Earnings Call: Q1 2015

May 8, 2015

Welcome to the Q1 2015 Crocs Incorporated Earnings Conference Call. My name is John, and I'll be your operator for today's call. At this time, all lines are open and interactive. We ask that you please keep all background noise and site conversations to a minimum. If you're not speaking, please mute and unmute your line phone. We also ask that you not place your line on hold as music will interrupt the conference. Note that this conference is being recorded. And I will now turn the call over to Brendan Frey. Thank you, and thank you everyone for joining us today for the Crocs' Q1 2015 earnings conference call. Earlier this morning, we announced our Q1 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 laws. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, 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 listed in the call are advised to report a 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 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 will 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 Q1 2015 financial results. Revenues were $262,200,000 in line with expectations and adjusted net income was $8,400,000 Excluding China store closings and discontinued operations, our business was up slightly to last year on a constant currency basis. As we stated last quarter, we expect to see material progress in China in Q2 based on actions already taken, and we are planning for growth in that market beginning in Q3. This is a dynamic time at Crocs as we transform our brand and business into one of the leading global casual lifestyle footwear companies in the industry. During the quarter, we continued to work through the internal challenges of the transformation, while addressing the external challenges, including a strong dollar and the West Coast pork plays. Despite these issues, we continued to make great progress on the strategic initiatives we laid out in prior calls, including strengthening the Crocs brand, elevating our product stories, 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 are seeing meaningful results from our initial actions thus far. Andrew will walk you through some of the key milestones we are achieving in a few minutes. Having said that, there are 4 key strategic updates I would like to share with you this morning. First, we launched our new marketing campaign, FindYourFun on March 30. We feel great about the new campaign and Andrew will share some of the details in a few minutes. 2nd, on our last call, I shared my excitement around a new style we launched called the Free Sale, a core molded clog with an updated or more tapered last. The Free Sale, which was launched on a limited basis, is performing extremely well at retail and is now in the process of being expanded upon both within our direct to consumer channels and throughout our retail partners. Today, I want to mention another new shoe we recently launched called the Sloan, a molded sandal on a low wedge that was introduced a few weeks ago on a very limited basis and is also performing extremely well at retail. These two shoes demonstrate our ability to take our core molded category, reinvent products with updated styling and connect deeply with consumers' evolving taste and style needs. We're very excited about the broader opportunities these shoes represent and our ability to continue to evolve core molded footwear business in the future. 3rd, this past quarter, we achieved a major milestone with our SAP implementation. Our new ERP system went live on January 1, and we successfully closed our books on SAP this quarter. While not without some challenges and there is still more work to be done, conversion to the new system had no significant impact on our business for the quarter. Going forward, it will provide us better control of operations, faster global data aggregation, improved information for decision making and help us become more profitable across the globe. And finally, this morning, we announced externally a series of senior level organizational changes that we implemented earlier this week. As we shared in our release, Scott Crutchfield, Crocs' Chief Operating Officer is leaving the company. Scott has played a pivotal role at Crocs, helping build the company into a $1,000,000,000 plus global business over the past 9 years and has built a strong team beneath him. We thank Scott for his lasting contributions and wish him the best. We also shared that Chap Kistler, Crocs' Senior Vice President of Global Supply Chain is leaving the company. We wish Chap the best as well. As part of a revamped org structure, Phil Blake is joining Crocs as Senior Vice President of Global Sourcing. Phil previously served as the Vice President of Sourcing at Clark's Americas, as the Senior Vice President of Sourcing at Collective Brands Performance and Lifestyle Group, where he and I work together, and and as General Manager of Asia Supply Chain at Timberland. Dennis Sheldon, an 8 year veteran of Crocs is transitioning to a new role, Senior Vice President of Global Distribution and Logistics. Dennis led our successful ERP implementation. Before leading our SAP effort, Dennis served as Crocs' Vice President of Distribution and Logistics. Phil, Dennis and Steve Katsarubas, Crocs' Chief Information Officer, will now all directly report to me. We believe these changes elevate our functional capabilities, streamline decision making and improve communications and linkages both within Crocs and between our customers and our suppliers. In summary, we're making great progress across a broad range of strategic fronts. We did continue to experience several challenges in the Q1, as we discussed in our last call, including our China business, the slowdown from the West Coast ports and the strong U. S. Dollar. Nonetheless, much of the groundwork to transform Crocs and reposition the business for the future is well underway. I remain 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, Craig. We previously outlined our strategy for repositioning Crocs, which is well underway. Let me reiterate the major initiatives, the progress we have made and some of our plans going forward. Elevating the brand, we launched our new global campaign FindYourFun, which builds on our iconic clog silhouette. The campaign is designed to reignite excitement and relevance to 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. The campaign launched on March 30 supported by overall increase in marketing spend of $10,000,000 in Q2 compared to last year and a 50% increase in working media spend directed at the end consumer, achieved through a reallocation of funds from our non working marketing spend. Today, you can see this campaign in our digital marketing and social media efforts and in out of home markets in major markets across the United States. A new TV campaign in the U. S. Began earlier this week, focusing on our core product. Having exited non core businesses, Crocs Golf, Ocean Minded, Apparel and Accessories, we are focused on our core molded and lifestyle casual footwear. While these businesses represented $4,000,000 in sales in Q1 of last year, we are now leaner and a more focused organization. We recently finalized our spring summer 2016 line and I'm tremendously excited by the innovation and styling Michelle Paul and her team have brought to the table. We've just completed a series of top to top meetings with some of our largest customers, who were very supportive of our strategic marketing and product direction, in particular, expanding our springsummer season from 6 to 8 months with 4 product flows and our infusion of style and the pace of our innovation. Focusing on 6 key markets. We're focusing our efforts and investments on our 6 largest markets, which represent roughly 70% of our overall revenues and profits: the U. S, Japan, China, Korea, Germany and the United Kingdom. We continue to address our challenges in China. We're focused on driving sales per door and profitability of our business. We have closed stores, cleaned up distribution and moved through excess inventory. During the quarter, we took back the business from our distributor in Wuhan and will operate that business on an interim basis as we identify a suitable business partner. Consistent with what we shared in our last call, we saw a $25,000,000 decline in Q1 in sales in China. The declines will moderate significantly in Q2 and we expect to return to growth in Q3. I just returned from hosting our 1st global distributor conference in Dubai. Our partners from around the globe were enthusiastic in their response to the plans we shared with the strategic transformation underway. Building strong relationships with our wholesale accounts. As I mentioned, we have recently met with a number of our major wholesale accounts across the globe to share our strategy and pre line our initial spring summer 2016 product. We believe effective pre lines are critical to gathering feedback and strengthening relationships. We were encouraged by the positive responses and support we have received thus far. Improving our direct to consumer capabilities and performance. We continue to trend our direct to consumer operations, eliminating underperforming or inefficient stores. We continue to work on key initiatives to improve the performance of our stores, including new retail management systems, closer management of inventory and in stock and creation of continuous flow of new merchandise in stores to keep them fresh and drive consumer return visits. We are confident that when fully implemented these initiatives will lead to success in our retail operations. Centralizing and streamlining operations while building a best in class team. We continue to streamline the business in the last quarter as we completed a restructuring of our Asian regional and country level overheads, resulting in a reduction of 120 staff and providing $8,000,000 in annualized savings. This is in addition to our efforts in 2014, which are now yielding in excess of $10,000,000 in annual SG and A savings. As I said earlier, we are redeploying the funds towards marketing, specifically consumer facing working media. While there is still much to be done in the balance of the year, I'm pleased with the progress the team has made thus far and confident in our ability to execute the balance of our plans. Now I'll turn it over to Jeff to go into details of our performance. Thank you, Andrew. Today, I will cover our Q1 2015 results and then briefly review the expectations for Q2 including the impact from changes in foreign currency. Revenue in the Q1 was in line with our expectations at $262,000,000 down 8% from a year ago on a constant currency basis. The revenue decrease in the quarter was due to lower China wholesale revenue down $25,000,000 as expected the currency impacted the stronger U. S. Dollar of $25,000,000 slightly more than expected due to the further 11% decline in the euro during the quarter the closure stores, which impacted revenue $6,000,000 compared to last year and the $4,000,000 impact from discontinued products and segments. We saw some impact from the West Coast port delays. Our teams had prepared for this situation and worked very hard to mitigate the delays in flow of product into our Ontario distribution center. Having said that, we did see some product less than $10,000,000 slip from Q1 into Q2. All of the revenue results that we will cover today are quoted in constant currency change versus prior year. Americas revenue was $106,000,000 for the quarter, down 8%, caused mostly by a continuation of the slowdown in the West Coast ports and strategic shift to more profitable product lines. Retail sales in the Americas declined 5% for the quarter, while e commerce declined 3%. Both of our direct to consumer segments were impacted by the strategic decision to exit direct business in Brazil. Same store sales at retail in the U. S. Were down 6% for the quarter. In Europe, revenues were $56,000,000 for the quarter, up 12% year over year with wholesale growth of 18%, more than offsetting closed retail stores and local language e commerce sites. Same store sales were strong in Russia following the extreme drop in the ruble. Non Russian same store sales were flat in the region. Combined same store sales were up 6% for the quarter. Asia revenues for the quarter were $100,000,000 down 19% versus prior year. With the exception of China, our Asia wholesale business was flat to prior year. We forecast China revenue declines of approximately $5,000,000 in Q2 before growing in the second half. We saw exceptionally strong growth in e commerce volume in China as that volume doubled over prior year. However, the shift to e commerce in the market impacted same store sales in China and lower visitor traffic to Hong Kong pressured same store sales in that market. Overall, Asia same store sales were down 8%. In addition, strategic decision to close many retail sites including all locations in Taiwan resulted in lower retail revenue of 17% overall. But we anticipate that lower fixed costs will improve profitability in the region during seasonally low volume quarters. While no longer a separate region for the company, Japan revenues were $26,000,000 for the quarter flat with prior year. Retail sales were down as the market was up against tough comparisons with last year as the Japanese consumer in 2014 prepared for an increase in the consumption tax. Wholesale revenue in the quarter was $20,000,000 up slightly on a constant currency basis. We sold 14,800,000 pairs in the quarter, a slight reduction from prior year. The average selling price of our footwear in the Q1 was $17.45 a 14% reduction from the prior year, primarily the result of currency. Turning to our retail operations. During the Q1, we reduced our global store count by 27 stores, as we closed 30 stores and opened just 3. We ended the quarter with 5 58 locations, down 65 from the same period last year. The stores that we closed in 2014 generated $6,000,000 of revenue in Q1 of 2014. As discussed, in total, we plan on closing 65 locations in 2015, while only opening 30. Gross margin for the quarter was 48.6%, down 140 basis points from prior year, more than explained by currency as constant currency margins improved 100 basis points from favorable product mix. We expect a higher impact to our gross margins from currency in Q2 as we are up against the peak euro valuation of 2014 in the quarter. During the quarter, we have made significant progress on strategic objectives announced in 2014. The major one time items associated with these changes include: we reduced salaried employment in the quarter by 120 positions through job eliminations primarily in Asia. This resulted in one time expenses of $3,000,000 $8,000,000 of annualized savings. Cost associated with the development of launch for our new SAP system that Greg discussed earlier, which totaled $6,000,000 in the quarter. The cost of closing retail stores totaled $2,000,000 Excluding these items, core selling and administrative structure expenses were $119,000,000 down from $131,000,000 in the prior year including a $6,000,000 reduction in direct channel SG and A. We will be increasing our marketing spend in the Q2 and plan on spending $10,000,000 over prior year in Q2. Including our marketing investments, we expect our operating SG and A to be flat in Q2, but down slightly versus prior year in Q3 and Q4. Turning to the balance sheet at the end of the quarter. Global Cash ended the quarter at $181,000,000 We used $20,000,000 of cash to repurchase 1,700,000 shares in the quarter. Inventory at the end of the quarter was $185,000,000 down from Q1 of 2014 ending inventory of $192,000,000 Two final notes on the financials. 1st, adjusted net income attributable to common shareholders was $4,700,000 after preferred share dividends and equivalents of $3,500,000 2nd, the weighted average share count used to calculate the loss per share attributable to common stockholders disclosed in the earnings release was $77,800,000 As a reminder, basic and diluted shares counts are the same in the quarter that generated a net loss. As we discussed on the last call, for 2015, while we continue to make great progress in our strategic initiatives, there are external factors that will impact our global results. About 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 Q2 to be about 8% at today's rates or approximately $30,000,000 As a reminder, at this time last year, the euro stood at approximately $1.39 compared with $1.10 today. Revenue in Q2 will be impacted by several strategic decisions we have made to improve the long term financial performance of the business. First, our retail footprint is lower by 65 stores and we plan on closing an additional 35 stores. This will reduce second quarter revenue by $13,000,000 We expect the net impact of store closings to be approximately $10,000,000 in the back half of the year. 2nd, we exited several non core product lines last year and this will reduce Q2 revenue by $7,000,000 3rd, as we mentioned, we anticipate that our China business will be down in the 2nd quarter approximately $5,000,000 We expect 2nd quarter revenue to be between $340,000,000 $350,000,000 down from last year on an as reported basis, but showing modest growth in core revenue from continuing business lines on a constant currency basis. We continue to be very confident in our future and expect to show material progress in our results in coming quarters. Now I'll turn it back to Greg for closing thoughts. Thanks, Jeff. As I mentioned at the opening of the call, we are making great progress on the transformation of Crocs. We are 9 months into an 18 to 24 month process and our transformation is progressing well, it's on track and it will set us up for long term sustained success. Despite some headwinds in the business from currency to China to the West Coast ports, we're making great progress on focusing the business on core products and markets, elevating our product and marketing stories and evolving our cost structure organization and talent. Over the course of 2015, particularly in the back half of the year, we expect to see some of the benefits of this work. While the real benefit of much of this work will be seen during the spring summer 2016 season. I'm confident in the direction in which we are headed and our ability to execute successfully against our plans. 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 up for questions. Thank you. And we will now begin the question and answer session. And from Buckingham Research, we have Scott Krasik online. Please go ahead. Thanks. Hi, everyone. Good morning. Two questions on the outlook. First, I think last conference call you said that you believe you could achieve reported revenue growth by either the back half of the year or by Q4. Just wondering how you view that now, your updated thoughts there? And then if anything was a little bit disappointing this quarter, maybe it was the domestic revenue growth or the decline in the domestic sales. Can you talk a little bit about how your trends are looking now as the weather has more normalized both your wholesale sell through trends as well as your own retail trends? Thanks. Sure. Good morning, Scott. So look, I guess the way I start is, I'm very pleased with the progress we've made in the transformation of Crocs so far. Last July, we shared our strategy to transform the business including strengthening the Crocs brand, elevating product stories, exiting non core categories, evolving our international business, strengthening relationships with key partners, improving direct to consumer capabilities, simplifying our operations and building a best in class team. And as you know and as everyone knows, the transformation of any brand or business in the industry is an 18 to 24 month process. And over the last 9 months we've accomplished a lot. We've narrowed our business focus. We focused on our top markets. We've closed stores and shut down websites. We've streamlined the business, centralized key functions such as product and marketing to create a consistent global brand. We've reduced headcount across regions and within corporate. We've implemented SAP and we've added some great talent with great industry and functional experience. So a lot of the groundwork has been laid in terms of transforming business and positioning us for the future. That said, our consumer facing initiatives are just starting to hit now. Our new marketing campaign just launched in the last few weeks. The impact of our product team is only just starting to appear in a very small way. Their full impact won't be really seen till beginning in Q4 when we start to ship spring summer 2016. Having said that, I'm super encouraged by what I see in the line and by our retailer's response so far. And I'm incredibly excited by the fantastic team we're building. So we feel increasingly good as we look at 2015 as the year progresses and more importantly, about 2016 as the full impact of our transformation effort comes to fruition. So when we think about the business, we still expect to see some growth in the back half of the year on a constant currency basis. And I think as we hit 2016, we start to feel more and more confident in terms of the future direction and where we're heading. I don't know Andrew if you want to kind of add anything on that? Yes. I mean I think the only other thing the second part of your question Scott was around the domestic business. Right. So one note to remember that when we report Americas, it includes Latin America and we made some strategic shifts in our Brazil business where we moved away from being a direct participant in that market through distributors. So obviously that has a net impact on our revenues while the payers can be equivalent. And I'd have to say the retail quarter, the 1st retail quarter was a very challenging quarter, I think for everybody with a lot of weather impacts. And our wholesale business, as we talked about in our prepared remarks, was impacted by the port delay and some push out of volumes. So I think we're we feel like we're on track and we think the Americas will strengthen substantially as we go through the year. And trends are getting better as the weather normalizes? Trends are getting substantially better as the weather normalizes, absolutely. Okay. Thanks and good luck. Thank you, Doug. Thank you, Doug. From Goldman Sachs, we have Tapash Bari online. Please go ahead. Thanks. Good morning. Greg, you spoke about the meetings you'd had with your big wholesale accounts and how they were supportive of your strategy. I was hoping you can elaborate more on what the feedback has been? And if you can elaborate elaborate more as far as what the order book looks like? How they're responding? Any color would be great. Yes. It's interesting. We spent a lot of time with accounts over the last few weeks. And obviously, we've done that kind of worldwide. And as part of that process we share the strategic direction in which we're heading. We've kind of unveiled some of our broader brand strategy changes. We've shared our marketing initiatives and pre line spring 2016. And I'd say as I just mentioned while we're still in the early stages of all the consumer facing components of our strategy in terms of our marketing TV actually hit earlier this week and product we've only been able to hit a few key styles. The updates to our product and what we've shared has been extremely positive. When we walk through how we're engaging the consumer from a marketing perspective and how we're evolving our product range both within our core molded products and how we're evolving some of our more casual lifestyle product, the reaction has been extremely positive and they buy into kind of the direction we're taking the brand and the business and are fully supportive. So that gives us confidence. When you combine that with early reads we have on small programs like the presale and the Sloan, where we've taken traditional molded product and we've updated and elevated the styling. And while these are small programs and we're just starting to expand them now, the performance of those products are great early indicators that we're really heading in the right direction. So we feel confident in terms of those early indicators. And Andrew, you want to? Yes. The only thing I'd add, I suppose, is I just returned from our distributor conference. So as you think about our important customer base, we have major customers in the U. S. We also have very significant distributors on a global basis. And I would say that we're putting forth as extremely commercial, very salable. And obviously, as we push stronger more strongly into molded product and balance that with a broader range of casual lifestyle, obviously, the margin picture is also extremely attractive for them. So I think very, very supportive. They see a very commercial focus to the business and they see that there's a business that they can really back and support. Just a quick follow-up. How comfortable and how much visibility do you have into the inventory situation at especially in some of these international markets as you obviously transition from legacy into some of the new product? So that's something as we've talked about before we've really been focusing on, Subbuj, is really focusing our mantra is moving from a culture which is more about sell in to a culture that is more inclusive. It's about sell through for our retail partners and for our distributor partners. So we have increasing visibility to that as we get more and more metrics around that. So that's been a real strategy. Strategy we've been pursuing. And I'd say it's improving. Absolutely, last year, we saw some retailers and some distributors with inventories far higher than we would like to have seen. And we've really higher than we would like to have seen and we've really spent the last 9 months working that down substantially. And because of that the nature of our conversations with all of our partners worldwide is changing. So it's about driving sustained growth worldwide. It's about developing deeper consumer connections. It's about building out product and marketing initiatives that are long term sustainable programs that enable us to grow the business in a much more strategic way than we have in the past. So the nature of all those conversations are changing and are evolving. And what we see is that our partners around the world's reaction has been very, very strong. Great to hear. Good luck. Thank you. Thank you. From Stifel, we have Jim Duffy online. Please go ahead. Thanks. Good morning. Couple of questions. First, the constant currency improvement the gross margins, I find very encouraging, particularly given the geographic mix. Is that principally a function of the SKU reduction and concentration of volumes in better margin styles? And is there any way to characterize where you stand in that transition? Yeah. Thanks, Jim. I think when we look at the margins for Q1, we saw 100 basis point improvement in constant currency margins, which we're pretty happy with and shows really the key drivers that we're focused on as a company between the merchandising mix and we discontinued some products that weren't as high margin products for us. And then the impact of China kind of coming to an end here for the second half of the year will also be a positive. And then finally, for the second half of the year, which leads us to have the data set to forecast that our margins are going to get better, we are bringing in spring summer 2016 line in as early as November. So really looking forward to that with our new product coming out for spring summer 2016. In the near term, Q2, we should see about that same 100 basis point improvement driven by merchandise and mix. And currency impact in Q2 margins will be about 3.50 basis points of a drag because of the peak valuation of the euro last year. Okay. And then as you look out to the spring 'sixteen line, is there opportunity to build on that just given anticipated shift in product mix? Yes, Jim. So, hey, it's Andrew here. I think that's right. As we look at our margin mix going forward as we look at our product mix going forward, the greater emphasis on mold, it gives us definitely some stronger support in our margins. So we see the margins building into 2016 and beyond. And we're going to have a more stable business as we've kind of worked through a lot of the business transformation over the last year. So absolutely. Great. And then Jeff, the ERP expense expectations as the year progresses and can you talk about the depreciation run rate at deployment? Yes. So our depreciation in SAP went live this quarter. So we do anticipate a year over year increase in our SAP expense that comes through on our depreciation and amortization line of about $10,000,000 And you'll see that throughout the year and that offsets some other depreciation. So in general, we expect depreciation to be about flat to last year at around $37,000,000 We expect to see a little bit lower CapEx than that $37,000,000 number. But as far as the SAP specific expenses going forward, we'll have a little bit residual in Q2 and then that will fade out throughout the year. So I think the good news, the headline is the team worked really hard on the global installation of SAP and we're really proud of that team. Great. And then lastly, despite the stock being lower during the quarter, the pace of share repurchases moderated pretty meaningfully versus the Q4. What was the rationale behind that? I think our feedback on that is probably consistent with the last quarter which was we've tried to put in place a very disciplined approach. I think as we've reported we've repurchased around $165,000,000 worth of stock since the Blackstone investment. In the quarter, we bought back 1,700,000 shares or $20,000,000 of stock and we'll continue to be patient and methodical going forward. We try to maintain a disciplined approach, which will continue going forward. Okay. Thanks for that guys. Thank you. From Wonderlic, we have Danielle McCoy online. Please go ahead. Good morning. Thanks for taking my question. I was wondering if you could just give us a little bit more detail on the West Coast port situation, a little bit more color on how you're seeing shipments today versus the beginning of the quarter. Any cancellations at wholesale accounts? And how much of the inventory decline was attributed to the delay in shipments? Thank you. Perfect, Danielle. So, yes, I think it was a very challenging quarter given the West Coast port situation. We saw at the sort of peak of the quarter and towards the end of the quarter, 3 4 week delays in terms of product flowing through the port to our warehouse. And we as we reported in our remarks, feel like we slipped to between $5,000,000 $10,000,000 of potential Q1 revenue in for North America wholesale from Q1 to Q2. I think a part of your question associated with that was do we expect to book that revenue or is there some cancellations. We feel like about half of that will potentially cancel and the rest will carry forward. In terms of the impact today, it's improving rapidly and the work that we've done over the last week or 2 indicates that we are approximately on time with our containers coming out of China arriving into the West Coast. So we feel like the situation has improved dramatically. And I think also another part of your question was the impact on inventories. We don't feel like that had a substantial impact on our inventory levels. And as you know from prior calls, there's been a strong area of focus in terms of working down our overall inventory levels. Great. Thank you. And then just one follow-up on the store closures. I guess, could you just give us a little bit more color on the pace or location of some of the store closures? Or is it been easier to kind of shed these stores? Or has it become a little bit more tough given the availability of real estate in the market today? Got it. So we reported in Q1 that we closed 30 stores and opened 3, so a net 27 closings. As we look through the balance of the year, we feel like we're going to close about 30. That number may tick up a little bit. And but we've got about 25 openings. The bulk of the closings have been orientated towards Asia where the lease environment is a lot easier in terms of closing stores that we don't feel like meet our expectations or our strategic focus. I'd have to say also the bulk of the openings have also been in Asia where we're strategically opening outlet capacity in key markets to ensure that we can maintain healthy inventories in all cases. Hardest places to close stores is in Europe. And that's a place where over the next year or 2, we feel like we've got some stores that don't meet our financial benchmarks or strategic intent and we'll close a small number of stores going forward. Great. Thank you. Good luck, guys. Thank you. From Stern AG, we have Sam Poser on line. Please go ahead. Good morning. Thank you for taking my call. Just a clarification on the gross margin. You said that you expect the gross content currency margin benefit to be about 100 basis points in the 2nd quarter and then a 3 50 basis point drag due to currency. So are we looking I mean just to understand it to clarify about gross margin to be down about 2 50 bps for the quarter? Yes. I mean just on the easy math there. And then we would expect that to start to improve dramatically going into the back half of the year given currency as well as the shift more towards more molded product? And then lastly in would you expect more on a year over year comparison, would you expect better improvement in Q4 than Q3 given that you're going to be delivering spring early? Yes. Thanks, Sam. So I think as we mentioned, there's 4 key drivers that are going to benefit us in the back half of the year, some of which have already started to benefit us. Number 1 being the merchandise mix and number 2 being the discontinued products that we mentioned. So dropping those 2 off have been the real driver between the 100 basis point improvement in the first half of the year. And then as the currency starts to lap in Q3 and even more so in Q4, we'll start to see some of that degradation drift away. And then finally, in the 4th quarter, that degradation drift away. And then finally, in the Q4, we will see the spring products being delivered in November, which have higher margins than the traditional winter products. So, we'll get the benefit of that. So and then when we look out into next year, I think that was second half of your question was really when you look out into next year. As Andrew mentioned, we're focusing a lot of our tire margins and allow us to mix our product line and improve our margins slightly because of that. Okay. And then I mean just to follow-up, the revenue growth, just to think about the revenue growth in the back half of the year, you would expect, let's say, not in actual dollars, but in percent year over year, you'd expect Q4 to increase more than Q3, because of that early delivery of spring. Yes. That's right. It's Greg. We would see Q4 being a stronger growth quarter in the back half of the year. Okay. Thanks guys. Good luck. Thanks, Sam. Thanks, Sam. From Piper Jaffray, we have Erinn Murphy online. Please go ahead. Great. Thanks. Good morning and thanks for taking my question. Just following up on the gross margin, just one clarification. I think on the last call, you did talk about flat gross margin for the balance for the full year. So with the kind of inflection in the back half and obviously the better than expected performance in the Q1, I mean could that actually be above flat for the full year? I think flat is still kind of where we're seeing things, Aaron. I think the Q2 currency impact has been a little bit better than it was a couple of months ago because of the euro decline from where we were in late February. So I think when we look out for the year that's kind of what we're projecting. Okay. And then in terms of the marketing campaign, it looks great. We've seen it in some of the international markets thus far. I mean can you just talk about any early responses you've seen? And then as you've kind of think about the revenue guidance for your back half, what's assumed in terms of the kind of consumer response to the kind of repurposed marketing dollars? Thanks, Aaron. This is Andrew. Yeah, I mean, I think so far we're encouraged, right? So in the very short term, we're monitoring the impact on our e com traffic, on our social media interactions and a lot of our in store traffic. So and I think we've seen some pointed and very clear improvement in terms of traffic in all those environments and interactivity with the brands. And that's extremely encouraging. The other impact of the marketing is the confidence that it provides your wholesale accounts and their ability to buy into product for future seasons and we've definitely seen that and heard that from our U. S. Wholesale accounts as well as our international distributors. So it's providing a great sense of confidence and support from those environments. As we look forward into the back half of the year, which I think was another part of your question, how do we anticipate that impact? We think that will provide some tailwinds and some positive indicators in the back half of the year. So we're encouraged. I think we've largely built that into our forecast and how we think about it. Great. That's great to see some steady progress. And then just last operating margin target kind of 10% to 12%, still kind of thinking about that longer term? Is that kind of still how you're thinking about the business over the next 2 to 3 years? Yes. I think our long term operating margin goal remains the same. And I think just building on the previous question, part of that is our ongoing commitment to marketing and continuing to invest back into the business going forward. Obviously, when we look at our kind of longer range plan, near term results have been impacted by the higher U. S. Dollar. But we're confident we can improve our profitability and achieve those longer term objectives and gross margin in the low 50s and operating margins in the 10% to 12% range in the intermediate future. Got it. Great. Thank you, guys. Best of luck. Thank you. Thanks, Aaron. From C. L. King and Associates, we have Steve Marotta online. Please go ahead. Good morning, everybody. Greg, earlier in the call you called out 2 new styles, which are working pretty well during the spring season. Conceding that fallwinter of 2015, it will be seasonally slower, of course, in springsummer. Are there any new styles, which could ultimately prove to be unit drivers in the back half of this year? Yes. So thanks. A couple of things I'd say. So first of all, we are excited about a number of programs we have coming into the fall. We've got an updated classic cloud called the City Lane that we've got great reaction to. We have a kids shoe program called the Bump It and then we've got a Star Wars program that we think is going to be fantastic and obviously that's going to be a big driver of business in the fall. And then we have some updated line product, the presale and a women's flat called the Mammoth. So we have plenty of product to drive the fall business that we feel good about. In addition to that, we're very excited about bringing some of our springsummer 2016 line in early and retailers, our partners' our partners reaction to that has been extremely positive. So in that November December timeframe, we'll start to deliver early runs of spring 2016 to the right retailers to the right geographies and that's going to be a big driver of business as Jeff mentioned earlier in the back half of the year. And that leads me right to my follow-up. So the Spring Styles some of the Spring Styles will be initially shipping in that November to December timeframe. Will they be hitting the shelves basically at the same time? I assume they're more skewed to warm weather markets. Can you talk a little bit about when they're going to hit the shelves? Is it really going to be during the holiday season? Yes, Steve. So obviously, our November 15 delivery date is intended to be on floor December 1, right? So that's the first period. And what I'd say in terms of when you'll see them on floor, all of our big U. S. Wholesale accounts all have a significant number of warm weather doors, whether it be in the Southern United States or outside the country. So they're particularly excited. And Carrie, you basically spring summer product all year round in those stores. So they're excited to have us on the floor in that period. So yes, you will see them, but it's generally in selected stores. It will be the same for our own stores. We'll skew that delivery towards our warm weather doors and they'll have a much stronger representation. But even some of our northern doors will have some representation of that springsummer product. The third thing I'd say, having just got back from meeting with our distributors, many of our big distributors are in Southeast Asia and other climates where it's potentially warm all year round. So this is a tremendous boost to their business. And obviously, these approaches are big changes for Crocs. And so as we've spent time with our retailers and our partners across the globe, they make a ton of sense for their businesses. So we are we expect to have a big impact from that and will flow newness throughout the season. This is not just an early delivery. This is part of a broader strategic approach to flowing more new product throughout the entire season in multiple deliveries. That's very helpful. Thank you. Thank you. From Robert W. Baird, we have Jonathan Komp online. Please go ahead. All right. Thank you very much. Greg, if I can maybe just ask a bigger picture question on the organizational changes you announced this week and this morning. Maybe first just at the executive level, do you think the entire team currently there in place is kind of the team that's needed? Or are there any other enhancements that you see looking out? And then below the enhancements that you see looking out? And then below the executive level more across the structure, do you see any more restructuring that's needed? Or are you pretty much done there as well? Look, what I would say is we feel great about our leadership team and how we're structured. We've made a lot of change over the last 6 to 9 months both structurally and adding talent. We've been fortunate to add some great talent, great talent that has functional experience, great talent that has industry experience. In the last week, we've actually had a number of new senior leaders join the company including David Thompson who is leading our Asia organization and Phil Blake who is our new SVP of Global Sourcing. As we look at structure, as we look at the organization we look at both structural changes and how we're organized to support the business. And so we've really designed our organizational structure to better position us for the future to support our broader strategic objectives. We also look at making sure we've got the right specific functional capabilities and some of the changes we made adding Phil into his role give us more experience in terms of global sourcing expertise in footwear specifically. Likewise David Thompson does this add similar capabilities in Asia. So we feel very good about our structure and the folks that we have in the key roles and we feel we're very well positioned for the future. Great, thanks. That's helpful. And then maybe Jeff just more of a clarification. Sorry if I missed this. But on the gross margin performance in the quarter and more specifically the underlying product margin improvement, did you comment on how that trended versus your expectation? I think that the 100 basis point improvement that we saw on the associated with the merchandising and mix of our product line was in line with our expectations. I think the only difference that we would have from where we were in February is the currency impact in Q2 will be a little bit more because of the currency rates have trended down. We're pleased to see it kind of moving back the other way, but it's still below where we were in February. Got it. Okay. Thank you very much. And we have a follow-up from Sam Poser. Please go ahead. Yes. You talked about the change in the leadership structure as well as you mentioned how you're becoming more consumer and I guess more customer centric. Can you give us a little more color on sort of where you were, where you're going with that? And the people even on the manufacturing side, are they from that more customer centric focus, I guess is the question? Yes. Thanks, Sam. We've got great partners around the world in terms of the manufacturing side. We've got some of the best manufacturing partners that there are in the business. So we feel very good about how we're positioned from a relationship standpoint and the long standing relationships we have with our manufacturing partners. I think we're going to look at evolving some of our supply chain and adding with the addition of Phil, we feel that we just add some great experience in the future. The other benefit that you know that we've kind of focused on is we've evolved the org structure, so that you know we now have an SVP of Global Sourcing and SVP of Distribution and Logistics, who is Dennis Sheldon, who is an 8 year company veteran, but who has deep experience in the global operations kind of arena and their direct reports to me now. And I think that also is the right structure for our brand and our business at this point and will really enable us to be far more customer centric and evolve some of our get closer to our customer needs than we may have in the past. All right. And then just lastly, I mean, you've a lot of people there's been quite a few departures from people that have been there a long time. There's still a couple of other people left at very high levels that are back from the very beginning. Can you make any comments about how the company, the Board and everything else thinking about that in a general sense without naming any names? We feel great about the team we have and we're extremely appreciative of everyone's contributions. Thank you. Thank you. We have no further questions at this time. So just to close, we're very excited about the ongoing transformation that's going on at Crocs. And I just want to take a moment and thank the Crocs team worldwide for all their fantastic contributions as we continue to evolve our business, unlock the full potential of the Crocs brand and build one of the leading casual footwear companies in the industry. Thank you everyone. Thank you for joining us all. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.