卡洛馳 (CROX) 2015 Q4 法說會逐字稿

Welcome to the fourth quarter 2015 Crocs, Inc.

earnings conference call.

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

Please not that this conference is being recorded.

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

Please go ahead.

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

This afternoon we announced our fourth 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 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 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 and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today and on our investor website, once again, at Crocs.com.

Joining me on the call today are Gregg Ribatt, Chief Executive Officer, Andrew Rees, President, and Carrie Teffner, Executive Vice-President and 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 afternoon, everyone.

First, before we talk about the fourth quarter, I am happy to welcome Carrie Teffner to her first earnings call as Executive Vice-President and Chief Financial Officer of Crocs.

Carrie brings more than 25 years of consumer goods and retail leadership experience to the company, having served as the Chief Financial Officer for Pet Smart, Weber-Stephen Products and Timberland.

We're thrilled to have Carrie as part of the team.

This afternoon we announced our fourth quarter 2015 financial results.

Revenues were $208.7 million, towards the higher end our expectations, and the adjusted net loss available to common shareholders was $53 million.

Reported revenue was up 1% versus last year, while revenue on a non-GAAP basis from our ongoing business, which excludes the impact of store closings and discontinued product lines, was up $23 million or 12.2% to last year on a constant currency basis aided by higher clearance sales and an easier China wholesale compare.

While this is typically a small quarter for our business it is the third quarter in a row that we delivered growth in our ongoing business.

We continue to make meaningful progress on positioning our business for long-term sustained success.

Some of our actions have yielded positive results already, while others are investments which negatively impacted the quarter but we believe will set us up for success in 2016 and beyond.

I will touch on a few of the highlights of the quarter and then Andrew will dive deeper on some of the key actions that we are taking and, finally, Carrie will walk you through the detailed financials.

In the fourth quarter we saw several early indicators of our progress.

On a constant currency basis revenue grew both in the Americas and Asia.

We had growth in our direct to consumer or DTC channel, up 2.1% globally on an as reported basis and up 9.8% on a comp basis, led by high double digit growth in e-commerce.

Despite a difficult retail environment inventory declined 1.6%, from prior year and our aged inventory was down as we'd cleared product during the quarter.

Our SG&A costs were down having removed 270 basis points from our cost structure.

Since the beginning of our restructuring efforts we have reduced our SG&A base by over $40 million on an annualized basis some of which we are reinvesting back into the business to drive growth.

Finally we have made substantial progress addressing supply chain challenges we'd discussed on the third quarter call.

As a result quarter to date performance in line with industry norms, which is our best shipping trend in many years and we expect to continue this level of delivery performance on a go-forward basis.

Clearly, there are still challenges.

Currency headwinds from the strong dollar continue and the impact in Q4 on revenue was $12 million.

The impact on gross margin was 270 basis points.

In addition, clearing excess and end of life inventory during the quarter negatively impacted gross margins by over 300 basis points.

As we look to 2016, we believe we are well positioned to execute our turnaround delivering improving results as the year progresses.

Our new product line for spring/summer 2016, the first developed by Michelle Poole and her team, had solid sell-in and very early sell through results are favorable.

Our customer service levels have improved significantly.

Our inventory is in a better position as we transition to a fresh product line in 2016.

Our DTC business continues to strengthen as we posted comp growth for the third consecutive quarter.

We continue to make progress in lowering our cost structure and finally, consistent with our strategic plan, in the fourth quarter we negotiated the transition of our subsidiary business in South Africa to a licensee.

While a license model will reduce revenue, compared to a subsidiary model, it will deliver a higher level profitability over time.

As the year progresses we expect to see positive momentum built as discussed previously a turnaround in the industry is an 18-24 month process.

Over the last 18 months, we have built a strong team, strengthened core processes, transitioned business models around the globe, and are in the process of bringing new product to market.

In summary, we are reaching an inflection point.

Despite challenging headwinds from the strong US dollar and a difficult global economic environment, we continue to make significant progress on our strategic initiatives and we are confident that they will have material positive impacts on the business in 2016.

And now Andrew will highlight some of the key details of the fourth quarter.

Thank you, Gregg.

Today I want to update you on several important topics including one, our global DTC, two, supply chain and customer service improvements, three, early reads on our spring/summer 2016 performance, four, the sale of South Africa and, five, our turn around plans for China.

Firstly, global DTC performance.

Global direct to consumer revenues up 2.1% as reported and comp sales up 9.8%.

This is our third quarter in a row of delivering positive DTC comp growth.

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

Overall global e-commerce revenues increased 28% on an as-reported basis and increased 37% on a comp basis.

Our e-commerce business continues to benefit from better execution, including enhanced digital marketing efforts, a better product assortment and a commitment to better in-stock positions on core product.

The fourth quarter DTC revenue also benefited from an increase in promotional cadence.

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

In the quarter we closed 11 stores and opened 13, 12 of the new stores were in Asia, bringing our Q4 global store count to 559 stores.

While the stores closed during the year generated topline revenue of $6 million in the fourth quarter last year they had no meaningful impact on earnings.

Consistent with our overall strategic plan we have now completed the bulk of our store closings.

Over the past two years our global store count has declined by 60 stores, as we closed 179 underperforming stores and focused our openings on a more profitable outlet format and increased store count in Asia.

We will continue to evaluate our store portfolio in the normal course of business to ensure effective capital allocation.

Retail comps were up 0.1% in the quarter with both Europe and Asia posting positive comes of 5.7% and 4.8% respectively.

The improved results over prior quarters reflected our efforts to the improve retail processes and systems.

Specifically, we enhanced assortment strategies and brand storytelling, improved replenishment and in-stock positions, and elevated customer experience.

Retail comps in the Americas, of negative 3.4%, continue to be impacted by the strong dollar causing significant traffic declines in our tourist markets, including Orlando, Miami, Las Vegas and Hawaii, which account for 25% of our retail sales.

Comp store performance in these tourist markets was down 7.9% in Q4 compared to -1.2% comp for the rest of the Americas.

Secondly, supply chain and customer service improvements.

We have been working hard to improve the processes which led to poor delivery performances historically.

We've made a number of important changes including reducing the SKU count by 40%, reducing complexity from excessive direct shipments and special orders, and increasing visibility in planning through the use of SAP.

These changes have us on track to achieve the company's best delivery performance in three years with the first quarter 2016 deliveries, thus far, achieving service levels in line with industry norms.

As Greg mentioned, we are confident this level of performance will continue going forward.

Thirdly, spring summer 2016 product performance.

Early reads on our spring/summer 2016 line are positive.

While we don't have comprehensive sell-through information at this time we can clearly see key areas that are working.

New mold and silhouettes, seasoned and trend right colors and enhanced graphics.

We expect overall wholesale revenue growth in constant currency to be in the mid-single digits during the first half of the year after adjusting for the sale of the South Africa business.

As we had said previously, we expect to see the highest growth in the US and Asia and less growth in Europe.

Fourthly, sale of South Africa.

During the quarter, we completed negotiations to sell our South Africa subsidiary business to a licensee.

Our new licensee will continue to operate the wholesale business, retail stores, and e-commerce.

In recognition of the aforementioned we recorded right-downs of $9.5 million related to goodwill, inventory, and other assets, all noncash.

In near term, while this license model will result in lower reported revenues, it will provide greater profitability and lower risk from this market as we leverage our franchise infrastructure and market knowledge.

This change is consistent with our overall strategic plan of focusing our direct business models on our largest markets and using best in class partners in the rest of the world.

Lastly, China turnaround.

China has been a key challenge over the past year but we are making progress.

Our China DTC business continues to perform well, delivering strong double digit comp growth for the year.

We have a core distributor base that continues to perform well and we are in active discussions with a small group of distributors to transition their business to a long-term sustainable model.

As discussed previously, we still believe we are on a path to growth in China for the back half of the year.

Now I will turn it over to Carrie to go into detail of our Q4 performance.

Thank you, Andrew.

Turning now to the financials, revenue in the fourth quarter was $208.7 million, up 1.1% from a year ago on an as reported basis.

Revenue was up 7% on a constant currency basis.

Revenue as-reported versus prior year was impacted by four items.

First, the negative currency impact of the stronger US dollar was $12 million.

Second, Asia wholesale growth of 27.5% was positively impacted by China, as you may recall from our 2014 Q4 call, our China wholesale business was down significantly.

Excluding China wholesale, Asia wholesale was up mid-single digits.

Third, the closing of 68 retail stores this year, reduced revenue $6 million in the quarter compared to last year and finally, discontinued products and segments reduced revenue by $2 million.

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

In the Americas, revenue was $102.7 million for the quarter, up 1.7%.

Wholesale revenue was down 4.4% due to lower at-once and increased discounting as we reduced excess and end-of-life products.

Retail sales in the Americas decline the 3.7% for the quarter reflect a negative 3.4% comp due to lower traffic, especially in our tourist markets, as well as 14 less store is compared to the same period last year.

E-commerce in the Americas grew 31.3%.

In Asia, revenue was $76.3 million for the quarter, up 21.5% driven by the increase in our Asia wholesale, reflecting the easier compare noted earlier, as we work with our China partners in the back half of 2014 to address excess inventory in the marketplace.

Retail sales in Asia increased 2.8% in the quarter reflecting a 4.8% comp, our second positive comp quarter in this market.

We operated 19 fewer full-line stores in the quarter compared to last year.

E-commerce sales in Asia increased 45.6%, in part reflecting stronger performance in China and an increase in our promotional cadence as a result of our decision to liquidate excess inventory.

In Europe, revenue was $29.6 million for the quarter, down 4.3% with wholesale decreasing 5.9%.

Retail comps were up 5.7% but retail revenue declined 8.1% compared to Q4 2014 as we have 15 fewer stores compared to last year.

E-commerce sales in Europe increased 13.4%.

We sold 11.6 million pairs in the quarter, a 10% increase over last year.

The average selling price of our footwear in the fourth quarter was $17.66 a 6.5% reduction from the prior year; the result of currency and increased promotional cadence in the quarter.

Non-GAAP adjusted gross margin for the quarter was 36.6% down 590 basis points from the prior year due to increased liquidation of excess and end of life product and 270 basis points of currency.

We made the decision in the quarter, given the overall retail environment, to increase our promotional cadence in order to liquidate excess and end of life product with the intent of improving our overall inventory quality in advance of the arrival of our new spring/summer 2016 line.

During the quarter, we had certain charges not associated with ongoing operations of $21 million.

As referred to earlier, this is inclusive of a non-cash charge for South Africa of $9.5 million and reorganization charges associated with closing stores and rationalizing our cost structure.

Excluding these charges, core selling, general and administrative expenses were $120.8 million, down $4.9 million from the prior year.

SG&A at 57.9% of sales for the quarter is down 300 basis point reflecting savings from our reorganization efforts, the implementation of SAP, and currency.

Turning to the balance sheet at the end of the quarter.

We ended the year with $143.3 million in cash.

The company repurchased 918,000 shares in the quarter at an average price of $10.86.

Inventory at the end of the quarter was $168.2 million, down $2.8 million from Q4 2014 ending inventory of $171 million.

Two final notes on the financials.

First, adjusted net loss attributable to common shareholders was $53 million for the quarter, after preferred share dividends and equivalents of $3.8 million.

Second, the weighted average share count used to calculate EPS was 73.5 million shares for the quarter.

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

Before I turn to 2016, I would like to highlight an additional item that occurred in the fourth quarter.

During our year end evaluation of the effectiveness of the internal controls of our financial reporting we identified two material weaknesses related to the financial close process and inventory accounting controls.

I do want to point out the underlying control deficiencies did not impact our reported results.

We realized the potential seriousness of controlled efficiencies and are taking actions to improve our control environment, including additional training, increased internal audit oversight and the engagement of a third-party to review our control environment and assist us in our remediation efforts.

Turning now to Q1 2016, currency rates have continued to deteriorate over the last several months.

At today's rates we estimate the currency impact on Q1 revenue to be $9 million compared to Q1 last year.

We expect first quarter revenue to be between $260 million and $270 million compared to $262 million last year.

Revenue, excluding South Africa on a constant currency basis, is expected to increase mid-single digits.

Currency has moved against us since our Q3 call, which will affect our gross margins as well as our revenue in the first half.

At the end of Q3 we guided revenue for the full year 2016 up mid-single digits despite the sale of our South African business and projected currency headwinds we continue to expect full year 2016 revenue to be up in the mid-single digit range, reflecting higher growth in the back half of the year.

We continue to be confident in our future performance and expect to show material progress in our full year 2016 results.

Before I turn it over to Gregg I just want to say how happy I am to be a part of the Crocs team and how excited I am about the opportunity ahead of us.

Now I will turn it back to Gregg for closing thoughts.

Thanks, Carrie.

As I indicated earlier despite challenges from a strong US dollar and an overall difficult macroeconomic environment we are making meaningful progress on our transformation efforts.

I believe we are reaching an inflection point and will see the benefits of our actions increasingly as the year progresses.

I continue to be confident in the direction in which we are headed and our ability to successfully execute against our plans and achieve our goal of sustained profitable growth.

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

Now operator, we will open the call up for questions.

Thank you.

(Operator Instructions).

Steve Marotta is on the line with a question.

Steve, your line is open.

Good morning, everybody.

Thank you for taking my question.

Carrie, I just want to underscore what you just mentioned and that is that revenue for the full year 2016 is expected to be up mid-single digits, or I should say including all of the currency fluctuations and this is a maintaining of a similar stance that the company took on the last call, that's correct, right?

That is correct.

Despite the currency moving against and the South Africa divestiture.

Correct.

The only thing I'd say to that is, yes, there'll be a little shift from H1 to H2 but, yes, we're still confidence in our full year guidance.

Great.

And Gregg you mentioned that spring sell-in had been pretty good and that it is a little early to quantify sell throughs.

Can you at least quantify the sell-ins and talk about what gives you confidence in the traction of the new product in the near term?

Yes, absolutely.

Thanks.

We feel great about the evolution of our product line and, as you know, spring/summer 2016 was the first line developed by Michelle Poole and her team.

And our goal coming into the season was to reenergize our core molded business while adding color and style to both our molded and non-molded categories and the teams have done a great job.

So as we look at spring 2016 the reaction and slash early reads, for both customers and consumers, have come out strong and we have seen that across our new core molded product, we have seen that with new color and print, that's kind of elevated our styling and you can see it across, kind of, new styles we introduced in the molded category like the City Lane, the Roka, the Offroad, the Karen and the Sienna.

And so to us it as great foundation.

Remember, that was starting point without a lot of strong foundation.

So as we move forward and look at fall/holiday 2016 reaction to that product, which will book, really, over next few months has been very, very positive.

You know, it a step further from the core spring/summer 2016 and we have just come off pre-lining spring/summer 2017 with, you know, about 20 of our top accounts around the globe and the feedback there has been excellent, as well, and it's really a step forward from where we are.

It is a process, Steve, and you try and make progress each season.

We feel we have absolutely done that.

Feedback from our customers in the early reads we see puts us in that direction and we are excited about where we are heading beyond that as well.

That's great.

I have one other question.

In the last few business days there have been some headlines about patent litigation regarding some of Crocs' held patents.

Can you talk about what that's about and why it would concern you or not?

Thank you.

Yes, it's really a non-issue for us.

The recent decision by the US patent and trademark office relates to one of many of our patents.

The decision is non-final and will be appealed.

We are confident we will receive a favorable ultimate decision in this and in the meantime we will to aggressively enforce all of our intellectual property rights around the globe.

Thank you.

Thank you.

Our next question comes from Scott Krasik from Buckingham Research.

Scott, your line is open.

Hi, everyone, thanks.

Hi, Scott.

So, Carrie, I know that, I guess, the reserves actually went down sequentially but still have a third of the receivables reserved.

I am wondering how that plays out and maybe where you are most concerned now going forward?

Right.

And the reserves that we have taken, you know, tied back primarily to the bad debt charge we took in Q3 primarily related to our China distributors and we feel, just like we did at the end of Q3, that we are properly reserve the for those accounts.

So I mean that is really the gist of it.

So let me turn it over to Andrew to add a little bit more.

Yes, and I think, sort of, resolving that situation, Scott, we are in active discussions with the handful of distributors that we have taken those results against and we anticipate they will be resolved in the coming months.

And really there is two options as we look at how to, you know, our impetus is to take back control of territories that those distributors are operating and we will do that in one of two ways.

We'll do that through finding a new distributor to take on that market or taking some of those markets back ourselves, which will allow us to resolve those receivables and actually get back in business in those important markets.

And then outside of that, sort of, how do you see the progression on the gross margins going throughout the year and then, obviously, we're now a long ways away from 50% but maybe talk about the long-term opportunities as well?

Sure, you know looking, starting with the 2016 if you look at the overall consensus, we think it is in pretty good shape, although I would say it's little bit optimistic in half one.

I think the important thing to keep in mind is that in Q1 gross margin will be negatively impacted by about 150 basis points associated with currency.

But overall, for the year, after that we feel good where consensus is coming through.

Now, what we've guided to longer term in the three year plan is to have gross margins in the low 50s and really the actions there are things we talked about in the past.

It's the SKU rationalization and overlap across region.

It is improving our on-time delivery.

It is the work we are doing around product development and designing to cost, as well as product life cycle management.

Those are kind of key impetus drivers to get us to the low 50s.

Okay.

Good.

And then, just last, Gregg, in terms of what are retailers telling you, obviously, still very early days but is this an opportunity for reorders as we get into the summertime since you have delivered earlier than last year?

You know, how do you think inventories are going to be at retail as we go forward based on what you can see?

Yes, two parts to that question.

So first of all, to the part of the question on delivery.

You know, we are on track to achieve the company's best delivery performance in recent history and the team has done a great job here in putting a ton of work to really put us in the position between reducing SKUs, which Carrie mentioned, evolving business processes, implementing SAP and starting to leverage the system to enable us to operate more effectively as well as, frankly, just being more customer centric.

We feel really good about our first quarter 2016 deliveries and it's going to be in-line with industry norms and it's going to set us up to really start driving that level of service going forward.

So we feel very good about that.

In terms of the retail environment, I'm going to hand off to Andrew in a second.

We've got to build that relationship.

We feel really good about all of the work we are doing with our retailers around the globe.

I think it is, you know, the retail environment is tough in general, as you guys know.

But we are going to continue to make progress each quarter and each season as we move forward.

Yes, I mean I think making deliveries on time is your first stepping stone to driving reorders.

We think we have a strong possibility for some significant growth and reorders in the Americas and Europe and that is, you know, that is really a Q2 factor.

I mean, Q1 is largely around delivering your pre-books and then (inaudible) starts to grow to get to Q2.

But we feel good about it.

Good luck, thanks.

Thank you,.

Thanks, Scott.

The next question comes from Sam Poser from Sterne, Agee.

Sam, your line is hope.

Thank you very much.

Can you just give us some idea of how you are thinking about the store openings and closings off of this base right now?

Thank you, Sam, it's Andrew.

You know, we finished the year with 559 stores, as we said.

As we look forward, we are really going to essentially, we're going to close poorer performing stores at lease termination, which will put us closing a handful of stores in Europe and North America.

Future growth or future openings will be exclusively focused on outlets and those will be largely around the world, that will be Europe, Asia and the US.

And then select full price stores in Asia.

We see ourselves kind of roughly holding constant at this approximate level of stores for the next couple of years.

So at 560, give or take, is where you see?

Yes.

(Inaudible).

Okay.

And then and, Gregg, I know you answered the question already on the patent.

Can you be a little more specific.

It was on the original clog, if I am correct, or the hinge on the back of the original clog, is that correct?

Yes, I think we are not going to get into the details of this.

I will just say we have, I will kind of repeat saying, Sam, what I said a moment ago, which is it is one of a number of patents that we have.

You know the decision is non-final.

We will appeal it.

And we are confident we will receive a favorable ultimate decision.

And I think that is kind of all we're prepared to say at this point.

How about this, what percentage of your sales in 2015 or as you see it in 2016 are impacted by, what items, how many SKUs or what percentage of the SKUs or sales is related to this particular patent?

Sam, I guess what I'd say is we're confident this will not impact the business.

All right.

And then I mean, I would love, Carrie, if you could walk through, maybe it is just because I am, if you could just walk through line-by-line to get to the $52.9 million net loss?

Maybe I have the taxes wrong in the quarter or something.

But could you give us some idea?

Could you just walk us line by line?

You did part of it on the press release.

But maybe it is the income tax that I have wrong for the quarter or something.

I think you know specifically if you turn, and the earnings release we kind of laid it out.

Revenue for the quarter $208.7 million.

Gross profit, and again I'm going to give you absolute gross profit not the adjusted gross profit, okay?

So gross profit was $72.7 million, selling, general and administrative was $129.3 million.

We had restructuring charges of $1.3 million.

We had asset impairment charges of $7.8 million, which gets us to a loss from operations of $65.6 million.

Then we have foreign currency transaction losses of about $700,000.

Interest income of about $200,000.

Interest expense of about $300,000.

And then other income of about $920,000, which gets us to an operating loss before income taxes of $65.5 million.

The income taxes are $4.7 million, getting us to $70.2 million.

Thank you.

Yes.

Thanks very much.

And good luck.

Thanks, Sam.

Thank you.

Thanks, Sam.

Our next question comes from Jim Chartier from Monness, Crespi.

Jim, your line is open.

Hi, thanks for taking my questions.

First, you guys reiterated the guidance for the year.

Do you still feel comfortable achieving a mid-single digit operating margin in 2016?

Yes, so, again, with respect to the revenue we are projecting that at mid-single digits, as I said, based on the consensus model that's out there we feel good overall with how that is shaping up and that is consistent overall with the mid-single digits that we guided to previously.

Great.

On the operating income line, yes.

Okay.

And then, I think, SG&A was last quarter you guys talked about SG&A being down $10 million year-over-year in fourth quarter, you know, adjusting for the one time, I think it was down $5 million, so if you can just talk about the variance there.

Yes, so in the quarter we were down year-over-year in terms of salary and wages.

Marketing was down a bit as well as rent associated with retail closures.

That said, it was partially offset by the higher variable costs associated with the e-com performance as well as higher professional fees.

Okay.

And then, Gregg, can you just talk about why you're still confident in the 2016 sales outlook despite some increased head winds?

Is it more on, you know the reception to your fall product line or is it a higher expectation for reorders on spring/summer based on your shipping performance?

Yes, look, I think there are a number of factors that, kind of, give us confidence as we look at 2016.

Certainly product is a piece and some of that is a combination, of kind of the feedback in the market, you know, expectations around bookings and (inaudible) and how that's planned in the front half of the year.

Part of that is, frankly, as we evolve from spring/summer of 2016 to fall/holiday we feel really good about where that product is.

And, you know, we look at our product this year versus last year and the expected performance at retail.

I'd say the second piece is deliveries and, you know, we are on track, as I mentioned, to have the highest service level the company has seen in its recent history and it's on track with industry norms.

That's going to drive material improvement in the business.

And that is something that we didn't, while we knew we were working on and had a line of sight to improving, now we're actually delivering that, we're actually executing on that.

We see that in the data.

And I'd say the third piece is team.

We built, you know, a terrific team, one of the best in the industry.

A number of folks have joined in the last three, six, mine months.

We'll see increasingly, over each quarter, additional benefits from them and that's building off three quarters of continuing business growth, some strong DTC performance and you know all of those things adding up give us confidence as we look at 2016.

Great, thank you.

Thank you.

Our next question from Taposh Bari from Goldman Sachs.

Taposh, your line is open.

Thanks, good morning.

Can you guys clarify the revenue guidance for 2016?

Is it in constant currency or reported, it may even be the same.

Yes, so Q1 we're guiding we are guiding at $260 million to $270 million and that's reflecting the sale of our South African business and the impact of currency in the quarter as well.

For the full year, it's mid-single digits based on the current assumptions relative to currency.

So, sorry, so mid-single digits on reported basis or excluding currency?

Yes, on an as recorded basis but, you know, that's based on our current projection for what currency will be, right.

I thought the guidance for 2016 was on a mid-single digit basis constant currency as of last quarter.

That is why I was confused.

Okay.

Can you quantify the impact of South Africa, what the transition does to revenues next year?

Yes, specifically, with respect to South Africa, we I'm trying to think.

It is in the single digits but the high single digits, the mid to high single digits, over the course of the year based on the performance of 2015 and so we've adjusted our guidance, the impact of that on the revenue in 2016 by an equivalent amount.

Okay.

And then last question for me is marketing plans.

How are you thinking about marketing spend as a percentage of sales in 2016 versus 2015 and how are you planning your budget in the spring/summer season, in particular?

Great, yes, so as we look at 2016 we're focusing the vast majority of marketing spend on the spring/summer season, which will kick off directly before Easter and take us all the way through to mid-July.

And that's coordinated around the world so that's in the US and also the Asian and European markets and as we think about our spend it's roughly consistent with what it was last year, although we're getting a little bit of leverage relative to some sales growth.

And, Taposh, this is Carrie, I want to come back on the South Africa question because I was looking more in the context of half one, half two.

So on a full year basis it was low double digits last year.

Okay?

Okay.

Thank you.

Our next question comes from Jonathan Komp from Robert W. Baird.

Jonathan, your line is open.

Yes, hi, thank you.

Just a couple of clarifications first for 2016.

In terms of the currency movement since the third quarter, in relation to the full year guidance, how much has that changed, percentage wise, for the year?

Yes, on the revenue, so basically taking it back in terms of where we guided, how much is currency down versus where we guided at investor day.

Our revenue is down from an impact of currency about 2% from when we gave guidance at investor day.

Okay.

Got it.

And then the South African business, sorry if I missed this, I think you were just talking the revenue impact.

How should we think about the profitability or the margin impact, either one, for next year?

Yes, so as Carrie said, the revenue impact for the year is low double digit, so obviously we are going to lose that revenue, but it's a licensee structure so we will take a license fee from that distributor which will go straight to the bottom line.

Okay.

And any perspective on how profitable it was last year?

It's roughly equivalent to how profitable it was last year but, obviously by making this transition we believe this distributor has the capacity to grow the business substantially ahead of where we could.

Okay.

And then, maybe just a broader picture on the revenue guide for 2016?

When you account for the two factors it seems like the underlying business is quite a bit stronger than the prior outlook and it's not entirely clear to me what is driving that so any additional perspective there?

Yes, I think the only thing I would add is, you know, we're few months further down the road.

We have more clarity around product and more feedback from product.

And you know, whereas when we last spoke about, you know, 2016, you know, we were working on our delivery plans.

We now have alignment, not just a line of sight but we are actually executing and we have data and we, kind of, see how all that's, you know is, operating and executing.

So we feel really good about that as well.

Got it.

And them, maybe the last one for me, Carrie, just on the deficiencies in the internal reporting for the controls.

Can you give anymore, kind of, specific insights on the scope of what you are looking at?

And then, maybe the expected time you might think in terms of remedying some of the issues.

You know, I want to kind of ground us in, relative to the material weaknesses, again, it was in the financial close process and in the inventory accounting.

And so a couple of things to think about, 2015 has been a year of significant change.

We implemented SAP this year.

We had a number of business process and model changes.

We also had changes in personnel, including leadership within the finance department.

And, you know, all of these contributed to the deficiency in the control environment.

So, you know, relative to how we will address that, it will be, as I indicated, part of this is training.

Part of this is additional auditing of, you know, processes to make sure we are grounded in the process and complying with them appropriately.

As well as, you know, we will bring in a third-party to take a look at it as well and make sure we're buttoned up as we can be.

So relative to timing, what I would tell you is we're going to be working to address this as quickly as possible.

And the professional fees you mentioned four fourth quarter is that partly related to this or what were those for?

No.

No, normal course of business.

Okay, got it.

Thank you.

Our next question comes from Mitch Kummetz from B. Riley.

Mitch, your line is open.

Yes, thanks.

I guess first question, I am just trying to reconcile some of the comments, Carrie, that you are making on 2016.

Because you are talking about mid-single digit sales growth.

I think you said that from an earnings standpoint you thought that consensus looked like it was in pretty good shape but then, I think, you also said that you were talking about still a mid-single digit operating margin.

I guess, when I am looking at consensus, trying to back into the operating margin on consensus it is like 3.6%, which I don't know if that is in the range of how you are defining mid single digits but, kind of, help me understand those pieces a little bit.

Yes, so, you know, I think, you know, that mid-single digit is a range, right.

What I want to be careful of you is we're not giving explicate full-year guidance on each line of the P&L.

But what I would say is, again, mid-single digits on the revenue line and then, with respect to the gross margin, again, we feel good overall about consensus.

However we think half one's a little optimistic given the currency impact but from a full year standpoint we feel pretty good.

On the SG&A, you know, we didn't really talk about SG&A for the year.

We think it's going to be, after adjusting for the Q3 bad debt, the charge we look in China, we think SG&A will be relatively flat for the year but leveraging meaningfully as a percentage of sales and through those pieces we get to the mid-single digit range on EBIT margin.

Okay, so what you were saying that consensus looks like it is in pretty good shape, you are referring to the gross margin, not the EPS.

I'm looking at gross margin and, like we said, confirming mid-single digit game range on the EBIT margin.

Okay.

All right.

And then help me understand, actually, what is the implied FX impact on the year.

I think you said it was $9 million or is projected to be $9 million on Q1 and I know you are saying mid-single digit growth in reported dollars for sales.

What is the overall FX on the year?

Yes, we expect the overall FX impact on revenue to be about 3%.

Okay.

All right.

And then help me understand the promotional activity in the fourth quarter?

That was just a function of how challenging the environment was because I think you were expecting margins to we flattish if not up even a little bit.

And, obviously that wasn't the case because of, a lot of that I think the difference was because of the promotional cadence.

So what exactly was going on there?

How clean are you and then maybe as a follow-up to that, what did that do to the sales in the quarter?

Does that make for a tough sales comp in Q4?

Obviously, an easy margin comp but how do you guys lap the sales impact from those promotions?

All right, thanks, Mitch.

A number of questions.

So the first thing I'd say is, look, the Q4 is always a promotional period for all brands and all retailers but I think, as you rightly pointed out, we made the decision in the quarter to react to the retail environment, which was a tough environment and we were, you know, were equivalently promotional to liquidate H goods and make sure that we are clean as we come into spring/summer 2016.

And the impact to the margin was really caused by the depth and breadth of those promotions.

So pricing was a little worse that we thought it was going to be and we had to go broader in terms of the product line.

But the impact of that is we come out of the quarter with inventories flat relative to last year, which I think is a very good performance.

And as we look at the mix of those inventories we feel pretty clean, that the proportion that's EOL is pretty limited and, also, the age of that EOL is less than it was historically.

So how much of a sales lift did you get in the quarter because you were as promotional as you were?

Not extraordinarily high to quantify.

It did have some impact on sales and will create some issues with comping it next year but we are two seasons into our new product line and feel confident with the performance of the business next year.

Got it.

Okay.

Thanks a lot.

Thank you.

And we have a question from Sam Poser.

Sam, your line is open.

Just a follow up.

I know you don't want to go over line by line but can you give us some idea, in absolute dollars, of what kind of growth you're expecting to see in reported numbers based on what you know on your SG&A for the year?

Yes, so, again, in absolute dollars what we communicated on Q3 is we expected SG&A to be about $515 million.

You know, I will think we are relatively going to be close to that so that is what we are expecting.

Thank you.

Thanks, Sam.

And we have a question from Scott Krasik.

Hi, thanks.

Just two follow-ups.

One, I knew you were trying to get away, to some extent, from delivering backlog on a quarterly basis but maybe you could help in this situation, given there is so many moving parts.

What type of visibility do you have at this point, you know, at the end of the year?

I guess you'll probably have to file that in the K anyways, right?

No, we don't file the backlog in our K.

No.

Oh.

Okay.

Look, I think we've tried to share kind of, you know, our confidence.

There's obviously a lot of moving parts on backlog, which is why it is difficult to, you know, use that as too much of a guide and so when we look at it, you know, we certainly look at a number of factors and what we tried to convey is, you know, why we are confident, you know, based on feedback from products, expectations around at once, expectations around delivery and what have you.

So we feel like we have conveyed on the call we continue to feel really confident as we look at 2016, you know, we are 18 months into what we have continued to talk about as an 18-24 month turn around, you know, we feel we have made significant progress despite really challenging financial results and we are looking forward to 2016 and really driving improved performance, you know, throughout the year and so that is kind of how we'd answer that question.

Well, okay.

And then, am I remembering correctly, that your mid-single digit 2016 revenue guidance before this was on a constant currency basis and now it's on a reported basis?

No, the prior guidance was mid single-digits on a current basis.

Current currency basis.

Okay, so even though the currency weakened you are still able to do it.

Yes.

That is correct.

So you're, sort of, you're raising your constant currency revenues guidance.

That is one way of interpreting it, Yes.

Okay.

(Multiple speakers).

Yes.

Okay, cool.

All right, thanks, guys.

All right, thanks.

We have no further questions at this time.

Thank you, everyone.

Have a great day.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.