Earnings Call: Q2 2015

Jul 30, 2015

Welcome to the Q2 2015 Cross Inc. Earnings Conference Call. My name is Vivian and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. 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 Kroc Q2 2015 earnings conference call. This morning, we announced our Q2 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 the 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 the 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 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 Jeff Lascher, Senior Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I'll now turn the call over to Greg. Thank you, Brendan. Good morning, everyone, and thank you for joining us today. This morning, we announced our Q2 2015 financial results. Revenues were $345,700,000 in line with expectations and adjusted net income available to common shareholders was 27,300,000 dollars Excluding store closings, discontinued product lines in China, our remaining business was up $20,000,000 or 5% to last year on a constant currency basis. We're making meaningful progress in transforming Crocs into one of the leading global casual lifestyle footwear companies in the industry. As we go through these changes, we continue to face the ongoing headwinds of a strong U. S. Dollar. Despite this overhanging challenge, over the past year, we've laid out much of the foundation for that transformation, making great progress on the strategic initiatives we laid out in prior calls, including strengthening the Crocs brand, elevating our product stores, exiting non core categories and businesses, evolving our international business model to focus on our 6 most important markets, strengthening our relationships with key wholesale partners, improving our direct to consumer capabilities and performance, simplifying our operations and processes, and building a best in class team. We're highly confident that the actions we've taken will positively impact our business and our partners' businesses around the world. As we've said before, it will take until the first half of twenty sixteen for these initiatives to be fully implemented and to deliver material improvements in growth and profitability as our new springsummer 2016 product will then be in front of consumers. Having said that, we're extremely pleased with some of the results we are starting to see from these actions, and I want to call out a few of them this morning. First, in the Q2, we launched our new marketing campaign, FindYourFun. On a very tight timeline, we established a global campaign that celebrated the Crocs brand and our core clog silhouettes. The campaign was extremely well received and is a foundation for Crocs to communicate more effectively with our consumers around the globe. Andrew will share some of the details of our new marketing platform in a few minutes. 2nd, our global e commerce business was up almost 30% on a constant currency basis, despite a reduction of 9 individual country websites versus the prior year. Results were especially strong in the U. S, up 30% and China, up 84% on a constant currency basis. The U. S. In particular benefited from our new marketing campaign, much of which was spent on digital media, helping drive Internet activity and sales. I also want to note that while our retail comps were negative, showing only slight improvement over the Q1, we did see week over week improvement throughout the quarter. Coupled with strong growth in e commerce and modest constant dollar growth in global wholesale excluding exited businesses in China, I view the quarter's overall results with tempered optimism. 3rd, we continue to make nice progress with new product introductions that give us confidence for the future. On prior calls, I've discussed the presale and the sloan, 2 new designs which both continue to perform extremely well at retail. On this call, I also want to mention the City Lane molded sandal and our Swiftwater franchise that are both having very strong sell throughs at retail. The success of these shoes demonstrate our ability to both continue to evolve our core molded business as well as build strong platforms in new adjacent segments such as outdoor. And finally, we continue to be extremely excited about the launch of our new springsummer 2016 collection, which begins shipping in the Q4. Retailer response has been overwhelmingly favorable and gives us confidence in the commercial success of this new line. In summary, 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 the very near future. Having said that, we do continue to face some challenges, chief among them a strong U. S. Dollar. 2nd, while we have built our organizational capabilities by strengthening our team, investing in systems and streamlining processes, We need to elevate our service levels across the globe. And finally, we need to return China to growth in the second half of the year. On the positive side, we see early signs of growth in the U. S, a substantial moderation of the declines in China and stability in Europe. We're also excited about our gross margin improvement in the first half and this quarter's strong e commerce increases. I believe this sets us up well to capitalize on the launch of our new springsummer 2016 collection, and I remain very confident in our strategy, our team and our ability to transform the Crocs brand and business to reach its full potential. And now Andrew will highlight some of the key details of our turnaround efforts. Thank you, Greg. We previously outlined the 6 pillars of our strategy for repositioning Crocs, which are well underway. Let me reiterate the major initiatives, the progress we have made and some of our plans going forward. 1, elevating the brand. In Q2, we launched our global marketing campaign FindYourFun, which builds on our iconic Cloak silhouette. As a reminder, the campaign is designed to reignite excitement and relevance for Crocs, celebrate our core clog while inviting consumers to move into appropriate adjacent categories and give consumers who are neutral in their attitudes towards Crocs permission to engage with us. Thus far, consumer and customer feedback around our campaign has been very positive. And we're seeing both significant growth in traffic to our websites and sell through acceleration at key wholesale accounts when they have been linked to our digital marketing. We're now working on the evolution of the campaign for 2016 as well as looking into ways to drive greater global cohesion and further increase the proportion of our marketing spend utilized for working media. 2, focusing on our core product. We're in the early stages of seeing some newer and more innovative products coming to market, both within core molded as well as a broader range of casual footwear styles, which expand wearing occasions. To update you on the free sale, which we mentioned in our Q1 call, this style continues to perform well across our direct to consumer channels. Globally, this style was worth less than 20,000 pairs in the first half of twenty fifteen, where we brought it to market on an accelerated timeline, but will expand to more than 200,000 pairs in the back half of twenty fifteen based on a strong performance at retail. This is a great example of how we can reinvigorate our coal molded category with freshness and elevated styling as well as establish a robust test and learn capability that will enable us to drive growth in the future. Today, I would like to highlight 3 additional styles. First, the City Lane, a molded twin gore clog, which has been delivered to our own direct to consumer channels and is selling at double digit sell throughs. We estimate we will ship greater than 300,000 pairs globally in the full holiday of 2015 across all channels. 2nd, the Bump It collection, which Greg mentioned on our last call, a kid's molded clog and shoe, which also had initial deliveries in our direct to consumer channels. They have been top selling styles over the past few weeks. Our expectation that we will also ship in excess of 300,000 pairs of this collection in the fall holiday of 2015. 3rd, the Swiftwater, a new men's outdoor franchise that has expanded to 7 styles for full holiday of 2015 from a single style in springsummer of 2014. It will be further expanded to a total of 13 styles including kids in springsummer of 2016. Its performance demonstrates our ability to expand existing offerings into naturally adjacent segments. Our larger makeover in terms of product innovation is our springsummer 2016 line. We continue to be super excited about the feedback we've been getting from our wholesale partners as well as our distributors around the new line. 3, focusing on our 6 key markets. We continue to focus our efforts and investments on our 6 largest markets, which represent 70% of our overall revenues and profits: the U. S, China, Japan, South Korea, Germany and the U. K. During Q2, we also had the opportunity to host a global distributor conference for our 40 largest distributors from around the world in Dubai. This allowed us to outline our strategy and future direction in detail to our best in class partners who service our non direct markets. We are making progress in addressing our challenges in China. As we discussed on our last call, during the Q2, we saw our revenue decline in China moderate significantly from $25,000,000 decline in the Q1 to a $5,000,000 decline in the Q2. We're focused on driving sales per door and profitability of the business. We have closed stores, cleaned up distribution and moved through excess imagery. We continue to expect to return to growth in the second half. 4, building stronger relationships with key wholesale accounts. Starting next week, we'll embark on a series of pre line meetings with our largest wholesale accounts globally to review our major product stories for fall holiday of 2016. Earlier this year, this initiative to pre line our springsummer 'sixteen season was a major success in terms of building stronger wholesale relationships. 5, improving our direct to consumer capabilities and performance. Our e commerce business was very strong across all regions, led by the U. S. And China. Despite operating 9 fewer country specific sites compared to last year, overall global e commerce revenues increased almost 30%. In our six core markets, our e commerce benefited from most directly from our investment in marketing. Our business also benefited from better execution, including a globally consistent online customer experience and a commitment to better in stock positions on key products. We continue to trim our retail operations, eliminating underperforming inefficient stores. While these stores previously contributed $12,000,000 to top line sales in Q2, they made no meaningful contribution to earnings. We're also pleased to announce the hiring of Neil Parker based in Singapore, who will lead our Asia direct to consumer business as well as drive strategic direction for our global partner stores. Neil comes to Crocs with an extensive direct to consumer background, most recently from Levi Strauss in Asia. While we're disappointed in our Q2 retail comps, we're confident we're putting in place the team, processes and systems to drive much stronger performance in the future. 6, centralizing and streamlining operations while building a best in class team. As Greg alluded to earlier, we're not satisfied with our current service levels. We've done a lot to build our capabilities, strengthening our team, implementing SAP, streamlining the processes and centralizing key activities. In the Q2, the lingering effect of the West Coast port strike exacerbated by the supply chain challenges more than offset the positive changes we have made. However, we believe the new organization structure, new team, new tools currently in place are sufficient for us to achieve improvements in service levels we demand and our customers expect. In summary, I echo Greg's sentiments that we have done much to stabilize the business and create a platform to deliver improved growth and profitability, beginning with a successful and profitable launch of our springsummer 2016 line. Now I'll turn it over to Jeff to go into details of our performance. Thank you, Andrew. Today, we'll cover our Q2 2015 results and then briefly review expectations for Q3, including the impact from changes in foreign currency. Revenue in the second quarter was in line with our expectations at $346,000,000 down 8% from a year ago on a reported basis. Revenue was down 1% on a constant currency basis. Revenue as reported was impacted by: 1st, the currency impact of the stronger U. S. Dollar of $27,000,000 slightly more than expected second, the closing of 44 retail stores so far this year, which reduced revenue $12,000,000 compared to last year third, a $7,000,000 reduction in revenue from discontinued products and segments and 4th, lower China wholesale revenue down $5,000,000 as expected. Excluding the impact of these items, revenue increased 5%. All of the revenue growth rates from here that we will cover today are quoted in constant currency change versus prior year. Americas revenue was $143,000,000 for the quarter, up 3%, as e commerce revenue grew 30% in the quarter and now represents 14% of the overall Americas business. Retail sales in the Americas declined 3% for the quarter, reflecting a 3% drop in same store sales and the closing of 13 stores this year. As Greg mentioned, retail comps improved throughout the quarter. As expected, wholesale sales were up 2% in the quarter, reflecting improving results in the U. S. Wholesale business. In Europe, revenues were $53,000,000 for the quarter, down 7% year over year with wholesale decline of 11%. This represents a shift in our order pattern to earlier in the season, as European wholesale revenues were up 1% for the first half. Retail same store sales grew slightly, but revenue declined 3% compared to Q2 2014 as we closed 9 stores year to date. E commerce sales in Europe increased 5% over 2014 levels despite having closed 6 country specific sites in the region. Asia revenues for the quarter were $150,000,000 down 2% versus prior year. Excluding China, our Asia wholesale business was up 9% from prior year. As we anticipated, China wholesale revenue was down $5,000,000 We saw exceptionally strong growth in e commerce revenue in China as ad volume doubled over prior year and total e commerce sales in Asia were up 55% compared to 2014. Overall, Asia same store sales were down 9% with large drops in China and Hong Kong. Sales in South Korea, where we have 1 third of our company owned retail points of distribution in Asia, were impacted by a 30% decline in traffic resulting from the MERS outbreak. In addition, the strategic decision to close many retail sites resulted in lower retail revenue of 13% overall, but we anticipate that lower fixed costs will improve our profitability in that region. Globally, we sold 17,300,000 pairs in the quarter, a slight increase from the prior year. The average selling price of our footwear in the Q2 was $19.24 a 12% reduction from the prior year, primarily the result of currency, a shift away from retail and a higher mix of core molded footwear. Turning to our retail operation for the year to date, we have closed 44 stores and opened 18. Of these closures, 30 were full price retail store locations. During the Q2, we reduced our pace of closures for seasonal reasons. We ended the quarter with 5.59 locations compared to 6.24 locations at the same quarter last year. The stores that we closed generated $12,000,000 of revenue in Q2 of 2014. We are on pace to have fewer than 5.50 locations at year end. Adjusted gross margin for the quarter was 55.2%, up 100 basis points from prior year, as favorable merchandising mix and exiting unprofitable product lines more than offset the negative impact of currency. We anticipate Q3 margins to decline compared to last year, as currency impact will be the greatest during the quarter and more than offset other gross margin benefits. In Q4, we expect year over year margins to improve as we anniversary a strengthening dollar and our China issues. Overall, we expect back half margins to finish flat to slightly down and project again that full year gross margins will be essentially flat. During the quarter, we have made significant progress on our strategic objectives announced in 2014. As a result, we had restructuring charges of $2,800,000 in the quarter and we had expenses of $2,700,000 specifically for the SAP launch costs, as well as other one time charges of $12,100,000 in the quarter. Excluding these items, core selling and administrative structure expenses were $157,000,000 up from $146,000,000 in the prior year. The items impacting core SG and A for the quarter were: 1st, increased marketing spending by $15,000,000 over 2014 levels. This was slightly more than previously discussed, reflecting our decision to pull forward approximately $5,000,000 of Q3 spending to energize the brand during the peak selling season. And we increased reserves for doubtful accounts by $5,000,000 primarily associated with our China business and partner store network. We expect our operating SG and A to be down in Q3 and Q4. Specifically, we now expect that with that to pull ahead in marketing spend, we should see our overall SG and A spending in U. S. Dollars in the second half to be down more than $20,000,000 compared to adjusted SG and A expenses in 2014, which totaled $263,000,000 This improvement should be evenly split between the quarters. Turning to the balance sheet at the end of the quarter. Inventory at the end of the quarter was $183,000,000 down from Q2 of 2014 ending inventory of $192,000,000 Global cash position at the end of the quarter was strong and the company repurchased 1,600,000 shares in the quarter at an average price of $14.62 Two final notes on the financials. First, adjusted net income attributable to common shareholders was $27,300,000 after preferred share dividends and equivalents of 3,700,000 dollars 2nd, the weighted average share count used to calculate EPS was 76,800,000 shares for Q2. As we discussed on the last call, we continue to make progress on strategic initiatives, currency continues to be an external headwind. Approximately 70% of our expense structure is denominated in U. S. Dollars, while only 35% of revenue is generated in U. S. Dollars. We expect the revenue impact to currency in the Q3 to be about 7% at today's rates or approximately $22,000,000 As a reminder, at this time the euro stood at approximately $1.37 compared to $1.12 used in our projections for Q3 this year. And the yen was at $102 to the $1 compared to $122 today. Revenue in Q3 will be impacted by several strategic decisions we have made to improve long term financial performance of the business. First, our retail footprint is lowered by 65 stores at the beginning of Q3 and we plan on closing additional stores. This will reduce 3rd quarter revenue by $9,000,000 2nd, we exited several non core product lines in the last year, including ocean minded in our golf and apparel business. The exiting of these businesses will reduce Q3 revenue by $2,000,000 as these product lines accounted for sales of $12,000,000 in 2014. We expect Q3 revenue to be between $280,000,000 $290,000,000 down from last year on an as reported basis, but showing an increase of 4% to 8% on core business on a constant currency basis. We continue to be very confident in our future and expect to show material progress in our results in the coming quarter. Now I'll turn it back to Greg for closing thoughts. Thanks, Jeff. As I mentioned at the opening of the call, we're 12 months into the transformation of Crocs, well into the 18 to 24 month process that it typically takes to impact the business in the footwear industry. We continue to make meaningful progress in the transformation of Crocs, and we feel very good about our plan and how this will set us up for long term sustained success. Despite the headwinds in the business from currency to China to the operational issues that have challenged our business in the past, we're making great progress on focusing the business on core products and markets, elevating our products and marketing stories, and evolving our cost structure, organization and talent. While this quarter provided some early signs of progress, over the back half of the year, we expect to see increasing benefits of this work. As we've discussed on prior calls, we expect to see the lion's share of this benefit during the spring summer 2016 season. I continue to be very confident in the direction in which we are headed and our ability to successfully execute upon our plans. We look forward to providing you a deeper dive on our strategy at the upcoming Investor Day in Boston on September 30th. Special thanks to the Crocs team across the globe for all their hard work, passion and commitment to unlock the full potential of the Crocs brand and build one of the leading global casual lifestyle footwear companies in the industry. Now, operator, we'll open the call for questions. Thank you. We will now begin the question and answer session. And our first question comes from Erinn Murphy from Piper Jaffray. Please go ahead. Great. Thank you, guys. Good morning. I guess I have a couple of questions and I think I'll start, Craig, with you. I mean, You've been in the hot seat now for just over a half a year. Kind of what gets you excited about the future? And then I guess are you still confident in that 10% to 12% operating margin goal over time? Sure. Thanks, Aaron. So obviously, we've spent a lot of time talking about our strategy. And we're now just beginning to see some of the early signs that's giving us more and more confidence in terms of the direction we're heading. And there are probably 3 data points this past quarter outside of the customer feedback that we've talked about that give us some of that confidence. So first, if you dissect our Q2 results, our underlying business grew by 5% when you take out currency, closed stores, discontinued products and our China decline. And even if you include China and look at our go forward business, the business was actually up 4% in the quarter. So that's certainly getting us excited and making us feel good about the direction we're heading. 2nd, we continue to see very positive consumer reaction on some of our new product introductions. And shoes that we've talked about on past calls like the presales, the Sloan, shoes that we've talked about on this call like the City Lane, the Bump It, the Swiftwater, they're all performing extremely well at retail, which tells us that as we think about the product changes we've made for the future and we think about that springsummer 2016 line and the broader direction we're heading, it gives us confidence that those product changes will connect with consumers going forward. And I'd say the third thing is our if you look at the Q2 e commerce results and our 30% increase in the quarter, which can be attributed to our improved marketing as well as operational improvements in our online customer experience and in stock position. That tells us we're making the right moves both from a marketing perspective and some of the operational changes that we're making are going to have the kind of impact that we're expecting to have in the future. So we think while it's still early that there are a lot of signs to take from our Q2 results that would tell us that we're heading in the right direction. And then in terms of your second question, the margin goals, long term margin goals, our long term operating margin goal remains the same. Obviously, in the near term, it's been impacted by our near term results have been impacted by a higher U. S. Dollar, which depresses our international margins and given the mix of our business impacts our overall results. But we're very confident we can improve our profitability in the near term and achieve some of our broader operating margin goals in the intermediate future. And so we still feel good about that. And frankly, we plan to talk about that in more detail at our Investor Conference in Boston in late September. Okay. Thank you. That's helpful. And then I guess Andrew for you, you talked about return to growth in China in the second half. And obviously, the negative headwind has lessened through the Q2. But just help us think about some of the mechanics that you're seeing that gives you the confidence that, that business can stabilize? And just maybe broader, are you seeing any near term volatility just with some of the pressure points on the consumer there of late? Thank you. Yes. Thanks, Aaron. So to start with, to sort of set some context, our China business is less than 10% of our overall business. And I think we've been very explicit about a plan that we laid out to stabilize that business, which was to pull back on our sell in to our key partners within China, help them liquidate inventory in the channel and work selectively with some key partners to help them improve their operations of their business. That plan entailed us selling less into the marketplace by $25,000,000 in Q1, dollars 5,000,000 in Q2. I think we're upfront and explicit about that. We've hit both of those goals. I think it's true that the I think the macro consumer environment is becoming a little bit more volatile in China with the stock market volatility and the impacts on consumer confidence. But based on the plan that we put in place, the tracking against that plan and the leadership that we brought to the table within the broader Asia business with hiring of David Thompson, the shift of Adrian Holloway from Europe to be the FD in our Asia business and the hiring of Neil Parker as the lead on DTC. We feel like we're on track and we feel confident that we'll return to aggregate growth in the China market. And I think it is worth also pointing out that even at these depressed levels of revenue in the first half of the business, it's still a very profitable business for us. Okay. That's helpful. And if I could just sneak one more. I guess Andrew, it would be for you as well. On the last conference call, I think you talked about the quarter to date trends in the second quarter, kind of picking up the call, I think you talked about the quarter to date trends in the Q2 kind of picking up through early May just as weather had improved. And I guess what we're trying to reconcile is the comp in and of itself was roughly similar Q1 versus Q2 and you've kind of talked about week to week improvement throughout the quarter. So just trying to understand maybe more how did April versus May versus June shake out because it does seem like there's a little bit of a disconnect there? Yes, got it, Aaron. That makes total sense. So I think the first thing I'd say is if you looked at our combined DTC business, so if you looked at retail plus e commerce in North America, you would have gone from a negative 4% performance in Q1 to a +4 percent performance in Q2, okay? So you've got an 800 basis point swing in aggregate DTC. Now I know you're focused on the underlying retail business and yes, we saw improvement in comps between April, May, June and into July. And we feel like we've got the team in place and the process improvement, systems improvements to drive improved retail performance in North American business. But undoubtedly, as every other business is experiencing, you're seeing some shift from consumer preference from going into a store to going to a website. Okay. Thank you guys and best of luck. Thank you. Thanks Aaron. And our next question comes from Mitch Kummetz from B. Riley. Please go ahead. Yes. Thanks for taking my questions. A couple of them, I guess. You guys made a few comments this morning just on how encouraged you are about spring and the excitement that you have around that line for 2016. Is there any way you could provide some more color on the order book? How much of the orders are in? Kind of what are you seeing in terms of those orders? And how do you think about the impact of shipping that product earlier this year than last year given the expanded calendar? What that might do to Q4? Sure. Thanks, Mitch. This is Greg. So the first thing I'd say is, look, it's extremely early in the selling season. Our major booking windows for springsummer 2016 is the August October timeframe. So meaningful level of data at this point. As we shared in our prepared remarks, the feedback we've gotten from our retail and distributor partners around the globe gives us a lot of confidence in the direction we're heading as they're planning the business and as we're discussing kind of opportunities and mix going forward. And I'd say the other piece is the product that's selling through and performing at retail, which is kind of an early indicator of some of the product trends that we're going to be investing more behind going forward. That gives us a lot of confidence as well. So we feel really good about the direction that we're heading. The data is not here at this point. We'll be in a better place to talk more about that during the our investor meeting in September. Okay. And then, Jeff, maybe a question for you on the gross margins. I want to make sure that I caught your comments correctly. On gross margin, you're saying Q3 should be down year over year and that's the quarter where you see the biggest negative impact from FX and then Q4 gross margin is up. But on the back half as a whole, I think you're saying flat to down slightly. Is that right? Did I hear that correctly? And is that any different than how you're thinking about margins prior to this call or? So Mitch, we expect that gross margin for the full year to be flat to slightly down on an as reported basis overall. Obviously, the currency impact on us is offsetting some of the improvements that we're seeing in mix and other changes. In the second quarter, that mix and other changes was substantial and we were able to overcome the currency headwind. In the Q3 with both the yen and the euro down 18% on a year over year basis, that headwind will be about 300 basis points in the quarter and we will not be able to offset fully the impact of currency in the quarter. So on a year over year basis, Q3 will be down. But because of the improvements in some of the operational issues that we had last year in China, our year over year comparisons in Q4 are favorable as we anniversary both the stronger dollar and those China issues. So that's how we see it right now and that kind of blends out to be basically flat for the full year. And can you quickly remind me what the China drag on gross margin was last year in Q4? We talked about it last year in the Q4 period. It was substantial. We didn't break it out specifically, Mitch, but it was a substantial impact. As you remember, I think our Q4 2014 margins were only 42%. And that was impacted by the issues we had in China. Got it. All right. Thanks guys. And our next question comes from Scott Krasek from Buckingham Research. Please go ahead. Hi, good morning. This is Kelly on for Scott. Just have a quick question on Europe. It looks like you did talk about a shift in the wholesale business that accounts for some of the deceleration in there. But if you look at the comps on a sequential basis, those kind of decelerated as well. So could you just talk about the dynamics of that market and how we should expect that to play out in the back half of the year? Thank you, Kelly. Yes, I mean, I think Europe from a macro perspective is in a difficult place. The economy is still extremely sluggish. Greg talked a little bit about some of the operational factors affecting Europe in the 1st part of the year. There was a slight deceleration in the retail comps. But again, if you point to the if you look at the aggregate DTC business, you've actually got an acceleration of the business. So the combination of e com and physical retail was a +2 percent in Q1 and was a +6 percent in Q2. So I think the way we think about Europe is that it's a stable market and we're kind of weathering the broader opportunities in the marketplace. Okay. And then just your expectations for then just the wholesale business, we should is it is this a channel shift out of wholesale towards retail for the back half? I think as we look at it, we'd say that the first half on a constant currency was up to LY. And so I think that's the way we look at the business. Okay. And then secondly, just when we get to 2016 and just when we think about our model, are we going to be past most of the divestitures and retail closures? Will we be on a like for like basis when we think about revenues? Yes. We will be if you think about the big impacts on revenue this year, there are 3. 1 is currency, 2 is retail closures, 3 is divestitures. We'll be obviously past the divestitures. There will still be modest retail closings next year because as we've analyzed our retail portfolio, we've taken a sensible economic view of what we close when based on the cost to do that. So there'll be still some aggregate closings in the next part of next year, but the rate will slow down significantly. And I think your guess is as good as ours relative to FX. Okay. Thank you very much. Thank you. And our next question comes from Jonathan Komp from Robert W. Baird. Please go ahead. Yeah. Hi. Thank you. Maybe just one follow-up first on the retail comps. Andrew, I think you mentioned a little bit disappointed with the results there. And it's not entirely clear to me how much just maybe the macro issues with some of the shift towards the online channel versus some internal execution or operations challenges. So do you have any more color on your views on what's impacting the comps there? And maybe how soon you might expect to see some changes? Yes. I mean, I think very clearly there is the macro issue, which is broadly across a broad segment of retail. E commerce or direct to consumer via the web is growing much more significantly than store based retailing. So we're seeing that in our performance, but we're also seeing the impact of our marketing program, I think, very strongly within our e commerce business where we've seen 20% increase in traffic. The other thing that you also have to dissect and break out of our aggregate retail performance is Asia, where we saw a significant negative comp. But a third of our own retail points of distribution are in Asia, are actually within Korea. And Korea was impacted by the MERS outbreak this last quarter, which drove a 30% decline in traffic to shopping malls and to shopping environments. That will mitigate towards the end of this month if there is no more new cases of MERS. But that's a very significant drag on our Asian results. So you've got another external factor to take into consideration. And I think more broadly putting in place the team and the capabilities and the operational efficacy that we need to run an effective DTC business is well underway and we'll start to see that impact in the future. Okay. And if there's a scenario where the comps stay negative for longer and maybe I'm thinking more in the North America business, would you go back and reevaluate the store closure plan that you currently have in place? Or is there any scenario where you'd be more aggressive on closing some of the existing bricks and mortar? We look rigorously at our entire portfolio every year. So we do an economic analysis of the portfolio to understand, does each individual store make a contribution to cash flow and to profitability and how that is likely to trend in the future relative to the economic options you have against closing or early or at sensible points of lease termination. So we have a very thorough grip on the portfolio performance. And if a store is not making a contribution, we almost always choose to close it. We're also confident that retail will continue to play a pivotal role in the business and will continue to provide significant profits will provide significant profits in future. Got it. Makes sense. And then maybe just one more bigger picture for whoever wants to take it and I'm sure we'll hear more in September it sounds like. But if I look at the Q2 revenue growth constant currency and excluding the year over year headwinds that you called out, it sounds like about 5% growth on that basis and projecting 4% to 8% in the Q3. As you look longer term and understanding there's a lot of moving parts, is that type of kind of underlying growth rate, rate that you think is sustainable going forward? Do you think the ultimate growth rate is materially different than that? Or how do you conceptually think about the right pace of growth for the business? Yes. No, I appreciate the question. We do plan to spend more time talking about that in September. And I think we'd like to hold off on kind of having that part of the discussion till our investor meeting in Boston. But we do feel very good about that 5% number when you kind of exclude retail, eliminated product lines, currency in China and feel that that is an indication combined with our guidance for the Q3 that the business is stabilizing, we're making progress and we're well positioned to have some more significant growth going forward. So we feel that we're making meaningful progress. Got it. Okay. Well, we'll look for more details then. Thanks, guys. Thank you. Thank you. And our next question comes from Jim Duffy from Stifel. Please go ahead. Thanks. Good morning. Hope you all are doing well. Three lines of questioning for you. First, Jeff on the gross margins, I may have missed this, but did you call out the FX impact to gross margin in the quarter? The FX impact for the quarter was roundabout300 basis points, 3 50 basis points, Jim, and we were able to offset more than that by merchandising mix and improvements in our overall product line profitability. That's pretty good progress considering that FX headwind. Would you expect comparable rate of FX in the Q3? Yes. We expect that our FX impact in the Q3 will be roundabout300 basis points of margin degradation in Q3. And then it will start to moderate in Q4 as we start to lap some of the decline in Japan and then next year as we lap the decline in Europe. Okay. And then based on some of the products you expect to ship in volume in the second half of the year, it strikes me that mix should continue to be a benefit to the margin. Is that accurate? Yes. It will be a benefit to us in Q3 and Q4. It just won't be able to offset the full 300 basis point impact in Q3. But we did say in Q4 we should see some improvement in our overall gross margins both because of China lapping of the currency and yes the product mix being a benefit for us. So we are definitely aggressive in managing our product mix especially in those marketplaces where currency has had an impact on our profitability and we you can see in the second quarter results we were able to offset a lot of that currency degradation by better merchandising of our product. Great. The mix, I'm interested in the impact that's having on the retail productivity. ASP was a 12% drag overall. What's the product mix and ASP impact on the retail comp? And then I guess I'm curious, is it plausible that in the retail stores you're actually comping negative, but doing more gross profit dollars just because of the mix? That's an excellent question, Jim. And you picked up on one of the key trends there obviously within retail. Yes, our ASPs are down within retail, which frankly is intentional, right? We are mixing towards molded product, which is the core DNA of the business where we're driving innovation and where we have substantially higher gross margin percentages. So we have an ASP drag in the retail business that's approximately equivalent to the average drag that you're seeing across the whole business, but driving some incremental margins. And obviously making up for that drag, you've got to drive significant increase in pairs out the door. And so we think we can do that in the future, but that is some of the drag that we're experiencing. And don't forget, we're doing that in a time where we've been able to impact only a very finite portion of our product line as we head into fall. We've moved that with an existing product line and we believe that we go into spring 2016, the increase in innovation that we have in that molded product will help drive improved performance at retail and at wholesale across the globe. Thanks. That's great perspective. And then finally, the service levels call out, can you speak in more detail on that? Is that a regional issue? Is it having consequence on the revenue and the margin? Yes, sure. I think look over the last year we've talked a lot about evolving our strategy. In Q2 we were very disappointed by our on time deliveries to customers in the U. S. And to a lesser extent Europe. And we tracked this back initially to the port strike in Q1, but subsequently to some delayed shipments. And so given that, we're obviously not satisfied with our service levels. And the second phase of our strategy has always been focusing on our supply chain and some of our other key shared service capabilities. The good news is we've discussed on the last few calls, we've made great progress on the product creation process, cutting out lead time, establishing global line, decreasing our number of SKUs. We're also fortunate to have great manufacturing partners, some of the best in the industry. We've rolled out SAP, so while we have some more work to do to drive efficiencies, we're operating on that on a global basis. We've added talent. We've talked about Phil Blake as Head of Global Sourcing. We've also added Jerry Irvin as VP of Global Supply Planning. Those are in addition to some very strong talent we have in the business already. And so we're confident that with these changes and putting in some new processes that we're kind of putting in place now that we will make the improvements that as Andrew said on the call earlier that we demand and our customers expect and we feel we're making significant progress in that area and that will be well set up for the future. Thank you. Good luck. Thank you. And our next question comes from Steve Marotta from CLK King and Associates. Please go ahead. Good morning, everyone. Couple of quick questions on the marketing spend. There was $15,000,000 incremental in the second quarter. You mentioned that that was a $5,000,000 pull through from the 3rd quarter. Is it possible that overall annual incremental marketing spend could be greater than you previously expected? No. We're on track to spend the marketing that we anticipated. And like we said, it is a pull forward. We expect that our Q3 adjusted SG and A will be down about $10,000,000 and then about $10,000,000 again in Q4 for total back half savings versus last year of $20,000,000 So significant progress in our core SG and A spending. And if you look at the underlying SG and A spending for Q2, Steve, you can see that we spent $15,000,000 more in marketing in Q2 on a year over year basis. We had $3,000,000 year over year increase in bad debt. So our overall SG and A savings for the company was $7,000,000 to get to the net number. So at the end of the day, we had some visible progress in our SG and A cost cuts. Great. Thank you. The other question I had as it pertains specifically again to marketing you're noticing and realizing increased traffic at websites and there's traction in e commerce based on a new marketing plan. Do you expect that similar traction to occur at the retail stores and through wholesale? And if so, over what period of time? Yes. Thank you, Steve. Obviously, as we think about making our market investments, we're making medium to long term investments. We're focused on driving relevance for the brand, introducing new products and really connecting more consistently coherently with our consumers across the globe. Certainly, we've seen the most immediate impact in our e commerce business, and we have certainly seen impacts in our wholesale business. There are many instances where we've actually tagged key wholesale accounts within our digital programs, and we've seen dramatic acceleration in terms of sell through. The one thing that we didn't do this year, as you know, is the introduction of the marketing campaign wasn't coordinated with our sell in. We all came to the business too late to do that. And as we look at 2016, we've made much more significant traction and coordination in terms of presenting our marketing investments to our wholesale accounts as we sell in. So we see impacts in a number of areas. 1, continued impact in e commerce, significant impacts on wholesale from a sell in perspective, but also a sell through perspective and over time an impact on retail. That's very helpful. One last question as it pertains to China. Are you experiencing any negative effects from the macro issues going on there? Clearly, you're executing well on the plan in order to turn the business around as it pertains to hitting those targets in the 1st and second quarter. But are you do you have any concerns about again the macro issues going on there as it pertains to the the traction that you would expect within China over the next 6 to 12 months? Yes. So I think we've already outlined in response to Aaron's question that we're we feel like we're on track with the plan. Clearly, the macro environment doesn't make it easier, but we've been experiencing that environment frankly for the last 12 to 18 months. So we're managing through it. That's helpful. Thank you. Thank you. Thank you. And our next question comes from Jim Cartier from Monness, Crespi and Hardt. Please go ahead. Good morning. Thanks for taking my questions. The first question, you've talked about extending the springsummer selling season into July. Just curious if that had an impact on the business this year and how it impacted Q2 versus Q3? Yeah. As we kind of look at July and spring summer that's really a 2016 initiative. We'll have a little bit of business in Q4 as it relates to the earlier part of that initiative. But then the springsummer season will extend further than kind of the 2015 season. So it's really a July 2016 timeframe. Okay. And then you've talked a lot about kind of combined e commerce and store comps trend. Is that sustainable, the trends in e commerce and the combined DTC comps going forward? Thank you, Jim. Yes. So yes, we think we're going to see a sustained differentiation between e commerce and physical store performance based on macro consumer preferences. Clearly, the a large part of our e commerce growth is driven by traffic improvements, which was driven by our marketing, which was driven by increasing interest in the brand. So as we intend to make sustained investments in marketing over many years, we believe we can improve traffic to the brands and it's a leading indicator of preference for the brand. So we believe our DTC business needs to play an important strategic role for the brand in terms of allowing us to showcase the broader product range that we have to offer and it needs to come positively and drive a strong economic contribution as well. And we look at e comm as a leading indicator in terms of that's going to be the first thing that gets impacted and we believe that over time as we have as we can impact more and more, we'll see some of the broader benefits as well. Great. And Jeff, the bad debt expense has been going up for 4 or 5 quarters now. And I think the allowance is something like $43,000,000 versus $21,000,000 a year ago. Could you just talk a little bit more about what's going on there? Do you see any more increase in the bad debt expense coming? Or could that reverse itself at some point in the future? So Jim, we took the charge consistent with our policy internally here at Crocs. And the vast majority of our partners in China are current on their payment plans. Current on their payment plans. But we are dealing with some isolated instances among our 40 different distributors in the marketplace. We're working with those accounts diligently and we are trying to address the situation and recover completely our to address the situation and recover completely our receivables from those accounts. We continue to work with them and at this time we feel like our bad debt reserve adequately portrays the risk of the organization. Specifically, our bad debt allowance overall is $12,300,000 when you add the other rebates and other things like that is when you get to the number that you quoted Jim. Okay. And then finally, any thoughts on pricing to offset currency, when you would take price increases? Yes, it's Jim. So we have taken price increases in select markets to offset currency. We think about the major areas that we've been impacted by currency. They are number 1, Europe number 2, Russia number 3, Japan number 4, Brazil. We've taken price action in Russia earlier this year and we'll take some more later this year. We've got Japan price action late this year and into the following year. Frankly, in Europe, it's extremely difficult. So in sort of mainland Europe, the U. K, Germany and France, we're doing we're taking select action on select styles, but broad based program is really, really hard and we've taken price action in Brazil. Great. Thank you and best of luck. Thank you. And our last question comes from Sam Poser from Stern AG. Please go ahead. Thanks for taking my question. A couple of things. We've in talking to people, we understand the response to the product for spring 2016 is pretty good. And there's a pull forward I mean, you're not pull forward, you're delivering your warm weather product earlier. Can you give us some view on how you're looking at the Q4 right now from a revenue perspective? Yes. Hi, Sam. Thanks. Yes, I would say we're planning that in a small way for the Q4 and we're not I don't think we're prepared to share a number. We'll talk a little bit more in more detail in September. But right now it's a small part of our 4th quarter plan and but we think over time it becomes a bigger and bigger part of the overall program. So, okay. But I mean just trying to get comfortable that you're moving in the right direction. Your margins were good. I assume you're expecting the margins to be up in the Q4 fairly significantly if I'm not mistaken just given the easy comparison last year and so on. That's correct, Sam. I mean the thing is that I guess the question is can you give us some idea of the kind of maybe the change in revenue velocity that you're perceiving? Give us like a little preview of the kind of revenue velocity in general that you're perceiving as we go into 2020. Of the kind of revenue velocity in general that you're perceiving as we go into 2016 given the response to product and what you're seeing both in your wholesale retail and e commerce channels? Yeah. So obviously, Sam, we're going to talk in more detail about this in September and we'll have a more robust conversation. Going back to the thing something we talked about earlier, we view kind of Q2 performance and the run rate on the go forward business of plus 5% to be an indication of solid performance on the core business despite not having an updated product line and putting in a new marketing program and platform on an accelerated basis. We have more time as we look at 2016 to leverage our learnings relative to the spring 2015 marketing platform. We have more time to leverage our learnings as it relates to some of the new product introductions we've had over the last 6 months and we feel we've made a lot of progress. So we start with that kind of 5% Q2 2015. We're sharing 2.80% to 2.90% guidance for Q3, which is plus 4% to 8% on that go forward business. And I think so that's in that similar kind of range. And so I would just leave it as we continue to feel confident in the direction we're heading. We feel the core business is stabilizing. We believe there are a number of key indicators as we look at Q2 from revenue of +5 percent on a go forward basis, core business, gross margins, DTC, comps of plus 1% in constant currency. And that those are all indicators that we're making meaningful progress. And I would say, as you know, we still have the lion's share of the progress that we hope to bring forth that really starts to hit in spring 2016. And again, we'll share greater detail in September, but we're excited for the direction we're heading. Just one quick follow-up. Is that a the 5% go forward will the new product that you're adding for spring 16 will be additive to that. I mean, because to get I mean, a 10% to 12% op margin was thrown out there last year. And the question and it looks to me like you need some fairly healthy top line growth to get there. Are you I guess on a go forward product plus new product, is it right to think that that starts to happen next year? So Sam, what I'd say is, yes, to get to the operating margin we've talked about in the 10% to 12% range, we obviously need revenue growth and that's a core part of the strategy. And our expectation based on our product and marketing evolution and some of the changes we're making in terms of how we run the business and how the business is structured that we will be able to drive growth going forward and that's a core part of the strategy. And we'll get more details on that at the end of September? You will get more details of that at the end of September absolutely. Thanks very much. Good luck. Thanks, Sam. Thank you. And I'm not showing any further questions at this time.