卡洛馳 (CROX) 2011 Q3 法說會逐字稿

Welcome to the Crocs, Inc., fiscal 2011 third quarter earnings conference call.

(Operator Instructions).

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

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

A copy of the press release can be found on 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 federal securities laws.

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

Crocs cautions that these statements and 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 25th, 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 the 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 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 Crocks.

Please go ahead, sir.

Thanks for joining us today to discuss our third quarter with me.

On the call is Jeff Lasher, our Chief Financial Officer, who will review the financials in a moment.

Let me begin today with details about our operating performance by region and provide more insight on the preliminary results we announced last week.

Overall, we were pleased with our top-line performance during the third quarter.

Revenue increased 28% to $275 million as we continued to experience strong global demand for our spring and summer products, with the positive momentum from the second quarter carrying over into early Q3.

Revenue growth for the first nine months of 2011 was nearly 31%.

We're also pleased with the initial sell-in of our fall line of products.

The shortfall in revenue versus our initial guidance was primarily in our US direct-to-consumer channel and, to a lesser extent, Europe.

Let me take a few minutes and discuss the US direct-to-consumer channel.

In retrospect, we feel there were two key decisions taking by management that affected US retail.

First, we changed the type of product and merchandise in our outlook and kiosks that was not as promotional as previous year or as other retailers.

Second, we changed our retail to back to school promotion too early in August, as warm weather drove consumers to purchase more wear-now products, which didn't have -- which we didn't have available in all locations.

While we experienced specific merchandising challenges in Q3 at our outlet and kiosk locations, we were happy with the performance of our full-price stores relative to our initial outlook, as these channels benefited from the introduction of new fall/winter products.

Therefore, we view the shortfall more as an execution issue versus a broad judgment call by consumers about our brand.

From a growth perspective, Asia was again our best performing region, with sales increasing 41% to $111 million.

After very strong in-season sales of our warm-weather products, we witnessed healthy demand for our new fall styles during August and September.

Japan continues to grow and has rebounded from the earthquake and tsunami in March to record another strong quarter of growth.

Sell-through rates in our 32 retail stores and at our wholesale partners throughout the country have accelerated from earlier this year, underscoring both the resiliency of the Japanese people and the strength of our brands in this key Asian market.

The rest of Asia also showed nice growth during the third quarter, led by China, where we have continued to build our presence in tier two and tier three cities through new retail stores and distribution partners.

In our other Asian markets -- Korea, Hong Kong, Taiwan and the ASEAN countries -- new products are being well received and we continue to see solid baseline demand for our core products, as well.

Our recent performance in the US, coupled with our backlog for 2012, highlights the progress we have made building our wholesale business over the past few years and evolving Crocs into a more casual footwear brand.

We are pleased with the success that we have had this year, broadening our appeal and creating new Crocs consumers through a broader portfolio of new products.

The crocband, translucent sneaker and Chameleon collection have all brought excitement to the marketplace and helped change the perception that Crocs is a one-shoe, one-style company.

This has led to new points of distribution, more shelf space within our existing account base of department stores, family footwear chains, specialty retailers and independents across the country.

Third quarter sales in the Americas region increased 18% to $123 million.

The next step in expanding our US business is to lengthen our selling season.

The fall/winter time has always been our lowest season.

However, we are diligent in our efforts to develop and merchandise new products that create a connection with new and existing consumers.

We strive to become a destination for consumers for back to school and fall/winter products.

However, this takes time as we move into new categories and attempt to take market share from established casual footwear and boot brands.

Our fall 2011 line is our most diverse offering of shoes and boots every and several styles have performed well since being introduced at wholesale and retail.

Similar to how we have recently evolve the spring/summer line, we will build on these initial successes to create a more comprehensive fall collection in the future.

At the same time, we need to be more effective in promoting our fall business in order to alter consumer perception that Crocs is just a warm weather brand and drive more traffic during the back half of the year.

In Europe, it's been a tale of two seasons.

As expected, after a strong first half of the year in which sales were up 46%, our growth rate moderate in the third quarter.

Most of Central Europe, UK, Benelux, France and Germany, our biggest markets in Europe, all struggled with cold weather throughout the summer selling season.

Historically, our European business has experienced a greater degree of seasonality than our other regions and this will be the case again in the fourth quarter.

Through direct operations in the UK, France and Germany, we have been able to reshape our spring/summer business through the introduction of more commercially viable footwear, a wider wholesale distribution.

Our Internet business is up 43% year to date, a good indicator that consumers are hungry for the brand and seeking out the product.

To better capitalize on this demand, we have opened nine stores this year.

However, this is below our original plan as we have struggled to find good locations that fit our financial criteria.

This fall we've seen some positive response to our sneakers and shoes, however the challenging economic conditions in the region, coupled with our lack of traction as a fall/holiday brand, is negatively impacting the second half growth.

We continue to be confident that Crocs can compete successfully in Europe on a year-round basis, but our near-term expectations have come down based on current conditions and our backlog.

To further address the dynamics in the European market going forward, we have taken the following steps.

We have hired a new Managing Director in Europe and we have restructured our Crocs Europe office to reduce ongoing costs in the region.

Before I turn the call over to Jeff, let me highlight a few key points about the state of our business and the health of the Crocs brand.

Today, we are a very diverse company.

Diverse in terms of geography -- year to date, approximately 38% of our revenue comes from Asia, 48% the Americas, and 19% from Europe.

Diverse in terms of distribution channels -- year to date, approximately 62% is wholesale, 29% is through company-owned retail and roughly 9% through the Internet.

And diverse in terms of product.

And you can see, our business is not dependent on any one area, channel or product, which is a strategic advantage we did not have a few years ago.

Our balance sheet is in very good shape.

Inventories are up only 6% compared to a year ago on a 28% sales increase.

At the end of Q3, we had $220 million in cash, no debt, which puts us in great position to further invest in the growing business and weather another potential downturn in the global economy.

And, in my opinion, the brand has never stronger.

Our product development team is creating great products and our marketing organization is focused on creating the emotional connection with consumers that is solidifying the long-term sustainability and growth of the business.

I'll now turn the call over to Jeff.

Thanks, John.

Hello, everyone, and thanks for joining us.

Today I'll be discussing third quarter 2011 results.

Revenue for the quarter increased $59 million, as John said, or 28%, to $275 million.

Each of our three geographic regions saw strong revenue growth in Q3.

Sales in the Americas increased 18% to $123 million, Asia increased 41% to $111 million and Europe increased 26% to $41 million.

In Americas, Q3 revenues continued to grow in all three channels.

Retail sales in the Americas region increased 20%, while store count was 195 at the end of the quarter, up 14 locations from prior year.

At present, we have 72 full-price stores, 58% full-price kiosks and 65 outlet locations.

Sales from our wholesale channel grew 15%.

Internet grew 24% in Americas and in the USA, revenue was up 20% for the quarter and represented about a third of total global sales.

The 20% increase in retail sales in the Americas was from a combination of larger locations, product breadth and higher average footwear selling prices.

Sales from the Asia segment were strong across all channels.

For the third quarter, Asia revenues grew 41% from last year.

Results in Japan grew 40%, reflecting continued strength as the recovery continues, and favorable currency conversion.

Growth in the region as broad-based as each of our top 10 countries in the quarter generated strong growth.

In Asia, retail sales were up 49% during the quarter, as we ended with 182 stores, up from 151 last year.

In Europe, sales grew by 26% versus prior year.

During the quarter, results were driven by strong growth in our Internet and retail business.

Wholesale revenue grew 18% in the quarter as pre-books were delivered for the fall/winter season, but negatively impacted by lower-than-expected at-once orders during the season.

As we detailed in our earnings call earlier in the year, we expected European growth rates to moderate in the second half of the year and we foresee modest growth in the wholesale channel going into next year.

Specific to retail channel, third quarter retail sales increased 31% to $95 million.

We ended the quarter with a total of 410 company-owned retail locations globally, which is up from 354 last year at the end of September and up 13 units from Q2, 2011.

This includes 169 full-priced stores, 92 store-in-stores, 83 factory-direct stores or outlets and 66 kiosks.

Compared to the same time last year, we have 12 less kiosks as we continue to shift toward full-line locations.

As John highlighted, we were encouraged with our Q3 results as we work to transition into our 12-month brand.

For the quarter, our percentage of the clog silhouette from 52% to 46%, with a corresponding increase in the boot and sneaker product lines.

This shift, combined with channel mix, currency impact and pure price changes, increased average selling price in Q3 to $22.18, up $3.95 or 22% compared to last year in the same period.

Global footwear unit sales in the quarter were 11.7 million, up 4% from last year.

Our new products globally represented about 33% of our Q3 unit sales.

Gross profit for Q3, 2011, was $147 million, up from $119 million in the third quarter of 2010.

Gross margin was 53.5% in Q3 versus 55.1% in prior year.

The 160 basis point decline compared to a year ago was primarily driven by lower wholesale margins in our Americas and European businesses.

As we highlighted in our preannouncement last week, we had been expecting stronger revenues from our US retail business, which also negatively impacted gross margins.

Third quarter 2011 SG&A increased 21% to $112 million, compared to $92 million in Q3, 2010.

As a percentage of sales, SG&A was 40.6%, down from 42.8%.

The majority of our SG&A increases was driven by the expansion of our retail footprint.

Additionally, versus our original expectation, our costs for the quarter not only included the cost of supporting year-over-year increase in revenue, but also included severance from certain salaried employee reductions, in part associated with our efforts to optimize processing activity and acceleration of agency marketing expenses for fall/holiday marketing assets that were retired in 2011 and an asset impairment for tools.

In total, these factors combined to impact our results by about $3.5 million.

Operating profit was positively impacted by $2.1 million in foreign exchange gains from restatements of certain balance sheet items and the timing of intra-company settlements.

For the quarter, we saw overall revenue increase by $17.5 million, associated with year-over-year changes in foreign currency.

These changes also benefited operating income by $5.5 million.

The third quarter 2011 yielded an operating profit before tax of $37 million versus $27 million last year.

While revenue grew 28%, operating income grew 36% for the quarter.

As reported earlier today, net income for the third quarter of 2011 improved to $30 million or $0.33 per diluted share on 90.5 million shares, compared to $25 million or $0.28 per share in the prior year.

Now, turning to our balance sheet, we ended Q3 with a record $220 million in cash, a 54% improvement from 2010 level of $143 million.

We ended the quarter with inventory of $151 million, down $5.4 million from Q2, 2011.

On a year-over-year comparison, inventories increased 6%.

Looking forward into Q4 and into 2012, we ended the quarter with a backlog of $297 million, which represents approximately 30% growth over last year's tough comparison.

Of the backlog, $229 million is in the first half 2012, representing a 33% increase over the same point last year.

On a regional basis, strong growth in the Americas and Asia were partially offset by modest single-digit growth in Europe's backlog.

For the fourth quarter of 2011, we expect to generate revenues in the range of $200 million to $205 million and diluted EPS to be between $0.03 and $0.05.

Currency estimates used for the quarter, are $1.36 to EUR1 and JPY77 to the $1.

Included in our assumptions, we expect wholesale revenue to be up modestly for the quarter.

We anticipate that our direct channel growth will be driven by Asia and Americas and globally be about half of our total sales for the quarter.

While we face certain seasonal challenges in Q4, we anticipate that 2012 will reflect strong growth as we prepare to invest in new retail stores, continue to transition kiosks and move forward as a global, 12-month brand.

I will now turn it back over to John.

Thanks, Jeff.

In summary, our Q3 performance did not meet our expectations and management is not satisfied with our performance for Q3.

With that said, we do like the overall pace of our business to be at nearly $1 billion in revenue and around $1.22 EPS for 2011.

We are happy with the overall trajectory of the brand.

EPS is up 58% year over year.

We'd like to reiterate our overall long-term growth plan for the business based on sustained growth in wholesale, higher product-driven ASPs, direct channel development and geographic expansion.

With that, we would now like to turn the call over to the operator and take questions.

Operator?

Thank you.

(Operator Instructions).

We'll take our first question from Jeff Klinefelter with Piper Jaffray.

Thank you.

A couple questions for you, Jeff and John.

First of all, John, just to clarify the top-line trends or comp trends between the outlet division or outlet kiosks compared to full-line stores.

Can you just give a sense for kind of the magnitude between the two and kind of what that tells you about the new fall product reception by consumers versus some of your own strategic decisions in the outlet channel?

Specific to Q3, Jeff, or to Q4?

Yes.

Q3.

To Q3.

I think for us, new products went into their retail channel in that early August, mid-August timeframe and I think the initial indication is a little bit hard to read with not many consumers looking for fall/winter products.

So, what we have seen subsequently as the weather starts to turn is we see a little bit better traffic in the stores and we see an uplift in terms of revenue, based on new products and sell-through for lined products and more of our fall/winter selection.

I guess I was referring, John, more to -- you saw a slowdown -- you saw a specific issue in the outlet kiosk business in Q3.

I mean, what kind of a difference in comp trend between full-line stores and outlet stores did you experience?

I mean, was it a 5 point difference between comp?

I mean, what was the indication that told you you had more of a strategic issue in the outlet channel versus just a product issue?

Yes.

We don't really break out percentages between channels in our retail sector.

I think what we have said in both the initial guidance and today is that our outlet stores and kiosks have had a higher percentage of discounted products in previous years.

And I think this year we reduced the percentage and the types of products that we had in outlet and kiosk to be a less percentage of products being sold in those channels and we put a larger percentage of more full-line products, which, in retrospect, may have had an impact on consumer behavior.

Consumers, in a previous year, would have come in and maybe bought two pairs of full-price shoes and one or two pairs of discounted product shoes.

And where we saw them buying full-price shoes this year, there wasn't that propensity to add that third or fourth pair to the acquisition, just based on us not providing as much discount product.

Okay.

A couple other quick questions.

One, as you look forward in terms of unit versus dollar growth -- I mean, that's impressive.

Jeff, I think you said 22% increase in average -- unit retail average selling price year over year.

That's driving a meaningful part of your top-line growth.

What do you kind of see as the relationship that you expect to see or you're intending to see going forward?

Is your top-line growth going to be kind of two-thirds pricing, one-third unit velocity?

Thanks, Jeff.

I think when we look at the results for Q3, obviously, we were encouraged by our success in the boot business, which had a considerable benefit to our ASP, as well as our new sneaker lines, both of which were up significantly on a year-over-year basis and actually generated a higher percentage of revenue, driving down our clog silhouette from 52% to 48%, as I mentioned in the script.

And that's a major driving reason why our ASP, in total, was higher by 22% versus last year.

So, when we look forward into next fall, we'll be looking forward to building on that success in the second half of next year.

Obviously, our ASPs will trend on a seasonal basis, based on the percentage of spring/summer as a total of our volume.

Okay.

And then just one other quick thing.

On your backlog, you said about $229 million of that $297 million would be first half shipments or Q1/Q2.

Then, can you give us a sense for how that splits between Q1/Q2?

I mean, Q1 is -- there's more visibility for pre-book as a percent of your total wholesale, if I recall from the trend this year.

I mean, do we have a rough sense for how much of that $229 million is Q1 versus Q2?

Well, last year -- sorry, in 2011, speaking to the last two quarters, we saw wholesale activity that was pretty close to the same level, Q1 versus Q2.

I think Q2 was like $10 million higher than Q1 for wholesale activity.

So the split for pre-books is disproportionately towards the first quarter of 2012 as far as that $225 million that's associated with 2012 volume coming in.

So that would disproportionately heavy to Q1, but we anticipate that the rollout of that Q1/Q2 pre-book is -- we're still kind of working through that.

We'll have a little bit more detail of that in 90 days when we go out with our earnings for Q4.

Obviously, we'll give you a lot more color on Q1 at that point.

But last year, or, sorry, earlier this year, the split in wholesale was pretty close to $165 million/$175 million kind of levels.

So, we anticipate that same kind of performance next year.

Okay, great.

Thank you very much.

And our next question comes from Jim Duffy with Stifel Nicolaus.

Thank you.

Hello.

A couple questions.

The inventory (technical difficulty) inventory balances, can you speak to the composition of that?

How much of that is spring product versus fall product?

I guess I'll start with that.

Thanks, Jim.

Right now, our inventory levels, as we mentioned, are down versus the prior quarter.

We ended the quarter with $151 million worth of inventory, so a pretty strong balance sheet perspective.

Of that level, about 90% is current product and that's equal split, basically kind of a 50/50 split of that 90%, spring/summer versus fall/holiday.

As you know, it's still warm weather in much -- in many parts of the world that we have a lot of our revenue coming from, both the Singapore and south of the equator volume, as well as South America volume and Florida markets in the US.

So, we still have a presence of spring/summer, but we do have about half of our present inventory that's not EOL would represent fall and those are just approximations.

Okay.

Can you do the same kind of back of the envelope approximations for the geographic location of the inventory?

Yes, sure, Jim.

Basically, our inventory split around the globe, Americas has always traditionally been a little bit heavier than their revenue percentage for the total distribution of inventory and Asia's always traditionally been lower than their revenue percentage on the distribution of inventory.

And Europe has kind of waffled between a little bit lower to a little bit higher.

Right now it's a little bit higher than their percentage of revenue generation.

So, on a revenue split -- sorry, on an inventory versus revenue split, Americas would be a little bit higher on inventory than their revenue percentage.

Europe would be a little bit than their percentage of revenue and Asia would be a little bit lower.

Okay.

That's helpful.

And then how much incremental fall inventory are you likely to take during the fourth quarter?

If you have kind of an inventory balance number at present that you could share with us, that would be helpful, or anything you can comment on to the extent of how much incremental product shipment you're taking in relative to your forecast.

Well, I think we've been very pleased with some of our fall products and we are in position to replenish much of those products.

I think you're on the mailing list that we sent out some notifications that we replenished our Cobbler clog and some of our boot products that we had very strong sell-throughs of in Q3.

So, as those inventories come in, we're aggressively getting those to market as soon as possible for our direct to consumer channel and benefiting from the strong demand of those products.

Okay.

And then, John, a question for you.

It sounds like some of the shortfall for plan could be characterized as self inflicted.

You mentioned merchandising mistakes in the outlets.

With the benefit of the hindsight, what were some of the other places where you feel like the organization made mistakes?

What can you do to correct them, both now and as you look out to next year?

I think we touched on the revenue side of the equation.

I think maybe a little bit more aggressive, proactive sales management in Europe during what was a pretty rough summer period there could have helped in that market.

I think as we talked about SG&A, we made some decisions there to write off certain assets to reduce our longer-term operating expenses and I think that, in retrospect, we thought that the market would be stronger based on performance through the second quarter into the third quarter and those decisions were taken thinking that we would be at a higher revenue level.

And so in retrospect maybe it would have been better just to let those assets bleed out or those costs bleed out over time.

I think those would be the kind of bigger takeaways.

John, related to that, from an accounting convention standpoint, why wouldn't call out some of those as one-time in nature?

Typically restructurings are held aside as kind of outside of the context of continuing operations.

Yes, I think in general terms, that would be correct.

At this point, for this particular quarter, those were unexpected expense for us in the quarter and we did call those out in the script that we didn't anticipate those coming down in Q3.

There was a decision that management made during the course of the third quarter, after we had the call, and the primary reason why we had that callout in the paragraph.

In and of itself, it was not a hugely material number and, therefore, was not going to, necessarily, be included in our script or our -Q in that that number, in and of itself, was not material.

But when you add it with the other items that we had that impacted our forecast for the quarter associated with SG&A, we thought it was important for the investment community to understand that there was some issues in the quarter that clipped us on the SG&A line that we did not foresee back 90 days ago.

Okay.

And then last question, John, for you, we've seen a big correction in the stock, one that appears to be a disconnect from the fundamentals.

Is there anything that gives you a reason to change your philosophy for managing the business, going forward because of what you saw during the third quarter?

I think, Jim, we had some nice tailwind in the second quarter where we had some pickups on some things that you don't always have visibility to.

I think in the third quarter we, maybe, had a little bit of headwind and had a few things that didn't work as smoothly.

If we look at what I said at the end of the call, for us to sit here today and say that we're going to be close $1 billion, be close to $1.25, $1.22, do I think that this has been a successful year?

The answer is yes.

Do I think that management still has some overhang from prior years where the Street gets a little bit overly nervous about the Company and the performance and what may be happening inside this organization, the answer is yes.

And I think what Jeff and I are working hard to do is to be transparent, to dispel those kinds of thoughts and overreactions to what is a pretty fundamentally sound business that has a strong global play, has a strong balance sheet, no debt and an experienced management team that's going to continue to do what we have done for the last few years and execute and perform to guidance.

Was guidance a little bit overly aggressive at the end of Q2?

I mean, maybe, but I think 30% growth, 31% growth for the first nine months of the year speaks to the brand strength and the overall performance of the business.

So, I think you're going to continue to see us be pretty straightforward and pretty direct, as we have been.

That's very helpful.

Thanks very much and good luck.

Thanks, Jim.

Our next question comes from J.

Chartier with Monness, Crespi and Hardt.

Good evening.

Following up on the last conversation, given your confidence in the business, have you given thought to buying back stock, given that the stock is down significantly on what was still a very good quarter?

Thanks, Jim, for joining the call today.

We have -- we left the quarter with $220 million in cash and, as you know, we've had an approval to do repurchases for quite some time and we are always reviewing our strategic alternatives when it relates to that $220 million in cash.

That said, we are committed to having a cash reserve to buffer us against any headwinds that come across in the future and we're cognizant of that before we enter into any repurchase programs here of our stock, even at the price that it's at today.

We do feel like we would feel more comfortable at the $3 a share mark that John has mentioned in the past as our target, near-term target, for cash reserves.

Okay, that's helpful.

And then, can you talk about the performance in Europe of subsidiary versus distributor markets and if there's any difference between the two?

I think that if you look at distributor markets for Crocs in Europe, you have to remember that the only major markets where we have distributor is the Benelux, Spain, Italy and then really anything that would be kind of considered really Eastern bloc, so from Poland all the way south to the Balkans.

And we have good distributors in each of those markets and we continue to work closely with them.

In some of those markets distributors do build out retail stores, so we do have a retail presence in Benelux and Spain.

We have recently taken back our retail rights in Italy.

So, we're looking at options in that market to open up franchise stores or owned stores or with partners in that marketplace today.

I think those markets had a lot more sun.

If you look at how the sun pattern ran, during the quarter and we were there probably three times during the quarter, Spain, Italy, Mediterranean countries had a lot more sun at the beginning and then at the end of the season the Nordics and Russia had nicer summers.

Hence, we had good sell-through in those markets, good growth in those markets.

I think, unfortunately, in those markets that we do directly control, specific to Q3, the UK, France, Germany, those markets just, I think, underperformed mainly because of what I heard and saw in discussions with retailers and our sales force there was that sell-throughs were okay, but there was really very little lack of appetite to buy additional spring/summer product in the July-August timeframe.

They just waited for fall/winter products to stock.

So, I think those are kind of the implications in the short term.

I touched on, Jim, in the script a little bit, we are making progress, again, having take both those markets a couple years ago, to rebuild both the independents and key wholesale partnerships in department stores, in sporting goods, in the major markets there.

We're going to see door growth there next year.

I think what we're seeing right now is a little bit of reluctance from European retailers to place orders, really, outside of the first quarter or their first draft.

Maybe with today's news and what's happening in Europe, maybe we'll start to see a little bit more confidence return to the retail market, but I think time will tell.

Okay.

And then fourth quarter backlog, I estimate it's up 22%.

Is that about right for holiday product, I guess?

Yes, I think last year at this point we were saying that the fourth quarter backlog was like $55 million and this year it's at like $60 million, $65 million.

So, yes, around about that 20%, a little bit more than that 20% growth.

Okay.

And then, I know you guys dropped a catalog this year of fall product.

Can you talk about the performance of that catalog and maybe the timing of it, if it could have been dropped earlier or later?

Sure.

I think as we said in our remarks that it's really our desire to find other ways to engage consumers, to show the portfolio of products for the fall/winter season.

We did do one drop.

Conversion on that drop was about 2%.

I think more so than just the conversion on that initial drop was, 1.5 million pieces sent out is getting the brand in a different way in front of consumers where most of the reactions that we've heard is the same thing that we hear a lot.

Wow, I didn't you had all these different products.

Wow, you guys have come a long way.

I only thought of you as a clog or maybe a lined clog for the fall/winter season.

And what we've seen is very strong sell-through of some of our new line products and some of the new women's products which is the targeted consumer for the brand.

She makes so many of the decisions, purchases around footwear for kids, for her husband and for herself.

We have another catalog that will be a larger distribution that is much more geared around gifting for the holidays and that will come out here in the next two weeks.

Great.

Thank you.

Thanks, Jim.

(Operator Instructions).

Our next question comes from Robert Samuels with WJB Capital.

Hi.

Good afternoon, guys.

Can you just talk a little bit about how you're thinking about retail growth for next year and how many new stores, perhaps, you're planning by geography?

I think this year, Rob -- we talked a little bit about this in our commentary -- that our retail business is up about 31% this year while door growth was only at about 16%.

Jeff highlighted that in his remarks.

I think it's our belief that we need to continue to build the brand out, not only in the US market where store growth could run anywhere from 25 to 50 stores next year.

I think the same thing would be true in Asia as we see continual growth there in the fourth quarter.

We expect about 10 additional stores to open in the fourth quarter, 15 in Asia and 1 in Europe and those are all types of retail opportunities -- full-line stores, outlets, shop-in-shop, across the board.

And we think that's going to continue into next year.

I think the harder market for us to project right -- and we've spent a lot of time on this in 2011 -- is really the opportunities to build a stronger brand in Europe with both retail stores, as well as outlets.

And I think it's a little bit premature for me to tell you at this point in time what I think the door growth will be in Europe, but we will talk about on the Q4 call and we'll give a little bit more color on where we're at from a retail standpoint there.

But it's still our belief to continue to invest in key locations for retail.

Great.

And then what are you seeing, just with regards to input costs right now for next year?

I, having lived in Asia for a long time, having just spent a week with the head of our product development, who lived in Asia, also, for a number of years and the head of our supply chain management group, we're starting to see a little bit of softness occur.

We're starting to see, from a supplier standpoint, movement of products into lower cost regions in Vietnam, in Indonesia and we will continue to build additional products in Vietnam with one of our partners to continue to offset any cost increases that we see.

I think, Rob, we're -- we continue to be pretty aggressive in how our input costs and how quality improvements can drive costs out of the business.

And so we're still waiting to see what the final indications are going to be from the Chinese government that will come, really, in that January timeframe, about minimum wage increases.

But we're working hard to mitigate any cost increases that we have or what we think can be in that 5%, again, 10% range in the China market.

But it's clearly cooling off.

You're clearly seeing more and more footwear manufacturing being moved to other locations to balance their risk, from a manufacturing standpoint, through those three markets, China, Vietnam and Indonesia.

Okay, great.

And then just last question, at what point does Asia become a bigger region for you guys than the Americas?

I mean, is that next year?

How soon do you think that could happen?

I don't know.

I don't know that we can see into '13 yet with the rate of growth.

I think we're very happy with the growth of wholesale doors and the quality of relationships that we're building in the US marketplace when it comes to wholesale and we continue to invest in retail at a fairly strong pace and the Internet is a strong part of our US business that's not really part of our Asian business, outside of Japan.

So I think we're -- for '12, I think the Americas marketplace will continue to be larger than Asia.

If we continue to see the brand strength that we have in Asia in the last couple of years, carrying, again, to what pre-books look like for 2012, then I think it is possible that you could see that change in '13.

Thanks.

Best of luck.

Thank you.

We'll take our next question from Reed Anderson with D.A.

Davidson.

Good afternoon.

Can you hear me okay?

We can hear you fine, Reed.

Thank you.

Just a couple questions.

On -- back to the backlog piece, Jeff, if you look at that number that's the backlog increase or the dollar, however you look at it, what portion or how much does pricing or does pricing influence that increase?

Reed, if we look at our backlog for next year, the pure price increases that we see in our carryover spring/summer product is still going to be modest.

We still have some iconic price points, the $39.99 Crocband, $34.99 for kids.

So, the pure price opportunities on those is limited.

That said, the spring/summer products that we're bringing in, the new products, do represent some opportunities to raise our prices.

When we look at the Adrina flat that we're bringing in that changes colors, the Chameleon Adrina flat that we brought in is $5 more than the Adrina flat that doesn't change colors, so the non-Chameleon product.

So, there's a 10% pricing opportunity there on added content from the product side and the product development side.

So, there'll be a slight wind at our sails associated with new products 2012, spring/summer, but on the pure pricing side for carryover products, it'll probably be modest, at least in the United States.

Okay.

And then also on backlog, just curious, in terms of, again, you look at kind of the overall growth there, I mean, presuming it's still pretty broad-based -- I'm really more thinking of kind of the US business now -- but still broad-based across your customers, not so much dominated by a lot of the new customers or new initiatives kind of thing, can you just speak to kind of the breadth of strength in that backlog?

Yes, I think it's fair to say, Reed, I think you see strength in some of our partners that we have worked closely with over the last two or three years -- more styles, more doors or all doors.

I don't know that we're adding many additional major national-type of distribution points or partners.

We are adding some.

But I think that the confidence that our existing wholesale accounts in the US feel about Crocs and see the diversity of product and kind of the quality versus price points that we're at is fueling, really, the growth in US backlog.

I think our US sales force team has done an outstanding job of just staying in front of the customer to get them to see the evolution of the brand.

Great.

Then lastly, just on gross margin, Jeff, I think in the script you said that the majority of the margin degradation, if you will, year over year was really attributable to the lower margins in the wholesale business.

So, I guess, I just want it qualified.

I mean, is that essentially just the input cost piece or is there some other dynamic there that would account for that?

Well, as you know, the fall/holiday product line, with the higher content, the boots, the sneakers, much higher labor content than the spring/summer molded line.

So we would have anticipated a sequential drop, exacerbated by the increased percentage of boots and sneakers as a total of our overall volume.

So we did anticipate a slight decrease in gross margin.

On the other hand, as we look at Q4, our gross margins for Q4, we're fairly comfortable that they will be in good shape and we'll be able to hold the sequential drop to a drop of less than what we saw last year.

Last year, our gross margin dropped from, I think, 55% to 48% or 49% in Q4.

We don't believe that we'll see that large of a drop Q3 into Q4 this year.

We are seeing some great success with our fall 2011 product line and that's driving both the revenue and the ASP, as we talked about earlier in the call, but it does affect our gross margin a little bit on the margin line, percentage-wise.

Great.

Thank you very much.

Best of luck.

(Operator Instructions).

We'll take our next question from Sam Poser with Sterne, Agee.

Good afternoon, guys.

Thanks for taking my question.

The non-recurring charges in the quarter, I just -- can you walk through exactly what they were?

Jeff, please?

So, Sam -- Yes, so, Sam, I think what we said in the script earlier in this call was that we had the cost of the severance for certain salaried employees.

As John mentioned, we did some actions in Europe to lower the headcount in Europe and that was associated with some outsourcing and some process improvement and as part of the opportunity there it did lead us to take a little bit of a severance hit in Europe.

We also had an acceleration of agency marketing expenses for fall/holiday assets that were retired in 2011 and an asset impairment for tools that is shown as a call-out on the 10-Q or is in the income statement today.

So, you can see that there was a bit of a tooling change in the way we handle our tools.

All those, together, added up to about $3.5 million more than we had originally anticipated.

$3.5 million?

Well, I mean, is that -- so you can take out $0.5 million for the asset impairment and it's $3 million for the other two, but you haven't included those anywhere, except for in the remarks you just made.

Correct.

The remarks associated with that were against our original expectations, our costs for the quarter.

So, what I was trying to do was explain the unanticipated --

I mean, those -- but expected or unexpected, those charges are a one-time in nature, so we could adjust the EPS by the amount of that as a recurring number, because they aren't going to exist next year in the SG&A?

Well, in that we only have the employee for Europe on an ongoing basis now and the assets we have for advertising are normally spread over the revenue generated by those assets.

So that is a fair statement, but it's important to acknowledge that we do have SG&A expenses in all quarters and we will benefit from the reduction in force associated with that severance going forward.

No, understood, but I mean, but my point -- understood, but the -- but, like, in the agency -- in the write-down in the agency, retirement of the agency, you had had -- you were paying double for that.

You had in-house marketing and you had this agency.

So getting rid of that got rid of some costs that were there that won't happen again.

Yes.

As in any quarter, you would have some surprises that hurt us.

This quarter we just had those isolated events that came at us for the quarter and we wanted to make sure that people understood this is why our SG&A costs were a little bit higher than we originally anticipated when we gave guidance out in --

Why not just make an adjustment for that on the income statement?

You're free to make that adjustment.

We live in a GAAP world, so we didn't want to make that adjustment on a GAAP basis, because they are expenses for SG&A.

Okay, fair enough.

Then, back to where we started here, the US same-store sales, refresh my memory, were up what?

As we've discussed on prior calls, we're really not in a position to break out comp metrics by region or by segments and a given --

I'm going to press this, John.

You called out in -- on the -- in the press release last week, as well as today, that the outlets and the kiosks -- and then your prepared remarks -- the outlets and the kiosks were responsible for a good deal of that -- of the shortfall in the retail business and which resulted in a shortfall overall, based on the decisions to not have as much promotional product in those stores and so on.

Right.

Fair statement?

So, then, the question really is, on a percentage basis, what was the differential between the full-price stores that shouldn't have been affected and the outlets?

I mean, on a comp, on a to-expectation, did the full-price stores live up to your expectation while the other ones fell short or did they fall a little short, as well or they were a little bit better?

I mean, give us something here.

Okay, so let me --

Numbers would be better.

Well, let me see what I can do.

So, as I said, our overall retail business for the quarter was up 31%.

Door increase for the quarter was up 16%.

So, we can see, by definition, what's happening.

By segment, our outlets and kiosks performed below our initial expectations and what we had forecast, while the growth in our full-line stores reflected the continued reception of our fall products.

So, they performed well?

At or above -- at, below or above your expectation?

Slightly above.

And has that --

I think --

I'm sorry, go ahead.

Okay, two other points and then I'll let you ask your question.

As I said, we're working through merchandising changes in our outlet business right now as we prepare for the holiday season.

So, we're trying to make those changes were we clearly identified the mix of products, the discounting structure that we had in those two channels, in outlets and kiosks, to be back to what we had done in prior years, plus what we think is in line with the current structure of today's US retail market.

And the last one I'll give you a little bit of kind of guidance, then, or a little bit of direction is that our sales, by store, by day -- our sales by store by day -- during the quarter were up 8%.

So, we look at this on an overall basis.

We look at the shifting dynamics of putting a retail store in a mall where we already have a kiosk.

We look at the dynamics of how many dollars we're taking out a particular mall or in a particular location.

We look at the impacts on the business and we believe that the retail business continues to drive the right kind of branding and the right kind of growth for the business.

Okay.

And then lastly, in the guidance for the fourth quarter, $200 million to $205 million, which is really up low teens, what -- why -- how are you thinking about wholesale there, versus the retail?

And -- or call it direct businesses?

And given that the backlog number is higher, can we expect it means that there's higher wholesale growth and lower retail or direct growth?

I mean, given it looks like the backlog is 18% to 20% up.

So, Sam, as we discussed in the prepared remarks, we said that we expected wholesale revenue to be up modestly for the quarter.

So, soon when we look at the fourth quarter we anticipate just a modest growth in the wholesale.

Yes, our pre-books are up, but, as you know, we've shifted much of our volume from at-once to pre-books and that trend has continued for quite some time.

So, our pre-books are up 20% versus last year, but we did see a shift from at-once to pre-books in our wholesale category.

We do anticipate that the majority of our growth on a year-over-year basis will come from the direct channel, both Internet and Europe, which continues to be strong, even in the face of some macroeconomic challenges, as well as our retail businesses in Asia and in the Americas that are well diversified across those geographic locations.

I think to add to what Jeff said, and even, Sam, this goes back a little bit to the question Jim Duffy had asked earlier about spring/summer sales in wholesale, is that, in both cases, in both spring/summer and fall/winter, we have taken a more conservative approach and position to chase business and to putting inventory in place.

Hence, you see lower inventory growth, year over year.

You see a reduction in inventory from Q2 to Q3 and it's really our belief, maybe based on our history, that we are going to manage inventory a little bit more tightly in season.

As Jeff said, we're not, also, as a brand, prepared to back-stock products as we used to do that and have inventory available for at-once business.

So, what we're seeing is, is that we're seeing kind of a change in our buy philosophy.

It's impacting a little bit of that at-once revenue.

So, hence, I don't think you should expect to see us chasing wholesale growth through the quarter.

We'll now move to our final question from Steven Martin with Slater Capital.

Hi, guys.

John, just preliminary views out to next year.

Can you talk about your preliminary views on G&A, non-retail G&A, and your advertising and market spend for '12?

And also, what you might be doing in the Southern Hemisphere to offset some of the fall/winter issues?

Sure.

So, I think if you think about SG&A, we're -- we have a large portion of our SG&A cost that still comes through our direct channel and today we're about 50, 50 almost, for an annualized basis on what's SG&A direct.

So you're going to continue to see that grow as we continue to grow our direct-to-consumer retail business.

I think on the indirect SG&A, we're continuing to try to create leverage in the business, so some of the efficiencies that we're driving in certain areas of the business -- finance, outsourcing some of our back office -- creates additional spend for indirect SG&A.

And I think we finish our budgeting and planning here in another week's time.

We'll have a better feel for where that's going to be, but it's clearly our stated objective, both externally and internally is that we want to continue to create leverage in the business.

We think we can do things in a fun and innovative way that engages with consumers that still can drive the proper messaging about the diversification of the portfolio of products that we do have today and about the brand in a way that creates leverage.

So, I think we'll have more color, more kind of vision on SG&A, again, when we do the next call for Q4, but, again, it's our stated objective that we're going to continue to manage SG&A in a more judicious and a more efficient manner, while still spending the adequate amount of money required to market and to drive the brand.

On the Southern Hemisphere marketplaces, I think we're starting to see a little bit of growth again in Australia.

We continue to build on our growth that we have had in Chile, Argentina, Brazil in the southern cone, Panama in kind of the north South American marketplace and in through Central America.

It continues to be a good growth market for us.

It's a great tourist destination.

Anywhere that's a great tourist destination is usually a great place for us.

So, we continue to grow those businesses.

I'm increasingly bullish about what's happening for us in various portions of the Middle East market where there is stability, in Saudi Arabia and a lot of the Gulf states where we are working with partners in opening additional retail locations and wholesale accounts.

So, I think that our strategy to continue to do the geographic outreach and expansion is still a significant piece of our strategy for the upcoming years.

All right.

And one follow up.

The -- you talked about the -- in response to Sam's question, the 8% growth by day per door.

Where you talking about full-line stores, full-line and outlet, or just outlet, or all stores?

In fact, if we take all stores globally and we look at what the dynamic is within the brand, I think there's a little bit of concern with investors whether the indication is, is that the brand is losing its appeal and our point, really, has been that we're apologetic about the growth that did not occur in the United States in our retail markets that we had forecast in our prior guidance that there would be continued robust growth that did not sustain itself into the third quarter, but that there is still a strong appeal to consumers, both existing and new, about the brand and about the products that we're bringing to the marketplace.

And I think that's the best way for us to kind of share that is to kind of give in that term.

Got you.

One last question.

On your direct, your e-commerce and your own stores, what has your stock position been this year versus last year, i.e., stock outs and replenishment, et cetera?

I think for the first nine months of the year, we're continuing to focus on supply chain management and stock outs.

I think we've done a better job in all markets in terms of managing the higher-running products.

It's always a bit of a challenge when you're chasing growth like that.

So, I think that, overall, organizationally, we've done a good job.

I think as we go into fall/winter last year by the time we hit Black Friday, Cyber Monday, our sales for October and November were pretty solid and we really sold through a lot of our fall/winter products.

So this year, being cognizant of that, you're going to see our retail stores are much more seasonally decorated and much more gifting, additional accessories to go with our footwear brand, and we're much more cognizant and focused on making sure that we have good fall/winter product all the way through the selling season.

All right.

Thank you very much.

Thanks, Steve.

And that's all the time we have for questions today.

I would like to turn it back over to our presenters for any additional or closing remarks.

Thanks for joining us for the call today and we'll talk to you again in three months.

And that does conclude today's call.

Thank you, all, for your participation.