卡洛馳 (CROX) 2012 Q3 法說會逐字稿

Welcome to the Crocs third quarter fiscal 2012 earnings conference call.

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

Following the presentation we will conduct a question and answer session, instructions will be provided at that time.

We ask that in the interest of time participants limit themselves to one question each.

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

It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations.

Mr. Kent, please go ahead.

Thank you, and thank you all for joining us for our third quarter 2012 earnings conference call.

Participants from the Company include John McCarvel, President and Chief Executive Officer, and Jeff Lasher, Senior Vice President and Chief Financial Officer.

During today's call John McCarvel will share some opening remarks, cover third quarter highlights, and talk briefly on Crocs' corporate strategy.

Jeff Lasher will review our third quarter financial results in detail and cover guidance.

John McCarvel will then wrap up our prepared remarks with a few closing comments.

Earlier this afternoon we announced our third quarter fiscal 2012 financial results.

A copy of the press release can be found on our website at crocs.com.

We 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 Securities law.

These statements include but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospect, and product pipeline.

We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factor section of the Company's 2011 report on Form 10-K filed on February 29th, 2012 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 the Safe Harbor Provision of the Securities and Exchange Act of 1934.

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

The Company may refer to certain non-GAAP metrics regarding currency on this call.

The explanation of those metrics can be found on the earnings release filed earlier today.

I will now turn the call over to John McCarvel.

Thanks Will.

Thank you for joining us this afternoon as we discuss our third quarter results.

The third quarter demonstrates how diversified Crocs is today.

We are operating in a global marketplace with balanced distribution channels, which benefit Crocs and our shareholders.

Revenue for the quarter increased 7.5% to $296 million.

Our sales on a constant currency basis grew 10.3% globally, our gross margins increased 80 basis points in Q3 2011.

Average global same store sales grew by 1% for the quarter.

We earned $0.49 per diluted share on a net income of $45 million, inclusive of a one-time tax benefit that was recognized in the quarter.

Our global multi channel strategy continues to provide a platform to engage consumers wherever they shop.

As we saw growth in all three channels, wholesale, retail, and internet.

On a constant currency basis, our direct to consumer business grew 12.7% in the Americas, and 17.6% in Asia.

The consumers appetite for the brand and constantly seeking out our products in all three channels is extremely encouraging to all of us at Crocs.

Revenue for the quarter increased slightly less than we had expected.

I would like to discuss two key factors that affected our quarterly results.

There were macro economic challenges in Japan and in the European markets that we are not immune to in the quarter.

In Japan we experienced a drop-off in our own retail stores, primarily from an overall consumer spending slow down, and partly from a comparison against the significant gains in our same store sales in last year's results.

In Europe, at once demand for our wholesale accounts and distribution partners for our products was significantly down as most retailers experienced a cooler summer season, and managed their inventory levels lower during the quarter.

Before I talk about business factors, I would like to take this opportunity to talk about our Crocs Cares program.

This is important initiative at Crocs that gives to local and global charities.

And it is a very important part of our culture.

In July there was a terrible tragedy in our Colorado community.

The shootings at the movie theaters in Aurora, Colorado not far from Boulder, not far from where many of us live in the greater Denver area, we felt that it was imperative that we do something for the people that were affected by this tragedy.

We donated $5 from every pair of shoes that we sold online and in our Colorado stores for one week in August.

We were honored to present a check to the Aurora Fund for $559,000.

We have done similar things after other tragedies in Europe, the tsunami in Japan, and here in the United States last year in Tuscaloosa, Alabama, as well as Joplin, Missouri.

Turning for a moment to some of the key positive events that we see in the business and those that impacted the quarter.

First, we continue to see the investments that we have made in our diversified product line pay off, specifically in products that carry higher price points in our clog business.

In third quarter more than 35% of our sales volumes came from new styles.

Our average sales price in the quarter increased by approximately 3% while unit sales increased 6%.

We are seeing excellent demand for a number of our new fall and winter products.

In the US marketplace we are seeing sell-in and sell-through of our Cobbler collection, boot collections, including the new Rain Flow, and the newly reintroduced Mammoth products are all doing well.

We see an improving US domestic marketplace for Crocs products.

Increased demand for new products with all of our key US wholesale partners increased in the third quarter.

We experienced strong sell-in and sell-through of our 2012 spring summer products.

Additionally we are seeing solid sell-through of our new fall winter products too.

The solid and improving performance of the brand can be see both wholesale and our direct to consumer channels.

Retail comp gains were above 9% in the US marketplace for August and September.

Second, we continue to focus our marketing campaign on bringing new consumers to think about us differently during spring summer, but also during fall winter.

This is a gradual process, and our marketing data shows that we are we attracting new consumers to the brand at the highest level in many years.

Our new products are changing the minds of consumers globally who thought about us only as a clog brand, and I remind you the growth rates in the back half of the year are lower than those in the front half of the year.

Third, a lot has been written about the Asian marketplace and the changes that are occurring.

The market is changing.

And it is changing rapidly.

But to us, so are the American, Brazilian, and European markets.

Jeff is going to talk about the specific performance changes of various Asian countries later in his section.

However, you can see in our increased prebook backlog levels for Asia in 2013 that we anticipate another solid year ahead of us.

We also remain very positive about the growth prospects in the Middle East and in South America too.

Lastly, while Europe is a difficult market for everyone today, and the London Olympics had a large negative effect on our UK stores, except for the one in Stratford, which was there by the Olympic venue, we did scratch out a small comp store increase for the quarter.

New stores and outlet locations in France, Germany, and Russia are all performing well.

Our new retail format was opened near London in the Blue Water Mall and is performing well.

We like the improved brand image and the shopping experience.

We are seeing more interest in European customers in Crocs' new product offerings outside of the clog, and the bookings for 2013 also reflect the change in confidence in the brand.

Before I turn the call over to Jeff, I would like to say a few words about an important initiative at Crocs, and that is our sustainability program.

As we have consistently demonstrated over the years with our Crocs Cares program, we are committed to the well-being of our neighbors and social environment.

Next month we will further underscore our commitment to the environment by publishing our first sustainability report planned for release on November 1st of 2012.

This report aligns to the Global Reporting Initiative, GRI, Sustainability reporting guideline.

The GRI is a globally accepted sustainability reporting framework that is considered the gold standard, and provides a flexible system that promotes incremental improvement over time.

Our first report outlines our approach to sustainability and addresses key environmental and social issues, including both accomplishments and challenges.

Through the public communication of our sustainability program, we will build on a strong platform from which to communicate and grow our sustainability efforts more formally.

With that, I will turn the call over to Jeff.

Thank you, John.

Hello everyone.

Thanks for joining us.

I will start with some financial highlights of the quarter before going into some detail.

First revenue for the quarter increased to a new record of $296 million for Q3, up $20 million or 7.5%, on a constant currency basis revenue grew 10.3%.

2012 year to date revenue has increased 13% which on a constant currency basis represents a year-to-date revenue increase of 15%.

Second, total retail sales grew 18% with same store sales on a constant currency basis increasing 1% globally.

For the year-to-date same store sales were up 3%.

Third we were able to of focus on enhanced profitability as we generated improvement in operating margins of 80 basis points driven by better product margin.

Fourth, we continue to focus on building up a strong balance sheet, as we ended the quarter with $313 million of cash and cash equivalents.

Finally in the quarter we successfully defended certain tax positions globally that led to a release of a tax provision.

That resulted in a nonrecurring tax benefit in the quarter of approximately $11 million.

These factors all combined contributed to the 16th year-over-year increase in diluted EPS of $0.49 during the quarter.

Looking at the results in more detail.

As John communicated, sales in Asia were more challenging than expected in the quarter.

Same store steals in Japan declined 15% in the quarter, as the country experienced a general slowdown in consumer purchasing, and was further challenged by strong sales growth last year.

This unexpected slowdown in consumer demand in Japan was partially offset by the rest of the region, overall same store sales in Asia dropped 6%.

Our expectation for the region was for single-digit growth.

Our internet growth was powered by a 12% improvement in Americas, while consumption in Europe continues to be challenged by macroeconomic factors impacting consumer confidence.

Europe internet was down 10% on a constant currency basis.

We had higher than expected wholesale revenue of about $5 million with lower than expected direct to consumer revenue of about $10 million, combined with a regional shift.

The outcome of this revenue mix was reflected in our revenue results.

Notably in the Asia region, notwithstanding the challenging retail market in Japan, and the delayed shipment of $2.5 million in wholesale orders following a strike at one of our manufacturing locations in the quarter, our overall sales in Japan were flat to last year.

Outside of Japan in the region, China sales continue to show exceptional strength, and increased 47%.

Our Korea business expanded 18%.

In Europe our UK business was impacted by lower than expected demand in August, but this was offset by stronger salesin Germany and Russia, which resulted in a 1% constant currency same store sales increase.

Globally retail channel revenues in the third quarter increased 18% to $112 million.

Global same store sales for the quarter increased 1% on an FX neutral basis.

On a year-to-date basis, same store sales have increased 3% over last year with Americas at 4%, Asia at 1%, and Europe at 8%.

For the remainder of the year we plan to open an additional 35 to 40 stores globally, with most of these in Asia and Europe.

Our direct to consumer model benefits us greatly in the peak selling seasons around the globe.

And sometimes requires perseverance during shoulder and trough seasons.

We remain committed to expanding our direct to consumer portfolio, and continue to assess individual location performance, and act aggressively when detrimental data arises.

This was evident in our decision last year to close underperforming kiosk locations, and shift to more full line stores.

Turning to product data, our percentage of third quarter revenue derived from the clog silhouette grew slightly to 48% from 46%.

This was in part driven by the return of the Mammoth this season.

Also our new product introductions globally represented about 35% of our Q3 unit sales.

As we highlighted at our Analyst Day earlier in the year, we continue to grow the clog silhouette, while diversifying into other important categories.

Average selling price for footwear in Q3 increased $0.59, or 3% to $22.77, compared with last year in the same period.

Global footwear unit sales in the quarter grew 6% to 12.4 million pairs.

For the first 9 months total unit sales have been up 40.1 million pairs, up 4% from the first nine months of 2011.

While ASP has increased about 8%.

Gross profit for Q3 2012 was $161 million, up from $147 million.

Margin was 54.4% in Q3 versus 53.5% in the prior year.

It benefited from key initiatives and controlling our cost of goods sold, lower promotional activity, improved economics from new product introductions, but our margin was slightly impacted by lower than expected retail growth in Asia.

Third quarter 2012 SG&A increased 8% to $121 million, compared to $112 million in Q3 of 2011.

As a percentage of sales, SG&A was 40.8% essentially flat to 2011.

The SG&A dollar increase was driven by investments in our direct to consumer channel, as we continue to build our retail network globally.

Our indirect SG&A declined 5% compared with last year, as we tightly managed SG&A costs and leveraged our existing infrastructure at our corporate and regional locations.

Overall Q3 operating income increased 14% to $40 million, or 13.5% of sales primarily driven by improved gross margin.

In Q3 we had a nonrecurring tax benefit of $11 million, as we successfully defended certain tax positions around the globe, and released valuation allowances in the USA as our profitability here has improved substantially here in 2012.

Going forward into 2013, our rate will be impacted by improving USA net profit.

It will be on the higher end of our forecasted rate range of 18% to 22%.

Net income was $45 million, or $0.49 per diluted share on91.1 million shares, compared with 30 million, or $0.33 per diluted share in the prior year.

We ended Q3 with $313 million in cash, nominal bank debt, and inventory of $188 million.

Our inventory increase was the result of timing of Q4 deliveries, higher priced new products for Fall holiday, and additional retail stores.

Moving on to backlog.

At the end of the quarter backlog increased 33% from the same period a year ago to $395 million.

Inside this result, America's backlog is up 19%.

Europe is up 49%.

And Asia is up 40%.

On a quarterly basis backlog for Q4 deliveries represented $71 million, up 5% from 2011.

Backlog for Q1 2013 stood at $217 million as of September 30th, and was up 38%.

Backlog for Q2 2013 deliveries totaled $107 million, and was up 50% from 2011 for the same date.

Many of our wholesale accounts around the globe accelerated their ordering into Q3 in order to secure early season deliveries,which is a departure from historical prebook ordering patterns.

Guidance for the fourth quarter of 2012, we expect to generate revenues of about $220 million, up about 8% from last year, or 9% on a constant currency basis.

We expect our revenue will be moderated by continued week consumer demand in Japan, and the ongoing challenges to the consumer market in Europe.

With additional retail store locations coming online in a challenging international macro economic environment, we estimate the Company will breakeven on a net profit basis in the quarter.

Currency estimates used for the quarter are $1.30 US dollar to the Euro, and 79 Yen to the US dollar.

On a year-to-date basis, EPS is $1.48 compared with $1.18 at the same time last year, or a 25% improvement.

With our fourth quarter estimated EPS, we anticipate full year 2012 to be $1.48 per share.

Overall we estimate that revenue growth in US dollars will be about 12% over 2011.

In constant dollar growth that will be about 15%.

Our second half revenue has been impacted by global consumer behavioral changes impacting our operating margin for the year, and is keeping us from hitting our goal of 15% full year operating margin.

As we reflect on Q3 there are a number of key takeaways.

We were able to increase revenue 10% on a constant currency basis in a challenging global market, through the strength of other overall product line and the distribution network that we have developed around the world.

While some specific markets were troubled and resulted in below expected levels of revenue, we were still able to have grow our sales in those areas because of our investment in direct to consumer channels, and the strength that our product line brings to our wholesale accounts around the globe.

Operating profit increased 14% compared to the same period last year, and year-to-date our operating profit is up 20%.

For the full year, we expect constant currency revenue grow of the 15%, and as such this will mark the third year of 15%-plus growth.

The Company's employees around the globe are focused on delivering outstanding results to our investors, as we build a fantastic diversified footwear brand.

Thanks.

I will now turn the call back over to John for some closing comments before taking questions.

Thanks, Jeff.

As Jeff mentioned, our prebook business for spring summer 2013 product line has been received very well.

Positive order flow bookings from all of our major wholesale partners.

But as Jeff notes, we see order flow coming in slightly earlier than last year.

When we look at the spring summer 2013 booking season when it is completed, we expect backlog to be somewhere between 15% to 18% higher than spring summer 2013.

Spring summer products remain the foundation for our business, and while we are making steady progress to grow Crocs into a four season brand, we do believe that the growth in the back half of the year will continue to be slower than the first half.

With these thoughts in mind, I would expect 2013 revenue growth and operating income to follow a similar trend to what we are exhibiting here in 2012.

I think the whole industry will continue to sees these kind of challenges, with specific global markets being challenged, and solid growth, we expect to see solid growth here in our Americas business.

Thanks.

And with that, we will open up to questions.

(Operator Instructions).

We will take our first question from Erinn Murphy with Piper Jaffray.

Good afternoon gentlemen.

John, I just had a question for you.

We want to dig in a little bit more into Asian piece of the business, and very helpful the regional split-out that both you and Jeff provided.

Curious if you looked at the quarter, how it started relative to your plan versus how it ended relative to plan, if you could just provide some more detail and context around some of the major markets, acknowledging Japan as you mentioned a significant market for you, and that is where you saw the most pressure, but hoping you could help us understand how some of the quarter trended from the beginning to the end relative to plan?

Very happy to do it.

And I think what Jeff and I will do is with this particular question, I think it is probably one that is on the minds of a lot of people when you look at the financials, not only revenue mix within the quarter, but then how that overall impact of mix change, geographic mix change affects the overall profitability of the business.

I think what we will do, Erinn is we will kind of tag team this.

On the revenue side of this, I think we came out of the second quarter in most of our Asian countries on trend to where we thought the plan would be.

We saw very little change to that in the Japanese market.

Sell in, sell through was on trend on track.

Starting really in late July and then into the August timeframe, we just saw the amount of conversion in our retail stores starting to decrease at a level that we haven't seen before in that market place.

I think you have to remember that last year that market, the Japanese market comped in retail at 15%.

So you are comparing against a pretty strong quarter in your previous year.

In a market place that we would now start to consider semi-mature from a growth standpoint.

I think other brands, VF and others have talked about what they think the Japanese market looks like relative to the rest of Asia, and I adhere to that same belief that we will see growth in the Japanese market in that 5% to 10% range, where we will see much higher growth rates in other parts of Asia.

Relative to our overall business and in Japan, the wholesale business as Jeff mentioned our total sales in Japan in the third quarter was flat.

But it was more that back end, back portion back portion of the third quarter where we saw a retail degradation.

Okay.

That is helpful.

I guess in terms of just speaking to the retail comp kind of going from a mid-single digit positive to a mid-single digit negative rate Q2 versus Q3, are you see seeing more pressure just from traffic, or are you seeing that when a consumer comes in that the basket size whether it is driven by units, or pricing is actually coming down.

Where are you seeing more of the pressure on the comp?

And you talk about this in a global environment?

Sorry, that was specific to Asia, so just going from that positive mid-single digit to a negative mid-single digit Q2 versus Q3, where was that incremental pressure coming from on the comp contributor side of it?

I think that again a lot has been written.

If you think about Japan, we are not converting and traffic is down.

If you look at in some of the major Chinese cities, and in Hong Kong where you do depend on a lot of consumer behavior during a tourist kind of outing or endeavor, what we are seeing is traffic is down, spending is down across the board.

I think specific to the US market place, there is the counterpart of that is that we are seeing traffic up in a lot of our outlet stores, and we are seeing conversion at a higher rate.

So I think depending upon the market and depending upon really the situation, that is specific to each of those countries.

Okay, that is helpful.

Last on Europe.

You talked about, clearly in the UK market some pressure around the Olympics, but still able to have that positive comp.

Did you see actually the comp trend improve after the Olympics, or was it essentially in that kind of slightly positive/slightly negative range throughout the quarter?

Trying to again just understand the pattern of the quarter?

I think without a doubt and other brands that have reported before us and have talked about what has happened in their European business, really around the Olympics.

2 or 3 weeks before that during Olympic time and then really with the vacuum that was created thereafter, many of the UK stores were impacted significantly just by the lack of tourist traffic in the London, and in the UK market place.

I think in other destinations in Europe, outside of the UK, it was consistent comp performance throughout the quarter, as I think we get better brand recognition now that we are more than just a clog product, so a lot of the new products that we are put ting in our retail stores in Europe performed very well.

Erinn, before we move past it, is a little bit I would like to come back and talk about this impact with Asia being down a little bit this quarter, which has been an anomaly for us.

US Americas business was up, and how that really flows through the, so maybe I will let Jeff take that.

As we mentioned during the script and as John talked about just now, both of those areas, Japan, the rest of Asia, to a more limited extent, and then the UK sector of Europe, we are lower than what we had originally expected for the quarter.

That resulted in about a $10 million shift downward in their retail business overall.

We were able to make some of that up with the wholesale demand that we saw during the quarter, and about half of that revenue was made up through the wholesale demand on an at-once basis during the quarter.

But when you take retail with high margin product sales and replace that revenue with wholesale, unfortunately the operating income impact of that was roundabout $5 million, which is what you see in the operating results for quarter.

So $10 million lower retail coming out at 70% to 75% margins, replaced with $5 million higher wholesale which comes in roundabout $2.5 million ofmargin for us, results in about a $5 million operating income.

And we just wanted to clarify that yet again for everyone, so that everyone understands the impact of the revenue myth at the retail store line.

Like John said, we are really happy with the performance, especially in the latter two months in the US business as John said in his script, 9% growth in those two months in the Americas locations, as we set ourselves up for the fourth quarter selling season.

Thank you guys.

That is very helpful.

And I will let someone else jump in.

Thank you.

(Operator Instructions).

Next question comes from Sam Poser with Sterne, Agee.

Hi, guys.

A question about your guidance and the results.

When you guided for the quarter, did you know that this one-time tax benefit was going to be there?

No we did not.

And your guidance for the fourth quarter, so that was about $0.12 if I did my math right, correct?

Yes, as we talked about at the end of the second quarter, Sam, we anticipated a normal quarter in taxes.

We benefited from settlements of, or not really settlements, but finishing up of audits around the globe, and our tax structure survived those audits around the globe, which we are really proud of, as you can tell from the script.

script.

We also benefited from a movement in the USA net profit to be profitable again in 2012, which results in us taking a look at our valuation allowances that we had set up in the prior years, and those were reviewed and reduced in the quarter.

Those were not planned activities, but they did take place in Q3.

So if we think, I mean you guided to about $1.48, $1.49 in your last call for the full year, correct?

Yes.

Okay.

So basically even though it is maintaining itself, the guidance sort of on a recurring basis has been dropped to about $1.36?

As we said Sam, we took into account the global consumer slowdown, especially in Japan and parts of Europe as we talked about in the script.

I understand.

I guess it is just the question is, am I thinking about that correctly?

Yes.

I think so.

Okay.

And then where in Q4, I mean how do you look at the SG&A versus the gross margin on the revenue that you, on the $220 million to get to the flat earnings?

We think we will be at about $220 million of revenue and our gross margin will be about 50%, a slight improvement from last years' gross margin attainment, as we are able to control our discounting in the marketplace.

When we look at the fourth quarter as we head into the Christmas selling season, the US as John mentioned, August/September was pretty strong, and our same store sales comps were good.

As we go into the back half of the year, there is a lot of optimism around the consumer behavior in the US, but that optimism can shift rather quickly if something were to happen in the US, relative to the election, or some other macro events impacting the Q4 consumer demand in the US.

Okay.

Thanks very much.

I will get back in.

We will take our next question from Jim Duffy with Stifel Nicolaus.

Thanks.

Hi guys.

So the backlog numbers really jump off of the page.

It seems there is some nuance to it.

I don't understand why retailers would be ordering so much earlier this year than in the past?

If you could provide some help there, that would be great.

Then momentum in the spring line clearly looks very good.

Fall holiday progress seems to be more difficult to come by.

So your revenue is becoming even more concentrated from a seasonality standpoint.

Does that at all change your thoughts on how you plan expenses for the business, or your go to market strategy?

Thanks.

I think we start with kind of how we think about backlog first.

And I think that this quarter is a bit of an anomaly where we would see in prior seasons order flow come in starting at 7/15 date all of the way through 10/15 or 11/15.

We even get orders in 12/15 for delivery in the second quarter.

What we noticed this year, and I think part of it has been we are becoming more mature as a sales organization, as a Company.

I think we are doing a better job of prelining and preparing customers.

I think that in a lot of our more mature markets, Asia and the US especially, where we are working with major retailers that are booking in the 8/15 and 9/15 dates, what we are seeing is orders that would have trickled into the fourth quarter to be processed internally, now were entered early in the third quarter.

So we think that it artificially inflates the actual growth in backlog to the point of 10% to maybe 15%.

And I think you will get a better feel for overall backlog for first and second quarter when we report the 12/31 backlog.

With all of that said, I will come back to something that Jeff said, and that is that as he gave the breakout for Q2, you can see the strength of our spring summer line that we have put out.

And maybe that is part of the reason why we see retailers ordering it earlier, with more delivery dates on 2/15 and 3/15.

I think they think that if there is momentum with the brand, and if we do have a solid spring sell through, that they can actually get another turn maybe or two with the products for next year.

So optimistically we think there is some momentum there that is going to play itself out in 2013.

I think that the skewing and the movement of the brand to spring summer is, it is a natural phenomenon in that we have we have a place in most wholesalers minds where we sell, and are taking more shelf space and opening more doors, there is great product that falls into that category, it runs a longer period of time.

And unfortunately, it is just a much shorter selling season for fall winter, and we just continue to work at boots and relevant indoor products, and casual more leather upper products for men and women, that try to find a place with consumers in the fall winter period.

But I think it is clear that next year, we will have a stronger first half again for the year, just based on the momentum that we have on the products that we have that are coming to market.

To finish that, it does, and I think what Jeff and I have said over the last 2 to 2.5 years now is that we really do try to manage the business.

And as we have communicated to the investors, and to the [shareholders], we do try to match expenses and revenue appropriately within each quarter where possible.

I think one of the things that is going to impact our Q4 business maybe a little bit more this year than it has in previous years, is that we are going to open more stores in the fourth quarter than most brands would.

And it is a matter of timing when the stores are coming open.

A few of those stores should have opened in Q3 that have rolled over into Q4, but it is an development that we believe we have to make and that will payoff in the long term, soopening those doors will create a little bit of downward pressure on operating income in the fourth quarter.

Okay.

That is helpful John.

Good answers.

Does the concentration in spring summer change the go to market thought process at all?

Clearly, wholesale has the potential to grow as a percent of the mix in spring summer 2013.

I think every brand struggles with this, and I think other brands out there, Deckers, others, I think we all strive to be a 12-month brand, we all strive to be a four-season brand.

It just takes a lot of work.

It tales a lot of focus.

And some things comes more naturally.

Of course summer comes more naturally for us, that is where we started.

In the consumers mind that is where it resonates.

I just think you have to work harder both from a marketing and from a product standpoint to overcome those weaknesses, and we have got to keep working harder at the Back-to-School and the fall winter products.

I appreciate that perspective.

Thank you.

Our next question is from Corinna Freedman with Wedbush.

Hi there.

Sorry.

I jumped on late.

I am not sure if you gave the tax rate for fourth quarter, what you are expecting?

And if you could also talk about comp expectations for fourth quarter, what is the comparison, any color you can give us quarter-to-date, and then additionally, if you could talk about the ASPs of the backlog?

Sure.

I will take one at a time.

Maybe not in the order you gave them.

The comp guidance that we have included in our number, we basically try to take the year-to-date number and roll that in.

So when the regions are sitting down to think about how their revenue is going to roll out in Q4, they try to use a year-to-date number, and not be overly influence influenced by a 90-day period, because that is just not enough of a statistical trend to jump off of.

You can kind of use the year-to-date number.

As far as the 3% year-to-date is what we were using.

As far as the taxes in Q4, we said that we expect revenue to be about $220 million, we expect that our margin is going to be about 50%, that leaves the rest being SG&A in taxes.

The tax rate in Q4 is kind of difficult to estimate as our operating income would be relatively small.

So it is a relatively small tax expense that we are anticipating in Q4.

And then the ASP in backlog, we are looking at about an 8.3% increase in our ASP in our spring summer backlog.

So that is an improvement over last year's rate of about $18, we are looking at next year at about $19.50 as far as ASPin our backlog for spring summer 2013.

Okay.

Thank you.

Our next question is from Reed Anderson with Northland Securities.

Hi guys.

Most of my questions have been answered, but a couple of follow-ups just to that last one.

Jeff, the ASP comment you made is that 8.3% spring summer, is that relative to that 15% number John was talking about when you look at your spring summer business, or is it relative more to some other figure?

No I will help you out with it.

As John said we saw a little bit of activity in excess of what we have typically seen.

So our units are actually a little bit higher at the end of September 30th.

But the ASP being about 8%, that number that is a number that will probably continue to carry on.

It is going to be a pretty good balanced growth for spring summer based on the early results between ASP and unit growth.

Okay.

And then the answer you gave on the comp guidance, I mean, you use the year-to-date numbers kind of the reference, or how you plan that.

Should we infer from that you then are expecting a rebound in those Asian markets, Japan, or is there something that you have seen that would suggest that would happen, or is that going to play out differently?

I think, Reed, when you look at it on a aggregate basis, as Jeff talked about that, we think on an aggregate basis 3% is a reasonable comp growth number.

I think, as I said especially in my portion of the talk, that I think we are going to continue to see Europe, and we are going to continue to see Japan challenged in the short term.

I think we don't know really what to expect in the US.

We have a couple more weeks until the election, what is the consumer sentiment going to be, and how are our brands going to react in the holiday season, last year it became highly promotional early on.

I think as Jeff said earlier, we think 80 basis points increase in gross margin in the fourth quarter.

We don't expect to be as promotional in the fourth quarter this year as we were last year.

In the US or overall?

In the US.

And it is really a US phenomenon, the level of discounting in the fourth quarter.

So we think that we will see good comp performance in the United States based on where we are, the products that we have in stores, and the promotions that we have, I think that certain parts of Asia will do well during the fourth quarter, and I think that Japan will remain challenged.

But on average, we think 3% is a good estimate for the quarter.

Then also don't forget that in the fourth quarter the Americas represented last year $43 million of $74 million in total retail sales, so the game in the fourth quarter really is in the Americas, a retail game, and on the internet side it was $19 million of $25 million.

So it is really important to us to have a strong Americas performance in Q4.

And then just one last one I will sneak in, because when I look at the mix thing, the way you explained it Jeff very helpful, in terms of the impact on the margin, relative to direct declining, et cetera.

But I guess it still was a big difference, and I am just curious if you look at your margin structure in, call it your Asian region between direct and wholesale, or consumer and wholesale, however you want to look at it, compared to the US.

Are they the same, or is it actually a better margin in Asian markets in that direct channel?

It is a better margin in the direct channel, it is the higher percentage of total sales in Asia.

Okay.

That makes sense.

Thank you.

Good luck.

We will take our next question from Mitch Kummetz with Robert Baird.

Yes, thank you.

Thanks for taking my questions.

I have got a few, I will try to be quick.

On your Q4 sales outlook, you are saying $220 million, I think that pencilled out to be sort of high single digit growth, can you give us any color as to how you think of that growth in terms of geographies or by channel?

Yes, I think that when you look at that $220 million number that I just talked to Reed about, I mean so much of our retail sales come from the Americas.

Last year we did $74 million of $203 million was associated with the retail in that $40 million or so, $43 million or so was attributable to the Americas business.

So when we look at the growth in the $203 million to $220 million number, a lot of that comes from the Americas, investment in the retail infrastructure and converting those kiosks into full line stores, that is how we kind of developed that $220 million revenue base.

When we look out into Japan and the rest of the global market places, frankly in the fourth quarter in the direct to consumer it is not as important as the Americas business, it will be important in spring summer, when those market places get back to their seasonal uptrend.

Jeff, let me ask the question a different way, again when you at your three geographic segments, the three channels of distribution, is there anything that you would expect to be down in Q4 versus last year?

I think Mitch on that the European market is still one to be determined.

At this point in time what we have seen is with new retail stores opening in outlet channels especially, that resonates with consumers they have performed well.

Will the opening our own retail stores offset the kind of the black cloud that is sitting over wholesale accounts today buying with only one purchase, and not coming back and repeating, popping up.

I think time is going to tell.

And so what we have done is we have taken what we think is a pragmatic look at Asia and Europe.

They are going to be basically flat to last year, and the growth as Jeff said will come in the Americas business especially, with the investment that we made in the retail, and to a lesser extent Asia.

Got it.

John you provided some initial color on 2013, I was wondering if you can give us some sense of how many stores you plan to open next year?

I think today we expect to finish the year somewhere north of 500, around 520 stores.

Our plans right now are not completely set for 2013.

We are just in the process of finishing up our budgeting here at the end of this month, early November.

I think Mitch, in the range of 75 to 125 stores in total globally next year is an increase for us.

With the caveat that we will be down to somewhere between 10 to 15 kiosks left in 2013.

Okay.

There will be a few places, tourist markets where they work, but we will almost completely exit the kiosk format.

One last quick one on the backlog even after you adjust the numbers for the early ordering and sales it still sounds like a very healthy number, is that pretty much on an apples-to-apples basis in terms of accounts, or is there anything new in that spring summer number that we should be thinking about?

No major additions anywhere globally, no addition of a major retailer in that, but continual growth in terms of doors and shelf space in many major accounts in the United States and in Asia.

We are just getting ourselves reestablished in Europe, so we will see Crocs go into places like Debenhams and Tesco and other major retailers in the European market that we haven't seen in prior years.

Do remember next year that we will have a full year of operations with [Benelac] being fully integrated as a direct market for us in 2013.

Got it.

Thanks guys.

Good luck.

We will take our next question from Kelly Hauser with BB&T Capital Markets.

This is Scott Krasik, thanks for taking my questions.

The first one on the backlog that it was a big European number, did that actually, is that one that is benefited from the shift early because of an easy compare from a year ago?

I don't think it was a big number.

It was a big percentage.

Sure.

Scott, so I think what we have seen again new management teams have now been in place for about a year, really working with more major accounts.

Last year I think we went into the spring summer 2012 timeframe just not being as well connected as we are this year.

So I think the increase in backlog is more new products, more diversity as a brand, and some new accounts.

But on a dollar basis, it is not a significant increase around an $18 million to $20 million increase.

But relative to a year ago, you were sitting there with too much clog inventory slowing sell-throughs, so in the year you are able to convince people even if it is not a big dollar contribution to take new product, to try it even though your sell throughs were weak weaker this year, is that fair?

It is fair.

And it's the same thing, I think that happened here in 2009.

A lot of work going back in asking for forgiveness with accounts that we didn't do very well.

All ofthat went on in 2012 in Europe.

But I think people see the strength of the brand, and we sell a lot of products to Europeans in our own retail stores that also buy products overseas when they travel.

I think retailers are smart when they look at global trends today.

I think that is also helping us strengthen the US, strengthen Asia, convinces retailers to take another look at it in Europe.

So yes, I think it is a slow process of hitting singles.

Today is the first game of the World Series.

It is a matter of slowly easing into it, and they need to be convinced that we are a brand that they can work with, and work for on a long term basis.

Okay.

And then, Jeff, just on the Q4 guidance, the difference between the $220 million this year and the $200 million last year, you were able to do $0.06, gross margins are going to be up.

Is that just a make up of less Asian contributions to get to the breakeven?

It just seems like a big swing?

That is part of it for sure.

And then as we said in the script we are opening retail stores in Q4, as John just said in the last, a few questions ago, that kind of a new thing for us, as far as the quantity that we are going to be opening with 35 to 40 coming online in Q4.

And we believe that is necessary to really position ourselves well for the first half.

Okay.

And then can you just say it again, I apologize.

But John, your last comments about your outlook for 2013, what you said about the sales growth, and the operating income growth?

I think when I answered Jim Duffy's question talking about order timing, Scott, is probably the best way to look at this.

When the complete season is done, we think that it is going to be 15% to 18% overall growth in backlog relative to the spring summer season.

I would be surprised.

It could be higher.

We will see what it looks like over the next two months as orders continue to flow in.

What I said was that operating income would follow a similar trend to what we are exhibiting in 2012, where we will make a lot of money, and we will see higher growth rates in the first half of the year, and we are going to see slow slower growth rates, and a little bit lower operating income in the back half of the year.

And when you look at it on a holistic basis we still believe that the 15% to 20% growth is still achievable, and we still believe that 14% to 15% mid-teens operating income is how we want you to think about it, and how we try to operate the business today.

So you believe just, I am sorry, just because I am a little bit slow.

You believe you can do 15% annual operating income growth next year weighted above of that to the first half?

We have said that, yes.

Okay.

In many different forms, that is what we have said.

Okay.

Thank you.

Okay.

Thanks, Scott.

Our next question is from Steve Marotta with CL King & Associates.

Good evening everybody, quick question on inventory.

Inventory was 24% on a year-over-year basis.

You mentioned that a large part of that was early fourth quarter deliveries, as well as inventories for stores yet to be opened.

So is it possible to tease out those extra factors and compare inventory on an apples-to-apples basis year-over-year?

Yes, I will do it quickly because we are kind of running out of time.

We are thinking about 20% of that growth in inventories associated with our retail stores.

20% is associated with our growth in our ASP, the product mix that we see in that overall, and the rest is related to building of inventory, timing of inventory receipts, and other investments that we are making to position ourselves for strong revenue growth in the first half.

Is it possible to again tease it out on a fourth quarter instead of being up 24% on an apples-to-apples it would have been up, excluding those early deliveries as well as for the store openings.

As we said at the Analyst Day, we will have a little bit of an anomaly in Q4 because the inventory will be about $15 million to $20 million higher on year-over-year basis simply because of the way we are receiving our shipments from our factories overseas.

We did talk about that at the Analyst Day.

It is important to remember that when you guys do your analysis for the Q4 inventory expectations.

When you think about Q3, it is that 20/20/60 kind of split.

Forgive me I am a little new to the story.

Have you ever given expectations for year end inventory levels, and if so, would you like to offer it now?

Well, I think the way that we talked about this, our objective is that we would be between 3 and 3.5 turns per year.

That is what our objective has been.

Great.

Thank you.

Thank you very much.

That is great.

Our next question is from Mike Swartz with SunTrust.

Good afternoon everyone.

Could you maybe give us some more color on how the inventories look at the wholesale channels right now, even with the fall winter and spring lines?

Could you ask that one more time?

Yes.

Could you maybe give us some color on how inventory levels are at the wholesale channels?

In the Asian and European markets you don't have the same dynamics and vehicles in place to be able to look at inventory positions.

Here in the US, the systems are much more integrated, people are much more open with information.

Today our inventory levels on spring summer products as it worked through the third quarter are quite lean in most of our major accounts.

Placement of fall holiday orders relative to spring summer isn't that significant.

So when we look at inventory levels today, they are fairly lean in a couple places we are actually seeing the sell-through be it such a at a high rate relative to their buying, that we are actually starting to see someone, some at-once orders for product.

And I will give you an example.

DSW, for example, they have taken for the first time this year our Cobbler collection of shoes.

It is in a category kind of itself a lot of more hunter style and equestrian style boots in market this year.

So that is a kind of a nice add-on for them, indoor line type of clog product . It has done well so we see some at-once business coming there.

Overall, we don't see inventory levels in our wholesale accounts to be growing.

Okay, then one final question, could you maybe give us some color as well on, of your backlog, how much of that would be new product versus some of the traditional or classic footwear?

About 35% to 40% is what we see for spring summer 2013 orders.

I guess how does that line up versus last year and years prior?

Slightly higher.

Last year we ran maybe a little lower, 30% range, so slightly higher this year.

Okay, great.

Thank you.

Our next question is from Jim Chartier with Monness, Crespi and Hardt.

Good afternoon.

John, I know you have been asked this in the past.

Any update on your thinking on the share repurchase program at this point?

I think I will let Jeff maybe, Jim, take that.

Yes, I think, Jim when we look at our cash balances, and our capital structure, we are pretty proud of thecash reserves that we have built.

They have increased substantially over the past few years.

We continue to be very thoughtful on how we choose to deploy the cash.

Stock repurchase is obviously one way to do so.

The only comment I think we are willing to make today, is we continue to evaluate our options to maximize the returns on the cash, and we maintain a very conservative and appropriate capital structure, that we can weather the storms economically across the globe.

We do have an existing authorization to repurchase up to 5.5 million shares of our common stock, and we are always looking at what the best use of our capital is.

Great, thank you.

Our final questions comes from Sam Poser with Sterne Agee.

I just want to verify of that when you are talking about operating income growth next year, so basically, we are looking at basically the earnings growth off of that lower, off of that $1.36 number, not off the $1.48?

Yes.

Because it would be a more normalized tax rate?

Correct, yes, the tax rate has been abnormally benefited by that nonrecurring income tax benefit in Q3, Sam.

So when you look at it next year you have to adjust for that in.

And as I said, you have that additional issue of the USA being more profitable next year again, which puts some upward pressure on the tax rate, being that the US had such a very high relative tax rate relative to the rest of the world.

You expect the mix to grow into the US a little more next year, just based on the way things are growing?

Yes, when you look at statutory accounting, and the USA tax rate is impacted by the USA net profit, there are a lot of variables and those variabilities are all moving favorably for our business in the USA.

Okay.

Thank you very much.

Good luck.

You are welcome, Sam.

Thank you.

We don't see any other questions in the queue at this point in time, so on behalf of us within the Crocs management team, we thank you for joining us today on the call.

We look forward to talking to you in January.

Ladies and gentlemen, this does conclude today's presentation.

We thank you for your participation.