Earnings Call: Q4 2015

Feb 29, 2016

Welcome to the 4th Quarter 2015 Crocs Inc. Earnings Conference Call. My name is Corey, and I'll be your operator for today's call. Please note that this conference is being recorded. And I will now turn the call over to Brendan Frey. Please go ahead. Thank you, and thank you, everyone, for joining us today for the Crocs' 4th quarter 2015 earnings conference call. This afternoon, we announced our Q4 2015 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 you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section on the company's 2014 report on Form 10 ks filed on March 2, 2015, 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 discussion of these risk factors. Crocs is not obligated to update these forward looking statements to reflect the impacts 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 Tuckner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I will now turn the call over to Greg. Thank you, Brendan, and good afternoon, everyone. First, before we talk about the Q4, I'm happy to welcome Carrie Teffner to her first earnings call as Executive Vice President and Chief Financial Officer of Crocs. Cary brings more than 25 years of consumer goods and retail leadership experience to the company, having served as the Chief Financial Officer for PetSmart, Weber Steven Products and Timberland. We're thrilled to have Cary as part of the team. This afternoon, we announced our Q4 2015 financial results. Revenues were $208,700,000 towards the higher end of our expectations, and the adjusted net loss available to common shareholders was $53,000,000 Reported revenue was up 1% versus last year, while revenue on a non GAAP basis from our ongoing business, which excludes the impact of store closings and discontinued product lines, was up $23,000,000 or 12.2 percent to last year on a constant currency basis, aided by higher clearance sales and an easier China wholesale compare. While this is typically a small quarter for our business, it is the Q3 in a row that we delivered growth in our ongoing business. We continue to make meaningful progress on positioning our business for long term sustained success. Some of our actions have yielded positive results already, while others are investments which negatively impacted the quarter, but we believe will set us up for success in 2016 and beyond. I'll touch on a few of the highlights of the quarter, and then Andrew will dive deeper on some of the key actions that we are taking. And finally, Carey will walk you through the detailed financials. In the Q4, we saw several early indicators of our progress. On a constant currency basis, revenue grew both in the Americas and Asia. We had growth in our direct to consumer, or DTC channel, up 2.1% globally on an as reported basis and up 9.8% on a comp basis, led by high double digit growth in e commerce. Despite a difficult retail environment, inventory declined 1.6% from prior year, and our aged inventory was down as we cleared product during the quarter. Our SG and A costs were down, having removed 2 70 basis points from our cost structure. Since the beginning of our restructuring efforts, we have reduced our SG and A base by over $40,000,000 on an annualized basis, some of which we are reinvesting back into the business to drive growth. Finally, we have made substantial progress addressing the supply chain challenges we've discussed on our Q3 call. As a result, quarter to date delivery performance is in line with industry norms, which is our best shipping trend in many years, and we expect to continue this level of delivery performance on a go forward basis. Clearly, there are still challenges. Currency headwinds from the strong dollar continue and the impact in Q4 on revenue was $12,000,000 The impact on gross margin was 2 70 basis points. In addition, clearing excess and end of life inventory during the quarter negatively impacted gross margins by over 300 basis points. As we look to 2016, we believe we're well positioned to execute our turnaround, delivering improving results as the year progresses. Our new product line for springsummer 2016, the first developed by Michelle Pool and her team, had solid sell in and very early sell through results are favorable. Our customer service levels have improved significantly. Our inventory is in a better position as we transition to a fresh product line in 2016. Our DTC business continues to strengthen as we posted comp growth for the 3rd consecutive quarter. We continue to make progress in lowering our cost structure. And finally, consistent with our strategic plan, in the Q4, we negotiated the transition of our subsidiary business in South Africa to a licensee. While a license model will reduce revenue compared to a subsidiary model, it will deliver a higher level of profitability over time. As the year progresses, we expect to see positive momentum built. As discussed previously, a turnaround in this industry is an 18 to 24 month process. Over the last 18 months, we've built a strong team, strengthened core processes, transitioned business models around the globe and are in the process of bringing new product to market. In summary, we're reaching an inflection point. Despite challenging headwinds from the strong U. S. Dollar and a difficult global economic environment, we continue to make significant progress on our strategic initiatives, and we're confident that they will have material positive impacts on the business in 2016. And now Andrew will highlight some of the key details of the Q4. Thank you, Greg. Today, I want to update you on several important topics, including: 1, our global DTC performance 2, supply chain and customer service improvements 3, early reads on our springsummer 2016 performance 4, the sale of South Africa and 5, our turnaround plans for China. Firstly, global DTC performance. Global direct to consumer revenues were up 2.1% as reported and comp sales were up 9.8%. This is our 3rd 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 revenues increased 28% on an as reported basis and increased 37% on a comp basis. Our e commerce business continues to benefit from better execution, including enhanced digital marketing efforts, a better product assortment and a commitment to better in stock positions on core product. The 4th quarter DTC revenue also benefited from an increase in promotional cadence. We continue to realign our retail operations, eliminating underperforming stores while selectively opening new stores. In the quarter, we closed 11 stores and opened 13. 12 of the new stores were in Asia, bringing our Q4 global store count to 559 stores. While the stores closed during the year generated top line revenue of $6,000,000 in the Q4 last year, they had no meaningful impact on earnings. Consistent with our overall strategic plan, we have now completed the bulk of our store closings. Over the past 2 years, our global store count has declined by 60 stores as we closed 179 underperforming stores and focused our openings on more profitable outlet format and increased store count in Asia. We will continue to evaluate our store portfolio in the normal course of business to ensure effective capital allocation. Retail comps were up 0.1% in the quarter, with both Europe and Asia posting positive comps of 5.7% and 4.8%, respectively. The improved results over prior quarters reflected our efforts to improve retail processes and systems. Specifically, we enhanced assortment strategies and brand storytelling, improved replenishment and in stock positions and elevated customer experience. Retail comps in the Americas of negative 3.4% continue to be impacted by the strong dollar, causing significant traffic declines in our tourist markets, including Orlando, Miami, Las Vegas and Hawaii, which account for 25% of our retail sales. Com store performance in these tourist markets was down 7.9% in Q4 compared to negative 1.2% comp for the rest of the Americas. Secondly, supply chain and customer service improvements. We've been working hard to improve the processes which led to poor delivery performances historically. We've made a number of important changes including reducing the SKU count by 40%, reducing complexity from excessive direct shipments and special orders and increasing visibility and planning through the use of SAP. These changes have us on track to achieve the company's best delivery performance in 3 years, with the Q1 2016 deliveries thus far achieving service levels in line with industry norms. As Greg mentioned, we're confident this level of performance will continue going forward. Thirdly, springsummer 2016 product performance. Early reads on our springsummer 'sixteen line are positive. While we don't have comprehensive sell through information at this time, we can clearly see key areas that are working: new molded silhouettes, season and trend right colors and enhanced graphics. We expect overall wholesale revenue growth in constant currency to be in the mid single digits during the first half of the year after adjusting for the sale of the South Africa business. As we had said previously, we expect to see the highest growth in the U. S. And Asia and less growth in Europe. Fourthly, sale of South Africa. During the quarter, we completed negotiations to sell our South Africa subsidiary business to a licensee. Our new licensee will continue to operate the wholesale business, retail stores and e commerce. In recognition of the agreement, we recorded write downs of $9,500,000 related to goodwill, inventory and other assets, all non cash. In the near term, while this license model will result in lower reported revenues, it will provide greater profitability and lower risk from this market as we leverage our franchise infrastructure and market knowledge. This change is consistent with our overall strategic plan of focusing our direct business models on our largest markets and using best in class partners in the rest of the world. Lastly, China turnaround. China has been a key challenge over the past year, but we're making progress. Our China DTC business continues to perform well, delivering strong double digit comp growth for the year. We have a core distributor base that continues to perform well, and we are active discussions with a small group of distributors to transition their business to a long term sustainable model. As discussed previously, we still believe we're on a path to growth in China for the back half of the year. Now I'll turn it over to Carrie to go into detail of our Q4 performance. Thank you, Andrew. Turning now to the financials. Revenue in the Q4 was $208,700,000 up 1.1% from a year ago on an as reported basis. Revenue was up 7% on a constant currency basis. Revenue as reported versus prior year was impacted by 4 items. First, the negative currency impact of the stronger U. S. Dollar was $12,000,000 2nd, Asia wholesale growth of 27.5 percent was positively impacted by China. As you may recall from our 2014 Q4 call, our China wholesale business was down significantly. Excluding China wholesale, Asia wholesale was up mid single digits. 3rd, the closing of 68 retail stores this year reduced revenue $6,000,000 in the quarter compared to last year. And finally, discontinued products and segments reduced revenue by $2,000,000 All of the revenue results which follow are quoted in constant currency change versus prior year. In the Americas, revenue was $102,700,000 for the quarter, up 1.7%. Wholesale revenue was down 4.4% due to lower at once and increased discounting as we reduced excess and end of life product. Retail sales in the Americas declined 3.7% for the quarter, reflecting a negative 3.4% comp due to lower traffic, especially in our tourist market, as well as 14 less stores compared to the same period last year. E commerce in the Americas grew 31.3%. In Asia, revenue was $76,300,000 for the quarter, up 21.5%, driven by the increase in our Asia wholesale, reflecting the easier compare noted earlier as we work with our China partners in the back half of twenty fourteen to address excess inventory in the marketplace. Retail sales in Asia increased 2.8% in the quarter, reflecting a 4.8% comp, our 2nd positive comp quarter in this market. We operated 19 fewer full line stores in the quarter compared to last year. E commerce sales in Asia increased 45.6 percent, in part reflecting stronger performance in China and an increase in our promotional cadence as a result of our decision to liquidate excess inventory. In Europe, revenue was $29,600,000 for the quarter, down 4.3% with wholesale decreasing 5.9%. Retail comps were up 5.7%, but retail revenue declined 8.1% compared to Q4 2014 as we have 15 fewer stores compared to last year. E commerce sales in Europe increased 13.4%. We sold 11,600,000 pairs in the quarter, a 10% increase over last year. The average selling price of our footwear in the Q4 was $17.66 a 6.5% reduction from the prior year, the result of currency and increased promotional cadence in the quarter. Non GAAP adjusted gross margin for the quarter was 36.6%, down 5.90 basis from the prior year due to increased liquidation of excess and end of life product and 2 70 basis points of currency. We made the decision in the quarter, given the overall retail environment, to increase our promotional cadence in order to liquidate excess and end of life product with the intent of improving our overall inventory quality in advance of the arrival of our new springsummer 2016 line. During the quarter, we had certain charges not associated with ongoing operations of $21,000,000 As referred to earlier, this is inclusive of a non cash charge for South Africa of $9,500,000 reorganization charges associated with closing stores and rationalizing our cost structure. Excluding these charges, core selling, general and administrative expenses were $120,800,000 down $4,900,000 from the prior year. SG and A at 57.9 percent of sales for the quarter is down 300 basis points, reflecting savings from our reorganization efforts, the implementation of SAP and currency. Turning to the balance sheet at the end of the quarter. We ended the year with $143,300,000 in cash. The company repurchased 918,000 shares in the quarter at an average price of $10.86 Inventory at the end of the quarter was $168,200,000 down $2,800,000 from Q4 14 ending inventory of $171,000,000 Two final notes on the financials. First, adjusted net loss attributable to common shareholders was $53,000,000 for the quarter after preferred share dividends and equivalents of $3,800,000 2nd, the weighted average share count used to calculate EPS was 73,500,000 shares for the quarter. As a reminder, basic and diluted share counts are the same in a quarter that generates a net loss. Before I turn to 2016, I would like to highlight an additional item that occurred in the Q4. During our year end evaluation of the effectiveness of our internal controls over financial reporting, we identified 2 material weaknesses related to the financial close process and inventory accounting controls. I do want to point out that the underlying controlled efficiencies did not impact our reported results. We realize the potential seriousness of controlled efficiencies and are taking actions to improve our control environment, including additional training, increased internal audit oversight and the engagement of a third party to review our control environment and assist us in our remediation efforts. Turning now to Q1 2016, currency rates have continued to deteriorate over the last several months. At today's rates, we estimate the currency impact in Q1 revenue to be $9,000,000 compared to Q1 last year. We expect 1st quarter revenue to be between $260,000,000 $270,000,000 compared to $262,000,000 last year. Revenue, excluding South Africa, on a constant currency basis is expected to increase mid single digits. Currency has moved against us since our Q3 call, which will affect our gross margins as well as our revenue in the first half. At the end of Q3, we guided revenue for the full year of 2016 up mid single digits. Despite the sale of our South African business and projected currency headwinds, we continue to expect full year 2016 revenue to be up in the mid single digit range, reflecting higher growth in the back half of the year. We continue to be confident in our future performance and expect to show material progress in our full year 2016 results. Before I turn it over to Greg, I just want to say how happy I am to be a part of the Crocs team and how excited I am about the opportunity ahead of us. Now, I'll turn it back to Greg for closing thoughts. Thanks, Carrie. As I indicated earlier, despite challenges from a strong U. S. Dollar and an overall difficult macroeconomic environment, we're making meaningful progress on our transformation efforts. I believe we're reaching an inflection point, and we'll see the benefits of our actions increasingly as the year progresses. I continue to be very confident in the direction in 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 across the globe for all their hard work, their passion and their commitment to unlock the full potential of the Crocs brand and to build one of the leading global casual lifestyle footwear companies in the industry. Now, operator, we'll open the call up for questions. Thank you. We will now begin the question and answer session. And Steve Marotta is on the line with a question. Steve, your line is open. Good morning, everybody. Thank you for taking my question. Carrie, I just want to underscore what you just mentioned and that is that revenue for the full year 2016 is expected to be up mid single digits, not I should say including all the currency fluctuations and that is in maintaining of a similar stance that the company took on the last call. That's correct, right? That is correct. Despite the currency moving against and the South Africa divestiture? Correct. Great. Yes. And the only thing I'd say to that is, yes, there'll be a little bit of a shift from H1 to H2. But yes, we're still confident in our full year guidance. Great. And Greg, you mentioned that spring sell in has been pretty good and that it's a little early to quantify sell throughs. Can you at least quantify the sell ins and talk a little bit about what gives you confidence in the traction of the new product in the near term? Yes, absolutely. Thanks. Look, we feel great about the evolution of our product line. And as you know, springsummer 2016 was the first line developed by Michelle Pool and her team. And our goal coming into that season was to reenergize our core molded business while adding color and style to both our molded and non molded categories. And the teams have done a great job. So as we kind of look at spring 2016, the reaction andearly reads for both customers and consumers have been strong. And we've seen that across our new core molded product. We've seen that with new color and print that's kind of elevated our styling. And you can see it across kind of new styles that we've introduced in the molded category like the City Lane, the Roca, the Off Road, the Karen and the Sienna. And so to us it's a great foundation. Remember that was a starting point without a lot of strong foundation. So as we move forward and look at fall holiday 2016, the reaction to that product which will book really over the next few months has been very, very positive. It is a step further from the core springsummer 2016 and we've just come off pre lining springsummer 2017 with about 20 of our top accounts around the globe and the feedback there has been excellent as well and it's really a step forward from where we are. So it's a process, Steve, and you may try and make progress each season. We feel we've absolutely done that feedback from our customers and the early reads we see push us in that direction and we're excited about where we're heading beyond that as well. That's great. I have one other question. In the last few business days, there have been some headlines about patent litigation regarding some of Crocs' held patents. Can you talk a little bit about what's that about and why it would concern you or not? Thank you. Yes. It's really a non issue for us. The recent decision by the U. S. Patent and Trademark Office relates to one of many of our patents. It's the decision is non final and will be appealed. We're confident we'll receive a favorable ultimate decision in this. And in the meantime, we'll continue to aggressively enforce all of our intellectual property rights around the globe. Thank you. Thank you. Our next question comes from Scott Craseck from Buckingham Research. Scott, your line is open. Hi, everyone. Thanks. So, Kerry, I know that, I guess the reserves actually went down sequentially, but you still have roughly a third of your receivables reserves. I'm just wondering sort of how that plays out and maybe where you're most concerned now going forward? Right. And the reserves that we've taken tied back primarily to the bad debt charge we took in Q3 primarily related to our China distributors. And we feel just like we did at the end of Q3 that we're properly reserved for those accounts. So I mean that's really the gist of it. So let me turn it over to Andrew to add a little bit more. Yes. And I think sort of resolving that situation, Scott, we're in active discussions with the handful of distributors that we've taken those reserves again. So we anticipate they will be resolved in the coming months. And really there's 2 options as we look at how to our impetus is to take back control of the territories that those distributors are operating and we'll do that in 1 of 2 ways. We'll do that through finding a new distributor to take on that market or taking some of those markets back ourselves, which will allow us to resolve those receivables and actually get back in business in those important markets. And then outside of that, sort of how do you see the progression on the gross margins going throughout the year? And then obviously, we're now a long ways away from 50%, but maybe talk about the long term opportunities as well. Sure. So looking starting with 2016, if you look at the overall consensus, we think it's in pretty good shape, although I would say it's a little bit optimistic in half one. I think the important thing to keep in mind is that in Q1, gross margin will have a negative will be negatively impacted by about 150 basis points associated with currency. But overall, for the year, absent that, we feel good where consensus is coming through. Now what we've guided to longer term in the 3 year plan is to get gross have gross margins in the low 50s. And really, the actions there are things we've talked about in the past. It's the SKU rationalization and overlap across region. It's improving our on time delivery. It's the work we're doing around product development and designing to cost as well as product life cycle management. Those are going to key impetus drivers that are going to get us to the low 50s. Okay, good. And then just last, Greg, in terms of what are retailers telling you, obviously, still very early days, but is this an opportunity for reorders as we get into the summertime since you have delivered earlier than last year? How do you think inventories are going to be at retail as we go forward based on what you can see? Yes, I guess 2 parts to that question. So first of all, to the part of the question on delivery, we're on track to achieve the company's best delivery performance in recent history. And the team has done a great job here and putting a ton of work to really put us in a position between reducing SKUs, which Carrie mentioned, evolving business processes, implementing SAP and starting to leverage the system to enable us to operate more effectively as well frankly just being more customer centric. So we feel really good about our Q1 2016 deliveries and it's going to be in line with industry norms and it's going to set us up to really start driving that level of service going forward. So we feel very good about that. In terms of the retail environment, I'm going to hand off to Andrew in a second. But we're in a we've got to build that relationship. We feel really good about all the work we're doing with our retailers around the globe. I think it's a the retail environment is tough in general as you guys know. But we're going to continue to make progress each quarter and each season as we move forward. Yes. I mean, I think making deliveries on time is your first stepping stone to driving reorders. We think we have a strong possibility for some significant growth in reorders in the Americas and Europe. And that's really a Q2 factor. I mean, Q1 is largely around delivering your pre books and then out once starts to grow as you get through Q2. But we feel good about it. Next question comes from Sam Poser from Stern Gerber. Can you just give us some idea of how you're thinking about your stores openings and closings off of this base right now? Yes. Thank you, Sam. It's Andrew. So yes, we finished the year with 559 stores, as we said. As we look forward, we're really going to essentially we're going to continue to close poorer performing stores at lease termination, which will put us closing a handful of stores in Europe and North America. Future growth or future openings will be exclusively focused on outlets and those will be largely around the world, that will be Europe, Asia and the U. S. And then select full price stores in Asia. We see ourselves kind of roughly holding constant at this approximate level of stores for the next couple of years. So at $560,000,000 give or take is where you see? Okay. Okay. And then okay. And Greg, I know you answered the question already on the patent. Could you be a little more specific? It was on the original clog, if I'm correct, or that hinge on the back of the original clog. Is that correct? Yes. I think we're not going to get into the details of this. I'll just say we have I'll just kind of repeat, Sam, what I said a moment ago, which is it's one of a number of patents that we have. The decision is non final. We will appeal it. And we're confident we'll receive a favorable ultimate decision. And I think that's kind of all we're prepared to say at this point. How about this, what percentage of your sales in 2015 were or as you see it in 2016 are impacted by what come of your items, how many SKUs or what percentage of the SKUs or sales is related to this particular patent? Sam, I guess what I said, we're confident this will not impact the business. All right. And then I mean I'm I would love, Kerry, if you could walk through maybe it's just because I'm if you could just walk through line by line or to get to the 52.9 $1,000,000 net loss? Maybe I have the taxes wrong in the quarter or something, but could you give us some idea could you just walk us line by line? You did part of it on the press release, but maybe it's the income tax that I have wrong for the quarter or something. Yes. I think specifically if you turn in the earnings release, you kind of laid it out. So revenue for the quarter was $208,700,000 And again, I'm going to give you absolute gross profit, not the adjusted gross profit, okay? So gross profit was $72,700,000 Selling, general and administrative was 129.3 percent. We had restructuring charges of 1.3 percent. We had asset impairment charges of 7.8 percent, which gets us to a loss from operations of 65.6 losses of about $700,000 interest income of about $200,000 interest expense of about $300,000 and then other income of about $920,000 which gives us to an operating loss before income taxes of $65,500,000 income taxes are $4,700,000 getting us to $70,200,000 Thank you. Yes. Thanks very much and good luck. Thanks, Dan. Thanks, Dan. Our next question comes from Jim Chartier from Monness Crespi. Jim, your line is open. Hi, thanks for taking my questions. First, you guys reiterated the guidance for the year. Do you still feel comfortable achieving a mid single digit operating margin in 20 16? Yes. So again, with respect to the revenue, we're projecting that at mid single digits. As I said, based on the consensus model that's out there, we feel good overall with how that's shaping up. And that is consistent overall with the mid single digits that we guided to previously on the operating income line. Okay. And then I think SG and A was last quarter, you guys talked about SG and A being down $10,000,000 year over year in Q4. Adjusting for the one time, it looks like it's down $5,000,000 So you can just talk about the variance there? Yes. So in the quarter, we were down year over year in terms of salary and wages. Marketing was down a bit as well as rent associated with retail closures. Rent associated with retail closures. That said, it was partially offset by the higher variable costs associated with the e com performance as well as higher professional fees. Okay. And then, Greg, can you just talk about why you're still confident in the 2016 sales outlook, despite some increased headwinds? Is it more on the reception to your fall product line? Or is it a higher expectations for reorders on springsummer based on your shipping performance? Yes. Look, I think there are a number of factors that kind of give us confidence as we look at 2016. Certainly product is a piece and some of that's the combination of kind of the feedback we've seen in the market, expectations around bookings and at once and how that's planned in the front half of the year. Part of that's frankly as we evolve from springsummer 2016 to fall holiday, we feel really good about where that product is. And if we look at our product this year versus last year and the expected performance at retail. I'd say the second piece is deliveries. And we're on track as I mentioned to have the highest service level the company has seen in its recent history and it's on track with industry norms. That's going to drive material improvement in the business. And that's something that we didn't while we knew we were working on and had a line of sight to improving, now we're actually delivering that. We're actually executing on that. We see that in the data. And I'd say the 3rd piece is team. We've built a terrific team, one of the best in the industry. A number of folks have joined in the last 3, 6, 9 months. We'll see increasingly over each quarter additional benefits from them. And that's building off 3 quarters of continuing business growth, strong DTC performance and all those things adding up give us confidence as we look at 2016. Great. Thank you. Thank you. Our next question comes from Toshiya Bari from Goldman Sachs. Toshiya, your line is open. Thanks. Good morning. Can you guys clarify the revenue guidance for 'sixteen? Is it in constant currency or reported? It may even be the same, but Yes. So Q1, we're guiding at $260,000,000 to $270,000,000 and that's reflecting the sale of our South African business and the impact of currency in the quarter as well. For the full year, it's mid single digits based on our current assumptions relative to currency. So sorry, so mid single digits on a reported basis or excluding currency? Yes, on an as reported basis, but that's based on our current projection for what currency will be, right? Okay. Because I thought last quarter I thought the guidance for 2016 was on a mid single digit basis, constant currency as of last quarter, that's why I was confused. Yes. Okay, fine. Can you quantify the impact of South Africa with what the transition does to revenues next year? Yes, specifically with respect to South Africa, we it's in the single digits, but the high single digits over the mid to high single digits over the course of the year based on the performance in 2015. And so we've adjusted our guidance the impact of that on the revenue in 2016 by an equivalent amount. Okay. And then last question for me is, marketing plans, how are you thinking about marketing spend as a percentage of sales in '16 versus 'fifteen? And how are you planning your budget for the springsummer season in particular? Great. Yes. So, what we in as we look at 'sixteen, we're focusing the vast majority of our marketing spend on the springsummer season, which will kick off directly before Easter and take us all the way through to mid July, and that's coordinated around the world. So that's in the U. S. And also the Asian and European markets. And as we think about our spend, it's roughly consistent with what it was last year, although we're getting a little bit of leverage relative to some sales growth. And Toshi, this is Carey. I want to come back on the South Africa question because I was looking at it more in the context of half 1, half 2. So on a full year basis, it was low double digits last year, okay? Okay. Thank you. Our next question comes from Jonathan Komp from Robert W. Baird. Jonathan, your line is open. Yes. Hi, thank you. Just a couple of clarifications first for 2016. In terms of the currency movement since the Q3 in relation to the full year guidance, how much has that changed percentage wise for the year? Yes. On the revenue, so basically taking it back in terms of where we guided, how much is currency down versus where we guided at Investor Day, our revenue is down from the impact of currency about 2% from when we gave guidance at Investor Day. Okay, got it. And then the South African business, sorry if I missed this, I think you're just talking the revenue impact. How should we think about the profitability or the margin impact, either one for next year? Yes. So as Carey said, we think the revenue impact for the year is low double digits. So obviously, we're going to lose that revenue, but it's a licensee structure. So we will take a license fee from that distributor, which will go straight to the bottom line. Okay. And any perspective on how profitable it was last year? It's roughly equivalent to how profitable it was last year. But obviously, by making this transition, we believe this distributor has the capacity to grow the business substantially ahead of where we could. Got it. Okay. And then maybe just a broader picture on the revenue guide for 2016. When you account for those two factors, it seems like the underlying business quite a bit stronger than the prior outlook, and it's not entirely clear to me what's driving that. So any additional perspective there? Yes. I think the only thing I'd add is we're a few months further down the road. We have more clarity around product and more feedback from product. And whereas when we last spoke about 2016, we were working on our delivery plans. We now have a line not just a line of sight, but we're actually executing and we have data and we kind of see how all that's operating and executing. So we feel really good about that as well. Got it. And then maybe the last one for me, Kerry, just on the deficiencies in the internal reporting or the controls. Can you give any more kind of specific insights on to the scope of what you're looking at? And then maybe the expected time you might think in terms of remedying some of the issues? Yes. What I kind of I want to kind of ground us in relative to the material weaknesses. Again, it was in the financial close process and in the inventory accounting. And so a couple of things to think about. 2015 has been a year of significant change. We implemented SAP this year. We've had a number of business process and model changes. We've also had changes in personnel, including leadership within the finance department. And all of these contributed to the deficiency in the control environment. So relative to how we will address that, it will be, as I indicated, part of this is training, part of this is additional auditing of the processes to make sure we're grounded in the process and complying with them appropriately. As well as we'll bring in a 3rd party to take a look at as well and make sure we're as buttoned up as we can be. So relative to timing, what I would tell you is we're going to be working on it to address this as quickly as possible. And the professional fees you mentioned for the Q4, is that partly related to this or what were those for? No, no, no, normal course of business. Okay, got it. Thank you. Our next question comes from Mitch Kummet from B. Riley. Mitch, your line is open. Yes, thanks. I guess first question, I'm just trying to reconcile some of the comments, Kerry, that you're making on 2016. Because you're talking about mid single digit sales growth. I think you said that from an earnings standpoint, you thought that consensus looks like it was in pretty good shape. But then I think you also said that you're talking about still a mid single digit operating margin. I guess when I'm looking at consensus, trying to back into the operating margin on consensus, it's like 3.6%, which I don't know if that's within the range of kind of how you guys are defining mid single digits, but kind of help me understand those pieces a little bit. Yes. So I think the mid single digit is a range, right? And what I want to be careful of is we're not giving explicit full year guidance on each line of the P and L. But what I'd say is, again, mid single digit on the revenue line. And then with respect to the gross margin, again, we feel good overall about consensus. However, we do think half 1 is a little optimistic given the currency impact. But from a full year standpoint, we feel pretty good. On the SG and A, we didn't really talk about SG and A for the year. We think it's going to be after adjusting for the Q3 bad debt charge that we took in China, we think SG and A will be relatively flat for the year, but leveraging meaningfully as a percentage of sales. And through those pieces, we get to the mid single digit range on EBIT margins. Okay. So when you were saying that consensus looks like it's in pretty good shape, you're referring to the gross margin, not the EPS? I'm looking at gross margin and mid like we said, confirming mid single digit range on the EBIT margin. Okay. All right. And then help me understand actually, what's the implied FX impact on the year? I think you said it was $9,000,000 or it's projected to be $9,000,000 on Q1. And I know that obviously you're saying mid single digit growth in reported dollars for sales. So what's the overall FX on the year? Yes. We expect the overall FX impact on revenue to be about 3%. Okay. All right. And then, help me understand the promotional activity in the Q4. That was just a function of how challenging the environment was because I think you guys were expecting gross margins to be kind of flattish, if not up even a little bit. And obviously, that wasn't the case because of a lot of that. I think the difference was because of the promotional cadence. So what exactly is going there? How clean are you? And then maybe as a follow-up to that, what did that do to the sales in the quarter? Does that make for a tough sales comp in Q4, obviously, an easy margin comp, but how do we how do you guys lap the sales impact from those promotions? Thanks, Mitch. Yes, a number of questions, Ed. So the first thing I'd say is, look, the Q4 is always a promotional period for all brands and all retailers. Yes, but I think as you rightly pointed out, we made the decision in the quarter to react to the retail environment, which was a tough environment. And we were equivalently promotional to liquidate aged goods and make sure that we're clean as we come into spring, summer 'sixteen. And the impact to the margin was really caused by the depth and breadth of those promotions. So pricing was a little worse than we thought it was going to be and we had to go a little broader in terms of the product line. But the impact of that is we come out of the quarter with inventories flat relative to last year, which I think is a very good performance. And as you look at the mix of those inventories, we feel pretty clean. The proportion that's EOL is pretty limited and also the age of that EOL is less than it was historically. So how much of a sales lift did you get in the quarter because you were as promotional as you were? No, that's extraordinarily hard to quantify. Obviously, it did have some impact on sales and will create some comps, some issues with Confident next year. But then we're 2 seasons into our new product line and we feel confident with the performance of the business next year. Got it. Okay. Thanks a lot. Thank you. And we have a question from Sam Poser. Sam, your line is open. Just a follow-up. I know you don't want to go line by line, but can you give us some idea in absolute dollars of what kind of growth you're expecting to see in reported numbers in your based on what you know now on your SG and A for the year? Yes. So again, in absolute dollars, what we had communicated on Q3 is we expected SG and A to be about $515,000,000 I think we're relatively going to be close to that. So that's what we're expecting. Thank you. Thanks, Sam. And we have a question from Scott Cresick. Hi, thanks. Yes, just two follow ups. 1, I know you're trying to get away to some extent from delivering backlog on a quarterly basis, but maybe could help in this situation given that there's so many moving parts. I mean, what type of visibility do you have at this point at the end of the year? I guess you'll probably have to file that in the K anyways, right? No, we don't file the backlog in our K. No. Okay. Yes. Look, I think we've tried to share kind of our confidence. There's obviously a lot of moving parts on backlog, which is why it's difficult to use that as too much of a guide. And so when we look at it, we certainly look at a number of factors. And what we've tried to convey is why we're confident based on feedback from product expectations around at once, expectations around delivery and what have you. So we feel like we've conveyed on the call, we continue to feel really confident as we look at 2016. We're 18 months into what we've continued to talk about as an 18 to 24 month turnaround. We feel we've made significant progress despite really challenging financial results And we're looking forward to 2016 and really driving improved performance throughout the year. And so that's kind of how we answer that question. Okay. And then am I remembering correctly that your mid single digit 2016 revenue guidance before this was on a constant currency basis and now it's on a reported basis? No, the prior guidance was mid single digits on a current basis, current currency basis. Digits on a current basis, current currency basis. Okay. So even though the currency weakened, you're still able to do it so? Yes. That's correct. So you're sort of you're raising your constant currency revenue guidance? That's one way of interpreting it. Yes. Okay. No, that's good. Yes.