卡洛馳 (CROX) 2014 Q3 法說會逐字稿

Welcome to the Third-Quarter 2014 Crocs Earnings conference call.

My name is Jeanette, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the car over to Brendan Frey.

Mr. Frey, you may begin.

Thank you.

And thank you, everyone, for joining us today for our third-quarter 2014 earnings conference call.

After the close of the market, we announced our third-quarter 2014 financial results.

A copy of the press release can be found 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 on 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 earlier today, 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.

Thank you, operator.

Good afternoon, and thank you for joining us today.

We are committed to an ongoing and open dialogue with investors about our Company's performance.

And we're glad for the opportunity to share this update and take your questions.

Today, we are sharing our third-quarter financial results.

We're in the early stages of implementing a series of strategic initiatives that we are confident will drive improved growth and profitability.

Our third-quarter revenue increased by $14 million or 5% to $302 million.

Income from operations for the quarter on a non-GAAP basis, excluding non-recurring and special items, was $18.6 million, compared with $21 million in the third quarter of 2013.

Our top line results were in line with the forecast we shared with you in July, as we continued to achieve modest top line growth globally.

That said, our business faced various challenges during the quarter, which represented the continuation of trends seen earlier in the year.

Notably, weaker results in our China wholesale and retail business, which impacted our performance in Asia.

This was offset by strong sales growth in Europe, and improvements globally in our internet and wholesale channels.

Jeff will share details in a moment.

I want to give you an update on our four key strategic initiatives for the Company that we outlined in July, where we are making meaningful progress on all fronts.

To remind you, these four initiatives include: one, rationalizing our product line and merchandising approach, two, focusing our global efforts and investments on six key countries that deliver 75% of our revenues, three, getting the right people in key roles as we simplify our organizational structure, four, making significant changes in the way we distribute our product.

Let's take these one at a time.

First, we've been rationalizing our product line so that we can focus on our core molded product, while developing more compelling casual footwear platforms.

We need the right products to drive growth, while eliminating SKU proliferation and non-core product development activities and investments.

Since earlier this year, we have discontinued the Crocs Golf business, closed Ocean Minded as an independent branch, and consolidated its key products into the core Crocs line.

We've eliminated 30% of our style color combinations from the Fall holiday 2015 line while in development.

Michelle Poole, who joined the Company in July, is leading this effort.

Our current focus before holiday 2015 is developing powerful product stories, including Fuzz Love, a collection of clogs, boots and flats, which our customers know and love.

Fast Forward, a product story inspired by active casual products.

And flat-out fun, a range of fashion flats that combine great style and comfort for our female consumer.

Second, we're well underway in sharpening our focus on key countries that are important drivers of Crocs' future growth.

As you know, we've seen tremendous growth in China in recent years, and it remains an important market that holds great potential for our brand.

But as we indicated during the quarter, we began to see a deceleration in our China business that impacted performance and results.

Our retail comps were down double-digits, and our wholesale partners were under similar pressure.

Jeff will share the details, including a reserve for doubtful accounts during this quarter.

As part of our comprehensive business review, we installed new leadership in China with the appointment of Scott Yuan, General Manager for greater China.

In keeping with our overall aim of prioritizing sustainable profitability over near-term revenue growth, our intent in China is to drive a strategic shift from opening partner doors to focus instead on our current locations and wholesale partner sell through.

This has impacted our results in Q3.

We are addressing these issues, and expect to right size our inventory and channel over the next six months.

In Europe, we're cautiously optimistic that the business that the business improvements we made will continue to bear fruit.

As we note in the release, our Europe revenues were up 13% during the quarter, driven by solid wholesale growth.

This is the second consecutive quarter of double-digit sales growth in Europe, and we're pleased with the progress made by Vince Gunn and his team.

Next, I want to share an organizational update.

I'm delighted that Michelle Poole has been named Senior Vice President of Global Product Creation and Merchandising.

Adding to her merchandising role global responsibility for product design and development.

Michelle joined Crocs in August.

After five successful years in senior product leadership roles at Sperry Topsider, she also brings great product experience from Converse and Timberland.

Michelle is an enthusiastic, high-energy executive, with strong leadership abilities, and we are very pleased to have her on our team.

Her initial focus has been transforming Crocs to a merchant led culture, with tighter product and marketing stories.

While she's already making great strides in improving our product organization and process, her real impact on our global product strategy will be seen at the beginning of 2016.

I want to welcome Bob Munroe as the new General Manager of the Americas region.

The largest of our four regions, and one where we have significant opportunities for improvement.

Like Michelle, Bob is an experienced footwear executive.

He has 11 years at Reebok in a variety of leadership roles.

Including Senior Vice President and General Manager for North America, and most recently President of the Reebok brand.

He brings strong leadership, and a keen focus on optimizing performance in North American wholesale accounts.

The fourth and final area I want to touch on briefly is improving performance and reducing costs in our distribution channels.

We said in July that we intended to close 75 to 100 Crocs branded retail stores around the world.

We are on target to meet that goal.

We closed 31 during the quarter, bringing our total to 78 year-to-date.

We plan to close 25 to 30 in Q4.

In addition, our near-term closure of nine international e-commerce sites in smaller markets will be completed by the end of the year.

Jeff will share details on store closures, and anticipated short-term impact on revenue growth.

As we constructed future plans, we are very focused on growing our top six markets, including the United States, Japan, China, South Korea, Germany, and the UK, which account for 75% of our revenues.

Given the timing of the quarter end, relative to the market base booking windows, we have determined that backlog information we have historically provided does not consistently provide an effective measure of the future trajectory of our business.

Therefore, we plan to discontinue reporting of this measure.

However, I would like to give you visibility into what we are seeing for our Spring Summer 2015 season on a region by region basis.

First, in the Americas wholesale, Spring Summer bookings are meeting our expectations in the US.

And we project that are wholesale volume next season will be essentially flat to our realized volume in 2014.

Second, at present, our Europe bookings in total are up mid-single digits, with strong performance relative to the marketplace.

This gives us confidence that our Europe season will be up mid-to high single digits.

Third, in Japan on a local currency basis, we anticipate flat sales for the season.

And finally, Asia excluding China, is up single digits across the region.

Our China bookings are down year-over-year by roughly $20 million for Spring Summer, and we believe that in the aggregate that shortfall results in Asia volume being down mid single digits for Spring.

We expect our performance in China to improve in the second half of 2015.

Now I'd like to turn the call over to Jeff to share details of our Q3 financial results, and provide top line guidance for Q4.

Then I'll return to touch on a few challenges and opportunities we see ahead.

Thank you, Andrew.

Good afternoon.

Thank you for joining us today to review our third-quarter 2014 financial results.

I will go over the third-quarter financial results of operations, and projections for fourth-quarter 2014 revenue.

In total, third-quarter revenues increased $14 million or 5% to $302 million compared with 2013.

Looking at each region, in the Americas, performance in the US wholesale market exceeded our expectation in the quarter, driving America's wholesale growth quarter-over-quarter by 18%.

We saw strong internet sales results.

But overall revenue was impacted by negative 3% retail comp store sales in the quarter, and weaker Latin America volume.

Asia-Pacific revenue was down 1.4%.

Our performance, excluding China, was up mid teens.

Our China revenues were impacted by a high level of existing inventory in our partner store network in Q3.

This was the result of aggressive assumptions on same-store sales for the Spring Summer season that influenced the amount of product ordered in the first half.

As a result, our third-quarter China wholesale volume declined 35% from last year.

We recorded a reserve for doubtful accounts of approximately $5 million in the Asia region, primarily due to delayed payments from our partner stores in China.

We have a comprehensive plan to address this.

In Europe, despite the macroeconomic backdrop and challenging currency exchange, revenue was up 12.5% on a US dollar basis, driven by a 23% increase in wholesale.

Our business in Japan was down 5% on a constant currency basis, primarily caused by weak same-store sales and lower at-once demand in wholesale.

The decline of the Japanese yen has adversely impacted year-over-year results in 2014.

And has put pressure on our overall global gross margins by about 50 basis points.

Now, looking at our global direct channel, global retail sales grew 1% in the quarter as same-store sales were down 4.5% globally.

Comps in Europe were slightly positive for the quarter, while all other regions were down.

The Americas was down 3%, mostly influenced by a poor July comp performance.

Japan was down 8% in the quarter.

The Asia-Pacific region had a drop in the same-store sales in the quarter of 9%, influenced primarily by declines in China, Korea, and Hong Kong.

Global internet sales in the quarter were up 9%, driven by a strong performance in the US market.

We closed 31 stores in the quarter.

We did open 12 stores in the quarter, half of which were outlet or stop-and-shops.

We plan on closing 25 to 30 stores in Q4, bringing the total gross closures in 2014 to 105 to 110.

As discussed at the end of second quarter, we expect store closings will reduce the annualized revenue by approximately $35 million to $50 million.

And reduce SG&A expense by approximately $20 million to $30 million, with an insignificant impact on net income.

The acceleration of store closures is impacting our projections for revenue growth in Q4, as we are forecasting flat overall retail revenue in Q4.

With regards to units in ASP, unit volume increased 11% to just under 13.3 million pairs in the quarter.

Global average selling price decreased by $1 per pair from $23.11, to $22.09.

This was driven by a planned reduction in boot volume, from 7.3% of revenue to under 5% as a result of product eliminations.

Clog volume in the quarter was up from 45% last year to 48% of volume in 2014.

This was also influenced by declines in markets such as China and other Asian markets that have a relatively lower volume of clogs.

Gross margins were down 190 basis points from 53.2% to 51.3% compared with the same period in 2013.

This was primarily the result of currency related decline in gross margin in Japan, lower margins on new product introductions in 2014 compared to 2013 launches, and the decline in China revenue and other Asian markets as the average margins in those markets are higher than the global average.

Sustained weakness in the yen, euro, and other currencies compared to prior year will further affect our global margins in Q4 in 2015 as our cost of product is tied to the US dollar.

Excluding one-time items, our core SG&A expenses declined.

This reported SG&A includes bad debt reserves of $5 million, and SAP expenses of $4.1 million.

In addition, we experienced several charges including restructuring charges as a result of transition activities and accelerated depreciation of assets for retail stores that are part of closure plans.

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

Operating income on a GAAP basis was $1.1 million in the quarter.

Excluding cash expense of $12.5 million, primarily related to restructuring, ERP implementation, and non-cash charges of $4.9 million primarily related to store closure costs and accelerated depreciation.

Our non-GAAP operating income was $18.5 million, compared to $21 million in 2013.

The difference on a year-over-year basis can be explained by the increase in allowance for doubtful accounts in Asia that exceeded $5 million.

Our press release, filed today, provides a complete reconciliation of all special items.

For the quarter, we booked an income tax credit of $15.7 million.

Recently, we concluded an audit of the historical USA income tax filings.

The results of this audit was an elimination of a reserve for uncertain tax positions, commonly referred to as FIN 48 reserves of $10.5 million.

The balance of the credit reflects our change in income year-to-date.

Our normal tax rate has been and continues to be impacted by the deductibility and timing of SAP expenses, restructuring and asset impairment charges.

Earnings-per-share in the quarter were $0.12 on a GAAP basis, and $0.30 on a non-GAAP fully diluted basis.

On a year-over-year comparable basis, excluding the overall impact of the preferred share issuance in January, non-GAAP EPS is $0.39 per share compared to $0.18 per share last year.

It is important to understand the pieces that make up the GAAP EPS calculation, including the impact of the preferred stock investment in January of this year.

GAAP net income for the quarter was $15.8 million.

Dividends and dividend equivalents of $3.8 million related to the Series A preferred stock were deducted from this amount, leaving GAAP net income for common shareholders of $12 million.

An additional $1.7 million was deducted from the $12 million as undistributed earnings related to the preferred stock, leaving $10.3 million for common shareholders.

The common stock weighted average shares used in EPS calculations was 85.4 million shares.

Finally, we've repurchased approximately 2.9 million shares at an average price of $14.74 for an aggregate investment of approximately $43 million, excluding related commission charges.

Year-to-date, we have repurchased approximately $90 million worth of common stock.

This reduced our outstanding common share count to 84 million shares at the end of the quarter.

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

We ended the quarter with $350 million of cash on the balance sheet.

Our increase in inventory and accounts receivable are directly correlated with the business conditions in China.

We will remain in a 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 significant issues.

Both locations successfully closed the quarter without concern.

A successful global ERP system implementation is our top short-term operational priority, as we will launch SAP in the remaining markets during Q1 of 2015.

We expect GAAP revenue of approximately $200 million to $210 million in the fourth quarter of 2014.

As we address the issues in China, close retail stores, focus sales activities on key product stories, and anticipate flat same-store sales in the US and Europe.

In addition, as mentioned, the above revenue includes the effect of stronger US dollars.

Which will impact our revenue by 3% in Q4, specifically currency rates assumed in our projections are $1.28 to the euro and JPY107 to the dollar.

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

Thank you, Jeff.

In July, we laid out a clear action-oriented plan for driving improved performance across.

Focused on products, prioritizing our most important geographic markets, people, and points of distribution around the world.

Over the past 90 days, we have made significant progress in each of these areas.

Obviously, we have much work to do in order to unlock the power of the Crocs brand, and deliver consistently better results to our shareholders.

We will be finalizing the location for our new global commercial center in the Boston area, we'll keep working to focus our product line on core molded products and casual footwear, creating powerful product stories.

We anticipate exciting news related to marketing strategy for 2015 and beyond.

Now we look forward to taking your questions.

Operator, please open the line.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Erinn Murphy, Piper Jaffray.

Great.

Thank you, and good afternoon.

I guess that first I wanted to focus a little bit on the Asia Pac region, and just dig into a little bit more on the pressure that you guys have been seeing in China.

Could you just talk about when you started to see the inventory build, and how long you think it's going to take to work through some of the inventory there?

Particularly given that you've just made a management change on the ground there.

Thanks, Erinn, appreciate your question.

So we first started to see our business in China from a take away perspective softening in the early part of this year.

We saw it within our own retail stores, but then also within our partners.

And I think the issues built up, because neither our partners nor ourselves anticipated that slowdown.

So when we ordered the Spring inventory, we anticipated significant growth.

So with a growth in merchandise receipts, and a slowdown in take away, we saw a buildup inventory.

Which accumulated through the Spring Summer season, and you can start to see it in our inventory levels at the end of Q2.

In terms of addressing it, we have slowed down dramatically sell-in to our partner store operators, to our distributors, already.

We're continuing to work with them to work through their inventory in the fourth quarter of this year.

But as you're aware, that's a smaller quarter for us in the China market, and we think that will continue through the first two quarters of 2015.

Okay.

So then maybe along that line, I think, Jeff, you had mentioned just before as you wrapped up your comments that the comp assumption for fourth-quarter for both US and Europe was flat.

Could you just add a little bit of context for how your thinking about the comp assumption in the Asia Pac region as well as Japan in the fourth quarter?

We think the influence of Japan in the Asia region will bring our overall comp performance to about minus 2% for the quarter.

That's what we're forecasting internally right now.

Okay, that's helpful.

Thank you.

And then just bigger picture, as we start to just refine our models for next year and then understating that gross margin in particular came in lighter in the third quarter.

Just help us think about some of those drivers for the gross margin, both from a headwind as well as tailwind perspective given that we've got a confluence of both.

Yes, thanks, Erinn.

So I think if you look at our headwinds associated with gross margin, obviously the global currency markets continue to put pressure on us as we buy in US dollars, and we sell in local currency.

So that's a significant influence on some margin pressure for us.

We, as well as other players within our space, will be impacted by cost changes within China, and additional social insurance issues that we're seeing in our factory costs.

Overall, we think our supply chain can run more efficiently next year as we decrease the number of products styles that we're carrying, and really focus our attention on the core molded heritage line that we have.

So that will help us in the other cost to goods sold providing some tailwinds going into 2015.

And should we anticipate any of the SKU rationalization progress that you've made?

Is it really for the Fall 2015 line to be as a tailwind for the second half, or how do we think about that component?

Yes.

There will be a slight tailwind for the second half of 2014.

Obviously, the currency -- I'm sorry, of both 2014 and 2015.

The currency markets also, you've got to consider into Fall for next year as well.

Okay.

And I guess just the last bigger picture question as we think about the margin.

I guess first, Andrew, for you.

Should we still be thinking about a 12% intermediate goal from an operating margin perspective?

And then, just from the SG&A component of the former question.

Just how do we think about some of those headwinds and tailwinds for SG&A as we build towards that, in theory, that 12%?

Yes.

Thanks, Erinn.

We, very much, we think we're are still on track for a 12% operating contribution in the intermediate future.

As we think about the restructuring plan that we've laid out, I think we're very much on track with our SG&A reductions, with putting the right people in place, and focusing on the team.

As well as driving the strategic focus around the business.

As we look forward to 2015, even with flat revenues or a modest increase in revenues, some stabilization in margins, with a reduced SG&A, reduced working capital.

We see a strong performance in terms of cash from operations returning to our historic levels.

And then we think that positions us well for some significant growth in 2016 and beyond, which will, as we laid out before, will drive to our 12% contribution.

Great, that's helpful.

I'll let someone else jump in the queue.

Thank you both.

Jim Duffy, Stifel.

Thanks, good afternoon.

A couple more questions around China.

Inclusive of the partner doors, guys, how many points of distribution do you currently have in China?

And what's your visibility to inventory with those distribution partners?

So, thank you, Jim.

Inclusive -- we have about 50 of our own doors, and there are about 700 to 750 partner doors, so about 800 points of distribution total.

And I'd say we have increasing visibility to the inventories and our partners.

One of the things we've been focusing on very strongly as we've been helping them deal with their inventory levels, is getting a much better visibility to their inventory.

And we're able to focus in on a distributor by distributor basis.

Most of our distributors are regional in nature.

They have the right to distribute in a given province or part of a given province and cities.

And so we've been really working hard with them to understand their inventory levels, and put in place the right incentives to do up and down.

And then the slow down in take away, as you characterized it.

Is that concentrated it in any particular product categories or styles?

I guess a key question from where we sit is, how do we know this isn't a Crocs brand issue rather than some temporary inventory imbalance?

We see the majority of the impact, Jim, to be broad-based in terms of across our inventory -- across the merchandise that we're carrying in the stores.

And we attribute a lot of it to the slowdown in the Chinese consumer.

We've looked at it geographically.

We cannot see significant patterns across the country.

We've looked at it across our different distributors.

We see it really as fairly broad-based.

I'd say there are one or two styles that are weaker than others, and we've put in place programs to try and address that.

But the majority of it is really broad-based.

Okay, thank you.

And then, Jeff, can you provide the regional split of operating income for the quarter?

Or will we need to wait for the Q on that?

Just give me a minute, and I'll pull it up.

So when we look at the -- well we gave you the channel revenues and an overall basis.

So you just want to get the operating margin on an overall basis?

By region actually.

Yes.

Right.

Well we're going to have the Q come out tomorrow, so that will have it all in there.

But on a basis for the Americas operating in total, we had about a 9.7% increase in revenue.

You'll see the operating income tomorrow, Jim, so I do want to read these figures off.

But we'll get those out to you tomorrow.

Fair enough.

And then the last question is on the SG&A.

Just looking at on a year-to-year basis, even adjusted still up year-to-year.

With the restructuring, I guess it's my expectation we'll start to see some progress there.

Are we near to the point where we'll see adjusted SG&A down on year-to-year basis?

As we think about next year and going into next year, we'll have some headwinds and some tailwinds associated with SG&A.

So when we look at next year, we're going to be focusing our attention on marketing as a Company, and increasing our marketing costs about 1% of sales overall as we go into 2015.

On the other side, as far as tailwinds that we think of for next year, we see some improved SG&A expenses associated with the restructuring efforts that we've taken place all year long.

The elimination of products, the focus around our distribution channels that make sense, and the geographies -- the concentrating in the five geographic markets we compete in most effectively.

And really tightening our resources around that.

As far as other headwinds for next year, we do have some variable compensation headwinds going into next year, but in total we're heavily focused on our SG&A line.

Okay, thanks.

And if you, Jim, if you back out the bad debt that we highlighted, I think our run rate in the Q3 period was actually down last year.

Okay.

Thanks.

Scott Krasik, Buckingham Research.

Hey, everyone, thanks for taking my question.

So just a couple questions here.

In terms of the America's wholesale growth this quarter, did you have any type of new channel distribution that may have impacted it?

Because your gross margins, even with some of the currency stuff, was below our expectation.

And then what's your outlook for the next couple quarters on gross margin?

So, Scott, thanks for your question.

With regard to the US wholesale business, obviously we experienced some significant growth [back].

No significant new accounts or new channels.

Although, within that number, we were dealing with the closure of both our Golf business and the shuttering of Ocean Minded as a distinct brand.

So we had some inventory that we had to deal with within that number.

So that accounts for some portion of the margin impact in North America.

And I'll let Jeff take the broader question around what we see for gross margins in the future.

Yes.

Thanks, Scott.

So I think again, when we look at our headwinds tailwinds associated with gross margins, our pricing models did assume a more favorable currency exchange.

So that's an important thing to remember.

We will see a little bit of liquidation activities in Q4 associated with some styles and brands that we'll be getting out of, namely Ocean Minded, Golf and some of the things we talked about on the call today.

So there will be some downward pressure on our gross margins overall.

As we look into 2015, with our tighter focus around product styles that make sense for us, both from a profitability as far as individual styles as well as revenue growth opportunities.

We think we'll have some tailwinds as we go into the later parts of 2015 from our focus in the merchandising group.

And then just going back to Jim's question about brand stability.

What are you seeing or how do you feel about Europe in particular.

You've sold in a lot of products, your comps aren't that strong, you're assuming they're going to be flat this quarter.

I think it was pretty warm in September in Europe.

So how do you feel about the brands in Europe?

Could we be heading towards a China situation next year?

No.

Scott, that's a good question.

So the way we think about it, yes, our comps haven't been that strong in our own stores.

But in terms of the size of our overall business in Europe, even with a weaker macroeconomic environment in Europe, we have a significant amount of penetration opportunity.

And the majority of our sales are traditional wholesale sales, so they're into large and medium-sized, well-established European retailers.

Our biggest countries are Germany, the UK, followed by France.

So we're not selling into a partner door type operation that we have in China.

We're selling into traditional retailers that have sophisticated operations around the amount of inventory they buy, how they monitor those inventory levels, and sell through that inventory.

And we have no indication that our business is slowing down, in fact, we've probably got modest indications that's picking up and we're getting incremental traction with key wholesale partners.

Okay, that's good.

And then just your comment that sales would be a mid to high single digits in Spring 2015 in Europe, was that on a constant currency basis?

Yes.

Okay, thanks guys.

Sam Poser, Sterne Agee.

Thank you for taking my questions.

I guess the first question I have is, were there pull forward orders for I guess probably the US and Europe in Q3?

No, Sam.

We haven't consciously pulled forward sales in either Europe or the US in Q3 from Q4.

But you wouldn't expect the -- I would assume you're not expecting the whole sub business in the fourth quarter for either to be as strong as they were in Q3.

Is that a fair statement?

I think when we look into Q4 for 2014, Sam, we've got a number of headwinds I'll go through.

One is, our China business on a year-over-year basis will be down about $11 million, and that represents about half of our forecast to decline on year-over-year basis.

As we talked about earlier in the year, and throughout the year in conversations with the analyst community, we've been very open about the South America challenges that we've seen.

Obviously as they come up upon their Summer period in South America, that's a revenue impact.

And that's about a quarter of our overall decline on a year-over-year basis and that's included in our guidance number.

And then finally, I don't want to sound like a broken record today around currency.

But that's impacting our fourth-quarter revenue projections as well.

In pretty much the three components that go into the fourth-quarter revenue projections.

Thank you.

And then just go back to gross margin.

The last fourth quarter, you were down 240 bips.

Do you expect to be down, given all of the moving pieces, do you expect to be down as much as you were in Q3 in the fourth quarter, or less just because the comparison is much worse in a sense?

Well as you know, our gross margins are very seasonal in nature, as we come up into the higher cost fourth quarter with a lower level of revenue to cover our cost to goods sold outside of the product costs period.

So that will be a headwind as well into our gross margins overall.

And as I mentioned, when we were talking about gross margins earlier, we'll have some impact in the fourth quarter associated with currency and in the liquidation of styles that we're no longer carrying into 2015.

So those are really the three components as you think about our fourth-quarter gross margins.

But would you expect it to be down 150 bips again?

Would be in that range, higher or lower?

I think they will be pressured downward.

You don't want to answer the question.

We're trying to figure this out.

We want to be able to model this properly, and so can you -- the comparisons are all different.

There are moving pieces all over the place.

Just can you give us more direction than that?

Or you're going to get people on every different planet on the numbers here?

Sam, I think when you look at it overall, the headwinds that we're going to deal with.

The currency alone is probably going to be about 50 to 100 basis points of negative drag on us.

As we look at the style liquidation, there will be a component to that.

Your particular viewpoint at 150 basis points, is probably in that range.

But we didn't come here today to give particular guidance around gross margins going into fourth quarter.

Okay, thank you.

And then how much of the inventory increase is China-based?

Is the majority of that problem in China right now of the 15% increase?

We think about a third of the problem is in China.

We know it's about a third of the problem is in China from an inventory basis.

There are a couple of other important elements, Sam.

One was, coming into this year as a business.

We felt like we were light in our core basics, and so it increased the inventory levels in our core basics in our stores.

And secondly, our internal projections around the US business being stronger than it ended up being in the Spring Summer season had us ordering more inventory than we've been able to sell through.

So about a third is in China, about a third is in North America, and then we've got some other impacts.

I think it's important to say we fully recognize the degree to which our inventory is higher than it should be, and we have a very coherent plan to work it down this quarter and the first two quarters of next year.

And just to follow-up, how should we think about that as a when do you think your sales and your inventory will get in line with one another?

How do you foresee that?

We are in no rush to burn up this inventory, Sam.

The vast majority of the inventory that we have in excesses is our core basic styles.

Which, as you know, will sell this year as well as they'll sell next year.

So there's no point in us liquidating that unnecessarily, that would be counterproductive.

We see the two being in line by the end of Q2 2015.

Okay.

And then just the 12% EBIT margin, when do you expect to get -- when do you expect the revenue -- you're going to need the revenue really to get going to get there.

You're really expecting that I guess beginning in Spring of 2016, once the work of all of the new initiatives really get going.

So all through next year, is going to be transition?

We have the most confidence around projecting revenue growth when we have the product line and the marketing to back it up, Sam.

Which we think will be Spring Summer of 2016.

We're going to make progress next year.

But one of the challenges with the timing of this turnaround is obviously our Fall holiday season is significantly smaller than our Spring Summer season.

So next year, we'll make impacts in the back end of the year, but the size of those impacts were muted by the relative size of the seasons.

Thank you very much, and good luck.

Thank you.

Mike Swartz, SunTrust.

Hey, good afternoon, guys.

I just wanted to talk about gross margin, and I know we've kind of beaten this horse dead.

But just looking at maybe over the longer term, how you think about gross margin, vis-a- vis the product mix, the evolution therein.

And also just with the changing of your distribution model as you continue to close stores.

I guess, how should we think about it, is the mid-50%s the right level?

Is that how you plan for the business to look in a couple of years, or is it another level altogether?

It's not dramatically off that.

The way we think about it in the long run, so it's a good question.

The way we think about in the long run is, as you said, you've got a number of those factors.

You've got channel mix changing, which has a dramatic impact because obviously it was selling in retail at a double margin versus wholesale.

We see a lot of our growth coming out of wholesale.

It's much more capital efficient, it's much more profitable in terms of return on the assets that we invest.

On the flipside, I think there's a much stronger focus around the product range innovation, both in our molded products which are very profitable, to drive growth in that arena, as well as growth in our cut and sew or non-molded products.

We are planning and thinking around gross margin at the longer run being in the 51% to 52% range.

Okay, that's very helpful.

Thank you.

And then I guess as we look at the tax benefit you had in the quarter, is there a way to look at what EPS would've been excluding that tax benefit?

And is -- should we see something similar in the fourth quarter?

It was all booked in the third quarter, Mike, so there won't be any benefit in Q4 associated with the USA tax audit settlement.

That was $10 million, so it would have been about $0.11 per share benefit associated with that tax credit.

Okay, thanks a lot.

I appreciate it.

Steve Marotta, CL King & Associates.

Good evening, everybody.

I just have two quick questions.

We talked a lot about the costing pressures going into 2015.

Are there any opportunities whatsoever to get a tailwind to ESPs, either from new product that's being launched that's slightly higher in price point, or very small incremental price increases anywhere that would be able to offset some of the costing pressures on the unit side?

Yes.

So we will certainly be looking very hard at pricing our products to the value that they deliver to consumers.

And so, there will be some opportunities for price increases as we look across the range.

In terms of the mix, I think largely, that's going to work against us in terms of a shift from retail to wholesale.

And as we continue to focus and develop our product range, we're really looking very hard at what our weighted average growth margin, and in planning that on a very coherent basis.

And we do have some products within our range that are extraordinarily profitable, and product ranges that are extraordinarily profitable.

So if we can drive significant sell-in and take away for those products, it can have a material impact on gross margin.

Thank you.

And the other question I had is, you had previously mentioned in public forums that you believed after the strategic realignment, you would -- and without major sales increase, you'd be at roughly a 10% operating margin rate.

And that run rate could be hit by the end of next year, the run rate by the end of next year.

Is that still in the gun sites?

I think when you look at our operating margin in the near term, obviously, we're being influenced by the events internationally just like everybody else.

So that's a near-term pressure point on us.

As we get into we get out into, call it TTM Spring Summer 2016, we'll start to substantially approve our trailing 12 month operating margins.

As we think about the business model going forward, we are really focused in 2015 on cash from operations and improving our overall cash flow as an organization.

We think primarily, we can improve our cash from operations by addressing our working capital needs.

And a more rational approach to our inventory in accounts receivables going forward, which will reduce our need for working capital on that front in 2015.

And then, a year in 2015 without restructuring charges, we'll return our cash from operations back to historical levels that you saw in 2013.

So that's really our near-term focus, and in 2016 we're focused on improving our operating margin.

One more question on the share repurchase.

I believe it was at the beginning of the year that there was intimation that it would be done in a relatively quick period of time, within a couple of quarters.

Is there any set deadline to exhaust the share repurchase?

I know you mentioned slow and prudent, and you'd be opportunistic.

But is it opportunistic within the next two quarters, or the next three quarters, or the next four quarters, can you put any perimeters around it whatsoever?

I think when we think about the share purchase, first of all, we almost bought 3 million shares last quarter.

So that was a pretty healthy pace of share purchases.

As we look out into the future quarters, we continue to be methodical and patient and opportunistic in our purchasing of shares.

And do it in a very patient manner to get the best possible flow of our cash back to our shareholders through the form of stock repurchases.

So that's how we think about it, and were not putting a specific deadline to this share repurchase program.

Okay, thank you.

Danielle McCoy, Wunderlich Securities.

Hello, thank you for taking my question.

I was wondering if you could just talk about some of the progress that you're having with shifting to more of a distributor model in some of the smaller international markets?

Thanks, Danielle.

Thanks for joining us today.

So I think last quarter, we talked about the progress that we're making both in Taiwan and in Brazil.

I'd say our progress in Taiwan is substantially advanced.

We've moved the vast majority of our business to distributors, including parsing a number of Company-owned stores are selling a number of our Company-owned stores to some of our key distributors.

We're still actively working on our Brazil situation.

And I'd say there are probably two additional countries where we're looking at a potential transition to a distributor, but we're not ready to -- obviously these are fairly complex discussions and negotiations.

And we wouldn't like to prejudice them by talking about them in a public forum at this stage.

Okay.

And then can you just talk about some of the strength that you're seeing in the Americas in the wholesale channel?

Is it any increased shelf space at some places, or the styles?

Can you just talk about that a little bit?

Yes.

There's a couple of places where we're very pleased with our progress.

There are one or two of the family channel retailers, where -- particularly Shoe Carnival, where we have a number of shop-in-shops that we've established over the last year.

Those shop-in-shops have been particularly successful in terms of driving both our selling and sell through.

We're very pleased with the strong relationship we have with that account in general.

There is also some significant strength to some key department store accounts, where we've had some strong sell-in and sell through.

Namely in Dillards and Belks have been particularly successful for us.

Obviously, their focused toward the southern part of the US, and particularly appropriate for our product range.

And then I think the third one I'd highlight is Amazon.

Amazon is a significant account for us as they grow continue significantly, but our rate of growth with them significantly outpaces their underlying growth.

Okay, great.

Not sure if I missed this earlier, but tax rate going forward for the fourth quarter, and then how she would look at it in 2015?

As we return to profitability across our overall regions and return to historical levels of profitability and then exceed that going forward, we'll return to a tax rate of 22% to 25% overall from an effective tax rate perspective.

The key for us is more of a balanced operating income around the globe, which really is the most tax efficient for us.

Okay, great.

Thank you.

Good luck.

Mitch Kummetz, Robert Baird.

Yes, thanks for taking my questions.

Jeff, I think you said you expect to close another, what is it, about 25, 30 stores in Q4.

And if that's the case, where does that put your store count at year end?

Is it in that 575 to 580 range, or are there new stores also coming online in Q4?

We'll be down below 600, right around that 590 mark.

There's a couple of stores that are opening in Asia, but nothing really to write home about.

The major initiative that we're under is rationalizing our fleet going forward.

So, if you're at 590, I think you said that if you closed 25 or 30 in the quarter, then how many will you have closed since you initiated this plan?

We'll be over our original target, and we'll continue to work on retail stores going forward.

Okay.

Yes, I guess that was my next question, because I think the plan was originally 75 to 100 stores initially.

So how should we be thinking about stores on a go forward basis, now that you've exceeded the initial stages of the plan?

Where does it go from here?

Like we said, we continue to look at opportunities for outlets in some other key locations where the brand strength really drives the economics for a retail platform.

But overall, our initiative is of focusing our long-term growth in revenue in the wholesale channel.

Specifically, global family footwear channels, and department stores, and key independent players.

So that's our predominant focus, not on growing retail stores, but we're opportunistic I guess on the retail storefront.

Okay.

And then what's the timeline on the SKU count reduction?

Not only just in terms of how you're reducing SKUs, but when you would expect to see that positively impacting the business.

Andrew, I think you made a comment in your prepared remarks, there was something about elimination of 30% of something by Fall holiday 2015.

I thought you said something about just colors, but maybe you could just elaborate on that, and talk about where you are in the process of looking to reduce SKUs?

And when that runs its course and impacts the business positively?

Yes, that's a great question.

So as we dug into it and started to work on Fall holiday 2015, we were able to reduce about 30% of our SKUs style colors in development.

So the style colors that came out the back end of our development process that were confirmed in the line and that we're going to produce, are about 30% less than those that were being worked on.

And I would say the rough order of magnitude would be about the same in terms of 30% less than the prior season, so that's a significant reduction.

A lot of that reduction comes from eliminating differences and duplications across the regions.

So getting all of the regions on the same fundamental platform, on the same colors, and really driving efficiencies there.

So that was step one, and if you like, the easy work.

The harder work will really take effect in Spring Summer 2016, which is what is the tight assortment, the line, that we think is going to drive growth in revenue but on a smaller SKU base.

And if we think historically we've been around the 1,600, 1,800 range in the number of star colors of any given season, we think go forward we'll be going more 1,200 to 1,400 in terms of the style colors that we go to the marketplace with.

Okay.

So getting from 1,600 to 1,800 down to 1,200 to 1,400, what do you think that does in terms of margins, or operating profit, or however you want to look at that?

Well there's a lot of moving pieces in that.

I think -- we think it allows us to focus our organization, and reduce lot of development cost.

In terms of malls, the way we work with our factories, et cetera, and the way we develop product.

So we think there's some opportunities for a cost of goods savings from that perspective.

And as I talked about earlier, as you think about the long-term margins, we're really trying to balance mix shifts in terms of our channels.

Mix shifts in terms of our regions, rising cost of goods, the benefits of SKU focus and SKU reduction, and we see it as a baseline the 51% to 52% range as a long-term annualized margin rate.

Okay.

All right.

Thanks.

Good luck.

Thank you.

Corinna Freedman, BB&T.

Hello.

Thank you for taking my question.

You did allude to it in the press release, but I was wondering if you could give us a conservative assumption or a guideline as to when you think you'll have a CEO?

And maybe if you can talk about -- it doesn't seem like it might be likely for 2014, but if it's a fiscal 2015 issue, is it first-half, second-half, just wanted and up on the timing there.

Thank you.

Thank you Corinna.

The Board is actively engaged in the CEO search and that continues, and when they have news, they will make an announcement.

Okay, thank you.

And that concludes the question-and-answer session.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.