卡洛馳 (CROX) 2014 Q2 法說會逐字稿

Welcome to the Q2 2014 Crocs Incorporated earnings conference call.

(Operator Instructions)

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

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

Mr. Kent, please go ahead.

Thank you.

And thank you all for joining us today for our second quarter 2014 earnings conference call.

Yesterday evening we announced our second-quarter 2014 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 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 2013 report on form 10-K filed on February 25, 2014 with the Securities and Exchange Commission.

Accordingly, all 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 discussions of these risk factors.

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.

Explanation of these metrics can be found on the earnings release filed late yesterday, and on our investor website, once again, at crocs.com.

Joining us on the call today are Andrew Rees, President and Jeff Lasher Senior Vice President and Chief Financial Officer.

I'll now turn the call over to Andrew Rees.

Thank you, William.

Good morning.

And thank you for joining us today for our second-quarter 2014 earnings call.

This is my first opportunity to speak with investors on an earnings call as president of Crocs and I look forward to an ongoing open dialogue with you all about our Company's performance.

I will start with some brief business and financial highlights from the quarter.

And then I would like to tell you about our plans to improve the business operations of the Company.

Revenue during the quarter increased by $13 million, or 3.6% to $377 million compared to 2013.

Income from operations for the quarter, on a non-GAAP basis excluding certain non-recurring and special items, was $58.7 million, compared to a like result of $58.1 million in 2013.

These revenues results were slightly ahead of our forecast we shared with you in May.

And the Crocs brand continues to achieve modest top line growth globally.

We realize we are not delivering the appropriate level of profitability to our shareholders.

We know that in order to unleash the potential of the brand and play the wind going forward we need purposeful change in our strategy, organization, and ultimately, our approach to the market.

Over the last several months, we've been engaged in a comprehensive strategic review of the Business around the globe.

Through this process we identified seven key long-term structural improvements we expect will allow the Company to achieve its potential.

The are as follows.

One, driving cohesive brand positioning from region-to-region and year-to-year, to avoid consumer confusion and to create more powerful consumer connectivity to the brand.

Two, developing powerful product stories supported by effective marketing.

Three, enhancing engagement with key wholesale accounts in select markets to drive profitable sales growth.

Four, gaining greater strategic and economic leverage from our direct-to-consumer assets including owns retail stores and e-commerce.

Five, prioritizing investment in large-scale geographies to focus our resources on our biggest opportunities.

Six, increasing working marketing spend by approximately 50% through investing savings realized from reducing marketing overhead.

Seven, streamlining the cost structure by reducing decentralization, duplication, and complexity across regional offices and the corporate center.

As well as the directing the long-term strategy, we've identified four key actions to obtain short-term wins.

First, in the product arena, we intend to focus on our core molded footwear heritage, as well as develop innovative key casual footwear platforms.

To accomplish this, we are restructuring the product development function to emphasize product innovation and margins in molded footwear and key casual footwear lines.

We also intend to streamline the product portfolio to give us the right products to drive growth and eliminate SKU proliferation, eliminate non-core product development, and will explore strategic alternatives for non-core brands.

Second, from a geographic perspective, we intend to refine our business model globally.

Moving away from direct investments in retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents.

These re-alignments are already underway in Brazil, Taiwan, and other markets around the globe.

In addition, we intend to focus on our key markets globally.

These are China, Korea, Japan, North America, and Europe.

These five markets represent 85% of our annual volume.

We are working to improve our business in Japan through broadening our base of wholesale accounts, specifically entering the family footwear channel and working with our key partners there to develop strong product marketing messages in the market.

Third, from an organizational perspective, we have a reorganized key business functions to improve efficiency.

Yesterday afternoon we made an announcement that will eliminate 183 positions globally, reducing structural complexity, size, and cost.

Of these reductions, 70 current and planned positions are in Colorado, the remaining are in global functions.

We made these personnel decisions to prioritize profitable growth, drive greater efficiency, and manage overall costs in the future.

We believe that this will be part of the first steps to unlock the power of the brand and unleash the entrepreneurial talent in the global organization.

Four, we expected close or convert 75 to 100 Company-owned retail locations around the world as part of this initiative.

We have already closed or converted 18 stores during the quarter.

We are refocusing our global Company-owned e-commerce efforts to keep 11 of our current 21 sites that drive the vast majority of our profitable online sales, while discontinuing or consolidating the rest.

This is part of an overall effort to focus our investments and energies where we can drive profitable growth.

We have completed analysis that identifies the primary drivers of store performance across regions.

In the near-term, we've identified four opportunities to turnaround the operational performance of our retail stores.

In-stock and inventory management, promotional activity and marketing, organizational execution, and the evolution of concepts and space allocation.

There are some things that are working well that we are not changing.

These include focusing on delivering products that meet our consumers needs and continue to bring the profound comfort of Crocs shoes to the world's feet.

We are also continuing to build on our Find Your Fun brand positioning.

Which is authentic and aligned with our consumers needs and values.

It differentiates us in the marketplace and will continue to bring us alive in our culture too.

We also announced that we will open a global commercial center in the Boston area in late 2014, housing key merchandising, marketing, and retail functions.

We've chose the Boston location in order to attract senior footwear and retail talent to the organization.

The global commercial center in Boston will join the product creation and global shared services in Niwot, Colorado, the cornerstone of the support of our global business.

Amsterdam will be our European commercial center.

Singapore will be our Asia commercial center.

And Tokyo will be our Japan commercial center.

Each housing key international marketing, sales, retail operations and local finance functions for the region.

Jeff will cover in detail the financial impact of our strategic initiatives.

This clear strategic focus will simplify our workflow, allowing us to develop and execute more powerful and cohesive global brand stories.

By clearly defining our core products, it we will allow us to focus our growth initiatives around products where we are competitively well-positioned for success.

We are evolving to become a merchant driven organization, supported by central product development and marketing teams.

We will deliver a more cohesive global footwear assortment, activated by powerful marketing stories and increased working marketing spend.

I will now turn the call over to Jeff.

Thank you Andrew.

Good morning, and again thank you for joining us today to review second-quarter 2014 financial results.

In summary, revenue in the quarter was above our guidance, which includes strong performance from our Europe segment and continued strength in Asia and Pacific.

Gross margin was down from prior-year, but adjusted operating earnings were up slightly versus last year.

I'll go over quarter in more detail, discuss the transition of our earnings per share calculations and briefly discuss our projections for third-quarter 2014 revenue.

Second-quarter revenues increased $13 million to $377 million, or 3.6% up compared with the 2013.

Despite continual unfavorable exchange rates with United States dollar year-over-year revenues grew in both the European and Asia-Pacific regions.

Specifically, the Europe region grew 21%, powered by a 32% increase in wholesale over last year.

Retail sales grew 9% in the quarter, and same-store sales were up 1% in Europe.

Asia-Pacific revenue was up 9% for the quarter, with retail up 9% and wholesale of 6.5%.

Same-store sales in Asia were negative 6% as we had difficult comps and weak demand in China and Korea.

Our business in Japan was down 6% on a constant currency basis, primarily caused by weak at once demand in wholesale and lower sell through in the sporting goods channel.

In Japan, we are refocusing the wholesale strategy toward the family footwear channel, which allow us for greater diversity in our product line up and reduces the reliance on clogs in that market.

The decline of the Japanese yen adversely impacted year-over-year second-quarter revenues by about $2 million and operating income by approximately $500,000.

In addition, we continue to see challenges in our Americas wholesale channel primarily caused by significant year-over-year erosion of our South America volume.

In South America we are taking action to change our business model.

We've already transitioned or closed half of the retail stores.

And we plan to transition the remaining stores and Internet sites to partners.

Same-store sales in the Americas region were down 6%.

For the quarter we reduced our promotions and stores.

Overall while sales were down, margins improved in retail 90 basis points.

We've been disappointed with our retail results in 2014 and a key priority for the rest of the year will be improving retail sales performance.

We will transition to a more merchant driven retail approach, focused on key styles with strong demand.

We'll exit underperforming styles quickly and manage the retail stores for economic gain.

In addition, we plan to close 25 to 30 stores in the Americas region.

Outside of the Americas we plan on closing are converting 50 to 70 stores.

In some cases these exits will be timed with contractual rights and will be relatively affordable exits.

In other cases we may take additional charges to accomplish our goal of streamlining our retail store portfolio around the globe.

We expect store closings will reduce revenue by approximately $35 million to $50 million and reduce SG&A expense by approximately $17 million to $25 million, with an insignificant impact on future operating income.

We think we can close over 30 stores in the back half.

A rough estimate of store closing costs in Q3 is about $3 million $6 million as each store should cost about $100,000 to $200,000 to exit.

This amount is in addition to the asset impairments already included in our results.

With regard to products, the second-quarter revenue growth was driven by a global average selling price increase of 0.5%.

Primarily driven by new product introductions and strengths in men's loafers and women's wedges.

Unit volume increased 3.6% to just under 17 million pairs.

During the three months ended June 30, clog silhouettes represented approximately 44% of sales, this is flat to 2013.

Adjusted gross margins were down 90 basis points from 55.2% to 54.3%, compared with the same period in 2013.

We saw a currency related decline in gross margins in Japan, and increased shipping costs globally.

Both of which were offset by decreased in promotional and clearance activity.

Importantly, gross margins in the Americas region's improved 90 basis points reflecting less promotional activity in direct-to-consumer channels.

We are emphasizing profits over revenues and will discontinue some of the excessive promotional activities that took place in 2013.

While this and other product rationalization activities may hurt overall sales and retail comp sales, we remain laser focused on improving the profitability of the business as our top commercial priority.

Selling, general, and administrative expenses excluding certain items, increased $3 million, or 2% to $146 million.

Overall, this increase was more than explained by higher building and occupancy expenses related to additional retail stores, which total over $4 million.

In addition, we increased our allowance for doubtful accounts by $3 million as we are seeing slow payments from some of Asia wholesale accounts.

This was offset by lower variable compensation and other efficiencies.

Excluding cash expense, of $9.5 million primarily related to restructuring and ERP implementation, non-cash charges of $7.3 million primarily related to store closures, costs and accelerated depreciation, non-GAAP operating income was $58.7 million compared to $58.1 million in 2013 on a comparable basis.

Our investor website provides a complete reconciliation of all special items.

We experienced restructuring charges as a result of transition activities, additional operating expenses related to our ERP implementation, and accelerated depreciation of assets for retail stores at a part of our closure plans.

We expect future corrective actions to result in additional restructuring charges as we start executing on a profitable revenue growth strategy.

Specifically, we expect a Q3 2014 restructuring charge of between $8 million and $10 million related to the reduction in force, in addition to the retail exit cost.

In the second quarter we closed 18 stores around the globe and ended the quarter with 624 stores, up 50 from June 2013, but only up five compared to year-end 2013.

We anticipate a reduction in our total fleet by year-end.

For the quarter we incurred income taxes of $18.7 million.

This higher tax rate in the quarter is directly attributable to the charges I just highlighted.

Excluding such items, the effective tax rate was 32% on a non-GAAP basis in the second quarter.

As we transition the US business, the overall tax rate may increase on a percentage basis as certain expenses do not carry the same timing for tax purposes and may not carry the same value.

In addition, until our business improves profitability in the US we cannot book the benefit from losses for tax purposes.

We expect our tax rate on adjusted EBIT to be approximately 25% to 28% for the full year.

Earnings per common share in the quarter were $0.19 on a GAAP basis, and $0.36 on a non-GAAP fully diluted basis.

On a year-over-year comparable basis excluding the overall impact of the preferred shares issuance in January, non-GAAP EPS is $0.46 compared to $0.48 per share last year.

It's important to understand the pieces that make up the GAAP EPS reconciliation, including the impact Blackstone preferred stock investment.

Please refer to the non-GAAP reconciliations included in our website for further details.

GAAP net income for the quarter was $23.3 million, dividends and dividend equivalents of $3.8 million related to series A preferred stock issued to Blackstone were deducted from this amount.

Leaving GAAP net income for common shareholders of $19.5 million.

An additional $2.6 million, or 13.5% was deducted from the $19.5 million as undistributed earnings related to the preferred stock, this is based on a two class method, leaving $16.9 million for common shareholders for EPS.

Weighted average shares used in the EPS calculation was 87 million shares.

Finally we repurchased just over 2.3 million shares during the quarter at an average price of $14.71, for an aggregate cost of approximately $34 million, excluding related commission charges.

Under our previously announced $350 million repurchase plan, year-to-date we have repurchased approximately $50 million worth of common stock.

We will continue to be patient methodical and opportunistic in the execution of this buyback plan.

We ended the quarter with $409 million of cash on the balance sheet, while our inventories and accounts receivable were significantly higher than 2013, timing of collections and our global focus on reducing current assets was forecasted to reduce these amounts by year-end.

Inventory in Q2 was impacted by our higher volume pre-booked orders as in-transit inventory of Fall seasonal orders was up $16 million from last year, representing half of our year-over-year increase in inventory levels.

We remained in the testing and development phase of our ERP system implementation.

We went live with SAP in Australia on April 1st without significant issues.

And on July 1st we went live in Japan, again without issues.

A successful global ERP system implementation is a key operational priority.

We expect the SAP system to leverage our operating costs and provide efficiencies in 2015.

Entering the third-quarter, our backlog was up approximately $45 million to just over 206 million.

While we are pleased by our increased globally in pre-books, we are driving a shift from at-once to pre-books in Europe and Japan.

Such as that reliance on pre-books would result in overly optimistic growth expectations in wholesale.

We expect GAAP revenue of approximately $300 million to $305 million in the third quarter of 2014, driven by strong contributions from Europe.

It is important to remember that we will be impacted by a number of variables that will affect revenue for the balance of 2014 and full-year 2015.

These include, one, store closures as mentioned earlier and a reduction to our pace of opening stores.

Two, lower at-once orders as our pre-book percentage of wholesale increases.

And three, continued impact of transitions in our geographic locations around the globe, including South America.

I will now hand the call back to Andrew for some closing comments before we take questions.

Thank you, Jeff.

This is an exciting time of transition for Crocs.

Our near-term focus is on controlling costs and reorganizing for better operating margins.

Which will prepare us for future profitable revenue growth from our core products and markets.

We are confident we have the right plan for driving performance improvements with critical implementation steps already underway.

Crocs is a powerful global lifestyle brand with strong potential.

I'm excited to work with our team to realize that potential and create improved returns for our shareholders.

Operator, would you now like to open the line for questions.

Thank you.

We will now begin the question and answer session.

(Operator Instructions)

Our first question on line comes from Mr. Scott Krasik from Buckingham Research.

Please go ahead.

Thanks.

Congratulations, Andrew.

Welcome.

Thank you, Scott

I guess -- I think we understand you have been sort of doing the due diligence, or focusing on Crocs for almost a year now.

Can you maybe talk about what you see in the opportunities, or how they've changed in the six or nine months that you have been looking at the Crocs opportunity?

Thanks, Scott.

I think it's been closer to the six months but yes, I have had the opportunity to be engaged with the Company for some period of time.

I've been formally on board as the president for only about six weeks.

But I think in terms of what's changed, I would probably focus on what's positive and what our opportunities are.

I think if you start off with the positives, there's tremendous opportunity and upside here at Crocs.

We are a powerful global brand.

We have distribution across the globe.

Our brand name is extremely well known.

We have portions of our product line that are extremely profitable.

We have a strategically valuable direct-to-consumer distribution asset, in terms of retail and e-commerce.

And we have good relationships with both distributors and wholesale partners.

What's challenging, is I think the Company has spread themselves too thin in the past.

They've spread themselves too thin in terms of products.

They spread the marketing around the word.

They spread their efforts in terms of distribution across a great number of countries.

We go to market in 90 countries across the world.

And so I think you'll see in the comments we've made and the plan we've put in place, we are aggregating for strength.

We are focusing on our core products and for core markets.

And we're going to drive the business in terms of growth through our wholesale partners.

And fundamentally we are cutting costs to enable us to flow more money to the bottom line.

I think you've got those positives and negatives I think that's where we are focused

Okay and thanks.

And just one follow-up.

In terms of the 12% operating margin target, how do you view gross margin playing in that?

As you pointed out you do some very high margin businesses, but there's a lot of moving around the mix.

There's a lot of moving around in gross margin.

And I think there's going to continue to be moving around in gross margin.

On the positive side, we believe we can strengthen our core molded business, which is where we make very strong margins.

On the negative side, like every other player that's manufacturing in China or Vietnam, we are experiencing cost increases from our factories.

And then our distribution mix also affects that.

So we see probably, not significant increase or decrease, but with we think margins can stay where they are.

Okay.

Thanks and good luck

Thanks, Scott

Thank you.

Our next question on line comes from Jim Duffy from Stifel.

Please go ahead.

Thank you.

Hello, everyone.

Good morning.

Sounds like a thoughtful plan, pleased to see you've begun to take action in advance of the appointment of a CEO.

Few questions with respect to the restructuring.

Jeff, can you perhaps talk about the margin and working capital influence from SKU rationalization?

And then with respect to the 12% operating margin objective, what do you see as the timing for that?

And I have a follow-up question thereafter.

Thanks, Jim.

Good morning.

We had a little hard time hearing you so when you come back on the follow-up question, you could speak up just a little bit, might be able to help us out.

I'll try to answer your question about working capital and the margin implications of our product rationalization.

We believe that, we think we can get our working capital down for year end and going forward in the future with our inventory and our working capital needs of our retail stores relaxing a bit.

We think we can get some savings from that inventory line on that front, as well.

As Andrew just mentioned on the margins, we anticipate some pluses and minuses in the margin category.

As Andrew said, we have some favorable mix implications from focusing on our core products, clogs, flips, flats, sandals, men's loafers, and women's wedges going forward.

At same time we have some cost pressure in general from our factories and other supply-chain issues, as everyone else does.

So we think overall our margin is not really the story that's going to drive the operating margin improvements, we think it will be on the leverage of our SG&A, going forward, which will drive us to that 12% operating margin as a target for us.

As far as the dates in which we think we can get to that 12% operating margin, it's not going to be in 2015, it will be out in the future years.

But as we progress toward that target, we will give you a little more sense of when that we think when we think that can be achieved.

Okay, thanks.

And then follow-up on the SG&A opportunity.

What's the evidence that marketing works for casual footwear of this sort?

I guess from where I sit, I'm questioning why spend another two points of sales, 50% increase in the marketing budget?

Thus far I haven't really seen good evidence that your marketing efforts have proven to demonstrate good returns.

Good question, Jim.

So to start with we are not planning to spend two points of sales more on market.

We are going to spend a small amount incrementally on marketing.

The vast majority of the increase in working spend will come from reducing the infrastructure.

And the infrastructure is both people, agencies, and a variety of expenditures within the marketing budget, that essentially weren't reaching the consumer and were not working.

The vast majority of the increase comes from internal efficiencies.

And then a good question is, what's the evidence?

We believe there is strong evidence.

If we look at our competitor set, we believe a number of those have had tremendous success with launching new product lines and enrolling the consumer in their brand store and some of the key features and benefits of their products.

Our intent in that marketing will be extremely product focused.

It will be around our products, our technologies, and the benefits we bring to the consumer.

And we plan to spend that money as we talked about in an aggregated way in the key markets.

Thanks for that.

And good luck.

Thank you.

Our next question online comes from Erinn Murphy from Piper Jaffray.

Please go ahead.

Great, thanks.

Good morning.

Congratulations on much improved execution on the quarter.

And Andrew, welcome.

I guess first Andrew for you, I would love a little more detail on the store closures.

What went into your selection process for the you're marking to close?

Just any further detail on the buckets, from a regional perspective, of the stores you are initially going to be closing?

And then 12 months from now, how should we think about that profitability of the remaining fleet?

Okay.

Great.

So three questions.

I'll take the first question around how do we think about it.

Then I'll let Jeff answer where those closures are occurring on a geographic basis.

And then we will tackle the profitability question.

There's really two fundamental things that went into selecting the stores, was their performance, so their sales margin and operating contribution.

Obviously we've opened a lot of stores recently, so some of that was tricky relative to new stores.

But we assessed their current performance and their likely future performance and were they going to make a contribution.

The second aspect was strategic.

So were they in markets where we believed we wanted the points of distribution, the brand presence?

Were they in places that where we thought we had chances of improving our performance in the future as we flowed new products, new products stories, and improved marketing?

So those were the two primary aspects.

I'd say, to be frank, the profitability in the operating performance was the major driver.

We recognize that the Company rushed to open a significant number of stores and when you open stores you don't always make all the right real estate decisions and we needed to address some decisions quickly.

As far as the regional opportunity, Erinn, about 25 to 30 of the stores are in the United States.

Those are mostly full price stores located out of the Southeast, although there's a handful that are in the Southeast.

But for the most part those are stores outside of the Southeast of the United States, 25 to 30.

The remaining 50 to 70 are out in the rest of the world.

About half of those are in Asia as we refine our fleet and understand what works well.

Frankly those are the ones that are easier to get out of.

You have short term leases and we have less investment.

We have opportunities to exit those at certain points in times during our contract, where they have contractual rights to exit with relatively little cost.

The other half are in Europe.

And in general we were thinking that $100,000 to $200,000 would be in average as far as what we expect to pay to get out of the store.

As you know, some of those will be low cost or little cost to us as an organization's exit.

Some of those will cost more as we try to get out of a particular contractual obligation.

The last part of your question, Erinn, was what will the profitability of the fleet look like when we are finished?

I think the best way to say it is, it will be solidly profitable.

The hurdle rate that we've established to essentially operate a store, is a healthy hurdle rate, let's put it that way.

And we don't want to be operating the store that's marginally contributing.

Great.

That's very helpful.

And just a follow-up on prior question on the SKU rationalization initiative.

The 30% to 40% seems fairly significant, so I'm just curious if there's specific product lines that you're planning to discontinue completely?

Or is just more of a broad brush, paring back across the portfolio?

And then within that SKU rationalization, how are you thinking about the clog versus non-clog mix?

Perfect.

There are two pieces to the rationalization.

So there was a mechanism in the Company which was they never fully discontinued old products and some of them kept coming back on a regional basis.

So the rationalization addresses all SKUs that we think are end-of-life and we don't wish to manufacture and distribute anymore.

It addresses product lines such as our Elite product line that we don't wish to manufacture anymore.

As we looked at the core of the brand, we think the brand plays best in casual situations and there'd been an effort to push the brand to more dressy or formal situations with leather boots with some heeled product, et cetera.

So it's a combination of trimming within the existing product line and exiting product lines where we don't think we have a right to play.

That's helpful.

And then last question for you and I'll let someone else ask a question.

On just a structural change are making both in Europe and Asia, on pushing the wholesale model to be more pre-book versus at-once.

Does that actually have an impact on the gross margin profile of your wholesale businesses in those regions?

Thanks.

Not really.

I think it's generally a win-win for the customer.

I think what we are transitioning -- win-win for the customer and for us.

What we're transitioning away from is a historic business model which had been more orientated around us buying the inventory and then selling it in season to our wholesale customers.

And over time we transitioned part of that buy to a pre-book and still left part of it to as an at-once.

I think we are being much more concerted effort working with our key wholesale partners to have them place their orders upfront and flow the inventory as they desire.

So it doesn't require additional discounts or a margin hit, it really is just a different way of working.

So that in and of itself should not be effecting the margin.

Thank you.

Our next question on line comes from Taposh Bari from Goldman Sachs.

Please go ahead.

Hey, guys, good morning.

Had a question on some of the targets you provided in the press release this morning.

So it looks like you want to get return to a 12% EBIT margin.

Looks like you're coming off of a 7% base off of a trailing 12 month period.

So if I'm doing the math correctly, the store closures are going to get you about 30 basis points expense reductions, by the end of 2015 gets to another 80 basis points.

But that leaves close to 400 basis points unaccounted for, and in response to one of the earlier questions it sounds like gross margins are going to be pretty constant.

So can you help us understand what some of the bigger sources of SG&A leverage will be, if I'm getting that math correctly, as you think out over the next couple years?

You know not really sure I follow your math completely.

Because what we said was, we expect our retail stores to generate about $35 million to $50 million of revenue.

We are going to take that out of the model of the business that we have today.

Our operating margin dollars will not change.

So our operating percentage will increase substantially with a $50 million reduction in revenue without any change to our operating income.

In addition we think we can save about $10 million on an annual run rate associated with the opportunities that we listed out today and the actions that we've already taken.

Which is really important for everyone to know we've already taken a lot of these initiatives to save the $10 million.

That will be an accretive one full point of -- almost one full point, of margin enhancement.

So between those two, we'll get a good running start.

The second piece is to leverage our SG&A with growth in our revenue over time.

As we grow in our core categories of clogs, flips, flats, sandals, men's loafers, women's wedges and other products that we are going to put all of our attention on.

And we are going to stop being distracted by other niche products.

Okay.

I'll take the details of the question off line with you, Jeff.

The other question was, in the press release you talk about 2015 revenues being impacted by store closures and then suggesting that 2016 would be a year of resumed revenue growth, it sounds like, for the overall Company.

So are you implying that 2015 will be a year of absolute revenue declines for Crocs in aggregate?

And if that's the case, I would've expected -- it doesn't sound like you need to get much wholesale growth to withstand that retail closure, so I'm just trying to understand if there is something unique going on to wholesale that would suggest the revenue decline in that business as well next year?

Good question, Taposh.

As you call out, it's clearly a revenue headwind by closing the stores is the right thing to do from a profitability perspective in the structure of the business, absolutely.

But it creates a revenue headwind.

And in terms of where we net out overall, you know frankly I think is too early to say.

Obviously we are going to be looking for wholesale growth we haven't started to show that product and book those orders for spring.

So we are a little ahead of ourselves there.

But you are right, a relatively modest growth in the wholesale business would counteract that.

It's too early to say whether will be able to achieve that yet.

Okay, but there's nothing unique going on as far as your initiatives go that would suggest a strategic reduction in wholesale business next year, is there?

Nope.

Okay.

One more if I could sneak it in.

And I know there's a lot of focus on the long term here, but if you could just provide some context into the spring season in the US, how that played out?

I know that your Americas region is influenced by what's going on in South America but if you could provide some additional context into the US that would be helpful.

Yes, it is obviously two pieces to our US business.

It is obviously a wholesale business and our retail business.

As you can see from our comps, our retail business was a little stronger earlier in the season and softened toward the back end of the season.

And as we talk to our wholesale partners, I think we've seen that trend across-the-board.

That their business was a little stronger around Easter but has softened since.

And then our business at wholesale, I think was not as strong as we would've liked it to have been.

And we have some key initiatives in place to strengthen it and build relationships with some of those key partners.

But it was acceptable.

Okay.

Thank you very much.

Good luck.

Thank you.

Our next question online comes from Corinna Freedman from Wedbush Securities.

Please go ahead.

Hi there, good morning.

I just wanted to reconcile the comments that you just made about SKU rationalization and the wholesale business being relatively stable.

Is there -- with 30% less SKUs are you offsetting that with expectations of deeper buys or any pricing changes?

So good question.

And the answer is essentially, yes to a certain extent.

The SKUs that we're rationalizing, we are rationalizing because they were low-volume.

I mean the aggregate volume of the SKUs that we're taken out is 30% of the SKUs but is a very small part of our aggregate sales.

And the rationalization brings us tremendous focus because we no longer have resources worrying about product development, design enhancements, and marketing.

We can focus all those resources back on core products.

And on the of flip side of the equation, yes, absolutely, our intent is for our core stories to be bigger.

And we will make our core stories bigger by partnering more closely with some of our key wholesale accounts and having derivatives, or portions of that story that might be exclusive to them.

And also more colors and more marketing behind them so we get greater sell through.

Okay, thank you.

And I have a few follow-ups.

What size, ultimately, do think ultimately the retail store fleet should be?

Can we expect further closures beyond the 75 to 100 you announced today?

I'll let Jeff take that.

Yes, at this point the 75 to 100 is all we're prepared to speak to.

We will be slowing our pace of new additions, but we are still going to be looking at opportunities around the globe where our model and our economic unit power really pays off.

So in markets around the globe we still have some opportunities for some greenfield locations.

But for the most part we will be slowing our pace of retail store growth and being more methodical and analytical about our approach to retail.

As far as the additional store closures beyond the 75 to 100, we have targeted those at this point in time.

Things might change, but for the most part that's what were thinking about right now.

Okay.

And lastly -- just my last one.

If you could just give us long-term targets for you see online, where you see retail, where you see wholesale?

And then also domestic versus international -- you know looking towards that 2015 long-term plan?

Thank you.

Yes, I think, Corinna, I think in general, the growth of the organization is going to come from the wholesale category.

I think we will continue to see growth coming in the Asia-Pacific category, segment I should say.

And growing that China marketplace and Korea marketplace.

As Andrew mentioned in his prepared remarks, we are going to focus our attention on the geographic locations that make sense to us.

Which is China, Korea, Japan, and USA, and Europe.

We are going to focus our attention on the products that really make sense to us.

Which is clogs, flips, flats, sandals.

We are going to focus our attention on direct-to-consumer economic value-add where it really makes rational sense for us.

And we are going to organize our organization around a leaner business model that drives SG&A leverage.

So with those four things, to rationalize the business, then we're going to go forward and grow from our core base, geographically, product wise, and segment wise.

Thank you.

Our next question online comes from Sam Poser from Sterne Agee.

Good morning.

Andrew, welcome to the party.

A couple things.

Number one, how many other geographies, other than Brazil and Taiwan, do you plan to transfer over to a third-party?

And how much revenue associated -- how will that revenue -- how much revenue is associated with those changes?

Thank you, Sam.

We are not prepared to disclose that at this time.

We, obviously, there are 2 to 3 additional countries where we are looking to make a transition.

And I would say the revenue is not significant.

But due to the ongoing discussions with other parties in these countries we can't disclose at this time.

We disclosed Brazil and Taiwan because we made substantial progress on both those entities.

And then Brazil and Taiwan -- I mean how much revenue are you going to give up?

How does that work?

I would assume it's going to help your operating margins because you get rid of expenses associated with that.

But you're also going to give up some revenue there.

I'm just trying to --

Sam, that's exactly right.

So if you take a story like Brazil, where we had $25 million to $30 million business, and we are transitioning the retail stores to partner locations.

We are going to be transfer some other business units to partner locations, utilizing agents and distributors in the local marketplace that have a better knowledge of the marketplace.

Our revenue will decline.

Our operating income should be about the same when we model this out.

Because we're going to have less expenses that we are going to be responsible for in Brazil over time.

We've already taken those actions.

So we've already, as part of the restructuring charge in Q2, we've already restructured the Brazil marketplace.

So we are getting closer to our optimal distribution mix in Brazil.

We still have some ways to go in other parts of the world.

But basically the operating income stays about the same, revenue drops.

So that again, drives us to that 12% operating margin over time.

Okay and then, I hate to beat this dead horse, but 2015 -- how should we think about revenue growth next year and sort of SG&A dollars in a pure sense from a growth perspective?

I mean how should we think about that?

You know I think in 2015 like we mentioned, there's going to be some puts and takes, right?

So first of all, you have the $50 million of retail revenue -- up to $50 million I should say -- of retail revenue that may come out of the model over time.

We are going to focus our attention on wholesale and e-commerce growth.

But our revenue in general is going to be under pressure because of that modification of go to market on the retail front.

On the operating margin basis we expect to see some improvement in 2015.

We are not really willing to give some guidance around 2015, just some kind of high-level views.

And we have to remember that we are early in the stage as far as this and as we get closer to 2015 we will set some better targets for you

Okay, and then lastly, the stock's going up nicely today.

You bought back 2.3 million shares in the quarter.

I was wondering why did you step up and buy back more, given that the higher the price -- the higher the stock goes the higher your share count remains?

Can you just give some more detail on how your -- what the thought process was during the quarter and sort of more detail on what opportunistic means and how you're going approach it?

And originally I thought you'd plan to get the share count -- to get this almost completed by September of this year, but it's going much more slowly.

So I mean how long do you think this is going to take to complete the repurchase and so on and so forth?

Well, I think first a couple facts.

We did buy back in the quarter a stock price of $14.71, 2.3 million shares.

So we made a lot of progress against our goal.

We are patient and we are methodical and we are working together as a team to determine the best course of action on a regular basis.

I think we are going through this process and we still have a target, $350 million, we are just going to do it very methodically over time.

All right.

Thank you.

Good luck.

Thank you very much, Sam.

Our next question on line comes from Steve Marotta from CL King and Associates.

Please go ahead

Good morning, everybody.

Thanks for taking my question.

Two quick questions.

One, when you actually arrive at the 12% operating margin, what do you assume, from your product mix standpoint for classic clog and non-clog roughly?

That's a hard question to answer, Steve.

The strategic decision that we've made, is to shift the focus of the Company back to both pieces of the business.

I think if we look at what's happened over the last couple years, there's been an outsized focus on non-clog business.

So we made the strategic decision to say, to focus on the molded business -- and it's really molded versus clog -- business, as well as the casual silhouettes were we have been successful.

So I think what that will do over time, will mean that we can grow in both arenas.

I would imagine over a long period of time that the non-molded business will probably grow slightly faster than the molded business.

But we are going to get that growth back into the molded business.

So I think you have a very gradual change in mix over a number of years.

That's very helpful.

Thank you.

And lastly, what is your assumed comp, geographically, for the third-quarter as well as consolidated?

At this time we are anticipating conservative same-store sales in our model.

We'd rather not disclose the specific number, but we are acknowledging the realities in the marketplace as we look around our same-store sales performance in Q2 and modeling those into our Q3 projections.

Terrific.

Thank you.

Thank you, Steve.

Our next question comes from Mitch Kummetz from Robert Baird.

Please go ahead, sir.

Yes, thanks.

I got a few questions, I guess.

On the store count -- so you're closing stores and you're slowing the pace of stores -- is there a kind of a year end store count that you're looking for?

We said in the script, Mitch, that we thought we would be able to close around 30.

We'll have a nominal amount of store openings so the you will be kind of in that 15 to 30 range, down.

Okay.

And then you also mentioned in the press release that you're looking to explore strategic alternatives for non-core brands.

Is there any way to give a sense to what -- kind of what the volume of non-core brands is today?

And the 12% operating margin assumption, is that elimination of those brands kind of baked into that 12%?

Yes it is, on second half of that question.

And on the revenue front, it's not really that material.

It's less than 1% or 2% of total revenue.

Thank you.

Our last question on line comes from Mr. Jim Chartier from Monness, Crespi, and Hardt.

Please go ahead.

My questions were answered, thank you.

At this time I see we have no further questions.

Great.

Well thank you very much everybody for that participation in today's call.

It's much appreciated and we look forward to ongoing dialogue with you all.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.