卡洛馳 (CROX) 2016 Q3 法說會逐字稿

Good morning, and welcome to the third-quarter 2016 Crocs, Inc.

earnings conference call.

My name is Brandon, and I'll be your operator for today.

(Operator Instructions)

Please note this conference is being recorded.

I will now turn it over to Brendon Frey.

You may begin, sir.

Thank you, and thank you everyone for joining us today for the Crocs third-quarter 2016 earnings conference call.

This morning we announced our third-quarter 2016 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, 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 2015 report on Form 10-K filed on Feb 29, 2016 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 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 morning everyone.

This morning we announced our third-quarter 2016 financial results.

Revenues were $245.9 million, in line with our guidance.

And net loss attributable to common shareholders was $5.4 million.

While sales reflect a generally tepid consumer environment for nonathletic footwear and corresponding retailer caution, our financial results demonstrate the more strategic management and resulting improvements of our business.

Our adjusted gross margin was approximately 700 basis points above last year and approximately 200 basis points above our guidance, as we focused our business on higher margin molded product and reduced our promotional activities.

In addition, we managed our inventories down $21 million, or 11% from last year.

Over the past two years we have elevated the capabilities of the team and successfully implemented a more strategic and stable operating platform.

Specifically, we have narrowed our product line, reduced our inventory levels, reduced our retail store footprint, created a product development engine focused on delivering stronger gross margins, achieved top quartile customer service levels for on-time and in-full deliveries, completed the transition of parts of our China business from challenged distributors, and increased our focus and simplified our business model by converting sub-scale markets to distributors.

Despite this progress, we are anticipating the retail environment to remain challenging.

Having restructured our business and tightened our operating practices over the past two years, we believe we can gain market share and deliver profitable revenue growth over time.

We're planning a business cautiously, including accelerating the pace of improvements in our cost structure.

These efforts are primarily focused in three areas.

First, reducing SG&A as part of our increased focus and simplification efforts.

Second, driving efficiency through business process improvements as we leverage our more mature SAP implementation.

And third, optimizing our distribution and logistics costs through more effective supply and inventory planning and execution.

Our product line for fall/holiday 2016 and spring/summer 2017 continues to improve from a consumer perspective as we leverage learnings from each season, which will better position us for the future.

In the quarter we unveiled our collaboration with leading designer Christopher Kane, which drew a great deal of positive media attention.

In the near future we will announce exciting enhancements to our marketing campaign for spring /summer 2017.

I am pleased that we continue to be more strategic and managing our business and executing at a higher level than we have previously.

We are focused on driving quality revenue growth in this challenging environment, and I am confident we will do so.

Now Andrew will provide some additional thoughts on the quarter and future direction.

Thank you, Greg.

The global environment continues to be challenging.

In the US the consumer remains cautious within the nonathletic footwear category.

In Europe economic growth remains tepid, and security concerns have affected tourism and shopping in key markets.

And in Asia growth has moderated, driven predominantly by the economic slowdown in China.

Against this backdrop global wholesale revenues declined 17.9% with declines reflected in all regions.

Carrie will cover the regional performance shortly.

But before she does, I want to put our third-quarter global wholesale revenue performance into perspective.

Wholesale revenues were impacted by three key items.

Firstly, our planned production sales to discount channels.

This was primarily in Europe and the Americas where we deliberately chose to reduce revenue in this channel as we work to elevate the brand.

Secondly, our planned production and sales to distributors.

This was primarily in Asia where we still have some distributors with excess inventory, and we're being conservative in shipping them in order to help them right-size those positions.

And finally, at-once orders came in lower than planned as retailers continue to be cautious with their open to buy dollars and are focused on reducing inventories.

In terms of direct-to-consumer revenue, while year-to-date DTC comps are up 2.4%, our DTC comps for the quarter were down 2.6%.

In the quarter retail comps declined 2.8% in the Americas, 5.8% in Asia and 0.9% in Europe.

High single digit traffic declines across all regions were partially offset by improved conversion and UPCs.

In addition, retail gross margin improved approximately 70 basis points versus expectations through a higher mix of molded product and more careful management of promotions.

Given our retail performance, we are being extremely disciplined in managing our store portfolio, trimming store counts selectively in the US and Europe while opening a limited number of new outlet stores in Asia.

After growing more than 40% cumulatively over the prior two years our e-commerce business slowed in the quarter.

The strongest growth, 12%, was in Asia.

However, overall global e-commerce growth was less than 1% due to double-digit declines in Europe where we experienced lower traffic associated with less effective digital marketing activities as well as reduced end-of-life sales, given our higher quality inventory as compared to last year.

In the quarter we completed the transition from our challenged distributors in China, resulting in mid-single digit constant currency revenue growth for China during the quarter.

We replaced 19 distributor stores with Company-owned stores and we transitioned 24 stores to existing partners.

We are focused on building back our business in these transition territories by serving our go-forward distributors, who are trading normally, and expanding our distributor representation in new territories.

As a reminder, the distributor business falls in the wholesale revenue number.

Turning now to product.

We are excited by the developments in our core product line, especially in our Classics where we have been focusing our innovation activities to generate excitement and demand.

We unveiled the collaboration with Christopher Kane, a leading fashion designer, who's models went down the runway at London Fashion Week wearing an exclusive version of Classic Clog designed specifically for the show.

We anticipate partnering with Christopher Kane on a number of additional initiatives that will roll out in 2017 and beyond.

We've seen momentum building for the Classic Clog.

After the feature of the white Classic Clog in Vogue and our very successful Crocs at Prom social media campaign in the spring, we launched an additional social campaign to accelerate an emerging trend we see in the US where the Classic Clog is seeing double-digit sales growth versus Q3 of last year.

For fall/holiday 2016 we have introduced a broad range of new flats around the Lina and Eve lines which are selling well.

Additionally we continue to build out key franchises, including Swiftwater, Isabella and CitiLane.

We remain focused on disciplined SKU management while building key franchises within improved storytelling.

In keeping with our strategy of focusing on our major countries and simplifying our business model, we recently signed a letter of intent to sell our business in Taiwan to a distributor, similar to what we did in Q2 with our South Africa business.

Revenue for our Taiwan business was approximately $7 million for the past 12 months.

Under the terms of the agreement the distributor will have the rights to operate wholesale, retail and e-commerce in Taiwan.

Now I will turn it over to Carrie to go into details about Q3 performance.

Thank you, Andrew.

Revenue in the third quarter was $245.9 million, down 10.3% from a year ago on an as reported basis.

Wholesale revenue was down $23.8 million and DTC revenue was down $4.4 million reflecting DTC comps of negative 2.6%.

We ended the quarter with 554 stores, three fewer stores as compared to Q3 last year.

Currency had a 1%, or $3.5 million positive impact in the quarter.

And the sale of South Africa, which we've discussed on previous calls, reduced revenue by $2.6 million in the quarter.

Given the minor impact of currency in the quarter, all the revenue results which followed are quoted as reported.

In the Americas revenue was $114.7 million, down 8% versus prior year.

Wholesale revenue was down 15.3%, driven by lower at-once and reduced discount channels sales.

Retail sales in the Americas declined 4.8% reflecting a negative 2.8% comp and seven fewer stores as compared to the same period last year.

E-commerce revenues were up 2.1% resulting in Americas DTC comps of negative 1.7%.

In Asia revenue was $90.9 million, down 8% versus prior year.

Wholesale revenue was down 14.7% as we deliberately reduced shipments to several distributors in an effort to help them reduce their on-hand inventory levels.

Retail sales in Asia declined 2.9% reflecting a negative 5.8% comp and the increase of eight stores in the quarter compared to last year, primarily in China.

E-commerce sales in Asia rose 14.1% resulting in Asia DTC comps of negative 2.4%.

In Europe revenue was $40 million, down 20.1% versus prior year.

Wholesale revenue declined 27.6% due primarily to less discount channels business as compared to Q3 last year.

Retail sales in Europe declined 4.5% reflecting negative 0.9% comps and four fewer stores in the quarter compared to last year.

E-commerce sales in Europe declined 18.4% due to lower traffic and less end-of-life sales, resulting in Europe DTC comps of negative 6.7%.

We sold 12.1 million pairs in the quarter, a 16.9% decrease from the prior year.

The average selling price of our footwear in the third quarter was $19.96, a 7% increase from the prior year, due to less promotional activity and less sales of product to discount channels.

Adjusted gross margin was 51.2%, up 707 basis points from the prior year, due to favorable product mix, less promotional activity, reduce freight cost, inventory adjustments, and currency compared to the prior year.

Non-GAAP SG&A expenses were $122.7 million, down $10.2 million from the prior year largely reflecting the 2015 charge we took for bad debts in China of $18.9 million, partially offset by higher wages and labor-related costs, additional professional fees and currency.

Turning to the balance sheet.

We ended the quarter with $150.2 million in cash and no outstanding borrowings.

As of September 30, 2016 we had 73.5 million shares outstanding.

And we did not repurchase any shares during the quarter.

Inventory at the end of the quarter was $169.4 million, down $21.4 million, or 11.2% from Q3 2015 ending inventory of $190.8 million.

Two final notes on the financials.

First, adjusted net loss attributable to common shareholders after preferred share dividends and equivalents of $3.8 million was $5.8 million.

Second, the weighted average share count used to calculate EPS was 73.5 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.

We're now expecting softer macroeconomic conditions and a more cautious retail environment.

As such, we have lowered our guidance and now expect fourth-quarter revenues to be approximately $185 million to $195 million, resulting in full year revenues of $1.034 billion to $1.044 billion, down low single digits as compared to 2015 after adjusting for currency, the sale of South Africa, and closed stores.

We expect fourth-quarter gross margins to be up approximately 1,000 basis points over Q4 last year due to less promotional activity and lower sales of end-of-life product.

This is a pretty dramatic year-over-year gross margin rate increase, so I want to remind you that in Q4 last year we made a strategic decision to increase the depth and frequency of our promotional activity and clean up inventories ahead of the spring/summer 2016 season.

So we are lapping an historically low gross margin rate.

Finally, we expect adjusted SG&A expenditures to be slightly below last year.

The current environment is challenging.

And we expect those challenges will continue as we entered 2017.

With a more conservative outlook on the top line, we need to more aggressively manage our costs.

As Gregg mentioned, our areas of focus are simplifying our business model, driving process improvements, and optimizing our distribution and logistics costs.

We will update you on the next call with more information on these efforts.

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

Thanks, Carrie.

The third quarter proved as challenging as we had a expected in terms of revenues.

At the same time, we continue to make significant improvements in the way we run the business.

In the near term we expect the difficult retail environment to continue.

We must do a better job of driving quality revenue growth and improving our profitability by continuing to enhance our gross margin and more aggressively reducing our costs.

The work we've done to simplify our business model and improve our processes will continue, enabling us to improve our bottom line.

I continue to believe that we are on the right track.

And while it is taking longer than we would like, I am confident we will drive growth, profitability, and shareholder value in the future.

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

Thank you, sir.

(Operator Instructions)

From Robert W. Baird, we have Jonathan Komp online.

Please go ahead.

Yes, hi.

Thank you.

I would like to ask a few questions about the Americas wholesale performance.

And maybe just starting with a bigger picture question.

Gregg, I'm wondering if you could maybe help parse out what gives you comfort that some of the pressure you are seeing is more externally driven versus any sign that the brand and the marketing direction are resonating like you thought it would?

Sure.

At the end of the last quarter we guided to a revenue range of $245 million to $255 million.

We are obviously in the bottom end of that range.

That guidance included planned reductions of the discount channels sales in the Americas and in Europe, and reduced sales to distributors in Asia with a focus on really trying to help address some exit inventory we had in that channel.

So relative to guidance, we were disappointed with at-once and some of our DTC comp performance.

But we have seen our business stabilize in a number of areas.

And we think we've made significant progress in areas like the improvement we showed in gross margin, where we are from an inventory standpoint, marketing work in some of the recent brand study work that we have done.

And we are focused on driving quality revenue growth.

And we think that we are better positioned today to do that, and that we continue to see signs that give us confidence in the future.

[To close], Jonathan, clearly you see major retailers trying to manage their business close to market.

They are trying to work down their inventories.

And so we think that was some of that primary impact on our at-once in the quarter.

And just following up, is there any color you can provide on different areas or channels, or even geographic areas where you are seeing outsize weakness or strength from a wholesale perspective?

We continued to see solid sell-throughs in the channels that have been core quite channels for us, our key strategic channels such as e-tail, family and sporting goods.

And sporting goods includes Dick's and Academy.

We've been talking about those channels for a while.

And we feel very good about them in terms of what our performance has been and the role that they play for us going forward.

We did see some less -- some challenging performance in department stores in the US.

And frankly that's, as we have talked about in the past, that is our smallest channel of those channels and least strategic in terms of our focus in terms of how we're going to drive growth going forward.

So from a channel perspective, we feel pretty good overall about what our sell-throughs are and how that sets us up for the future.

Yes.

And I think on the other side, as we look around the other side of the world, we really feel like we've grown a line under China.

We've completed the transition from our challenged distributors.

We talked about that in the script in terms of opening 19 stores, transitioning 24 stores to existing distributors.

I think we grew that market at mid-single digits on a constant currency basis.

We feel like we are in a really solid place to grow there in the future.

Okay.

And then maybe one last one on the wholesale business.

I understand visibility may not be all that great sitting here today.

But just given what you see forward-looking in terms of the spring/summer and the fall product line for next year an the marketing plans, any help trying to dimensionalize when you think the wholesale business might get back to growth again?

How long you might think that could take to happen?

We continue to guess.

We've been obviously in front of our key accounts with our spring/summer 2017 line now for a couple of months.

We've been getting very positive feedback on the line, and we are excited about the prospects for that.

But it does remain a challenging retail environment.

Retailers are being very cautious with their open to buy dollars.

So one side, I think we're getting positive feedback on the progress that the brand is making, the progress the products is making, but they're being cautious with their open to buy dollars.

We can't say too much about our marketing programs.

I think Gregg highlighted in the script, we will be in the coming weeks unveiling a significant investment in marketing and a key strategic shift that we're making there.

We're super excited about that.

And we been talking to some of our key relationships under NBA for that.

Okay.

Thanks for the perspective.

From Piper Jaffray, we have Erinn Murphy.

Please go ahead

Great, thanks.

Good morning.

I guess just following up on some other questions on wholesale.

Can you just talk a little bit about how retailers are thinking about big picture, like spring/summer 2017 from an initial order perspective?

Particularly if weather, and I know it's not as sensitive to you guys in this season as others, but if weather really doesn't cool, does that push out maybe the timing of your spring/summer 2017 line hitting wholesaler, even the initial upfront that retailer is willing to take?

Yes.

I think the way I'd answer that, Erinn, is the portion of our business that's pre-broken and placing those orders that are obviously scheduled for delivery on specific dates that actually start in November and December this year with our limited amount of spring/summer delivery in the back portion of this year for major retailers that have hot doors where they take their merchandise in.

It is scheduled for delivery through the first quarter of next year.

As you get into the quarter, do they start to try and push some of those dates a few weeks?

Maybe.

We don't think that's likely.

I think as they come out of fall/holiday and they really -- I think they're in their best interest to liquidate their fall goods and shift to spring/summer and be season right.

But they've been excited about the product line.

We feel good about where the product is.

But at the same time they're trying to manage their business close to market and being a little cautious with their open to buy.

Erinn, I would add that we are trying to plan our business cautiously, given the overall environment.

And we feel we are in a very good place to do that in terms of how we're managing the business, the team we have in place, the visibility we have in terms of how were operating.

So we're definitely taking all of that into consideration as we think about the future.

Okay.

So just said simply, any kind of caution that retailers have right now in terms of the initial conservativeness of the pre-book that's already requested and how you're thinking about the fourth quarter.

I guess as long (inaudible) understanding that.

And how much of your fourth-quarter revenue would you consider would be reorders, or dependent retailers coming back and replenishing?

If we look at last fourth quarter, as a guide, about just over 70% of the business is pre-booked in the fourth quarter.

So the -- that's the wholesale business.

So the remainder is at-once.

But also as a reminder, the fourth quarter is a high DTC quarter where we have about just under half of the business is wholesale, the rest of it DTC.

Got it.

That's helpful.

And then maybe on the SG&A side.

You talked in your opening remarks about some of the opportunities to better manage costs.

Can you flesh out some of those (technical difficulties) and how meaningful could that be as we get into next year?

And then obviously offsetting that it sounds like, and I know you can share a lot of details now, but it does sounds like you will have a decent uptick in marketing.

So just trying to understand the opportunity from a (technical difficulties) perspective (technical difficulties) next year on the SG&A line in aggregate.

Sure.

Erinn, as we mentioned on the call we've obviously done a lot of work over the last couple of years getting the business in a good shape with the narrow product line, improving our deliveries, reducing inventory levels.

What we talked about on the call in terms of additional areas where we expect we can drive efficiency and help drive lower cost is really in the area of how we simplify our business.

And examples of that would be the South African move, the Taiwan letter of intent that we talked about.

Also now that we've had a year, almost two years now on our SAP platform, we now have the opportunity to drive more efficiency and better utilize that system now that we're more stable on that platform.

And then finally the other area's really around distributional logistics and how we can optimize that network to help drive costs as well.

What we talked about, we're doing a lot of work in this area now.

And so we will talk more about this on the next quarter call in terms of what we think the impact will be and the timing of that in 2017 and beyond.

And Erinn, one way to think about it, and certainly is the last two point, leveraging the SAP environment and optimizing distributional logistics.

We had to get SAP up and running, and we had to get our deliveries solid and stable before we could start driving efficiencies out of either of these areas.

So we certainly have felt the coming into 2017, that was going to be the opportunity to really transition from getting stable to starting to drive efficiencies.

And that really is how we're thinking about it and how are trying to transition in our approach to these two areas.

Got it.

Thank you guys.

I will let someone else hop in.

From Susquehanna we have Sam Poser online.

Please go ahead.

Good morning.

Thank you for taking my questions.

A couple of things.

Number one, can you walk through China in a little more detail as to where you are now?

It sounds like you're much more confident for how it is set up, and then maybe some of the stuff you still need to do there.

Yes, Sam, certainly.

If you remember our key challenges in China was a group of distributors who were no longer growing the business and who we had it a significant amount of bad debt that we wrote off with.

Those distributors are completely out of business at this point.

Our relationship is terminated.

We're no longer doing business with them.

What was really important is the retail stores that they operate, or some portion of the retail stores that they operated, we have opened 19 stores which are directly managed.

That brings our overall store count to just over 50.

And we now run those.

And then we also transitioned an additional 24 stores that they operated to existing distributors who are operating those stores.

So we feel like the business is stabilized.

How do we grow it in the future?

A couple of things.

We're looking for new representation in some territories where we don't believe that we're adequately represented so the new party could continue to grow the business and could drive the brand.

And we're seeing very positive results in our DTC business, both retail and e-commerce, with high double-digit comps in our Chinese store base.

And as you know, we are coming into the fourth quarter.

We are looking at some key festivals 11/11 and 12/12 which are huge e-commerce events in China.

So in Q3 we grew the business at mid-single digits in constant currency terms, and we feel like this is a really solid foundation for the future.

Thank you.

And then Carrie, can you just repeat what you said about the fourth quarter SG&A?

Were you saying it is in line as a percent or in line in dollars with last year?

Yes.

Thanks, Sam.

Good point to clarify.

We've indicated it's really going to be slightly down in terms of dollars as compared to last year.

And that is a little bit up as compared to where we had guided at the end of the Q2 call.

And the reasons for that is really we've got some additional expenses planned in the quarter, the fourth quarter associated with our efforts around lowering our cost base for 2017 and beyond.

So that's really the driver of the increase that you see in the absolute dollars.

Last year it was at $121 million.

Are we talking about -- what is -- I guess, can you give us a range of where your thinking in absolute dollars?

When I say slightly below we're talking $1 million, $2 million below last year's level.

And then when we think about next year, some of that falls away.

I would assume, you're doing (multiple speakers) set up for next year.

So a good chunk of that would fall away, because the SG&A, it was $10 million below last year in the quarter.

Or are we looking at about $120 million a quarter as a good run rate, in that ballpark?

I would say the key thing to think about relative to 2017 from an SG&A standpoint is we are working diligently to continue to take out costs and ultimately leverage our SG&A as a percentage of sales.

That said, going into 2017 a headwind that we do have is that we do need to reset our variable comp for next year.

We're taking that into consideration and working against that as well.

As we think about next year, I think we will guide more specifically when we get to our Q4 earnings call.

The takeaway I would want you to have is that we are diligently focused on improving our SG&A cost structure.

From Buckingham Research we have Scott Krasik on the line.

Please go ahead.

Hey, everyone.

Thanks.

If I just look at the roughly $7.5 million decreases in America wholesale and I guess Europe, a little more than that, can you quantify how much of that was reduced sales to the off-price channel?

And then are you going to take that same approach in spring 2017, and roughly how big a business was that in spring 2016?

Then I have a follow-up.

I will start and then maybe Gregg will jump in.

But as we think about Q3 and Q4 last year I think it's important to remember that we did do a lot more in terms of discounting and promotion and sale of end-of-life product as we tried to clean up our inventory base heading into spring/summer 2016.

We're lapping that more so in the back half of the year than a first half of type thing to think about for spring/summer 2017.

As we think about Europe and the wholesale decline in Europe, what I would say there is the majority of that decline in Europe in wholesale is directly related to our deliberate choice to sell less product to the discount channel there.

And then the Americas, it's a combination of a both less discount channel sales as well as less promotional deals in the quarter.

And this is something we've been focused on, Scott, throughout the year.

So while it continues to be a focus going forward, we are focused on quality revenue growth.

As Carrie mentioned, it was a larger issue in the back half of the year.

Okay.

So while you're expressing some caution or conservatism around bookings and the pace of growth in spring/summer 2017, the pullback in discount sales is not going to be a primary contributor to that?

Yes.

I would say, Scott, we're planning the business cautiously.

And that is absolutely given the overall retail environment.

I'd say at the same time, we are focused on quality revenue growth.

And so I would think about those side by side.

It is a real -- we believe it's the right strategy for the business.

Look, our gross margins, the effect that this had on gross margins in Q3 is a real positive.

And that combined with where our inventory is, we feel we are well positioned to execute this and really drive shareholder value going forward.

And then thinking, is returning to a 50% gross margin, is that still the goal?

Yes.

We actually do think that the gross margin rates in the low 50%s is actually feasible.

And we think we are tracking -- we are on schedule to be able to deliver that by 2018.

So we definitely feel like we put all the foundational elements in place and were doing the right thing from a product and brand standpoint to make that happen.

And then Gregg, if you think about your goal is to return to profitable top-line growth, if that happens, because it feels like that's probably not going to play out maybe in the first half of the year, at least the initial look isn't.

What category or what region do you think will really drive that?

What should be the markers that we would look for that you are ready to reaccelerate the business?

We have seen very positive feedback and reaction in many of our core categories.

So clogs, sandals, areas of the business that we have a strong heritage and areas of the business that we have invested it to innovate and freshen up to drive newness and excitement.

So we feel really good about that.

We also think the work we have done around stabilizing the business sets us up that we can operate differently.

And the work we have done in China, frankly, positions us to drive growth there.

So I'd say from a regionality standpoint, we feel good about Asia as being a critical area of growth for us.

But we feel confident in terms of the direction we are heading.

Where we're talking about being cautious is, it's a different retail environment.

We've got to drive the gross margin improvements, we've got to manage our expenses aggressively.

And then we've got to drive quality revenue growth.

Okay.

Thanks and good luck.

Thank you.

From B. Riley, we have Mitch Kummetz online.

Please go ahead.

Thanks.

I've got a few questions.

Gregg, I think it was you or were maybe it was Andrew, who made the comment about Classic Clogs being up double digits in the US.

I was hoping for some additional context around that.

First of all, did I hear that correctly?

And if I did, can you elaborate on that?

What percent of the US is that?

And if that was up double digits, then I'm guessing something else wasn't very strong.

And can you maybe talk a little bit about that as well?

Mitch, let's take this all the way back.

One of our initial strategies was to reinvest from an innovation perspective in our (inaudible) business.

For a reminder, overall clogs, not just Classic but overall clogs, there are many other clogs we make, are about half the business.

And a couple of elements of that strategies in terms of product were, one, is narrowing our breadth and assortment within clogs onto the key franchises and platforms.

Those key franchises are, number one, Classic; number two, Quark brand; and there are a couple of others that are important.

The second was driving both color, seasonal color and prints innovation into those franchises so there's more reason to purchase in season.

And so we think that's been very successful.

The double digit we referenced in North America was a combination of our retail sell-through and our wholesale selling where we've seen double digit growth in our sell-in and sell-through of the Classic Clog.

And then on the Q4 guidance, particularly on the revenue side, the range that you have, particularly if you look at the midpoint of the range, that is a pretty big haircut from where you guys were previously indicating.

If I do my math right, I'm thinking maybe like a $25 million haircut from the prior guide.

And I'm just trying to understand, I know that you're more cautious on the environment.

But is that the entire reason for that big of a haircut?

I would say it's a couple of things.

We are comping a pretty decent DTC comp in Q4 last year that was really driven primarily by, again, that end-of-life, high promotional environment that we were operating in.

So we're taking that into consideration.

I would say the other thing is while we are seeing bigger bookings related to spring/summer 2017 and Q4, as we have expected, that increase is being partially offset by lower discount sales, again as we deliberately try to lower -- reduce that business to improve the quality of the product that's out there in the market and raise the perspective of the brand.

And both of that has been factored in our guidance.

So I would say that combined with, again, the cautious retail environment that both Gregg and Andrew have already mentioned is what we're taking into consideration relative to Q4.

I would also remind you that as we talked about it the margin we are anticipating in Q4 is over 1,000 basis points higher than last year.

So yes, the sales are lower than last year but the quality of sales are dramatically improved and a very different perspective.

Okay.

And then maybe last, Gregg, a bigger picture question.

Ultimately I think you said that you're hoping to take market share.

I think a couple times in your script you also referenced a tough nonathletic environment.

It seems like your core family channel on the wholesale side, it seems like those guys are continuing to move more and more into athletic, which I've got to believe is a bit of a headwind for you guys in terms of ultimately taking share.

Can you just talk a little bit about that?

Is that an issue as we go forward?

Yes.

That is absolutely built into that cautious environment that we speak about.

Clearly athletic, even though it's slowed down overall, is gaining share from a market perspective.

And we are focused on gaining market share in the categories in which we compete.

But those categories absolutely have some headwinds internally within the retailers based on the shifts they have going on internally.

We feel we are well positioned to do that.

That's what I will say.

I think we have strong relationships with our accounts.

Those are -- those are something we're constantly worked on -- we work on.

But we've built that.

And we feel that are product engine and our marketing plans will put us in position to do that very effectively.

So we feel we are well positioned to do that, but it is absolutely a headwind.

Got it.

All right.

Thanks, guys.

Thank you.

(Operator Instructions)

From CL King we have Steve Marotta online.

Please go ahead.

Good morning, everybody.

Can you talk a little bit about the geographic breakdown of fourth-quarter sales, the anticipated decline of 10%, and where the strongest and weakest market shake out?

We typically don't guide at that level within the quarter.

I would say if we talk about it from a channel standpoint, I would say from a DTC standpoint we're expecting to see a little bit of improvement from what we saw in Q3 from a DTC standpoint, and that's primarily related to some of the e-comm issues we had in Europe that we expect to be recovering from in the number.

But we are comping at pretty high DTC comp from last year.

And then in the wholesale business, again that, the lower guidance, is really reflecting a lower at-once assumption in terms of the cautious perspective that we're taking relative to that.

So as you think about the various across the regions, we still expect to be in a growth position in Asia, specifically in China in the fourth quarter as we recover from a Q3 standpoint.

We are projecting a little bit of softness across the board from the wholesale account business.

Okay.

That's helpful.

My final question is, I understand the conservativeness surrounding the first half of next year and order flow and the challenging environment.

In the totality when you consider your direct-to-consumer layered onto that and inclusive of e-commerce, of course, is there a chance at low single-digit growth in the first half of the year?

Or is that a stretch dream?

Are you referring to overall single-digit growth or are you referring to DTC?

Comprehensive, overall.

What I would say is, we're not providing specific guidance on 2017 at this point.

I think what we're saying -- I guess the message we would like you to take away relative to spring/summer 2017 is we are being cautious.

We have not indicated a specific growth or decline number, obviously, for spring/summer 2017.

So I would be careful about what people are taking away from the call around that message.

Again, we feel good about the spring/summer 2017 line.

We've had good receptivity.

We've done a lot of work to improve the foundation from which we will grow from specifically as we think about China, and as we have exited underperforming retail stores.

So we feel good about 2017, but we are being cautious and planning the business accordingly.

Okay.

Thank you.

From Monness, Crespi and Hardt, we have Jim Chartier on the line.

Please go ahead.

Thanks for taking my questions.

Carrie, you mentioned you wanted to get us to a point where you could start to lever again.

What type of sales growth do you think you can start to lever SG&A again on, once you start to take in the costs benefiting from the SAP systems?

I don't really want to put out a revenue growth that we need to leverage.

I think the opportunity we have is, given the foundational elements that we would put in place, the stability that we have come to over the last couple of years, we believe there's an opportunity to leverage the SG&A against that.

Now we do have, like I said, have the headwind of the resetting of the variable comp.

But otherwise we should be able to drive some leverage in SG&A once we adjust for that, even as we think about a more cautious top-line revenue growth number.

So that's what we want to be mindful of when Gregg talks about planning the business cautiously.

Obviously if you plan your business aggressively, SG&A, it's easy to say (laughter) you're going to leverage SG&A.

I think our point of view is, let's plan the business cautiously, be ready to respond to the demand that's out there, but we need to control our SG&A costs in an environment that doesn't deliver that for us.

Right.

Andrew, you have talked about allowing your distributors in China to work through some excess inventory.

Where are the inventory levels at those distributors now?

And where do you think you will start to shift those distributors and they'll growing again for you?

We said distributors in Asia.

Those are -- The biggest issues are not in China, just to be 100% clear on that.

The distributors in Southeast Asia and the Middle East where we think -- where we know inventory levels are heavy.

I can say we've made some good progress on that in the last 3 to 6 months.

We think we've got another 3 to 6 months of working on that, and then we'll be in good shape.

Great.

Thank you and best of luck.

Thank you.

And from Susquehanna, we have Sam Poser online.

Please go ahead.

Two other questions.

Can you give us some idea of how to think about the tax rate for the fourth quarter?

And then in your inventory and in your sales, can you talk about the percent of regular price and the percent of closeouts or promotional, because it sounds to me like you're really working hard to, as you mentioned, to clean up your distribution.

The tax rate in the quarter, because it's a quarter with a loss and given geographic dispersion of where income is and our losses are in the quarter, the tax rate percentages is, you will see in -- looks completely out of whack.

I think it is important, really it's more about where we are from a year to date from a tax rate standpoint and where we expect to be on a full-year basis.

And that's pretty much in line with where we were -- actually, I probably can't use last year as an example.

But it's a pretty normalized tax rate in the 20%s -- 20%, Sam.

I can follow up with you after.

I don't have that at my fingertips.

But Q3 will be unusual, given the loss and the geography of the income.

I don't know if that answers your question, but again, we can follow up afterwards.

Q4 you meant will be.

Well, Q3 is, given a loss in Q3, the tax rate percentage is going to look unusual.

So it's really looking at tax on a year-to-date basis and what we project for the full year.

All right.

Go ahead, Tom (sic).

As far as the percent of closeouts and so on and so forth?

Obviously we don't break our full price versus closeout sales.

The key thing, yes, you're absolutely right.

We are working really hard to clean up the business.

And the piece that we focused on very coherently is the discount channels.

As we talked about that in Europe and in America we have significantly cut back the proportion of the business that we sell into those channels because we think that's undermining the brand in the long term.

We think this is an opportunity to elevate the brand.

At the same time, it is a promotional environment right now.

And so as we look at our DTC business, we are certainly not looking to lead the market down in terms of promotion, and we're doing exactly the opposite.

We are cutting back our promotions both online and in-store.

But you do have to provide some additional incentive for the consumer to purchase and be competitive in the marketplace.

It's a balancing act, as you know well.

Let me just come back on the tax rate real quick, Sam.

Year to date through September end the effective tax rate is 24%, But in the quarter what you'll see as you look at the Q is the tax rate is 1,000% in the quarter, given the geography of the jurisdictions where we have income.

So that's what I was trying to allude to in terms of Q3 will look unusual.

But you've really got to look at it on a year-to-date basis.

Thank you.

Thank you.

We will now turn the call back to management for closing remarks.

We just want to thank everyone for your questions.

We appreciate the support.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.