卡洛馳 (CROX) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter 2016 Crocs, Inc.

earnings conference call.

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

Please note that this conference is being recorded.

I will now turn the call over to Marisa Jacobs, Senior Director of Investor Relations.

Miss Jacobs, you may begin.

Good morning, everyone, and thank you for joining us today for the Crocs fourth-quarter 2016 earnings call.

I am Marisa Jacobs and I would like to start off this morning by introducing myself.

I recently joined Crocs as the Senior Director of Investor Relations.

I began my career as a securities lawyer before transitioning into Investor Relations and Corporate Communications.

Most recently I let the Investor Relations function at Express, the specialty apparel and accessory retailer.

Since joining Crocs I moved to Boulder and am now fully immersed in the business and getting up to speed as quickly as possible.

I am delighted to be here and look forward to speaking with you shortly and working with you together in the months and years ahead.

Earlier this morning we announced our fourth-quarter and fiscal year results and a copy of the press release can be found on our website at Crocs.com.

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

These statements include, but are not limited to, statements regarding future revenue and earnings, prospects and our product pipeline.

We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the Company's annual report on Form 10-K.

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 those metrics can be found in the earnings release filed earlier today and on our investor website located at Crocs.com.

Joining us 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 to the call over to Gregg.

Thank you, Marisa, and good morning, everyone.

Please join me in welcoming Marisa to Crocs; we are delighted to have her on the team.

This morning we announced our fourth-quarter and full-year 2016 results and introduced guidance for the first quarter and full year of 2017.

We also made some announcements that relate to the ongoing transformation of Crocs as we continue on the path towards sustained profitable growth.

I want to spend the bulk of my time talking about our ongoing transformation and Andrew and Carrie will speak to you in greater detail about our 2016 results and our 2017 guidance.

Looking back on 2016, the year can be viewed from two perspectives: operational and financial.

From an operational perspective it was a successful year.

We continued to reshape Crocs into a Company that functions more efficiently and effectively and we are in a far better place now than two years ago.

And while the operational work is critical, it is not yet, and I emphasize yet, translating into the financial gains we continue to believe are achievable.

As some of you know, our efforts to reshape Crocs actually began more than two years ago when Andrew joined the Company as President.

At that time a strategic roadmap to unlock the full potential of the Crocs brand and business was put in place.

Over the last two plus years we have made significant progress with respect to: our team and organizational structure, product, marketing, sourcing and distribution, inventory management and sales channel capabilities.

Let me briefly touch on each of these beginning first with our team and organizational structure.

Over the past two years we upgraded the talent in the organization with individuals possessing deep industry experience and essential skill sets across each of our regions and functions.

The executive team that we've put in place averages over 20 years of relevant industry experience apiece.

With this stronger team in place, including the broader team we have assembled, we are better positioned to complete the transformation embarked upon two years ago.

Second is product, we have greatly simplified our product line.

Since completing the 2014 collection we have reduced SKUs brought to market from over 2,000 to approximately 1,000, generating improved SKU productivity and gross margins.

The SKU count reduction of approximately 50% is also contributing to simplifying our supply-chain and planning and allocation functions.

In addition, for the first time, we are presenting a unified global collection which is crucial to enhancing our brand positioning on a global scale.

Finally, from a style perspective, we have invigorated essential products such as our classic clog while also building out new collections such as Isabella, Swiftwater and CitiLane Roka.

Third is marketing, we created a global marketing function to replace the regional one.

This has enabled us to project a consistent global brand image for the first time.

Combined with an elevation of our overall marketing execution, we are seeing an increase in our brand relevance rankings in almost every key market.

Fourth is sourcing and distribution.

The improvements we've made in sourcing and distribution are driving more reliable demand in supply planning processes, more robust and proactive supplier relationships, more effective supply-chain management by leveraging SAP, and shorter lead times, all of which are enabling us to be more responsive to the needs of our customers and in turn drive higher quality revenue and margin gains.

Our on-time and full performance illustrates this progress.

We went from being one of the worst performers in the industry two years ago to a top quartile performer today.

In fact, our 2016 performance was the best in the Company's history.

Fifth is inventory management.

We have been working with our wholesale and distributor partners to clear out their old and unproductive inventory while simultaneously reducing Company owned inventory.

At year end our inventory was down 13% or $21.2 million compared to a year ago.

Due to our success in this area we are bringing newness to our customers more consistently, which is essential to building demand and generating more full price selling.

Sixth is strengthening and simplifying our go-to-market approach.

At wholesale we have strengthened our customer relationships and are now delivering higher levels of service and better product and marketing programs.

With a more collaborative approach we are better positioned to grow this business.

At the same time we been focused on our highest potential relationships and decreasing our Tier 4 or discount channel business as well as terminating relationships with less strategic distributor partners.

With respect to our retail business, we are still too heavily weighted towards full price versus outlet locations.

In some cases we are being constrained by large expensive stores with long leases that have been difficult for us to exit.

We nevertheless continue to close full-price stores and, since the beginning of 2015, have reduced our full-price store count by 83 or more than 25% of the full-price fleet.

New store openings are being heavily weighted toward outlet locations.

The rightsizing of our store fleet will continue over the next few years and Andrew will provide more details on that shortly.

And finally, e-commerce where our sales grew high-single-digits in 2016 despite disappointing second-half results.

Given shifting consumer shopping patterns we expect this channel to continue to grow in importance to the overall business.

We have been improving our online customer engagement, accelerating our efforts around a mobile first approach and allocating additional marketing dollars to drive further e-commerce growth.

In summary, over the past two years we established critical capabilities and added key talent across the organization.

We created an effective and stable operating platform and our work to establish best practices with respect to our wholesale, retail and e-commerce platforms has been substantially advanced.

I am proud of the organization now in place and extremely grateful for the hard work and dedication shown by the Crocs team across the globe.

Looking ahead we are committed to further strengthening the organization and improving our financial results -- which gives rise to two other topics I want to discuss this morning.

The first is today's announcement regarding leadership changes.

I am very pleased to share that in response to the substantial progress made over the past two years, our Board of Directors and I have determined that we are now in a position to streamline our leadership structure and consolidate the President and CEO roles.

Effective June 1, Andrew Rees is being promoted to President and CEO.

At that time I will step down as CEO but continue in my Board role.

Andrew and I have worked side-by-side over the past few years and I have witnessed firsthand his strength as both a strategic thinker and a leader.

I've greatly enjoyed working with him and look forward to continuing to do so as he moves into his new role.

I believe fully that Crocs will be in good hands under his direction.

It also gives me great pleasure to share with you today a number of other changes we are making to better capitalize on the talented team we have assembled over the last two years.

Michelle Poole, SVP of Global Product & Merchandising, is also assuming responsibility for marketing.

Ann Chan current SVP and GM of Europe will transition to the role of SVP and GM of America's.

David Thompson, current SVP of Asia, Middle East & Africa is also assuming responsibility for Europe.

And given the importance of e-commerce we are establishing a new global e-commerce function to be headed by Adam Michael who has been promoted to SVP of Global E-Commerce.

The last topic I want to address before wrapping up relates to our continuing efforts to drive further operational efficiencies and reduce our SG&A.

We have identified a number of actions to be completed by the end of 2018 which we expect to reduce our SG&A by $75 million to $85 million and deliver between $30 million and $35 million in incremental earnings before interest and taxes in 2019.

We believe these actions are critical to rightsizing our cost structure.

Andrew will provide additional details momentarily.

I'd like to close today by reiterating my confidence that the progress we have made over the past two years, combined with the changes announced today, sets us up for improved growth and profitability.

Although I will be taking a step back from day-to-day operations, I am looking forward to contributing to the success of Crocs as I continue in my Board role.

At this time let me turn the call over to Andrew.

Please join me in congratulating him on this well-deserved promotion.

Andrew.

Good morning, everyone.

I would like to begin by thanking Gregg for the strong leadership he has provided to this organization.

The Company has benefited from his footwear expertise and he has inspired people all across the organization with his passion for this business and his vision for reenergizing the Company and the brand.

On a personal note, I want to thank him for serving as a mentor during the time we have worked together.

His guidance has been invaluable and I know I can count on his ongoing advice and support.

As we focus on our business we are all aware of the macro environment as clearly challenging.

It is our job, whatever the circumstances, to grow shareholder value.

Our focus in 2017 is to capitalize on the talented team we now have in place to continue driving improvements in our product and marketing, leveraging our more stable operating platform to create further efficiencies, and improving the profitability of the Company.

While the focus of the management team is clearly forward-looking, I do want to begin by briefly looking back to 2016.

It was a busy and productive year.

As Greg has already noted, from an operational perspective we strengthened our organization both from a people and process standpoint, dramatically improved our on-time and [in full] performance, solidified relationships with our key wholesale partners, worked through excess inventory in each channel of our business, reduced the size of our full-price retail fleet, exited certain Company owned businesses where we lacked the necessary scale and expertise to justify our presence, and shifted business to more qualified distributors.

The last four actions just mentioned depressed our revenues last year.

We took those actions intentionally, however, because they are essential to improving the long-term health and profitability of the business.

As it relates specifically to the fourth quarter of 2016, revenues were $187.4 million, which was within our guidance range.

Please keep in mind this includes $4.4 million impact of FX fluctuations, an intentional reduction of sales in our discount channel, store closures and the disposition of our South Africa business which in aggregate reduced our revenues by approximately $16 million compared to last year.

At wholesale our global business decline 10.7% as expected.

These reductions versus the prior year were driven by the same factors we discussed during our third-quarter call.

Specifically we continue to reduce sales to discount channels, primarily in Europe and the Americas; in Asia wholesale revenues were down due to the sale of our South Africa business earlier in the year; and lastly, at-once orders came in slightly lower than planned as retailers continue to be cautious with their open to buy dollars and to focus on reducing their own inventory.

In terms of our direct-to-consumer business, sales declined 9.9% and our comps were down 7.7%.

At retail we saw high-single-digit traffic declines in the Americas and double-digit traffic declines in Asia.

We drove conversion rates and UPTs higher.

But these games did not offset the slowdown in traffic.

In response to shifting shopping patterns, during the year we reduced our full-price retail locations by 47, to end the year with a full-price retail store count of 228, down from 275 at the end of 2015.

We increased outlet stores by 46 during the year and ended 2016 with 232 outlet locations.

Total store count at year end was 558 compared to 559 last year.

Our e-commerce business was mixed throughout the year.

On a full-year basis we grew e-commerce 7.9% on top of a 15.6% in the prior year.

After getting off to a good start our performance weakened and actually declined 9.7% in the fourth quarter.

Our execution across regions was inconsistent with performance in Europe, our smallest region, outpacing Asia and Americas.

In Asia weak sales in China on singles day, or 11-11, accounted for the shortfall versus expectations.

In the US conversion and UPT gains were insufficient to overcome the drop in traffic.

There were three primary causes for the weaker traffic.

First, we reduced marketing activity compared to last year's fourth quarter.

Second, we saw some purchasing activity migrate from our site to sites hosted by large retailers offering our product.

Finally, with quality inventory compared to last year we had less deep discounting and end-of-life product available.

Turning to product marketing initiatives.

We continue to see success in our core molded product line.

Customers are responding favorably to new colors and prints added to the lineup.

Furthermore, with demand up for both lined and unlined molded clogs, we learned that some of our spring/summer products can be carried over into fall holiday season, thereby extending our selling season.

We have also confirmed the importance of adding newness to our iconic molded footwear through new color and graphic introductions and through the expanded use of licensed characters.

Key collections including Isabella, Swiftwater and CitiLane Roka are working well and are poised for further growth.

At the same time, a few of our new fall/winter lines, specifically Sarah and Lena, proved to be a bit too fashion forward for our core customers.

We took away valuable learnings from this and will be incorporating those into future collections.

Our spring/summer 2017 collection rolled out to warm weather doors in November and early reads are encouraging.

Going forward our innovation and newness will be most heavily concentrated on core clogs and sandals, flips and slides where we see the greatest opportunity for growth.

From a marketing perspective we are excited about our new Come As You Are campaign.

It is just getting started with the official launch planned for April.

It is our first campaign tapping into the power of brand ambassadors.

Our partners are Drew Barrymore, John Cena, Yoona Lim and Henry Lau.

Each of the celebrities has a unique personality which simultaneously possesses qualities consistent with Crocs' DNA.

Additionally, Drew and John enjoy strong global recognition while Yoona and Henry are widely known and admired throughout Asia and have fans across the world.

In spite of the fact that the campaign hasn't yet formally launched it is creating great buzz.

Our teaser postings are the most viewed in the Company's history and we are generating the highest engagement of any social media campaign we have run to date.

In terms of our marketing investment, consistent with our belief that digital and social campaigns are the most effective means of reaching our target consumers, we are channeling the majority of our marketing dollars there and materially reducing our use of TV and print.

Before wrapping up I want to expand upon Gregg's comments relating to the cost reductions we announced earlier today.

Over the past several months, as we continued to focus on removing unnecessary complexity from our business, we conducted a comprehensive review of our cost structure.

This led us to identify a series of actions to reduce our SG&A by $75 million to $85 million.

The SG&A reductions fall into two main categories: approximately 70% will come from planned store closures over the next two years.

This will result in a net 25% reduction in store count, bringing it down to approximately 400 stores by the end of 2018 from the 558 at the end of 2016.

The balance of the SG&A reductions will be generated from efficiency gains.

We are increasingly able to leverage costs through standardization and our global ERP system and, from an organizational changes, giving rise to more nimble and responsive organization.

In order to deliver these savings we expect to incur approximately $10 million to $15 million in one-time costs over the next two years with approximately $7 million to $10 million of costs being incurred in 2017.

The SG&A reductions just outlined are expected to deliver an incremental $30 million to $35 million of earnings before interest and taxes in 2019.

For modeling purposes, if you use the midpoint of both ranges you will arrive at a flow-through of approximately 40%.

I specifically want to call your attention to the fact that the flow-through rate is lower than would otherwise be the case because the stores being closed are burdened with high SG&A and generate little to no operating profit.

Our ability to deliver these SG&A reductions is a direct result of the operational and process improvements we put in place over the past few years combined with the continued efforts to simplify our business model.

At this time let me turn the call over to Carrie to provide a deeper dive into our fourth-quarter financial results and give more detail on our cost reductions and 2017 guidance.

Thank you, Andrew.

Without repeating what Gregg and Andrew have already said, I hope it is clear that despite a decline in revenues this year the quality of our revenues and our underlying business have significantly improved, which positions us well going into 2017.

Our 2017 guidance incorporates our ongoing commitment to our current strategy, which I believe will drive long-term growth and profitability.

I also want to call out some of the financial progress we did make throughout 2016.

We drove our gross margins higher, we improved our working capital and inventory management, we strengthened our internal controls, and we identified substantial cost savings opportunities all of which create momentum.

Let me turn now to the fourth quarter of 2016.

Revenue in the fourth quarter was $187.4 million, down 10.2% from a year ago.

This places us at the top end of our guidance after excluding the impact of currency, which reduced our revenues by $4.4 million.

We sold 10 million pairs in the quarter, a 14.1% decrease from the prior year.

The average selling price of our footwear in the fourth quarter was $18.59, a 5.3% increase.

The increase was realized across all channels since we benefited from both limiting sales into the discount channel and promotions that were not as deep as the prior year.

During the quarter we opened 21 stores, 16 of which were in Asia, and we closed 17 stores, 14 of which were full price stores.

We ended the quarter with 558 stores, one fewer store as compared to Q4 last year.

Turning to our regions, let me note first that given the limited impact of currency in the quarter the following revenue amounts are as reported.

America's revenue was $93.1 million, down 9.3% versus prior year.

Wholesale revenue in the Americas was down 9.9% driven by lower at-once sales.

Retail sales in the Americas declined 7.1% reflecting a negative 5.6% comp and six fewer stores compared to the same period last year.

E-commerce sales declined 12.6% due to factors Andrew previously discussed, resulting in an Americas DTC comp of negative 8%.

In Asia revenue was $68.8 million, down 9.8% versus prior year.

Wholesale revenues were down 5.3% as a result of the sale of our South African business in April 2016.

Retail sales in Asia declined 16.6% reflecting a negative 12.1% comp despite the addition of nine stores compared to last year.

Gains in conversion and UPT could not offset double-digit traffic declines.

E-commerce sales declined 7% resulting in an Asia DTC comp of negative 9.6%.

In Europe revenue was $25.4 million, down 14.2% versus prior year.

As planned, we continue to reduce sales into our discount channel leading to a 23.3% reduction in our wholesale revenue versus last year's Q4.

Retail sales in Europe declined 1.4%.

Our retail comp of positive 1% was offset by four fewer stores compared to Q4 2015.

E-commerce sales in Europe declined 0.8% resulting in our European DTC comp being essentially flat.

Our adjusted gross margin was 42.0%, improving approximately 550 basis points from the prior year.

This reflects a favorable shift in our product mix, reduced discount and promotional activity and lower freight charges.

While improving meaningfully we did not achieve the 1,000 basis point improvement referenced on our last call.

A little more than half of the shortfall related to larger than anticipated currency fluctuations and our DTC mix coming in less than expected.

The remaining shortfall was primarily due to an increase in royalty expense related to clarification of new and existing agreements which resulted in a change in estimates for royalties.

Non-GAAP SG&A expenses were $115.7 million, down $5 million or 4.2% from the prior year and better than our guidance.

Due to the shortfall in gross margin versus expectations, our loss from operations was higher than anticipated and our EPS was materially lower than anticipated.

Net loss attributable to common shareholders, after preferred share dividends and equivalents of $3.8 million, was $44.5 million or a loss of $0.60 per diluted share.

The weighted average share can use to calculate EPS was 73.3 million shares for Q4.

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

Turning to the balance sheet, we ended the quarter with $148 million in cash compared to $143 million last year and no outstanding borrowings.

We did not repurchase any shares during the quarter.

Inventory at the end of the quarter was $147 million, down $21.2 million or 13% from Q4 2015 ending inventory of $168.2 million.

We generated $40.3 million (sic ? see note before Q&A) of cash from operating activities, an increase of $30.6 million (sic ? see note before Q&A) over last year, driven primarily by improved working capital management.

Before I wrap up our discussion of 2016 I am pleased to share with you that we have successfully remediated the two material weaknesses that were identified during our 2015 yearend evaluation of the effectiveness of our internal controls.

As we discussed with you last year, these controlled deficiencies did not impact our reported results.

We take our internal control environment very seriously and have made significant improvements over the past year.

This enables us to now say with confidence that our internal control environment is effective.

Andrew commented earlier on our cost reduction plan.

I want to reiterate the key elements of that plan.

We have identified opportunities to reduce our SG&A by $75 million to $85 million, which will deliver an incremental $30 million to $35 million of earnings before interest and taxes in 2019.

As Andrew noted, the SG&A reductions will fall into two main categories.

Approximately 70% of the SG&A reduction is driven by planned store closures over the next two years which will result in a 25% reduction in our store count.

While these store closures reduce our SG&A they do not have a meaningful impact on our earnings before interest and taxes.

But, by reducing our geographic footprint, we will continue to simplify a complex business model and also address the disproportionate amount of owned retail relative to our peers.

The balance of the SG&A reduction is associated with operating more efficiently.

We are progressively realizing greater leverage through standardization and the use of our global ERP system and from making organizational changes to streamline our business.

We expect to achieve approximately $25 million of SG&A reductions in 2017 increasing to $45 million to $50 million in 2018 and then reaching the full $75 million to $85 million in 2019.

Of the $25 million in anticipated SG&A reductions in 2017 we have already taken action to deliver half of this and we expect the planned store closures to deliver the rest.

These benefits have been factored into our guidance.

To achieve these savings we expect to incur approximately $10 million to $15 million of one-time costs over the next two years with approximately $7 million to $10 million of this amount being incurred in 2017.

These one-time costs consist primarily of severance and consulting costs.

Let me now turn to guidance.

Regarding currency I want to note that our guidance is on and as reported basis.

I also want to call out that our guidance does not reflect any meaningful changes to foreign currencies compared to today.

Separately, we expect the retail environment to remain challenging due to continued global uncertainty and macroeconomic issues.

However, we are focused on controlling those items within our control and on strengthening the organization, elevating our brand and improving profitability.

Against this backdrop for the full year 2017 we expect revenues to be relatively flat.

Consistent with our strategy to improve the quality of revenues, we are continuing to reduce sales into the discount channel to improve both margins and brand perception.

Second, we are continuing to rationalize our footprint by closing less productive stores.

And third, we have the impact of lower sales due to the disposition of our South Africa and Taiwan businesses in 2016.

Absent these deliberate actions revenues would be up mid-single-digits for the year.

We expect our gross margin rate to be approximately 50% for the full year as we continue to drive improvements in this area.

These gains relate to our ongoing focus on higher margin core molded product, anticipated changes in channel mix, reduced discount channel revenue and lower promotional activity associated with better inventory management.

Our SG&A for 2017 is expected to be between $500 million and $505 million, which includes the $25 million in SG&A reductions previously mentioned.

These savings will be partially offset by increases related to the resetting of variable compensation and a higher marketing investment.

Please keep in mind that approximately $7 million to $10 million of one-time charges associated with the implementation of our SG&A reduction plan are included in the $500 million to $505 million guidance range.

With respect to the first quarter of 2017, we expect our revenues to be between $255 million and $265 million.

This range takes into account the impact of three factors mentioned previously: reduced lower margin discount sales as we continue to elevate our brand; a lower store count; and the sale of our South African and Taiwan businesses in 2016.

In addition, our revenue guidance reflects a conservative DTC comp.

We are lapping a 9.9% DTC comp from Q1 last year generated in part by high sales of excess and end-of-life product which will not be the case this year given our improved inventory position.

We expect first-quarter gross margins to be up approximately 200 basis points over the prior year.

SG&A is expected to be moderately above prior year in absolute dollars reflecting a timing shift in marketing expenses and the addition of the one-time cost to support our SG&A reduction plan previously mentioned, which are estimated at $2 million for the quarter.

At our fall 2015 Investor Day we had established targets of 8% revenue growth, gross margins in the low 50%s and an EBIT margin of 10%, which we expected to be achieved by 2018.

Due to dramatic changes in the retail environment over the past two years, we want to acknowledge the fact that the 8% revenue growth target was overly aggressive and the operating margin target will not be attained in the original timeframe.

Given volatile market conditions we are not establishing new mid-term revenue and EBIT margin targets today.

That said, we continue to believe that the gross margin target can be achieved as projected.

We also continue to believe that longer-term the business can deliver EBIT margins in the 10% range.

I am proud of the operational progress we made in 2016.

We stabilized our organization, which allows us to turn our attention to optimizing the business.

We understand clearly that our results must translate into improved financial performance and that objective is our top priority for 2017.

Now I will turn the call back over to Gregg for his final thoughts.

Thanks, Carrie.

Throughout 2016 we continued to refine our business so that we can succeed in the current retail environment.

While our financial results did not improve to the degree anticipated when the year began, we did make meaningful strategic and operational progress transforming Crocs into a Company that can more efficiently and effectively produce product that delights our existing consumers and bring new ones into the brand.

This is the means by which we will improve our financial results and in turn deliver enhanced shareholder value.

Let me close by once again expressing my sincere thanks to our incredible associates around the globe whose dedication and hard work is so essential to our Company.

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

Before we take our first question -- this is Carrie.

During my prepared remarks I referenced an inaccurate number with respect to our cash from operating activities.

Just to clarify, we generated $39.7 million of cash from operating activities and that is an increase of approximately $30 million over the prior year.

Steve Marotta, CL King & Associates.

Carrie, one quick comment.

Regarding SG&A, you mentioned that it is expected in the first quarter to be moderately above last year, there is a timing shift in marketing spend.

Could you quantify that timing shift and is it from second quarter, I assume?

And the other question related specifically to that is did you say there was about $2 million in non-cash expenditures in there as well?

So let me take the latter part of the question first.

The $2 million of one-time charges are cash charges, so they are not non-cash.

With respect to the increase in expenses in Q1 relative to last year, it is marketing and that will (technical difficulty) approximately around $4 million incremental over prior year.

And it is really phasing across the quarters and that is really just related to the accounting treatment as we have got the celebrity campaign which is different than what we have had in the past years.

Okay, that is helpful.

And the guidance for fiscal 2016 sales is relatively flat.

But as you mentioned, you are deemphasizing the discount channel, it will be a lower store count and the discontinued businesses internationally.

What is up in the quarter?

What's -- where is the silver lining in the quarter to offset those that would get you to flat sales?

Yes, so, the -- relatively flat for the year.

So let me take it against the year and then we will come back to the quarter if that is helpful.

So against the year where we will offset the lower discount sales, the sale of South Africa, Taiwan and the [starters] will really be more in the DTC area.

Primarily in the e-commerce business where we expect to get back to the double-digit growth that we have been seeing kind of up until this year where we had high-single-digits due to some of the challenges in the back half of the year.

We do see some growth in wholesale as well, but it will be primarily out of the e-com business.

And then if I go back to the quarter, we are talking to revenue guidance of $255 million to $265 million.

Again, as we think about the quarter, growth in the quarter will primarily be coming from the Internet channel.

If you think about the discount channel in South Africa and Taiwan, those really were in our wholesale channel.

So those channels will be down because of those areas.

Okay, but Q1 is expected to increase from an e-commerce standpoint?

Overall we are expecting it to be relatively -- we don't guide specifically on the channels in the thing.

But I would say we do expect to see -- it is going to be a tough quarter.

Look, we are comping over a 30% comp from Q1 last year because we were exiting a lot of [EOLs] and its products.

So we are going to expect it to be significantly softer than last year obviously.

I would model it more around the flat level from an e-commerce standpoint.

Yes, I think the important element, Steve, is that we are planning the business conservative from a top-line perspective but continuing to drive margin improvement.

That is very helpful.

Thank you.

Erinn Murphy, Piper Jaffray.

Just a clarification I guess first on the guidance.

How many stores are you closing particularly in 2017?

Sorry if I missed that.

I think you said 25% over two years.

Yes, we said -- which is about 160% over two years.

We are closing a little -- probably a little less than half of that in 2017.

Okay.

And, Carrie, do those store closures come out in any particular quarter?

Are they towards the end of the year or how are you thinking about timing?

Yes, they are actually spread throughout the year, Erinn.

Okay.

And then I guess just going back to Steve's first question.

I guess where we are struggling a little bit is if -- obviously you are closing the doors and you talk about discontinuing discount sales as well.

It just seems like you must be seeing something in an order book that gives you the confidence to kind of see revenue acceleration in the back half.

But could you maybe just speak about what you are seeing on the wholesale side from your key partners, particularly in North America?

Yes, Erinn, let me take that.

So if we look at wholesale -- I mean, obviously the wholesale environment is challenging.

But as you look at our wholesale partners this year versus last year, we believe they are coming into the year with cleaner inventories.

They were very focused in the back end of the year in terms of working there inventories down.

They have been cautious with their open to buy.

And we believe we are in a much better position relative to them.

We've got better product, better marketing, we are lapping a full year of dramatically improved service levels and we have much stronger relationships.

So while we think the environment requires us to continue to be cautious about our forward-looking expectations from wholesale, we are seeing some positive signs of light.

I think if you look additionally in the quarter, we continue to see good sell-through in our classic and Croc brand product, our core products.

They are performing well.

Early deliveries of sandals, which have started to deliver in late Q4, have been selling well, particularly around some traditional styles, Capri, Sanrah and some new styles, Swiftwater.

So that is kind of how we see the wholesale environment particularly in the US.

And I would say that translates reasonably well to the rest of the world.

Okay.

And then maybe just on gross margin for 2017; you guys have it projected up again.

Just trying to understand some of the puts and takes.

Because I would imagine if you close those stores that is going to be a negative headwind for gross margin.

So obviously there is offsets, I'm sure, with discontinuing some of those discount sales.

But just curious on just the overall puts and takes there.

Yes, so a couple pieces.

So the discount channel sales, reducing those obviously reduces lower margin product.

The other element there is continued focus on the core molded product, which is the highest margin product in our portfolio.

And then the last piece, as we talked about the 2017 guidance, the growth really is going to come from DTC primarily from e-commerce.

And so, that mix shift is still going to be favorable for us.

And so, we'll get the channel mix benefit from a gross margin standpoint as well.

And then the final piece is, again, we had in the first part of this year -- still had EOL and deep discounts trying to exit excess inventory primarily more so in Q1 last year than later quarters.

But we don't have that in this year.

Okay.

And then just last question for me on Asia.

You talked about double-digit traffic decline.

How does that look by kind of core country between Japan, Korea and China?

And it seems -- I guess China must have decelerated, I imagine, given that it was up mid-single in the third quarter.

Just trying to understand the regional pieces.

Thanks.

Yes.

I mean I think if we look at DTC traffic, it was down across Asia to be honest.

It was really a pan Asian impact.

So it was China, Singapore, Korea, Japan.

So we really saw a dramatic slowdown in traffic.

And I would say it was across the region.

Okay.

And then China in particular -- I mean, kind of how do you think about that going forward just given you had made some progress towards the tail end of the third quarter; it seems like it has obviously reversed.

So just curious on what you are expecting in China for 2017.

Yes, good question.

So, look, as we kind of think more broadly about China the issues that we had with our problem distributors, as we talked about last quarter, are very much behind us.

We have moved on from those distributors.

And we are focused on rebuilding our wholesale base and building quality -- quality wholesale growth.

It did slip a little bit in Q4.

A good part of that was actually driven by the e-commerce performance and the bachelor day holiday, or the 11-11 holiday, which didn't perform as well for us this year as it did last year driven, again, by higher pricing and less discounting relative to the prior year.

And also a little bit of shift in how Alibaba is approaching that particular event.

As we look at China in general, we remain really confident that the business has stabilized and it represents an important opportunity for growth in the future.

Great, thank you, guys.

And all the best.

Sam Poser, Susquehanna Financial.

I have a couple -- I have a bunch of questions.

Number one the store closures are you -- is SoHo and the Green Monster on the list?

Yes.

So, they are not on the list, Sam.

We are actively in discussions and trying to sublet and get out of those stores.

But we don't have anything concrete.

And as you know, our leases are long in those environments.

And so they are not in the list until we have something concrete to report.

But we are working on it.

Okay, thank you.

And then Carrie, when we look ahead to 2018 and the SG&A savings that you talked about, I mean you are not -- how much of those say -- and I know we are looking way out.

But I mean are we going to -- are you going to have the same situation where the SG&A savings from this redo is going to be offset by marketing spend?

Or is this a situation where we will see these numbers really start to go down significantly in absolute dollars?

Yes, you will see them go down in absolute dollars in 2018.

This year the reductions in SG&A are being offset by an investment in marketing that we are making this year as well as the reset of variable compensation.

But that -- the flow through rate that Andrew mentioned of about 40%, we expect to see that come through to the bottom line in 2018 and continue obviously into 2019.

This is not about taking that and reinvesting it further in the business.

We expect that those reinvestments in the business will come from other savings.

Well, let me then ask you even if we are just talking about -- you are talking about $495 million of SG&A in 2017.

What would the number be, all other things being equal today, in 2018 -- given what you are planning?

Right.

So if we are talking -- again, using that approximate 40% flow through rate and we are assuming between $45 million and $50 million of SG&A reductions, what you would take off of that is -- basically you would bring through about $15 million to $20 million of that through in SG&A reductions in 2018.

I mean, obviously all things being equal, and things change over time, but that is the flow through rate that we are projecting.

Okay, thank you.

And then what tax rate should we be using on this year coming up?

Yes.

So you should assume around 24% for a tax rate.

Obviously this year -- any year of a loss the tax rate is pretty goofy.

But you should assume around 24% for 2017.

Okay.

And when you talk about moderate in Q1 of 2000 -- you talk about moderate growth in SG&A in absolute dollars, what does moderate mean?

Yes.

So, basically what we are talking about is we are up a few million due to additional marketing expense.

We also have some one-time costs of approximately $2 million in there.

So, moderate is around $3 million to $4 million above prior year, nothing significant.

That is on a GAAP basis or a non-GAAP basis (multiple speakers)?

That is on a GAAP -- that is on it GAAP basis.

I don't think we had much -- I have got to look it up, but one time (multiple speakers).

You just said there was a onetime charge.

But no, you said this year there is a onetime charge (multiple speakers) --.

Yes, in the number -- yes and the number is $2 million.

Yes, so we are moderately up with the $2 million in there for this year.

So, basically it will be [$4 million less $2 million] give or take on a non-GAAP basis?

Yes.

Okay, all right.

Thank you very much.

And Gregg, congratulations, Andrew congratulations, thank you.

Thank you, Sam.

Thanks, Sam.

Jim Duffy, Stifel.

Congratulations to you both.

A few questions for me, many of mine have been already asked.

Can you, Carrie, share a 2016 operating loss figure for the stores earmarked for closure?

Yes, so we -- the stores we have closed have either been operating essentially at low to no profit on a four wall basis.

Okay.

It is obviously a blend, right.

So there are some that are losing more money and there are some that are making a tiny bit.

But they blend to essentially zero.

Fair enough.

And then, Andrew, I am interested in your comments on focusing product efforts on clogs, sandals, flips, slides.

What will be deemphasized and does that have implications to the seasonality of the business?

Great question.

So it is really a question of where we are going to put more emphasis.

So as we looked at where we are seeing success today and where we were seeing the most success over the last year, it is really in the core products, in the clogs.

We talk a lot about Classic and Croc brands; they are our two biggest franchises.

But there are obviously others as well.

And clog represents about 46% -- high 40% of the business.

The other places we have seen real traction is with -- in the wholesale category both here in the US and overseas.

So those are the areas that we are going to be focusing the greatest.

Obviously we have a range of products beyond that in terms of casual men's shoes, casual women's shoes, wedges.

We believe that range has been narrowed to the point where it is productive, it makes sense, it adds to our mix.

But we won't be growing that.

So it is really a question of where we will be growing our styles and putting emphasis around where we want incremental distribution.

Okay, great.

And then, Carrie, last question is on the FX.

Can you speak to just kind of the mechanics of how that flows into the model in 2017?

I know in past years there has been of course the revenue impact, but in some instances a carryover impact on cost of goods and margin.

Yes, so, it is actually interesting.

If we look back at 2016, we basically saw about a 1% change in currencies against the US dollar.

And the impact in 2016 was a revenue impact of about $3.4 million and a gross margin impact of a little over $2 million or 20 basis points on the rate.

So if -- we don't have the situation we had, if you think back to 2014 to 2015 with the significant swings in currency rates.

So the inventory is pretty steady going into 2017.

Assuming the rates kind of stay where they are we feel our guidance is based on that.

Very good.

Thank you.

Scott Krasik, Buckingham.

I have a few questions.

Just wondering, last year your better delivery rate I think was supposed to lead to faster turns and perhaps sales growth without gaining shelf space.

So what happened there as you were booked for spring 2017?

And then maybe can you comment how your delivery rates are going so far in the spring?

And will you continue to be up year over year?

So, let me take the backend of that first, Scott.

So our deliveries, as we think about kind of on time and in full, which is how we measure it, were in the [90s] across US portfolio and across our international business.

And that compares to a history that unfortunately Crocs enjoyed where most customers would tell us that we were kind of the worst-in-class around deliveries.

So that made a dramatic improvement and I think frankly did help particularly our US business.

So I think that was very successful and obviously an important stepping stone.

I think as you highlighted in your question, that would obviously logically lead to potentially faster turns and greater sell in.

I think what we experienced as you kind of went through that year is the market shifted and softened.

The market shifted dramatically towards athletic and we saw major wholesale customers cut open to buy for casual, shift it to athletic and that hurt us.

And the second thing is we saw them trying to lower inventory levels and destock to the extent they could and so they were reluctant to place preorders.

So I think that is how it played out for us in 2016.

As we look at our 2017 book we are projecting that cautiously.

And the guidance that we have given you incorporates the amount of preorders that we have taken and we are currently in the throes of delivering and what we believe is a cautious and sensible sell-through and reorder rate.

In terms of actually improving upon your on time?

Yes, I think we have got a little room to improve up on our on-time actually.

I mean I think most customers would tell us that we are sort of best-in-class at this point.

Okay, okay.

And can you just, Carrie, go through again -- obviously big gross margin improvement in 4Q, but missed my estimate at least by 450 basis points.

So I am just wondering, what were the sources of the shortfall again by category?

Sure.

So you are right, we are up about 550 basis points and we talked a little bit about that.

But the gap to what we provided relative to guidance on the third quarter, half of that was due to the strengthening of the US dollar essentially post the election.

And then we also had, given the DTC performance, a lower DTC mix which created a drag on the rate as well.

So the remaining shortfall was primarily due to an increase in our royalty expense, which was related to some clarification of new and existing royalty agreements and it resulted in a change in our estimate.

So while we are disappointed with the incremental royalty expense that we took in the fourth quarter, it was the appropriate thing to do and we feel that now the estimates are complete and accurate there.

Okay.

And then the $150 million that you have in cash on the balance sheet, how much of that is overseas?

And do you view that as sort of the minimum level you need to operate with or how would you characterize the cash?

Yes.

So, as usual the majority of that is overseas.

We are heading into our peak working capital season now.

I think -- it is hard to say it is the minimum capital because it all depends on where the cash actually sits.

So right now we feel it's the appropriate level to have on the balance sheet.

Okay.

And just last, Andrew, I mean you essentially wrote the original turnaround plan a few years in.

Obviously excluding the currency impacts of the P&L, sort of what hasn't gone right relative to your original expectations?

That is a good question, Scott.

So I think frankly a lot has gone right and we have hit some significant headwinds.

I think as Gregg talked about at length, we've made a lot of progress in stabilizing and cleaning up the business, which has been -- which has taken longer than we originally thought it was going to take.

But I think we are -- feel like we've made a ton of progress on that.

And then as you kind of think about the headwinds that we ran into they were significant.

Number one is currency.

And if you go back all the way to 2014, so late 2014/early 2015, the currency impact is huge in terms of the revenue impact and then the flow-through of gross margins.

Secondly, I think more recently we have really seen the shift to athletic and a little bit of the softening of the market.

And what has been interesting about 2016 has been the softening of the market here in the US, but frankly globally as well with -- we are seeing really a change in terms of traffic patterns in Asia.

And I think the third thing that had a very significant impact was China.

I don't think any of us anticipated the issues that we ran into in China.

I am happy to say that we feel that those are behind us at this point, but those are the three big things that we faced.

I think if we think about going forward what we are going to focus on, which will we think continue to drive the business and improve our financial performance significantly, it is really quality sales, it is driving growth and high quality sales and high-margin business and not relying so much on low margin and discounts.

It is getting the cost structure further in line with the SG&A reductions that we have announced today and that we will execute over the next two years.

And it is continuing to elevate product and marketing to drive demand for our high margin molded products.

Okay.

Good luck, thanks.

Mitch Kummetz, B. Riley.

Carrie, on the close -- the stores that you are closing, can you say what the sales impact is for 2017 either in terms of percentage or actual dollars?

No, we didn't call it out specifically.

But what I did elaborate on was as we adjusted for the elimination of the discount sales, the sale of Taiwan and South Africa as well as the impact of the store closures we would actually be up mid-single-digits, and the bulk of that actually is related to the store closures.

Right.

Well, so what piece of that is the store closures?

I guess that is what I am trying to get at because that seems like it's one component of that call it mid-single-digit delta between the two.

But how much of that is actual store closures?

I would say the majority of it is.

Okay.

And is that an impact that we would expect then to kind of continue over the next couple years as you continue to close stores?

Yes.

Basically over 2017 and 2018 you would expect to see that continue.

But then obviously being offset as we continue to improve the business in wholesale as well as on the DTC side of the business, primarily e-com.

And I know that you guys aren't necessarily giving 2019 guidance or anything, but is there sort of a sales assumption that's out there as well?

I mean obviously you got the SG&A coming down; you talked about kind of 50% gross margin.

I mean sales are flat this year, there is going to be some pressure from stores next year.

Are you assuming higher sales in 2019 than 2016?

I don't know if that is a fair question.

It's not (laughter).

So what I would say is, look, right now what we are focused on in 2017 is quality revenue and driving profitability through driving up gross margins and reducing our SG&A.

That is going to be our focus in 2018.

We are going to take a cautious line on revenue and I think that is the fiscally responsible thing to do and make sure we are managing our bottom line to drive toward that 10% EBIT margin.

Okay.

You mentioned that molded product is your most profitable.

Can you say what percent of your sales these days is molded?

And is that gross margin rate on that molded product still kind of like in that -- I think you used to say it was maybe in the high 50%s, is that about right?

Say that last bit again.

Is the gross margin on the molded product like in the high 50%s or 60%s?

And what percent of your overall sales are actually molded product?

We don't break all of that out.

But I think -- and to give you an indication, molded is well above 50%.

Okay.

And growing as a percentage of our overall business.

And it is significantly higher margin than our (technical difficulty) average margin.

Okay.

And then last question.

You guys have obviously done a great job cutting the SKU count you mentioned from 2,000 SKUs to 1,000 SKUs.

I know that as you switched to a global line there was a lot of sort of nuance that you sort of trimmed out of the business.

When you look at the business today at 1,000 SKUs -- I mean is there some low hanging fruit in there that you should be looking to get rid of in order to continue to improve the margins?

Yes, we have looked very hard at the SKU productivity.

As you look at sort of the poorer performing SKUs -- you're always looking at your tail, right?

You are always looking at your tail to try and understand is that an investment that you want to make?

Does it provide a strategic benefit to the business or is it just a poor performing SKU?

And we actually recently went through an exercise on that.

And our conclusion was the majority of things in the tail were making an incremental contribution and/or were strategically important.

They were a color that was important to the overall story, they were an item that was new that needed more time, etc.

So we have looked pretty hard at the tail and we really feel like our overall portfolio is in a good place.

Got it.

All right, thanks, guys.

Good luck.

Jim Chartier, Monness, Crespi, Hardt.

First, Carrie, on the EBITDA improvement in -- so, how much of the $30 million to $35 million of EBITDA improvement do you expect in 2017?

Yes, so what we have essentially -- we have not guided to the EBIT or EBITDA line.

Essentially with the improvement in gross margin that is basically going to be what we will see is the increase on the bottom line.

Because SG&A is relatively flat once you factor in the one-time costs in there.

So with relatively flat (multiple speakers).

Sorry, go ahead.

Of the $30 million to $35 million EBITDA improvement you expecting from the SG&A savings, is it $10 million, is it about 40% flow-through we should be thinking about?

Yes.

No, for 2017 no and that is because in 2017 we are investing additional in marketing and we are resetting our variable compensation.

And then we have the additions of the one-time cost.

So how you are thinking about 2017, you should model that (technical difficulty) a relatively flat revenue line, gross margins increasing to about 50%, and essentially SG&A relatively flat year on year.

And so the improvement to EBIT and EBITDA is really going to come from the gross margin increase.

The question is are you expecting a $30 million to $35 million of EBITDA margin improvement off of 2017 EBITDA (multiple speakers)?

Oh I am sorry, yes, I apologize, I didn't understand the question.

Yes, it is off of the 2017 base.

So there is no EBITDA margin improvement from the SG&A savings baked into -- in this year?

You are not expecting any of that SG&A to flow through?

Correct, correct.

Because it is being offset by that variable comp and stuff, right.

It is embedded in our SG&A guidance.

Yes, it is in our guidance.

And then last quarter you talked about inventory excesses in the Middle East and I think Southeast Asia that you thought could take one or two quarters to work through.

Where are you on that?

Yes, that is a good -- we did, that is a good question.

Making good progress.

I mean I think through Q4 we made good progress and that is -- to just be clear that his inventory in the channel, inventory with our distributors in the Middle East and Southeast Asia.

We are making good progress and we anticipate being through that in the first two quarters of this year.

And that impact is embedded in our guidance.

Okay.

And then on China, how far down from the peak is your business in China and where do you think it ultimately can get back to?

Yes, we don't break out China revenue specifically.

It is off the peak, it is off the peak by a significant amount.

We really feel it has stabilized and a go forward distributor base, the e-commerce business and the DTC business that we have in China are well positioned for future growth.

And the only thing I would add to that is when you see the K later today we call out in it that China revenue represents about 7% of our overall revenue.

I don't have the prior year's right in front of me, but you should be able to reference it from there.

Okay, great.

And then finally the store footprint, 400 stores after these closings, is that where you think you should be?

Do you expect to maybe add some stores over time?

Look, I think the one thing that we all know is that the retail environment globally is shifting very rapidly.

That is our current estimate of the stores that we need to exit.

But it is something that we are going to have to re-evaluate on a constant basis.

The consumer shifting out of retail to e-commerce in this marketplace and many other marketplaces across the globe, and we think our DTC stores, full price and outlet, play a strategic role in the outlet side for obviously liquidation and cleaning up inventories.

And on the full price side for representing and showcasing the full breadth of the product line.

But our intent is not to run those stores at a level -- to run those stores at a level which is un-economic.

Our intent is to make sure they make a valuable contribution to the bottom line and we will continually adjust that.

Great.

Thanks and best of luck.

This concludes the question-and-answer session.

I will turn the call back to Gregg for closing remarks.

Thank you for joining us today and your continued interest in Crocs.

Thanks, everyone.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.