卡洛馳 (CROX) 2011 Q2 法說會逐字稿

Welcome to the Crocs, Inc.

fiscal 2011second-quarter earnings conference.

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

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

Instructions will be provided at that time.

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

Earlier this afternoon, Crocs announced its second quarter 2011 financial results.

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

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 the Federal Security laws.

This statement includes but is not limited to statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline.

Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the Company's 2010 annual report on form 10-K, filed on February 25, 2011 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 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 this Safe Harbor provisions 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.

Welcome and thank you for joining us today.

With me on the call is Jeff Lasher, Chief Financial Officer.

Today's strong results demonstrate the growing power of our global operating platform.

We grew all regions of our business to achieve our highest quarterly sales in unit volume in the Company's history.

There are several notable achievements from the second quarter that underscore how much the Company has evolved in terms of product, distribution, and reinforced our global business has become the past few years.

Sales increased 30% to a record $296 million of which $198 million or 67% came from our international market.

Asia had a terrific quarter, and surpassed the Americas as our largest region for the first time ever.

Consumer adoption of our new products throughout our Asian markets has been faster than other areas of the world and this has fueled our growth in the region over the past several quarters.

The diversity of second-quarter sales in Asia was robust with more than half coming from the spring 2011 line.

The wholesale business in the region was a strong element for their performance.

From a country perspective our business in Japan rebounded nicely following a slowdown in the first several weeks of the quarter after the earthquake and tsunami.

We were able to get goods out to the wholesale accounts and to our retail stores in time for Golden Week, which turned out to be a better selling period than I think most everyone expected.

We are also are excited other performance of several emerging markets that have been growing rapidly and becoming more meaningful to our overall results.

This includes China where between our Company-owned stores and our distributor partner stores, we have significantly increased our retail presence in the past 12 month and have extended the brand's reach to the Tier 2 and Tier 3 cities in China.

We are also seeing solid growth in many other countries, especially around the equator like the Southeast Asian countries, Korea, Taiwan, and the Middle East where the year round climate is ideal for our type of casual lightweight footwear.

In Europe, our business continues to rebound from 2009 and 2010 levels.

The resurgence is led by our largest direct markets, the UK, France and Germany.

Working more closely with key wholesale accounts we have been successful in obtaining more shelf space for new styles which have been critical to educating consumers on the evolution of the product line, particularly since we have so few of our own stores in the region.

There is still a lot of opportunity here as many retailers continue to heavily rely on our core collection and not take advantage of our larger portfolio of great products for spring/summer season.

Obviously there are some differences between all our global markets, but there is no reason that we shouldn't be able to bridge the gap, given our past success in Europe and the fact that this is the second-largest footwear market in the world behind the US.

We are seeing good growth out of some of our newer markets such as Russia, the CIS countries and the Nordic region.

However we are focused on growing our direct business in the region and this includes opening more retail locations, selectively adding new wholesale distribution and more effectively marketing to our target customers.

In the Americas we delivered another solid performance.

Since our last summer we have expanded our relationships with the majority of our wholesale partners.

This includes increasing sku counts and adding doors, converting kiosks to stores and introducing various compelling new products into the marketplace.

Our distribution in the US is well balanced between wholesale and consumer direct and within wholesale it is diversified amongst chain stores and independents.

With the performance of our spring 2011 line, featuring translucent sneakers and more recently the Chameleon, along with continued strength of the Crocband collection that was introduced last year, our product sales have become more balanced as well is less reliant on a handful of styles.

As a result our growth in the US versus a year ago has been broad-based.

It has come from a combination of new products which in turn has led to higher productivity and existing wholesales stores and Crocs retail stores that were open a year ago plus new distribution primarily within the family footwear channel, as well as mall based stores.

We have continued to attract outstanding senior management talent at Crocs while promoting from within.

In the past 6 months we have added a new Chief Marketing Officer, VP of Marketing and Creative Vice President to the organization.

This talented group is building internal creative teams to bring our great products to life, build the right creative innovative messaging for Crocs in the market.

We recently promoted Dale [Bass] into Senior Vice President for Product Development and Christy Saito to Vice President for Product Line Management.

Both well deserved.

We have a new Vice President in Asia, Dave [Sealin] and Mike Debell, a former Vice President in Asia has assumed a new corporate role as our Corporate Vice President of Sales of Global Sales.

Angie Callaway now heads our global retail team after previously heading our retail visual merchandising organization.

And of course the promotion of Jeff Lasher to Chief Financial Officer.

Jeff has added some additional senior management to the corporate finance team, complementing the existing strong financial team we have at Crocs today.

After very good first half of the year, let me outline our plans for the next 6 months.

The momentum we ended the second quarter with has continued into July.

Demand for our spring/summer line has remained strong with the pace of weekly sellthrough in our stores and wholesale replenishment orders running well above last year.

In a few weeks, we will be building on our success from last year's back-to-school line with several new kids products, including a take down version of our lightweight sneaker, while at the same time delivering Chameleon to select wholesale accounts in the United States.

Depending upon location many of our retail stores have already made the transition to back-to-school.

Then in September we will start shipping our broadest fall offering ever, headlined by a new casual and rugged boot.s And we believe we have the caliber of products to keep the brand more relevant with consumers late into the year.

Over the next few months we will continue to fill in the map, opening more new stores around the world.

As I mentioned earlier, European retail expansion is a key part of our growth strategy for the region.

And we have plans to currently add locations in France, Germany and Russia.

In Asia, China, Japan, Taiwan, Hong Kong, and the Middle East will all see their store basis increase as we look to take advantage of the current momentum in these countries.

Within the United States -- within the Americas, excuse me, we have opened additional stores in Canada and the Caribbean, and in the third quarter our first store in Brazil.

In the US market we will continue to convert kiosks to stores before debuting our new store prototype in the fourth quarter.

A lot of time and thought went into the development of this new concept and we are very excited to unveil what we will believe will be a much more memorable and unique shopping experience for consumers.

On the US wholesale site, we won't be bringing on significant number of new accounts or stores over the remainder of the year.

We obviously have increased the number of family channel stores we added earlier in the year, but a major driver of our wholesale growth will come from increased shelf space we have secured as a result of the evolution of the fall line.

In support of the new products coming out for back-to-school and fall holiday, we will continue to engage consumers through direct marketing tactics in all 3 regions.

We have a powerful brand with great products behind it and a story that needs to be told in order to increase awareness about our ongoing transformation and generate demand for growing product assortment.

This being done through multiple mediums including visual merchandising, direct marketing via the Internet, social and digital media, traditional print and print campaigns with our key partners as well as public relations campaigns.

Very much like the way our R&D department has evolved, our marketing team has become more adept at reaching more consumers effectively in a very cost efficient manner.

This has been an important piece of our recent top line success and some of our operating expense leverage we have experienced as well.

I will now turn the call over to Jeff.

Thank you John, hello everyone.

Thanks for joining us.

Today I will be discussing Q2 results for 2011.

Revenue for the quarter increased by $68 million or 30% to $296 million, which exceeded our guidance by $280 million and established a quarterly sales record for the Company.

We saw sales increase in all 3 of our channels during the first quarter - second quarter.

In wholesale, revenue increased 26% to $176 million as we saw broad acceptance of key new styles and collections.

We ended the quarter with backlog of $168 million which represents approximately 42% increase over last year's backlog.

Average selling price in our backlog appear strong and they are in line with our expectations at $19.79 per unit.

Retail sales for Q2 increased 38% to $92 million.

All three regions showed strong year-over-year growth and we ended the quarter with 397 Company-owned retail locations globally which is up from 363 last year at the end of June.

We ended the quarter with 153 full price stores, 96 store-in-stores, 81 factory direct stores or outlets, and 67 kiosks.

Compared to the same time last year we have 24 less kiosks as we continue to shift toward full line locations.

Retail sales increased in all regions of our average revenue per store grew by 20% through a combination of larger locations, product breadth, and higher prices.

The increase was driven by performance from our outlets and our full line stores.

In the third quarter we plan to open 33 locations globally with the bulk of those coming in Asia and Europe.

Internet sales increased 30% in the second quarter to $28 million, driven again by increased activity in Europe.

Each of our 3 geographic regions saw strong revenue growth in Q2.

Sales in the Americas increased 16% to $121 million, Asia increased 37% to $122 million and Europe increased 51% to $52 million.

Included in our revenue for the second quarter, we saw positive benefit from foreign exchange rate fluctuations that increased year-over-year revenue by $19.4 dollars.

In Americas we saw Q2 revenue increases in all 3 channels.

Retail sales in the Americas region increased 28%, while store count was 192 at the end of the quarter up 4 units from prior year.

Since the end of Q2 2010 we have converted or closed 26 kiosk locations, added 8 outlet stores and 22 full price stores.

Sales from wholesale grew 9% for the quarter as revenue shifted in the year from Q2 to Q1 as a result of our pre-book strategy.

In the USA, revenue was up 12% for the quarter and represented one-third of our global sales.

Sales from our Asia segment were strong across all channels.

For the second quarter results Asia was our largest region, producing revenue as it grew by 37% from prior year overall to $122 million.

Japan has recently reopened all of the locations that were closed as a result of the earthquake and tsunami in March.

We celebrated the reopening of the Sendai store last month completing the reopening.

For the quarter, Japan revenue grew over 30% from prior year as the recovery continues.

For the quarter, the Company again made donations to our charitable efforts including further donations to the area affected by the Japan natural disaster, the cities of Joplin, Missouri and Tuscaloosa, Alabama and donations to UNICEF.

The net impact of that donation was about $500,000.

In Europe, sales growth of 50% versus prior year was driven by currency strength, stronger wholesale demand and a doubling of our Internet volume in the region.

Wholesale revenues were up 43% from prior year and Internet was up 94%.

The results from Europe include the benefit from higher local currency, which we estimate at $5 million of the $18 million total increase.

While the first half results in Europe have been strong, we expect second half growth to be more modest as we comp higher currency levels and sales from last year.

Global footwear unit sales in the quarter were a record $14.2 million, up 15% from last year.

Our new products globally represented about 35% of our Q2 2011 unit sales.

Average selling price in Q2 was $19.96, up $2.20 or 12% compared to last year in the same period.

We are very excited about the consumer reception of our Chameleon color changing shoes, but it is important to remember that we were selling this product in relatively small volumes exclusively through our direct channel.

We are preparing to open a line up to wholesale accounts for the second half of the year with increased capacity.

This will allow for more opportunities to satisfy market demand.

We continue to strive to diversify our product line for the second quarter of 2011, the top 50 styles represented 69% of total unit sales as compared to 79% of unit sales in 2010.

Gross profit for the second quarter of 2011 was $170 million up from $132 million in the second quarter of 2010.

Gross margin was 57.6 % in Q2 versus 57.8% in prior year.

Second quarter 2011 SG&A increased 15% to $107.6 million compared to $94 million in our Q2 2010.

As a percentage of sales SG&A was 36.4%, down from 41.2%.

In addition our operating profit was positively impacted by $3 million in net gains from restatements of certain balance sheet items associated with the timing of inter-company settlements.

The second quarter 2011 yielded an operating profit before taxes of $65 million versus $39 million last year, while revenue grew 30%, operating income grew 67% for the quarter.

As reported earlier today, net income for the first quarter of 2011 improved to $56 million or $0.61 per diluted share on 90.8 million shares.

Compared to $32 million or $0.37 per share in the second quarter 2010.

Effective tax rate for the quarter was below 15%.

We benefited from a change in the tax treatment of our structure in Japan and other countries around the world that resulted in a one-time benefit of $3.6 million.

For the second half of the year we expect our tax rate to be about 20%.

We ended the second quarter with $180 million in cash, an 86% improvement from 2010 levels of $97 million.

Our account receivable balance was $116 million, or 36 days sales outstanding, down from 38 days in the same period in 2010.

We ended the quarter with an inventory of $156 million.

Our estimated breakdown of the $43 million increase in inventory from 2010 levels is as follows.

$15 million is associated with the mix of higher content products, $12 million is associated with our 42% growth in wholesale backlog, $6 million is from increases in raw material, $4 million is in higher product costs and $6 million is associated with direct support of larger stores and the remainder being currency.

For the third quarter of 2011, we expect to generate approximately $280 million in revenue and diluted EPS of $0.40.

Currency estimates used for the quarter are $1.43 US dollar to euro and JPY 80 to the US dollar.

And we expect diluted EPS of $0.40.

Now I will turn it back over to John.

Thanks Jeff.

Before we take questions, I want to thank and congratulate all Crocs employees around the world on the Company's record sales results.

It has been a terrific start to the year and we are on track to surpass our peak revenue in 2007, thanks to everyone's efforts.

As we approach this important milestone, there is an obvious sense of achievement, but at the same time there is a feeling throughout this organization that we are just getting started.

This is a young company.

Next year will be Crocs 10th anniversary and I know many of us feel that the next 10 years can be as special as the first 10.

I share the enthusiasm and believe that Crocs future has never been brighter.

With that, operator, we are now ready for questions.

(Operator Instructions) We'll take our first question from Jeff Klinefelter with Piper Jaffray.

Congratulations John and Jeff and everyone else at Croc.

Great performance and great outlook.

Thanks, Jeff.

So, maybe just thinking about the guidance here, the specific guidance for Q3 and the implied momentum for the back half of the year with your bookings.

Can we break that down a little bit, Jeff, in terms of out of that bookings increase, would the ASP increase versus the unit increase be similar to the trend that you saw in Q2 in terms of the sell through rates, just to get some sense of what impact inflation is having?

More importantly, then, looking forward it is always interesting for people to find out how the mix is changing between classic styles, new styles, and then even clog versus non-clog.

John, can you share any perspective on that, on what has happened year-to-date and how that's evolving for the back half?

Let us parse that question into two pieces.

Let Jeff take the first piece and I'll talk about the product piece, second.

Thanks Jeff, so, as we said on the script our backlog at the end of Q2 was $160 million and an ASP of $19.79.

Last year at the same time, we had hundred $118 million in backlog the ASP in that backlog was $16.50.

So, we are seeing about a $2.29 improvement in ASP associated with product mix as well as global currency movement and some pricing effect in there.

The way that breaks down, in Q3 we anticipate $125 million of that backlog will roll into revenue.

Last year at the same time that number was $83 million.

In Q4, we anticipate $42 million, or the remainder of the balance of the backlog were rollout and last year at the same time it was $35 million.

So, that gives you some color about the backlog and how it rolls out.

I think your question was related to the pricing side of it and we were up about $2.29 in the product side for ASP.

I think, Jeff on the question on mix, I think it's a settling of the business and it is an interesting trend to look at over the last six quarters.

Our core business runs quarter by quarter just a little, but you are running in the 50% to 20% range, roughly.

Classics, as we've moved so many new products into the channel, it takes less retail space than what we used to give it.

It still sells well in the direct channels and it still sells well in certain wholesale accounts that carry that globally.

And that runs in the 7% to 10% quarter over quarter for the last six quarters.

Kids runs in that 25% to 35% range by quarter depending on the time of year.

This quarter of course our kids business is a little bit stronger.

Q2, usually is as we head into summer.

And then new products, really the last two quarters runs in that low to mid 30s range in terms of total revenue.

John, maybe you could clarify that a little further.

Coming into the end of the year, I think the expectation was, or the belief was that the reception, the retail reception and wholesale reception of your new styles was going to drive a majority of the bookings, were actually from new styles year-over-year.

How did that end up transpiring through the first half?

And in that booking number for the second half, what percent of that roughly is new styles year-over-year?

So, the first piece of the question, I think that we are happy with the performance of new styles.

There's different levels of satisfaction.

Our European business is always been a little bit slower when we roll out new styles and so you see that trending the same in 2011.

And we think that the retail business in Europe is going to be ultimately key to us opening up consumers to the new products.

Now we see on the Internet business, as Jeff alluded to in his comments, strength and growth through new products into the European markets because consumers there are looking for innovative new products from us that they may see another markets or that they see online.

I think our Asian business as we talked about, really grew on the strength of new products.

So they are at the other end of the extreme where the sell in of new products sell through of new products has been extremely strong.

I think what you will see next year is that we will roll out in larger quantities translucent sneakers, Chameleons, all the new generation products to a larger door count in the US that is driving new products into '12 with some of the very good products that we released in 2011.

Okay.

Thank you.

Just a couple quick things.

One would be on your forward look for the regional trends.

Jeff, you mentioned that Europe would likely moderate a little bit given the comparisons last year.

What about the Americas?

And Asia?

Do you expect similar sort of trends out of both Americas and Asia's into the second half compared to the first or any other comparables that we should be aware of?

So, looking at Q3 in particular, as you know we did not give Q4 guidance we looked at Q3 as we look at it, we see that the Americas revenue will be a little bit below the growth that we've seen in Asia.

It's still going to be a pretty good market reception for the Asia region.

Europe we do anticipate it slowing down a bit from the 51% growth rate, but still it will be in the range of Asia and Americas.

So you will see kind of a conversions back again to similar revenue increases in all three markets.

In Q3 with some regions kind of lagging behind the overall average.

Obviously we're pretty happy with our Q3 revenue expectations of a 31% growth rate year-over-year.

Okay, so you expect the Americas to sequentially to accelerating in terms of year-over-year growth rates?

Yes, the Americas will benefit from -- you can it in the pre-booking numbers, right?

A lot of that pre-booking is in Q3, and as you know we shipped a lot of our customers away from the at-once model and onto the pre-book model.

We are seeing a big benefit in Q1 and Q3 from that model.

Helping us a little bit on the seasonality associated with the drop off on spring/summer.

And then in the Q4 period, the Americas tend to be the strongest market during Q4 because of the Christmas list and our presence in the retail locations throughout the country.

So, historically Americas has been relatively stronger in the Q4 period than the other two regions.

We anticipate that to continue, although not to discount the growth rate that we see in Asia going forward.

Okay, great I will let some others jump on.

Thanks a lot and congratulations.

Our next question comes from Reed Anderson with D.A.

Davidson.

Thank you, good afternoon and let me just add my congratulations.

Let me just follow up first on that last question of Jeff's on the geography piece.

The big surprise to me was just the strength of Asia on a relative basis.

So, as you look at that it seems like we are definitely in some level of inflection here.

Is it conceivable, John, that Asia could be a bigger region for you next year than the Americas or is that jumping too far ahead of ourselves?

I think that gets a little bit ahead of us.

But I think that as we said Reed, a number of times, it was our belief and our strategy to reopen wholesale business in the US the right way the second time around.

And so I think when we went through the growth cycle that we went through the first time, we maybe could have done things a little bit differently.

And so this time out we are opening doors at a slower rate than maybe we could have or should have which reflects a little bit in the US and Americas region growth being a little bit less than Q2 then maybe the other two regions.

But I do think that the foundation is being built out there.

I visited now 5 or 6 of our top 10 customers in the last four or five weeks.

We are going to continue to visit the rest of them in the next month.

You know the since that I get is very positive and they are probably at a point now because we didn't do the outer replenishment model this year through the cycle, that inventory is a little bit lean today in terms of retail wholesale channel and I think that builds the base for next year.

There is a little bit of a hunger.

There is a little bit of demand that is out there and I think we are going to see a very good year for the Americas in '12 building on that base and opening more doors with our independent and with chain store partners that we have today.

That's very helpful, thank you.

And then shifting gears a little bit.

Jeff, gross margin, obviously, came in relatively good compared to where we thought it might have been.

Is that mostly a function of just having the better top line number?

Or are you seeing some of the cost factors etc, that had played into that, the weight into that dissipate a little bit?

How should we think about that the next couple of quarters?

Yes, a little bit of both.

We did see some leverage in our other cost of sales line items representing the cost of distribution centers in the fixed costs associated around the globe of warehousing our products.

We do see a little bit of benefit because of the leverage impact on that.

Offset slightly by a little bit lower product margins, but at the end of the day we came in at about the same gross margin is last year down 20 basis points.

So, consistent with what our expectations were for the quarter as we try to work through this inflationary cycle by taking actions on our pricing and by taking action on the cost of goods sold, fixed cost line items.

So, I think going forward, what we have always said is that we expect 2011 to be very similar in nature to 2010.

And we are working very hard to achieve those levels as we look out for the balance of the year.

Okay and then the lower product margin you cited -- that is really just a function of mix ultimately, yes?

Yes, a little bit of both.

We've had -- I think we mentioned in the script we talked about the cost increases that we are seeing on the inventory side that ran about 5% of our product cost.

So, that represents the true inflationary impact on our product cost and we have had to offset that with peer pricing on the product side.

We've been able to do that for the most part, but we do take some efforts to maintain price in some of our iconic price points such as the classic at $29.99 and CrocBand at $39.99.

It's important to remember also that our AFC's and our pricing globally has been impacted by foreign exchange as well.

And we have benefited from that.

And they just a couple more, on the comment you had made, I think it was John, talking about Chameleon and you're going to bring that into some wholesale accounts here.

Is that something that you would strategically select certain accounts?

Or are you going to give everybody a little taste of that?

I'm just curious how you're thinking about a product like that, going from a direct only to little bit of a wholesale.

It's hard as we have said on previous calls and in meetings.

It is a product that was really innovation, ideation was created in Q4 of last year and we worked through all of the manufacturing nuances in dealing with this kind of material in putting it together in a product that we had and bringing it to market in the second quarter.

That's what I think is one of the key attributes of Crocs today, is that ability to innovate and bring products to market in a really rapid mode.

We are still going to be somewhat capacity constrained when it comes to manufacturing for the remainder of this year around Chameleon.

So, we have offered and have started to shift the Chameleon product into a number of our key independents as well as some of our key chain-store partners.

And I was in Southern California and Phoenix at the end of last week in our retail stores and our wholesale accounts and saw the nice displays out in Nordstrom and Nordstrom's Kids and our initial feedback from them, having product out in a number of stores but not all stores, was very good last week.

That is encouraging to see that our consumers are looking for that product in those locations.

They're aware of the product and we are just constrained by capacity for the remainder of 2011.

Okay, good I will stop there and let somebody else jump on.

Good luck.

We'll take our next question from Jim Chartier with Monness, Crespi, and Hardt.

Hi, congratulations on another great quarter.

Jeff, I just wanted to make sure I understand this.

Tax rate going forward, going to be 20%?

Is that what we should be modeling?

Yes, we benefited from structural changes in our structure that we run globally.

And we think that as we look forward we can go more comfortable at about a 20% tax rate, given the legislative changes that have taken place.

Most notably in Japan, as well as some minor impacts in China and Brazil, as well as the increased profit as a percentage of our total profit of Asia.

So moving forward we think that we can move that tax rate down to about 20%.

As you saw in this quarter, our tax rate was under 15% because of a $3.6 million benefit.

If you back that out, we are closer to the 20% level.

So, we think that we can maintain that for the balance of this year at least and get further clarity to that as we move into next year.

Okay and then can you tell us what the retail SG&A was for this quarter and last quarter?

Yes, we are trying to shy away from breaking out SG&A out into the retail, Internet, and our indirect business.

I will tell you that over the past six months we have been managing our non-retail business come our non-Internet SG&A line item about the line of inflation to little bit less than a double-digit number.

As we've taken some frugal actions on the part of the corporate office as well as maintaining a good cost structure in our region and our country structures and the based fixed amount of running the business.

We continue to look for and continue to leverage our SG&A on the non-retail direct business.

Retail direct spending is growing in line with revenue, as you know, once you add storage you add revenue, but you also had rent and people associated with running that store.

So, we do see a little bit of leverage on the retail and Internet as we go forward, but for the most part the real leverage on the SG&A line will come from our indirect SG&A, as we call it, which is our fixed SG&A spending.

Thanks.

Can you share with us the marketing expense in the quarter?

Do you still plan for that to be flattish for the year?

Yes, we still plan on marketing to be flattish for the year.

Last year, I think the total marketing spend is going to be about the same as what you'll see this year.

We didn't actually want to talk specifically to marketing cost, externally.

We did not do the television campaign that we ran last year.

So, we saw little bit of benefit.

We saw basically flattish marketing, but different spending, right?

So, we spent more on Internet, we spent more on corporate sponsorship activities around the globe and less on television media and expensive advertising campaigns.

That is how that kind of broke out.

Great, thank you.

Our next question will come from Mitch Kummetz with Robert Baird

You mentioned in your prepared remarks that over the balance of this year in the US that you're not really going to be adding a lot of doors, more better penetration of the existing doors.

Can you elaborate on that?

Specifically I'm interested in -- you have done a great job of late of building out the family channel, I'm just wondering where you are in that process?

And then even more recently you've added some distribution with Target and Kohl's, and I'm hoping you can talk about how that unfolds over the balance of this year?

And then when you talk about better penetration, are there certain collections that you are focusing on to get into that existing distribution?

Whether it is translucent or sneakers or anything else?

Sure, Mitch.

Let me break this into three pieces.

I think you had three different thoughts there.

So the first one on retail, it's really our belief if you look at the marketplace today, that we need more Crocs consumers.

And that when people become educated and in contact with the brand and they see the transformation of the product, we get interest.

I think we used to say, love us or hate us, people still don't knew who we were.

They knew us for a clog.

I think the transformation of the US retail business and the expansion in Asia of their retail business has given us that connection to consumers.

And to be at 190 plus stores in the United States still gives us a huge opportunity to grow and to develop the brand, to tell that story.

On the wholesale side, as I said earlier to Jeff's question, really, or maybe it was Reed's question, our focus really was around growing the wholesale business back in a methodical fashion.

And to your question on products, we segment products by line, Kohl's has a line of SMU products that we don't sell to other accounts.

We have segmentation between products that we sell in the family channel, but we sell into department stores or what we sell into sporting good chains.

So am I think that we have that portfolio of products that we have that ability to segment.

I think, again, the response that we've seen and the feedback that we've got on 2011 wholesale in the first half of the year has been very positive.

So, what you will see, anecdotally, what you will see Kohl's doing all doors next year with kids.

You will see the Kohl's go all doors next year with mens.

We will see growth in womens doors there and we will kind of see have the portfolio of products shakes out and how many doors that they will expand into.

I think you can take that across many of our wholesale partners, especially in the family channel and you would see similar types of results or SKUs, end caps, aisles that are dedicated to now Crocs products, shop-in-shop.

More brand resonance in 2011 and 2012.

Okay, that is helpful.

And then, Jeff, on your retail business, you gave some numbers on the quarter.

I think you broke that out by concept, whether it is full price or kiosk or shop-in-shop outlet.

Can you break out where you are on the retail business by region?

And then I think you said 33 stores your opening in Q3.

Could you maybe talk more specifically as to where the stores are opening and then also, fill us in as to what your thoughts are for Q4 in terms of new stores?

Maybe I'll take that, Mitch.

So, what we think is that we will see, as Jeff said roughly, 33 doors open.

About 5 will be in the US, maybe more if we get the right locations and those come to fruition before the holiday season.

We do expect to add about the same number of doors, 4 or 5 doors in Europe, but with the opportunity to add a few more.

And our main growth of doors will really come in Asia where we will add roughly 20 plus doors in Q3.

And in Q4, would you expect a similar number of new doors as the third quarter?

It starts to slow down, of course a little bit because we are not opening stores in all territories.

During that time of year, of course, it is much easier for us to open stores in Asia and the southern hemisphere or in warmer climates during that time of year.

So I think what we expect is we would open about 20 plus doors in the fourth quarter and then again it would be spread similarly to what we just discussed.

And again opening doors in the US and in warmer climates like Florida and Georgia and California, Texas during that time of the year.

And then lastly, just quickly housekeeping, Jeff, average share count on the quarter?

I didn't see that on the press release.

So weighted average shares finish about 90.8 million altogether, when you factor in the RSUs and other overhang for the total used for EPS purposes, we're at 90.8 million on a diluted basis.

Our next question will come from Jim Duffy with Stifel Nicolaus

Jeff, looking at Asia and Japan business didn't seem to miss a beat.

Can you offer perspective on the momentum of the other regions within Asia?

And maybe specifically comment on progress in China during the quarter and the outlook for growth in China?

Maybe I will do that one, Jim.

I should have directed that to you.

I think we're obviously ecstatic, very pleased with the performance, especially of our North Asia business, which is the larger market for us during Q2.

Korea, China, and Japan all grew nicely during the quarter.

Japan rebounded nicely.

Good weather in May and June, and just that renewed sense of the nation there.

In China, as we said, we started on this last year because of the strength in the Tier 1 cities, in Guangzhou, Beijing and Shanghai to really push into Tier 2 and Tier 3 cities.

As you know, these are large population centers that offer a great opportunity for us.

People are shopping.

The Tier 1 markets taking back products into the 2 to into 3 cities.

And so we saw an appetite for the brands on both our own investment in retail as well as with some of our distribution partners in each of the provinces there, has really allowed us to take that step forward this quarter and a platform to build on going forward.

Okay, great.

Jeff, I have a couple questions for you.

Should we continue to expect similar seasonal flow of gross margins by quarter for the remainder of the year as we saw in 2010?

I think our belief is we don't typically want to give out Q4 at this point in time.

But as we kind of look out though the rest of the year, we see gross margin in line like we've said, throughout the year that we see the gross margin line being very similar to 2010's gross margin line.

In first-quarter we ended at 52.6 versus a prior year of 52 so we were 60 basis points ahead of that point.

This quarter we were 28 basis points behind.

So really no big differences from last year.

So, continue to try and manage our cost of goods sold, our infrastructure costs and leverage that at the same time as trying to manage our product margin and our variable margin that we get on our Crocs that we sell through the pricing activity or reduced factory cost through efforts of our supply chain group.

So, we kind of see the same slope of the curve throughout the rest of the year and we are hopeful that we can maintain that going forward.

Okay, it sounds like from your answer to the previous questions that improving revenue outlook doesn't really have you thinking differently about SG&A spend, inside the whole SG&A spending plan -- static, I suppose?

Yes, that is directionally correct.

I think we are making some specific decisions on marketing spend and other investments that we could make.

One of the things that we have always said is that we are not going to hold back the growth by holding back SG&A and direct spending.

That said, it the year-over-year increase in SG&A indirect is pretty modest and we continue to manage that line pretty tight.

But going forward, we do think we might need to spend some money on marketing in order to support our increase in wholesale activity as well as our increased retail stores that would drive retail and Internet spending, to drive that direct to consumer channel.

But for the most part marketing costs are going to be in line with our expectations.

Okay, and then just can you explain the inter company operating profit adjustment you spoke to?

Sure, I think as we talked about throughout the year, we do have some settlement issues between the countries of our global enterprise here.

And specifically we had some exposure to end that we left uncovered for a period of time that resulted in a gain of about $3 million.

We are trying to close that down right now.

We were transitioning from one particular method to another.

We are trying to close that down and protect us against an increasing US dollar.

Giving us a little bit better risk profile, but in the meantime we were able to show a gain on the restatement of our balance sheet accounts that resulted in roughly a $3 million gain which you see on the income statement.

Okay, that is good to hear.

And then, with respect to the 3Q guidance, do you have particular us assumptions four FX translation rates?

What we said was that it was $1.43 for euro to the dollar and JPY80 to the dollar.

We'll take our next question from Robert Samuels with WJB Capital.

Most of my questions have been answered but can you elaborate more on some of the marketing plans that you do have for the back half of the year?

And then maybe into next year as well?

Okay, I think for the back half of this year, a lot of the marketing dollars really go in a directed manner.

So, directed into our own retail stores from a visual merchandising standpoint and some innovative things to tie to that.

That again brings the product portfolio out to the consumer whom may still think of us in a different way.

A number of programs with our major chain-stores wholesale partners, especially in the US, some also in Europe.

Again to really tell the story of the back-to-school line in the United States and into the fall holiday products.

And a number of directed digital marketing, social marketing campaigns that we have.

And that is the main focus for the back half of this year.

That will continue into next year.

We haven't finalized our 2012 plans yet.

You will see us be a little bit more out in the marketplace from a print advertising and maybe some of the things that we have done in the past that we can draw back on.

Experiential ways to market the brand, bus wraps in major markets and that type of activity.

Thank you very much.

And we will take our last question Sam Poser with Sterne, Agee.

I just have a couple of questions.

Number one on the gross margin, which was well above what we expected.

How much of that was due to the balance of -- well, I might have missed the beginning of the call.

What was the at once versus the futures numbers with in the sales for the quarter?

We didn't talk to that, specifically on the margin impact of at once.

I think we saw some pretty strong at once business at our Asia market.

Asia tends to have a bit higher margins benefiting from both the exchange rate variance that was set at the pricing that we did for the market compared to where we are at today.

As well as some potential for peer price differences between the regions in Asia is benefits from that brand strength in Asia.

So, there's the look that we saw from the at once business coming through from Asia and that help their margin out.

It also helped is that we were able to drive 35% of our sales through new products and we ended the quarter with an ASP $19.96.

All those benefited our overall margin line.

And I think as we mentioned, Sam, and I'm not sure your that part, but we think that our cost in inventory, the actual basket cost, market basket or so, the way we look at it internally is up about 5%.

So that was a little bit better than we expected --

You mean the unit cost is up 5%?

Yes.

On an apple to apples basis.

But I guess my question is, I assume that Q2 was a stronger at once quarter than Q1 was as Q4 will likely be versus Q3?

Your at once business should run a higher margins than your futures business.

So, can you give us some idea what kind of contribution that was?

On the margin?

Yes, as we said before that we see the benefit of pre-books result in higher volume in the wholesale channel in Q1 and Q3.

And then putting us in a position to benefit from at once business in Q2 and Q4.

So as a percentage of overall sales, we've shifted the model toward the pre-book enterprise.

And that resulted a lot of cost efficiencies from us in ability to manage our factories better and our ability to manage our distribution centers better so that drives a lot of efficiencies in our workforce and our infrastructure costs.

So, that we have seen as a benefit.

As far as the go forward, I think what we said was -- and Sam, I'm not sure if you were jumping on at that point, but we said that our backlog was at $168 million at the end of Q2, $125 million of that will rollout in Q3, $42 million in Q4 and beyond.

As you can see a lot of our pre-books that we have on the backlog will roll into Q3.

That $125 million compares to $83 million last year and the $42 million compared to the $35 million.

So you see a real strong lift in our backlog sales coming off in Q3, with a little more modest growth rate in Q4 as the seasonality has shifted from Q4 to Q3 on that pre-book.

Does that help answer the question?

Yes, and I'll just ask one last thing.

Last year in the fourth quarter -- I know you're not really giving guidance for fourth quarter, your gross margin was 48%.

That probably leaves a lot of room on the upside into Q4.

It may not look as good as Q2, but it definitely should look a lot better than that 48% last year.

Given away you are flowing goods, but the way the at once will become more important at that time.

Yes, we are always careful about only talking about one quarter at a time.

We don't want to get too far ahead of ourselves.

As we look out into Q4, our crystal ball is not much better than any other analysts.

We don't know what the impact of the USA issues are going to be in the Christmas time.

We don't know what Europe is going to look like at Christmas time.

It is a little bit too early for us to call and I think when we get together in 90 days, we'll have a lot better clarity on Q4.

And clearly as we move into Christmas we will have a lot better sense of accomplishment there on the retail storefront for Christmas 2011.

Hopefully we'll have a US budget by that time, too.

Yes, maybe by next week.

Understood.

I'm just saying with all things being equal, because of the way you've shifted the business, that should drive a higher margin, a significantly higher margin in the fourth quarter than fourth quarter last year.

Not assuming -- just taking everything else off the table.

Like I said, Sam, we're reluctant to break out that crystal ball into the Q4 period at this point in time.

We are hopeful that we can deliver up on what you are saying, but at this point we are still going to wait for 90 days to give you guidance on Q4.

But we remain optimistic about our prospects, given the 20% growth in pre-books at the end of the Q2 period as we look out into Q4.

And then the potential of additional retail and Internet sales and the strength of Internet in Europe.

And the additional stores that we would have opened by that point, which we think will be about 50 stores.

We will be operating about 450 stores for the Christmas selling season for 2011.

So, between those things we're fairly optimistic but on the margin line, I think we'll have to give you a little bit better guidance as we get closer to that day.

Thank you very much.

Continued success.

This does conclude today's Q&A session.

I would like to turn the conference back over to today's speakers for any additional or closing remarks.

Think you all for joining us on the Crocs Q2 earnings call.

And we look forward to talking to you again in October.

Once again, this does conclude today's conference call.

We thank you all for your participation.