卡洛馳 (CROX) 2010 Q2 法說會逐字稿

Welcome to the Crocs Incorporated fiscal 2010 second quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session.

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

Earlier this afternoon, Crocs announced its first quarter 2010 financial results.

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

Reconciliations of the non-GAAP measures mentioned on the call today can be found on the investor relations section of the crocs website.

The Company 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.

This statement concerns plans, beliefs, forecasts, guidance, projections, expectations and estimates for future operations.

Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the risk factor section of the Company's 2009 annual report on form 10K, filed on February 25, 2010, with the Securities 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 Crocs' annual report on form 10K, 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 Provision of the Securities and Exchange Act of 1934.

Crocs is not obligated to update its forward-looking statements to reflect the impact of future events.

Now at this time, I would like to turn the call over to Mr.

John McCarvel, Chief Executive Officer of Crocs.

Please go ahead, sir.

Thank you, operator.

Good afternoon, and thank you for joining our second quarter earnings call.

On the call with me today is Russ Hammer, our Chief Financial Officer.

We're very pleased to announce better than expected operating results for the second quarter of 2010.

We're clearly seeing the financial benefits of executing our strategic plan, which we have shared with you during the past few earnings calls.

We're striving to develop a global brand with a balanced business model.

Let me summarize some of the highlights of the quarter.

First, our revenue growth was broad-based, all markets and all sales channels reflecting the renewed strength of the brand globally.

Second, the performance of our customer direct channel reflects solid growth both through expansion and same-store comp sales.

As an example, same-store comp sales for Q2 in the US market was 8%.

Third, our operating margins in all regions reflect the efforts of our very talented global operations team to evolve our business model, while continuing to develop our unique in-season auto replenishment system.

And fourth, our SG&A costs aligned to our business model.

We increased our marketing spend in the quarter by $7 million to $15.5 million to drive brand awareness, new product introduction, and channel sales with our key wholesale customers globally.

We are striving to develop a balanced business globally, and are working to minimize the seasonality of our product portfolio.

Revenue increased by 31% to $228 million over an adjusted revenue of $174 million reported in the second quarter of 2009, which excludes $23.7 million in previously impaired product sales reported last year at this time.

Our international sales accounted for 61% of total revenue, and we continue to believe this is a key strategic strength for Crocs.

We are encouraged with the development of the BRIC and Middle East markets.

We're very pleased with the resurgence of our wholesale business channel.

We have invested significant management time and effort to methodically rebuild our wholesale business, especially in the US market.

Sales of Crocs products with our major retail partners in department stores, family channels, sporting goods, and with our independents are all up consistently through Q2 and into early Q3.

We hear customers are returning to retailers, actively looking for the brand.

Over the past two years, we have seen significant diversification of our product portfolio and collection, all building on our core design fundamentals of comfort, casual, fun and colorful.

Today, we have over 250 models of shoes sold across a diverse range of sales channels.

While our core products are still up 21% of our overall sales, we continue to bring relevant and exciting new products to market.

New products introduced in Spring, Summer of 2010 accounted for 31% of our first half sales.

As with most footwear brands, we are currently pre-lining our Spring, Summer 2011 products with key customers, and are excited about the response indication we are receiving.

We continue to invest and develop our direct channel business, which has performed exceptionally well.

Russ will expand on our financial performance of our direct channel later in the presentation.

We believe the direct channel is key to connecting with new consumers, and exhibiting the expanded Crocs product line.

We opened 30 new stores, shop-in-shops and outlet stores in Q2, mainly in the US and Asia.

We will continue to selectively expand in the Americas and Asia, and we are focused on building a stronger retail presence in Europe.

We're evaluating various new locations throughout the European region, and expect additional locations to be opened in early 2011.

In our Internet services group, we have now deployed our demandware Internet services platform in the Americas and Europe in 10 different languages.

We intend to launch five new websites in Asia starting in Q3.

This will include local currencies, new languages, and gives us the ability to customize the solution for local markets.

Gross margin for the second quarter was 57.8%.

The improved gross margin performance reflects the effects of restructuring of the Crocs business in 2009, and the continued improvements in our supply chain globally.

We also realized slightly more favorable channel mix than expected.

We do anticipate gross margins in future quarters to be affected by product cost inflation from the factories and in our logistic services.

We are not immune from the cost pressures of the industry, but believe our unique supply-chain strategies will afford us the opportunities to mitigate some of the anticipated increases.

Our gross margin in the back half of the year will also be impacted by Fall, Winter products that have slightly lower gross margins.

We continue to be pleased with the results of our new campaign for 2010, our Feel the Love campaign, which builds on the comfort and casual aspects of the Crocs Brand.

We have an integrated activation program that incorporates digital, print media, television, advertising billboards in high-traffic areas, and bus route programs, which we have successfully used in Asia for some time.

Based on the success of the first half 2010 marketing program, we plan to invest an incremental $8 million to $10 million in marketing in the second half of 2010.

We believe we have innovative new marketing programs with our key retail and distribution partners, as well as improved visual merchandising solutions.

With that, I would like to turn it over to Russ.

Thanks, John.

Thanks to everyone joining us on the call today and listening via webcast.

I'll begin with a review of our income statement starting at the top with revenue.

Total revenues for the second quarter increased 31% to $228 million over adjusted revenue of $174 million we reported in the second quarter of last year, which excludes $23.7 million in previously impaired sales that we stated would be non-recurring.

On a GAAP basis, revenue increased 15% year-over-year.

By channel, wholesale sales rose 12% to $140 million.

Retail sales were up 20% to $66.4 million, and Internet sales increased 24% to $21.6 million.

Same store sale comps for the second quarter, as John mentioned earlier, increased to 8% in the Americas.

We ended the second quarter of 2010 with 363 Company operated retail locations compared to 310 this time a year ago.

This is an increase of 30 stores from the 333 stores at the end of Q1.

Compared to Q2 2009, we have decreased the number of kiosks by 30, and have increased our full price and factory direct stores by 56.

Now, by geographic region.

Sales in the Americas rose 23% to $104.8 million from $85.85 million.

Asia sales increased 11% to $88.6 million compared to $80 million, and sales in Europe increased 7% to $34.6 million versus $32.2 million a year ago.

For Q2 2010, 61% of our sales came from outside the United States.

This reflects the strong global reach of the Crocs Brand, which consumers purchase in 129 countries.

We are very proud that approximately 70% of our second half wholesale business is pre-booked.

Backlog as of June 30 was up 41% from last year to $118.5 million.

We continue to have great success with our Croc band collection, as well as women flat, kids footwear.

In fact, three of our top styles are part of our back-to-school collection.

Our average selling price for the second quarter of 2010 increased 12% or $1.96 to $17.76 from $15.80 one year ago.

Our product mix continues to diversify over the same period last year to 24% of Q2 sales coming from our new Spring, Summer 2010 products, including the popular Croc band collection, classic and core represented 12%, and 21% of Q2 2010 sales respectively.

As our mix shifts towards a higher percentage of new products with higher price points, we expect our ASPs will continue to increase in future periods.

Now, for gross profit.

Gross profit increased 30% to $131.9 million compared to $101.1 million, with gross margin up 670 basis points to 57.8% from 51.1% a year ago.

The significant improvement in gross profit is a result of our effective cost reduction actions, namely the consolidation of our global warehouse footprint, a more efficient supply chain including a greater degree of direct shipments to our customers, as well as the increased sales contribution from our consumer direct division, which carries a higher gross margin than our wholesale channel.

SG&A decreased $32.3 million or 26% to $93.3 million compared to SG&A of $125.6 million a year ago.

As a percentage of sales, SG&A decreased to 40.9% from 63.5% in the year ago quarter.

As a reminder, all of our retail expenses including occupancy costs and store labor are in our SG&A, which now make up about one-third of our operating budget.

Retail related costs included in SG&A were $31 million, up from $25 million a year ago, but remained fairly constant as a percent of revenue.

Our improved top line performance, coupled with the benefits from our enhanced operating platform, helped reverse negative operating results from a year ago in a very meaningful way.

We achieved operating income of $38.9 million compared to an operating loss of $24.5 million in Q2 2009.

Our operating margin for the second quarter of 2010 was 16.9%.

For the second quarter, our effective tax rate was 17%, versus guidance of 30%.

The lower tax rate resulted in a $0.06 per diluted share of favorable impact versus guidance.

These tax savings were the result of the Company restructuring its international operations, cost sharing arrangements, and release of valuation allowances related to net operating losses in various international entities.

Second quarter net income improved to $32.3 million or $0.37 per diluted share compared to a net loss of $30.3 million or a loss of $0.36 per diluted share in the corresponding period last year.

Now, let's turn to the balance sheet.

We ended Q2 2010 with $96.9 million in cash, an increase of 25% over cash of $77.5 million at June 30, 2009.

At the end of Q2 2010, the Company had no bank debt.

And we were in compliance with all of our covenants.

Inventories at June 30, 2010 were $113.6 million, a slight increase of 2% over inventories of $111.6 million at June 30, 2009.

We ended Q2 with accounts receivable of $94 million compared to $67 million a year ago.

Now, to our guidance.

For Q3 2010, we expect revenue to be approximately $205 million, a 24% increase over third quarter 2009 adjusted revenue of $165 million, which excludes $11.5 million in impaired product sales that we have stated would be non-reoccurring.

On a GAAP basis, we expect third quarter 2010 revenue to grow approximately 16% year-over-year.

We expect diluted earnings per share in the range of $0.22 to $0.24 for Q3 2010.

This represents a significant improvement over the diluted earnings per share of $0.09 we reported in Q3 2009, which excludes a one-time tax benefit of $0.16 we reported in the year ago period.

We expect our tax rate for the remainder of the year for the third quarter to be approximately 22%.

For the full year 2010, we are projecting capital expenditures to be approximately $34 million.

I will now turn the call back to John for some closing comments.

Thanks, Russ.

We are pleased with the solid growth of our top line revenue, coupled with the effects of our gross margin improvements.

We'll continue to manage and develop the brand carefully for sustained long-term growth.

In conclusion, as the evidence mounts that Crocs turnover his irrefutably underway, we hope those who prematurely published our obituary a year ago will now take some time to give us our due for the positive achievements of our Company, brand and products over the last 12 months.

With that, operator, I would like to turn it back to you, and we'd be happy to take questions now.

Thank you, sir.

(Operator Instructions).

We'll now take our first question from Reed Anderson with DA Davidson.

Good afternoon, and congratulations on another nice quarter.

Thanks, Reed.

You're welcome.

Thank you--a couple questions.

First, I want to just focus on the gross margin because it was extraordinarily high versus where I think I was expecting and probably a lot of people.

And I just want to get a sense, John, your comment that the second-half will be lower, is it relative to what you saw in 2Q, or is it to more that what I describe as a more of a low 50's level that seemed where this business was going to be tracking.

So, can you give us a little more color on how we think about that in the second half?

Sure, we're very pleased with our second quarter margin.

The improvement in margins exceeded our own and even internal expectations.

But I think what we'd like to share with you is really based on three factors.

One, we have worked really hard at a supply chain solution for our direct shipment programs.

And we have the benefit of having factories closer to market with Italy and with Mexico to the European and US America's market, and of course in Asia we have the factories there in souther China.

So, that has really accelerated our ability to drive higher gross margins.

Secondly, cost reduction supply chain efficiencies that we've been working on for the last 12, 18 months continue to roll through the balance sheet and then into our P&L.

And last is really our direct to consumer mix was solid this quarter, and especially for a lot of our newer products that we launched, which we've talked about in prior calls, which were at a higher ASP, thus driving better margins.

I think when you think of the Q3 and second half margins, we expect our margins to be in the low to mid 50's, no difference in what we have said through the whole process.

I think it's important to point out, factors that are going to influence our margins again in the back half of the year.

So, second quarter is always our highest quarter, has been traditionally our highest quarter.

So, we're going to see a little bit lower volume, which is going to impact our gross margin.

Our Fall, Winter products have slightly lower margins compared with our Spring, Summer lines, which we've shared with you in the past.

And then the last piece of it is, is that with all of us in the industry today, we're going through the same dynamic with our Asian supply partners, and we're going to see some level of cost increases, which will impact Q3, Q4 margins to some level.

Okay, that's very helpful.

And then the last piece, John, on the cost increases, presumably that also bleeds into first half of next year as well, or is it really more you're just thinking the next couple of quarters.

No, I think it's a sustained cost increase from the factory.

Okay, that's what I figured.

Okay, good, again, that's very helpful.

Then on the, Russ, the comment you made on same-store sales up 8%, from what I recall, where you were tracking April, May, you must have seen some nice acceleration in June.

Could you talk about that?

And if there were, whether there was some marketing or promotion that might have kicked in to help that ?

Just kind of give us some color on that as

Sure, Reed.

So in, as you said, the second quarter was 8% but June actually came in at 13.4%, very strong.

And as we saw the advertising impact and then the products that we were a little short on on our own consumer direct channels in Q1, so that we could make sure the wholesale channels got them first.

We then fed them in.

And another data point for you, our July comps right now in the Americas are at 20%.

So we're really seeing acceleration in our direct channels.

Year-to-date in June, we were up 9.3%, but July comps are very strong.

We're very, very, again, exceeding our own expectations.

That's terrific.

And then last one for me for now, and I'll let somebody else jump in.

You talked about the incremental marketing spend obviously seeing your comps, you're getting the benefit there.

Where will that be directed, and just, more broadly where you're already putting the marketing dollars or are you going to do some other things with that incremental spend.

Kind of two-fold, one, we're going to continue to work with our key wholesale customers as we have in programs with them for the third quarter.

And then one other thing that we're doing that you will see starting tomorrow is that we have a back-to-school video that will start to air on multiple channels here in the US market first to support our new back-to-school line of shoes that we're launching this year.

And as Russ said, pre-books on those, and what we're shipping on a wholesale basis, they're three of our top 10 kid's models today, and you'll see the ad running with a tagline also with Nordstrom's for kid's products.

Excellent.

Good.

Thank you very much.

Good luck.

I'll let somebody else on.

Thanks, Reed.

And Jeff Klinefelter with Piper Jaffray has our next question.

Great, thank you.

Congratulations, everyone on the Croc's team.

That's a terrific quarter.

Thank you, Jeff.

So, on the wholesale business, I think digging a little deeper, John, into the success of the turnaround here at wholesale and using US as an example.

Can we drill down a little bit and look at where the particular strength is coming from, when we think about volume per door or comp door gains versus number of doors versus number of new styles per door?

Just to get a sense for the direction that the wholesale channel is taking the brand.

Is there any way to break it down to that level to understand the building process as we go into 2011.

And then, Russ, did you comment actually--I don't know if I missed this, but did you comment on any Spring bookings numbers at this point?

I think, Jeff, in mine I just briefly said, last question first, that we don't have pre-booked numbers in yet.

We're just starting pre-books for August 15 in our cycle, so we'll start to see it here in the next two weeks.

I think as we've talked in the past, door count is something that we moved away from because of the volume per door and it really wasn't a good indication.

But I can talk to it at a higher level and just talk about maybe channels a little bit and see if I can answer your question and give you some color.

If we look at department stores today, we have gone through this year a whole overhaul of our relationship.

How we engage the fact that we're going to do this marketing campaigning for back-to-school, and specifically tag it with and work within, this case Nordstrom.

We're doing that with others in the department store channel, and we're starting to see, as I said in the call, the resurgence of consumers coming back to the wholesale space looking for Crocs products.

I think that coupled with the number of new models that we have for next year for Spring, Summer, we're seeing significant interest.

Additional style counts that they'll be taking, and additional doors that they're opening.

But no firm commitment and no clear understanding exactly what that expansion will look like, and that analogy goes through the other channels with sporting goods as well as the family channel, which we've talked about on the call before.

We've done a significant amount of work in that channel for the last year.

We believe it's where our consumers shop, and we feel comfortable, confident that we're going to see door growth and SKU count go up in each of those channels.

And I think the independents, as we talked about too, are key to building the brand in the early days.

And they're key to Crocs to continue to sell our products with the wide portfolio of products that we have today throughout the US market.

So, I hope that gives you a flavor for the magnitude and volume.

That's very helpful.

In terms of a couple housekeeping modeling questions, for SG&A, you're spending the $8 million to $10 million of additional marketing for the year, given the other initiative you have in place, offset by some of the efficiencies you're realizing.

Where should that put, generally speaking, you think the SG&A dollars for the year, Russ, how should we think about that in terms of dollar year-over-year growth at this point?

And then also just for Q4, I know you're not giving Q4 specific guidance, but given the seasonality of the business, how should we be thinking about that as an early set up here, going into that quarter.

Jeff, maybe I'll do those.

I think when we look at marketing spend for the year, we internally believe that we need to continue to invest in rebuilding the brand in both the US marketplace, as well as in Europe.

We think our marketing spend this year will be up about $8 million to $10 million from what we had discussed in prior meetings, and in discussions, and it will be closer to $47 million, $48 million in marketing spend.

With the expansion of the number of retail doors globally now to be about 400 stores by the end of 2010, we think our overall SG&A spend will be somewhere between $345 million and $350 million.

That's our best estimate at this time.

Okay, and then, generals about Q4.

How should we think about that in terms of it being more of a heavy direct and retail quarter versus wholesale?

We look at the back half of the year being 45% wholesale, 55% direct business, and as we've said before it's our toughest quarter, Q4, from a product standpoint.

We're working hard to overcome that, but right now our goal is to be break-even or marginally profitable for Q4, and then accelerating into 2011 with our new line of Spring, Summer products.

And then just one more thing in Q4, John.

I know last year ended up being more challenging, you had to participate in the promotional cycle with your own stores and your own Internet, keeping in step with what your wholesale retailer customers were doing.

In terms of what the sensitivities are to the fourth quarter, what could result in both upside and downside?

Does it really come down to what level of comps you're generating in your own business.

Does it come down to whether or not one of your items hits, really hits for wholesale, and there's more re-order than you thought.

And how much variability do you see in that season?

Probably for us the easiest season for us to predict is more the fourth quarter, where we have a pretty good feeling for the product sales.

There isn't a product or, as we had in the past, a hero product that drove revenue in significant volumes.

Today, we're much more distributed from a product standpoint.

We have a larger portfolio of boots and winter footwear this year.

So, I think we're more evenly distributed from a product standpoint.

Globally, I think that having the global balance continues to be a strength.

We saw a lot of product in the more warm climates in the US, but as we bring on Brazil and we bring on southern markets a little bit more aggressively this year than we have in previous years, I think we hope that that's going to balance our Q4.

But in the US market place, it's really hard.

I read lots of differing information, what we're going to see from a retail season for this upcoming Christmas holiday season, what the economy's going to look like with the election coming up in November.

I think we're sensitive to what will happen, and how discounts will effect comp sales as well as our own sell-through.

Great.

Thanks a lot, congratulations, I'll let someone else jump on.

Thanks, Jeff.

And moving on to Jim Duffy with Stifel Nicolaus.

Thank you, and great quarter, everyone.

I want to make sure, like Jeff, I'm understanding the business flow in the back half of the year.

You mentioned a 41% increase in the backlogs.

Russ, could you repeat what you said about pre-booked business.

You gave some statistic--.

We said that 70% of our second half wholesale business is pre-booked.

Okay, so that's the wholesale component of it.

Now how is that different from what you saw coming into the Spring season or maybe what you'd seen second half of last year.

Well, Spring, Summer books and ships heavier in the second quarter because that's our largest quarter from a seasonality standpoint, but we're very pleased with the strength of our pre-books right now in our backlog.

I think, Jim, Russ also had made the point in his portion of the presentation that if you look at where we were at the end of Q2 2009, we were up 41% year-over-year.

So we feel we're in a much healthier position going into the back half of the year than we were a year ago, to the tune of about almost $40 million.

That's great, and the pre-booked element is progress that direction.

Is that about where you want to see it, or do you still see more room to navigate the business towards pre-book.

I think we're happy with that balance if we're in the 65% to 70% range.

That's great for us, and then I think when we get products that are a hit and become hero products then it plays to our advantage of being able to build product in market in a more auto replenishment model.

But you'd always like to have more pre-book dollars than what you have, and we're happy with where we are obviously versus a year ago.

One thing to keep in mind, the pre-books, as we said, are the wholesale business, and as John mentioned earlier, our marketing campaign is aimed at the kids back-to-school business here, especially the launch we're having with Nordstrom, which is not included in that pre-book.

So, we're very pleased with the pre-books, and we're cautiously optimistic on the consumer direct side.

Great, and then specific to the 3Q guidance, you mentioned strong comps thus far through July.

What is the comp that is assumed in the 3Q guidance?

Our Q3 guidance would assume comps for the quarter that would be up about 15%.

Okay, and then John, can I ask you to maybe comment on the reception to the toning shoe that you've seen in the market, and how Crocs is positioning that uniquely relative to the rest of the category.

For us, we've looked at the toning categories for a while.

We contemplated products in the space going back even three or four years ago.

I think today, what you see is we see a lot of sports shoe type products and a lot of flip flops that have been the really early products into this space.

And we think, we're showing now the new line of toning products that outdoor retailers this week, we have show them in previous meetings with our key customers, and we will introduce those into the direct channel in limited volumes in Q4.

But we're taking a much different slant on what toning means, and how it can fit into your lifestyle.

Not that you have to go out of your way to put on a clumsier, larger type of exercise shoe in some cases, or exercise type flip flop.

We think we have a design innovation that fits with Crocs innovation and comfort.

So, you'll start to see products from us in this space the later part of this year in the direct channel, and then with our wholesale partners into the early part of 2011.

I just saw them today at Outdoor Retailer, and they look great.

The other interesting thing is the price point seems very approachable relative to the category.

So, good luck.

Thanks.

We hope our consumers feel the same way on the price point, Jim.

Thanks, Jim.

And next is Mitch Kummetz with Robert W Baird

Hi, guys, this is actually Kevin Kim calling in for Mitch.

Russ, I think on the Q1 call you broke down the growth rates with wholesale and retail within each of the geographical regions.

Would you mind doing that again this quarter?

Sure, I'd be happy to give them.

If you look at the Americas wholesale market, it grew second quarter 2010 over second quarter 2009 17%, and Asia wholesale grew 16% and Europe was about flat.

We saw a very strong growth in the retail markets in all channels, and the Internet was up as well.

In the Americas and Europe's down slightly in Asia.

And then, I think you guys mentioned that within the US wholesale channel, family, sporting goods, department store and independent were up during the quarter.

Can you confirm that, and then specifically within that family channel, I think you guys have made comments in the past about how Famous Footwear is at about a 120 doors, and looking to expand.

Can you guys talk about what your plans are with them for the remainder of this year.

Sure, so Kevin, I think as Russ said, we said growth was 17% in the US marketplace, our wholesale growth year-over-year was about 12%, and it accounts for 61% of our overall revenue.

So wholesale is a very important gem for us especially in the US, and we did talk in the past, specific to some accounts with Famous Footwear, Shoe Show, Shoe Carnival, DSW, Dillard's and a number of those with growth.

We don't have a clear door count number today and how many specific stores we're in.

And plus what will happen is that even when we're in certain doors, it depends upon the range of products that they'll even carry.

Sometimes people will go in and look and say, well, you're not in a Famous Footwear, or you have a limited quantity.

They make their own calls on the amount of product that they put in certain stores in certain geographies.

So, what we found was it caused a little bit of confusion to try to get too specific on the door count.

In each of those categories, we see retailers in that space excited about our product, and we expect them to add doors and add styles that they'll carry going into Spring, Summer 2011.

Okay, and then, Russ, in terms of the product cost increases that we're going to expect going forward.

Can you help us quantify what that will look like in the second half of this year and possibly what you're seeing with the first half of next year?

If you're specifically referring to the China industry cost, we see the same impact of that 5% to 10% that most of the other industry sees, and we do expect that in the second half and we do expect that ongoing next year as well.

Okay, and that's it for me.

Thanks, guys.

(Operator Instructions).

Moving on to Jim Chartier with Monness, Crespi, and Hardt.

Good afternoon.

A couple of quick questions.

First on the SG&A.

On the last call, I believe you guided to flat to about $319 million in the prior year, so you're adding $8 million to $10 million this year.

So, I'm wondering what else you're spending on to get to that $345 million to $350 million number.

The main portion, Jim, of the increased SG&A is in retail expansion.

You'll see greater retail growth in Q3 and Q4.

You'll see greater SG&A spend in the retail space.

That's the majority of the increased cost in SG&A.

But--didn't you--I thought you told us to expect 400 doors on the last conference call as well.

Right, so what happens.

That's true.

And what's happening a little bit within that mix is that we're shifting a number of shop-in-shops and some of our short-term stores are going away at a more rapid rate than previously discussed.

And we're adding in incremental full price retail stores in mid-mall, as well as a few incremental outlet stores.

Mainly, again in the US.

And then are the margins better on the full price stores than the shop-in-shops?

It depends a little bit on the product, but generally speaking, yes.

Where we have a wider portfolio of products, but there are locations where our outlets for us that do primarily sell all full-price products do quite well.

And then the tax rate that you guided to, is that a normalized rate that we should expect going forward or are there still some deferred tax benefits in there.

Right now, we should model going forward around a 25% tax rate.

So, we have seen the benefit of our tax strategy that has brought us down from our traditional 30%, and so for 2010 we should model that 25% going forward.

And in 2011, we should model 25% as well.

Correct.

Okay, and then it sounds like you're still scratching the surface on the Internet business, so I'm wondering where you think that can get as a percentage of total sales.

I think we're really happy.

Last quarter, we talked a little about Internet sales growth.

This quarter, year-over-year our Internet growth is about 24% year-over-year, so we talked about, Jim, some of the things that impacted Q1 putting new products for Spring, Summer 2010 into our direct channel a little bit later in the quarter than maybe what we should have and what our competitors did.

I think we see the benefit of having a full quarter with new products in our retail stores, thus driving our Internet up 24%.

And also we think it's a big contributor to why comp sales were up both, especially in the America side that Russ broke out for you, in June as well as for July.

Okay, and then--.

Jim, I think as you're thinking about that, the mix between wholesale consumer direct did about 60%, 40%.

We expect them to continue growing at about that rate as we go forward.

And then, looking at the Asian retail business on a per door basis, it looks like it was down.

So, I was curious what was going on in Asia.

I know in the 10Q you mentioned some unfavorable weather.

So having just moved back from Asia in late June, I can tell you that it was, especially in the northern portion of Asia and Japan and Korea and China, really cold rainy weather all the way through the early part of June.

So, our China stores and our Japan stores were down year-over-year, quarter-over-quarter.

They did comp down, but in stores more to the southern portion of the northern hemisphere, Hong Kong, Singapore, some of the southern stores then our comps were up or were equal to last year.

So yes, we do think that the impact of weather hit, and Japan is still a difficult retail climate, so we're happy with flat to nominally up comps in that market.

And then have you seen an improvement in the comp trend in July with better weather?

We have.

Are the other stores not comping positively in Asia.

They are.

Okay, great.

Thanks a lot.

Next is Steven Martin with Slater Capital Management.

Hi, guys.

I just was wondering, you've been under inventory for a while, where do you think your inventory is as to adequacy, because I have been in a number of Sports Authorities, for instance, where you guys manage the inventory, and they seem to be particularly light versus other retailers.

Sports Authority, Steven, is a different dynamic.

We only started with them in late Q2, only in a smaller portion of their doors with a pay on scan program.

So, there is a learning curve that we're going through--that they're going through in replenishment, but we're in a different dynamic with them this year.

And the sell-throughs in all of our channels have been stronger than what we had expected, and what we had pipelined.

So, yes, demand has driven some temporary shortages in products, no question.

So, if you looked at your quarter-end inventory and last quarter-end inventory, what would that number have been in an ideal situation, and should we expect going forward that maybe that's going to build a little as you open more doors and are in a better position for replenishment?

I think from our standpoint, we believe inventory is positioned well.

It's okay to have some shortages where consumer demand outstrips some of our hot selling products.

We expect inventory to be flat quarter-over-quarter, and we work really hard to drive that out of a replenishment model during the Q2 and Q3 times of the year.

So, yes, there will be times when any company has product shortages especially on hot selling products.

Can you update us on the new Crocslite material?

New Crocslite material starts to go into products in the last half of this year.

It's performance-wise very similar to our existing materials, so from a consumer standpoint you'll see really no change to product performance.

And from a manufacturing standpoint or cost standpoint?

It will help us with better yields in the factory.

It will be at a higher production rate for us, so there are some cost benefits that we can derive from the new materials from a production standpoint.

Alright, and last but not least, where do you stand in the restructuring process on the issues of space, facilities, people, systems, et cetera, on shedding excess?

Well, having worked at this for the last 18 months, I think we've made such radical and significant changes to the business that it is a phenomenal management team that we have at Crocs to be able to do that in such a short period of time.

I think from a footprint standpoint, we talked about this in the queue.

We did take the opportunity to write up the lease cost--the excess lease cost that we have here in Denver, as well as in Rotterdam on warehouse space.

We think our footprints are well-positioned going forward.

We're doing one transition this quarter from our own distribution center into a 3PL.

So, basically, all of the restructuring around manufacturing distribution logistics, and then even with our own offices globally is all completed.

And we continue to invest at a rapid rate in new systems to support a three channel sales strategy that we have.

And again, we're moving at a fairly rapid rate.

Once we start to see stability in those systems, then as you know, after a year to 18 months into it, we'll start to drive additional efficiencies out from a headcount and efficiency standpoint.

Thanks a lot and congratulations.

(Operator Instructions).

We have no further questions at this time.

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

I'd just like to say thanks to all for joining us today, and we hope that we've answered your questions, and we look forward to a great Q3 and Q4 ahead of us.

Thanks again.

This does conclude our conference call today.

We'd like to thank you for your participation.