Earnings Call: Q2 2018

Aug 7, 2018

Please note that this conference is being recorded. I will now turn the call over to Marissa Jacobs, Senior Director of Investor Relations for Crocs. Ms. Jacobs, you may begin. Good morning, everyone, and thank you for joining us today for the Crocs' 2nd quarter 2018 earnings call. Earlier this morning, we announced our Q2 results and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding future revenues, gross margin, SG and A expense, income from operations, adjusted EBITDA and our product pipeline. Krausz is not obligated to update these forward looking statements to reflect the impact of future events. Adjusted EBITDA is a non GAAP measure. A reconciliation of this amount to income from operations is contained in the Crocs investor presentation posted on our website. We caution you that all forward looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10 ks. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for more information relating to these risk factors. Joining us on the call today are Andrew Reese, President and Chief Executive Officer and Keri Tefner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew. Thank you, Marissa, and good morning, everyone. Q2 was another strong quarter with revenues up 4.7% even with significant reduction in our retail store fleet. Clogsandsandles performed well, and LiteRide, our newest franchise, continued to exceed expectations, resulting in another quarter where we exceeded our revenue and gross margin guidance. Our brand continues to strengthen as social media engagement grew and Crocs benefited from another quarter of increased PR coverage. At wholesale, we are seeing increased interest from new customers who would like to add Crocs to their lineup, and our 11.8% DTC comp speaks to growing demand amongst existing consumers and those who are new to the brand. We feel very good about our Q2 results, and we're well positioned for the back half of the year. As you saw in the earnings release we issued earlier this morning, Carrie has announced her decision to leave Crocs on April 1 next year. In anticipation of her departure, we're excited to announce that Anne Melman will be joining us as our new EVP and CFO. Her experience as a CFO at Zappos as well as her prior experience at Crocs makes her a great choice. I want to thank Carrie for the contributions she has made to Crocs over the past 3 years. During that time, we have developed and pursued strategic priorities to put the company on a sound footing and position it for future success. Carrie was there every step of the way, providing tremendous leadership and counsel. I couldn't have asked for a better partner. When Anne joins us on August 24, Carrie will transition to EVP of Finance and Strategic Projects until her departure to ensure a smooth transition. With respect to our business update, we remain focused on creating great product, strengthening our brand and advancing our 3 strategic priorities: to drive sustainable profitable revenue growth improve the quality of our revenues so that we generate annualized gross margins in the low 50s and simplify our business to bring our annualized SG and A rate down to the low 40s as a percentage of revenues. This morning, I'll update you on the progress we're making on these strategic priorities and across our distribution channels. Carrie will then review our Q2 financial results and our latest guidance, and then we will take your questions. As I mentioned, our first strategic priority is driving sustainable, profitable revenue growth by continuing to deliver great product and strengthening our brand desirability. With respect to product, in 2016, we narrowed our focus to molded footwear with an emphasis on clogs and sandals. This was clearly the right decision. This product focus is driving meaningful growth. During the Q2, we sold 17,800,000 pairs of shoes, an increase of 2.4% over last year's Q2, and we did this with a significantly smaller retail fleet. Our average selling price of footwear increased 2.2 percent to $18.05 Our clog revenues grew 11.4% and represented 52% of our footwear sales, up from 48.9% in last year's Q2. Sales of our iconic Classic clog and Croc Band clogs increased, driven by consumer demand for traditional colors along with new seasonal colors, graphics and on trend embellishments. Sales of Crocs at Work were also up, supported by new styles and more effective account management. We grew our clog revenues in every region. In North America, our great DTC results were helped in part by high school and college students purchasing classic clogs to wear at pre and post sporting events. We also continued to strengthen our brand in Europe, generating robust clog silhouette growth following significant reduction of our discount channel business. And in Asia, we're driving increased clog penetration as we continue to prioritize clogs over cut and sew product. Q2 is a key quarter for sandals, and we performed well. Sandals grew 17.9% in the quarter, generating 26.2% of our total footwear revenues, an increase of 300 basis points compared to last year's Q2. Asia and Europe showed the most meaningful growth, while Americas was hampered by the late start to spring. Standouts for the quarter include our sports sandals, Swiftwater, and our women's Capri and Sandra styles. Since we increased our focus on sandals, we've consistently experienced double digit growth in this silhouette, and we continue to be excited about the opportunity ahead. Our innovative new LiteRide collection, which launched in March, continues to exceed our expectations. To anyone new to the story, LiteRide combines a revolutionary new material with Crosslight to produce an extremely lightweight shoe with a highly cushioned footbed and clean modern styling. The collection includes clogs, sandals and athletic silhouettes. During the Q2, we expanded our wholesale distribution of the LiteRite collection in addition to featuring the entire collection on our own e commerce sites and in store. Just like last quarter, demand was very strong. With 4 months of the sales now under our belt, we are exceptionally pleased with the rollout. In fact, LiteRide has already become one of our top 5 franchises, and we see significant growth opportunity ahead. As we head into the back half of the year, we feel good about our full holiday 2018 collection. We have incorporated seasonally appropriate colors and graphics, including a new platform clog, which launched last week. And while it's still very early, we are pleased with the initial feedback from our wholesale accounts on our springsummer 2019 collection. Our Commerce UR marketing campaign continues to raise the profile of our brand and drive demand for our product. Let me share some metrics with you. Interest in Crocs is accelerating, and we continue to increase our digital footprint and attract more PR coverage. During the 1st week of June, the number of Google searches for Crocs hit a 5 year high and has remained at elevated levels since then. And when we launched our 1st Snapchat filter, over 6,000,000 people used the Snapchat lens to see themselves in a giant classic clog hat. Our online musical featuring Drew Barrymore is our most viewed content ever and the 2nd most widely viewed content Drew has ever posted. Our collaboration with A Life, a highly regarded Sweetwear brand, generated over $400,000,000 PR impressions in just a few months. And from a financial perspective, our return on ad spend is up almost 50% year to date as we continue to refine our digital marketing capabilities. The Come to You Are campaign is continuing to resonate with customers and consumers. It is bringing heightened attention to the Crocs brand and boosting brand consideration. Our second strategic priority is to improve the quality of our revenues. Maintaining discipline around our gross margin goes hand in hand with our drive for top line growth. Over the past 2 years, we have phased out unproductive product, cleaned up inventory in the channels and took a highly disciplined approach to promotions. We have delivered meaningful gross margin gains, including 110 basis point increase in Q2. With the significant improvements we have made on this front over the past 2 years, we expect future gains to be more modest. Our 3rd strategic priority is to simplify our business so that we can operate more efficiently and reduce cost. We intend to bring on SG and A as a percentage of revenues down to the low 40s. We are on track to achieve this as we continue to execute against our SG and A reduction plan. A key component of our SG and A reduction plan was closing 160 stores between 2017 2018. We've done exactly that. During the quarter, we closed a net 27 stores and in the 2nd quarter with 3 98 company operated stores. Outlets, our most profitable format, now represent over half of our store fleet, up from approximately 40% at the end of 2016, while our less profitable full price retail stores now represent about onethree of our fleet compared to over 40% at the end of 2016. Shop in shop and kiosk locations make up the balance. Although this transition is a headwind to our revenues and gross margin, it is contributing to our growing profitability as we eliminate unproductive SG and A. In May, we announced that in connection with our ongoing efforts to simplify the business and improve profitability, we've closed our manufacturing facility in Mexico. In June, we moved ahead with plans to close our manufacturing facility in Italy. When these closures are complete, we will outsource our entire production to 3rd party manufacturers. I want to thank each of our Italian employees for their dedication and commitment. They are talented individuals whose contribution to the company since its earliest days has been greatly appreciated. Turning to our wholesale, e commerce and retail distribution channels. I'm pleased with our ongoing progress. As we described on our last call, our wholesale channel is made up of e tail accounts, distributors and traditional brick and mortar accounts and in certain countries, partner store operators. The business we do with e tailers and distributors contributes approximately half of our wholesale revenues, and we expect high single digits growth from this portion of our wholesale channel. We expect the brick and mortar accounts and our partner stores, which make up the other half of our wholesale revenues, to grow more modestly. During the Q2, wholesale revenues increased by 7.2%. More wholesale doors carried Crocs and customers allocated more shelf space to our product than at the same time last year. A great example is ABC Mart in Japan, an important multi brand retailer we began to work with last year in a limited number of doors. Since then, ABC Mart has expanded the placement of Crocs into several 100 of their doors, and more will be added next year. Turning to e Commerce. We had another outstanding quarter with revenues up 23.8%. Results were particularly strong in Asia, where the fastest growing countries grew at 30% to 40% rates. We're benefiting from our highly successful digital marketing activities and the continued migration of consumers to online shopping. And since appointing a Global Head of E Commerce and deepening our bench of local experts, we have delivered a more compelling online experience to our consumers, featured more product exclusives to our DCC channel and improved our conversion rates. In retail, we delivered a 7.1% comp. The right product, well managed inventories and energized sales force totally focused on delivering a great customer experience resulted in an outstanding quarter. Through the first half of twenty eighteen, we continued to make significant progress against our strategic priorities. Our springsummer 2018 collection was a clear winner, and LiteRide significantly surpassed our expectations. Our marketing is delivering on 2 key objectives: elevating our brand positioning and increasing brand consideration to drive sales. We're growing our top line, improving the quality of our revenues and taking costs out of the business. In short, we're doing exactly what we committed to do. Looking ahead, we're optimistic about the future. We will continue to focus on molded footwear, particularly clogs and sandals, which are the best reflection of Crocs' DNA and have long term growth potential. From a channel perspective, our digital business, whether embedded in our e commerce or wholesale channels, is expected to drive robust growth. A reinvigorated network of well placed, growth. A reinvigorated network of well placed highly qualified distributors will bring Crocs to more people around the world. And lastly, our retail channel will benefit from the elimination of underperforming stores as our remaining stores effectively showcase our product and our brand. With a clear strategy in place and a detailed road map to follow, we have returned the company to top and bottom line growth, and we are generating increased shareholder value. Looking ahead, we believe we are well positioned for continued success. I'll turn the call over to Carrie now, and she will take you through our Q2 results and discuss our guidance for the Q3 and full year of 2018. Thank you, Andrew. I appreciate the kind words. I joined Crocs fully aware that it would be a challenge, but knowing that it would be also extremely rewarding and I have not been disappointed, thanks to all the fantastic people I've gotten to work with. The company is in a great place and I am very confident that I'm leaving it in good hands. I've enjoyed getting to know many of you and I know you will enjoy getting to know Anne. Now let me review our 2nd quarter results. Revenues were $328,000,000 up $14,800,000 or 4.7 percent from a year ago and above our guidance of 3 $15,000,000 to $325,000,000 Store closures and business model changes reduced revenues by approximately $22,000,000 Excluding the impact of those events, our revenues would have grown by approximately 12%, a clear sign of the underlying strength of our business. Currency positively impacted 2nd quarter revenues by $7,700,000 versus last year's Q2. The positive response to our springsummer 2018 collection drove solid results across each of our distribution channels as well as our geographic regions. Wholesale revenues grew 7.2%. After experiencing strong sell throughs on their initial springsummer orders, customers placed additional fill in orders to restock shelves and meet consumer demand. Looking at retail and e commerce combined, our DTC comp was a positive 11.8%. Our retail comp was 7.1% and comps were positive in every region. This was our 4th consecutive quarter of positive comps. We continued to close stores, which accounts for the 8% decline in our global retail revenues. Specifically, we operated 105 fewer stores during this year's 2nd quarter compared to the same period in 2017. Our e commerce business grew 23.8% during the quarter, representing our 5th consecutive quarter of double digit e commerce growth. Along with in demand product and impactful marketing, we are benefiting from better execution, improved in stock levels contributed to higher conversion rates and our use of increasingly sophisticated analytical tools is boosting the effectiveness of our digital marketing, which is translating into higher revenues. From a regional perspective, the following revenue amounts are as reported. The Americas generated revenues of $137,800,000 in the 2nd quarter, an increase of 1.2% over last year's Q2 with outstanding results in the retail channel. Wholesale revenues in the Q2 declined 5.9%. Our results were impacted by 3 factors. In North America, sandal reorders were muted due to the late start to spring and some orders which we expected to ship in Q2 did not ship until early Q3. In South America, a number of countries experienced economic disruptions stemming from the significant depreciation of their respective currencies. Because we expect the currency situation to continue, this has been factored into our guidance for the remainder of the year. Our Americas DTC comp was a positive 10.4% with great retail and e commerce results evidencing robust consumer demand for our clogs and sandals. Our retail comp was a positive 7.5%, up for the 5th quarter in a row. Total retail revenues grew 1.8% despite having 15 fewer stores than in last year's Q2. E commerce revenues increased 17.1% due to higher site traffic and higher unit sales per transaction. Turning to Asia. 2nd quarter revenues of $128,400,000 increased 3% compared to last year's Q2. This is a great result for Asia given the significant store closures in the region. Currency favorably impacted the region by $4,700,000 Wholesale revenues increased 9.8% as we continue to gain traction across the region. Our Asia CTC comp was a positive 11.6%. Our retail comp for Asia was a positive 2.9%, driven by an increase in average selling prices and units sold as we increased penetration of built for outlet product. Retail revenues declined 21.9% as a result of operating 67 fewer stores compared to the Q2 of 2017. E commerce revenues increased 29.7% with particularly strong results in our key countries. In Europe, revenues grew 17.6 percent to $61,500,000 over last year's Q2. We delivered terrific results across each distribution channel, reflecting the increasing popularity of our brand, better execution and great summer weather. Currency positively impacted the quarter by $3,100,000 Wholesale revenues grew 25.4% due to high demand for core product and enthusiastic buy in of LiteRide and notably stronger results with our European e tail partners. Some customers took additional product in Q2 rather than waiting until Q3 to ensure availability into the fall. Our Europe DTC comp was a positive 18%. Our retail comp was a positive 16.4%, benefiting from heavy demand as well as better availability of our built for outlet product. Our retail revenues decreased 7.6% due to operating 23 fewer stores. Our e commerce business grew by 28.2% as we benefited from the strength of the collection, reduced promotional activity and higher traffic driven to the site by more effective marketing. In terms of other items on our P and L, gross margin of 55.3 percent came in above guidance and 110 basis points above last year's 54.2% rate. We continued to benefit from the shift to molded product and from a more disciplined promotional cadence in our DTC channels. Our SG and A expenses of $144,300,000 were higher than our guidance by $4,000,000 This was due to higher non recurring charges associated with the closure of our Italy manufacturing facility, which had not been included in our prior guidance and higher incentive compensation. Total non recurring charges in the Q2 were $8,400,000 $7,100,000 related to the termination of manufacturing operations in Mexico and Italy and the remaining $1,300,000 was associated with our SG and A reduction plan. This compares to $1,800,000 of non recurring charges in last year's 2nd quarter. If we deduct the one time charges, our SG and A actually declined $2,700,000 and improved by 2.90 basis points as a percentage of revenue. Our income from operations, which includes our non recurring charges, was $37,100,000 increase of 25.9 percent over last year's Q2. Net income attributable to common stockholders after preferred share dividends and equivalents of $4,000,000 was $30,400,000 After adjusting for the preferred share participation rights of $5,100,000 adjusted net income available to common stockholders came to $25,300,000 Our diluted EPS attributable to common stockholders was $0.35 a 75% increase from $0.20 in last year's Q2. Turning to the balance sheet. We ended the quarter with $171,500,000 in cash and no outstanding borrowings on our credit facility. This compares to $157,000,000 in cash and no outstanding borrowings at the end of Q2 2017. During Q2, we repurchased approximately 378,000 shares of our common stock for $6,000,000 at an average price per share of $15.55 And over the 12 month period ending June 30, we repurchased approximately 6,100,000 shares for approximately $66,000,000 at an average price of $10.86 per share. This leaves approximately $193,000,000 available for future repurchases. Inventory at the end of the second quarter was $129,900,000 a $25,800,000 or 16.6 percent decrease compared to last year's Q2 ending inventory. This reduction reflects our continued focus on improving the quality of our revenues as well as our lower store count. Cash provided by operating activities during the 6 months ended June 30, 2018 was $40,900,000 an improvement of 3.8% compared to the same period last year. Before providing our guidance for Q3 and the full year, I want to remind you that our guidance is on an as reported basis based on current currency rates. For the Q3 of 2018, we expect revenues of $240,000,000 to $250,000,000 compared to $243,300,000 in last year's Q3. This includes the loss of approximately $15,000,000 of revenue associated with our reduced store count and business model changes. Gross margin for the Q3 is expected to be about 50 basis points above last year's 50.8 percent rate. Our Q3 SG and A is expected to be slightly higher than last year's $120,800,000 This includes approximately $6,000,000 of non recurring charges, consisting of approximately $5,000,000 relating to the closure of our manufacturing operations and $1,000,000 associated with our SG and A reduction plan. Non recurring charges in last year's Q3 were $3,600,000 Let me now turn to our full year guidance. With respect to revenues, we continue to expect a low single digit increase. We are maintaining this guidance despite the strengthening of the U. S. Dollar since our last earnings call, which we estimate will reduce our sales in the back half of the year by approximately $11,000,000 as compared to our prior guidance. Double digit e commerce growth and moderate wholesale growth are expected to more than offset the lower retail revenues associated with store closures. Store closures and business model changes will reduce 2018 revenues by approximately $60,000,000 compared to 2017. Absent those changes, we would expect revenues to be up high single digits for the year. We continue to expect our gross margin to increase 70 basis points to 100 basis points over last year's 50.5 percent rate. SG and A for the full year is now expected to be slightly higher than our prior guidance of $485,000,000 reflecting an approximately $3,000,000 increase in non recurring charges to support the closure of our Italy manufacturing facility. This compares to our 2017 SG and A of $499,900,000 For the full year, we now anticipate incurring approximately $18,000,000 of non recurring charges compared to our prior guidance of $15,000,000 Approximately $14,000,000 of this amount relates to the closure of our manufacturing operations and $4,000,000 relates to the implementation of our SG and A reduction plan. After adjusting for the non recurring charges and the currency impact, our full year 2000 SG and A reduction would be approximately $45,000,000 against our SG and A reduction goal of $75,000,000 to $85,000,000 We are maintaining our guidance with respect to income from operations at approximately $50,000,000 compared to $17,300,000 last year. And we are maintaining adjusted EBITDA guidance at approximately $95,000,000 compared to $67,000,000 last year. We define adjusted EBITDA as income from operations plus depreciation and amortization and non recurring charges. 2018 adjusted EBITDA is expected to include approximately $30,000,000 of depreciation and amortization and $18,000,000 of non recurring charges. 2018 income tax expense is still expected to be approximately $17,000,000 compared to $7,900,000 in 2017. Looking beyond 2018, we see a clear path to double digit EBIT margins, which based on the current level of depreciation and amortization would translate into a 13% adjusted EBITDA margin. The strengthening of our brand, our relentless focus on operational improvement and our commitment to drive profitable top line growth is how we will get there. At this time, I'll turn the call back over to Andrew for his final thoughts. Thank you, Carrie. We had a very good second quarter, bringing the first half of our year to a successful close. I want to express my thanks to everyone on the Crocs team. We wouldn't be making this progress without their hard work and continued dedication. The success of our springsummer 2018 collection validated that there is growing demand for clogs and sandals. And with LiteRide, we are successfully meeting the consumers' desires for product incorporating comfort technology. Our Come As You Are marketing campaign is driving brand perception and consideration higher and contributing to revenue growth. And our strategic priorities provide the road map for future growth and shareholder value as we continue delivering the product our customers and consumers want, simplifying our business and delivering strong financial results. Operator, please open the call for questions. Thank Our first question comes from Erinn Murphy from Piper Jaffray. Please go ahead. Great. Thanks. Good morning. I guess my first question was around LiteRide. You talked about it consistently exceeding your expectations. Maybe if you could share a little bit more about what kind of customers attracting? And then since it's been one of your larger launches that you've done in the last few years, how have the learnings of this launch really shaped how you're thinking about the product development calendar and just the launch cadence going forward? Thank you, Aaron. Yes, so look, we're really pleased with the LiteRide launch this year. I think we talked about it last quarter and this quarter and the momentum has continued. In terms of learnings, I think this is the first time and we talked it last quarter, it's the first time for a number of years we've really put together a comprehensive launch globally coordinated, supported by appropriate marketing and coordinated through both our wholesale and DTC channels. And I think that was extremely successful in creating a great deal of interest and a great deal of momentum behind the product. It was also a relatively large suite of product that we launched at the same time. So it really created an impact in the marketplace. We think the USPs or the unique features of the product, the high comfort, the lightweight, etcetera, really resonated with consumers. So it's been very successful. I think there were a lot of really good learnings from that. And I think as we look into 'nineteen and beyond, we will be looking at other key launches to anniversary this and build upon this. I would also emphasize as we plan LiteRide forward, we see it growing. This is not a one time deal for us. It's a suite of product that's really resonated with consumers. We see it growing in the fall and we see it growing into next year. Okay, that's helpful. And then I think Andrew, you had said at the beginning of your prepared remarks, you're starting to see some interest from potential new customers on the wholesale side. Can you just expound upon that statement? And then just are there specific characteristics of types of accounts you'd be willing to work with, new accounts that is? Yes. I think, the resurgence of the brand and the higher profile that we're getting really globally, both at the consumer level and also at the wholesale customer level is driving some more some new customers our way. What I would say is in the U. S. Where I don't want to really get into kind of specific names, but working closely with some significant mall based retailers where we've got some test programs and we look to drive some expansion on those in the back half of this year into next year as well as big box retailers here in the U. S. Where we think we've got new placement and significant growth in placement opportunities. And as we look across the world, we've also talked about ABC Mart as an example in our prepared remarks, we look across both Europe and Asia, we can see interest from significant family channel players. So I would say it's kind of a global phenomenon and it gives us obviously a great deal of confidence. Okay. And you said some retailers here in the U. S. This fall. Would that be already embedded in the guidance? Yes, absolutely. That's embedded in our current guidance. And then just the last question for me and I'll turn it over. I didn't hear you guys mention anything on the work opportunity as well as gibbet. Can you just talk about how both of those categories performed in the quarter and kind of how you see the longer term opportunity for both of them? Yes. Let me talk about work because it's obviously bigger in terms of its quantum than gibbets. So work, I think we've highlighted consistent with our clog focus, what work is primarily a clog silhouette, obviously with a non slip outsole for the work environment. That continues to perform extremely well. It's definitely tracking at or ahead of our expectations. We see that category as growing. It's more in the U. S. And Europe and Japan in terms of locations, less in the developing world. But that's definitely growing for us. We're happy with this progress and it's where we will continue to put marketing effort and product innovation behind that. Jibbitz, obviously, this is a brand that's a sub brand that's existed within Crocs for some period of time. That's really benefiting from a significant trend towards personalization. I think you can see it across many product categories where the consumer is increasingly interested in personalizing and making the product something that's special for them and Jibbitz is our vehicle to do that. So particularly within our U. S. Stores, within our e commerce environments that has made great progress. So we're seeing significant growth there, but obviously it's a small but very high margin business. Thank you. Our next question comes from Mitch Kummetz from Pivotal Research. Please go ahead. Yes. Thanks for taking my questions. And Carrie, thanks to you. Good luck. So let me start, just to follow-up on Aaron's question about new customers. So it sounds like that's already having some impact on the business, but it sounds like you're expanding that into the back half and then maybe more so next year. Is that an accurate assessment that this becomes more impactful on a go forward basis versus kind of the results that you've reported through the first half? Yes. Mitch, I think it's Andrew. This is a good way of thinking about that. Obviously, most significant retailers these days will take a trial and expand approach, and I think we're in trial mode with a number of new customers that we're excited about. And the potential that would come from that with expansion would be more in 2019 than in 2018. Okay. And then, Kerry, I think you talked about it sounds like there were some orders that were sort of pushed out in the Americas from Q2 to Q3 and there were some others that were pulled forward in Europe from Q3 to Q2. Could you use any way to quantify that or do those sort of net against each other? How do we think about the impact on the quarter and then also in the Q3? I think it's a fair way to look at it. They relatively offset each other. Not huge dollars, but enough to make a difference in the quarter. And hence, the reason we felt it was important to call out, especially as we think about the North America performance. And so maybe I'll comment a little bit on the wholesale performance in North America, just to give it a little bit more color. As noted in the prepared remarks, you know, overall wholesales performed extremely well in the quarter. But in the Americas specifically, we had a couple of things going on. In North America, we did have a late start of spring, and I think you've heard that from other folks as well. But what we did see with that is once we got shipping sandals, we saw really strong sell through. So we feel really good about that. And then we did have that timing shift at the end of the quarter that kind of moved shifted from Q2 into Q3. I think the other important thing to really call out is with respect to Latin America. And we've had significant currency depreciation in the Latin in a number of Latin American countries and then the economic disruption that has kind of been caused by that. So if we think about the first half for wholesale in North America, we're up in North America low single digits, but in LatAm, we're down double digits. So that I think is important to understand. And that currency impact is something that I think I want to make sure everyone understands as we think about our full year guidance. We're calling revenues up low single digits. That's consistent with what we called it at the end of Q1 when we provided guidance. But the U. S. Dollar strengthened meaningfully against a number of our currencies since then. And so we're losing approximately $11,000,000 plus of revenue in the back half of the year related to as compared to the guidance when we provided at the end of Q1. And we feel really good about our retail and DTC performance. And it factors that in to offset that revenue decline in the back half associated with currency. I think the other thing that's important to call out around currency is in the first half, we have benefited year over year from currency. In the back half, it's a drag for us year over year. So I don't want that to get lost, especially given that over half of our revenue does come from outside the United States. Got it. And then on the guidance, I think you're seeing moderate wholesale growth for the year. You're up, I want to say like 6%, 7% through the first half. I'm not really sure what your definition of moderate is, but are you assuming that the wholesale business is actually down in the back half? And is that just a function of tougher compares or is there something else going on? Got it. When we think about wholesale in the back half of the year, I would say, you know, more so, you know, we've seen good, as you commented, good results in the first half. I think we see something similar going through the Q3. I think we're a little bit softer in Q4 just because of the year over year compares. And I think that will continue to evolve as we continue to work the order book. Yes. But obviously, the currency is, as Carrie talked about, the currency is a currency going against us for the back half year is a factor and we've maintained our revenue guidance despite that. Okay, great. Thanks. Good luck. Our next question comes from Jonathan Komp from Baird. Please go ahead. Yes. Hi. Thank you. Couple of questions, a little bit of a follow-up, but I just wanted to ask on the revenue outlook overall. I know on the underlying basis, you've been trending kind of double digit growth. And for the Q3, you're implying something slower than that kind of mid to high single digits underlying and just wanted to maybe fully understand the moving pieces as you see them there? Yes, I think maybe I'll just kind of start and then hand it over to Carey. Yes, you're absolutely right, Jonathan. If you look at the first half of the year and you exclude our store closures and our business model changes across all channels, we actually did achieve double digit underlying growth. As we go into the back half of the year, Carrie can give you kind of a little bit more detail, but one of the big factors is still that currency. Yes. So specifically to Q3, if we think about the currency, just for the business model changes store closures, we're still up mid to high single digits despite the currency headwind. And then, again, as we go into Q4 as well, again, we'd be up mid single digits excluding the business model changes and store closures in Q4. I think the other thing that's important to think about with respect to Q4 is the business model and store closures have a much bigger impact because Q4 is a smaller base. So it does have a bigger impact. Okay, great. That's helpful. And then maybe specifically on the Americas segment and the wholesale business there, just wanted to follow-up and maybe clarify. I know last year Q3 and Q4 for the wholesale business in the Americas, you shipped essentially the or you sold essentially the same dollar amount in Q3 and Q4, which was pretty unusual historically. Q4 usually being a much lower period. And I just wanted to ask, is that more reflective of what you expect going forward or was that unique last year? Yes. I think you're right. I mean, I think we definitely saw a significant pickup in the North American wholesale business last Q4. That was really the key issue. As we look forward, yes, we think that patent basically repeats, yes. Okay, great. Helpful. And then maybe just last bigger picture question on the margin. I know you've been talking sometime now about a 13% adjusted EBITDA margin target. And I was hoping to maybe clarify any kind of updated thinking around the timing of what you think that might be achievable? Yes, I would say, we have a clear line of sight to achieving that. And I think as we get ready to provide 2019, we'll certainly provide more color on that. So stay tuned. Okay. I thought you might take the bait in setting the bar high for your replacement, Gary. All right. Well, thank you very much. Our next question comes from Steve Marotta from CL King and Associates. Please go ahead. Good morning. Andrew Carey and Marisa Carey, let me offer my congratulations and thank you very much. Best wishes to you as always. Thank you. I appreciate it. Carrie, I wanted to just clarify the $95,000,000 in adjusted EBITDA estimated for fiscal 2018 excludes the one time cost associated with SG and A. Is that accurate? That's correct. Okay, great. And as it relates, Andrew, to the fall and winter assortment, in recent years, instead of endeavoring to really delve deeply into fall and winter product, more heavier weight product, there's been some of that on the margin. I think the goal has been a little bit more to sell further into Q3 on a buy now, wear now basis and deliver earlier into or excuse me, well, deliver earlier into spring later in Q4 into the warmer weather markets in order to even out the seasonality a little bit. Is that the same this year and anticipates in next year? Or do you see a little bit more heavier weight product becoming a larger percentage of the mix in the second half of the year? Yes. So we think the strategy that we applied last year and definitely works. So essentially we're planning to repeat that, which is exactly what you said. So sounds longer into the Q3, try and deliver in Q4 for some of our warm weather markets, sell our core clogs throughout the year, which I think have performed extremely well year round. I mean, I think the key product that we do offer in the fall holiday unique to fall holiday, which has been building over the last couple of years has been on our line clogs as we've cleaned up that line and I think presented it more clearly. So yes, it's clogs, sandals, line clogs. And I also would note that as you kind of think about full holiday or think about that season for the Crocs brand, right. So we do a lot of business in portions of the world where there is no cooler weather, right? As you think about Southeast Asia, as you think about Asia, so we have a lot of year round business. And so tailoring our assortment to sort of Northern Hemisphere is less productive for us. And I think that's something we've corrected and we continue down that path, Steve. Okay. I know Andrew also you are reticent to speak about quarter to date trends and understandably to the extent that you could speak broadly about back to school and what you have seen again broadly from an inventory in the channel standpoint, from the popularity of the Crocs product and clogs product and even perhaps the digital activity in the back to school period that might be helpful? Yes. I mean, I'll mention a few things, Steve. So first is, as we kind of look at the overall environment, we feel pretty good about the consumer environment, the retailer environment here in North America, but also in a lot of other places around the world. We think the consumer is much more apt to spend, interested in spending and can be enticed to do so. Think the vast majority of retailers that we do business with are in much better shape than they were last year. As we kind of think about back to school specifically, a few things could come up. I think we mentioned in our prepared remarks, we are seeing a particular segment of the market, which is high school and college age students buying the clog, particularly the classic clog for kind of pre and post sporting events. So that been a really nice focus for us and it's really driven some significant business. So we see that continue into back to school. And then we also launched our Platform Club last week, which is obviously a platform version of our classic clog inspired by some collaborations we had last year and we're excited about that and its potential to sell into that kind of younger consumer that's oriented around back to school. So, I think we've got a little bit of a kind of wind at our back from that perspective and we generally feel good about the return environment. Very helpful. Thank you. Our next question comes from Jim Duffy from Stifel. Please go ahead. Good morning, everyone. Carrie, congratulations to you on a productive and successful leadership tenure. So it occurs to me you're stepping down with fairly clear sight lines to the double digit EBIT margins and low teens EBITDA margins. I recognize this could fall into the category of front running Anne's view, but with Andrew on the call, it seems fair game. Question is, how do you guys think about margin opportunities beyond this? Is revenue the key lever for further improvement? Or can you take the SG and A rate lower? How much is left in the gross margin? Thoughts there would be helpful. Yes. Maybe I'll start Jim and then Carrie can add a little color. Yes, I think you actually phrased the question well, which is as we think about our architecture that gets us to double digit EBIT margins, it's really been around getting our SG and A down and getting the quality of our revenues up and our gross margin up and getting us to a point where we can achieve that with modest revenue growth. As we then start to accelerate our revenue growth, it will provide leverage. A lot of our SG and A will see leverage from revenue growth, particularly in the wholesale business. And obviously, if we can drive some retail comps, which we now have for, I think, 4 quarters in a row, you get leverage that way. So we do see it going a little bit lower as you get revenue growth, but that will be the primary leverage. Yes. I think the only thing I'd add is getting SG and A in the low 40s is the first step to achieving double digit EBIT margin. And then it's really I think what we've driven in the organization and will continue is a continued focus operational improvement. And we still have opportunities to continue to drive improvement in the business as well as benefit from the leverage as we grow the top line. Great. That's a good segue to my next line of question. From an optics standpoint, compares begin to get more difficult. You've talked about wholesale distribution expansion opportunities, which is encouraging. Can you speak for a moment about opportunities to build on the positive comps and continue to improve retail productivity? And also maybe touch on some of the progress you're having with analytics and opportunities to leverage that for further digital growth? Yes, I mean, so in terms of let me sort of break that down a little bit. So if we talk about retail, yes, obviously, we're going to start to come up against our positive comp trajectory. As the fleet has rationalized and as we've closed our more unproductive stores as we've repositioned the whole retail fleet to be majority outlet stores on a global basis. We remain confident that we can continue to comp on our compare numbers because I think we have the product, the built for outlet product. We have a much greater focus on driving and managing that outlet business specifically and we feel really confident that we can provide ongoing comps in that environment. As you said, from a digital perspective, we've obviously achieved double digit and strong double digit digital growth for a good number of quarters now. We see that continuing as the consumer frankly continues to migrate to that environment, particularly in Asia where we see digital commerce really replacing or in some developing markets preventing the growth of traditional retail. It's really skipping in a significant way. We see that as a strong revenue driver for us and one where as a brand, as a company, we're focused. And I think you also referenced the digital marketing efforts where we've put in place new technologies that allow us to target our marketing efforts to personalize our messaging. And we're seeing very dramatic increases in terms of 50%. I think we mentioned in our prepared remarks, increases in our productivity from that. And I would say that's in its infancy today. So we see that continuing. The one thing I would add to the retail comment that Andrew made is as we innovate with product, we're also allowed us to bring product to the market at higher price points, right? So that will help. LiteWraide is a great example of that. And as Andrew indicated earlier, we're going to continue to innovate and look for comfort stories that add unique selling propositions that are worth more to the consumer. Yes. Great. Thanks for that. Thanks, Jim. Thank you. Our next question comes from Jim Chartier from Monness, Crespi and Hardt. Please go ahead. Good morning. Thanks for taking my questions. First, Andrew, you talked about great returns on advertising. What's the opportunity to continue to grow the ad spend? And if you could talk about that maybe by region? And then in terms of the new potential new distribution, how do you manage the product segmentation by channel going forward as you add new distribution? Thanks. Yes. So even as we've let me deal with ad spend first. So even as we have reduced our SG and A and plan to reduce our SG and A into next year, we have also increased our total investment in marketing and also skewed more and more of that spend to what we call working dollars. So less on SG and A headcount and agency fees and more on driving digital and social media. So our increases in terms of dollars spent impacting the consumer have grown over the last several years and that has been an important factor in driving, think, the resurgence of the brand. We intend to continue to do that. Yes. And then I'll just add to that on the analytics. I think as we've shifted to digital social, obviously, we get a tremendous amount of information and our ability to use that information and make our targeted ad more effective is something that Andrew called out in his prepared remarks in terms of a return on ad spend being up 50%. We think there's still opportunity there as we continue to hone and get better at this. Yes. And then you also kind of referenced by market. One of the beauties of a social digital orientated architecture is it's very scalable and applicable by market. We don't break out that what that spend looks like by market. But it does allow us to take our message from the U. S. To Europe to Asia and that's also been really effective. And we probably see the strongest growth in our spend more orientated towards our Asian markets in the future. In terms of product segmentation, I think that's been a we've gone through an arc here where we've really rationalized product and stabilized our product development engine. And now with the introduction of LiteRide and a lot of new product that we brought to market in the last 2 years, we're getting more and more sophisticated around product segmentation with different lines associated with our outlet, different lines and unique lines on our e commerce and also being able to differentiate and SMUs across some of our key wholesale partners. So we see that as highly productive going forward and we'll do more of it going forward and allows us to provide more differentiation. I would say there is a core of our business, particularly kind of classic and Croc Band, which is like many other brands that have a core unique franchise like that, that does show up in every channel. So that will continue to show up in all of our key channels plus a little bit differentiation around it. Great. And then you previously talked about still a big opportunity to grow the business within existing distribution. So how has the I guess the demand of shelf space you have at your existing wholesale customers changed versus last year and then how much opportunity is there still going forward within the current distribution? I would say we have definitely seen growth in shelf space in aggregate. There are sort of key partners that we've grown really rapidly with in terms of shelf space and others that we have kind of stood still with that haven't been as sort of forward thinking in our view. But I think that remains as you look at the kind of particularly the developed markets, the U. S. Marketplace, we have a lot of distribution and our biggest growth driver is going to be growing representation in that distribution as well as adding select key accounts. So that is still a very important driver. I think we've made good progress, but we want to make more progress in the future. Our next question comes from Sam Poser from Susquehanna. A few things. Just details on the domestic expectation for domestic or North America or Americas wholesale growth for the back half of the year or by quarter. You explained it sort of conceptually, but could you give us some direction there as to sort of what's built in? Yes, I guess what I would with respect to North America wholesales, Sam, we don't guide specifically by region. Americas. No, nobody. I mean, we don't guide specifically by region for any of the regions. So I think that the way we've factored in our forecast for Americas into our overall guidance for the rest of the year. And it isn't just incorporated in. But we do feel good about our overall performance in the Americas. It is going to be muted by LatAm given the currency headwind. Yes. And that is factored into our guidance. Okay. And then you're down to 3.98 stores now. Are there more store closures either within the guidance or planned maybe for next year? Or are we at the level now where are we there? What we would say Sam is there are more store closures in the guidance and plan next year. We have completed the plan that we architected and announced and we regard that as completed. Go forward closures and openings will be kind of normal course of business as we assess the fleet and each store as it comes up for lease, whether we want to continue to operate that store, relocate it, open another one. But as we look at the guidance for the back half of the year and our preliminary view on 2019, that will be modest net closings. So what becomes sort of the optimum like by the end of I know you're not guiding 'nineteen, but what should we think of like store base by the end of 'nineteen? I mean it's like 380 or 350? Yes, I would say kind of modestly down on what it is today. Yes, I think that's reasonable, Sam. That's the right way to think about it. Okay. And then your are you going to be involved with Singles Day or are you not involved with that at all? You had talked, I believe, not being involved. Is that something that you're going to be are you going to be involved with that this year? Absolutely. Yes. No, I don't think we've talked about not being involved in Singles' Day. If you look at sort of what I would describe as sort of major festivals or major digital events on a global basis, Midsummer Festival, Singles' Day, twelvetwelve and even Prime Day, obviously, we just had here in the U. S. And Europe and other Amazon countries, Those are really, really important to be involved in. What we have looked at is the profitability of those events and how do you transact on those particular events such that you can actually make money. We do believe, and as we look, we've seen an erosion in our profitability associated with those events over the last couple of years. We see that in competitive brands and we're looking at a strategy that will maximize the profitability of those events, not just the revenue. Okay. And then you talked I mean, I guess my last question is how do you get to I mean, what should we think about sort of a base revenue growth now that the store closures are sort of you'll make just normal decisions? And so I mean, should I mean, can are you looking at like mid single digit revenue growth over the next few years to get to what is the number you're using to get to your margin target? I think the way I would ask that without giving guidance on 'nineteen and beyond at this point, Sam, is really if you look at our underlying performance in 'seventeen and in 'eighteen, adjusting for the store closures and business model change, which impacted both years by about $60,000,000 we've seen moderate to high single digit underlying growth. As we move into 2019, we still have a bit of a headwind related to store closures for the partial year impact as it goes into 2019. But again, we feel good about that underlying growth. And that's really driven by the fact that the clogs and the sandal focus is extremely beneficial to our business. It's core to our DNA. We've had many quarters of double digit sandal growth, and we feel like that's something we can look at that continued growth going forward as well as quads. It's a growing category. We're taking share. So we think the underlying growth of this business is absolutely solid. Yes. And I think I know that is a key question for many and some are skeptical about that. But if you look at the track record, we've got 2 years of producing underlying growth and I think we have the ammunition from a product and marketing perspective to continue that into the future. Okay. And I promised one more I promised that was last one, but one more. You talked about your adjusted EBITDA, but you didn't why not just give everybody a non GAAP reconciliation on the earnings thing? Because next year, a lot of these charges fall away and then you're going to have bad compares unless we take them out this year and so on. So why not just provide non GAAP reconciliation, especially when you're talking about basically a non GAAP EBITDA target? Yes. And I know we've talked about this before, Sam. I think what's important is that we're explicit about the elements that actually do make up our guidance. And then I think the other element is that's really important is that we meet or exceed the guidance that we give. So I think all the pieces are there for how people want to look at it and that's what's critical. But I mean you raised your underlying EBIT guidance by $3,000,000 because that should goes from your $50,000,000 operating margin target now goes to was at $65,000,000 because of the one time charges. Now it goes to 68,000,000 dollars because of now that because the charges have gone up. I mean, why not I mean, it's just you're talking both ways. Why not just give it one way, especially when you start talking about adjusted EBITDA? I would say, Tim, this is probably something we're not going to agree on. So I think that's where we probably ought to leave it. And we do have a follow-up question from Steve Marotta from C. L. King and Associates. Please go ahead. Carrie, a very quick question on maybe it's topical, non GAAP taxes for the quarter, just a housekeeping standpoint. I know that it was $3,000,000 on a GAAP basis. What would it have been when you exclude those items on a dollar basis? On an adjusted, I have no idea off the top of my head. I think it is lower than it normally would be just because we had the release of some valuation allowances and you'll see that commentary in the Q that will come out later this morning. But there's nothing overly unusual in that number. So we don't look at the tax on adjusted versus not adjusted. No problem. Thank you very much. Yes. Okay. Thank you. Great. Well, thank you very much for everybody for joining us today and for your continued interest in Crops. We appreciate it. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.