Earnings Call: Q2 2014

Jul 22, 2014

Welcome to the Q2 2014 Crocs Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. I would like to remind everyone that this conference is being recorded. It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead. Thank you, and thank you all for joining us today for our Q2 2014 earnings conference call. Yesterday evening, we announced our Q2 2014 financial results. A copy of the press release can be found on our website at crocs.com. We'd like to remind everyone that some information provided in this call will be forward looking and accordingly are subject to Safe Harbor provisions of the federal securities law. These statements include, but are not limited to, statements regarding future revenue and earnings, 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 of the company's 2013 report on Form 10 ks filed on February 25, 2014 with the Securities and Exchange Commission. Accordingly, all actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs is not obligated to update these forward looking statements to reflect the impact of future events. The company may refer to certain non GAAP metrics on this call. Explanation of these metrics can be found on the earnings release filed late yesterday and on our investor website once again at crocs.com. Joining us on the call today are Andrew Reese, President and Jeff Lascher, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Andrew Reese. Thank you, William. Good morning, and thank you for joining us today for our Q2 2014 earnings call. This is my first opportunity to speak with investors on an earnings call as President of Crocs, and I look forward to an ongoing open dialogue with you all about our company's performance. I will start with some brief business and financial highlights from the quarter and then I would like to tell you about our plans to improve the business operations of the company. Revenue during the quarter increased by $13,000,000 or 3.6 percent to $377,000,000 compared to 2013. Income from operations for the quarter on a non GAAP basis, excluding certain non recurring and special items, was $58,700,000 compared to a like result of $58,100,000 in 2013. These revenue results were slightly ahead of our forecast we shared with you in May and the Crocs brand continues to achieve modest top line growth globally. We realize we are not delivering the appropriate level of profitability to our shareholders. We know that in order to unleash the potential of the brand and play the win going forward, we need purposeful for change in our strategy, organization and ultimately our approach to the market. Over the last several months, we've been engaged in a comprehensive strategic review of the business around the globe. Through this process, we identified 7 key long term structural improvements we expect will allow the company to achieve its potential. They are as follows: 1, driving cohesive brand positioning from region to region and year to year to avoid consumer confusion and to create more powerful consumer connectivity to the brand 2, developing powerful product stories supported by effective marketing 3, enhancing engagement with key wholesale accounts in select markets to drive profitable sales growth 4, gaining greater strategic and economic leverage from our direct to consumer assets, including owned retail stores and e commerce. 5, prioritizing investment in large scale geographies to focus our resources on our biggest opportunities 6, increasing working marketing spend by approximately 50% through investing savings realized from reducing marketing overhead. 7, streamlining the cost structure by reducing decentralization, duplication and complexity across regional offices and the corporate center. As well as addressing the long term strategy, we've identified 4 key actions to obtain short term wins. First, in the product arena, we intend to focus on our core molded footwear heritage as well as develop innovative key casual footwear platforms. To accomplish this, we are restructuring the product development function to emphasize product innovation and margins in molded footwear and key casual footwear lines. We also intend to streamline the product portfolio to give us the right products to drive growth and eliminate SKU proliferation, eliminate non core product development and we'll explore strategic alternatives for non core brands. 2nd, 2nd, from a geographic perspective, we intend to refine our business model globally, moving away from direct investments in retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and 3rd party agents. These realignments are already underway in Brazil, Taiwan and other markets around the globe. In addition, we intend to focus on our key markets globally. These are China, Korea, Japan, North America and Europe. These 5 markets represent 85% of our annual volume. We're working to improve our business in Japan through broadening our base of wholesale accounts, specifically entering the family footwear channel and working with our key partners there to develop strong product marketing messages in the market. 3rd, from an organizational perspective, we have reorganized key business functions to improve efficiency. Yesterday afternoon, we made an announcement that we'll eliminate 183 positions globally, reducing structural complexity, size and cost. Of these reductions, 70 current and planned positions are in Colorado, the remaining are in global functions. We made these personnel decisions to prioritize profitable growth, drive greater efficiency and manage overall costs in the future. We believe that this will be part of the first steps to unlock the power of the brand and unleash the entrepreneurial talent in the global organization. 4, we expect to close or convert 75 to 100 company owned retail locations around the world as part of this initiative. We have already closed or converted 18 stores during the quarter. We are refocusing our global company owned e commerce efforts to keep 11 of our current 21 sites that drive the vast majority of our profitable online sales. While discontinuing or consolidating the rest, This is part of an overall effort to focus our investments and energies where we can drive profitable growth. We have completed an analysis that identifies the primary drivers of store performance across regions. In the near term, we've identified 4 opportunities to turn around the operational performance of our retail stores: in stock and inventory management, promotional activity and marketing, organizational execution and the evolution of concepts and space allocation. There are some things that are working well that we're not changing. These include focusing on delivering products that meet our consumers' needs and continuing to bring the profound comfort of Crocs shoes to the world's feet. We're also continuing to build on our Find Your Fun brand positioning, which is authentic and aligned with our consumers' needs and values. It differentiates us in the marketplace and we'll continue to bring this alive in our culture too. We also announced that we will open a global commercial center in the Boston area in late 2014, housing key merchandising, marketing and retail functions. We chose the Boston location in order to attract senior footwear and retail talent to the organization. The Global Commercial Center in Boston will join the product creation and Global Shared Services Center in Niwa, Colorado, the cornerstone of the support of our global business. Amsterdam will be our European commercial center, Singapore will be our Asia commercial center and Tokyo will be our Japan commercial center. Each housing key international marketing, sales, retail operations and local finance functions for their region. Jeff will cover in detail the financial impact of our strategic initiatives. This clearer strategic focus will simplify our workflow, allowing us to develop and execute more powerful and cohesive global brand stories. By clearly defining our core products, it will allow us to focus our growth initiatives around products where we are competitively well for success. We are evolving to become a merchant driven organization, supported by central product development and marketing teams. We will deliver a more cohesive global footwear assortment activated by powerful marketing stories and increased working marketing spend. I will now turn the call over to Jeff. Thank you, Andrew. Good morning and again thank you for joining us today to review Q2 2014 financial results. In summary, revenue in the quarter was above our guidance, which includes strong performance from our Europe segment and continued strength in Asia and Pacific. Gross margin was down from prior year, but adjusted operating earnings were up slightly versus last year. I will go over the quarter in more detail, discuss the transition of earnings per share calculations and briefly discuss our projections for Q3 2014 revenue. 2nd quarter revenues increased $13,000,000 to $377,000,000 or 3.6% up compared with 2013. Despite continual unfavorable exchange rates with the United States dollar, year over year revenues grew in both the European and Asia Pacific regions. Specifically, the Europe region grew 21%, powered by a 32% increase in wholesale over last year. Retail sales grew 9% in the quarter as same store sales were up 1% in Europe. Asia Pacific revenue was up 9% for the quarter with retail up 9% and wholesale up 6.5%. Same store sales in Asia were negative 6% as we had difficult comps and weak demand in China and Korea. Our business in Japan was down 6% on a constant currency basis, primarily caused by weak at once demand in wholesale and lower sell through in the sporting goods channel. In Japan, we are refocusing the wholesale strategy towards the family footwear channel, which allows for greater diversity in our product lineup and reduces the reliance on clogs in that market. The decline of the Japanese yen adversely impacted year over year second quarter revenues by about $2,000,000 and operating income by approximately 500,000 dollars In addition, we continue to see challenges in our Americas wholesale channel, primarily caused by significant year over year erosion of our South America volume. In South America, we're taking action to change our business model. We've already transitioned or closed half of the retail stores and we plan to transition the remaining stores in Internet sites to partners. Same store sales in the Americas region were down 6%. For the quarter, we reduced our promotions in stores. Overall, while sales were down, margins improved in retail 90 basis points. We've been disappointed with our retail results in 2014 and the key priority for the rest of the year will be improving retail sales performance. We will transition to a more merchant driven retail approach focused on key styles with strong demand. We'll exit underperforming styles quickly and manage the retail stores for economic gain. In addition, we plan to close 25 to 30 stores in the Americas region. Outside of the Americas, we plan on closing or converting 50 to 70 stores. In some cases, these exits will be timed with contractual rights and will be relatively affordable exits. In other cases, we may take additional charges to accomplish our goal of streamlining our retail store portfolio around the globe. We expect store closings will reduce revenue by approximately $35,000,000 to $50,000,000 and reduce SG and A expense by approximately $17,000,000 to $25,000,000 with an insignificant impact on future operating income. We think we can close over 30 stores in the back half. A rough estimate of store closing costs in Q3 is about $3,000,000 to $6,000,000 as each store should cost about $100,000 to $200,000 to exit. This amount is in addition to the retail to the asset impairments already included in our results. With regard to products, the 2nd quarter revenue growth was driven by a global average selling price increase of 0.5%, primarily driven by new product introductions and strength in men's loafers and women's wedges. Union volume increased 3.6% to just under 17,000,000 pairs. During the 3 months ended June 30, clog silhouettes represented approximately 44% of sales. This is flat to 2013. Adjusted gross margins were down 90 basis points from 55.2 percent to 54.3% compared with the same period in 2013. We saw a currency related decline in gross margins in Japan and increased shipping costs globally, both of which were offset by a decrease in promotional and clearance activity. Importantly, gross margins in the Americas regions improved 90 basis points, reflecting less promotional activity in direct to consumer channels. We are emphasizing profits over revenues and will discontinue some of the excessive promotional activities that took place in 2013. While this and other product rationalization activities may hurt overall sales and retail comp sales, we remain laser focused on improving the profitability of the business as our top commercial priority. Selling, general and administrative expenses excluding certain items increased $3,000,000 or 2 percent to $146,000,000 Overall, this increase was more than explained by higher building and occupancy expenses related to additional retail stores, which totaled over $4,000,000 In addition, we increased our allowance for doubtful accounts by $3,000,000 as we are seeing slow payments from some of our Asia wholesale accounts. This was offset by lower variable compensation and other efficiencies. Excluding cash expense of $9,500,000 primarily related to restructuring and ERP implementation, non cash charges of $7,300,000 primarily related to store closures, costs and accelerated depreciation non GAAP operating income was 58 point $58,100,000 in 20.13 on a comparable basis. Our investor website provides a complete reconciliation of all special items. We experienced restructuring charges as a result of transition activities, additional operating expenses related to our ERP implementation and accelerated depreciation of assets for retail stores that are part of our closure plans. We expect future corrective actions to result in additional restructuring charges as we start executing on a profitable revenue growth strategy. Specifically, we expect a Q3 2014 restructuring charge of between $8,000,000 $10,000,000 related to the reduction in force in addition to the retail exit costs. In the Q2, we closed 18 stores around the globe and ended the quarter with 6 24 stores, up 50 from June 2013, but only up 5 compared to year end 2013. We anticipate a reduction in our total fleet by year end. For the quarter, we incurred income taxes of $18,700,000 This higher tax rate in the quarter is directly attributable to the charges I just highlighted. Excluding such items, the effective tax rate was 32% on a non GAAP basis in the 2nd quarter. As we transition the U. S. Business, the overall tax rate may increase on a percentage basis as certain expenses do not carry the same timing for tax purposes and may not carry the same value. In addition, until our business improves profitability in the U. S, we cannot book the benefit from losses for tax purposes. We expect our tax rate on adjusted EBIT to be approximately 25% to 28% for the full year. Earnings per common share in the quarter were $0.19 on a GAAP basis and $0.36 on a non GAAP fully diluted basis. On a year over year comparable basis, excluding the overall impact of the preferred share issuance in January, non GAAP EPS is $0.46 compared to $0.48 per share last year. It's important to understand the pieces that make up the GAAP EPS reconciliation, including the impact Blackstone preferred stock investment. Please refer to the non GAAP reconciliations included in our website for further details. GAAP net income for the quarter was $23,300,000 Dividends and dividend equivalents of $3,800,000 related to Series A preferred stock issued to Blackstone were deducted from this amount, leaving GAAP net income for common shareholders of $19,500,000 An additional $2,600,000 or 13.5 percent was deducted from the $19,500,000 as undistributed earnings related to the preferred stock. This is based on the 2 class method, leaving $16,900,000 for common shareholders for EPS. Weighted average shares used in the EPS calculation was 87,000,000 shares. Finally, we repurchased just over 2,300,000 shares during the quarter at an average price of $14.71 for an aggregate cost of approximately $34,000,000 excluding related commission charges, under our previously announced $350,000,000 repurchase plan. Year to date, we have repurchased approximately $50,000,000 worth of common stock. We will continue to be patient, methodical and opportunistic in the execution of this buyback plan. We ended the quarter with $409,000,000 of cash on the balance sheet. While our inventories and accounts receivable were significantly higher than 2013, timing of collections and our global focus on reducing current assets is forecasted to reduce these amounts by year end. Inventory in Q2 fact it was impacted by our higher volume of pre booked orders as in transitive inventory of fall seasonal orders was up $16,000,000 from last year, representing half of our year over year increase in inventory levels. We remain in the testing and development phase of our ERP system implementation. We went live with SAP in Australia on April 1st without significant issues. And on July 1st, we went live in Japan again without issues. A successful global ERP system implementation is a key operational priority. We expect the SAP system to leverage our operating cost and provide efficiencies in 2015. Entering into the Q3, our backlog was up approximately $45,000,000 to just over $206,000,000 While we are pleased by our increase globally in pre books, we are driving a shift from at once to pre books in Europe and Japan, such that reliance on pre books would result in overly optimistic growth expectations in wholesale. We expect GAAP revenue of approximately $300,000,000 to $305,000,000 in the Q3 of 2014, driven by strong contributions from Europe. It is important to remember that we will be impacted by a number of variables that will affect revenue for the balance of 2014 and full year 2015. These include: 1, store closures as mentioned earlier and a reduction to our pace of opening stores 2, lower at once orders as our prebooked percentage of wholesale increases and 3, continual impact of transitions in our geographic locations around the globe including South America. I will now hand this call back to Andrew for some closing comments before we take questions. Thank you, Jeff. This is an exciting time of transition for Crocs. Our near term focus is on controlling costs and reorganizing for better operating margins, which will prepare us for future profitable revenue growth from our core products and markets. We're confident we have the right plan for driving performance improvements with critical implementation steps already underway. Crocs is a powerful global lifestyle brand with strong potential. I'm excited to work with our team to realize that potential and create improved returns for our shareholders. Operator, would you now like to open the line for questions? Thank you. We will now begin the question and answer session. Our first question online comes from Mr. Scott Krasek from Buckingham Research. Please go ahead. Hi, thanks. Congratulations, Andrew. Welcome. Thank you, Scott. I guess, I think we understand you've been sort of doing the due diligence or focusing on Crocs for almost a year now. Can you maybe talk about what you've seen the opportunities or how they've changed in the 6 or 9 months that you've been looking at the Crocs opportunity? Thanks, Scott. Yes, I think it's been closer to 6 months. But yes, I have had the opportunity to be engaged with the company for some period of time. I've been formally on board as the President for only about 6 weeks. But I think in terms of what's changed, I probably focus on what's positive and what our opportunities are. I think if you start off with the positives, there's tremendous opportunity and upside here at Crocs. We're a powerful global brand. We have distribution across the globe. Our brand name is extremely well known. We have portions of our product line that are extremely profitable. We have a strategically valuable direct to consumer distribution assets in terms of retail and e commerce and we have good relationships with both distributors and wholesale partners. What's challenging is I think the company has spread themselves too thin in the past. They've spread themselves too thin in terms of product. They spread their marketing around the world. They spread their efforts in terms of distribution across a great number of countries. We go to market in 90 countries across the world. And so I think if you'll see in the comments we've made and the plan we put in place, we're aggregating for strength. We're focusing on our core products. We're focusing on our core markets. And we're going to drive the business in terms of growth through our wholesale partners. And fundamentally, we're cutting costs to enable us to flow more money to the bottom line. So I think you've got those positives and negatives and I think that's where we're focused. Okay. And thanks. And then just one follow-up. In terms of the 12% operating margin target, how do you view gross margin playing? And as you pointed out, you do have some very high margin businesses, but there's a lot of moving around the mix? There's a lot of moving around in gross margin and I think there's going to continue to be moving around in gross margin. On the positive side, we believe we can strengthen our core molded business, which is where we make very strong margins. On the negative side, like every other player that's manufacturing in China or Vietnam, we're experiencing cost increases from our factories. And then our distribution mix also affects that. So we see probably not significant increase or decrease, but we think margins can stay where they are. Okay. Thanks and good luck. Thanks, Scott. Thank you. Our next question online comes from Jim Duffy from Stifel. Please go ahead. Thank you. Hello, everyone. Good morning. Sounds like a thoughtful plan. I'm pleased to see you've begun to take action in advance of the appointment of a CEO. A few questions with respect to the restructuring. Jeff, can you perhaps talk about the margin and working capital influence from SKU rationalization? And then with respect to the 12% operating margin objective, what do you see as the timing for that? And then I have a follow-up question thereafter. Thanks, Jim. Good morning. We had a little bit hard time hearing you. So when you come back on the follow-up question, you could just speak up just a little bit, it might help us out. But I'm trying to answer your question about working capital and the margin implications of our product rationalization. We believe that we think we can get our working capital down for year end and going forward in the future with our inventory and our working capital needs of our retail stores relaxing a bit. We think we can get some savings from that inventory line on that front as well. As Andrew just mentioned on the margins, we anticipate some pluses and minuses in the margin category. As Andrew said, we have some favorable mix implications from focusing on our core products clogs, flips, flats, sandals, men's loafers and women's wedges going forward. At the same time, we have some cost pressure in general from our factories and other supply chain issues as everyone else does. So we think overall, our margin is not really the story that's going to drive the operating margin improvements. We think it will be on the leverage of our SG and A going forward, which will drive us to that 12% operating margin as a target for us. As far as the dates in which we think we can get to that 12% operating margin, it's not going to be in 2015, it will be out in future years. But as we progress toward that target, we'll give you a little bit more sense of when that we think when we think that can be achieved. Okay. Thanks. And then follow-up on the SG and A opportunity. What's the evidence that marketing works for casual footwear of this sort? I guess from where I sit, I'm questioning why spend another 2 points of sales, 50% increase in the marketing budget. Thus far, I haven't really seen good evidence that your marketing efforts have proven to demonstrate good returns. Yes, good question, Jim. So to start with, we are not planning to spend 2 points of sales more on marketing. We're going to spend a small amount incrementally on marketing. The vast majority of the increase in working spend will come from reducing the infrastructure and the infrastructure is both people, agencies and a variety of expenditures within the marketing budget that essentially weren't reaching the consumer and weren't working. So the vast majority of the increase comes from internal efficiencies. And then a good question is, what's the evidence? We believe that there is strong evidence. If we look at our competitive set, we believe a number of those have had tremendous success with launching new product lines and enrolling the consumer in their brand story and some of the key features and benefits of their products. Our intent is that the marketing will be extremely product focused. It will be around our products, our technologies and the benefits that we bring to the consumer and we plan to spend that money as we've talked about in an aggregated way in the key markets. Thanks for that and good luck. Thank you. Our next question online comes from Erinn Murphy from Piper Jaffray. Please go ahead. Great. Thanks. Good morning and congratulations on much improved execution in the quarter. And Andrew welcome. So I guess first Andrew for you, I would just love a little bit more detail on the store closures. What went into your selection process for the stores that you're marking to close? And then just any further detail on the buckets from a regional perspective of the stores you're going to initially be closing? And then 12 months from now, how should we think about that profitability of the remaining fleet? Okay, great. So three questions. I'll take the first question around how do we think about it, then I'll let Jeff answer where those closures are occurring on a geographic basis. And then we'll tackle the profitability question. There's really two fundamental things that went into selecting the stores was their performance. So their sales, margin and operating contribution, obviously, you know we've opened a lot of stores recently, so some of that was tricky relative to new stores, but we assessed their current performance and their likely future performance and where they're going to make a contribution. The second aspect was strategic. So were they in markets where we believed we wanted the points of distribution, the brand presence? Were they in places that we thought we had chances of improving our performance in the future as we flowed new products, new product stories and improved marketing. So those were the 2 primary aspects. I'd say to be frank, the profitability and the operating performance was the major driver. We recognize that the company rushed to open a significant number of stores. And when you open stores, you don't always make all the right real estate decisions and we needed to address some decisions quickly. As far as the regional opportunity, Aaron, about 25 to 30 of the stores are in the United States. Those are mostly full price stores located out of the Southeast, although there's a handful that are in the Southeast. But for the most part, those are stores outside of the Southeast of the United States, 25 to 30. The remaining 50 to 70 are out in the rest of the world. About half of those are in Asia as we refine our fleet and understand what works well. Frankly those are the ones that are easier to get out of. We have short term leases. We have less investments. We have opportunities to exit those at certain points in time during the contract where they have contractual rights to exit with relatively little cost. The other half are in Europe. And in general, we're thinking that $100,000 to $200,000 will be an average as far as what we expect to pay to get out of a store. As you know, some of those will be low cost or little cost to us as an organization to exit. Some of those will cost more as we try to get out of a particular contractual obligation. The last part of your question, Aaron, was what will the profitability of the fleet look like when we're finished? I think the best way to say it is, it will be solidly profitable. The hurdle rate that we've established to essentially operate a store is a healthy hurdle rate, let's put it that way. And we don't want to be operating a store that's marginally contributing. Great. That's very helpful. And just a follow-up on a prior question on the SKU rationalization initiative. Just the 30% to 40% seems fairly significant. So I'm just curious if there are specific product lines that you're planning to discontinue completely or is it just more of a broad brush pairing back across the portfolio? And then within that fee rationalization, how are you thinking about the clog versus non clog mix? Perfect. There are 2 pieces to the rationalization. So there is there was a mechanism within the company, which they never fully discontinued all products and some of them kept coming back on a regional basis. So the rationalization addresses all SKUs that we think are end of life and we don't wish to manufacture and distribute anymore. It addresses product lines such as our Elite product line that we don't wish to manufacture anymore. As we looked at the core of the brand, we think the brand plays best in casual situations and there's been an effort to push the brand to more dressier formal situations with leather boots, with some heeled product, etcetera. So it's a combination of trimming within the existing product line and exiting product lines where we don't think we have a right to play. That's helpful. And then just a last question for you, and I'll let someone else ask the question. On just the structural change you're making both in Europe and Asia on kind of pushing the wholesale model to be more pre booked versus at once, does that actually have an impact on the gross margin profile of your wholesale businesses in those regions? Thanks. Not really. I think it's generally a win win for the customer. I think what we are transitioning win win for the customer and for us. What we're transitioning away from is a historic business model, which had been more orientated around us buying the inventory and then selling it in season to our wholesale customers. And over time, we transitioned part of that buy to a pre book and still left part of it as an at once. I think we're just being much more concerted effort working with our key wholesale partners to have them place their orders upfront and flow the inventory as they desire. So it doesn't require additional discounts or a margin hit. It really is just a different way of working. So that in itself should not be affecting the margin. Thank you. Our next question online comes from Tapash Ary from Goldman Sachs. Please go ahead. Hey, guys. Good morning. I had a question on some of the targets you provided in the press release this morning. So it looks like you want to get returned to a 12% EBIT margin. It looks like you're coming off of a 7% base off of a trailing 12 month period. So if I'm doing the math correctly, the store closures are going to get you about 30 basis points. Expense reductions by the end of 2015 gets you another 80 basis points, but that leaves close to 400 basis points unaccounted for. And in response to one of the earlier questions, it sounds like gross margins are going to be pretty constant. So can you help us understand what some of the bigger sources of SG and A leverage will be, if I'm getting that math correctly as you think out over the next couple of years? Yes. I'm not really sure that I follow your math completely because what we said was we expect our retail stores to generate about $35,000,000 to $50,000,000 of revenue. We're going to take that out of the model of the business that we have today. Our operating margin dollars will not change. So our operating percentage will increase substantially with a $50,000,000 reduction in revenue without any change to our operating income. In addition, we think we can save about $10,000,000 on an annual run rate associated with the opportunities that we listed out today and the actions that we've already taken, which is really important for everyone to know we've already taken a lot of these initiatives to save the $10,000,000 So that will be an accretive one full point of almost one full point of margin enhancement. So between those 2, we'll get a good running start. And the second piece is to leverage our SG and A with growth in our revenue over time as we grow in our core categories of clogs, flips, flats, sandals, men's loafers, women's wedges and other products that we are going to put all of our attention on and we're going to stop being distracted by other niche products. Okay. I'll take the details of that question offline with you, Jeff. The other question was in the press release you talk about 2015 revenues being impacted by store closures and then suggesting that 2016 will be a year of resumed revenue growth, it sounds like for the overall company. So are you implying that 2015 will be a year of absolute revenue declines for Crocs in aggregate? And if that's the case, I would have expected it doesn't sound like you need to get much wholesale growth to withstand the retail closure. So just trying to understand if there's something unique going on to wholesale that would suggest the revenue decline in that business as well next year? Good question, Toshiya. As you call out, it's clearly a revenue headwind by closing the stores. It's the right thing to do from a profitability perspective and the structure of the business absolutely, but it creates a revenue headwind. And in terms of where we net out overall, frankly, I think it's too early to say. Obviously, we're going to be looking for wholesale growth. We haven't started to show that product and book those orders for spring. So we're a little ahead of ourselves there. But you're right, a relatively modest growth in our wholesale business will counteract that. It's too early to say whether we'll be able to achieve that yet. Okay. But there's nothing unique going on as far as your initiatives go that would suggest a strategic reduction in wholesale business next year, is there? No. Okay. One more if I can sneak it in. It is just I know there's a lot of focus on the long term here, but if you can just provide some context into the spring season in the U. S. How that played out? I know that your Americas region is influenced by what's going on in South America, but if you can provide some additional context into the U. S, that would be helpful. Yes. So there's obviously 2 pieces to our U. S. Business. There's obviously our wholesale business and our retail business. As you can see from our comps, our retail business was a little stronger earlier in the season and softened towards the back end of the season. And as we talk to our wholesale partners, I think we've seen that trend across the board that their business was a little stronger around Easter, but has softened since. And then our business at wholesale, I think was not as strong as we would have liked it to have been. And we have some key initiatives in place to strengthen it and build relationships with some of those key partners, but was acceptable. Okay. Thank you very much. Good luck. Thank you. Our next question online comes from Harinna Friedman from Wedbush Securities. Please go ahead. Hi there. Good morning. I just wanted to reconcile the comments that you just made about SKU rationalization and the wholesale business being relatively stable. Is there with 30% less SKUs, is there are you offsetting that with expectations of deeper buys or any pricing changes? So good question. And the answer is essentially yes to a certain extent. The SKUs that we're rationalizing, we're rationalizing because they were low volume. I mean the aggregate volume of the SKUs that were taken out is 30% of the SKUs, but is a very small part of our aggregate sales. And the rationalization brings us tremendous focus because we no longer have resources worrying about product development, design enhancements and marketing. We can focus all those resources back on the core products. And on the other flip side of the equation, yes, absolutely. Our intent is for our core stories to be bigger and we'll make our core stories bigger by partnering more closely with some of our key wholesale accounts and having derivatives or portions of that story that might be exclusive to them and also more colors and more marketing behind them so that we get greater sell through. Okay. Thank you. I have two follow ups. What size ultimately do you think the retail store fleet should be? Can we expect further closures beyond the 75 to 100 units today? I'll let Jeff take that. At this point, the 75 to 100 is all we're prepared to speak to. We will be slowing our pace of new additions, but we still are going to be looking at opportunities around the globe where our model and our economic unit power really pays off. So in markets around the globe, we still have some opportunities for some greenfield locations. But for the most part, we'll be slowing our pace of retail store growth and being more methodical and analytical about our approach to retail. As far as the additional store closures beyond the 75 to 100, we have targeted those at this point in time. Things might change, but for the most part that's what we're thinking about right now. Okay. And lastly, just my last one, if you can just give us the long term targets for where you see online, where you see retail, where you wholesale and then also domestic versus international, just looking towards that 2016 long term plan? Thank you. Yes. I think, Karina, I think, in general, the growth of the organization is going to come from the wholesale category. I think we'll still continue to see growth coming in the Asia Pacific category segment, I should say, and growing that China marketplace and Korea marketplace. As Andrew mentioned in his prepared remarks, we're going to focus our attention on the geographic locations that make sense to us, which is China, Korea, Japan, USA and Europe. We're going to focus our attention on the products that really make sense to us, which is clogs, flips, flat sandals. We're going to focus our attention on the direct to consumer economic value add, where it really makes rational sense for us. And we're going to organize our organization around a leaner business model that drives SG and A leverage. So with those four things to rationalize the business, then we're going to go forward and grow from our core base geographically, product wise and segment wise. Thank you. Our next question online comes from Sam Poser from Sternagie. Please go ahead. Good morning, Andrew. Welcome to the party. A couple of things. Number 1, in what how many other geographies other than Brazil and Taiwan are do you plan to transfer over to a 3rd party? And how much revenue associate how will that revenue how much revenue is associated with those changes? Thank you, Sam. We are not prepared to disclose that at this time. We obviously there are 2 to 3 additional countries where we are looking to make a transition. And I would say the revenue is not significant. But due to the ongoing discussions with various parties in those countries, you can't disclose at the time. We disclosed Brazil and Taiwan because we made substantial progress on both those entities. And in Brazil and so let's say in Brazil and Taiwan, I mean how much revenue you're going to give up? And I mean how does that work? I mean I would assume it's going to help your operating margins because you're going to get rid of the expenses associated with that, but you're also going to give up revenue there. I'm just trying to Yes. Sam, that's exactly right. So if you take a story like Brazil, where we had a $25,000,000 to $30,000,000 business and we are transitioning the retail stores to partner locations, We were going to transfer some other business units to partner locations utilizing agents and distributors in the local marketplace that have a better knowledge of the marketplace. Our revenue will decline. Our operating income should be about the same when we model this out, because we're going to have less expenses that we are going to be responsible for in Brazil over time. We've already taken those actions. So we've already as part of the restructuring charge in Q2, we've already restructured the Brazil marketplace. So we are getting closer to our optimal distribution mix in Brazil. We still have some ways to go in other parts of the world. But basically, the operating income stays about the same revenue drops. So that again drives us to that 12% operating margin over time. Okay. And then I mean I hate to beat this dead horse, but I mean in 2015, I mean how should we think I mean about revenue growth next year and sort of SG and A dollars in a pure sense from a growth perspective? I mean, how should we think about that? I think in 2015, like we mentioned, there's going to be some puts and takes, right? So first of you have the $50,000,000 of retail revenue up to $50,000,000 I should say, of retail revenue that may come out of the model over time. We are going to focus our attention on wholesale and e commerce growth. But our revenue in general is going to be under pressure because of that modification of go to market on the retail front. On the operating margin basis, we expect to see some improvement in 2015. We're not really willing to give some guidance around 2015, just some kind of high level views. And we have to remember that we're early in the stage as far as this. And as we get closer to 2015, we'll set some better targets for you. Okay. And then lastly, I mean, the stock is going up nicely today. You bought back 2,300,000 shares in the quarter. I was wondering why didn't you step up and buy back more given that the higher the price the higher the stock goes, the higher your share count remains. Can you just give some more detail on how your what the thought process was during the quarter and sort of more detail on what opportunistic means and how you're going to approach it? Originally, I thought you planned to get the share count to get this almost completed by September of this year, but it's going much more slowly. So I mean, how long do you think this is going to take to complete the repurchase and so on and so forth? Well, I think first a couple of facts. So we did buyback in the quarter stock price of $14.71 2,300,000 shares. So we made a lot of progress against that course of action on a regular basis. I think we are going through this process and we still have a target $350,000,000 We're just going to do it very methodically over time. All right. Thank you and good luck. Thank you very much, Sam. Our next question online comes from Steve Marotta from C. L. King and Associates. Please go ahead. Good morning, everybody. Thanks for taking my question. Two quick questions. 1, when do you actually arrive at the 12% operating margin? What do you assume as from a product mix standpoint for Classic Log and Non Clock roughly? That's a hard question to answer, Steve. I think we the strategic decision that we've made is to shift the focus of the company back to both pieces of the business, right? I think if we look at what's happened over the last couple of years, there's been an outsized focus on non clog business. So we made this strategic decision to say to focus on the molded business and it's really molded versus clog business as well as the casual silhouettes where we've been successful. So I think what that will do over time will mean that we can grow in both arenas. I would imagine over a long period of time that the non molded business will probably grow still grow slightly faster than the molded business, but we're going to get growth back into the molded business. So I think you have a very gradual change in mix over a number of years. That's very helpful. Thank you. And lastly, what is your assumed comp geographically for the Q3 as well as consolidated? At this time, we're anticipating conservative same store sales in our model. We'd rather not disclose a specific number, but we are acknowledging that the realities in the marketplace as we look around our same store sales performance in Q2 and modeling those into our Q3 projections. Terrific. Thank you. Thanks, Steve. Our next question comes from Mitch Kummetz from Robert Baird. Please go ahead. Yes, thanks. I've got a few questions, I guess. On the store count, so you're closing stores and you're slowing the pace of stores. So is there a kind of a year end store count that you're looking for? We said in the script, Mitch, that we thought that we were going to be able to close around 30. We'll have a nominal amount of store openings. So the net will be kind of in that 15 to 30 range down. Okay. And then you also mentioned in the press release that you're looking to explore strategic alternatives for non core brands. Is there any way you can give us a sense to what kind of what the volume of non core brands is today? And the 12% operating margin assumption is that is the elimination of those brands kind of baked into that 12%? Yes, it is on the second half of that question. And on the revenue front, it's not really that material. It's less than 1% or 2% of total revenue. Thank you. Our last question online comes from Mr. Jim Chartier from Monness, Crespi and Hardt. Please go ahead. My questions were answered. Thank you.