Earnings Call: Q2 2016

Aug 3, 2016

Welcome to the Second Quarter 2016 Crocs Incorporated Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded. I will now turn the call over to Brendan Frey. Mr. Frey, you may begin. Thank you, and thank you everyone for joining us today for the Crocs' 2nd quarter 2016 earnings conference call. This morning, we announced our Q2 2016 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward looking and accordingly are subject to Safe Harbor provisions of the federal securities law. These statements include, but are not limited to, statements regarding future revenue and earnings, prospects and product pipeline. We caution that these statements are subject to a number of risks and uncertainties described in the Risk Factors section on the company's 2015 report on Form 10 ks filed on February 29, 2016, with the Securities and Exchange Commission. Accordingly, all actual results could differ materially from those described in this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs is not obligated to update these forward looking statements to reflect the impact of future events. The company may refer to certain non GAAP metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today and on our investor website, once again at crocs.com. Joining on the call today are Greg Rabat, Chief Executive Officer Andrew Reese, President and Carey Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I'll now turn the call over to Greg. Thank you, Brendan, and good morning, everyone. This morning, we announced our Q2 2016 financial results. Net income available to common shareholders was $11,700,000 up 21.1% as compared to Q2 last year. Revenues were $323,800,000 down 6.3% versus the Q2 of 2015. On a constant currency basis and excluding the sale of our South Africa business, revenue was down 5.4%. For the first half of twenty sixteen, revenue as reported was down less than 1% and up 1% on a constant currency basis, excluding the sale of South Africa. Overall, while revenue fell short of our expectations, we believe the shortfall relative to our guidance was primarily tied to industry softness in the quarter and our continued distributor challenges in China rather than the overall health of our brand or specific product performance. In addition, we see a number of positive indicators that give us confidence in the direction that we're heading, including our 5th consecutive quarter of positive DTC comp performance. For the first half, Americas revenue was up mid single digits. Gross margin showed significant sequential improvement. We managed expenses effectively. We reduced inventory levels and we have executed deals with the majority of our challenged China distributors. And as indicated on our last earnings call, we continue to have strong delivery performance and feedback on our new product remains very positive. Relative to our expectations, wholesale was negatively impacted by lower at launch orders, particularly in the Americas given retailers caution in allocating open to buy dollars. In addition, China underperformed versus expectation. The resolution of our challenged distributors has taken longer than planned. And while we have reached agreements with most of our distributors, we still have more work to do to reestablish growth in our China wholesale business. That said, despite these challenges on the wholesale side of the business, our DTC business in China continues to be very strong. Andrew will share more details in a moment. During the quarter, we managed what was in our control and we're able to mitigate most of the sales shortfall. Gross margins, up 600 basis points sequentially from Q1, came in approximately 150 basis points better than our expectations due to less discounting as well as a higher mix of DTC revenue, which comes at a higher gross margin than our wholesale business. In addition, we closely managed our operating expenses and adjusted SG and A spending came in below expectations, reflecting an $8,700,000 reduction to prior year. Finally, as a result of our improved operations, we were able to manage our inventories down $12,800,000 or down 7% to last year, despite the revenue shortfall. Let me now share my perspectives on where we stand today and where we are going. First, importantly, our global direct to consumer business grew for the 5th consecutive quarter with DTC comps up 2.9 percent despite the continued decline in retail traffic. Retail comps decreased by 3.4% due primarily to declines in Asia and the Americas as increased conversion and units per transaction were not enough to offset the decline in retail traffic during the quarter. E commerce grew 19.5%, reflecting growth in all regions. Global wholesale revenue was down 12.4% for the quarter versus last year. The majority of the decline in the 2nd quarter was primarily due to shortfalls in our China business, resulting from changes being implemented with distributors in that market. For the first half, global wholesale was down 3.1% versus last year. Despite disappointing top line results in Q2, I believe our results show that we're making significant strategic progress, including managing our business tightly and we're committed to maintaining this operating discipline going forward. Against the backdrop of our Q2 performance, we believe our second half revenues in 2016 will be lower than previously indicated. We now expect 2016 full year revenues to be down low single digits based on a more cautious view on North America consumer demand and slower improvement in China. At the same time, the better than expected improvement in gross margins indicates a shift to our higher margin molded product and a more disciplined approach to discounting and promotional activity. With a tighter product line, a more molded product mix, less discounts and better inventory discipline, we continue to expect year over year gross margin improvements going forward. Also, we expect continued SG and A improvement as we manage our expenses in the second half, leveraging more efficient and effective operating capabilities while managing costs where we can. As we have communicated in the past, we remain committed to controlling our operating expenses and improving our operating margins. Finally, we will continue to manage our inventory closely, balancing it with demand, while delivering service at industry benchmark levels are better. Fewer SKUs, leveraging a common global platform, along with tighter processes and procedures are providing improved operational performance. As we look to 2017, retailer feedback on our current and spring 2017 line is very strong. That combined with continued growth in our global DTC business based on new product, strong marketing and continued operational improvements position us well for springsummer 2017 beyond. I want to reiterate that I am disappointed that we are not yet delivering the revenue growth we projected for 2016. But given the overall retail environment, we feel it is prudent to be more conservative with our guidance at this time. Our product, our marketing and our service levels are better than they have been in our recent history. I'm proud of the work our team has done over the past 18 to 24 months, which is showing up in our gross margins, our SG and A, our working capital and our service levels. We remain committed to the pillars of the strategy that we have laid out previously. And while we've made substantial progress in each of these areas, the work continues. And despite recent challenges, we continue to see many positive signs, which gives us confidence in the direction we're heading and seeing the results reflected in our operating performance. And now Andrew will highlight some of the details for our key initiatives in the Q2. Thank you, Greg. Today, I want to update you on 3 key topics: 1, our turnaround in China 2, our global DTC performance and 3, our product line performance. Firstly, our turnaround in China. In the quarter, we've made substantial progress transitioning our business from our challenged distributors. The resolutions are in the form of transitioning stores to existing partners, replacing some distributor stores with company owned stores as well as some store closures. For some perspective, the challenged distributors represented approximately 20% of our partner stores and 30% of our China wholesale revenue or approximately $13,000,000 of revenue in the first half of twenty fifteen. As you may recall, we stopped shipping these distributors in Q3 last year. In addition, China revenues have been impacted by a new credit policy that we implemented in 2016 for several distributors, which has initially resulted in lower revenue, but reduces our overall credit risk. As Greg mentioned, it has taken more time than expected to work through the challenges. But we continue to make progress and we're confident that the changes we have made are positioning us to return our China business to sustained and profitable growth with a focus on DTC and working with our stronger China distributors. Secondly, global DTC performance. Global direct to consumer revenues were up 1.1% as reported and comp sales were up 2.9%. This is our 5th consecutive quarter delivering positive DTC comp growth. Our e commerce business was up across all regions led by the U. S. And Asia. Overall, global e commerce revenue growth was 19.5%. Ourecommerce business continues to benefit from our new product lines and better channel execution, including enhanced digital marketing efforts and a commitment to better in stock position on core product. As we have said, the bulk of our store closings are behind us. In the quarter, we closed 23 stores and opened 31, 22 of which were in Asia and 15 of which were outlet stores, bringing our Q2 global store count to 558. Retail comps were down 3.4% in the quarter, reflecting declines in Asia and the Americas, with Europe posting positive 1.8% comps. Conversion improvements and increases in units per transaction were not enough to offset traffic declines during the quarter. We believe that a continued improvement in conversion is a clear indicator that our improved product, enhanced assortment strategies and brand storytelling as well as elevated customer experience are resonating with customers. Thirdly, current product line performance. Our purest view of the performance of springsummer 2016 comes in our own DTC business, which increased on a comparable store basis by 2.9% globally in the quarter despite lower traffic. Sell throughs within our DTC and wholesale channels were solid, particularly given the overall retail environment. Important trends and key products that tapped into these trends during springsummer 2016 were athleisure, the ROKA, part of our City Lane collection and a great representation of our Crocs DNA capitalized on a mainstream consumer trend and did well globally with both men and women. Sandals, a number of our sandals had a strong quarter, including the Isabella, Sloan, Sondra, Capri and Maligne. Consumers responded to the fresh, lightweight styling and strong price value. Finally, graphics including tropical, florals and animals did well, especially on our core clogs, the Classic and the Croc Band. Looking forward to fall holiday 'sixteen, several new products where retailers have responded well to the newness and fresh styling in the line are boots, the large point boot and the bump it rain boot with Batman and Dory graphics. Clogs, new graphics continue to engender strong response across multiple product lines, notably the new graphic package on our best selling bistro clog. Athleisure, the City Lane Cut and Sew Slip On is a nice follow on to the molded City Lane introduced in the full holiday of 2015. We're extremely pleased with the continued improvements in our product line. And as Greg outlined in his remarks, these product line improvements are the foundation needed in order for the brand to achieve its fullest potential in any macroeconomic environment. Now I'll turn it over to Carrie to go into details of our Q2 financial performance. Thank you, Andrew. Turning to the financials. Revenue in the Q2 was $323,800,000 down 6.3% from a year ago on an as reported basis. Revenue was down 5.4%, excluding the sale of our South Africa business and on a constant currency basis. Currency had a negative $440,000 impact during the quarter and the sale of South Africa, which we've discussed on previous calls, reduced revenue by $3,000,000 in the quarter. There were no other factors materially affecting the year over year comparability of our Q2 revenues. Given the minor impact of currency in the quarter, all of the revenues which we follow are quoted as reported. In the Americas, revenue was $135,100,000 for the quarter, down 5.6%. Wholesale revenue was down 16.3%, up which over 80% was due to early deliveries in Q1 as we have previously discussed. For the first half, total Americas revenue was up 4.2% with North America wholesale revenue up 7.6% for the first half. Revenue up 7.6% for the first half. Retail sales in the Americas decreased just less than 1% for the quarter, reflecting negative comps of 2.5% and 4 fewer stores as compared to last year. E commerce in the Americas grew 16%, resulting in Americas DTC comps of 2.4%. In Asia, revenue was $130,800,000 for the quarter, down 12.5%. Wholesale revenues were down 19.6%, primarily due to the sales decline associated with our challenged China distributors. Retail revenues were down 10%, reflecting the sale of our South Africa business and negative comps of 6.8%, partially offset by 7 more stores as compared to last year. E commerce sales in Asia increased 37.4%, resulting in Asia DTC comps of 4.3%. In Europe, revenue was $57,700,000 for the quarter, up 9.5%. Wholesale revenue increased 17.5%, driven by the planned change in the shipping window, as we discussed last quarter, to better align our product delivery across regions, which shifted some wholesale orders from Q1 to Q2 as compared to last year. Retail revenues were down 3.9%, reflecting positive comps of 1.8% and 4 fewer stores as compared to last year. E commerce sales in Europe increased 2.4%, resulting in European DTC comps of 1.6%. We sold 17,700,000 pairs in the quarter, a 0.7% increase from last year. The average selling price of our footwear in the Q2 was $18.05 a 6.3% reduction from the prior year, driven primarily by the regional mix of revenue. Gross margin for the quarter was 52.4%, down 254 basis points from the prior year, primarily due to higher distribution costs associated with both higher e commerce volume, as well as smaller, more frequent retail replenishment for better inventory management, higher royalty expenses and lapping a favorable inventory adjustment from last year. This was, however, a greater sequential improvement than we had anticipated due to better product margins associated with lower discounting and favorable channel mix. Adjusted selling, general and administrative expenses were $148,200,000 down $8,700,000 from the prior year, primarily associated with lower bad debt and variable comp. SG and A at 45.8 percent of sales for the quarter is up 40 basis points as the loss of leverage offset the reductions in absolute spending. Turning to the balance sheet at the end of the quarter. We ended the quarter with $146,700,000 in cash and no outstanding borrowings on our credit facility. We ended the quarter with 73,500,000 shares outstanding and the company did not repurchase any shares during the quarter. Inventory at the end of the quarter was $169,900,000 down $12,700,000 or 7% from Q2 2015 ending inventory of $182,600,000 Two final notes on the financials. First, net income attributable to common shareholders was $11,700,000 for the quarter after preferred share dividends and equivalents of $3,800,000 2nd, the weighted average share count used to calculate EPS was 73,400,000 shares for the quarter. In recognition of the soft macroeconomic conditions and the cautious retail environment, we expect Q3 revenue to be between $245,000,000 $255,000,000 compared to $274,100,000 last year. We expect Q3 gross margins to be approximately 500 basis points better than Q3 prior year and adjusted SG and A to be approximately $10,000,000 better than prior year. For the year, we now expect 2016 revenue to be down low single digits. We believe gross margins will be approximately 150 basis points better than prior year, while adjusted SG and A will now be approximately $500,000,000 versus our previous expectation of $510,000,000 Now I'll turn it back to Greg for closing comments. Thanks, Gary. In closing, despite the decline in our 2nd quarter revenue performance, the team has made great progress elevating the brand, developing compelling product, vastly improving service levels, reducing costs and implementing better operating disciplines. In the face of a challenging global consumer environment, this work has not yet been fully reflected in our financial results. It is our responsibility to translate this into strong operating performance. Despite the challenges, I'm confident that we have repositioned the business and built the platform to provide sustained growth and profitability for the future. While we are not immune to the overarching business conditions, we must continue to improve to execute better every day. I'm confident that we have the right plan and the right team to do just that. My thanks again to our team around the globe for all their hard work. Now operator, we'll open the call up for questions. Thank you. We'll now begin the question and answer And our first question comes from Jim Duffy from Stifel. Please go ahead. Thank you. Good morning. Can I ask you to provide more detail on the revenue puts and takes in the changes to the guidance? Sure. So this is Carrie. Specifically with respect to the overall revenue shortfall in the quarter, I think we had talked both first about Q2 and then that will help inform the full year change to our overall guidance. So we mentioned Q2 What we mentioned, Q2 revenues came in below our expectations primarily related to the decline in the Americas wholesale at once. Despite solid sell throughs, we had cautiousness with retailers using their open to buy dollars and then the transition taking longer than we had hoped. So factoring that impact into our overall guidance, we've projected full year revenue down to the low single digits and that really is incorporating that Q2 performance and taking that continued cautious outlook from our wholesale business as well as the China business. That said, I think what I want to make sure is clear relative to our guidance for the full year and again Q2 is great example of taking how we performed in Q2 and translating that into our guidance. Despite the revenue shortfall in Q2 from our guidance, our improved margin and our SG and A and performance allowed us to deliver our EBIT above the consensus expectation. So as we take that into the full year, we are calling our gross margin up 50 basis points from our last guidance. We are also lowering our SG and A spend $10,000,000 from $510,000,000 down to $500,000,000 for the full year. So with that gross margin improvement and the SG and A improvement, we're expecting both of those to help mitigate the majority of the revenue shortfall in our revenue guidance. Okay. Thanks for that. And the China situation, we're now going on over a year of challenges there. Can you give us more detail on where you stand with respect to distributors, when we should expect a return to growth in China, perhaps itemize the expected impact to the top line guidance from the China situation? That would be helpful. Yes. Thank you, Jim. You're right. Look, the resolving distribution issues in China has taken absolutely longer than we planned. I do want to highlight that during the 1st 2 quarters of this year, our DTC business actually grew very strong double digits in China. China. Resolving the wholesale issues with our key distributors is really a 2 step process, the first of which is terminating the relationships with the troubled distributors. And I can tell you at this point, that's effectively complete. The second step is then transitioning the stores that those distributors operate, and there's 2 parts to that. Firstly, some of those have gone to other strong distributors and others that we've taken over ourselves. And I can tell you that that's substantially complete. There are 1 or 2 transitions to take place during this quarter, but the majority of that's done. So in terms of handling and dealing with our troubled distributors, we can update you that, that is, at this point, largely complete. We then turn our attention to building back our distribution, which is hiring incremental or building relationships with incremental distributors for key parts of the country and probably more importantly, working with a base of distributors that through this process have been working well. As we look to the second half of the year, to the second part of your question, there's a couple of critical things to keep in mind. In Q3 and Q3 onwards, we're no longer up against revenue to those troubled distributors. So the last revenue that we placed with them was in Q2 of 'fifteen, so we're not up against that business anymore. And secondly, the DTC portion of our business, both retail and e comm, grows as a proportion of the overall revenues in China, and that's been tracking all year at a strong double digit growth rate. So the combination of those two events as we look at the back half of the year, while we're planning it conservatively, because this, as you rightly point out with your question, has taken longer than we thought, we are confident that we'll see growth in H2 from China. Thank you for that. And my last question, the inventory really stands out as a positive. You're able to manage that nicely without consequence to gross margin despite the lower than expected sales. Was that managing flow of receipts? Some perspective there would be helpful. Thanks, Carey. Yes. Look, we've been able to leverage a series of operational improvements, leveraging systems, talent processes. And I would say we've over the course of the last year really changed our whole approach to inventory management at the company. And so it's a key area of focus for us in making sure we're kind of operating at the highest level going forward. And we've made great progress, and we expect to continue to do so going forward. Thanks. Good luck. Thank you. Thanks, Jim. And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead. Great. Thanks. Good morning. I guess I wanted to follow-up just a little bit more in detail on the Q2 miss. I mean, it seems like it was mostly wholesale. Could you just maybe parse out as you thought about that kind of at once order business, particularly in North America that you were planning for the quarter and then where that ended up coming in? I just try I understand the China issue a little bit, but just trying to understand the Americas kind of shortfall in that planning process? Yes. Thanks, Aaron. Look, when we kind of look at our Q2 performance, our overall performance was from a business at retail perspective, it was solid. We obviously had strong delivery throughout Q1, which we talked about. That continued into Q2. Our product performed well at retail. We had solid sell throughs throughout the quarter. New product introductions performed well. Shoes that we talked about in our prepared remarks like the City Lane, the Duet, Isabella, but shoes like the ROKA as well performed well and give us confidence in terms of both the strategic direction we're heading as well as kind of key platforms that we're building for the future. We had solid global DTC performance, relates to obviously the other side of the business. But when you take a step back, our North America business in the first half and North America is where we've always talked about we expect the business to turn first. Our North America wholesale business in the first half was up about 7.6%. And so we feel good about that. What we saw in Q2 is as the quarter progressed, the retail environment got more challenging and at once orders became more difficult to fill. And we saw that progress in particular in the last 2 months of the quarter. And so when we look at our peers, despite being very disappointed in our top line results, we feel in light of the overall environment. And when you look at kind of the first half figures, our overall performance was solid and that there's strong indicators that we're moving in the right direction and it sets a foundation for our plans going forward. Yes. And I think the only piece I'd add to that, Aaron, would be in China, which is the other real big piece of this. I'd say it was largely due to our credit policy, which was highlighted in the script. We made a change in our credit policy in 2016 to really tighten the provision of credit to the ongoing distributors. The vast majority of our ongoing distributors in China are paying cash before delivery, so we're not providing credit. That caused them to be more cautious in terms of their receipts. We think that was the right decision relative to making sure that we have a quality business in China. Okay. That's helpful. And then maybe just, Carey, for you. If you think about the cadence of the year, I would just take the midpoint of your revenue guidance for the Q3. It implies about down 9% in terms of sales. So are you seeing kind of trends weakening quarter to date? Or is there a timing shift in terms of how you're planning that wholesale business between Q3 and Q4? Just trying to understand, kind of that Q3. And then it obviously implies growth again in the Q4 to get to a down low single for the year. So any kind of constructs of how you're thinking about or what you're seeing right now that kind of provides that range would be helpful. Yes. So as you think about Q3 and Q4, there is a step up in Q4. And part of that is what we've talked about previously in our ability to ship more springsummer 2017 products in the 4th quarter to the warm weather markets and that's been factored into our guidance all year. And so that's kind of helping with the step up in Q4 relative to Q3. Okay. And then Q3, the weakening relative to Q2, is that something that you guys are seeing now? Or are you anticipating the North American market to continue to soften? Or how should we think about the sequential deceleration in Q3? Yes. So with respect to Q3, we are continuing to remain cautious related to the at once orders in North America wholesale and we're taking a more cautious point of view on China specifically as we kind of ramp through that as Andrew discussed earlier. Okay. And then just big picture longer term at the Analyst Day about a year ago, you guys were referencing kind of the 2018 kind of pillars 8% top line growth, 10% to 12% EBIT. Should we still be thinking about that? Or does this year and I know you are seeing some good bright spots in new products, but just this year, given how the environment in the industry has kind of panned out, I mean, should we assume that that's no longer on the table, particularly on the top line side of the equation? So what we've talked about is the 8% on the top line, 10% to 12% on operating margin. We continue to believe that 10% to 12% operating margin is the right target for the business. That said, the gross margin improvement that we're seeing, the trend that we're on, we continue to expect that to grow as we've discussed to the low 50s. The SG and A improvement, again, we're tracking on that. However, the slower ramp in sales will have an impact on that relative to the delivering that 10% to 12% margin in 2018. But obviously, our midterm guidance to 2018 didn't take into account the overall slowdown in the U. S. And global economy. But we still feel confident in the direction we're headed. So I think what I kind of the short answer to that, Aaron, is really we're seeing a little bit of a timing delay, specifically as it relates to SG and A leverage and the slower ramp in the revenue given that we're projecting low single digits for 2016. Got it. All right. Thank you, guys, and best of luck. Thanks. Thanks, Eric. And our next question comes from Mitch Kummetz from B. Riley. Please go ahead. Thanks. Can you hear me okay? Yes. Yes. Okay. Sorry. I just want to reconcile some China because Andrew, I thought you said earlier, maybe in response to Jim's question, Aaron, do you expect China to grow in the back half? Is that right? That's correct. Yes. But not in the I think you said or you guys said that Q3 is still going to be tough on China. So China doesn't grow in Q3, but it grows in the back half, so a lot of that comes in Q4. Is that how to think about China? I think the way to think about China is more that we expected to grow in the back half, it's just not growing at the rate that we had previously anticipated. Sure. That's exactly right. Yes. Okay. As we talked about yes. And then on Craig, I know you talked about a positive response to initial positive response to spring 2017. I know it's early to talk about next year, but how do you think about potential spring pre books coming out of a what looks like a springsummer season that was pretty challenging at retail? I mean, I would think that retailers are likely to take a pretty cautious stance on pre books. How do you kind of think about all of that, positive response to the product, but maybe retailers being a little gun shy to order? Yes. I think if you look at it from a Crocs perspective, we had a number of things to prove coming into spring, summer 2016. Clearly, one of the issues we've talked about over the last year has been delivery. Throughout Q1 and Q2, we delivered what we call on time and in full top quartile in terms of industry performance. And having done that kind of 2 quarters in a row and leveraging people, processes, new systems, we're confident that issue is behind us. So to us that was kind of a first step that we had to address. In terms of the second issue, our spring summer 2016 sell through was solid, including taking the brand and introducing some new style and elevation of style in molded product and as well as providing and kind of trying to put in new energy into our core clog category. And I think we've performed in both of those areas as well. So we're able to leverage those learnings and use that as a foundation. Yes, the reach the broader retail environment in the U. S. Across the globe is more difficult. So as we're thinking about the business in the back half and into 'seventeen, we're absolutely taking that into consideration. But I will say we're a critical spring summer 'sixteen resource in the industry, and I think we've had some key learnings that we can build off of and that gives us confidence in the direction we're heading. Okay. And then maybe lastly, can you talk a little bit about maybe differences in performance by gender in the quarter? I'm just kind of curious whether it's men's, women's or kids, if you saw any differences in how that product performed or if it was all pretty consistent? Yes. No, there were some differences, Mitch. So I think we saw stronger progress in women's, particularly in sandals and in clubs. And some of our men's business was more challenging. So I think we can see some clear differences. That's kind of relative to U. S. Wholesale. On a global basis, I think we saw progress in kids as well, but really the highlight in the U. S. Wholesale business was women's in the saddle category and in the club category. Got it. Okay. Thanks guys. Good luck. Thank you. And our next question comes from Sam Poser from Susquehanna. Please go ahead. Good morning. Thank you for taking my question. I mean, I guess, what changed in China from when you gave the guidance in the Q1 to now? I mean, what was it that changed in that period of time? Because it really sounded like you were turning the corner on the Q1 call and then it seems like things did decelerate? Yes, Sam, the critical thing that changed is just so far, right? So we felt like we had agreements with our troubled distributors that we're moving them out and we're replacing them. And that has taken probably 6 months longer than we thought it was going to take. But at this point, they are our relationship is over with those distributors that is done. Okay. And then secondly, granted the macro environment isn't as good as people would like to see, and your sell throughs at retail have been good. When you look at your wholesale accounts, do you have to maybe get more focused, do more work with those retailers to do better in store storytelling and so on create sort of items that they can't live without rather because what happened this year is when you had a great item, people filled it in. If it was a good item, people tended not to from what I gathered. So I mean, what can you do to sort of raise the bar, I guess, on those items that have performed well and make them more, I guess, work to make them more compelling within the wholesale accounts? Yes. I mean, I think broadly, Sam, that's right, right? So going into this year, as Greg said, we had 2 challenges. 1 was deliveries and giving them confidence in that, because previously they felt like they'd place orders and never received product, right? So I think we gave them that confidence, and we've done that 2 quarters in a row now. The second was really making those items big and making them really successful. And exactly as you said, making them must have. And I think what we've landed in this season is they've really seen a number of items. They've seen both the core product, clogs are 49% of the business in Q2, they were 43% of the business last year in Q2. So the core product with newness in graphics and newness in terms of key styles within that category has resonated. We've seen sandals move forward and there's some really critical items that we'll be building upon next year and really landing those. The second is absolutely reinforcing that sell through with marketing. We've got some really exciting programs that we're working on for next year. There is also importantly some real shifts going on in the marketplace in terms of channel mix. We've seen the e commerce and the digital channels really taking a lot of share. That's working for us. It's working for other people. And we're really focused on partnering very strongly with our large digital partners and with our family channel partners. To Andrew's last point, we also think we're well positioned relative to the channels of distribution, which we're focused. So obviously, family and retailers within the wholesale business, outlet and e comm in terms of our DTC business and then distributors internationally. So we think we're kind of well positioned and that we built enough of foundation in the first half of 'sixteen to leverage that for growth into 'seventeen. Thank you. And then lastly, I guess, just on the full year gross margin improvement, Carrie, what you said it's about 100 basis points? Yes. We said, we expect it to be 150 basis points above last year, which is a 50 basis point improvement from our most recent guidance. And so all of that's going to come in, I mean, you've got 500 basis points improvement in Q3 and then the balance in the Q4, correct? Correct. Yes. And leverage in, of course, we can deliver better than we planned in Q2 as well, so that factors in. Okay. All right. I mean but it is 500 bps in Q3 improvement over last year. That is correct? Yes, it is. Okay. Thanks, Ray. Yes. I'm sorry. No, that's fine. Thanks, Sam. Thank you, guys. And our next question comes from Jim Chertiere from Monness Crespi. Please go ahead. Good morning. Thanks for taking my questions. Just the direct to consumer comps were positive again, which is great to see, but it decels from the last couple of quarters. Do you think that was primarily weather related or was there something else going on? There's a couple of things going on. Probably the biggest is the e com component. As you saw in the ecom was up 20% this quarter. I think prior quarters, we've been up 30 plus percent. But importantly, we're now lapping when we started to make real traction on the e commerce business Q2 last year. So Q2 last year were up a strong 30% in e commerce. We're now lapping that with an additional 20%. So that's one factor. The second factor is underlying DTC. We saw a little deceleration in the Americas and Asia, and I think that's really a reflection of the tough marketplace we're operating in. And in particular, the tourist markets. We haven't talked about that at length in this call, but it continues to be a challenge. The tourist markets are important to us and tourist traffic is clearly down. Okay. And then any color in terms of how the DTC comps progressed over the course of the quarter? And then any color on Q3 to date? Yes. So we're not going to comment on quarter to date, and we don't break out DTC comps 5 months, but they did clearly decelerate during the quarter. The strongest month of the quarter was the 1st month and they decelerated through the quarter. Okay. And then Andrew, you mentioned that increased restricted credit standards was part of the issue in China. Was did that cause lower orders with the non trouble distributors, the go forward distributors as well as the trouble distributors? So well, just to be clear, in the first half of this year, we shipped nothing to the trouble distributors. We haven't shipped them since Q2 of last year. So the deceleration in orders was to our ongoing distributors where they're really managing their inventories more tightly as you'd expect them to do if they have to pay for their goods upfront. Okay. And then, Harry, please Sorry, we think that gives us a stronger and higher quality business in China. Absolutely. And then Carrie, on the SG and A improvement versus plan for the quarter and the year, is that primarily lower incentive comp or are there savings elsewhere? So versus prior year it was lower bad debt and some variable comp and variable comp was versus expectation. We also had some lower T and E and those types of things, some of the variable expenses we were able to reduce. Great. Thanks and best of luck. Thank you. Thanks. And our next question comes from Steve Marotta from CLK Associates. Please go ahead. Good morning, everybody. Greg, you've mentioned in the past that increasing penetration across channels and across geographies is very important. Obviously, if you only have, say, 2 or 3 styles in a particular door going to 4 or 5 is very important. And you can even do that sometimes in a more difficult environment. Can you talk a little bit about where you are in that process, where you think you might be a year from now, both domestically and internationally? Yes, sure. Thanks, Steve. Look, I think, as I said before, I think we did make significant strategic progress in terms of delivering our springsummer 2016 line, connecting with consumers. I think our DTC performance is an indication that they're reacting favorably to our product offering, particularly given the overarching retail environment. We've also had a lot of learnings, whether it's things that we can leverage and build on to help drive growth. I think our relationships with our wholesale partners around the globe has strengthened pretty materially and set the foundation. So we believe we can grow dollars per door and grow shelf space. It is something that it's going to happen over time, we do believe we can kind of move forward and make some progress as we head into 2017 and continue to leverage that as we move beyond 2017 as well. Thank you. And Kerry, could you quantify how much those earlier deliveries in the Q4, what the delta is over the previous year or give a little bit of guidance there? Yes. So it's been and what I would say is we've not quantified how much that is, but that's been factored into our guidance consistently as we've guided for the year. We typically have shipped some spring summer 2017, so it's not all incremental to prior year. So this is just an increase in what we've done previously. Do you feel that that's more of a pull forward through from Q1 or incremental? We're looking at its overall. I would say in the past I don't think we've necessarily had the product ready, fully ready to be able to deliver. So we actually see, I would say it's a little bit of blend of both to be honest. There's a little bit that we're now able to deliver sooner but we also would expect more repeat orders given the timing that we're putting in the market. And some of it frankly is for those warm weather doors where our retailers are looking to bring that product in early so they can set it up on the floor and start selling it early to Carriage Point. And it's also also when we're able to do that, we can leverage those learnings and react accordingly. Great. Thank you. Thank you. And our next question comes from Benjamin Brab from Robert Baird. Please go ahead. Hi. Thanks for taking our question. So coming out of the first half of the year, can you just comment on the reception of some of the new products and comment on what learnings you have coming out of this year for next season? Yes, I think the greatest successes we saw during the first half of this year, I think, was innovation we put into products that we're well known for. So molded product, clog products, we talked about clogs being 49% of the business versus 43% of the business last year. The appealing part of that, which you kind of see in our margins, is those are high margin products. The 2nd place where innovation has really played is in the sandal category, where the Isabella and a number of other sandals that we highlighted, the Sloane, the Malene, etcetera, have been particularly strong. And I think as Greg also highlighted in one of his answers, as we look at our kind of top 10 selling styles, 3 of them were brand new items. So to get 30%, to get 3 brand new items in your top 10 global styles, I think, is a good result. We see NCI performance about 40% of our overall business, whereas if we looked pre a couple of years ago, MPI was about 20% of our in season sell through. So hopefully, that gives you a little color about the new product introductions. Yes. Thank you. And then as a follow-up, did you comment on what the marketing spend was in the quarter? And related to those initiatives, are you seeing any impact on how consumers are approaching the brand? So yes, marketing spend in the first half, in the season and in the quarter was consistent with what it was last year as a percent of sales. So we've maintained the same stance in terms of the amount of money we're willing to invest in marketing. As we've talked about previously, we've narrowed the focus of those marketing dollars to our key markets, and we've really been spending against kind of 5 key markets this season. In terms of the impact relative to consumer perception of the brand, I think we talked previously that we've seen some evidence that, that through some of our research that, that improved fairly markedly towards the end of last year and we'll we'll keep a close eye on that on an ongoing basis. All right. Thanks. That's helpful. Thank you. And that was the last question. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation, and you may now disconnect.