took costs out of our corporate G&A, we took cost out of our accounting and finance organizations.

And then, as you mentioned, legal and marketing.

We increased costs in retail, Internet and our product marketing, and our IT systems, as we mentioned.

So, those are areas that we are strategically investing in so that we can get the cost efficiencies out longer term by the end of 2010.

So, the mix we have is challenging because we are constantly growing the consumer direct side, which has much higher margins and flow-through scores from a profitability standpoint, but it does take our SG&A up.

We have reduced our wholesale side significantly.

I mean, just a little color there, in 2009 our wholesale employee base that supports that business is down about 24%.

But it gets heavily offset by the retail investments.

Okay.

And then do you have the FX on Q4?

I don't know if you had --

$21 million loss was FX in Q4.

Okay.

All right.

And then legal and marketing seem to be two areas where you've been cutting pretty aggressively.

How should I be thinking about those two particular items in terms of opportunity for continued cut?

I mean, is there any way you could sort of speak to what those two pieces represented as a percentage of sales in, let's say, 2009, when your overall SG&A was roughly $369 million?

Yes.

So, I'm not going to provide actual percent of sales by line item on the SG&A pieces, but our legal costs are going to flatten out after we hit Q4 here.

As you know, we have reduced those over in half, and we think that we have the right amount of investment there to protect our IP, and to protect our legal stances.

From the product marketing standpoint, we're actually going to be -- as you know, we're rolling off the sponsorship, which we enjoyed a very healthy relationship with the pro volleyball tour, EVP, and now we're rolling that into more consumer direct.

So, overall that expense is coming down and it's going to come down about $5 million to $8 million year-over-year.

But we are going to channel that quite a bit spend, which was, as we said on previous calls, between $14 million and $20 million into direct consumer marketing, which we're very excited about.

Okay, great.

One of the things that we intend to do is, we are going to focus our marketing spend, so it will be less, sort of, Mitch, in big lumps, but focused very specifically behind supporting our selling strategy, particularly with regard to the wholesale business.

And we're lining up our advertising and cooperative advertising to support our major wholesalers.

Okay.

All right.

And, Mitch, just one more thing to build on John's comment.

Back to your first question, I think that helps, also, the confidence in the pre-books we're seeing with our wholesale accounts.

Okay.

And then, Russ, tax rate for Q4, how should we be thinking about that?

That seems to be fluctuating a lot from quarter to quarter.

Yes, so for Q4 you should look at the tax rate as about zero.

All right.

And then one last question.

On your retail, you gave store counts end of quarter versus last year, but then you talked about the mix shifting, maybe shutting down some kiosks, opening more branded stores.

So, is there another way I can be thinking about either in terms of -- can you give the Q3 comp on your retail?

Can you talk about where the square footage stands versus a year ago, just to get a better sense of how much retail growth, or where the retail growth was coming from in the quarter?

So, the retail growth, we've had a significant shift in lowering the number of kiosks the last three quarters, as we've said on each call, and we had that again this quarter.

So, while we have been slowly opening especially outlet stores, which have a very much smaller initial expense to open than any full stores.

You know, we're not opening big platinum stores.

Right now our strategy has shifted away from that.

And so most of the growth has come from the outlet store, where we have better margin and profitability flow-through.

Okay.

And I can give you, our comps right now as we're in fourth quarter, our quarter-to-date comps, for example, in the US are up 5% right now.

Okay.

In this environment we find that's very healthy.

Great.

Thanks.

Good luck.

Thanks, Mitch.

We'll go next to Reed Anderson with D.A.

Davidson.

Good afternoon.

A couple of questions.

I was curious about ASPs, particularly as you look into next year in your pre-books.

Thinking about having a lot more new product in knowing where I think you were taking that, I'm just curious what makes sense when we think about next year, the direction and magnitude of average selling prices?

I think the short answer to that is we expect it to be up slightly.

I don't want to be specific about it, but I think with the mix, particularly with the retail-wholesale mix, and certainly even at wholesale we expect average selling price to be up.

And certainly we are driving the sales organization in that direction.

And, Reed, just on top of that, I think as you look at some of the fall new product line and the spring lines that we've shared with our wholesale customers, you see that we have a lot of new product entries that have a slightly higher ASP, and that is part of the whole product development, design, marketing strategy that we've implemented.

And so we're going to start seeing some of the benefits of that next year.

But you think at this point just plan on it being a small amount or a modest uptick?

Yes, I think I described it as that, yes.

Okay.

And then just getting back to, just back to this notion of pre-books and the magnitude of that.

I'm just curious, too, if you looked at your major US customers, I mean, is it a fair assumption the pre-books of people that would be substantially less than the 130% you might have said overall for Americas?

Yes, that's true in the United States.

Our pre-bookings, actually it's 60%, I think I said, for the United States.

Yeah, 131.

131 was total Americas.

We've had -- we see a major opportunity in Brazil, and that is reflected in early bookings for next year.

Okay, good.

I had those numbers wrong, sorry about that.

And then, Russ, you had said, I believe, that the SG&A piece attributable to just the direct to consumer was roughly 40% of the SG&A spending, which is essentially, I think, what the revenue is as a percent of the mix.

I was just trying to reconcile that, because it still feels like the SG&A in that business, and you've said it, should be higher.

Why didn't we see that in the fourth quarter -- or the third quarter, excuse me?

I'm sorry, Reed, are you referring to SG&A in the retail business?

Exactly.

In the retail business you said -- why are those two numbers fairly similar when really it shouldn't, the SG&A component of the overall be higher, because it's a more expensive business to run.

Right.

So, one the SG&A in retail and Internet combined are a little over 39%, so about 40%.

And the retail business, if you think about the model that we had previously, where we were opening more full price stores and now we're changing that model to opening more outlets.

So, as I said, the outlets are much less expensive to open.

For example, we just opened an outlet down in the St.

Louis area and we spent $30,000 or $40,000 to open instead we used to spend $300,000 to $400,000 to open stores.

So, we're much more prudent about how we're opening our stores, and we're finding a very nice sell-through success rate in our outlet stores.

Okay, and then last question.

Just looking at the mix changing of stores, I mean, of the 116 kiosks you have today, I mean, how many of those might go away and be replaced with something else?

I mean, is it a third of them, half of them, what do you think?

Over the next year we will probably reduce another 40 to 50 kiosks as we go forward.

Good.

That's it for me.

Good luck.

Thanks, Reed.

And we'll go next to Andrew Burns with Thomas Weisel.

Hi.

This is Andrew in for Jim Duffy.

Congrats on a good quarter.

I have just a question longer term.

It seems like the trajectories of the wholesale and the retail side, and given the investments in direct versus cost-cutting on the wholesale side, that the mix can shift fairly significantly in a quick manner.

Can you give us any ideas just longer term what's the appropriate mix for the business model to be optimized?

Thanks..

Andrew, I'll be frank with you, I'm not certain yet what the appropriate mix is.

And to some extent the growth, the relative growth in the retail as a percentage of our total revenue is as much a function of the success in retail as much a function of the decline in wholesale over the last 18 months as it is with the success in retail.

My intention will be to grow both of those, really, in parallel.

And although I don't have a firm figure and that's one of the things we're trying to evaluate right now, we've got a major kind of strategic exercise going on to look at it.

If you want my broad opinion, I would say we would be looking in a mix eventually maybe of 60/40.

Longer term?

Longer term, and maybe up to 70/30.

I'd like to get the wholesale business moving at a faster rate.

Obviously, it's a lower level of investment and less risk.

Right.

Right.

And is it fair to say that looking into next year that the strategy is going to continue to focus on the outlet stores for new stores, or just focus next year would be helpful.

There is a mix in there.

We are opening a number of full price stores, but I think a significant part of the volume will continue to come from outlet stores.

Okay.

We're taking a cautious approach to the number of store openings next year, and we'll see how it goes.

Okay.

You know, Andrew, we're not going to have, as I think we've said on previous calls, we're not going to have a super-aggressive growth in the retail area, although it is an attractive area of opportunity.

We're going to balance the winding down of some of the kiosk areas with some moderate growth in the combination, as John said, of the whole stores and the outlet stores.

Okay.

One of the most successful things about the retail strategy, as I indicated earlier, is our ability to display a full line of product.

And there is a certain -- I think symbiotic relationship between our retail stores because of the way in which we merchandised the brand, which is kind of the waterfall effect of the color, of the mass merchandising of the product that I think stimulates the mind by itself.

And actually has enabled us -- we've taken some of that into our merchandising programs, where we have set up in-store displays in a number of the major retailers.

And that has had a very positive effect, frankly.

So, there is a cross-effect, think.

The brand merchandises well at retail.

And I think the retail Internet also provides that guaranteed access to the customer so they can see a whole portfolio, and when they see that we definitely see a link to increased sell-through.

Our stores are quite busy.

If you stop by one, you'll see there, is a lot of energy there.

Great.

Last question.

As I think about modeling and looking at SG&A next year, there is a lot of puts and takes.

Can you give us any direction just in terms of dollar terms, like given the cost-cutting and the investments in retail, and the current business, the top line trends that you expect SG&A to be up in absolute dollars next year, or down or flattish?

Any color there would be helpful.

Thank you.

Andrew, at this time we are not providing any 2010 guidance, so we'll give more color on that as we get closer to it.

Okay.

Thank you.

Thanks, Andrew.

And we'll take our final question from Steve Kernkraut with Berman Capital.

Hi, it's David Berman.

Can you hear me?

We can hear you fine, David.

So, my two questions were already answered, but just curious, a year from now based -- everything assumed goes smoothly, what kind of cash per share are we looking at?

Right now it's close to $1 per share.

We don't predict stock price.

No, not stock price, cash per share.

Oh, cash per share.

Yes, right now it's $1.

We're not going to give any guidance for 2010 of any kind right now.

We think that the market and our customer base on the wholesale side has enough uncertainty in it that it's not prudent to give guidance at this time.

Okay.

And if there is anything that you can point to in the quarter that you thought was particularly good in the quarter or disappointing to expectations, because you did really well at the end of last quarter, too.

I think we did very well with our retail business.

We're still learning about that business, and I think that the Internet business has actually really taken off.

We're kind of hanging on to that, actually, it's growing so fast at the moment.

And where we have put it in place internationally now, we're moving it out internationally, particularly into Europe.

We're already seeing a significant improvement in the Internet business.

And we staffing now with really high quality people, and I see that as a terrific opportunity for us in the future.

I think the brand merchandises very well on the Internet, and because our sizing is not as critical as more conventional shoes, our return rate is much lower.

And therefore our ability to hold that price level, the achieved price on the product is very attractive.

So, Internet has been good, and the retail business has been good.

And the retail business has been good, right, right, right.

And what are the biggest risks or worries you have as we had into this important season?

Well, obviously, the sell-through of our product is always critical for us, and -- you mean as we head --

But there is no reason to believe that thing should change, I mean, you know, in that respect.

I don't think so.

The fourth quarter is always a little difficult for us because our products by their very nature tend to be more summer, and we're putting a lot of effort for 2010 into the fall/winter line in order to bridge that gap.

It makes a big difference if we can lift up the sales in the fourth quarter, makes a huge difference in the full year.

So, we're concentrating on that.

Yeah, you need your own version of the (inaudible), you know, to complement your business.

(Inaudible) Maybe.

All right.

Thank you.

That concludes the question-and-answer session for today.

At this time I'd like to turn the conference back over to speakers for any closing remarks.

No, I don't have much to add except that I think that we are proceeding deliberately with our strategy.

I think we've had a satisfying quarter.

We're going to have to work very hard the next quarter and probably every quarter subsequently.

But I think the management team here and the people of the Company are really behind the strategy, and I think committed to the success of Crocs.

Thank you.

That does conclude today's conference.

We thank you for your participation.