卡洛馳 (CROX) 2013 Q2 法說會逐字稿

Welcome to the Crocs second quarter 2013 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, Melanie and thank you all for joining us for our second quarter 2013 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.

Earlier this afternoon we announced our second quarter 2013 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 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, prospects and product pipeline.

We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the Company's 2012 report on Form 10-K filed on February 26, 2013, 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 of the Securities 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 on this call including adjusted net income.

Explanation of these metrics can be found on the earnings release filed earlier today.

I w/ill now turn the call over to John McCarvel.

Thanks, Will.

Thank you for joining us on our second quarter earnings call.

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

I will begin the call today with commentary on the second quarter, followed by Jeff who will review the financial results for the second quarter and walk through our third quarter guidance.

I will then add some additional insights into our ongoing business before we take questions.

Turning to the quarter.

The second quarter turned out to be more challenging than we had anticipated during our last earnings call.

While we are very pleased with the performance of our Asia-Pacific and European segments, we were impacted by lingering challenges in Japan and the overall performance of our Americas business.

Revenue for the second quarter was $364 million or 12.5% growth versus the second quarter of 2012 on a constant currency basis.

Our first half revenue growth for 2013 is in line with our plans and prior communications.

Revenue for the quarter was near the middle of our revenue guidance and is the highest quarter in the history of the Company.

I would like to share with you our perspective on the quarter and some of the decisions that we made and the thinking behind those decisions.

In our second quarter guidance we projected revenue at $360 million to $370 million and EPS at $0.60 to $0.63 per share.

While revenue in the Americas and Japan were challenged by lower than anticipated at-once business from our key wholesale partners, our direct-to-consumer business generally delivered strong growth through expansion and comp performance in the quarter.

It is important to understand the impact of the one time charges and external factors in the quarter versus our prior guidance.

Let me list three key items for you.

First, the Brazil statutory tax audit was a $0.07 EPS charge.

The additional FX expense non-related to the Yen was also about a $0.01 EPS charge and the unfavorable tax rate which Jeff will go through later in the presentation was a $0.02 EPS charge.

Without these unanticipated factors, EPS from ongoing operations was $0.50 per share.

Now, let's walk briefly through the regions and channels to better understand what transpired as each market has different nuances and impact to the business.

Starting in the Americas.

Weather had a significant impact on the cadence of buying activity in the quarter and we experienced very different weather patterns from the second quarter of 2012.

Sell-through of products early in the quarter was slower than anticipated but accelerated quickly in the latter half of May and throughout June.

Due to the late spring summer buying season, many of our wholesale partners did not place additional at-once orders for delivery in the second and early third quarters.

You can also see this impact in our backlog at the end of the second quarter.

Our retail business followed a similar pattern throughout the quarter.

Slow sales early in the quarter due to the weather was reversed by very strong sell-through in June.

Retail counts for the quarter were a positive 1%.

We made a few key decisions later in the quarter to sell some products in the wholesale and retail channels with a higher level of promotional discounts than we would have normally.

Inventory that had been purchased to support a higher level of at-once business in wholesale in the quarter was sold at a discount later in the quarter through both our wholesale and direct-to-consumer channels in the Americas and Europe.

It was our decision to reduce inventory and not carry over products to the back half of 2013 and the spring-summer of 2014.

Our balance sheet reflects stronger liquidity and lower inventory levels, which resulted in very healthy inventory turns of 3.8 on an annualized basis.

Our key new product introductions in spring-summer 2013 have done very well.

While satisfying our core Crocs loyalists, our new products are bringing new consumers to the brand.

Innovative, fun, comfortable new models are connecting with consumers.

Sell-through at our major wholesale partners have been strong through the quarter resulting in lower inventory levels at many major partners.

At one point in the quarter, 23 of the top 100 footwear styles sold on Amazon were Crocs.

In Europe, our business continues to grow and strengthen in all three channels in a generally difficult economic and retail environment.

Our wholesale business was up 2%, retail increased 96% driven by new store openings and a positive 1% retail comp.

And e-commerce was up 5% all on a constant currency basis.

We are transforming our European business from being primarily wholesale and clog oriented to a better balance of wholesale and direct-to-consumer business offering a wider portfolio of lifestyle products.

New products now make up 19% of revenue in Europe, up significantly from prior years and quarters.

New retail stores and a larger retail presence is achieving our long-term objective of connecting European consumers to the broad lifestyle portfolio of Crocs products.

In Japan the consumer market remains challenged at a macro level and we see the impact on our business, too.

However, the brand remains strong in the Japanese market.

New product introductions have done extremely well.

Not withstanding the macro market pressures, our distribution partners remain bullish on the brand and have continued to build new partner stores in various parts of the country.

Our wholesale business was down 3% but retail was up 14% and e-commerce up 1% on a constant currency basis.

Retail growth was driven primarily by new store openings and comps were a negative 19% for the quarter.

Lastly, our Asia-Pacific region continues to show strong growth.

The strength of our casual lifestyle footwear brand can clearly be seen in this market.

Consumers look for us to deliver fun, colorful, innovative products, and our spring-summer line for 2013 has done extremely well.

New products account for over 50% of the revenue in the quarter.

Wholesale growth is up 22%, retail up 15% on the back of a 6% improvement in comp store sales and e-commerce is up 50%.

The e-commerce business in the region is small but offers significant long-term potential growth as it includes China, Korea and Taiwan, all markets where e-commerce is emerging and growing at a rapid rate.

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

Thank you, John.

Hello, everyone and thanks again for joining us.

What I would like to do first is to go through the factors that impacted our second quarter results compared to our prior guidance.

I will then provide additional detail on the second quarter and our guidance for Q3.

In the second quarter we had various challenges that impacted our results, that we did not expect when we had the Q1 call guidance.

These include non-recurring expenses, an impact of lower margins from three identified areas, and a higher than anticipated tax rate.

Separately, and included in guidance, we continue to be impacted by unfavorable foreign exchange rates, macroeconomic forces most notably in Japan, and our ongoing expenses associated with SAP and marketing investment.

As you saw in our release earlier this afternoon, we recorded a non-recurring charge of $6.1 million related to a resolution of a statutory tax audit in Brazil during the second quarter.

In addition, our actual Q2 tax rate was 29% versus guidance of 21%.

The Brazil expense was non deductible and our operating profit shift did not provide any reduction in global tax expense.

Combined these increased the rate as a percent of pre-tax profit.

We now expect our full year effective tax rate to be 22% to 25% after adjustments for the above mentioned Brazil issue.

This is higher than previous levels as our operating income in Japan has declined and our mix of International profitability has shifted from low effective tax rate jurisdictions.

Together these two items reduced EPS by $0.09 per share in the quarter.

The remainder of the EPS shortfall versus our guidance for the second quarter was primarily the result of lower gross margins as we ended the quarter with gross margins of 55.2% compared to 59.3%.

From a high level, margins were down due to several factors with mostly balanced weighting.

One, we were more promotional in the Americas than in Europe in response to softer sales trends primarily due to challenging weather.

Two, revenue in our high margin Japan business was lower than expected notably in the retail channel which has high profit margins.

Three, we saw a US dollar strength in some additional foreign markets outside of Japan impacting our margins in the second quarter.

Next, on a year-over-year basis we were impacted by planned additional marketing expenses, SAP investments, unfavorable Japan foreign exchange rates and other macro forces.

Specifically with the Yen declining 18% versus the US dollar in the quarter, year-over-year reported revenue was reduced by 2%.

This had an approximately 150 basis point impact on our our overall gross margin and similar impact on our operating margin as a Company.

Overall, with the lower translation of our Japan Yen-denominated operating income and ongoing lower purchasing power of the Yen relative to the dollar, we saw a year over year decline in consolidated net income of $5 million or $0.06 per share.

In addition, the macro forces impacted at-once orders in same-store sales which declined 19.5% for the quarter.

Also on a year-over-year basis our global SG&A expenses increased $26 million or 21% to $150 million.

This consisted of $72 million in indirect expenses inclusive of increased year-over-year marketing expense of $3 million and $2 million for our SAP project.

Direct SG&A expenses totalled $71 million.

Our retail channel SG&A was up $12 million as our store count increased from 484 locations in 2012 to 575 locations in 2013.

Including those items and the non-recurring Brazil expense, total SG&A expense was up approximately 3% for the quarter.

Other notable items for the quarter.

Revenue increased $33 million, up 12.5% on a constant currency basis from Q2 2012 driven by increased sales volume as units increased 16% to $16.3 million.

This was partially offset by a 4% or $0.81 decline in ASP which was $21.65 in the second quarter of this year.

Clogs represented 44% of units sales in the quarter, down from 46% last year, while non-clog wedges, loafers and women's casual shoes increased as a percent of overall unit sales.

Overall our retail revenue increased 18% over 2012 levels as we added 91 net new locations since the end of last year's second quarter.

Global retail same-store sales increased 1% over last year with Americas up 2%, Asia-Pacific up 8%, Europe was up 1% and Japan was down 19.5%.

Our global outlet stores had a same-store sales increase of 16%.

In summary for the second quarter, while we had various challenges that impacted our results that we did not expect when we had the Q1 call, the fundamentals of the business remain strong as the balance of revenue around the globe and strengthening retail performance outside of Japan solidify our long-term sustainable growth expectations for revenue.

Our healthy balance sheet continues to be a source of notable strength.

We had global cash reserves of $289 million with limited debt and believe that we will continue to grow cash balances from operations.

In addition, we lowered our inventory to $161 million.

This lower inventory positions us to run our supply chain more efficiently in coming quarters.

Moving on to Q3 guidance.

In the third quarter we expect revenue of $300 million to $310 million and EPS of $0.20 to $0.23 per share.

This includes slightly positive comp growth in the quarter.

We expect gross margins in Q3 to be consistent with the prior year, as discounting in Q2 was primarily the result of late spring and weather conditions.

We plan to open approximately 25 more retail stores globally by the end of the quarter and end the year with 600 Company-owned locations.

Backlog at the end of second quarter is down 7% from June 30, 2012.

Total backlog as of June 30 is $161 million, down $11.6 million from 2012.

However, on a constant currency basis backlog is down approximately 3%.

On the third quarter outlook -- our third quarter outlook takes into consideration the late spring in North America, currency headwinds from the Yen and European macro-economic issues.

In the third quarter we expect revenue of $300 million to $310 million and EPS of $0.20 to $0.23 per share.

This includes an assumption of 2% comp growth in third quarter.

Currency expectations are now 100 for the Yen and 130 for the Euro.

Thanks.

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

Thanks, Jeff.

I would like to summarize for you again our overall view of the business.

First, Crocs is global brand with 66% of our revenue outside of the United States.

This continues to provide us with a diverse revenue business and long-term growth potential.

From a Crocs perspective, what we see going forward is an improving Europe, a stabilizing Japan, a growing and strong Asia and an opportunity for us to improve our going forward business in the Americas.

Secondly, while gross margins are down in the second quarter from historic levels, this is due to Management decisions taken to be more promotional and aggressive in reducing inventory in selected markets, and as Jeff said earlier in our guidance our gross margins for the third quarter of 2013 will be consistent with Q3 of 2012.

Third, Management remains committed to aggressively managing SG&A costs as it has in the past, both direct and indirect.

And fourth, we expect to grow on a continued second half of 2013 but at a slightly lower level due to the at-once levels of business in the Americas and Europe wholesale in the third quarter.

With that we would like to turn the call back over to the operator and we will take our first call now.

Thank you.

(Operator Instructions).

We will go first to Erinn Murphy with Piper Jaffray.

Great.

Thank you and good afternoon.

I appreciate the context around the second quarter and just some of the many moving parts.

John, I was hoping you could spend just a little bit more time on really the pattern of sales from the beginning of the quarter to the end of the quarter.

You did kind of indicate the improvement, but what would be interesting is if you could speak a little bit more about any regional call outs, if there was more improvement maybe in Europe.

Your closing remarks talked about your perspective on Europe starting to get a little bit better.

Just kind of helping us understand really the cadence as we progress throughout that quarter.

When we look at both the Americas and the European cadence throughout the quarter, it's very similar.

Weather patterns were very similar.

Where we had cold March and April, that really led to slower consumption both at the wholesale level and at our own retail level that continued on into the first half really of May.

So looking at less than the historic sell-through with our wholesale accounts and within our own retail operations.

It was really in the late part of May after the Memorial Day weekend that we made the decision to move to a little bit more aggressive BOGO program or promotional program in two specific markets, in Europe in our retail stores and in the United States.

In both markets we saw double-digit comp performance during the month of June.

Whether that's specifically due to the promotional nature of the business or whether it was that the sun came out starting Memorial Day weekend and it started to improve in many parts of the US.

It's hard for us to discern what portion of the growth or comp performance comes from those two elements.

But promotional activity specifically geared towards the US and the European markets.

We don't see promotional activity -- very little promotional activity throughout Japan and our Asian markets, hence stronger margins and significant comp performance.

As I said Asia up 6% on the back of over 50% new product introductions sales in our retail stores.

That's really helpful.

John.

I guess just maybe thinking about Japan as well then throughout the quarter, I mean the comps are fairly weak on top a weak comp last year.

I think [inaudible] is probably a little bit better for a lot of retailers, but clearly the market is still not very strong overall right now.

Could you just talk a little bit about how you feel like you're performing in the context of that market and then, secondly, just if you think about the evolution in Japan being much more of your established -- or much more of an established market, kind of the channel -- or if there is any channel conflict between both retail and wholesale as we think about that as we head into the back half of the year.

So I think for the Japanese market, the difficulty for them also kind of exists through that early [golden wave] period in early May where weather was not good again.

Their shopping consumer behavior was restrained.

Clearly what we saw also through the last part of May and then in through June is on a much more even comp store sales basis.

When we look at the impact of the Yen on the business, and Jeff can share his views of the impact that has and he mentioned some of this in his commentary earlier -- it on a Yen to Yen basis is fairly flat quarter-over-quarter.

And so we still see good demand for the products, traffic has remained strong throughout the second quarter, but a better conversion in the June time frame.

We think based on what we have seen through the June period and into July it gives us confidence both in the sell-through with our key wholesale accounts there as well as what we're seeing within our own retail accounts it appears that that market is solidifying, is getting to a point where we think we have some confidence in the back half of the year that that's going to continue to trend in a more positive way.

More positive being that it's not going to negative comp as it has.

If you do remember last year in the third and fourth quarter in Japan, we did start to see a slowdown from our standpoint in the consumer behavior to buy products.

I say all that, Erinn, and I also want to just remind you that that business even at its impacted levels still remains one of the most profitable parts of Crocs today even with a Yen depreciation that we have seen and even with a little bit slower retail market.

Okay.

And then just last question on the product line perspective, you're obviously in a much leaner position from an inventory perspective getting into the back-to-school season, but there's also a lot of new innovation hitting this fall and it's actually been hitting over the last couple of weeks.

You've got the Busy Day collection, the Retro Sneaker.

Can you just give us an assessment on how -- any early rates on how these are tracking, how they were received in the wholesale community as well as just in -- obviously if you've got them in your retail stores or coming there now.

Just kind of help us frame up some of the product innovation that you guys are excited for the back-to-school season.

In the first half of the year, I think A-Leigh M, the Retro -- Huarache came a little bit later in the quarter -- and Molded Boat all did extremely well and, hopefully, what we want is our wholesale partners who have done quite well with all those products, have sold through, many of our top US wholesale partners are less than 12 weeks' worth of inventory.

Some of our key partners are at four, five weeks' worth of inventory at this point in time.

They have sold through.

They did not reorder.

We're hoping that that's going to -- confidence in the sales of our spring-summer products will carry over.

It's too early for us to give you a read at this point in time as products are just flowing.

Most of our products are just flowing into wholesale starting now in early July.

So it's a little bit early for us to give you a read.

New products that have hit our retail stores continuing to do well, but we're early in the third quarter to get that kind of read.

We don't have a lot of product that goes to retail any way.

Wholesale for back-to-school, that's not a strong period of time for us, and so it's a smaller part of our overall revenue plan.

We'll go next to Jim Duffy with Stifel.

Thanks.

Hello.

Question on the backlog.

Can you speak to the composition of the backlogs, maybe the split between quarters for expected shipments and also the split between seasons to what extent does the year to year decline reflect perhaps cautious orders for next spring season?

Well, I think first it's important to note that our fall holiday pre-book is not down on a year-over-year basis.

It's basically flat on a year-over-year basis.

What we're really seeing in the backlog going into Q3 is lower spring-summer 2013 backlog going into the second half of the year.

And that's really been the decrease as we saw weather-related patterns that didn't materialize into at-once demand during the summer.

I think, Jim, the thing that we would normally see through the years of experience here is that we would see more sales of our products in the March, April, May time frame.

We would see more wholesale customers placing orders in May and June for delivery June, July and early August.

And that impacted as we talked about on the call today our at-once business, especially in the United States, and to a lesser extent from a dollar impact standpoint, Europe.

But then that carries over into our backlog for the third quarter revenue, which is why we have taken guidance down.

We think the impact year-over-year looks to be about $10 million of Q2 orders that would be shippable normally to wholesale accounts in the first half of the third quarter, which didn't materialize.

So as Jeff said, backlog remains fairly consistent year-over-year for fall-winter products.

We have not started to book any spring-summer 2014 products yet.

Booking deadlines come later in the third quarter and Jeff can give you the split between Q3 and Q4 backlog as a total of the $171 million.

$114 million is our Q3 and the balance would be in subsequent quarters.

So, John, a year-ago had you started to book orders for spring 2013?

No.

Is there some of that that's in the compare?

No.

Normally our booking date -- we don't book anything for a 6/15 date for delivery in 2014.

So our first real booking dates are 8/15 and 9/15 in the quarter.

So we no we don't.

We're comparing an apples-to-apples situation.

We don't have spring-summer products for either year-end in June 30 backlog.

Got you.

Okay.

And then based on conversations with retailers do you have a sense that they will be conservative in booking for spring next year and perhaps given the challenging spring this year want to take receipts later?

It's hard for us to tell,I think, what the wholesale thinking will be.

Jim, early on in 2013 what a number of the major wholesale partners that we have and especially in the mid tier family channel, we're actually looking at because of the lack of a fall-winter season for almost two years running, they started to come to us and talk about maybe taking some of the spring-summer 2014 products in the fourth quarter.

Products that they would sell all the way through.

And I think because of the late winter period that we had we have seen them go back and rethink that a little bit trying to look at what they think the weather patterns are going to be going into 2014, late 2013 and into 2014.

So we haven't seen many of them come forth with any kind of merchandising plan that would roll out spring-summer products in their southern stores or warmer weather locations in the fourth quarter of this year.

So I think from our standpoint many of them did take products earlier this year so we did see a little bit of that shift into the first quarter as we talked about on the last call where pre-bookings were a little bit higher with a February-March delivery.

I don't know enough to tell you.

That now maybe as we go through the booking season we will get better indications from our key wholesalers in the US and globally.

Okay.

Sounds good.

And then you talked about incremental marketing spend planned for this year.

Do you continue to plan to spend the total of that and related I'm just wondering given the difficulty of predicting the business if you are confident you have been sufficiently conservative with the outlook for the third quarter?

I think you've followed our stock for a long time, a number of people have followed this for a long time.

We have committed to managing the SG&A of the business according to the level of the business that we see.

Jeff and the finance group have been working with the rest of the executive team, both at a corporate level and a regional level, to manage down expenses in the back half of the year.

Yes, we will take down some of the anticipated marketing spend, additional marketing spend that we had in the plan where we can and where we think it's prudent to do so, but as you know, a lot of times your pre-booking out launches the products, we're pre-committing to advertising programs and marketing programs that are tied into promotional calendars both internally and with our key wholesale customers and so we're not in a position to take a step back from that.

So yes, you will see SG&A management in the back half of the year.

You will see some reduction to marketing expense.

Okay.

Thank you.

We'll go next to Corinna Freedman with Wedbush Securities.

Hi there.

I wonder if you could quantify -- or clarify your comments about the outlet stores.

I think you said they comped up 16% or maybe I misheard that.

Okay.

Can you expand maybe, Corinna just a little bit on the question.

So I think Jeff's --

The comps.

The comps at your outlet stores.

Right.

So Jeff's comment in -- section of commentary was that when we look at different segments of our retail channel, what we saw was strength in the outlet channels.

We're developing an outlet strategy and fleet of stores in Europe.

We have a fairly significant outlet presence here in the United States and what we have seen is that our consumers who continue to be challenged by employment issues, both in Europe and in the United States.

When you look at payroll taxes, you look at all the factors that we have all talked about and the macro-economic conditions, we still see the strength in consumers looking for shopping the brand, the people are constantly looking for a good deal, looking for products that are reasonably priced and what we see in our outlet stores is that we sell older models, they're still core products like clogs, at a fairly significant rate and when we offered the promotional programs that we did in June and into this first part of July we see that really resonating with our consumers.

These are people that make $65,000 to $75,000 per year as the household income and they're looking for value today and outlet stores are a place for them to find value as well as through our e-tailers which as said in my part of the presentation was a pretty significant accomplishment, we feel, that 23 of the top 100 selling styles on Amazon were Crocs products at one point in time in early June.

I think the other key thing to add, Corinna, is that we are looking at outlet stores as a green space opportunity for the Company.

If you look at our outlet openings in the quarter, on a year-over-year basis we have opened 34 at new locations so out of our 90 total locations 34 of those were outlets and that's the segment that continues to perform well and we did call out comp for outlets in the first quarter as well because it out paced the overall average as well.

Okay.

And then if you could give us a timing on the SAP testing and implementation and just lay out when those initiatives are going to occur this year?

You're not going to see anything in 2013, Corinna, relative to SAP.

That will continue on into the early part of 2014 with an estimated go live somewhere in about the middle of the year at this point.

Okay.

That's all I had.

Thank you.

We'll go next to Taposh Bari with Goldman Sachs.

Hi.

Good afternoon.

I wanted to focus on SG&A.

So I can appreciate the weather volatility but SG&A, I would imagine, given the fact that you're actually making your sales plan, is something that I think you guys could control.

So I think originally, Jeff, either last quarter or the quarter before you had guided to SG&A being flat as a percentage of sales.

Year-to-date it looks like SG&A is de-levering about 200 basis points.

And then as we look at your third quarter guidance you're saying 305 mid-point on sales, flat gross margins.

So in order for me to get anywhere near your guidance I have to put in about 500 basis points of de-leverage on SG&A so it actually gets worse.

So can you just walk us through why SG&A is de-levering 200 basis points year-to-date and why the third quarter guidance calls for that number to get worse.

Yes.

Like I said, Taposh, on the prepared remarks, we saw in the quarter about a $3 million increase associated with marketing, $2 million out of SAP on a year-over-year basis, our retail channel expenditure was up about 20% with a similar rate of growth in our store counts so our SG&A expense continues to go up in correlation with our retail store count and that was up $12 million in the quarter and included in our SG&A expense is the $6 million for Brazil associated with the resolution of the sales tax audit there.

So when look at it and you strip away those issues, our SG&A from a kind of a core controllable SG&A was up 3%.

So when you look out into the future quarters, the year-over-year increase in SG&A for the direct channel is going to be in correlation with the overall revenue growth associated with the additional retail stores and our overall growth in indirect SG&A for Q3 is still round about the rate of overall revenue growth if not a little bit lower in our internal models for 2013.

Okay.

Maybe I mis-asked the question.

I mean was the original guidance for SG&A to be flat this year or was that -- did I mishear that?

Well, we never said that our SG&A was going to be flat this year.

We said that our direct channel SG&A would grow in correlation with our revenue and our retail store count.

We said that our indirect store, our indirect SG&A, our overhead SG&A would grow around about half the rate of overall revenue growth, but we were going to make an investment in SAP to the tune of about $1.5 million to $2 million per quarter and we were going to make an investment into marketing for the year.

So those were specific call outs that we made back in February of this year.

Okay.

I wanted to ask a question just about the relationship between backlog and wholesale growth.

So if we went back to last quarter your backlog was up 1%.

Historically there's been a relatively comparable -- a pretty tight correlation between backlog and future quarter wholesale growth, but this past quarter if we look at backlog it was up 1% yet this quarter wholesale revenues were up 7% yet you're saying that at-once actually missed your expectations.

Could you just walk us through that dynamic what's happening there?

So on the quarter, Taposh, you have to look at the impact of the Asian business and the strength of wholesale in the Asian market and in the quarter I think to get a perspective as far as what happened relative to wholesale growth.

In the third quarter we -- as Jeff walked through the numbers -- see a -- we have taken down the expectation for at-once revenue during the quarter today.

I think if you look at this week specs, still about 20%, 25% of our revenue for the quarter still to come from at-once orders and in all markets which we're comfortable with today given the diversity of the brand globally.

So in the past I think our at-once orders have been a more significant percentage in dollar amount in Q3.

Q2 and Q3.

And I think right now we're trying to understand exactly what our key wholesalers are going to do in the third quarter.

So we're being conservative in what we think we are going to expect to see from them.

Finally, we saw as we said earlier to Jim's question prebooks going into the quarter was $114 million for Q3 and historically our prebook revenue as a percentage of total wholesale revenue for Q3 has been about 75%.

Okay.

Thank you.

And just one last question for you, John.

Kind of more theoretical.

I just want to gets your thoughts on this.

I mean looking at Crocs on paper it reads very well, it's a cheap stock, the return metrics are great, great margins, global brand, yet quarters like this there's just this record of inconsistency in terms of just execution, so -- and I get that there are external factors that play.

I was hoping you could perhaps give us some thought as to what you think contributes to this level of inconsistency just historically and what the management team is doing to reduce that degree of volatility going forward.

Yes.

We've had many conversations over the last couple of years when we look at quarterly guidance with the youth of this Company, the global diversification.

I think if you're operating in one single market, it's really easy to be able to forecast and control the business.

At the young age of this Company and with the growth of the business I think we for a number of years did not miss guidance on any quarter.

In the last two years we've seen quarters where we missed top line guidance by $5 million and bottom-line guidance not inclusive of one time charges be [$0.02 to $0.03].

And I think that that's kind of where we're at in the business.

We try to be as conservative as we can when we go into our quarterly process and giving guidance to the Street.

I think when we looked at the quarter given the strength of new products, the enthusiasm that our wholesalers had and our own enthusiasm for the products and what the sell-through looks like once the sun came out, I think it's really hard for us to have forecast the level of consumer conservatism in the first six to eight weeks of this quarter in two major markets.

We do try our best to be conservative when we go in and we give guidance for the quarter.

So I know that this creates a huge amount of concern on the Street and we continue to work at this to do our best to hit the numbers that we give from a guidance standpoint.

I, unfortunately, just don't think there's anything in this quarter given what happened weather-wise that we could have forecast even when we gave guidance at the end of April.

Okay well, thank you and good luck.

We'll go next to Scott Krasik with BB&T Capital Markets.

Yes.

Thank you.

Hi everyone.

Thanks for taking my questions.

So you talked about the global [alloc] comping up strongly and talked about the excellent results after you went to a BOGO event and ASPs I think you said were down this quarter.

Is there a chance that even though a big part of the strategy is to introduce higher priced product that maybe the stuff is just a little bit too expensive to drive the volume you're looking for?

Scott, I think you have to look at it on a global basis, right?

So that's not what we see in markets like Japan and in markets like Asia.

I think if you look at Asian comp at 6% in the second quarter based on last year we comped up 5.2% in the quarter and in some cases, Scott, we even sell the products at a higher level -- a higher price than we do even in the US domestic marketplace.

Pricing isn't an issue in those markets.

If we look at European priced products where we're at relative to the competition, where we're at with comparable products, a US dollar denominated company like us and products like us we don't see that is to be a barrier.

So when we come back and we look at what the issues are, as we said throughout the call today, being heavily an America centric issue.

What our marketing data tells us, what we see in the feedback that we get is when we're in a price point between $25 and $60, $25 and $70 we still see consumers not having a problem with buying products with the Crocs logo on it, with Crocs branded products because they know the quality and the comfort that comes.

When we get above that $60, $65, $70 price point then we do see that to be an area from both a marketing standpoint and from a consumer standpoint that we don't believe that right now the brand can take products up above that price point.

But wedon't have many products that go above those costs today and so we don't see ASP for the majority of the products we sell today to be the issue.

Most of our men's products run anywhere between $45 and $65 price point on a comparative basis.

People are buying similar products anywhere from $70 to $90.

So we don't see pricing to be an issue in our core business.

Okay.

And then in terms of just reporting the numbers going forward is it possible -- I think you had talked previously about maybe putting out the quarters that show a break out of Japan and Asia?

Can we get that for Q3 and Q4 before you reports the numbers if possible?

Yes, it is possible.

Is that going to happen?

Yes.

We'll get that to you.

Okay.

Thank you.

We'll go next to Sam Poser with Sterne Agee.

Thank you for taking my call.

I've got a few -- I've got three things.

Number one, what were you assuming the at-once business in Q2 and how -- and what are you looking for at the back half in especially in the fourth quarter?

And then secondly you guided for 600 stores at the end of the year.

Have you -- and that's less than the 90 store openings you planned on doing originally.

So can you talk about that?

And then I have one more thing.

I will let Jeff take that.

Okay.

So for at-once orders, which was your first question.

Right.

We did assume in at-once about a year-over-year increase globally and we did have some issues with at-once demand in the quarter.

As we looked at the quarter unfolding especially in the later parts of the quarter we have not seen the at-once demand that we had expected and frankly when you look at the data coming out of the wholesale accounts where they have relatively low inventory levels, we would have expected more aggressive ordering patterns from our wholesalers based on this information.

The wholesalers are taking conservative positions and that gives us hope for Q3, but we have a very conservative approach to Q3 guidance and assumption of at-once demand that's relatively moderate for Q3.

Yes.

Normally I think we would be on the 30%, 35% for at-once business for both Q2 and Q3.

and what we've seen and what we're carrying over in backlog we're forecasting at 15% lower at-once business now for the quarter.

And then your second question about retail stores when we're up 91 stores June 30, 2013, versus June 30, 2012.

We opened stores in the second half of last year at a fairly healthy clip, especially over in Europe when we opened stores in Q4.

This year our plan is to open a very modest amount of second half stores, only 25 in Q3 and only a handful in Q4.

So when we look at the year end we're looking at 600 versus a starting point of 537.

So the year-over-year December 31 versus December 31 is where the 60 comes from.

Right.

But I mean for the full year you said you were going to open like 90 so your number is going to be lower than the 90 at the end of the year?

The original plan, correct.

Our estimate right now is that we will be at 600 stores.

And when you look ahead into next year are you going to put that down -- are you going to keep -- are you going to work more to get your current stores working better rather than opening new stores in a general sense?

I think you have to go region by region, Sam.

I think if you look at the Asian business today, for example, we have 50 of our own stores in China and our partners have 650 stores so we will continue to add a certain numberof stores in the Asian market like that.

We anticipate that our partners will add another 150 stores in China going into 2014.

So today when we look at our pipeline of stores for next year, we still feel that we're in the same range, 75 to 90 stores with 25 to 30 stores in each geography.

Most of our US pipeline looks like outlet stores today in markets where we feel we need the presence and you're going to still continue to see a certain amount of growth in warmer weather locations and in France and Germany and Europe for next year.

So I think you see a little bit slower, maybe, growth in terms of stores in the pipeline.

I think we're dealing with the retail systems in place, better retail systems in place now with Oracle planning in place going into spring-summer 2014.

We're in a better system standpoint on how we merchandise, allocate and manage our stores on a global basis, the organizational construct is better.

We've added talent throughout the world.

We have a new head of Asian retail now for six months who came from Levi Strauss in the region.

We've done that in other parts of the business, in our retail business.

So we're feeling people wise, systems wise, product wise, second year is generally better.

People weren't too sure about Huarache going into the season, people weren't too sure about Molded Boat, people weren't too sure about A-Leigh, but second years are generally better for us so we are maybe at a fault, but we're internally optimistic that we think that this is -- that we've got the products in the right place at the right price point going into the next year.

Well and then last -- Okay.

Lastly, to the other question about the guidance and the global brand and the young global brand with all the differences and I mean we've talked about this in the past.

I mean there's guiding conservatively and guiding conservatively.

Clearly the eternal optimistic seems to be over taking the -- adding some --too much optimism to your conservatism.

So the question is are you guiding the balance of this the year -- are you thinking about guidance for the balance of this year the same way you thought about it at the beginning the year?

What I'm saying the same way you thought you were guiding at the beginning of the year because beat and raise is -- guide and beat is good, guide and miss is not and it's very, very difficult to try to figure out, should we listen to your guidance or should we just cut it by 10% to 20% because despite how conservative you say you are it's very hard to figure out what's going on.

I mean are you taking -- when you said you are cutting your at-once expectations I down to -- cutting it down by 10% to 15%, is that enough or should you be guiding your at -once expectations down 40% and then beat that?

That's -- I mean have you changed the way you're thinking about the way you're delivering the message here?

Because I mean your business -- you're running good increases and stuff like that, but you are setting a very high bar for yourself and you're not always jumping over it.

I think we are more conservative as each quarter goes on.

I know maybe that doesn't feel like that today.

I think when we step back and we look at this business, for the first half of the year, revenue growth has met expectations, has met our expectations, has met Street expectations.

I think the unfortunate part of this and we're not the only brand sufferers with seasonality of consumer behavior when we didn't have many winter seasons there for a couple of years, brands that were heavily fall-winter based, they had to go through the same dynamic to move product, to move inventory and to do the right thing for their business.

And we felt this quarter, first quarter we were very close in line, revenue was in line with the expectations.

We had a choice to make whether we would kind of forego the promotional activity, take a chance on June being warmer and letting that come to fruition and we made the decision this quarter that it was going to take a hit on profitability.

You have to take out all those other one time charges and it is what, the hand that we got dealt with.

We try to be conservative for the third and fourth quarter of this year.

We're giving guidance for the third quarter we feel is conservative based on what we see for at-once buying patterns for the third quarter.

So we hear it loud and clear, we see it, we're working really hard at meeting, beating and --

Hello?

Did I get cut off?

I don't know.

Yes, you cut off for a second there.

But any way, and let's talk about SAP and then I will get off and I will let everybody else ask questions.

I mean SAP, almost every company we've seen that does SAP hiccups while the implementation (sic).

You have said publicly that you think that you've got a simplified version of SAP and when you flip the switch the lights are going to shine and it will all be good.

Again, that may happen, but historically we've seen even the biggest companies in the world like Nike have significant problems as they've converted to SAP.

So shouldn't you guide to be -- to say look, we hope the lights shine but we're going to temper that a lot.

Again, regardless of how well you have planned it because it's a difficult situation.

Maybe the optimism just really needs to be tempered more than you're currently tempering it.

Well, I don't think, Sam, that we've given any guidance towards 2014 at this point in time.

What we think that impact could be or what it's going to look like.

What we have said is that where Nike did a lot of customization to the SAP solution that they implemented we're going with the straight APS solution with no customization to their apparel footwear solution.

That's what we've said so far.

As far as impact to the Business, of course you're going to have some kind of impact to the Business.

What we've said is it's our goal to minimize this, to do this judiciously.

We're not going to implement SAP until we have gone through proper testing globally to determine the impacts that it may have and we can't give you any more guidance than that at this point in time.

We're still somewhere as Corinna asked earlier nine to 12 months away from implementation so we will continue to give you updates, but all we have said so far is that we're not doing customization and we're working closely with SAP to be as vanilla as possible.

All right.

Well, thank you and good luck.

And we have time for one more question.

We'll take our last question from Steve Marotta with CL King & Associates.

Good evening everybody.

You mentioned the delta in marketing spend in Q2 was $3 million.

Can you offer that delta for Q3 and also remind us what aggregate spend is for this year versus last, please, marketing?

Yes.

The $3 million was for Q3.

We anticipate as John said, the second half of the year will be up slightly in marketing costs so when we look back on the full year, we'll be up about one full percentage point in revenue at the end of the year, which is about what we said at the beginning of the year for our incremental marketing spend.

Okay.

And lastly you mentioned in the prepared remarks that you endeavored to clear inventory by the end of the quarter.

The inventory levels on the balance sheet would imply that you did but I just wanted to verify that was entirely successful, that you are happy with where the inventory is and that there is no material carryover from Q2 to Q3.

No material carryover from Q2 to Q3.

A lot of what we did during the quarter was to move as I said in my remarks, a lot of what we had procured for at-once, a business that we thought would materialize in the quarter and we moved through a significant number of old, small numbers of styles that were in our LA -DC warehouse so we took the number of SKUs in the LA -DC warehouse down about 8,000 SKUs, so we're happy with the cleanup activity.

It should be beneficial to the business going forward in terms of a supply chain management being more efficient and effective.

We've made also significant improvement in the quality and level of inventory in Japan.

We have reduced the amount of warehousing and distribution costs in that marketplace also so we feel good about the progress that we made during the quarter.

Okay.

Thank you.

Operator, we would like to turn the call back over to you and thank you to everyone for joining us on our second quarter earnings call today.

This does conclude today's conference.

We thank you for your participation.