卡洛馳 (CROX) 2015 Q2 法說會逐字稿

Welcome to the Q2 2015 Crocs, Inc.

Earnings Conference Call.

My name is Vivian, and I'll be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Brendon Frey.

Please, go ahead.

Thank you.

And thank you everyone for joining us today for the Crocs' Second Quarter 2015 Earnings Conference Call.

This morning, we announced our second quarter 2015 financial results.

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

We would like to remind everyone that some information provided in this call will be forward-looking, and accordingly are subject to the Safe Harbor provisions of the federal securities law.

These statements include, but are not limited to, statements regarding future revenue and earnings, 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 2014 report on Form 10-K, filed on March 2nd, 2015 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 on the call today are Gregg Ribatt, Chief Executive Officer; Andrew Rees, President; and Jeff Lasher, Senior Vice President and Chief Financial Officer.

Following their prepared remarks, we will open the call for your questions.

I'll now turn the call over to Gregg.

Thank you, Brendon.

Good morning everyone, and thank you for joining us today.

This morning, we announced our second quarter 2015 financial results.

Revenues were $345.7 million, in line with expectations and adjusted net income available to common shareholders was $27.3 million.

Excluding store closings, discontinued product lines, and China our remaining business was up $20 million or 5% to last year on a constant currency basis.

We're making meaningful progress in transforming Crocs into one of the leading global casual lifestyle footwear companies in the industry.

As we go through these changes, we continue to face the ongoing headwinds of a strong US dollar.

Despite this overhanging challenge over the past year we've laid out much of the foundation for that transformation.

Making great progress on the strategic initiatives we laid out in prior calls including: strengthening the Crocs' brand, elevating our product stories, exiting non-core categories and businesses, evolving our international business model to focus on our six most important markets, strengthening our relationships with key wholesale partners, improving our direct-to-consumer capabilities and performance.

Simplifying our operations and processes, and building a best in class team.

We're highly confident that the actions we've taken will positively impact our business and our partner's businesses around the world.

As we've said before, it will take until the first half of 2016 for these initiatives to be fully implemented and to deliver material improvements in growth and profitability as our new spring/summer 2016 product will then be in front of consumers.

Having said that, we're extremely pleased with some of the results we are starting to see from these actions.

And I want to call out a few of them this morning.

First, in the second quarter we launched our new marketing campaign #FindYourFun.

On a very tight timeline, we established a global campaign that celebrated the Crocs' brand and our core clog silhouettes.

The campaign was extremely well received, and is a foundation for Crocs to communicate more effectively with our consumers around the globe.

And we will share some of the details of our new marketing platform in a few minutes.

Second, our global ecommerce business was up almost 30% on a constant currency basis despite a reduction of nine individual country websites versus the prior year.

Results were especially strong in the US up 30%, and China up 84% on a constant currency basis.

The US in particular benefited from our new marketing campaign.

Much of which was spent on digital media helping drive internet activity and sales.

I also want to note that while our retail comps were negative, showing only slight improvement over the first quarter, we did see week-over-week improvement throughout the quarter.

Coupled with strong growth in ecommerce and modest constant dollar growth in global wholesale excluding exited businesses in China, I view the quarter's overall results with tempered optimism.

Third, we continue to make nice progress with new product introductions that give us confidence for the future.

On prior calls I've discussed the Freesail and the Sloane.

Two new designs which both continue to perform extremely well at retail.

On this call, I also want to mention the CitiLane molded sandal and our Swiftwater franchise that are both having very strong sell throughs at retail.

The success of these shoes demonstrate our ability to both continue to evolve our core molded business, as well as build strong platforms in new adjacent segments such as outdoor.

And finally we continue to be extremely excited about the launch of our new spring/summer 2016 collection which begins shipping in the fourth quarter.

Retailer response has been overwhelmingly favorable.

And gives us confidence in the commercial success of this important new line.

In summary, we continue to make significant progress on our strategic initiatives.

And we're confident that they will have material positive impacts on the business in the very near future.

Having said that, we do continue to face some challenges.

Chief among them a strong US dollar.

Second, while we have built our organizational capabilities by strengthening our team, investing in systems, and streamlining processes, we need to elevate our service levels across the globe.

And finally, we need to return China to growth in the second half of the year.

On the positive side, we see early signs of growth in the US, a substantial moderation of the declines in China, and stability in Europe.

We're also excited about our gross margin improvement in the first half, and this quarter's strong ecommerce increases.

I believe this sets us up well to capitalize on the launch of our new spring/summer 2016 collection.

And I remain very confident in our strategy, our team, and our ability to transform the Crocs' brand and business to reach its full potential.

And now Andrew will highlight some of the key details of our turn-around efforts.

Thank you, Gregg.

We've previously outlined the six pillars of our strategy for repositioning Crocs, which are well underway.

Let me reiterate the major initiatives, the progress we have made, and some of our plans going forward.

One, elevating the brand.

In Q2, we launched our global marketing campaign #FindYourFun which builds on our iconic clog silhouette.

As a reminder, the campaign is designed to reignite excitement and relevance for Crocs, celebrate our core clog while inviting consumers to move into appropriate adjacent categories, and give consumers who are neutral in their attitudes towards Crocs permission to engage with us.

Thus far, consumer and customer feedback around our campaign has been very positive.

And we're seeing both significant growth in traffic to our websites and sell through acceleration to key wholesale accounts when they have been linked to our digital marketing.

We're now working on the evolution of the campaign for 2016.

As well as looking into ways to drive greater global cohesion, and further increase the proportion of our marketing spend utilized for working media.

Two, focusing on our core product.

We're in the early stages of seeing some newer and more innovative products coming to market.

Both within core molded as well as a broader range of casual footwear styles which expand wearing occasions.

To update you on the Freesail, which we mentioned in our Q1 call, this style continues to perform well across our direct-to-consumer channels.

Globally, this style was worth less 20,000 pairs in the first half of 2015 where we brought it to market down an accelerated timeline.

But will expand to more than 20,000 pairs in the back half of 2015 based on its strong performance at retail.

This is a great example of how we can reinvigorate our core molded category with freshness and elevated styling.

As well as establish a robust test and learn capability that will enable us to drive growth in the future.

Today, I would like to highlight three additional styles.

First the CitiLane a molded Twin-Gore clog which has been delivered to our own direct-to-consumer channels and is selling at double digit sell throughs.

We estimate we will ship greater than 300,000 pairs globally in the fall holiday of 2015 across all channels.

Second, the Bump It collection which Gregg mentioned on our last call.

A kids molded clog and shoe which also had initial deliveries in our direct to consumer channels.

They have been top-selling styles over the past few weeks.

Our expectation that we will also ship in excess of 300,000 pairs of this collection in the fall holiday of 2015.

Third, the Swiftwater, a new men's outdoor franchise that has expanded to seven styles for fall holiday of 2015 from a single style in spring/summer of 2014.

They'll be further expanded to a total of 13 styles including kids in spring/summer of '16.

Its performance demonstrates our ability to expand existing offerings into naturally adjacent segments.

Our larger makeover in terms of product innovation is our spring/summer 2016 line.

We continue to be super excited about the feedback we've been getting from our wholesale partners as well as our distributors around the new line.

Three, focusing on our six key markets.

We continue to focus our efforts and investments on our six largest markets which represent 70% of our overall revenues and profits: the US, China, Japan, South Korea, Germany, and the UK.

During Q2, we also had the opportunity to host a global distributor conference for our 40 largest distributors from around the world in Dubai.

This allowed us to outline our strategy and future direction in detail to our best-in-class partners who service our non-direct markets.

We are making progress at addressing our challenges in China.

As we discussed on our last call, during the second quarter we saw our revenue decline in China moderate significantly from $25 million decline in the first quarter to a $5 decline in the second quarter.

We're focused on driving sales per door and profitability of the business.

We have closed stores, cleaned up distribution and moved through excess inventory.

We continue to expect a return to growth in the second half.

Four, building stronger relationships with key wholesale accounts.

Starting next week, we'll embark on a series of pre-line meetings with our largest wholesale accounts globally to review our major product stories for fall holiday of 2016.

Earlier this year, this initiative to pre-line our spring/summer '16 season was a major success in terms of building strong wholesale relationships.

Five, improving our direct-to-consumer capabilities and performance.

Our ecommerce business was very strong across all regions led by the US and China.

Despite operating nine fewer country-specific sites compared to last year, overall global ecommerce revenues increased almost 30%.

In our six core markets, our ecommerce benefited most directly from our investment in marketing.

Our business also benefited from better execution including a globally consistent online customer experience, and a commitment to better in stock positions on key products.

We continue to trim our retail operations, eliminating underperforming, inefficient stores.

While these stores previously contributed $12 million to topline sales in Q2, they made no meaningful contribution to earnings.

We're also pleased to announce the hiring of Neil Parker, based in Singapore, who will lead our Asia, direct to consumer business, as well as drive strategic direction for our global partner stores.

Neil comes to Crocs with an extensive direct-to-consumer background most recently from Levi Strauss in Asia.

While we're disappointed in our Q2 retail comps.

We're confident we're putting in place the team, processes, and systems to derive much stronger performance in the future.

Six, centralizing and streamlining operations while building a best-in-class team.

As Gregg alluded to earlier, we're not satisfied with our current service levels.

We've done a lot to build our capabilities, strengthening our team, implementing SAP, streamlining the process and centralizing key activities.

In the second quarter, the lingering effect of the West Coast port strike, exacerbated by the supply chain challenges more than offset the positive changes we have made.

However, we believe the new organization structure, new team, new tools currently in place are sufficient for us to achieve improvements in service levels we demand and our customers expect.

In summary, I echo Gregg's sentiments that we have done much to stabilize the business, and create a platform to deliver improved growth and profitability.

Beginning with the successful and profitable launch of our spring/summer 2016 line.

Now, I'll turn it over to Jeff to go into details of our performance.

Thank you, Andrew.

Today we'll cover our second quarter 2015 results.

And then briefly review expectations for third quarter including the impact from changes in foreign currency.

Revenue in the second quarter was in line with our expectations at $346 million, down 8% from a year ago on a reported basis.

Revenue was down 1% on a constant currency basis.

Revenue as reported was impacted by first the currency impacted the stronger US dollar of $27 million, slightly more than expected.

Second, the closing of 44 retail stores so far this year which reduced revenue $12 million compared to last year.

Third, a $7 million reduction in revenue from discontinued products and segments.

And fourth, lower China wholesale revenue down $5 million as expected.

Excluding the impact of these items, revenue increased 5%.

All of the revenue growth rates from here that we will cover today are quoted in constant currency change versus prior year.

America's revenue was $143 million for the quarter up 3%, as ecommerce revenue grew 30% in the quarter and now represents 14% of the overall America's business.

Retail sales in the Americas declined 3% for the quarter reflecting a 3% drop in same-store sales and the closing of 13 stores this year.

As Gregg mentioned, retail comps improved throughout the quarter.

As expected wholesale sales were up 2% in the quarter, reflecting improving results in the US wholesale business.

In Europe, revenues were $53 million for the quarter, down 7% year over year with wholesale decline of 11%.

This represents a shift in our order pattern to earlier in the season.

As European wholesale revenues were up 1% for the first half.

Retail same store sales grew slightly, but revenue declined 3% compared to Q2 2014 as we closed nine stores year to date.

Ecommerce sales in Europe increased 5% over 2014 levels despite having closed six country specific sites in the region.

Asia revenues for the quarter were $150 million down 2% versus prior year.

Excluding China, our Asia wholesale business was up 9% from prior year.

As we anticipated, China wholesale revenue was down $5 million.

We saw exceptionally strong growth in ecommerce revenue in China, as that volume doubled over prior year.

And total ecommerce sales in Asia were up 55% compared to 2014.

Overall, Asia same store sales were down 9% with large drops in China and Hong Kong.

Sales in South Korea, where we have one-third of our company owned retail points of distribution in Asia, were impacted by a 30% decline in traffic resulting from the MERS outbreak.

In addition, the strategic decision to close many retail sites resulted in lower retail revenue of 13% overall.

But we anticipate that lower fixed costs will improve profitability in that region.

Globally we sold 17.3 million pairs in the quarter, a slight increase from the prior year.

The average selling price of our footwear in the second quarter was $19.24.

A 12% reduction from the prior year primarily the results of currency, a shift away from retail, and a higher mix of core molded footwear.

Turning to our retail operation for the year to date, we have closed 44 stores and opened 18.

Of these closures 30 were full price retail store locations.

During the second quarter, we reduced our pace of closures for seasonal reasons.

We entered the quarter with 559 locations compared to 624 locations at the same quarter last year.

The stores that we closed generated $12 million of revenue in Q2 of 2014.

We are pace to have fewer than 550 locations at yearend.

Adjusted gross margins for the quarter was 55.2%, up 100 basis points from prior year.

As favorable merchandising mix and exiting unprofitable product lines more than offset the negative impact of currency.

We anticipate Q3 margins to decline compared to last year as currency impact will be the greatest during the quarter, and more than offset other gross margin benefits.

In Q4, we expect year-over-year margins to improve as we anniversary a strengthening dollar and our China issues.

Overall, we expect back half margins to finish flat to slightly down and project again that full-year gross margins will be essentially flat.

During the quarter, we have made significant progress on our strategic objectives announced in 2014.

As a result, we had restructuring charges of $2.8 million in the quarter.

And we had expenses of $2.7 million specifically for the SAP launch costs.

As well as other one-time charges of $12.1 million in the quarter.

Excluding these items, core, selling, and administrative structure expenses were $157 million, up from $146 million the prior year.

The items impacting core SG&A for the quarter were first increased marketing spending by $15 million over 2014 levels.

This was slightly more than previously discussed reflecting our decision to pull forward approximately $5 million of Q3 spending to energize the brand during the peak selling season.

And we increased reserves for doubtful accounts by $5 million primarily associated with our China business and partner store network.

We expect our operating SG&A to be down in Q3 and Q4.

Specifically, we now expect that to pull ahead in marketing spend we should see our overall SG&A spending in US dollars in the second half to be down more than $20 million compared to adjusted SG&A expenses in 2014, which totaled $263 million.

This improvement should be evenly split between the quarters.

Turning to the balance sheet at the end of the quarter, inventory at the end of the quarter was $183 million down from Q2 of 2014 ending inventory of $192 million.

Global cash position at the end of the quarter was strong.

And the company repurchased 1.6 million shares in the quarter at an average price of $14.62.

Two final notes on the financials, first adjusted net income attributable to common shareholders was $27.3 million after preferred share dividends in equivalence of $3.7 million.

Second, the weighted average share count used to calculate EPS was 76.8 million shares for Q2.

As we discussed on the last call (inaudible) progress from strategic initiatives currency continues to be an external headwind.

Approximately 70% of our expense structure is denominated in US dollars, while only 35% of revenue is generated in US dollars.

We expect the revenue impact of currency in the third quarter to be about 7% at today's rate, or approximately $22 million.

As a reminder, at this time the euro stood at approximately $1.37 compared to $1.12 using our projections for Q3 this year.

And the yen was at JPY102 yen to the dollar compared to JPY122 today.

Revenue in Q3 will be impacted by several strategic decisions we have made to improve long-term financial performance of the business.

First, our retail footprint is lower by 65 stores at the beginning of Q3, and we plan on closing additional stores.

This will reduce third quarter revenue by $9 million.

Second, we exited several non-core product lines in the last year including Ocean Minded and our golf and apparel business.

Exiting these businesses will reduce Q3 revenue by $2 million, as these product lines accounted for sales of $12 million in 2014.

We expect third quarter revenue to be between $280 and $290 million down from last year on our as reported basis, but showing an increase of 4% to 8% on core business on a constant currency basis.

We continue to be very confident in our future, and expect to show material progress in our results in the coming quarter.

Now I'll turn it back to Gregg, for closing thoughts.

Thanks, Jeff.

As I mentioned at the opening of the call we're 12 months into the transformation of Crocs.

Well in the 18 to 24 month process that it typically takes to impact a business in the footwear industry.

We continue to make meaningful progress in the transformation of Crocs.

And we feel very good about our plan and how this will set us up for long-term sustained success.

Despite the headwinds in the business, from currency to China to the operational issues that have challenged our business in the past.

We're making great progress on focusing the business on core products and markets, elevating our product and marketing stories, and evolving our cost structure, organization, and talent.

While this quarter provided some early signs of progress over the back half of the year we expect to see increasing benefits of this work.

As we discussed on prior calls, we expect to see the lion's share of this benefit during the spring/summer 2016 season.

I continue to be very confident in the direction in which we are headed, and our ability to successfully execute upon our plans.

We look forward to providing you a deeper dive on our strategy at the upcoming investor day in Boston on September 30th.

Special thanks to the Crocs team across the globe for all their hard work, passion, and commitment to unlock the full potential of the Crocs brand, and build one of the leading global casual lifestyle footwear companies in the industry.

Now, Operator, we'll open the call for questions.

Thank you.

We will now begin the question and answer session.

(Operator Instructions) And our first question comes from Erinn Murphy from Piper Jaffray.

Please go ahead.

Great.

Thank you guys, good morning.

I guess I have a couple of questions, and I think I'll start, Gregg, with you.

I mean you've been in the hot seat now for just over a half a year.

Kind of what gets you excited about the future?

And then I guess are you still confident in that 10% to 12% operating margin goal over time?

Sure, thanks Erinn.

So obviously we've spent a lot of time talking about our strategy.

And we're now just beginning to see some of the early signs that's giving us more and more confidence in terms of the direction we're heading.

And there are probably three data points this past quarter, outside of the customer feedback, that we've talked about that give us some of that confidence.

So first, if you dissect our Q2 results, our underlying business grew by 5% when you take out currency, closed stores, discontinued products, and our China decline.

And even if you include China and look at our go-forward business, the business was actually up 4% in the quarter.

So that's certainly getting us excited and making us feel good about the direction we're heading.

Second, we continue to see very positive consumer reaction on some of our new product introductions.

And shoes that we've talked about on past calls like the Freesail, the Sloane.

Shoes that we've talked about on this call like the Citilane, the Bump It, the Swiftwater.

They're all performing extremely well at retail.

Which tells us that as we think about the product changes we've made for the future, and we think about that spring/summer 2016 line and the broader direction we're heading.

It gives us confidence that those product changes will connect with consumers going forward.

And I'd say the third thing, is if you look at the Q2 ecommerce results and our 30% increase in the quarter, which can be attributed to our improved marketing as well as operational improvements and our online customer experience and in stock position.

That tells us we're making the right moves both from a marketing perspective and some of the operational changes that we're making are going to have the kind of impact that we're expecting to have in the future.

So we think, well it's still early, that there are a lot of signs to take from our future results that would tell us that we're heading in the right direction.

Then in terms of your second question, the margin goals, the long-term margin goals.

Our long-term operating margin goal remains the same.

Obviously, our near time results have been impacted by a higher US dollar which depresses our international margins.

And given the mix of our business impacts our overall results.

But we're very confident we can improve our profitability in the near term, and achieve some of our broader operating margin goals in the intermediate future.

And so we still feel good about that, and frankly we plan to talk about that in more detail at our investor conference in Boston in late September.

Okay, thank you.

That's helpful.

And then I guess, Andrew, for you, you talked about return to growth in China in the second half.

And obviously the negative headwind has lessened through the second quarter.

But just help us think about some of the mechanics that you're seeing that gives you the confidence that that business can stabilize.

And just maybe broader, are you seeing any near term volatility just with some of the pressure points on the consumer there of late.

Thank you.

Yes, thanks Erinn.

So to start with to sort of set some context our China business is less than 10% of our overall business.

And I think we've been very explicit about a plan that we laid out to stabilize that business.

Which was to pull back on our sell-in to our key partners within China.

Help them liquidate inventory in the channel, and work selectively with some key partners to help them improve their operations in their business.

That plan entailed us selling less into the marketplace by $25 million in Q1, $5 million in Q2.

I think we're up front and explicit about that.

We've hit both of those goals.

It's true that I think the macro consumer environment is becoming a little bit more volatile in China with the stock market volatility and the impacts on consumer confidence.

But based on the plan that we've put in place, the tracking against that plan, and the leadership that we've brought to the table within the broader Asia business with the hiring of David Thompson, the shift of Adrian Holloway from Europe to EFD in our Asia business and the hiring of Neil Parker as the lead on DTC.

We feel like we're on track and we feel confident that we'll return to aggregate growth in the China market.

And I think it is worth also pointing out that even at these depressed levels of revenue in the first half of the business it's still a very profitable business for us.

Okay, that's helpful.

And if I could just make one more, I guess Andrew it would be for you as well.

On the last conference call I think you talked about the quarter-to-date trends in the second quarter kind of picking up through early May just as weather had improved.

And I guess what we're trying to reconcile is the comp in and of itself was roughly similar Q1 versus Q2.

And you've kind of talked about week-to-week improvement throughout the quarter.

So just trying to understand maybe more how did April versus May versus June shake out?

Because it does seem like there's a little bit of a disconnect there.

Yes, got it, Erinn, that makes total sense.

I think the first thing I'd say is if you looked at our combined DTC business, so if you looked at retail plus ecommerce in North America.

You would have gone from a negative 4% performance in Q1 to a plus 4% performance in Q2.

Okay?

So you've got an 800 basis point swing in aggregate DTC.

Now I know you're focused on the underlying retail business, and yes we saw improvement in comps between April, May, June, and into July.

And we feel like we've got the team in place and the process improvements, system improvements to drive improved retail performance in North American business, but undoubtedly as every other business is experiencing, you're seeing some shift from consumer preference from going into a store to going to a website.

Okay, thank you guys.

And best of luck.

Thank you.

Thank you.

Thanks, Erinn.

And our next question comes from Mitch Kummetz from B. Riley.

Please go ahead.

Yes, thanks for taking my questions.

A couple of them I guess.

You guys made a few comments this morning just on how encouraged you are about spring and the excitement that you have around that line for 2016.

Is there any way you could provide sort of more color on the order book?

How much of the orders are in?

Kind of what are you seeing in terms of those orders?

How do you think about the impact of shipping that product earlier this year than last year given the expanded calendar?

And what that might do to Q4?

Sure, thanks, Mitch.

This is Gregg.

So the first thing I'd say is look it's extremely early in the selling season.

Our major booking windows for spring/summer '16 is the August/October timeframe.

So (inaudible) meaningful level of data at this point.

As we shared in our prepared remarks, the feedback we've gotten from our retailer and distributor partners around the globe gives us a lot of confidence in the direction we're heading.

As they're planning the business and as we're discussing kind of opportunities and mix going forward.

And I'd say the other piece is the product that's selling through and performing at retail which is kind of an early indicator of some of the product trends that we're going to be investing more behind going forward.

That's given us a lot of confidence as well.

So we feel really good about the direction that we're heading.

The data's not here at this point.

We'll be in a better place to talk more about that during our investor meeting in September.

Okay, and then, Jeff, I have a question for you on the gross margins.

I want to make sure that I caught your comments correctly.

On gross margin you were saying Q3 should be down year over year.

And that's the quarter where you see the biggest negative impact from FX.

And then Q4 gross margins are up.

But on the back half as a whole I think you're saying flat to down slightly.

Is that right?

Did I hear that correctly?

And is that any different than how you were thinking about margins prior to this call?

So, Mitch, we expect that gross margin for the full year to be flat to slightly down on an as reported basis overall.

Obviously, the currency impact on us is offsetting some of the improvements that we're seeing in mix and other changes.

In the second quarter that mix and other changes was substantial, and we were able to overcome the currency headwind.

In the third quarter with both the yen and the euro down 18% on a year-over-year basis, that headwind will be about 300 basis points in the quarter.

And we will not be able to offset fully the impact of currency in the quarter.

So on a year-over-year basis the Q3 will be down, but because of the improvements and some of the operational issues that we had last year in China our year-over-year comparisons in Q4 are favorable as we anniversary both the stronger dollar and those China issues.

That's how we see it right now.

And that kind of blends out to be basically flat for the full year.

Can you quickly remind me what the China drag on gross margin was last year in Q4?

We talked about it last year in the Q4 period, it was substantial.

We didn't break it out specifically, Mitch, but it was a substantial impact as you remember.

I think our Q4 2014 margins were only 42%.

And that was impacted by the issues we had in China.

Got it.

All right, thanks, guys.

And our next question comes from Scott Krasik from Buckingham Research.

Please go ahead.

Hi, good morning.

This is Kelly, on for Scott.

Just have a quick question on Europe.

It looks like you did talk about a shift in the wholesale business that accounts for some of the deceleration in there.

But if you look at the comps on a sequential basis those kind of decelerated as well.

So could you just talk about the dynamics of that market?

And how we should expect that to play out in the back half of the year?

Thank you, Kelly.

Yes, I mean I think Europe from a macro perspective is in a difficult place.

The economy is still extremely sluggish.

Gregg talked a little bit about some of the operational factors affecting Europe in the first part of the year.

There was a slight deceleration in the retail comps, but again if you look at the aggregate DTC business you've actually got an acceleration of the business.

So the combination of ecomm and physical retail was a plus 2% in Q1, and was a plus 6% in Q2.

So I think the way we think about Europe is it's a stable market and we're going to weather in the broader [views] in the marketplace.

Okay, and then just your expectations for just the wholesale business?

Is it a channel shift out of wholesale towards retail for the back half?

The first half, I think as we look at it we say that the first half on a constant currency was up to [LY].

And so I think that's the way we look at the business.

Okay, and then secondly just when we get to 2016 and just when we think about the model are we going to be past most of the divestitures and retail closures?

Will we be on a light [floor] basis when we think about revenues?

If you think about the big impacts on revenue this year there are three.

One is currency, two is retail closures, three is divestitures.

We'll be obviously past the divestitures.

There will still be modest retail closings next year because as we've analyzed our retail portfolio we've taken a sensible economic view of what will close when based on the cost to do that.

So there will be still some aggregate closings in the next part of next year.

But the rate will slow down significantly.

And your guess is as good as ours relative to FX.

Okay, thank you very much.

Thank you.

And our next question comes from Jonathan Komp from Robert W. Baird.

Please go ahead.

Yes, hi.

Thank you.

Maybe just one follow up first on the retail comps.

Andrew, I think you had mentioned being a little bit disappointed with the results there.

And it's not entirely clear to me how much this maybe the macro issues with some of the shift towards the online channel versus some internal execution or operation challenges.

So do you have any more color on your views on what's impacting the comps there?

And maybe how soon you might expect to see some changes.

Yes, I mean I think very clearly there is the macro issue which is broadly across a broad segment of retail.

Ecommerce or direct to consumer via the web is growing much more significantly than store-based retailing.

So we're seeing that in our performance.

But we're also seeing the impact of our marketing program I think very strongly within our ecommerce business where we're seeing a 20% increase in traffic.

The other thing that you also have to dissect and breakout of our aggregate retail performance is Asia.

Where we saw a significant negative comp.

But a third of our own retail points of distribution are in Asia are actually within Korea.

And Korea was impacted by the MERS outbreak this last quarter, which drove a 30% decline in traffic to shopping malls and to shopping environments.

That [should mitigate] towards the end of this month if there is no new cases of MERS.

But that's a very significant drag on our Asian results.

So you've got another external factor to take into consideration.

And I think more broadly putting in place the team and the capabilities and the operational efficacy that we need to run an effective DTC business is well underway.

And we'll start to see that impact in the future.

Okay, and if there's a scenario where the comps stay negative for longer, and maybe I'm thinking more in the North America business.

Would you go back and reevaluate the store closure plan that you currently have in place?

Or is there any scenario where you'd be more aggressive on closing some of the existing bricks and motor?

We look rigorously at our entire portfolio every year.

So we do an economic analysis of the portfolio to understand does each individual store make a contribution to cash flow and to profitability?

And how that is likely to trend in the future relative to the economic options you have against closing early or at sensible points of lease termination.

So we have a very thorough grip on the portfolio performance.

And if a store is not making a contribution, we almost always chose to close it.

We're also confident that retail will continue to play a pivotal role in the business.

And will continue to provide significant profits.

Will provide significant profits in the future.

Got it.

It makes sense.

And then maybe just one more bigger picture for whoever wants to take it.

And I'm sure we'll hear more in September it sounds like.

But if I look at the second quarter revenue growth, constant currency and excluding the year-over-year headwinds that you called out.

It sounds like about 5% growth on that basis, projecting 4% to 8% in the third quarter.

As you look longer term, and understanding there's a lot of moving parts.

Is that type of underlying growth rate that you think is sustainable going forward?

Do you think the ultimate growth rate is materially different than that?

Or how do you conceptually think about the right pace of growth for the business?

Yes, no.

Appreciate the question.

We do plan to spend more time talking about that in September.

And I think we'd like to hold off on kind of having that part of the discussion till our investor meeting in Boston.

But we do feel very good about that 5% number when you kind of exclude retail, eliminated product lines, currency in China.

And feel that that is an indication combined with our guidance for the third quarter.

That the business is stabilizing.

We're making progress.

And we're well positioned to have some more significant growth going forward.

So we feel that we're making meaningful progress.

Got it, okay.

Well we'll look for more details then.

Thanks, guys.

Thank you.

Thank you.

And our next question comes from Jim Duffy from Stifel.

Please go ahead.

Thanks, good morning.

Hope you all are doing well.

Two lines of questioning for you.

First, Jeff, on the gross margins.

I may have missed this, but did you call out the FX impact of gross margin in the quarter?

The FX impact for the quarter was round about 300, 350 basis points, Jim.

And we were able to offset more than that by merchandising mix and improvements in our overall product line and profitability.

That's pretty good progress considering that FX headwind.

Would you expect comparable rate of FX in the third quarter?

Yes, we expect that our FX impact in the third quarter will be around about 300 basis points of margin degradation in Q3.

And then it'll start to moderate in Q4 as we start to lap some of the decline in Japan and then next year as we lap the decline in Europe.

Okay.

And then based on some of the products you expect to ship in volume in the second half of the year, it strikes me that mix should continue to be a benefit to the margin.

Is that accurate?

Yes, it will be a benefit to us in Q3 and Q4, it just won't be able to offset the full 300 basis point impact in Q3.

But we did say in Q4 we should see some improvement in our overall gross margins both because of China lapping of the currency.

And yes the product mix being a benefit for us.

So we are definitely aggressive in managing our product mix, especially in those marketplaces where currency has had an impact on our profitability.

And you can see in the second quarter results we were able to offset a lot of that currency degradation by better merchandising of our product.

Great.

The mix, I'm interested in the impact that's having on the retail productivity.

ASP was at 12% drag overall.

What's the product mix and ASP impact on the retail comp?

And then I guess, I'm curious, is it plausible then the retail stores you're actually comping negative, but doing more gross profit dollars just because of the mix?

That's a excellent question, Jim, and you've picked up on one of our key trends there obviously within retail.

Yes, our ASPs are down within retail.

Which frankly is intentional, right?

We're mixing towards our molded product which is the core DNA of the business where we're driving innovation.

And where we have substantially higher gross margin percentages.

So we have a ASP drag in the retail business that's approximately equivalent to the average drag that you see across the whole business.

But driving some incremental margins, and obviously making up for that drag.

You've got to drive significant increase in pairs out the door.

And so we think we could do that in the future.

But that is some of the drag that we're experiencing.

And don't forget we're doing that in a time where we've been able to impact only a very finite portion of our product line as we head into fall.

That we've moved that with an existing product line.

And we believe that as we go into spring of '16 the increase in innovation that we have in that molded product will help drive improved performance at retail and at wholesale across the globe.

Thanks.

That's great perspective.

And then finally, the service levels call out.

Can you speak in more detail on that?

Is that a regional issue?

Is it having consequence on the revenue and the margin?

Yes, sure.

Look, over the last year we've talked a lot about evolving our strategy.

In Q2 we were very disappointed by our on-time deliveries to customers in the US and to a lesser extent Europe.

And we tracked this back initially to the port strike in Q1.

But subsequently to some delayed shipments.

And so given that we're obviously not satisfied with our service levels.

And the second phase of our strategy has always been focusing on our supply chain.

And some of our other key shared service capabilities.

The good news is we've discussed on the last few calls.

We've made great progress on the product creation process, cutting out lead time, establishing a global line, decreasing our number of SKUs.

We're also fortunate to have great manufacturing partners, some of the best in the industry.

We've rolled out SAP.

So while we have some more work to do to drive efficiencies we're operating on that on a global basis.

We've added talent.

We've talked about Phil Blake as Head of Global Sourcing.

We've also added Jerry Irvine as VP of Global Supply Planning.

Those are in addition to some very strong talent we have in the business already.

And so we're confident that with these changes and putting in some new processes that we're kind of putting in place now that we will make the improvements.

That as Andrew said on the call earlier, that we demand and our customers expect.

And we feel we're making significant progress in that area.

And that will be well set up for the future.

Thank you, good luck.

Thank you.

And our next question comes from Steve Marotta from C.L. King & Associates.

Please go ahead.

Good morning, everyone.

A couple of quick questions on the marketing spend.

There was $15 million incremental in the second quarter.

You mentioned that that was a $5 million pull through from the third quarter.

Is it possible that overall annual incremental marketing spending could be greater than you previously expected?

No, we're on track to spend the marketing that we anticipated.

And like we said, it is a pull forward.

We expect that our Q3 adjusted SG&A will be down about $10 million and then about $10 million again in Q4 for a total back half saving versus last year of $20 million.

So significant progress in our core SG&A spending.

And if you look at the underlying SG&A spending for Q2, Steve, you can see that we spent $15 million more in marketing in Q2 on a year-over-year basis.

We had a $3 million year-over-year increase in bad debt.

So our overall SG&A savings for the company was $7 million to get to the net number.

So at the end of the day, we had some visible progress in our SG&A cost cuts.

Great, thank you.

The other question I had as it pertains specifically again to marketing.

You're noticing and realizing increased traffic at websites and there's traction in ecommerce based on the new marketing plan.

Do you expect that similar traction to occur at the retail stores and through wholesale?

And if so, over what period of time?

Yes, thank you, Steve.

Obviously, as we think about making our marketing investments we're making medium to long-term investments.

We're focused on driving relevance to the brand, introducing new products and really connecting more consistently, coherently with our consumers across the globe.

Certainly, we're seeing the most immediate impact in our ecommerce business, and we are certainly seeing impacts in our wholesale business.

There are many instances where we've actually tagged key wholesale accounts within our digital programs.

And we've seen dramatic acceleration in terms of sell through.

The one thing that we didn't this year, as you know, is the introduction of the marketing campaign wasn't coordinated with our sell in.

We all came to the business too late to do that, and as we look at '16 we've made much more significant traction and coordination in terms of presenting our marketing investments to our wholesale accounts as sell in.

So we see impacts in a number of areas.

One, continued impacts in ecommerce, significant impacts on wholesale from a selling perspective.

But also a sell-through perspective.

And over time an impact on retail

That's very helpful.

One last question as it pertains to China, are you experiencing any negative effects on the macro issues going on there?

Clearly, you're executing well on the plan in order to turn the business around as it pertains to hitting those targets in the first and second quarter.

But do you have any concerns about again the macro issues going on there as it pertains to the traction that you would expect within China over the next 6 to 12 months?

Yes, so I think we already outlined in response to Erinn's question that we feel like we're on track with the plan.

Clearly, the macro environment doesn't make it easier.

But we've been experiencing that environment frankly for the last 12 to 18 months.

So we're managing through it.

That's helpful.

Thank you.

Thank you.

Thank you.

And our next question comes from Jim Chartier from Monness, Crespi and Hardt.

Please go ahead.

Good morning.

Thanks for taking my questions.

The first question, you've talked about extending the spring/summer selling season into July.

Just curious if that had an impact on the business this year, and how it impacted second quarter versus third quarter?

Yes, as we kind of look at July and spring/summer that's really a 2016 initiative.

We'll have a little bit of business in Q4 as it relates to the earlier part of that initiative, but then the spring/summer season will extend further than kind of the '15 season.

So it's really a July 2016 timeframe.

Okay, and then you've talked a lot about kind of combined ecommerce and store comps trend.

Is that sustainable, the trends in ecommerce and the combined DTC comps going forward?

Thank you, Jim.

Yes, so yes.

We think we're going to see a sustained differentiation between ecommerce and physical store performance based on macro consumer preferences.

Clearly a large part of our ecommerce growth is driven by traffic improvements which was driven by our marketing, which was driven by increasing interest in the brand.

So as we intend to make sustained investments in marketing over many years we believe we can improve traffic to the brands.

And it's a leading indicator of preference for the brand.

So we believe our DTC business needs to play an important strategic role for the brand in terms of allowing us to showcase the broader product range that we have offer.

And it needs to come positively and drive a strong economic contribution as well.

And we look at ecomm as a leading indicator in terms of that's going to be the first thing that gets impacted and we believe that over time as we can impact more and more we'll see some of the broader benefits as well.

Great.

And, Jeff, the bad debt expense has been going up for four or five quarters now, and I think the allowance is something like $43 million versus $21 million a year ago.

Could you just talk a little bit more about what's going on there?

Do you see any more increase in the bad debt expense coming?

Or could that reverse itself at some point in the future?

So, Jim, we took the charge consistent with our policy internally here at Crocs.

And the vast majority of our partners in China are current on their payment plans.

But we are dealing with some isolated instances among our 40 different distributors in the marketplace.

We're working with those accounts diligently.

And we are trying to address the situation and recover completely our receivables from those accounts.

We continue to work with them, and at this time we feel like our bad debt reserve adequately portrays the risk of the organization.

Specifically our bad debt allowance overall is $12.3 million.

When you add the other rebates and other things like that is when you get to the number that you quoted, Jim.

Okay, and then finally any thoughts on pricing to offset currency when you would take price increases?

Yes, Jim.

So we have taken price increases in select markets to our set currency.

We think about the major areas that we've been impacted by currency they are number one Europe, number two Russia, number three Japan, number four Brazil.

We've taken price action in Russia early this early and we'll take some more later this year.

We've got Japan price action late this year and into the following year.

Frankly in Europe, it's extremely difficult.

So instead of mainland Europe, the UK, Germany, and France we're taking select action on select styles, but a broad-based program is really, really hard.

And we've taken price action in Brazil.

Great, thank you.

And best of luck.

Thank you.

And our last question comes from Sam Poser from Stern, Agee, please go ahead.

Thanks for taking my question.

A couple of things, in talking to people we understand the response to the product for spring '16 is pretty good.

And there's a pull forward -- I mean you're not pull forward, you're delivering your warm weather product earlier.

Can you give us some view on how you're looking at the fourth quarter right now from a revenue perspective?

Yes, hi, Sam.

Thanks.

Yes, I would say we're planning that in a small way for the fourth quarter.

And I don't think we're prepared to share a number.

We'll talk a little bit more in more detail in September, but right now it's a small part of our fourth-quarter plan.

But we think over time it becomes a bigger and bigger part of the overall program.

Okay, just trying to get comfortable that you're moving the right direction.

Your margins were good.

I assume you're expecting the margins to be up in the fourth quarter fairly significantly, if I'm not mistaken.

Yes.

Just given the easy comparison from last year and so on.

That's correct, Sam.

I guess the question is, can you give us some idea of maybe the change in revenue velocity that you're perceiving.

Give us a little preview of the kind of revenue velocity in general that you're perceiving as we go into '16.

Given the response to product and what you're seeing both in your wholesale retail and ecommerce channels.

Yes, so obviously, Sam, we're going to talk in more detail about this in September.

And we'll have a more robust conversation.

Going back to something we talked about earlier, we view kind of Q2 performance and the run rate on the go forward business of plus 5% to be an indication of solid performance on the core business despite not having an updated product line.

And putting in a new marketing program and platform on an accelerated basis.

We have more time as we look at '16 to leverage our learnings relative to the spring '15 marketing platform.

We have more time to leverage our learnings as it relates to some of the new product introductions we've had over the last six months.

And we feel we've made a lot of progress.

So we start with that kind of 5% Q2 '15.

We're sharing 280 to 290 guidance for Q3, which is plus 4% to 8% on that go-forward business.

And I think that's in that similar kind of range.

And so I would just leave it as, we continue to feel confident in the direction we're heading.

We feel the core business is stabilizing.

We believe there are a number of key indicators as we look at Q2 from revenue of plus 5% on a go forward basis.

Core business, gross margins, DTC, comps of plus 1% and constant concurrency.

And those are all indicators that we're making meaningful progress.

And I would say as you know, we still have the lion's share of the progress that we hope to bring forth that really starts to hit in spring '16.

And again we'll share greater detail in September, but we're excited for the direction we're heading.

Just one quick follow up.

The 5% go forward, the new product that you're adding for spring '16 will be additive to that.

I mean a 10% to 12% op margin was thrown out there last year.

And it looks to me like you need some fairly healthy top-line growth to get there.

On a go forward product plus new product, I mean is it right to think that that starts to happen next year?

Sam, what I'd say is yes.

To get to the operating margin we've talked about in the 10% to 12% range we obviously need revenue growth.

And that's a core part of the strategy.

And our expectation based on our product and marketing evolution, and some of the changes we're making in terms of how we run the business and how the business is structured.

That we will be able to drive growth going forward.

And that's a core part of the strategy.

And we'll get more details on that at the end of September?

You will get more details of that in the end of September, absolutely.

Thanks very much.

Good luck.

Thanks, Sam.

Thank you.

And I'm not showing any further questions at this time.

Okay, thank you everyone.

And have a great day.

Thank you.

And thank you, ladies and gentleman, this concludes today's conference.

Thank you for participating.

You may now disconnect.