Earnings Call: Q1 2016

May 10, 2016

Welcome to the First Quarter 2016 Crocs Inc. Earnings Conference Call. My name is Jason, and I will 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. And please note that this conference is being recorded. I will now turn the call over to Brandon Frey. Mr. Frey, you may begin. Thank you, and thank you everyone for joining us today for the Crocs' Q1 2016 earnings conference call. This morning, we announced our Q1 2016 financial results. A copy of the press release can be found on our website at crocs.com. We'd 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 you that these events 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 on 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 me on the call today are Greg Rabat, Chief Executive Officer Andrew Reese, President and Keri Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call up for your questions. I'll now turn the call over to Greg. Thank you, Brendan, and good morning, everyone. Today, we announced our Q1 2016 financial results. Revenues were $279,100,000 above our guidance of $260,000,000 to $270,000,000 and net income available to common shareholders was $6,400,000 Revenue was up 6.5% on a reported basis and up 9.2% on a constant currency basis versus the Q1 of 2015. Overall, we delivered a strong Q1, which demonstrates the meaningful progress that we've made in repositioning the Crocs brand and business over the past 21 months. This morning, I will touch on a few highlights of the quarter, and then Andrew will dive deeper on some of the key actions that we are taking. And finally, Carrie will walk you through the detailed financials and discuss our outlook. In the Q1, we saw 5 key indicators of our progress. First, importantly, the Americas grew 19.5% on a constant currency basis. We experienced growth across all Americas distribution channels as significant wholesale and e commerce growth was coupled with modest retail growth. As our biggest region and the one closest to home, we believe this growth is indicative of the progress that we've made. 2nd, we saw direct to consumer or DTC comp sales increases in each region. Strong double digit e commerce growth in every region was backed up by positive retail comps with North America retail comp store sales turning positive for the first time in 10 quarters. 3rd, we sustained and leveraged a lower operating cost structure as adjusted SG and A as a percentage of revenue was down over 400 basis points. While $1,300,000 of this was timing of marketing activities shifting from Q1 to Q2, We continue to see the benefits from the restructuring initiatives executed over the past 21 months. 4th, I'm happy to communicate that our supply chain execution and on time delivery performance has substantially improved. Our Q1 delivery performance was our best shipping trend in many years, resulting in earlier deliveries as compared to last year. And I'm pleased to say that 2nd quarter delivery performance is continuing at these significantly improved levels. And finally, 5th, we've made significant improvements in our inventory management processes. Inventory was up only $1,400,000 or less than 1% compared with sales growth of 6.5%. Over the past 21 months, we've built a strong team, we've simplified and strengthened core processes, elevated our product line and enhanced our go to market approach around the globe. As we proceed in 2016, we believe our financial performance will increasingly reflect the benefits of these significant improvements. Despite having more work to do, we're off to a good start as evidenced by solid Q1 performance. And we remain confident that we're on track to further transform the Crocs brand and business and achieve both our full year and future sales and profit objectives. And now Andrew will highlight some of the key details of the quarter. Thank you, Greg. Today, I want to update you on 4 key topics: 1, global DTC performance 2, our turnaround in China 3, current product line performance and 4, the sale of South Africa. Firstly, global DTC performance. Global direct to consumer revenues were up 5.9% on an as reported basis, supported by strong DTC comp sales, which were up 9.9%. This is our 4th quarter in a row of delivering positive DTC comp growth. Our e commerce business was strong across all regions, led by the U. S. And Asia. Overall, global e commerce revenue growth accelerated by 31.9% on an as reported basis and 34.3% on a constant currency basis. Our e commerce business continues to benefit from our new product line and better channel execution, including enhanced digital marketing efforts and a commitment to better in stock positions on core product. Retail comps were up 3.1% in the quarter with all regions reporting positive comps. Importantly, comps in North America were positive for the first time in 10 quarters. These results reflect positive consumer response to our new product line, strong end of season sales in January and our continuing efforts to improve retail processes and systems. Specifically, we enhanced assortment strategies, brand storytelling, improved replenishment and in stock positions and elevated consumer experience. Having completed the bulk of our store closings, we continue to fine tune our retail portfolio, eliminating underperforming stores, while selectively opening new stores. In the quarter, we closed 15 stores and opened 6, 5 of which were in Asia, bringing our Q1 global store count to 550. The net change in store count did not have a meaningful impact on our consolidated financial performance during the quarter. Secondly, turnaround in China. As we discussed on our last call, we have been in active discussions with our challenged distributors. I'm pleased to share that we reached agreements with several of these distributors. Over the next few months, we'll be replacing certain retail locations currently managed by some of our challenged distributors with new company owned retail operations as well as shifting certain territories from troubled distributors to stronger existing distributors. We are tracking to have our issues with these challenged distributors resolved by the end of Q2, which will allow us to focus on driving sustainable growth in this key market. This progress gives us confidence that we'll return to growth in our China business in the back half of twenty sixteen. Thirdly, current product line performance. As you know, our springsummer 2016 product was the first developed by Michelle Paul and her team. While early in the season, this product has been well received with replenishment orders up approximately 20% in Q1 versus the Q1 of 2015, and retailer feedback remains extremely positive. Our purest view of the performance of 2016 today comes from our own DTC business, where we can see some very positive signs across a number of initiatives. By rationalizing our core clog assortment, we have driven approximately 20% growth into our go forward anchor styles, including classic and Krog band. This allows us to consolidate volume across fewer SKUs, maximizing margins and simplifying our supply chain execution. In addition, our made for her clog style led by Freestyle and our made for him, Duet Max, have seen strong overall performance. Swiftwater, a key collection that's currently focused on men's and kids, has seen exceptional growth over last year with greater than 600% revenue growth, driven by expansion of the collection and strong sell through. In 2017, we will expand Swift Water to women's and continue to build this franchise across men's, women's and kids. SONRA, a collection of embellished sandals, has seen strong early season performance, especially with the mini wedge silhouette. And licensed product continues to perform well across Star Wars, Frozen and Realtree. More broadly, among the areas that are working best are new molded silhouettes, season and trend right colors and enhanced graphics. Our new product generated over 40% of global revenues in Q1 with 2 of our new introductions, the DUET MAX clog and the Santa Cruz Luxe, making it into our top 10 selling styles globally. Fourthly, the sale of South Africa. As we discussed last quarter, we completed negotiations to sell our South Africa subsidiary to a licensee. The transaction closed on April 15. Our new licensee will continue to operate the wholesale business, retail stores and e commerce. South Africa revenues in our Q1 results was 1,700,000 dollars As we noted on our last earnings call, while this license model will result in lower reported revenue, it will provide greater profitability and lower risk from this market as we leverage our licensee's infrastructure and market knowledge. This change is consistent with our overall strategic plan of focusing our direct business model on our largest markets and using best in class partners in the rest of the world. Now I'll turn it over to Carrie to go into the details of our Q1 performance. Thank you, Andrew. Now turning to our financials. Revenue in the Q1 was $279,100,000 compared to our prior guidance of $260,000,000 to $270,000,000 Revenue was up 6.5% compared to the Q1 of 2015 on an as reported basis and up 9.2% on a constant currency basis. Compared to the Q1 of 2015, currency impact from the stronger U. S. Dollar was $7,100,000 and we are lapping the pork strike from last year that impacted revenue by $5,000,000 to $10,000,000 There were no other factors materially affecting the year over year comparability of our revenues this quarter. Q1 revenue outperformed our prior guidance in large part due to our wholesale channel where improved supply chain execution and delivery performance reduced the number of unfulfilled orders at quarter end relative to prior year. We believe these improvements resulted in increased revenue of approximately $9,000,000 for the period. Relative to prior guidance, we also benefited from $1,700,000 of South Africa sales in Q1 due to the later than expected closing of the sale as well as stronger DTC performance across the business. The timing of wholesale shipments will result in a lighter Q2, but keeps us on track from a half one perspective. All of the revenue results which follow are quoted in constant currency change versus prior year. In the Americas, revenue was $124,100,000 for the quarter, up 19.5%. Wholesale revenue was up 24.7%, of which approximately 2 thirds was due to the aforementioned delivery improvements and prior year shipping delays, including challenges resulting from the port strike. Retail sales in the Americas increased 3.6% for the quarter, reflecting positive comps of 2.9% and better productivity in the stores opened during the past year. E commerce in the Americas grew 43.5% and total America DTC comps were up 12.2%. In Asia, revenue was $104,500,000 for the quarter, up 7.9%. Wholesale revenues were up 9.2%, primarily due to timing of shipments between Q1 and Q2. Retail revenues were up 0.6%, reflecting positive comps of 2.0%. E commerce sales in Asia increased 27.3% and total Asia DTC comps were up 5.8%. In Europe, revenue was $50,300,000 for the quarter, down 7.9%. Retail comps were up 7.5%, but retail revenue declined 4% compared to Q1 2015 as we had 12 fewer stores as compared to last year. E commerce sales in Europe increased 15.1%, while DTC comps were up 9.7%. Wholesale revenue declined 10.3%, driven by a planned change in the shipping window to better align our product delivery across regions, which shifted some wholesale orders from Q1 to Q2 as compared to last year. We sold 16,300,000 pairs in the quarter, a 9.9% increase over last year. The average selling price of our footwear in the Q1 was $16.85 a 3.4 percent reduction from the prior year, mainly the result of 2 40 basis points of currency. Adjusted gross margin for the quarter was 46.1 percent, down 2 47 basis points from the prior year, primarily due to a negative currency impact of 106 basis points, our successful year end sale period in January and higher distribution costs. We expect to see sequential gross margin improvement from Q1 to Q2 of approximately 4.50 basis points, reflecting higher demand for in season products, partially offset by the impact of currency. As we get to the back half of the year, we expect meaningful improvement in gross margins on a year over year basis. Adjusted selling, general and administrative expenses were $114,400,000 down $4,600,000 from the prior year. Adjusted SG and A at 41% of sales for the quarter is down 4.41 basis points, reflecting higher revenue combined with savings from our reorganization efforts, timing of marketing expenses and currency. We realized minimal non recurring and special charges in the Q1 of 2016. Income from operations was $14,200,000 compared to a loss of $2,400,000 in the Q1 of 2015. Turning to the balance sheet at the end of the quarter. We ended the quarter with $89,100,000 in cash and $8,500,000 in outstanding borrowings on our credit facility. As a reminder, Q1 is our peak working capital quarter. The company did not repurchase any shares during the quarter and we ended the quarter with 73,300,000 shares outstanding. Inventory at the end of the quarter was $186,100,000 up $1,400,000 or less than 1% from Q1 2015 ending inventory of $184,700,000 Two final notes on the financials. First, adjusted net income attributable to common shareholders was $6,400,000 for the quarter after preferred share dividends and equivalents of $3,800,000 After adjusting for Class A participation rights of $1,000,000 associated with our preferred shares, the weighted average share count used to calculate diluted EPS was 74,000,000 shares. Given our ability to deliver more of our springsummer 2016 orders in Q1, we expect 2nd quarter revenue to be between $340,000,000 $350,000,000 compared to $345,700,000 last year. This results in our projected first half revenues on a constant currency basis, excluding the impact of the loss of the South Africa revenue in Q2 to be up mid single digits. We continue to expect full year 2016 revenue to grow in the mid single digit range and EBIT margins at mid single digits. Now, I'll turn it back to Greg for closing thoughts. Thanks, Carrie. As I discussed earlier, our performance in the Q1 is a strong indication the strategic change we've been implementing over the last 21 months is beginning to take hold and having a positive impact on the business. While we're pleased with these results, we still have more work to do. Despite challenges from a strong U. S. Dollar and an overall choppy macroeconomic environment, I continue to be confident in the direction which we are headed and our ability to successfully execute against our plans and achieve our goal of sustained profitable growth. Special thanks to the Crocs team around the globe for all of their hard work, their passion and commitment to unlock the full potential of the Crocs brand and create one of the leading global casual lifestyle footwear companies in the industry. Now, operator, we'll open the call up for questions. Thank And our first question comes from Scott Craseck from Buckingham Research Group. Yes. Hi, everyone. Thanks and good quarter. Thanks. Hi, Scott. Hi. So couple of questions here. I guess the first, you talked about a $9,000,000 improvement in sales because of being able to deliver on time. You talked about timing shifts helping 1Q wholesale sales in Asia Pacific. I think Europe was hurt by a shift in the shipping window for delivery. So can you just help us understand actually how much moved around between 1Q and 2Q and how you sort of view the underlying season? Yes. Thanks, Scott. When we look at Q1 and take a step back, we feel we're making meaningful progress and beginning to see the positive results of our turnaround efforts. First, there is increasing structural stability in the business. So things like store closings and exiting lines of business are essentially behind us. Currency impact has moderated and should continue to do so if the current rates hold. Deliveries are performing well, which is part of what you're referring to. And the management team is in place around the globe and beginning to make a real impact on the business. So we definitely did have some tailwind in the business in the Q1. The $9,000,000 you referenced, which is a combination of improved deliveries and comping the Port Strike challenges from a year ago. But the fundamentals in the business are strong. So if you take a step back and look at the core business, e commerce continues to grow at a high rate. We saw positive retail comps in every region. And then when you look at wholesale, which was up in a very real way, the timing of 1st quarter wholesale orders was favorable in the U. S, but unfavorable in Europe, which you referenced. And so we think net net, overall, we're it was a very solid Q1. And as we look at Q2, we do see some moderation of growth as Q1 timing reverses, but we're solidly on track to achieve our objectives and achieve mid single digit growth for the full year. And our Q1 results gives us confidence in terms of the direction in which we're heading. Okay. And I guess just a follow-up then, you referenced 2Q. The comps obviously are indicative of brand strength, but we are seeing in some of the POS data that we look at that covers Family Footwear, DSW, some of your key retailers, extreme weakness in 1Q. How do the sell through that we're seeing in data sets like that relate to you're still guiding 2Q revs to flat even with some of these timing shifts? How do we reconcile that? Sure. When we look at our Q1 sell through, we actually feel very positive about the results and they're certainly within our expectations. And while it's early in the season, direct feedback from our retailers and the data that we received from other external sources shows that our sell throughs were up in the Q1. And Scott, it's clearly a different picture than the sports scan data that you're referencing. So it's clear to us that there's a disconnect with the sports scan data accurately reflecting the breadth of our customer base. And when we go back and look at our Q1 performance, we feel very good about both our sell in and our sell throughs at retail. Yes. And Scott, just to elaborate a little bit on that, we're seeing some key programs performing well at retail. I'd probably call out number 1 Swiftwater. You mentioned it in the script, but it's a key franchise both in men's and kids. It's performing extremely well. We're expanding that. It's performing well at our own retail plus also at wholesale. The core clog business is performing well, somewhat driven by improved deliveries and in stocks, but we're seeing nice increases both again at wholesale and in our own retail. And probably most recently just delivering in the last few weeks is our Isabella program, which is really a high summer sandal program. Not quite seeing the weather for that yet, but it's performing well despite that. Okay. And then if I could just squeeze one last one in, Carey. Your SG and A was down a few percent on a dollar basis year over year. Should we expect a similar magnitude in 2Q? Or are there opportunities to see even more significant decline in SG and A dollars year over year in 2Q? Yes. So with respect to Q2, we actually have some puts and takes in the quarter. So we're picking up some additional expense relative to variable comp and those types of things, but that's being offset by some lower bad debt expense. So we actually expect Q2 SG and A to be relatively in line with last year. And then kind of to reiterate last when we were on the call, at the end of the Q4, our full year SG and A is expected to be around $510,000,000 Okay, that's great. Thanks very much. Good luck. Sure. Thank you. Thank you. Thanks, Scott. Thank you. And our next question comes from Sam Poser from CRT Capital. Good morning, everybody. Thanks for taking my question. I just want to follow-up on your gross margin commentary. Last year, you had gross margin of about 55% in Q2. How you said you expected 4.50 basis points improvement on a sequential basis or I mean which means that your gross margin will still be down, I mean, 500 basis points, 400 basis points? Yes. So you're exactly right with respect to sequential improvement from Q1 to Q2, which does mean we'll be down year over year from a gross margin standpoint. Relative to Q1, we expect the margin improvement to come primarily from better in more in season sale of products and that will be partially offset by the continued challenge that we have from an FX standpoint that should mitigate as we get into the back half of the year. And then we talked in the less FX headwind as well as less EOL product specifically as we look at Q4 and then lapping some of those delivery issues that we had last year. So I mean can you give us some idea of how you're looking at gross margin on a full year basis on a year over year? Yes, consistent with where we communicated at the end of Q4, we really right at this point still expect full year gross margins to be in line with consensus. Well, can you give us an idea of what percent gross margin you're looking at or the kind of increase you're having from last year or non increase? Yes. So the gross margin on a full year basis, last year was 47.3% gross adjusted gross margin. We're expecting 100 plus basis point improvement off of that. And again, that will put us relatively in line with where the consensus is. Okay. Thank you. And then with your just to make sure, when we look at China, can we get a little more color, just you went through it pretty quickly on the breakdown of what your percent of the business there you're taking in house and doing yourself versus the consolidating the changing over to those larger, I guess, more powerful distributors? Can you just give us some more color there, please? Yes, for sure, Sam. So look, we've made a lot of progress in the last 3 months in China. We've reached agreement with the majority of the challenged distributors. We have a lot of work to do to continue to reshape the business in the future. And as we transition from those challenged distributors, there's 2 pathways. Some of those territories will transfer to existing distributors, who will operate the stores that have previously been operated by their challenged distributors, and some will transition to us. As we looked, we did a comprehensive review of the marketplace city by city, province by province to really understand where and our primary model is to continue to operate through partners, but there are certain cities where we believe it's very financially attractive for us to operate our own stores where we can densify stores that we already have today and enhance our portfolio. And in particular, we're looking to open significant number of outlet stores in China. Yes. And Sam, we intend to share a lot more of that detail on our Q2 call once we've had a chance to finalize a number of these deals and are in a position to do that. And then lastly, you talked a lot about South Africa. So that hurts the second quarter, but it will start helping from a revenue perspective, it will start helping the profitability on a go forward basis? And then, you have other I think it's Taiwan and Brazil where you already have established licensees or distributor agreements there. Are you done with those after you finish with South Africa? Is that the end of those kind of changes? Or are there other regions where you're still looking to go to 3rd party? Yes. I mean, as we've been clear about from the beginning, Sam, our strategy is to operate the business ourselves in our major markets where we have scale and it's financially attractive and in some of the smaller markets to transition to distributors. Yes, you're right, South Africa, the seller of South Africa to a licensee will take the revenue out of our go forward revenues, but will be obviously add license fees as we go forward. And we think that will be a more profitable model in the future as the current as the new licensee gets up to speed. Brazil is a market we operate directly today. Taiwan is a kind of a combination market where we're the importer of record and then we primarily do business through 3 distributors. Will there be more regional changes? There could potentially be more regional changes over time, but they will be carefully executed. Okay. And one I'm sorry, one more last thing. Over the long term, Kerry, the gross margin, I mean, let's say, over the next 2 or 3 years, I mean, are you seeing do you see the gross margin with the mix and the improved execution and sort of a flattening out of currency, do you see that gross margin going back into the low 50s? Is that sort of the kind of target that you have? Is that Yes. No, that's consistent with our guidance that we provided at Investor Day back in September to get gross margins back into the low 50s. And they're exactly it's driven by several other things you mentioned. In addition, specifically as Michelle and her team are actually designing to cost now, that's helping margins with each new line that we bring to market, the improved on time deliveries, product lifecycle management and then the outlet expansion primarily in Asia, which gives us a more profitable channel to eliminate end of season product, which is something that's hurt our margins thus far. I mean and do you see that happening? I mean do you think you can get there? I mean do you expect that to happen by next year? Or is that something that is another year away? I mean given especially the way the gross margin on a year over year basis is down a lot in the first half of this year. And on a 2 3 year stack, the numbers are very low. Yes. We really see that, Sam, over a couple of year time frame. And we definitely have a line of sight to that and are working on and have confidence that we can get there. But it's more of a 2018 timeframe. Okay. Thanks very much and good luck. Thanks, Sam. Thank you. And our next question comes from Jim Duffy from Stifel. Thank you. Good morning. Nice start to the year. Thanks, Jim. Couple of questions for you. First, with respect to the China distribution resolution, where you stand now, can you speak to the percentage of the previous China distribution footprint for which you now feel you have a solution in place? I'm trying to get my arms around what the expected contribution from resuming shipments to populate those retail stores with inventory could be. Yes. Just to stay at a high level, there's only so much we can share at this point. And as I mentioned, we do intend to share more detail at the end of the second quarter. We are actively kind of in process working through those deals. And obviously, at that point, we'll share the data then, Jim. Okay. But you do expect to begin shipments to those regions in the Q3? Yes. So there'll be a number of those regions that we will ship in the Q3. And then obviously the stores that we are opening will enhance our retail portfolio too. Okay. So that gives us confidence for that we'll see growth in the second half out of China. Correct. Yes. Okay. Thanks. And then any updates on the retail door footprint objectives for the year? Any change to the total number of doors expected? I think you had previously thought you'd see it about flat year on year. Yes. I think as we indicated in Q1, we closed more stores than we opened. And our intention is to continue to manage the portfolio prudently. I think there are a couple of places where we'll see some door expansion, which is in China with the stores that we're going to be opening and probably a slightly more assertive strategy relative to outlets in Asia. But we'll be up modestly on prior year end store counts. Okay. Thanks. And then, Kerry, on the SG and A, I think you mentioned $510,000,000 If I'm not mistaken, that's a slightly lower number than you had guided previously. Are you finding additional opportunity for SG and A savings? Actually, yes, we continue to look for opportunities to take out costs where we can. So the 510, that approximate number is reflective of what we believe SG and A will be for the year. Very good. I'll leave it at that. Thanks. Thanks, Jim. Thank you. And our next question comes from Mitch Kummetz from B. Riley. Yes, thanks. Thanks for taking my questions. Let me add my congratulations. So Greg, obviously better execution in the quarter. Is there any way, any metrics that you can quantify that? I don't know if it's if you could speak to fill rates this year versus last year or maybe there's a better metric to use to for us to get our arms around how much improvement you actually experience? Yes. Thanks, Mitch. We spent a lot of time, I think, in the second half of the year talking about a series of initiatives that we had put in place kind of addressing deliveries. As you know, deliveries historically was a challenge for Crocs. And the initiatives range from reducing our number of SKUs to implementing kind of a global approach to product life cycle management, gaining global alignment from our product range where we made a big impact. But it also came down to evolving business processes, leveraging SAP and just building leveraging a stronger global operations team. And I think what we had communicated to our customers was the objective of delivering what we call industry standards. And while we don't kind of share a specific metric, we also said that it might take us a little bit of time to get there. And what we're proud about, what we're excited about is that we certainly in the Q1 and feel we're in a place to continue doing this. We are at or above industry standards at this point and delivering kind of high levels of service and feel we're in a really good place with both our approach to this area and our execution at this point. And then how do you think about consumer demand for your product based on better execution? I would think that from one standpoint, better opportunity for replenishment orders throughout the season. But then I'm also curious if you think there's some sort of pull forward in demand. There was obviously some pull forward in terms of wholesale deliveries, but I'm wondering how you think about like demand going into the Q2, given that you got more product out early? Yes. So there's a couple of things there, Mitch. One is, look, we were able to deliver earlier, as you can see in our wholesale numbers, which we think was a positive. And that was probably more in line when where the retailers wanted it versus where we did a little bit last year. So we weren't forcing it in earlier. As we look at sell throughs on that merchandise, we have higher levels of merchandise at retail in our wholesale channel. It's selling through at higher rates than it did last year, and we monitor that. So that's positive. We talked about in Q1 about at once being up 20% and we anticipate at once being continuing to grow as we get through the season. And probably the purest view of brand health, if you like, is DTC, where obviously the assortment is 100% crocs. And I think positive comps across the globe gives us real confidence in the product line. Okay. And then, Carey, can you give us an update on the impact of FX on the year? If I recall correctly, I think off of the last earnings call, you talked about FX being, I think, a 3% drag on revenues and I think 100 basis points of a headwind on operating margin. Are those targets still kind of in play or has that changed at all? Yes. So maybe it's better if I take a step back and take us back to the guidance we provided back in September was for revenue growth in the mid single digit range and EBIT margins in the mid single digit range. So the thing to think about is based on our Q1 results and the recent changes we've seen in foreign exchange, we're still projecting to be in line with that initial guidance range for 2016. The rates today are essentially the same as when we originally guided last September. We've seen some movement obviously Q1 it moved against us. We've seen it come back, but we continue to hold that overall guidance. And based on where Yes, go ahead. No, I was just going to say based on where FX rates are today, when do you think that gross margin could actually inflect to where FX is no longer a drag on gross margin and might actually be able to help gross margin? Yes, the currency impact we're seeing is mostly in the front half of this year and we will start to be able to benefit more from that leveling off in the back half. So that's when we start to expect to see some of that improvement. Okay. All right. Thanks. Good luck. Thank you. Thanks, Mitch. Thank you. And our next question comes from Tapoosh Barry from Goldman Sachs. Good morning. It's Chad on for Tapush. Congratulations on a nice quarter. Thank you. Just wanted to drill down a little bit into the comp performance. Can you provide any color on the comp breakdown by channel, outlets versus mall locations, etcetera? Yeah. We don't Chad, we don't provide that information. And so what we try to do is kind of share kind of an overall kind of view of the market and where we feel really positive about our Q1 results. Yes, but clearly we do break out e com versus retail. And as you see, e com performance was very strong. Retail was strong relative, but obviously that drives a wide average of the comp that's more towards e com. Understood. And then just drilling down on e commerce a little bit as well. I mean, it's pretty much the best 1Q in e commerce on a dollar basis you guys have ever had. Is that largely on the success of the January promotion or are there other factors that are influencing that? Yes. The e com performance has been very strong for a number of quarters now. We've had strong double digit growth across our e com channel for a number of quarters. I think the January promotion was strong and effective in terms of clearing our year end inventory, and it was clearly the right thing to do. But I think it's a longer term trend that we're seeing. Great. Thank you. Thank you. Thank you. And our next question comes from Erinn Murphy from Piper Jaffray. Hey, good morning. This is Christoph Fisher on for Erinn Murphy. So I was wondering how confident are you guys in the long term revenue plan given what we're hearing from retailers about the open to buy dollars in the space? Especially as inventory has managed a bit tighter, how are you guys expecting or how are you guys navigating the landscape? Yes. Certainly, it's a challenging macroeconomic environment out there. Having said that, we continue to feel confident in our plans. We feel the Q1 basically is a strong start to the year and a good indicator in terms of the strategic direction that we're heading. We're seeing retailers being more conservative with their open to buy dollars given the challenging environment. But we think a combination of our strong deliveries and solid early performance both on our classic core product and our new product introductions sets us well for 2016 and beyond. Okay, great. Thanks. And then just second question in terms of kind of new product. Can you maybe compare and contrast any type of consumer response you guys have gotten in terms of being in the wholesale channel or retail channel, if there's any differences there? Yes. I mean, I think there's a few things we're seeing on new product, Christophe. As we look at Q1, 40% of our sales were on NPI product, about spring summer 2016 line is new. So a significant renovation on the line that's been delivering during the Q and we've generated about 40% of our sales on that new product. Obviously, the and as we monitor sell throughs, both in our own stores and in wholesale, we are seeing as we've talked about a couple of times, we're seeing some very focused areas checking well, number 1, and most importantly from a sales and margin perspective is our core clog range, both the classic and the crop band, which are evergreen styles as well as Made for Her, Free Sale, Made for Him, Duet Max, those have been performing really well. Swiftwater, we've talked about, is doing extremely well at DTC and wholesale. And Isabella is the new standard product that's delivering now. Okay, great. Thanks very much. Thank you. Thank you. And our next question comes from Jonathan Komp from Robert W. Baird. Yes, hi. Thank you. I want to ask first about the Americas comps. First, maybe just on the retail side, I'm wondering if you saw any less pressure from some of the tourist markets. And then also looking ahead, any thoughts on the expectations for the year just directionally? It looks like the store comps get a little less easy of a compare and certainly the Internet comps get more difficult starting in the Q2. So any thoughts directionally if you expect kind of the growth rates to moderate or not? I think the so a number of things in there. Firstly, the tourist markets, we continue to see significant pressure in the tourist markets where traffic is down considerably. And as a reminder, those are Orlando, Hawaii and parts of the West Coast where you've got tourists from a variety of regions coming in and you've clearly seen those tourist counts down. Secondly, I think if you look at kind of overall traffic, frankly, overall traffic at retail has been down and our traffic has been down. We monitor that on a daily basis. But our comps have been despite that. They've been driven by conversion and units per transaction. As you indicate, look, the comparators change a little bit primarily for e com as we go through the year. But to date, in Americas in particular, lapping some strong performance from e com, we're continuing to see healthy comps relative to strong performance LY. Okay, great. And then maybe a couple of questions on the outlook. First, just on the revenue side. I think previously, maybe directionally, it was talked about a little higher revenue growth in the second half of the year. Now it sounds like maybe kind of mid single digit growth both the first half and the second half to get to the full year guide. Any thoughts on kind of directionally any changes first half versus second half? And then as you look in the second half, how much of the growth is driven by the improvement in China versus any moderation in other places of the business? I think as you look at the full year guidance, you're right mid single digits in the first half as compared to the second half. I would just say it's nuanced a bit, but the second half does grow a little bit faster than the first half. And then what's driving that growth certainly we're lapping a challenging back an easier back half last year primarily because of the delivery issues that we had in the back half. That combined with new product coming to market, combined with the easing of the FX pressures are what give us confidence. And then we've assumed all along with respect to our overall guidance that we would return China to growth in the back half. So that's not a change in terms of our assumptions. Great. And maybe one more just similar type of question, but on the gross margin, a lot of year over year noise. So maybe looking sequentially second half compared to the first half gross margin, it looks like historically the second half gross margin is maybe 400 basis points below the first half. If I look at a longer term average this year, it sounds like the gross margin in the second half may be only slightly below the first half on a sequential basis. So any change in that normal cadence second half versus the first half gross margin or any perspective there? Yes. I think that's a fair assessment what you outlined. As we look at why that would be in the second half again go back to less FX headwind factored into our cost of goods sold in the back half, less EOL products that we're lapping the sales of last year specifically in Q4. And then going back to the fundamental things that we've done from a process different than in the past is the design to cost and the product lifecycle management activities that we're performing. So as Greg mentioned earlier, the increased overlap in terms of products globally, the reduction of SKUs across the line as we move to the more overlap across regions, those are the things that are going to help overall from a gross margin standpoint in the back half. Yes. And as we've said, with each season, we get to make a larger and larger impact on the business and you start to see some of those benefits coming to light in the second half of the year. Okay, great. Thanks for the perspective. Thank you. Thank you. And our next question comes from Jim Chartier from Monness, Crespi and Hardt. Hi, congratulations on a nice quarter. In the past, you guys have talked about constant currency gross margin. I'm not sure if I missed it this morning, but can you just tell us how the gross margin performed in constant currency in the Q1? Yes. So currency had 106 basis point impact on gross margin for Q1. Okay. And then the 20% increase in replenishment orders, is that how is that relative kind of to your expectations? Did any of those ship in Q1? Or is it more shipping in 2nd, Q3? So the 20% increase in Atone's business was in Q1. So that was our Q1 performance. I would say that was probably at or slightly above our expectations. Obviously, Q2 is a bigger at once quarter. The balance of the business shifts more toward at once, but we feel good about where we are year to date. Great. And then can you give us an idea of how much of a drag China is going to be on the first half of twenty sixteen and what kind of benefit you're embedding in your guidance for the second half of twenty sixteen? Yes. So we're not calling out the overall impact from China specifically. That impact is baked into our overall guidance for Q2 at the $340,000,000 to $350,000,000 And again, for the back half, it's returning that country to growth. Okay. And then finally, it seems like the availability of some of the new products at your wholesale customers earlier in the season was kind of hard to find. Other than the Isabella, anything else kind of shipping later or hitting kind of your wholesale accounts later than retail? And how do you feel about kind of the wholesalers' response to the new products? Yes. Thanks. A lot of that shipping did happen at the very end of the quarter. So that gets released through late April into early May. And the retail response continues to be really positive and the feedback has been strong. And Andrew called out a few examples of that from updates to core clogs to Swiftwater to Isabella. We feel really good about kind of the new product introductions we've made this year and directionally what they're telling us in terms of the broader strategic objectives for the brand and for the company going forward. Great. Thanks and best of luck. Thank you. Thanks. Thank you. And we have Scott Craseck with an additional question. Thanks. So three quick follow ups. Just number 1, can you give us some clarity on how the comp trends are performing in 2Q quarter to date? Are they supportive of the outlook? Number 2, roughly what percentage of your sales in 1Q or at once versus 2Q? And then 3, you didn't buy back any stock. You've obviously bought back stock at much higher levels. I assume most of your cash is probably overseas at this point. Is that because you don't want to take on debt to do it or what's the thought process around buyback? Thanks. Great, Scott. So let me start and then I'll hand it over to Carrie. So in terms of in season comps, we don't disclose those as you know. We feel great about our Q1 performance, but we don't disclose in season comp or in quarter comps. In terms of percentage of business that is Q2 is a much bigger at once business here in the U. S, but also in Asia and we're tracking closely to what we've embedded in our guidance in terms of at once shipments. Right. And then Scott, you're absolutely right. This is Q1 is our peak working capital quarter and the majority of our cash is in international locations. As we called out in the prepared remarks, we were in our credit facility in the quarter and we chose to be conservative relative to U. S. Liquidity and not buy back stock at this time. That said, we continue to be confident in the performance and the direction that we're heading and we'll continue to maintain a methodical approach and disciplined approach to share repurchases going forward. Okay, thanks. Thank you. And this concludes the question and answer session. I will now turn the call over to Mr. Abad for closing comments. Thanks, everyone, and have a great day.