卡洛馳 (CROX) 2015 Q3 法說會逐字稿

Welcome to the Q3 2015 Crocs, Inc., earnings conference call.

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

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

I will now turn the call over to Brendon Frey.

Brendon, you may begin.

Thank you, and thank you, everyone, for joining us today for the Crocs third-quarter 2015 earnings conference call.

This morning we announced our third-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 Safe Harbor provisions of the federal securities laws.

These statements include, but are not limited to, statement 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 2, 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 Mike Smith, Senior Vice President of Finance and interim Chief Financial Officer.

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

I will now turn the call over to Gregg.

Thank you, Brendon, and good morning, everyone.

This morning we announced our third-quarter 2015 financial results.

Revenues were $274.1 million, in line with our revised expectations, and adjusted net loss available to common shareholders was $19.2 million.

Excluding store closings and discontinued product lines, our continuing core business was up $9.7 million or 3.7% to last year, on a constant currency basis.

This is the second quarter in a row that our continuing core business grew in the low single digits.

We're making significant progress on positioning our business for long-term sustained success beginning in the first half of 2016 and remain committed to making the right long-term strategic decisions for the Company that will benefit our shareholders in the future.

As we had laid out in early 2015, this year remains a significant transition year for the Company, with associated volatility in our short-term financial results due to economic headwinds and operational issues which we have been discussing throughout the year.

Specifically, our third-quarter performance was negatively impacted by three critical items including: currency, which reduced revenue by $26 million; China, where we increased our bad debt reserve in Q3 by $19 million and withheld distributor shipments of $4 million in the quarter; and adjusted gross margins, which were down 760 basis points to last year primarily due to currency and inventory liquidation.

I want to address these short-term financial issues before commenting on the meaningful strategic progress we have been making and the early positive results we are seeing.

First, currency had its biggest impact to date in Q3.

Sales were impacted $26 million, about $4 million more than we had originally expected, as the dollar strengthened significantly since July against several specific currencies including the Korean won, the Chinese RMB, the Brazilian real, and the Canadian dollar.

Second, the macro-level economic conditions in China are hampering our turnaround efforts and placing additional strain on our distributors in the region.

As a result, in the third quarter we withheld $4 million of shipments to distributors and took a $19 million charge for bad debt in the quarter.

At this point our net receivables in China are less than $5 million, so we're confident we have fully accounted for any receivables risk in the market.

We continue to implement meaningful changes to our distributor model and partners in the region, which we believe will be a long-term benefit to the business.

We now expect to return China to growth in the back half of 2016.

Andrew will discuss the actions we are taking in China in a few minutes.

Finally, our Q3 financial results were negatively impacted by a 760 basis point reduction in adjusted gross margin rate versus the prior year.

Currency impacted gross margins by approximately 350 basis points in the quarter.

Roughly 300 basis point of this decline was due to increased discounts in the liquidation of end-of-life product, as we discontinued products and cleaned up inventories in advance of the arrival of our new Spring/Summer 2016 line.

As we have discussed previously, coming into 2015 the Company had taken the approach of extending product lifecycles, which made our overall product line more dated.

As we enter 2016, 60% of our Spring/Summer product range is new, reinvigorated product versus roughly 30% in 2015.

The remaining decline in gross margin rate was the result of certain operational supply-chain issues.

These issues resulted in poor delivery performance and led to increased freight costs, allowances, and chargebacks in the quarter.

As Andrew will discuss in more detail, based on actions already taken we're confident in our ability to meet our customers' delivery expectations for Spring/Summer 2016.

Despite the volatility in our current year financial results, we are extremely pleased with the meaningful progress we've made on our strategic priorities, which we laid out in detail at our Investor Day conference, including: strengthening the Crocs brand; elevating our product stories; exiting noncore categories and businesses; evolving our international business model to focus on our six most important markets; strengthening our relationships with key wholesale partner; improving our direct-to-consumer capabilities and performance; simplifying our operations and processes; enhancing our supply chain; and building a best-in-class team.

In addition to executing against our strategic priorities, we're encouraged by the positive underlying results we're seeing in our business including for the second consecutive quarter we saw growth in our continuing business globally in the low single digits on a constant currency basis.

Our global e-commerce business grew on a comparable-site basis 31% in constant currency, with the Americas up 33% and Asia up 42%, both replicating their strong performance from Q2, while Europe e-commerce was up 19%.

Overall, global direct-to-consumer comp revenues were up 4.7%, again repeating positive performance from the second quarter.

And our new marketing campaign, #FindYourFun, has driven a 27%-plus increase in brand desirability and consideration among consumers who have seen a Crocs ad.

Finally, this morning we announced the completion of building out our senior leadership team with two critical additions.

First, Carrie Teffner is joining the Company as Chief Financial Officer effective December 2015.

Carrie is joining the Company from our Board of Directors, as I did last January, demonstrating our collective confidence and excitement in the future of the Company.

Carrie is the former Chief Financial Officer of PetSmart and previously served as the Chief Financial Officer of Timberland.

In addition, in October Donna Flood, the former Chief Operating Officer of Easton-Bell and previously a senior-level executive at Reebok, joined the Company as Chief Information Officer.

We welcome both Carrie and Donna to the team; and we thank Mike Smith, who stepped in as interim Chief Financial Officer in October to facilitate this transition.

Looking forward, while there have been challenges, I believe we're on the verge of meaningful growth and significantly improved results as our Spring/Summer 2016 line begins to ship, evidenced by favorable wholesale bookings that we've seen from our customers around the globe.

Despite a dated product line and delivery challenges in 2015, we have driven continuing business model growth in constant currency in the low single digits.

With our new product, year two of our marketing programs and improved deliveries, we're confident that we can drive 2016 revenues up in the mid-single digits based on current exchange rates.

We expect 2016 gross margins to be flat to 2015, as the currency impact of approximately 250 basis points at today's rates is offset by product margin and operational improvements.

We anticipate that SG&A will decline 2% to 3%.

And as a result, we're confident that 2016 operating margins will be in the mid-single digits.

Turning to the longer term, at our recent Investor Day conference we also indicated that we expect to deliver 10% to 12% operating margins in the midterm, defined as 2018 and beyond, with 8% organic growth, gross margins in the low 50%s, and SG&A in the low 40%s.

We're confident that this level of performance is very achievable and that we will ramp to this level over the next three years.

In summary, despite challenging headwinds -- from the strong US dollar, to China, to deliveries and a dated product range -- we continue to make significant progress on our strategic initiatives, and we are confident that we will have material, positive impacts on the business in 2016.

We're excited about our Spring/Summer 2016 line, the first developed by our new product team, led by Michelle Poole.

And while we have built out our organizational capabilities by strengthening our team, investing in systems, and streamlining processes, we are improving our supply chain, its speed, cost, and reliability across the globe.

And finally, we're improving the business model in China to return the region to profitable growth in 2016.

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

Now Andrew will highlight some of the key details of our turnaround efforts.

Thank you, Gregg.

Today I want to update you on four important topics: our stabilization and repositioning efforts in China; evolving our supply chain and delivering best-in-class service; global DTC performance; and Spring/Summer 2016 expectations.

Number one, our stabilization and repositioning efforts in China.

China has been our biggest challenge over the last year.

After making progress in addressing our challenges in China in Q2, we experienced a setback in Q3 as the overall economy softened, impacting our turnaround plans in that market.

Our distribution in China has been fragmented.

With 48 distributors in the market, our initial challenge was to address inventory issues in the marketplace.

We have been working through inventory challenges by intentionally slowing sell-ins and providing incentives to help sell-throughs.

The recent slowdown in the overall economy offset much of the progress we had made and further pressured our distributors.

As a result we took further actions, holding back $4 million of shipments in Q3 and increasing our bad debt reserves by $19 million in the quarter, in accordance with our accounting policies.

Following these additional reserves, our receivables exposure in China is less than $5 million.

As we close 2015, we are transforming our business in China.

As part of our efforts, we have new leadership, a new leadership team in place in China; our product line is narrower, more commercial, and more consistent with our global range; our marketing is better, and its funding is increased.

Our team is working to improve our distributor base by elevating existing capabilities while aligning with fewer, more experienced, and stronger partners.

We're planning to operate more retail stores ourselves in strategic cities where we have existing infrastructure.

We expect to turn this market to growth in the second half of 2016.

We are disappointed the growth is not coming sooner, but we are confident that the actions we are implementing will position us for material growth in the future.

Two, evolving our supply chain and delivering best-in-class service.

As we've discussed last quarter, we're not satisfied with the effectiveness or efficiency of our supply chain.

In the third quarter, it resulted in poor customer service and ultimately lost sales and increased cost.

We're committed to improving our customer service levels and reducing our cost and complexity, and we have made this one of our key strategic priorities.

We have implemented five initiatives to drive materially improved performance in this area.

First, we reduced SKU count by 40%, which significantly simplifies product development, costing, forecasting, and inventory management.

Second, we've reduced our direct-ship model.

Historically, we have had very low minimum order quantities for orders placed directly with factories.

By increasing minimum order quantities to industry standards, we're taking away significant and unnecessary complexity on managing our factory orders and production.

Third, reducing the number of value-added services -- in other words, special order processing -- closer towards inventory standards to reduce the complexity on packaging our orders and handling through our distribution centers.

Fourth, we've implemented better systems such as SAP and processes giving us better visibility into customer orders earlier in the processing, enabling us to manage our global supply chain more effectively.

And fifth, we've elevated our team, adding great functional industry leadership in key areas, enabling us to manage this part of our business far more effectively.

Three, global DTC performance.

Global direct-to-consumer comp revenues were up 4.7%, repeating the strong performance in Q2.

Our e-commerce business was strong across all regions, led by the US and Asia.

Despite operating 11 fewer country-specific sites compared to last year, comparable global e-commerce revenues increased 31% on a constant currency basis.

In our six core markets, our e-commerce business has benefited from better execution, including a globally consistent online customer experience and a commitment to better in-stock positions on core product.

We continue to realign our retail operations, eliminating underperforming or inefficient stores, while selectively opening new stores.

In the quarter, we closed 13 stores and opened 11, six of which were outlet stores, bringing our Q3 store count to 557 stores.

While the closed stores generated top-line revenue of $10 million in the third quarter last year, they had no meaningful impact on earnings.

We anticipate closing another 15 to 20 stores during Q4.

While the majority of planned closings are now complete, we will continue to evaluate our store portfolio to ensure efficient capital allocation.

Retail comps were up 2.9% in Europe, but down approximately 1.5% in both Americas and Asia.

Our retail comps in the Americas were affected by the strong dollar, causing significant traffic declines in our tourist markets, including Orlando, Miami, Las Vegas, and Hawaii, which account for about 25% of our retail sales.

Comp performance in these markets was down 5.3% in Q3 compared to flat for the rest of the chain.

While we are disappointed in our Q3 retail comps, we are confident we're putting in place the team, processes, and systems to drive much stronger performance in the future, particularly in the Spring/Summer of 2016 as we bring that range to market.

Specifically, we're enhancing assortment strategies and brand storytelling, improving replenishment and in-stock position as well as customer service.

Four, Spring/Summer 2016 expectations.

As we discussed during our investor conference on September 30, we continue to get very positive feedback on our Spring/Summer line from distributors and wholesale customers, and we are confident that we can achieve high-single-digit growth rates in our wholesale business based on constant currency rates.

When coupled with appropriately conservative estimates across our DTC channels, we expect our overall revenue growth to be in the mid-single digits during Spring/Summer of 2016.

Our expectation is we will see the highest growth in the US and Asia and less growth in Europe, given our more established business in these regions.

Now I'll turn it over to Mike to go into details of our Q3 performance.

Thank you, Andrew.

Revenue in the second quarter was $274 million, down 9.4% from a year ago on an as-reported basis.

Revenue was down 1% on a constant currency basis.

Revenue as reported was impacted by four items.

First, the currency impact from the stronger US dollar of $26 million, about $4 million higher than originally expected.

Second, we stopped shipments to a number of China wholesale distributors that run partner stores throughout the market, reducing revenue by $4 million.

Third, the closing of 65 retail stores in the last 12 months, which reduced revenue $10.3 million compared to last year.

And finally, a $1.8 million reduction in revenue from discontinued products and segments.

All of the revenue results which follow are quoted in constant-currency change versus prior year.

Americas revenue was $125 million for the quarter, up approximately 1%.

E-commerce grew 30.7%.

Wholesale revenue was down 3.1%, explained by a drop in South America volume in the quarter.

Retail sales in the Americas declined 2.4% for the quarter, reflecting a 1.6% drop in same-store sales and 13 less stores compared to the same period last year.

In Europe, revenues were $50 million for the quarter, up 1.3% year-over-year, with wholesale increasing 7.2%.

Retail same-store sales grew 2.9%, but revenue declined 8% compared to Q3 2014 as we have 16 fewer stores compared to last year.

E-commerce sales in Europe declined 1.2% due to closing of smaller country-specific sites; but comp sales were 19% over 2014 levels.

Asia revenues for the quarter were $99 million, down 3.5% versus prior year.

With the exception of China, our Asia wholesale business was flat to prior year.

China wholesale volume was down $4 million, reflecting our decision to withhold $4 million of shipments to distributors, while wholesale revenue for the balance of the region was up.

Retail sales in Asia declined 4% in the quarter, reflecting a 1.5% decline in same-store sales and operating 19 fewer stores in the quarter compared to last year.

The 1.5% decline in Q3 same-store sales represented a significant improvement from the 9.4% decline we saw in the first half of the year.

Our operating results overall were significantly impacted by the business challenges in China.

As we indicated in the third quarter, the Company recorded a bad debt allowance of $19 million, attributed to the continued financial struggles of our distributors.

We are addressing our China issues both strategically and tactically, and our outstanding net accounts receivables in China at the end of the third quarter are now below $5 million.

We are focused on transforming our business in China and are planning for growth in the second half of 2016.

We sold 14.5 million pairs in the quarter, a 6.5% increase over last year.

The average selling price of our footwear in the third quarter was $18.92, a 14.9% reduction from the prior year, the result of currency, discounts, allowances, and liquidations in the quarter, which Gregg and Andrew discussed.

Adjusted gross margin for the quarter was 44.1%, down 760 basis points from prior year.

Currency impacted gross margins by approximately 350 basis points in the quarter.

Discounts and liquidation of end-of-life product impacted margins approximately 300 basis points, as we discontinued products and cleaned up inventories in advance of the arrival of our new Spring/Summer 2016 line.

Operational supply chain issues resulted in poor delivery performance, led to increased freight costs, allowances, and chargebacks in the quarter.

We anticipate Q4 margins to be flat to slightly up compared to last year's adjusted margin of 42.5%, assuming current exchange rates hold.

During the quarter, we had one-time and restructuring charges of $8.5 million for restructuring and reorganization expenses and retail asset impairments.

Excluding these charges, core selling and administrative expenses were $132.8 million, down from $137.9 million in the prior year.

Excluding the $19 million bad debt charge, core SG&A fell approximately $20 million, from 45.6% of sales last year to 41.6% this year, reflecting savings from our reorganization efforts, the implementation of SAP, the release of certain variable compensation, and currency.

We expect our SG&A to be down year-over-year in Q4 roughly $10 million.

Turning to the balance sheet at the end of the quarter, global cash ended the quarter at $168.5 million.

The Company repurchased 2.3 million shares in the quarter at an average price of $14.50.

Inventory at the end of the quarter was $190.8 million, down $12 million from Q3 2014 ending inventory of $202.8 million.

Two final notes on the financials.

First, adjusted net loss attributable to common shareholders was $19.2 million after preferred share dividends and equivalents of $3.7 million.

Second, the weighted average share count used to calculate earnings per share was 74.3 million shares for Q3.

As a reminder, basic and diluted share counts are the same in a quarter that generates a net loss.

Looking to the fourth quarter, currency impacts should lessen as we anniversary the strengthening of the US dollar.

While currency impacted revenue in the third quarter by about 9% or approximately $26 million, this was the peak of currency rates against current rates we have seen thus far.

As a reminder, at this time last year, the euro stood at approximately $1.25 compared to $1.10 today, and the yen was at $1.12 compared to $1.21.

At today's rates, we estimate the currency impact on Q4 to be $10 million compared to last year.

Revenue in Q4 will also be impacted by several strategic decisions we have made to improve the long-term financial performance of the business.

First, our retail footprint will be lower by about 33 stores in Q4.

These stores accounted for sales of $6 million in Q4 of 2014.

Second, we exited several noncore product lines in the past year, including Ocean Minded and our golf and apparel businesses.

These product lines accounted for sales of $2 million in Q4 of 2014.

Accordingly, we expect fourth-quarter revenue to be between $200 million and $210 million compared to $206.5 million last year, but showing an increase of 6% to 12% in core revenue from continuing business lines on a constant-currency basis.

We continue to be very confident in our future performance and expect to show material progress in our results as we begin to ship Spring 2016 product.

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

Thanks, Mike.

During Q3 we ran into strong headwinds in the business, from currency to China to gross margins.

Despite these headwinds, we continue to make meaningful progress on the transformation of Crocs and continue to feel confident in our plan and how this will set us up for long-term, sustained success in the future.

As we have discussed on prior calls, we expect to see significant progress toward our financial goals 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 against our plans.

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 up for questions.

(Operator Instructions) Steve Marotta, C.L. King & Associates.

Good morning, everybody.

Can you quantify at all the Spring/Summer order book now versus a year ago?

And what -- you've given a little bit of indication of what you expect sales to be in the first half of the year, and that was very helpful; but can you quantify at all what the order book is looking like right now versus last year?

Hey, thanks, Steve.

It's Andrew here.

As we look at Spring/Summer, we're basically in exactly the same place as we outlined at the Investor Conference of September 30.

Which is: Asia and Americas we think their wholesale orders will be up low double digits; Europe, they will be up low -- mid-single digits; netting to a high-single-digit growth in wholesale.

That's supported by our orders as they stand today and our anticipated at-once.

As a reminder, as we look at our wholesale business, about 70% of that is pre-books and about 30% of it is at-once.

And our orders as we continue to receive them support that level of growth.

Then, Steve, probably one thing that I'd add is one additional thing that's happened since the October conference is that in the last few weeks we had our Fall/Holiday final line review and for 2016, and we've had a number of pre-line meetings going through that Fall/Holiday 2016 product range.

When I say the progress we've made with regards to our Spring/Summer 2016 line, we've made similar progress with the Fall/Holiday [2016] line.

The feedback from customers has been very, very strong, and they recognize the commercial development of that product and how far we've come over the last year.

That's very helpful.

One more question, as it pertains specifically to inventories.

You hit the nail on the head quite well, saying that the older product and aged product is out of inventory, and there shouldn't be any more pressure from a liquidation standpoint.

Can you quantify that at all with either aged inventory as a percent of total inventory at third-quarter end?

I'm just trying to delve back one more layer of that onion.

Thanks.

Yes, okay, Steve.

That's fair.

As we look at our total inventory picture at the end of the third quarter, our aged -- which we define as before 2015, so 2014 and before, which is really mainly 2014 products at this point -- is about 17% of our over-inventory.

And we think that's down -- and we know it's down over last year by over 20%.

So pre-2014 is 17% of the inventory at the end of third quarter?

No, I guess I'd answer it a little bit differently.

I think our -- what we would call aged inventory, which is defined -- we go through it on a style basis -- it's about 15% to 20% down from what that aged inventory looks like a year ago.

We feel we've made significant progress relative to that.

We've tried to address inventory earlier this year, and the other thing I'd say is we've also tried to clean up channel inventory.

Our channel inventory across the globe is far better today than it was a year ago.

So part of our whole transition plan and of the work we've been doing over the last year, has been to clean up the whole business model to position us for sustained growth beginning as we hit 2016.

We've had to do that as we look at our own inventory and as we look at the channels as well.

That's helpful.

One last question, as it pertains to selected price increases in markets most affected by foreign currency next year, and an endeavor to recapture some of that margin, can you address how those plans have changed at all and what you anticipate next year?

Thank you.

Thanks, Steve.

Yes, obviously there's two components go into making price increases: one is the shift in currency and the pressure that you get and the desire to do it; it's also the state of the market and brand strength in the marketplaces.

There are a number of markets where we have enacted price increases.

I think Russia and Japan will be the two biggest, where we've made significant price moves in 2015 and also in early 2016.

We're frankly cautious relative to Europe.

You'd love to be able to increase prices in Europe at this point, but given the state of the economy -- and frankly that's a smaller market for Crocs today -- we remain cautious in that market and price increases have been very selective, on a style by style basis.

But the two markets where we've made significant moves are both Russia and Japan.

Two other points to note relative to pricing power.

One is, we haven't introduced our new product yet.

That comes with our Spring/Summer 2016 line.

Our product line that we've had in the marketplace is more dated than we wish it was relative to innovation and freshness around styles.

So as we get some more momentum behind the brand and as we introduce more freshness, that gives us more opportunity to take price up as well in the future.

That's very helpful.

Thank you.

Taposh Bari, Goldman Sachs.

Hey, guys; good morning.

I had a couple of questions for you.

I guess the first, I know it's not your peak time of year; but can you comment on what you're seeing on the ground in terms of the retail environment both in the US and in Europe?

We've heard -- obviously the US commentary seems pretty cautious out of a lot of your peers.

Hoping to get your perspective on state of inventories in the channel and how your business is performing in terms of point-of-sale; and also if you can contrast that to Europe.

Great, Taposh.

Let me start and then Gregg will add in.

Yes, I think the US retail environment is tricky, and it's tricky on a number of dimensions.

We highlighted in our release the impact of tourist; that particularly affects us as we are obviously Spring/Summer focused and focus on strongly on many of those tourist markets -- frankly, particularly, the South Americans or Latin Americans coming up into the Orlando/Miami area.

But more broadly, there's certainly cautiousness in the US consumer.

So we can see that.

We hear that from our wholesale customers.

In terms of how we're performing in that light, I think as Gregg highlighted, some of our product that's in the market today is a bit stale.

We've been very focused and clear about how we're refreshing that.

But I think it's performing acceptably given that.

And we're very -- we have very strong lines of communications with our major wholesale customers, ensuring that we are clean at the end of the season.

And maybe, Gregg, you can comment on Europe.

Yes.

I think -- look, obviously, Europe is tough as well.

It's interesting, I think from our perspective, as Andrew mentioned.

Under -- given the environment, we feel we're making progress at positioning the business going forward.

Both markets are challenging.

Interestingly enough, our retail comp was plus almost 3%, so despite that environment we feel we're performing reasonably well under the circumstances.

Great.

I just had a quick follow-up on the tourist point.

I would imagine that tourism has a disproportionately high effect on your US comps this quarter.

I think, Andrew, you had mentioned in your script 25% exposure to tourist locations.

Is that a full-year number, or is that a third-quarter number?

No, that was the quarter.

Well, it's the same, right.

So as a proportion of the business it's about 25% in the quarter, and about 25% for the full year as well.

As we highlighted in the script, our comp in those tourist markets was down 5.7%, almost 6%, whereas in the rest of the chain it was flat for the quarter.

Okay, great.

Then just a big-picture or bigger-picture question for you guys.

You're clearly focused on Spring/Summer of 2016.

You have been for a while and it seems like the building blocks are falling into place there.

But there are still a couple of quarters before we get there.

From what we've seen year to date, we've been taking a couple of steps backwards to take more steps forwards.

You've given I think some pretty respectable commentary for the fourth quarter based on the components.

How does 1Q look?

Is that part of Spring/Summer 2016, or is it really a 2Q event?

Just trying to better understand the bridge, because it seems like the worst of the stepping backwards is behind you.

But I just wanted to better understand that dynamic as we think about the path to Spring/Summer 2016.

Thanks.

Yes.

Obviously we've given you some specific commentary on Q4.

When we take a step back, we think that we see a lot of clear early signs that demonstrate we're making the momentum that we are despite challenging results.

We are incredibly cognizant that 2015 is a year of transition, that there's been short-term volatility.

We're obviously not happy with that.

But when you look at some of the underlying components, we've had a couple quarters of continuing business constant-currency growth in the low-single digits.

We've had strong e-commerce performance, strong DTC performance.

We're working on operational fixes that we feel confident in our ability to deliver Spring/Summer 2016.

So we think as we hit 2016 it flows throughout both quarters.

We'll show improvement.

We're not prepared to give details quarter to quarter at this point, but we feel good about the first-half plan in general.

Great.

Best of luck.

Erinn Murphy, Piper Jaffray.

Great, thanks.

Good morning.

I guess, Andrew -- or Gregg, for you, just hoping you could speak a little bit more structurally about China as it sits today.

How many distributors are you working with?

Then maybe could you parse out the portion of the distributor base that you feel are at most risk currently?

Then as you clean that up going forward, where would you like this level to settle in over time?

Got it.

Thanks, Erinn.

There's two things to -- as we think about China we comment on it in two ways.

The first way is from a financial exposure perspective.

We have 48 distributors in China, as we've talked about that.

As we parse that distributor group, 29 of them in our current and trading only and have been through the year.

Then, as we parse the remaining group, there are five that we're working in a very focused way with.

And there's 14 that have slipped behind their payment plans in the last couple of months, essentially in Q3.

And we're working with them to get them back on track.

So that caused us during the quarter to take the $19 million charge and essentially draw a line under the financial risk in China.

We have a net receivables in China now of less than $5 million.

As we look to restructure the marketplace, we'll focus on a couple of things.

We've got new leadership in the marketplace, we've got a refocused product line, and we wish to rework our distributor base.

Over time, we'd like to get to a much smaller base of distributors that are much stronger, have stronger financial capabilities, and much stronger operating capabilities.

And we're talking to a number of those at this point in time.

So our challenge over the next period of time is to execute that transition.

In addition, as we look strategically at the marketplace, there are some channels that we want to continue to own and we have benefited from.

DTC is about 45% of the market in China and that actually during this year has grown at double-digit rates.

So a combination of e-commerce in China, which is obviously growing very quickly, and our own retail stores.

As we look strategically at the markets, we wish to continue to own DTC in key markets -- Shanghai, Beijing, etc.

-- as well as e-commerce.

We wish to take a stronger position in the outlet channel, which is growing very, very rapidly in China and allows us to keep our inventories fresh as well as be very profitable.

And then use distributors to access the broader marketplace and consolidate that group to a much stronger group.

That's helpful.

Thank you, Andrew.

I guess just remind us, what's the split: partner store versus owned stores today?

There are about 900 points of distribution in China, in aggregate, of which around 60 are owned.

Got it.

So it's that 60 that you are looking to flex up over time?

Correct.

Okay, perfect.

Then just a question on the gross margins as you think about the third-quarter impact from -- I think about 50% of that total decline was really product liquidation.

Is that all behind us now?

Then as you talk about stability in gross margin in 2016, what are the major puts and takes there?

How do we see that playing out?

Okay.

Why don't I hit the liquidation element of that and turn it over to Gregg to talk about 2016?

In terms of, you asked me -- as we highlighted in the script, as we looked at the Q3 margins there was a significant erosion.

About half of that was currency, the remainder largely being clearance.

As the quarter progressed, we decided or we thought it was important to continue to keep our inventories fresh and accelerated our liquidation.

As we've also highlighted a number of times, we feel like our product line is extremely stale right now, and the prices that we're able to achieve for that product as we liquidate was less than we would have liked, causing the margin hit to be bigger than we originally thought it was going to be.

As we look into Q4 and early parts of next year, we have some liquidation or continued clearance activity baked into our plan.

But we believe that that is already baked into the margin guidance that we've already provided.

There are other factors that affect us more broadly in 2016, and I'll let Gregg touch on those.

Yes, thanks, Andrew.

When we think about gross margin and impact in 2016, we're looking at gross margin flat to slightly up in 2016.

We're seeing about a 250 basis point currency impact offset by mix and cost improvements.

But if we take a step back on currency, obviously we've had a very significant translation impact in the current year.

We've had about $76 million translation impact year-to-date revenue.

On the transaction side, we use a weighted cost average methodology.

In the first half of 2015, the impact of currency was mitigated from product that was purchased when the dollar was weaker in 2014.

So in 2016 we don't carry that benefit into the year.

As a reminder, roughly 30% of our revenues are in dollars, but 70% of our costs are in dollars, as the majority of our product around the globe across all regions is purchased in US dollars.

So the currency rates in the current year have continued to impact the business.

Fortunately we're working really hard on the product side and we feel very good about our product mix, the operational changes we're making, our approach to costs and product engineering.

And we feel that those will more than offset currency challenges as we look into 2016.

Got it.

Thanks you guys and best of luck.

Scott Krasik, Buckingham Research.

Yes, hi; thanks, guys.

Just a question on next year.

I think, again, not to beat a dead horse, but if you could give us some color on what the actual order book looks like.

All of the commentary we're hearing is the retailers are being pretty conservative with booking orders; and you are obviously putting out some pretty high growth rates out there for the whole season.

So how much reorders or fill-in business are you expecting with that high-single-digit wholesale growth target?

Yes, thanks, Scott.

I think the way to think about it -- obviously, we discontinued publishing backlog a number of quarters ago, because for our business we felt like it was not giving a valuable steer on the business.

The way to think about it, we're putting out, I think, the revenue guidance for Spring/Summer that we have.

If you think about the components of that, the preorder versus at-once mix is assumed to be roughly constant with last year.

So, that would imply that the preorders that we have received from retailers, particularly in Asia and North America where we're seeing the strongest growth off the preorders that we received this time last year, are up to the degree to which we highlighted.

Yes, and Scott, I would build on that, which is if you take a step back, in the last two quarters our core continuing business on a constant-currency basis has been growing in the low singles.

Now add to that far better product; cleaner inventory in channel; year two of a marketing program which based on all the data we have was very effective and the feedback in the marketplace was very strong; and a series of operational improvements, including the implementation of SAP and the addition of significant talent with some strong industry and functional expertise.

We feel very confident going into 2016 that our operational improvements will help us as well.

So we feel very good as we look at the season, because I think the core of how we look at the business -- the DTC numbers, the e-comm numbers, the retail numbers and that core continuing business at wholesale -- coupled with the full benefit of finally leveraging some of the effects that the team has been working on for the last year, that that will drive the growth that we're talking about.

Look, at the end of the day, working off that low-single-digit base, we're talking about 2016 growth in the mid-singles or 5% to 7%, so we feel really good about that.

And just to clarify your comment that you expect about 200 basis points of impact from FX next year, is that just the translation part?

And then this other issue around the COGS, that would be separate, or is that --?

No, that's all transaction.

Yes.

Then -- so we're seeing margins, any currency issues being more than offset by other mix, costs, and operational initiatives that we're putting in place.

Translation was really mostly this year, is how we would look at that.

Assuming no future currency (multiple speakers)

Yes, based on today's currency rates.

Okay.

All right.

Thank you, gentlemen.

Sam Poser, Sterne Agee CRT.

Hi, good morning.

It's Ben Shamsian for Sam; thanks for taking my question.

First, I missed your comment on SG&A for 2016.

I was wondering if you can just repeat that.

Yes, the way I'd look at SG&A is -- if you take a step back and look at SG&A, when we started this transition, working off 2014, we had roughly $540 million of SG&A on an annualized basis.

Over the last 18 months we've taken out around $40 million of SG&A.

We've reduced salary headcount by about 20%.

We've cut out about a net 70 stores.

Offset, we've reinvested in marketing and invested back in the business in some other areas as well.

But when we look going forward, we'll still be down roughly $25 million from those 2014 levels.

Got it; okay.

Then secondly on the supply-chain issues that you alluded to, how much of that -- did it hurt business in Q3?

And how much of that do you think -- is continuing to expect to hurt Q4?

And when can we see the fruits of the initiatives you laid out come into play and help you guys?

Yes.

It certainly impacted Q3, as it has impacted us throughout year to date.

What I would say is by -- our guidance or our commentary on Q4 includes our point of view in terms of how it will impact the fourth quarter.

We feel very good about 2016 and the work we're doing to really deliver at or above customer expectations from an operational performance going forward.

Okay, great.

Thank you.

Jonathan Komp, Robert W. Baird.

Hi, thank you.

Maybe first just a clarification on the fourth-quarter outlook.

I think it was mentioned the core revenue growth excluding currency projected up about 6% to 12% on that basis.

The third quarter was just a little better than 3%.

So could you maybe just walk through the pieces to bridge that gap and what's driving the faster growth on that basis?

Yes, this is probably a -- one thing is we do have a little bit of Spring/Summer 2016 hitting; that's a little piece of it.

It's just the way the flow of the business and some timing is what I'd say.

I'd say we feel that we've had some -- between the positive retail comps and some strong e-commerce performance that that's how the business is flowing in the fourth quarter.

Great.

Then just another clarification on the China outlook for next year and the expectations to grow the business in the second half of 2016.

Could you maybe just provide a little more color?

Is that because you're going to be cycling some of the issues you're facing now?

Or is that due to the timing of some of the distributor changes and the enhancement to the business that you are expecting?

Or what's driving the expectation in terms of the timing of on the second half for next year?

Yes, good questions.

I think basically you have it right, which is there's two things.

One is it's cycling the issues that we've had -- we're having in the back half this year where we've, frankly, stopped shipping a number of our customers, significant number of customers.

We did the same thing essentially last year as we cleaned up inventory, cleaned up AR last year.

So it's an easy comp, right?

Then the second thing is we're anticipating that we'll have some renewed distribution base in place and they'll be taking new deliveries.

Great, thanks.

Maybe one more for me, then.

Just as you look to next year, and as the Fall/Holiday order book gets lined up throughout the year, do you see any chance that as you prove the ability to your partners to deliver the Spring/Summer line on time, is there any chance that that strengthens the overall confidence in your operations and could lead to strengthening orders for the Fall/Holiday period as you progress and prove your ability to meet the customer expectations?

We certainly hope so, right?

One thing we've heard very clearly from customers -- and I'm talking about wholesale customers and large distribution partners in Southeast Asia and other places -- that, look, they love the product we're showing them.

They think it's brand-right, they think it's going to sell through, they think it works.

But -- they are placing increased orders, but they are nervous, right?

There's a level of nervousness that exists based on historic operational performance, including this year.

And we think as we strength that, that will give them a lot more confidence in the future.

Great.

Thank you very much.

Mitch Kummetz, B. Riley & Co.

Yes, thanks.

Just a follow-up on China.

I just want to maybe drill down on the numbers a little bit, because in the past you'd given us what the dollar impact was on China.

So what was it in Q3?

How much was China down in Q3?

How much are you expecting it to be down in Q4 as well as the first half of next year, because you're not expecting it to return to growth in the back half?

So if you could give us a sense to how much you expect it to be down in the first half of next year as well.

And then along those lines, if you expect it to be down in the first half next year, how do you reconcile that with the double-digit growth that you're expecting out of Asia Pac wholesale for Spring/Summer?

Right, okay.

A number of questions in there, Mitch.

Let me start with the first one, which we talked about in our script, which was China.

We held $4 million of revenue in China in Q3; and that was the number it was down, right?

So if you look at the aggregate China performance, it was down $4 million; and it would have been flat without those holds.

Okay?

As we look into Q4, in China that's a much more important DTC quarter.

In fact, for our whole business it's much more reliant on DTC in Q4.

And DTC in China which represents about 45% of the overall business has actually grown through the year, and we think it will continue to grow in Q4.

As we look into next year, the way we think about it is DTC continues to grow: strong Internet growth, coupled with some comp-store retail growth, coupled with some incremental store openings.

Then from a wholesale perspective, we see some degradation in the first half as we anticipate some proportion of our customers we will not be able to ship or we will not desire to ship, because we don't think they are credit worthy and we're in the process of replacing them.

We anticipate having them replaced by the second half, when we will be able to provide opening orders to some new distributors.

Okay.

I assume that on the wholesale side you expect China to decline in the first half; and obviously that's an assumption that is rolled up into your overall outlook on Asia Pac growing double digits.

Okay?

Yes.

No, I'm sorry, I missed that last bit of your question.

Absolutely.

That's an assumption that's embedded in our Asia Pac double-digit growth.

Okay.

Then just a second question.

On your DTC, could you give us a sense as to what you're expecting in terms of comp?

What sort of comp assumption is baked into your Q4 outlook as well as your guide next year?

The way that we think about DTC comps, and obviously we're coming off a multiyear period where the brand has not successfully driven positive comps in its DTC channels, other than in the most recent quarters where we've made a lot of progress based on the operational improvements that we put in place.

We think that those operational improvements, compounded with a refreshed product range, will drive much stronger performance in the future.

But we believe the appropriate way to plan this business is to remain conservative.

So we're planning modest comps around the world and hoping to exceed them.

Okay.

Then just one last question on Europe.

I think with your wholesale outlook for next year at least with Spring/Summer, I think you said up low singles; right?

If you did, that's a constant-currency number.

Why is Europe lag -- go ahead.

In mid-singles, we said mid-singles.

Oh, okay, mid-singles.

Yes, and it is a constant-currency number.

I think you were going on to just why (multiple speakers)

Yes, why is Europe lagging the US and Asia in terms of its rebound?

Or what's going on there?

Is the new product not resonating as much?

Is it more challenging trying to get the wholesale piece going again?

Why is that?

I would assume that you've got a lot of new product going into there as well.

You've made a lot of changes in that marketplace as well.

Why is it not expected to grow at the same rate as the rest of the business geographically?

Yes, I mean look, if you take a step back, Europe has been and continues to be a smaller market for us.

It's a more fragmented market by the nature of what it is.

Actually if you take a step back, Europe was actually up this quarter in wholesale and constant currency and up year-to-date.

Frankly, the brand is just -- and that's on a small base.

So we've got more work to do there.

We feel good about our plans.

But because of the nature of the size of the business and the fragmented nature of that market, it will just take us a little longer to get that ramped to the level we'll be satisfied.

Okay.

Thanks.

Good luck.

Jim Chartier, Monness Crespi Hardt.

Hi, thanks for taking my questions.

Just what are you seeing in the supply chain?

Anything that you are actually seeing now that gives you the confidence that you'll be able to deliver the product on time next year?

Anything you're seeing now and fourth quarter to date that's better than third quarter?

Yes, thanks.

As Andrew mentioned earlier and I talked about briefly, we've implemented a series of actions over the last year.

And between system implementations, improved reporting, process changes, we have more visibility further into the supply chain and deeper into the supply chain than we ever had before.

So we feel very good about progress we've made.

We still have more work to do, but we feel confident in our ability to deliver our Spring/Summer 2016 line at or better than customer expectations, based on that kind of insight and visibility.

Okay.

Then last quarter you talked about expanding your Freesail, Bump It, [Slow], and Swiftwater, some newer products into the market in the back half of this year.

How are those products performing?

Well.

Let me just hit a couple highlights there.

Freesail, which was the women's clog on a narrower last, performed extremely well through the summer as a simple molded product.

We have a lined version of it that's in the market this fall, obviously lined with fuzz, winter appropriate.

That's performing extremely well in North America and Europe.

Bump It continues to be extremely strong, and we're expanding the number of SKUs on the Bump It platform to include a sandal for Spring/Summer 2016.

So that's doing very well.

Then the other highlight I think is CitiLane which was introduced in the US as a four pack -- four colors, four molded styles -- that comes, that strengthens in this Fall/Winter and it strengthens again in Spring/Summer with wrapped, printed versions.

So some of those continue to do extremely well.

I think the other thing I'd highlight that's doing really well is our licensed product.

So, licensed against a lot of the movies that have been out, and we're particularly excited about the Star Wars movie which obviously debuts in mid-December.

Great.

Then finally, any comments on share repurchases to date in fourth quarter and your thoughts on that going forward?

Yes, I think as we've said all along, we would maintain a disciplined and methodical approach.

We've obviously purchased about 220 million to date, and we'll continue to maintain a similar approach in the fourth quarter and going forward.

Great.

Thanks and best of luck.

We have no further questions at this time.

I would like to turn the call over to Gregg Ribatt with closing remarks.

We just want to say thank you and have a good day, everyone.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.