卡洛馳 (CROX) 2013 Q3 法說會逐字稿

Welcome to the Crocs third quarter 2013 earnings call.

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

Following the presentation we will conduct a Q&A 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 now my pleasure to turn the presentation over to Mr. William Kent.

Senior Director of Investor Relations.

Mr. Kent, please go ahead.

Thank you, Jill, and thank you all for joining us today for our third quarter 2013 earnings conference call.

Earlier this afternoon we announced our third 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 tostatements regarding future revenue and earns, 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 Factor 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 contends that all of its forward-looking statements on 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 will now turn the call over to John McCarvel.

Thanks, Will.

Thank you to are third quarter earnings call.

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

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

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

Turning to the quarter.

Our results for the third quarter were in line with the updated guidance we provided in early September.

While the Crocs brand and business model remains strong, there's no doubt there was a more difficult quarter than we had anticipated at the time of our last earnings call.

I want to highlight what went well during Q3 and also discuss factors that impeded our performance and what we are doing about them.

Let's start with a regional view.

We continue to be pleased with the performance of our Asia-Pacific and European segments.

Notably, we believe our European business has turned the corner, and we are seeing positive signs in all segments of this business; wholesale, retail and Internet.

Our performance in Europe continues to improve.

Our wholesale business grew nearly 21% in the quarter, ourown retail stores recorded a 9% same-store sales growth, and we saw a 65% retail revenue growth overall.

We also saw strong Internet sales growth in Europe in Q3, with online revenue rising 35%.

While our product mix in Europe still skews toward the classic clog silhouette, that is changing, and our European consumers increasingly choose other styles with higher ASPs.

We've been particularly pleased of our winterboots and closed toe silhouette.

In Asia-Pacific same-store sales grew 9%, as we opened 15 new Crocs retail stores during the quarter.

Internet sales rose nearly 26%, as we added more local language sites to make it easier for more people in more places to shop Crocs.

We also saw continued support from our wholesale partners although, growth in this channel was a more modest 2.3%.

Unfortunately, Crocs' strong performance in Asia-Pacific and early indications of the turnaround in Europe were offset during the quarter by challenges in the Americas and Japan from both a Company-specific perspective and a macro perspective.

Beginning with the macro picture in the Americas.

We are seeing decreased consumer optimism amongst our consumers.

We're also seeing less discretionary spending for footwear, apparel and other consumer goods in the US.

Although we continue to make progress on establishing Crocs as a four season brand, these trends, as noted earlier by Coach Wolverine and others, are having an outsized effect right now in what is traditionally our most challenging part of the year from a revenue perspective.

I wish I could tell you we were expecting a big improvement in consumer confidence in the US throughout the year, but we are not.

We have come to the conclusion, due to challenging back-to-school season, soft holiday indications, weaker employment growth numbers for the upcoming holiday season, and the toll that ongoing battle over US fiscal policy take on our consumers, we expect to see this slower trend continue in the fourth quarter.

We're not seeing consistent market data to support improvement in customer confidence in the US retail sales as evidenced yesterday in the data release from the conference board regarding October.

In Japan, which represents 15% of our revenue, we continue to be affected by unfavorable exchange rates and decreased wholesale volumes.

Revenue in our business in Japan declined nearly 23% during the quarter, or $11.7 million, due to the weaker yen.

On a constant currency basis the Japanese business declined a more modest 3%.

So to summarize it geographically, we're pleased with the performance of two of the regions that represent nearly 50% of our business, including our fastest growing region, Asia-Pacific.

We're working hard to improve the performance of the other two regions, which represent the balance of our business.

Now let's take a look at the business from a channel perspective, starting with wholesale.

In the US a challenging short summer followed by a tepid back-to-school season for many of our partners reduced our at once orders in the third quarter.

They're remaining conservative with at once orders for the upcoming holiday season too.

We have reflected that in our guidance we have given today.

We see our key accounts maintaining lighter than historical levels and in cases looking for grounds to carry more at once inventory of their top selling styles.

We are working closely with our wholesale customers to meet their needs while managing our inventory levels prudently.

In the Middle East we have launched a new line regional footwear, the [Shamal] collection, which has performed very well to date.

In other key markets in Europe and China and Korea, wholesale growth remains strong, with double-digit growth in each market.

In our retail channel, I have touched on positive results in Asia-Pacific and Europe, and growth in Asia-Pacific is driven by core products and new collections of products; namely [boat line], Huarache, the A-Leigh and Leigh products collections.

Positive growth in transactions, UTPs and conversion rates are generally in the low double digits.

Same-store sales growth in Europe is driven by core products and a wider spectrum of new women's, men's and kids styles, as the European consumers sees a wider portfolio of product from Crocs.

Conversion rates in the low double digits where our new outlet stores are performing well in the quarter.

We still see European consumers shopping for value products.

In the Americas our retail performance has not met expectations, with a slowdown from late July through September.

We experienced choppy traffic and demand in most retail locations throughout the US.

In comparison to many of our competitors we were less promotional at retail in the quarter and thus did see a nominal lift in gross margin.

Conversion rates in the US were in the high teens.

Japan remains a highly challenging retail environment.

Our information shows that Japanese consumer traffic in malls was 10% to 15% lower in the quarter, but conversion rates remained in the mid-teens, and average ASPs were higher.

Even with the headwinds and negative same sore sales in Japan, this continues to be the most profitable retail operations for Crocs globally.

Now let's turn to the Internet.

We continue to see strong online demand and relevance for the brand globally.

To grow our online business and to optimize performance we are continuing to invest and develop our global analytics team, thus helping us to make better use of the data we have in allowing us to improve our online customer experience.

In the Americas the online environment remains challenging.

Business with many of Crocs' e-tail partners continues to grow, thus taking some traffic and business from Crocs.

We're certainly pleased to see that on Amazon.com in July, 23 of the top 100 styles sold were Crocs.

However, we believe we're seeing some of the same showrooming challenges experienced by retailers in electronics and other categories that is impacting Crocs' direct growth of our own already significant e-commerce business.

Positive takeaways for USE commerce business in the quarter were ASPs were up $4.66 or nearly 20%.

Tablet acquisition was up 20%, and mobile purchases were up nearly 10%.

Users are truly acquiring our products how and when they want.

New products are driving ASP growth where our new A-Leigh closed toe wedge, or cap toe flat, men's suede Santa Cruz, and the new retro sneaker collection we launched this fall.

Conversion increased 37% in Europe, and revenue increased 20% per transaction -- this is excluding Russia.

This is a broad-based growth across many European countries.

A few additional call outs I would like to add today.

Having covered our regions and channels, I would like to call your attention to a few things starting with product, which is the heart of our business.

We are continuing to innovate to drive product diversity and become a four season brand.

This year's line was the most diversify in terms of silhouettes, but also the most focused by building assortments [segmented] to specific channels.

This effort has been led by the Busy Day collection developed for the active woman on the go.

We also have infused our core collections with a refresh to our Fuzz collection, Blitzen II and Blizten II Convertible.

[To expand wearing] occasions, for a female consumer we also fall winter version of our A-Leigh product line, which has performed well to-date.

For a male consumer we continue to see the strengthen in our casino loafer business, highlighted by our Walu and Santa Cruz franchises.

Heading into 2014 we will continue to build on our franchise around core clogs, translucents, canvas, our boating line, and now Busy Day and Wedge is including Leigh and A-Leigh.

The innovation engine that we have built continues to generate results.

For 2014 we will be launching a stretch sole product, which allows the sole to stretch to articulate with the foot, creating up matched comfort, building opportunities to open new accounts, attract new consumers and raise price point.

Additionally in 2014, we will introduced [color light], a leather-like products made from a proprietary cross light material.

Color light will have an immediate implement impact on enhancing our and long-term drive down to cost savings as we expand into more styles.

With our spring/summer 2014 campaign, we'll be building on a brand position in the [casual lifestyle] space called Find Your Fun.

The Find Your Fun campaign will engage consumers with the global message that Crocs love color, creative, individuality, passion for positivity that drives us to deliver a fun and different footwear experience for people around the world.

Find Your Fun will serve as the true brand platform for our customer experience interactions and will be integrated into all of our marketing activities.

In other brand building news much of 2014 -- 2013 has been dedicate to laying the foundation for a global CRM platform and loyalty program that will roll out starting in early 2014.

To date we have been successfully leveraging our global newsletter database with millions of consumers to communicate our greatly expanded product offering across four seasons and effectively drive them to visit and purchase from our global e-commerce sites as well as our retail stores.

Our new CRM platform and loyalty program provides us with and exciting new opportunity to enrich consumer brand engagement and recognition to the sizable newsletter base and extend participation to our global fleet of retail stores that attract millions of consumers annually.

We are bullish that this program will bolster loyalty from the more than 70% of our global consumers who have purchased more than two pairs of shoes over the past year from our retail locations and e-commerce shirts respectively.

We remain focused on retail excellence.

While overall retail performance is mixed, we are investing significant time in this area to improve future performance.

Some of the key initiatives are store site selection, our store footprints and build-out costs, the roll out of our Oracle/Retek planning systems globally, our Kronos labor management software that we deployed this year also globally, to name a few.

We engaged earlier this year with the [AlixPartners] on best retail practices and are implementing some of these programs today globally.

Our new Bluewater and Bluewater Light concept stores allow us better showcase of our casino lifestyle range of products, and it elevates the brand perception with new and existing customers.

During 2013 we worked on hard on identifying segmentation and distribution opportunities.

Our market analysis says that we are 33% of our total distribution of the total available market identified.

We believe we have a diversify product line that provides significant growth opportunities for the future when properly segmented and sold.

We also continue to build strengthen our own retail management capabilities.

In Asia-Pacific Steve Castledine, our VP for Direct to Consumer Channels in the region joined us earlier this year and is brining the benefit of his two decade of experience with Levi Strauss and Adidas.

In Europe Tim Lyons recently joined our team as the head of retail operations after prior stints with Nike, Marks & Spencer, and the Gap.

These two hires are examples of the last thing that I want to call out, and that's leadership.

We have been working hard to find the right people on the bus by building a world-class Crocs management team.

The recent addition of Greg Sullivan as General Manager for our Americas business, after a distinguished management year at Walmart, will bring a new focus in energy to our efforts and improve the performance in this critical region.

Terrence Riley, formerly the Vice President of Marketing for Famous Footwear, is now leading our Americas marketing team.

Lastly, Florent Bailly, formerly our Vice President for the Middle East and Africa, has been named our General Manager for our Asia-Pacific region, and we're confident that this region will continue to prosper under his leadership.

Crocs continues to track high caliber brand business and retail leaders to help shape and implement our plans for a profitable growth.

I will be back with some closing comes, but for now I will turn the call over to Jeff.

Thank you, John.

Hello, everyone, and thanks again for joining us.

What I would like to do is go through the factors that impacted our third quarter results and our guidance for Q4.

In the third quarter we had various challenges that impacted our results.

These include a more challenging wholesale market in the Americas and Japan, a decline in Internet volume in the Americas, unfavorable foreign exchange rates, ongoing expenses associated with SAP, and increased marketing investments.

Partially offsetting these issues was an overall increase in revenue from our Europe business, with particular success of wholesale volume, up 28%, Internet volume and same-store sales in Europe up 9%.

Our Asia business also saw strong same-store sales of 9% over last year.

In total on a year-over-year basis our net earnings were down $32 million compared to 2012.

Our tax expense for the quarter was up $10 million as compared to the credit and tax expense last year.

We had an overall impact of about $7 million associated with the stronger US dollar compared to last year in Japan.

In addition, we had SAP expenses of $2 million over prior year and an additional marketing investment of $2 million.

For the quarter revenues decreased $7 million or 2% to $288.5 million for the quarter.

On a constant currency basis revenue was up 1%.

Revenue for the quarter was down mainly due to a soft wholesale market in our Americas segment as a result of conservative customer inventory demand throughout the United States, lower than expected e-commerce volume in the Americas as well as unfavorable foreign currency fluctuations in our Japan segment compared to the same period in 2012.

On a unit basis volume decreased 3% to 12 million total units.

This is partially offset by a 2% in increase in ASP, which was $23.11 in the quarter.

Clogs represented 45% of unit sales in the quarter, down from 48% last year, while non-clog boots, wedges, loafers and women's casual shoes increased as a percent of overall unit sales.

Overall, our retail revenue increased 11% over 2012 levels, aswe added 95 net new locations since the end of last year's third quarter.

[Global] retail same-store sales decreased 2% from last year, with Americas down 7%, Asia-Pacific was up 9%, Europe was up 9%, and Japan was down 14%.

Gross profit decreased $7.2 million or 4.5% to $153.6 million for the quarter.

Gross margin percentage decreased 120 basis points for the quarter.

This activity was mainly driven by unfavorable foreign currency fluctuations in our Japan segment, offsetpartially by improving gross margins in our Europe wholesale business and leverage from distribution and fulfillment costs.

Selling, general and administrative expenses increase $15 million or 12% to $136 million for the quarter.

We specifically expensed $3 million quarter to-date for our new SAP enterprise system development cost.

In addition, we saw an increase of $9 million in retail related costs, including rent, personnel and operating expenses of 95 additional retail stores, as we ended the quarter with a 594 retail locations, up from 499 last year.

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

We had global cash reserves of $333 million with limited debt and believe that we will continue to grow cash balances from operations.

In addition, we ended quarter with inventory of $176 million.

Our cash balances globally increased $43 million in the quarter.

Revenues from the Americas segment decreased $16 million or 12% compared to the same period in 2012.

Wholesale channel revenue decreased $11.3 million or 20%, and Internet channel revenue decreased $5.5 million or 33%.

These decreases were partially offset, as retail channel revenue increased $1 million over the prior year.

During the quarter revenue from the Asia-Pacific segment increased $6.4 million or 9% compared to the same period in 2012.

Revenue growth for this region was realized in all three channels as we retained strong support from our wholesale channel customers, continued to focus on disciplined expansion of our retail channel as we opened net 15 company operated stores during the quarter and have seen benefits of [new] consumer friendly web stores in various countries [throughout the channel].

Wholesale channel revenue increased $1 million or 2.3%.

In consumer direct channel overall revenue increased $6 million or 18%.

Revenues from the Japan segment decreased $12 million or 23%, driven by a $10 million unfavorable impact from foreign currency fluctuations due to this year's recent decreases in the value of the Japanese yen relative to the US dollar.

Retail revenue on a constant currency basis increased 17%, while wholesale revenue declined 11% from prior year.

Specifically, with the yen declining 18% versus the US dollar in the quarter, year-over-year reported revenue was reduced by 3% on a consolidated basis.

This had an approximately 300 basis points impact on our overall Company gross margins and 230 basis points impact on our operating margins.

This represented $0.11 of EPS decline year-over-year.

Our Europe segment increased $14 million or 36% compared to the same period in 2012.

Revenue growth for the region was realized in all three channels.

Retail channel revenue increased $7.4 million or 65%.

Wholesale channel revenue increased $4.7 million or 21%.

Internet channel revenue increased $1.9 million or 35%.

To reiterate the quarter results, in total on a year-over-year basis our net earnings were down $32 million compared to 2012.

Our tax expense was up $10 million as compared to the credit last year.

We had an overall impact of about $7 million associated with the Japanese yen.

In addition, we had SAP expenses of $2 million and marketing investment of $2 million.

Moving on to guidance for Q4.

In the fourth quarter we expect revenue to be flat to somewhat down compared to the prior year, as we forecast revenue of $220 million to $225 million, which ona constant currency basis about 1% to 4% over last year.

We estimate a loss of $0.20 to $0.23 per share.

We expect gross margins in the fourth quarter to be down from prior year and SG&A expenses to increase faster than revenue as a result of additional retail store locations.

We plan to end the year with just over 600 company-owned locations and about 1,700 total partner stores around the globe.

Backlog at the end of the second quarter is up from prior year.

Total backlog as of September 30 is $399 million, up $4 million from 2012, or 1%.

However, on a constant currency basis backlog is up 4%.

Currency expectations are now JPY98 for the yen and EUR1.35 for the euro.

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

Thanks, Jeff.

As we end -- as we near the end of our prepared remarks today, I want to give an update on our stock repurchase authorization.

I'm pleased to announce on October 29 this year, 2013, the Company's Board of Directors approved and additional 15 million shares under the existing 2007 stock repurchase authorization.

This brings the total shares available for repurchase by the Company under the existing authorization to approximately 17.8 million shares.

The number, price and timing will be at the Company's sole discretion and will be evaluated depending upon market conditions, liquidity needs or other factors.

In closing today, as in the past, our strategy for profitable growth has three pillars.

The first is optimizing our multi-channel go-to-market strategy.

Our priorities in this area at this moment are improving management of a challenging retail dynamic in the US, in part by balancing the number of full line and outlet stores, and solving for the same in Europe.

[And] strategically growing our retail presence in south -- in Asia-Pacific -- sorry -- which continues to offer tremendous promise.

We are experimenting with ways to make it easier than ever to purchase Crocs for the channel agnostic consumer.

We're continuing to invest in how our consumers experience the brand digitally across all platforms, from desktop/laptop computer to tablets to smartphones or to other types of in-store interactive displays, ensuring a seamless experience for our consumers regardless of time and day and physical location.

The second strategic pillar is product.

We are expanding our partnerships and licensing activities to offer our consumers outstanding properties from our footwear collection -- collaboration Duck Commander, inspired by the AE hit Duck Dynasty, to a very special line designed exclusively for Crocs by Project Runway star Mondo Guerra.

In late spring we will launch a new footwear partnership with Star Wars coinciding with the "May the Force Be With You" promotion, featuring new limited edition Star Wars production products available on May 4. I'm sure many of you will be pleased to know it our Star Wars line for the first time will come in adult sizes also.

The third pillar of our growth strategy is the Crocs brand through effective innovative marketing that connects with our consumers, brings new consumers to the brand, and embodies our signature attribute of color, comfort and fun most of all.

Lastly I am sure you're all aware of the devastating floods that impacted our home state of Colorado last month.

I'm proud to say that Crocs donated more than $75,000 in product and monetary donations to flood victims and first responders.

Given the mud and water that they were dealing with, our boots and other easy to clean footwear styles were the right thing at the right time.

Crocs in Colorado l also volunteered to help out with recovery work, and I want to thank them for their willingness to assist their neighbors.

In closing, the strength and potential of this Company remains clear to all of us here at Crocs, despite the challenging times we are managing through in North America and Japan.

We have a strong global brand, a broad and expanding product line, a business model that we continue to fine tune, a very strong balance sheet that gives us the ability to invest in business while returning capital to shareholders.

We also have a dedicated team of Crocs employees at our headquarters and in the regions who are working hard to improve our Company's performance, and I would like to thank them for their dedication.

With that, we'll open up the line to take your questions.

Thank you.

(Operator Instructions).

And our first question comes from Errin Murphy with Piper Jaffray.

Great.

Good afternoon, and thank you for taking my question.

I have two questions.

One for John, and then just a quick clarification for Jeff.

John, on the backlog [you have] 4% on a constant currency basis.

I recall it was [up] kind of closer to double digits kind of September.

Could you just speak to kind of what some of that delta is, maybe either by region -- I mean, recognizing the US has been a very tough market of late.

Just help us think about what is involved in that backlog?

And at this point [what sort of] the visibility do you have from the backlog onto the spring -- early spring orders?

So that's my first question for you.

Thank you.

So I think as we tried to communicate at each stage -- at each different date in time where we are at relative to backlog,I think today we continue to see orders continue to come in for second quarter delivery from major markets in the Americas and in Japan.

Major customers in those two markets.

And so what I think you're going to continue to see this year different than other years is just the order pattern is a little bit later.

Most of our customers that have carryover product from 2013 into 2014 have placed their orders to fill in the lines and take new products for their Q1 deliveries.

But what I think you will see when we give the update on December 31 is an increased backlog, specifically in those two markets which will put us more in line with prior expectations.

And we'll go next to Taposh Bari with Goldman Sachs.

Good afternoon.

John, I was hoping to get some more context around your -- not really the timing of your share buyback, but more about the philosophy.

So if I just go back over the past 12 months, you guys reactivated your share buyback program in the fourth quarter, you bought a little bit, you stopped.

At our conference in September you spoke about deploying about $80 million to $100 million of domestic cash.

Now you're increasing that amount for your -- an authorization that is about 20% of the Company.

So I guess the obvious question that I have is how do we think about urgency to actually activate that authorization?

And then second part of that question would be how you plan on funding it?

So I think first message is that as of yesterday the Company's Board of Directors approved an additional $15 million under the 2007 stock repurchase authorization.

The total available to repurchase now is $17.8 million shares.

As you know, we have constantly monitored the marketplace as well as our cash needs internally, and depending on market conditions and liquidity needs, we have made some decisions in the past to market to purchase back some shares.

We do have cash in the Americas geared up for share repurchases, and if the management team makes the decision to move forward with share repurchases, we will update you at the end of the next quarter as far as our activity.

Okay.

That's helpful, Jeff.

And then a question on Japan, just the philosophytowards retail growth in that country.

You're growing your store base -- I think it was up about 40% year-over-year this past quarter,yet you're comping down 16% constant currency year-to-date.

So I guess at what point do you revisit the store growth strategy in that country?

Well, I think as you look at this year, a few of the stores that we have added have really actually been where we have taken over partner stores in mall locations where the mall operators in Japan require the brand itself to run those outlet stores.

So some of the additions of retail in Japan has really been a transfer of [these] existing stores from partners to Crocs, with a few additions in key locations that we had in the pipeline dating back a year ago.

We've looked at what our retail growth strategy will be in Japan next year.

There will be a nominal number of stores somewhere probably in the three to five range, but we agree that we are continuing to look at whether we want to add additional stores in that market, given the overall macroeconomic issues that they're facing.

A sales tax that will kick in early April of 2014 will also have an impact on consumer spending.

So, yes, we are constantly looking at revising our thinking about expansion in Japan in 2014.

Great.

And just one quick one.

Just squeeze in a third question.

I don't know if you addressed this.

[I hopped on late.] But32% decline in the Americas Internet business?

What happened there?

What I commented on, Taposh, as I went through my overview is really, what we see is a lot of growth with other e-tailing partners today that buy a wide spectrum of Crocs shoes.

So whether that be Amazon, Zappos, [a shoe buyer], and of the other partners that we have in the e-tailing space, we're just -- we're not buying business.

We're not chasing revenue by giving away margin dollars, and so we are seeing the growth -- we have a sizable e-commerce business in the US that was built up years ago ahead of other brands, and what we're seeing today is some of that business is moving from our own site to them buying that product with their prime shipping capabilities with Amazon or with another e-tailer.

So we just see it as a shift more than it is actual consumption dissipation.

I guess that's specific to the Americas region, because it seams like Europe and Asia are actually performing quite well online.

[They are a little bit.]There's a little bit different dynamic.

I think Europe has been proactive in working with Amazon and cleaning up the marketplace activities that also create havoc for brands today.

The US is a little bit behind in that activity, in doing that, but we are actively working [on] the third, fourth quarter of this year that takes away a little bit from our own e-commerce operations.

So we don't have that dynamic in the other markets, and the growth in Asia is on a much smaller base of revenue than it is in the US.

Got you.

Well, thank you and good luck.

(Operator Instructions).

We'll go next no Jim Duffy with Stifel.

Thanks.

Good afternoon.

Question on the operating margins.

Near 14% in 2012, looking like 8% or so in 2013.

Can you put some [tape] around the main factors that led to the margin compression?

Yes.

I think as we called out in the prepared remarks, the number one item for us for this year has been the Japanese general movement.

In total forjust Q3 we saw a 230 basis point operating margin degradation associated with that particular dynamic, and that's probably the biggest mover.

In addition, [in the quarter] --

Do you have a sense of what that is [for the year]?

Would that -- that will be a little bit higher actually for the year.

It will probably be more like 250, 300 basis points for the year, because the quarter for Japan is actually relatively light to the balance for the year.

So if he looked at it on a year-to-date basis, which we do internally, the currency dynamic has actually impacted us round about 300 basis points for the year.

I think, Jim, to add to what Jeff said, you have another $6 million impact for the Brazilian settlement.

You have another $6 million to date on SAP.

And then you have -- as we had communicated, as we started 2013, that we were going to up our marketing spend heavily in the US with the number of new styles that we had coming out.

That would be kind of a one time spend to help push new styles into the marketplace and bring new consumers to the brand.

So we look at four different dynamicsthere that have really caused the majority of the impact.

And, John, are there any site lines to a bottom in the Japan business?

Well, I think, what we see in the time that we spend in market with them I think that they've seen a certain bottoming out.

The fact that we're do 3% for the quarter, some up in our wholesale business, people continuing to add doors, our partners are continuing to add doors and investment into 2014.

We will add additional doors -- wholesale doors in the market.

So it's not that there aren't opportunities for brand to grow.

I think what's [due for us] right now is to ensure that really we've hit bottom on retail coming out of 2013.

And as I said in my prepared remarks, I think we all we're very honest about how much that business benefited by a [90, 70, 8] yen to the dollar impact even with the pullback and a more even level of revenue in our retail stores, it's still our most profitable region and it's still our most profitable retail operations.

So we think that we're at a place where we can say this going forward and start to grow our wholesale business in Japan, wethink we're in a good place with the brand and with product to be able to do that.

Okay.

And then, John, you listed a number of things core to the strategy.

It certainly sounds like there is a lot of hard work going on across the organization.

Can you talk in more specific terms about how those strategies are going to help you recapture the operating margin?.

Well, it really starts with retail.

We have to continue to comp our business in Europe and Asia as we have.

We have to flatten where we're at from a Japan standpoint, and clearly the work is in front ever us in our US retail group.

I mean, we're ecstatic to have Greg onboard now.

We waited for a period of time for him to transition from Walmart, and we think we have a really good retailer now to head up that organization and start to provide more leadership towards running that business.

We there I that there's an opportunity to be more profitable and to see comp store growth in 2014.

It's all about execution right now, and I laid out a number of key strategies.

Our business has six key strategies for 2013, and they're very similar for 2014, so we don't have a myriad of different things that we're trying our work on.

And one of our key elements, number one element for the business for 2013 and for 2014 is retail excellence.

And we've invested in retail with the AlixPartners coming in early in the year to really pull it all apart with us, look at how we go-to-market, look at how we buy and allocate products, look at how we run our retail stores and how that works.

We don't generate all the benefit immediately, but we are seeing benefit as time goes on, and hopefully we're going to see more benefit in 2014.

Okay.

Thank you.

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

Yes.

Hi, everyone.

Thanks.

I just want to clarify, John, your comment about the backlog accelerating when you report the fourth quarter.

So Americas was down I think 12% or so.

Are you assuming that that's going to be up 10%?

Was that what your general goals were for spring 2014?

Well, what we think, Scott, is really in the next, basically, 60 days we're going to continue to see on an account by an account basis additional orders flow in for both our US marketplace and for Japan where we have key customers that are booking April 15, May 15 delivery dates for products that they have not placed orders for today.

And so just to add to that, Scott, the prebooks for the Americas since September 30, and internally we look at their pace of prebooks that are coming in, and they've already closed about a third of that gap that you identified.

So the orders are come I guess in, and we have some confidence around that statement.

Okay.

So in terms of deliveries, though, Q1 is done, and that's also a function of they took in a lot of product last year earlier, so is it just like a normal weather delay?

You had a better first quarter than second quarter in terms of wholesale deliveries.

So is it really a function of the comparison?

I think last year, because of the number of new styles that we had, new doors and a couple of key accounts that we added last year -- namely Rack Room, Off Broadway -- that took products early.

We just saw -- after two seasons of early spring, a lot of the wholesale accounts being -- not having enough product for that early spring, had pulled deliveries into January 15, February 15 and even May 15.

So I think we're seeing next year that kind of more even spreading of orders into a April 15 -- April 1, April 15, May 1 delivery date, so yes we are seeing them notas aggressive I have as they were in 2013 with orders.

Okay.

That's helpful.

And then, Jeff, in terms of the first quarter operating margin in Japan, that was down to 25% from 41% the year before.

Was that already part of the yen weakening, and so do we anniversary that?

And all else being equal, what are the pressures on Japan operating margins after we have anniversaried the yen weakening?

I think number one, the yen dropped last year, and the end of December is when their monetary policy changed and the yen dropped versus the US dollar to close out 2012.

So we have been impacted by this for the vast majority of 2013, and we will anniversary or lap that beginning of 2014.

The important thing to [notate on there], Japan backlogged that we report externally on how much they have, and we say this is what they did last year, this is what they're doing this year.

The Japan backlog may be down $18 million on a US dollar basis, but you have to factor in that last year that $70 million of backlog that was reported today was at JPY80 to the dollar, and the $52 million of yen that was reported today is in JPY100 to the dollar, JPY98 to the dollar.

So when you kind of factor it in that we're going to record that $52 million at the same exchange rate, we're going to be looking at a backlog release in the first half of round about that 4% to 5% growth rate in next year.

That's good.

Just -- and then -- but to answer the question in terms of once you have lapped the yen pressures, what are the swing factors then in the Japanese operating margin going forward?

Well, I think they have a competitive marketplace that John talked about.

They continue to diversify their product portfolio and merchandise their product portfolio better on a year-over-year basis.

They do have a more aggressive issue with substitute products that compete with us in our space, andwe are addressing that through constant product innovation.

Okay.

Thank you.

(Operator Instructions).

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

Thanks for taking my question.

Did you guys buy back stock after the end of the quarter?

Because on the coverage page of the Q we couldn't sort it out.

Could you let us know what is going on there ?

Sam, if you look at the reported shares outstanding on page three of the Q, you will see that the number is the same as it was last quarter on the documentation on the page three, which is the official record of our shares as of September 30 and as of June 30.

So no, we did not do any share repurchases in the quarter.

We bought back shares in the first quarter of -- a little over 2 million shares in the first quarter, if I recall right and we did not do any share repurchases in [Q3].

If I can follow up, on the cover of the Q2 Q you had 91.6 million shares, and the cover of the Q3 Q you had 88.4 million shares.

Yes, the end of the second quarter we were picking a number that included diluted shares in total -- including restricted shares, total total number of issuance.

So it included the treasury stock.

So that was an error that we fixed the later on.

So what a you're look at is kind of and apples to oranges.

So we did not do any share repurchase.

Okay.

Thanks.

If I can ask about the marketing spend.

One, can you talk about what that additional $2 million in the quarter was used for?

And, two, you had -- you said that it was a one time event, but are you going to -- when you think about marketing next year, how do you think about it?

You're going to have additional costs for the -- for your store base, you're going to have less costs on some of those other charges such as SAP and so on.

How does this all -- how do you think about this all playing out?

From an absolute -- from a dollar perspective?

Yes, so kind of three -- maybe three questions in one.

So first is that we had said that this would be a one year incremental spend on a percentage basis to our 2013 revenue.

So as we finish up our 2014 planning right now, we're basically flat to 2012 with a few specific incremental from spend items that we're going to do.

We have a big promo in China with a Chinese star there that will be basically an overall Asian play in that space for us, which will be incremental to that 2012 run-rate.

On the $2 million spend -- additional spend in the quarter, Sam, it's across the globe.

We spent additional money here in the US on print advertising, social digital ads, additional spend in Europe, Japan and the US on conversion for e-com, so that $2 million was really distributed across all three channels and all four geographies.

And did it bring you what you wanted?

I think what we have he learned over time is marketing spend has about a six months delay in conversion.

If we look at spend in prior years, just because we put something out in front of the consumer, that doesn't mean that they're ready to buy it.

We might play that idea in their mind that, hey, this is something interesting, and when I go buy a sandal I'm going our to go look at that products, or I'm going to go buy a flip-flop or a new fair of sneakers.

So we look at some of our marketing spend as pure conversion.

Some of it is brand building.

I think we're going to see.

For a wide distribution of new styles that we have this year, from wedges to sneakers, the retro products at the first parts of the year, the retro sneakers in the back half of the year, are we engaging on in bringing new consumers to the brand?

We see a number of new consumers coming into the brand, buying new products.

So I think we're going to see as we go forward whether that's going to be and accretive spend for the Company.

We placed it in the places where we want it to be, and now we'll see if we're going to bare fruit.

The e-commerce spend, though, would get a faster result.

So could we assume that you didn't spend a lot of money on e-commerce in the United States or in the Americas?

That would be fair.

Thank you.

And our next question comes from Mike Swartz with SunTrust.

Good afternoon, guys.

This is [Mitch] in for Mike.

Most of my questions have been answered, but just on the retail side of the business, comps were down 4% in third quarter.

Was there a material difference in the comp performance in young stores versus those of your more mature cohort?

I think in the older stores there's a certain segment of those older stores, which were placed in locations where we thought about them as marketing locations years ago.

As time has gone on, though, I think the way that we look at it is more what do outlets and some of the newer high traffic locations look like?

Outlets continue to perform well.

Outlets for us are running this year above 100% of their pro forma P&Ls when we looked at making those investments, so we're encouraged by the performance of new locations.

And so -- and it's also as we talk about, our business both -- and Jeff's comments out in New York in September as well as what we said today, most of that investment going forward, whether it's in Europe or in the United States, is mainly in the outlet sector for 2013 going into 2014.

Okay.

And then just on your outlook for Europe, obviously it was a highlight this quarter.

How do you see that market trending in the fourth quarter and into next year?

Forecast for Europe for the fourth quarter is up about 20% year-over-year.

We think -- the management changes that we made there two years ago, the organization that we have in place, growth of wholesale doors, the performance -- improved performance of retail as we have seen this year with another good comp quarter, the addition of Tim Lyons to that group to add another retail -- experienced retail leader.

[We are] growing retail business there.

We're very upbeat on our European business, and of course our e-commerce business has performed very well the last two quarters in Europe.

Okay.

Thanks, guys.

Best of luck.

And we'll take our last question from Scott Krasik with BB&T Capital Markets.

Yes.

Hey, thanks.

Because there is one quarter left now, can you guys give us the Asia-Pac and Japan sales and operating income breakdown for the 4Q last year?

Yes, I will give you last year.

Hold on one second.

So why don't I just do this.

I will just give you Japan.

So last year our Japan business generated $24.2 million of US dollar revenue.

It had an operating income of $4.6 million in Q4.

Okay.

That's helpful.

And then, John, you sort of alluded to it before with Amazon and that type having some pressure on your Internet business, but given that they don't have a lot of pricing respectability if you will, what does that do for your 200-plus stores in the US?

And if you knew that you would be going to more promotional retail environments or e-commerce environments, would that change your strategy in retail in the US?

Well, I think that there's two parts to [that].

The first part is how marketplace operates within Amazon, and how our existing wholesale partners use that forum to sell products, which in turn creates the dynamic within Amazon, the algorithm that looks at pricing.

And so it's really a matter of how do you address the first issue?

Second thing of it is -- and we talked about this, really, repeatedly over the last two years, is continuing [of dale] and our product development group continues to provide a larger portfolio of products as how we work on tiering and segmentating of products.

And so what you're going to continue to see in 2014 is that not all products are going to be sold in all channels, and we're doing a much better job going into 2014 of putting the right products in the right place.

That will also help our own retail stores in terms of selling the type of products that we want to sell in our retail stores.

You're going to see limited edition or limited quantity types of shoes rolling into our full priced stores next year.

Next year you see outlets starting to have a more segregated line of products, where we have outlet -- specifically built products for outlets.

So as we mature, and we start to segment and tier it a little bit better, Scott, I think you are going to see that start to dissipate.

Is it going to be perfect?

The answer is no, but it is going to take us a little bit of time to work through that.

But there's a clear strategy and plan in place to be able to make it a win-win situation.

Are you going to be there in terms of product segmentation for spring 2014 then, where you wanted to be?

I think you're 75%, 80% of the way there.

We're happy with where we're getting, and where we're getting from a marketplace standpoint also, so I think we see improvement on the horizon here.

And hopefully that will help us to start US -- our Americas business next year.

Okay.

Thanks.

And we'll take a follow-up question from Sam Poser with Sterne, Agee.

Scott -- thank you.

Scott, sort of -- it was asked and answered to some degree.

But a lot of -- in the prepared remarks, when you talked about a lot -- when the business wasn't good, especially in the States, you talked about a lot of the macro things.

I guess [that they] -- what -- like in the Americas what are you doing -- the macros fix everybody evenly, so what are you doing to change -- to be aggressively changing against that so you can overcome the macro, offer better product, fix -- make the stores more efficient, work with your retailers in a different manner and so on, so forth?

Yes, I think we covered a number of different things in the retail space on the last -- Jeff, kind of [add to] this.

But, Sam, I think on the retail we've taken inventory levels down over the last two-plus years by being better at allocating, planning, merchandising, buying for stores, how we segment, how we distributes, and how we replenish products.

So a lot of work that's been done from a systems standpoint and from a philosophical [standpoint to] how we approach retail, how we segment out between full priced stores and for our own outlet channel.

I think the same thing is carrying over into how we take our flats, how we take our wedges, even within wedges what we put into what channel, where translucent goes, how we handle Huarache, where sneakers go.

All the different elements of our product line are being segmented and tiered in a more effective way.

Yes, Sam, I think as John mentioned in his prepared remarks, we're taking a hard look at all of our channels, and [arranging] to see where we can accelerate a growth pattern that's acceptable to all of us.

We're certainly proud of our growth into a diversify four season footwear company and continue to design products that surprise and please our customers.

As we look out into 2014, we're going to continue to focus on innovation to bring customers the footwear products that they want.

Fun, colorful, comfortable new styles like the stretch sole line, which fits your foot.

We'll also enter into other line extensions of our popular Huarache sandals, boat shoes and the classic clog.

And as John mentioned, in the back half of the year we'll be introducing the color light program and expanded versions of Busy Day.

So when you look at our product portfolio for 2014, we're completed excited about the up coming be year.

Thank you.

And with no more questions in queue I would like to turn the call back to John McCarvel for closing remarks.

I would like it thank everyone for joining us today for our Q3 earnings call, and we look forward to talking to you again in February.

Thank you.

This concludes today's call.

Have a wonderful day.