Welcome to the second quarter 2016 Crocs, Inc. earnings conference call. My name is Adrian, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. As a reminder, this conference is being recorded. I'll now turn the call over to Brendon Frey. Mr. Frey, you may begin.
Thank you. Thank you everyone for joining us today for the Crocs second quarter 2016 earnings conference call. This morning, we announced our second quarter 2016 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward-looking and accordingly are subject to Safe Harbor provisions of the federal securities 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-K, filed on February 29th, 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-K, as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. The company may refer to certain non-GAAP metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today and on our investor website, once again, at crocs.com. Joining on the call today are Gregg Ribatt, Chief Executive Officer, Andrew Rees, President, and Carrie Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I'll now turn the call over to Greg.
Thank you, Brendon. Good morning, everyone. This morning, we announced our second quarter 2016 financial results. Net income available to common shareholders was $11.7 million, up 21.1% as compared to Q2 last year's. Revenues were $323.8 million, down 6.3% versus the second quarter of 2015. On a constant currency basis and excluding the sale of our South Africa business, revenue is down 5.4%. For the first half of 2016, 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 fifth 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. As indicated on our last earnings call, we continue to have strong delivery performance, and feedback on our new product remained very positive. Relative to our expectations, wholesale was negatively impacted by lower at-once 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 were 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&A spending came in below expectations, reflecting an $8.7 million reduction to prior year. Finally, as a result of our improved operations, we were able to manage our inventories down $12.8 million 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 consumer business grew for the fifth consecutive quarter, with DTC comps up 2.9%, 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 second 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, our 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&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 or 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 spring/summer 2017 and beyond. I want to reiterate that I am disappointed that we are not yet delivering the revenue growth we projected for 2016. 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&A, our working capital, and our service levels.
We remain committed to the pillars of the strategy that we have laid out previously. While we've made substantial progress in each of these areas, the work continues. 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. Now Andrew will highlight some of the details for our key initiatives in the second quarter.
Thank you, Greg. Today, I want to update you on three key topics. One, our turnaround in China. Two, our global DTC performance, and three, 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 million of revenue in the first half of 2015. 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 Gregg mentioned, it has taken more time than expected to work through the challenges. 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 fifth 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%.
Our e-commerce 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 spring/summer 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 spring/summer 2016 were athleisure. The Roka, part of our CitiLane 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, Sloane, Sanrah, Capri, and Malindi. 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 Crocband.
Looking forward to fall holiday 2016, several new products where retailers have responded well to the newness and fresh styling in the line are boots, the LodgePoint 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 CitiLane cut-and-sew slip-on is a nice follow-on to the molded CitiLane introduced in fall holiday of 2015. We're extremely pleased with the continued improvements in our product line, and as Gregg 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 second quarter was $323.8 million, 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 million 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 $135.1 million for the quarter, down 5.6%. Wholesale revenue was down 16.3%, of 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. 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 $130.8 million 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 $57.7 million 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 17.7 million pairs in the quarter, a 0.7% increase from last year. The average selling price of our footwear in the second quarter 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 $148.2 million, down $8.7 million from the prior year, primarily associated with lower bad debt and variable comp. SG&A at 45.8% 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 $146.7 million in cash and no outstanding borrowings on our credit facility. We ended the quarter with 73.5 million shares outstanding, and the company did not repurchase any shares during the quarter. Inventory at the end of the quarter was $169.9 million, down $12.7 million, or 7%, from Q2 2015 ending inventory of $182.6 million. Two final notes on the financials. First, net income attributable to common shareholders was $11.7 million for the quarter after preferred shared dividends and equivalents of $3.8 million. Second, the weighted average share count used to calculate EPS was 73.4 million shares for the quarter. In recognition of the soft macroeconomic conditions and the cautious retail environment, we expect third quarter revenue to be between $245 million and $255 million, compared to $274.1 million last year.
We expect Q3 gross margins to be approximately 500 basis points better than Q3 prior year, and adjusted SG&A to be approximately $10 million 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&A will now be approximately $500 million versus our previous expectation of $510 million. I'll turn it back to Gregg for closing comments.
Thanks, Carrie. In closing, despite the decline in our second 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 of their hard work.
Operator, we'll open the call up for questions.
Thank you. We'll now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. 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 and the changes to the guidance?
Sure. This is Carrie. Specifically with respect to the overall revenue shortfall in the quarter, I think we had talked, well, first about Q2, then that'll help inform the full-year change to our overall guidance. 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, then the China transition taking longer than we had hoped. Factoring that impact into our overall guidance, we've projected full-year revenue down to the low single digits, 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, again, Q2 is a 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&A performance allowed us to deliver our EBIT above the consensus expectations. 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&A spend $10 million from 510 down to 500 for the full year. With that gross margin improvement and the SG&A improvement, we're expecting both of those to help mitigate the majority of the shortfall in our revenue guidance.
Okay, thanks for that. 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'd be helpful.
Yeah. Thank you, Jim. You're right. Look, resolving our distribution issues in China has taken absolutely longer than we planned. I do want to highlight that during the first two quarters of this year, our DTC business actually grew very strong double digits in China. Resolving the wholesale issues with our key distributors is really a two-step process, the first of which is terminating the relationships with the troubled distributors. I can tell you at this point, that's effectively complete. The second step is transitioning the stores that those distributors operate, and there's two parts to that. Firstly, some of those have gone to other strong distributors, and others that we've taken over ourselves. I can tell you that that's substantially complete. There are one or two transitions to take place during this quarter, but the majority of that's done.
In terms of handling and dealing with our troubled distributors, we can update you that that is, at this point, largely complete.
We 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 onwards, we're no longer up against revenue to those troubled distributors. The last revenue that we placed with them was in Q2 of 2015, so we're not up against that business anymore. Secondly, the DTC portion of our business, both retail and e-com, grows as a proportion of the overall revenues in China, and that's been tracking all year at a strong double-digit growth rate.
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. My last question, the inventory really stands out as a positive. You were 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, Carrie.
Look, we've been able to leverage a series of operational improvements, leveraging systems, talent, processes, I would say we've, over the course of the last year, really changed our whole approach to inventory management at the company. It's a key area of focus for us in making sure we're kind of operating at the highest level going forward. We've made great progress, and we expect to continue to do so going forward.
Thanks. Good luck.
Thank you.
Thanks, Jim.
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. 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 understand the China issue a little bit, but just trying to understand the Americas kind of shortfall in that planning process.
Yeah. Thanks, Erinn. When we 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, and we had solid sell-throughs throughout the quarter. New product introductions performed well. Shoes that we talked about in our prepared remarks, like the CitiLane, the Duet, the 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 key platforms that we're building for the future. We had solid global DTC performance, which relates to, obviously, the other side of the business.
When you take a step back, our North America business in the first half. 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%. 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 two months of the quarter. 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 the first half figures, our overall performance was solid and there's strong indicators that we're moving in the right direction, and it sets a foundation for our plans going forward.
Yeah. I think the only piece I'd add to that, Erinn, would be in China, which is the other real big piece of this.
Sure.
I'd say it was largely due to our credit policy, which we 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. Maybe just Carrie, for you, as you think about the cadence of the year, if I would just take the midpoint of your revenue guidance for the third quarter, it implies about down 9% in terms of sales. Are you seeing 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 that third quarter, and then it obviously implies growth again in the fourth quarter to get to a down low single for the year. Any kind of constructs of how you're thinking about or what you're seeing right now that provides that range would be helpful.
Yeah. 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 spring/summer '17 products in the fourth quarter to the warm weather markets, and that's been factored into our guidance all year. That's kind of helping with the step-up in Q4 relative to Q3.
Okay. 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?
Yeah. 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. Just big picture, longer term. At the Analyst Day, about one year ago, you guys were referencing the 2018 pillars, 8% top-line growth, 10%-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 does this year, given how the environment in the industry has panned out, should we assume that that's no longer on the table, particularly on the top-line side of the equation?
What we've talked about is the 8% on the top-line, 10%-12% on the operating margin. We continue to believe that 10%-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&A improvement, again, we're tracking on that. However, the slower ramp in sales will have an impact on that relative to delivering that 10%-12% margin in 2018. Obviously, our midterm guidance to 2018 didn't take into account the overall slowdown in the U.S. and global economy. We still feel confident in the direction we're headed.
I think the short answer to that, Erinn, is really, we're seeing a little bit of a timing delay, specifically as it relates to SG&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, Erinn.
Our next question comes from Mitch Kummetz from B. Riley. Please go ahead.
Hey, can you hear me okay?
Yep.
Yeah.
Okay. Sorry. I just want to reconcile some comments around China, because Andrew, I thought you said earlier, maybe in response to Jim's question or Erinn's, you expect China to grow in the back half. Is that right?
That's correct, yes.
Not because I think you guys said that Q3 is still going to be tough on China. China doesn't grow in Q3, but it grows in the back half, so a lot of that comes in in Q4. Is that how to think about China?
I think the way to think about China is more that we expect it to grow in the back half. It's just not growing at the rate that we had previously anticipated.
That's exactly right. Yeah.
Okay.
As we talked about. Yeah.
Then on, Gregg, I know you talked about an 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 what looks like a spring/summer season that was pretty challenging at retail, I would think that retailers are likely to take a pretty cautious stance on pre-books. How do you think about all of that? Positive response to the product, but maybe retailers being a little gun-shy to order.
Yeah. 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. Having done that two quarters in a row and leveraging people, processes, new systems, we're confident that issue is behind us. To us, that was 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 stock, and the elevation of style in molded product, as well as providing and trying to put in new energy into our core clog category.
I think we've performed in both of those areas well. We're able to leverage those learnings, and use that as a foundation. Yes, the broader retail environment in the U.S. and across the globe is more difficult. As we're thinking about the business in the back half and into 2017, we're absolutely taking that into consideration. I will say we're a critical spring/summer 2016 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 headed.
Yeah.
Okay, thanks. Lastly, can you talk a little about maybe differences in performance by gender in the quarter? I'm just 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.
Yeah. There were some differences, Mitch. I think we saw stronger progress in women's, particularly in sandals and in clogs. Some of our men's business was more challenging. 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, really, the highlight in the U.S. wholesale business was women's in the sandal category and in the clog category.
Got it. Okay. Thanks, guys. Good luck.
Thank you.
Our next question comes from Sam Poser from Susquehanna. Please go ahead.
Good morning. Thank you for taking my question. I guess, what changed in China from when you gave the guidance in the first quarter to now? What was it that changed in that period of time? It really sounded like you were turning the corner on the first quarter call, and then it seems like things did decelerate.
Yeah, Sam, the critical thing that changed, it just took longer. We felt like we had agreements with our troubled distributors, so we were moving them out and we're replacing them. That has taken probably six months longer than we thought it was going to take. At this point, our relationship is over with those distributors. That is done.
Okay. 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, to create items that they can't live without, rather? 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. 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?
I think, broadly, Sam, that's right. Going into this year, as Gregg said, we had two challenges. One was deliveries and giving them confidence in that, because previously they felt like they'd placed orders and never received product. I think we gave them that confidence, and we've done that two quarters in a row now. The second was really making those items big and making them really successful. Exactly as you said, making them must-have. 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. 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, 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. Sam, to Andrew's last point, we also think we're well positioned relative to the channels of distribution which we're focused. Obviously family and e-tailers within the wholesale business, outlet and e-com in terms of our DTC business, and then distributors internationally.
We think we're kind of well positioned and that we built enough of a foundation in the first half of 2016 to leverage that for growth into 2017.
Thank you.
Lastly, I guess just on the full year gross margin improvement, Carrie, what you said it's at 100 basis points?
Yeah. 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.
All of that's going to come in. You've got 500 basis points improvement in Q3, then the balance in the fourth quarter, correct?
Correct. Yeah, and leverage and of course, we can deliver better than we planned in Q2 as well. That factors in.
Okay. All right. It is 500 basis points in Q3 improvement over last year. That is correct?
Yes, it is.
Okay.
Yep.
Thanks.
It's counted.
Thanks. Right.
Yep.
I'm sorry.
No, that's fine.
Thanks, Sam.
Thank you guys.
Andrew, next question comes from Jim Chartier from Monness, Crespi. Please go ahead.
Morning. Thanks for taking my questions. The direct-to-consumer comps were positive again, which is great to see, but it decelerated 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, e-com was up 20% this quarter. I think prior quarters we've been up 30%+, but importantly, we're now lapping when we started to make real traction on the e-commerce business Q2 last year. Q2 last year, we were up a strong 30% in e-commerce. We're now lapping that with an additional 20%. That's one factor. The second factor is underlying DTC. We saw a little deceleration in the Americas and at Asia, and I think that's really a reflection of the tough marketplace we're operating in.
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. Any color in terms of how the DTC comps progressed over the course of the quarter? Any color on third quarter to date? Yeah. We're not going to comment on quarter to date, and we don't break out DTC comps five months. They did clearly decelerate during the quarter. The strongest month of the quarter was the first month, and they decelerated through the quarter. Okay. Andrew, you mentioned that increased or stricter credit standards was part of the issue in China. Did that cause lower orders with the quote, "non-troubled distributors," the go-forward distributors as well as the troubled distributors?
Just to be clear, in the first half of this year, we shipped nothing to the troubled distributors. We haven't shipped them since Q2 of last year. 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 up front.
Okay. Carrie-
Sorry. We think that gives us a stronger and higher quality business in China.
Absolutely. Carrie, on the SG&A improvement versus plan for the quarter and the year, is that primarily lower incentive comp or are there savings elsewhere?
Versus prior year, it was lower bad debt and some variable comp, and variable comp was versus expectation. We also had some lower T&E and those types of things, and some of the variable expenses we were able to reduce.
Great. Thanks, and best of luck.
Yeah. Thank you.
Thanks.
Our next question comes from Steve Marotta from C.L. King & Associates. Please go ahead.
Good morning, everybody. Gregg, you've mentioned in the past that increasing penetration across channels and across geographies is very important. Obviously, if you only have, say, two or three styles in a particular door, going to four or five 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?
Yeah, sure. Thanks. Thanks, Steve. I think, as I said before, I think we did make significant strategic progress in terms of delivering our spring/summer 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 have strengthened pretty materially, and set the foundation. We believe we can grow $ per door and grow shelf space. It is something that's gonna happen over time, but we do believe we can 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. Carrie, could you quantify how much those earlier deliveries in the fourth quarter, what the delta is over the previous year? Give a little bit of guidance there?
What I would say is we've not quantified how much that is, that's been factored into our guidance consistently as we've guided for the year. We typically have shipped some spring/summer 2017, it's not all incremental, relative to prior years, this is just an increase in what we've done previously.
Do you feel that that's more of a pull forward through from first quarter or incremental?
We're looking at it as overall. I would say, in the past, I don't think we've necessarily had the product fully ready to be able to deliver. I would say it's a little bit of a blend of both, to be honest. There's a little bit that we're now able to deliver sooner, we also would expect more repeat orders given the timing that we're putting it in the market.
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 Carrie's point. It's also, when we're able to do that, we can leverage those learnings and react accordingly.
Great. Thank you.
Thank you.
Our next question comes from Benjamin Bray from Robert W. Baird. Please go ahead.
Hi. Thanks for taking our question. Coming out of the first half of the year, can you just comment on the reception to some of the new products and comment on what learnings you have coming out of this year for next season?
I think the greatest successes we saw during the first half of this year, I think, was innovation we put into products that we are well-known for. Molded product, clog product. We talked about clogs being 49% of the business versus 43% of the business last year. The appealing part of that, which you have seen in our margins, is those are high-margin products. The second 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 Malindi, et cetera, have been particularly strong. I think as Gregg also highlighted in one of his answers, as we look at our top 10 selling styles, three of them were brand-new items. To get 30%, to get three brand-new items in your top 10 global styles, I think is a good result.
We see NPI performance about 40% of our overall business. Whereas if we looked pre a couple of years ago, NPI was about 20% of our in-season sell-through. Hopefully that gives you a little color about the new product introductions.
Thank you. As a follow-up, did you comment on what the marketing spend was in the quarter? Related to those initiatives, are you seeing any impact on how consumers are approaching the brand?
Yeah, marketing spend in the first half, in the season, in the quarter, was consistent with what it was last year as a % of sales. 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 five 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 through some of our research, that that improved fairly markedly towards the end of last year, and we keep a close eye on that on an ongoing basis.
All right. Thanks. That's helpful.
Thank you. 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.