Earnings Call: Q2 2013

Jul 24, 2013

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. Kent, please go ahead. Thank you, Melanie, and thank you all for joining us for our Q2 2013 earnings conference call. Participants from the company include John McCarville, President and Chief Executive Officer and Jeff Lascher, Senior Vice President and Chief Financial Officer. Earlier this afternoon, we announced our Q2 2013 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 security 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 of the company's 2012 report on Form 10 ks filed on February 26, 2013 with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for additional discussion of these risk factors. Crocs intends that all of its forward looking statements in this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934. 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, including adjusted net income. Explanation of these metrics can be found in the earnings release filed earlier today. I will now turn the call over to John McPartell. Thanks Will. Thank you for joining us on our Q2 earnings call. With me today on the call is Jeff Lascher, Crocs' Chief Financial Officer. I'll begin the call today with commentary on the Q2 followed by Jeff, who will review the financial results for the Q2 and walk through our Q3 guidance. I will then add some additional insight to our ongoing business before we take questions. Turning to the quarter. The 2nd quarter turned out to be more challenging than we had anticipated during our last earnings call. While we are very pleased with the performance of our Asia Pacific and European segments, we were impacted by lingering challenges in Japan and the overall performance of our Americas business. Revenue for the Q2 was $364,000,000 or 12.5% growth versus the Q2 of 2012 on a constant currency basis. Our first half revenue growth for 2013 is in line with our plans and prior communications. Revenue for the quarter was near the middle of our revenue guidance and is the highest quarter in the history of the company. I would like to share with you our perspective on the quarter and some of the decisions that we made and the thinking behind those decisions. In our Q2 guidance, we projected revenue at $360,000,000 to $370,000,000 and EPS at $0.60 to $0.63 per share. While revenue in the Americas and Japan were challenged by lower than anticipated at once business from our key wholesale partners, our direct to consumer business generally delivered strong growth through expansion and comp performance in the quarter. It is important to understand the impact of the one time charges and external factors in the quarter versus our prior guidance. Let me list 3 key items for you. First, the Brazil statutory tax audit was a $0.07 EPS charge. The additional FX expense non related to the yen was also about a $0.01 EPS charge. And the unfavorable tax rate, which Jeff will go through later in the presentation was a $0.02 EPS charge. Without these unanticipated factors, EPS from ongoing operations was 50% $0.50 per share. Now let's walk briefly through the regions and channels to better understand what transpired as each market has different nuances and an impact to the business. Starting in the Americas, weather had a significant impact on the cadence of buying activity in the quarter and we experienced very different weather pattern from Q2 of 2012. Sell through of products early in the quarter was slower than anticipated, but accelerated quickly in the latter half of May and throughout June. Due to the late springsummer buying season, many of our wholesale partners did not place additional at once order for delivery in the second and early third quarter. You can also see this impact in our backlog at the end of the second quarter. Our retail business followed a similar pattern throughout the quarter. Flow sales early in the quarter due to the weather was reversed by a very strong sell through in June. Retail comps for the quarter were a positive 1%. We made a few key decisions later in the quarter to sell some products in the wholesale and retail channels with a higher level of promotional discount than we would have normally. Inventory that had been purchased to support a higher level of AtOne's business in wholesale in the quarter was sold at a discount later in the quarter through both our wholesale and direct to consumer channels in the Americas and Europe. It was our decision to reduce inventory and not carry over products to the back half of twenty thirteen and the spring summer of twenty fourteen. Our balance sheet reflects stronger liquidity, lower inventory levels, which resulted in a very healthy inventory turns of 3.8 on an annualized basis. Our key new product introductions in springsummer 2013 have done very well. While satisfying our core Crocs loyalists, our new products are bringing new consumers to the brand. Innovative, fun, comfortable new models are connecting with consumers. Sell through at our major wholesale partners have been strong through the quarter, resulting in lower inventory levels at many major partners. At one point in the quarter, 23 of the top 100 footwear styles sold on Amazon were Crocs. In Europe, our business continues to grow and strengthen in all three channels in a generally difficult economic and retail environment. Our wholesale business was up 2%, retail increased 96%, driven by new store openings and a positive 1% retail comp and e commerce was up 5% all on a constant currency basis. We are transforming our European business from being primarily wholesale and clog oriented to better balance of wholesale and direct to consumer business offering wider portfolio of lifestyle products. New products now make up 19% of revenue in Europe, up significantly from prior years and quarters. New retail stores and a larger retail presence is achieving our long term objective of connecting European consumers to the broad lifestyle portfolio of Crocs products. In Japan, the consumer market remains challenged at a macro level and we see the impact on our business too. However, the brand remains strong in the Japanese market, new product introductions have done extremely well. Notwithstanding the macro market pressures, our distribution partners remain bullish on the brand and have continued to build new partner stores in various parts of the country. Our wholesale business was down 3%, but retail was up 14% and e commerce up 1% on a constant currency basis. Retail growth was driven primarily by new store openings and comps were a negative 19% for the quarter. Lastly, our Asia Pacific region continues to show strong growth. The strength of our casual lifestyle footwear brand can clearly be seen in this market. Consumers look for us to deliver fun, colorful, innovative products and our springsummer line for 2013 has done extremely well. New products account for over 50% of the revenue in the quarter. Wholesale growth is up 22%, retail up 15% on the back of a 6% improvement in comp store sales and e commerce is up 50%. The e commerce business in the region is small, but offers significant long term potential growth as it includes China, Korea and Taiwan all markets where e commerce is emerging and growing at a rapid rate. With that, I'll now turn the call over to Jeff. Thank you, John. Hello, everyone, and thanks again for joining us. What I'd like to do first is to go through the factors that impacted our Q2 results compared to our prior guidance. I'll then provide additional detail on the Q2 and our guidance for Q3. In the Q2, we had various challenges that impacted our results that we did not expect when we had Q1 call guidance. These include non recurring expenses and impact of lower margins from 3 identified areas and a higher than anticipated tax rate. Separately and included in guidance, we continue to be impacted by unfavorable foreign exchange rate, macroeconomic forces most notably in Japan and our ongoing expenses associated with SAP in marketing investment. As you saw in our release earlier this afternoon, we recorded a non recurring charge of $6,100,000 related to a resolution of a statutory tax audit in Brazil during the Q2. In addition, our actual Q2 tax rate was 29% versus guidance of 21%. The Brazil expense was non deductible and our operating profit shift did not provide any reduction in global expense. Combined, these increased the rate as a percent of pre tax profit. Now expect our full year effective tax rate to be 22% to 25% after adjustments for the above mentioned Brazil issue. This is higher than previous levels as our operating income in Japan has declined and our mix of international profitability has shifted from low effective tax rate jurisdictions. Together, these two items reduced EPS by $0.09 per share in the quarter. The remainder of the EPS shortfall versus our guidance for the Q2 was primarily the result of lower gross margins as we ended the quarter with gross margins of 55.2 percent compared to 59.3%. From a high level, margins were down due to several factors with mostly balanced weighting. One, we were more promotional in the Americas and in Europe in response to softer sales trends primarily due to challenging weather. 2, revenue in our high margin Japan business was lower than expected, notably in the retail channel, which has high profit margins. 3, we saw U. S. Dollar strength in some additional foreign markets outside of Japan impacting our margins in the Q2. Next, on a year over year basis, we were impacted by planned additional marketing expenses, SAP investments, unfavorable Japan foreign exchange rates and other macro forces. Specifically, with the yen declining 18% versus the U. S. Dollar in the quarter, year over year reported revenue was reduced by 2%. This had an approximately 150 basis point impact on our overall gross margins and similar impact on our operating margins as a company. Overall, with the lower translation of our Japan yen denominated operating income and ongoing lower purchasing power of the yen relative to the dollar, we saw a year over year decline in consolidated net income of $5,000,000 or 0 point 0 $6 $6 per share. In addition, the macro forces impacted at once orders and same store sales, which declined 19.5% for the quarter. Also on a year over year basis, our global SG and A expenses increased $26,000,000 or 21 percent to $150,000,000 This consisted of $72,000,000 in indirect expenses inclusive of increased year over year marketing expense of $3,000,000 $2,000,000 for our SAP project. Direct SG and A expenses totaled $71,000,000 Our retail channel SG and A was up $12,000,000 as our store count increased from 484 locations in 2012 to 575 locations in 2013. Excluding those items and the non recurring Brazil expense, total SG and A expense was up approximately 3% for the quarter. Other notable items for the quarter. Revenue increased $33,000,000 up 12.5 percent on a constant currency basis from Q2 2012, driven by increased sales volume as units increased 16 percent to $16,300,000 This was partially offset by a 4% or 0 point 8 $1 decline in ASP, which was 21.65 quarter of this year. Clogs represented 44 percent of unit sales in the quarter, down from 46% last year, while non clog wedges, loafers and women's casual shoes increased as a percent of overall unit sales. Overall, our retail revenue increased 18% over 2012 levels as we added 91 net new locations since the end of last year's Q2. Global retail same store sales increased 1% over last year with Americas up 2%, Asia Pacific up 8%, Europe was up 1% and Japan was down 19.5%. Our global outlet stores had a same store sales increase of 16%. In summary, for the Q2, while we had various challenges that impacted our results that we did not expect when we had the Q1 call, the fundamentals of the business remain as strong as the balance of revenue around the globe and strengthening retail performance outside of Japan solidify our long term sustainable growth expectations for revenue. Our healthy balance sheet continues to be a source of notable strength. We had global cash reserves of $289,000,000 with limited debt and believe that we will continue to grow cash balances from operations. In addition, we lowered our inventory to $161,000,000 This lower inventory positions us to run our supply chain more efficiently in coming quarters. Moving on to Q3 guidance. In the Q3, we expect revenue of $300,000,000 to 3.10 1,000,000 dollars and EPS of $0.20 to $0.23 per share. This includes slightly positive comp growth in the quarter. We expect gross margins in Q3 to be consistent with the prior year as discounting in Q2 was primarily the result of late spring and weather conditions. We plan to open approximately 25 more retail stores globally by the end of the quarter and end the year with 600 company owned locations. Backlog at the end of 2nd quarter is down 7% from June 30, 2012. Total backlog as of June 30 is $161,000,000 down $11,600,000 from 2012. However, on a constant currency basis, backlog is down approximately 3%. On the 3rd quarter outlook our 3rd quarter outlook takes into consideration the late spring in North America currency headwinds from the yen and European macroeconomic issues. In the Q3, we expect revenue of $300,000,000 to $310,000,000 and EPS of $0.20 to $0.23 per share. This includes an assumption of 2% comp growth in the 3rd quarter. Currency expectations are now 100 for the end and 130 for the euro. Thanks. I will now turn the call over to John for some closing comments before taking questions. Thanks, Jeff. I would like to summarize for you again our overall view of the First, Crocs is a global brand with 66% of our revenue outside of the United States. This continues to provide us with a diverse revenue base and long term growth potential. From a Crocs perspective, what we see going forward is an improving Europe, a stabilizing Japan, a growing and strong Asia and an opportunity for us to improve our going forward business in the Americas. Secondly, while gross margins are down in the Q2 from historic levels, just due to management decisions taken to be more promotional and aggressive in reducing inventory in selective markets. And as Jeff said earlier in our guidance, our gross margins for the Q3 of 2013 will be consistent with Q3 of 2012. 3rd, management remains committed to aggressively managing SG and A costs as it has in the past, both direct and indirect. And 4th, we expect to grow in the continued second half of twenty thirteen, but at a slightly lower level due to the at once levels of business in the Americas and Europe wholesale in the Q3. With that, we'd like to turn the call back over to the operator and we'll take our first call now. Thank We will go first to Erinn Murphy with Piper Jaffray. Great. Thank you and good afternoon. I appreciate the context around the Q2 and just some of the many moving parts. John, I was hoping you could spend just a little bit more time on really the pattern of sales from the beginning of the quarter to the end of the quarter? You did kind of indicate the improvement, but what would be interesting is if you could speak a little bit more about any regional callouts, if there was more improvement maybe in Europe, your kind of closing remarks talked about the Europe your perspective on Europe starting to get a little bit better. Just kind of helping us understand really the cadence as we progress throughout that quarter? When we look at both the Americas and the European cadence throughout the quarter, it's very similar. Weather patterns were very similar where we had cold March April that really led to slower consumption both at the wholesale level and at our own retail level that continued on into the first half really of May. So looking at less than the historic sell through with our wholesale accounts and within our own retail operations. It was really in the late part of May after the Memorial Day weekend that we made the decision to move to stores and in the United States. In both markets, we saw double digit comp performance during the month of June, whether that's specifically due to the promotional nature of the business or whether it was that the sun came out starting Memorial Day weekend and started to improve in many parts of the U. S, it's hard for us to discern what portion of the growth or comp performance comes from those two elements. But promotional activity specifically geared towards the U. S. And the European markets. We don't see promotional activity, very little promotional activity throughout Japan and our Asian markets, hence stronger margins and significant comp performance. As I said, Asia up 6% on the back of over 50% new product introduction sales in our retail stores. That's really helpful, John. I guess just maybe thinking about Japan as well then throughout the quarter. I mean, the comp fairly weak on top of a weak comp last year. I think Golden Week probably a little bit better for a lot of retailers, but clearly the market is still not very strong overall right now. Could you just talk a little bit about kind of how you feel like you're performing in the context of that market? And then secondly, just as you think about the evolution in Japan being much more of your established or much more of an established market, kind of the channel or if there is any channel conflict between both retail and wholesale as we think about that as we head into the back half of the year? So I think for the Japanese market, difficulty for them also kind of exists through that early golden week period in early May where weather was not good again there. Shopping, consumer behavior was restrained. Clearly, what we saw also through the last part of May and then in through June is on a much more even comp store sales basis. When we look at the impact of the yen on the business and Jeff can kind of share his views of the impact that that has and he mentioned some of this in his commentary earlier, it on a yen to yen basis is fairly flat quarter over quarter. And so we still see good demand for the products traffic has remained strong throughout the Q2, but a better conversion in the June timeframe. We think based on what we've seen through the June period and into July, it gives us confidence both in the sell through with our key wholesale accounts there as well as what we're seeing within our own retail accounts. It appears that that market is solidifying. It's getting to a point where we think we have some confidence in the back half of the year that that's going to continue to trend in a more positive way, more positive being that it's not going to negative comp as it has. If you do remember last year in the 3rd Q4 in Japan, we did start to see a slowdown from our standpoint in the consumer behavior to buy products. I say all that, Aaron, and I also want to just remind you that that business even at its impacted level still remains one of the most profitable parts of Crocs today even with a yen depreciation that we've seen and even with a little bit slower retail market. Okay. And then just last question on the product line perspective, you're obviously in a much leaner position from an inventory perspective getting into the back to school season, but there's also a lot of new innovation hitting this fall and it's actually been hitting over the last couple of weeks. You've got the Busy Day collection, the retro sneaker. Can you just give us an assessment on how any kind of early reads on how these are tracking, how they were received in the wholesale community as well as just in obviously you've got them in your retail stores are coming there now. So just kind of help us frame up some of the product innovation that you guys are excited for the back to school season? In the first half of the year, I mean, I think AV, the retro, Karachi came a little bit later in the quarter, and molded boat all did extremely well. And hopefully, what we want is our wholesale partners who have done quite well with all those products have sold through. Many of our top U. S. Wholesale partners are less than 12 weeks' worth of inventory. Some of our key partners are at 4, 5 weeks' worth of inventory at this point in time. They've sold through. They did not reorder. We're hoping that that's going to confidence in the sales of our springsummer products will carry over. It's too early for us to give you a read at this point in time as products are just flowing. Most of our products are just flowing into wholesale starting now in early July. So it's a little bit early for us to give you a read. New products that have hit our retail stores continuing to do well. But we're early in the Q3 to get that kind of read. We don't have a lot of product that goes to retail anyway wholesale for back to school. That's not a strong period of time for us. And so it's a smaller part of our overall revenue plan. We'll go next to Jim Duffy with Stifel. Thanks. Hello. Question on the backlog. Can you speak to the composition of the backlog, maybe the split between quarters for expected shipments and also the split between seasons? To what expect I'm sorry, to what extent does the year to year decline reflect perhaps cautious orders for next spring season? I think first, it's important to note that our fall holiday pre book is not down on a year over year basis. It's basically flat on a year over year basis. What we're really seeing in the backlog going into Q3 is lower springsummer 2013 backlog going into the second half of the year. And that's really been the decrease as we saw weather related patterns that didn't materialize into at once demand during the summer. I think Jim the thing that we would normally see through the years of experience here is that we would see more sales of our products in the March, April, May timeframe. We would see more wholesale customers placing orders in May June for delivery, June, July early August. And that impacted as we talked about in the call today, our at once business, especially in United States and to a lesser extent from a dollar impact standpoint, Europe. But then that carries over into our backlog for the Q3 revenue, which is why we've taken guidance down. We think the impact year over year looks to be about $10,000,000 of Q2 orders that would be shippable normally to wholesale accounts in the first half of the third quarter, which didn't materialize. So Jeff's backlog remains fairly consistent year over year for fallwinter products. We have not started to book any springsummer 2014 products yet. Booking deadlines come later in Q3. And Jeff can give you the split between Q3 and Q4 backlog of the total of the $171,000,000 Yes. 1 $14,000,000 is our Q3 and the balance would be in subsequent quarters. $115,000,000 So John, a year ago, had you started to book orders for spring 2013? Is there some of that that's in the compare? No. Normally our booking date we don't book anything for a sixfifteen date for delivery in 2014. So our first real booking dates are 815 and 915 in the quarter. So no, we don't we're comparing an apples to apples situation. We don't have springsummer products for either year end in June 30 backlog. Got you. Okay. And then based on conversations with retailers, do you have a sense that they'll be conservative in booking for spring next year and perhaps given the challenging spring this year want to take receipts later? Right for us to tell. I think what the wholesale thinking will be, Jim early on in 2013 what the number of the major wholesale partners that we have and especially in the mid tier family channel, we're actually looking at because of the lack of a fall winter season for almost 2 years running. They started come to us and talk about maybe taking some of the springsummer 2014 products in the Q4, products that they would sell all the way through. And I think because of the late winter period that we had, we've seen them go back and rethink that a little bit trying to look at what they think the weather patterns are going to be going into 2014 late 2013 and into 2014. So we haven't seen many of them come forth with any kind of merchandising plan that would roll out springsummer products in their southern stores or warmer weather locations in the Q4 of this year. So I think from our standpoint, many of them did take products earlier this year. So we did see a little bit of that shift into the Q1 as we talked about on the last call, where pre bookings were a little bit higher with February, March delivery. I don't know enough to tell you that now maybe as we go through the booking season, we'll get better indications from our key wholesalers in the U. S. And globally. Okay. Sounds good. And then you talked about incremental marketing spend planned for this year. Do you continue to plan to spend the total of that? And related, I'm just wondering, given the difficulty of predicting the business, if you are confident you've been sufficiently conservative with the outlook for the Q3? I think you followed stock for a long time, a number of people have called us for a long time. We've committed to managing the SG and A business according to the level of the business that we see. Jeff and the finance group have been working with the rest of the executive team, both at a corporate level and a regional level to manage down expenses in the back half of the year. Yes, we will take down some of the anticipated marketing spend, additional marketing spend that we had in the plan where we can and where we think it's prudent to do so. But as you know, a lot of times you're pre booking out launches of products. We're pre committing to advertising programs and marketing programs that are tying to promotional calendars both internally and with our wholesale, key wholesale customers. And so we're not in a position to take a step back from that. So yes, you will see SG and A management in the back half of the year. You will see some reduction to marketing expense. Okay. Thank you. We'll go next to Corinna Friedman with Wedbush Securities. Hi, there. I wonder if you could quantify or clarify your comments about the outlet stores. I think you said they comped up 16% or maybe I misheard that. Okay. Can you expand maybe Karina just a little bit on the question? So I think Jeff's comment The comps at your outlet stores? Right. So Jeff's comment in his section of commentary was that when we look at different segments of our retail channel, what we saw was strength in the outlet channels. We're developing an outlet strategy and fleet of stores in Europe. We have a fairly significant outlet presence here in the United States. And what we have seen is that our consumers who continue to be challenged by employment issues, both in Europe and in the United States, when you look at payroll taxes, you look at all the factors that we've all talked about in the macroeconomic conditions, we still see the strength in consumers looking for shopping in the brand, but people are constantly looking for a good deal, looking for products that are reasonably priced. And what we see in our outlet stores is that we sell older models are still core products like clogs at a fairly significant rate. And when we offered the promotional programs that we did in June and into this 1st part of July, we see that really resonating with our consumers. These are people that make $65,000 to $75,000 per year as a household income and they're looking for value today. Outlet stores are placed for them to find value as well as through our e tailers, which as I said in my part of the presentation was a pretty significant accomplishment. We feel that 23 of the top 100 selling styles on Amazon were Crocs products at one point in time in early June. I think the other key thing to add is Karina is that we are looking at outlet stores as the green space opportunity for the company. If you look at our outlet openings in the quarter on a year over year basis, we've opened 34 net new locations. So out of our 90 total locations, 34 of those were outlets. And that's the segment that continues to perform well. And we did call out comp for outlets in the Q1 as well because it outpaced the overall average as well. Okay. And then if you could give us a timing on the SAP testing and implementation and just lay out when those initiatives are going to occur this year? Yes. I don't we're not you're not going to see anything in 13 Karina relative to SAP. That will continue on into the early part of 2014 with an estimated go live somewhere in about the middle of the year at this point. Okay. That's all I had. Thank you. We'll go next to Dhruvish Barry with Goldman Sachs. Hey, good afternoon. I wanted to focus on SG and A. So I can appreciate the weather volatility, but SG and A I would imagine given the fact that you're actually making your sales plan is something that I think you guys could control. So I think originally Jeff either last quarter or the quarter before you had guided to SG and A being flat as a percentage of sales. Year to date it looks like SG and A is delevering about 200 basis points. And then as we look at your Q3 guidance, you're saying 305 midpoint on sales, flat gross margins. So in order for me to get anywhere near your guidance, I have to put in about 500 basis points of deleverage on SG and A. So it actually gets worse. So can you just walk us through why SG and A is delevering 200 basis points year to date? And why the Q3 guidance calls for that number to get worse? Yes. Like I said to put on the prepared remarks, we saw in the quarter about $3,000,000 increase associated with marketing, dollars 2,000,000 out of SAP on a year over year basis. Our retail channel expenditure was up about 20% with a similar rate of growth in our store count. So our SG and A expense continues to go up in correlation with our retail store count. And that was up $12,000,000 in the quarter. And included in our SG and A expense is the $6,000,000 for Brazil associated with the resolution of the sales ex audit there. So when you look at it and you strip away those issues, our SG and A from a kind of a core controllable SG and A was up 3%. So when you look out into the future quarters, the year over year increase in SG and A for the direct channel is going to be in correlation with your overall revenue growth associated with the additional retail stores. And our overall growth in indirect SG and A for Q3 is still roundabout the rate of overall revenue growth, if not a little bit lower in our internal models for 2013. Okay. Maybe I misasked the question. I mean, was the original guidance for SG and A to be flat this year? Or was that did I mishear that? Well, we never said that our SG and A was going to be flat this year. We said that our direct channel SG and A would grow in correlation with our revenue and our retail store count. We said that our indirect store our indirect SG and A or kind of our overhead SG and A would grow round about half the rate of overall revenue growth. But we were going to make an investment in SAP to the tune of about $1,500,000 to $2,000,000 per quarter and we were going to make an investment into marketing for the year. So those were specific call outs that we made back in February of this year. Okay. I wanted to ask a question just about the relationship between backlog and wholesale growth. So if we rewind back to last quarter, your backlog was up 1%. Historically, there's been a relatively comparable pretty tight correlation between backlog and future quarter wholesale growth. But this past quarter, if we look at backlog, it was up 1%. Yet this quarter wholesale revenues were up 7%. Yet you're saying that at once actually missed your expectations. So can you just walk us through that dynamic what's happening there? So on the quarter, Tush, you have to look at the impact of the Asian business and the strength of wholesale in the Asian market in the quarter, I think to get a perspective as far as what happened relative to wholesale growth. In the Q3, we as Jeff walked through the numbers, see a we've taken down the expectation for at once revenue during the quarter. Today, I think if you look at this, we expect still about 20%, 25% of our revenue for the quarter still to come from At Once orders in all markets, which we're comfortable with today, given the diversity of the brand globally. So in the past, I think our At Once orders have been a more significant percentage in dollar amount in Q3 Q2 and Q3. And I think right now we're trying to understand exactly what our key wholesalers are going to do in the Q3. So we're being conservative in what we think we are going to expect to see from them. Yes. I think finally, we saw as we said earlier to Jim's question, pre books going into the quarter was $114,000,000 for Q3. And historically, our pre book revenue as a percentage of total wholesale revenue for Q3 has been about 75%. Okay. Thank you. And just one last question for you, John. Kind of more theoretical, I just want to get your thoughts on this. I mean, Crocs looking at Crocs on paper, it screens very well. It's a cheap stock. The return metrics are great, great margins, global brand. Yet, quarters like this, there's just this record of inconsistency in terms of just execution. So and I get that there are external factors at play. But I was hoping you could perhaps give us some thought as to what you think contributes to this level of inconsistency just historically and what the management team is doing to reduce that degree of volatility going forward? Yes. We've had many conversations over the last couple of years when we look at quarterly guidance with the youth of this company, the global diversification. I think if you're operating in one single market, it's really easy to be able to forecast and control the business. At the young age of this company and with the growth of the business, I think we for a number of years did not miss guidance on any quarter. In the last 2 years, we've seen quarters where we missed top line guidance by $5,000,000 and bottom line guidance not inclusive of one time charges to be $0.02 to $0.03 And I think that that's kind of where we're at in the business. We try to be as conservative as we can when we go into our quarterly process and giving guidance to the Street. I think when we looked at the quarter, given the enthusiasm that our wholesalers had and our own enthusiasm for the products and what the sell through looks like once the sun came out, I think it's really hard for us to have forecast the level of consumer kind of conservativism in the 1st 6 to 8 weeks of this quarter in 2 major markets. And we do try our best to be conservative when we go in and we give guidance for the quarter. So I know that this creates a huge amount of concern on the Street and we continue to work at this to do our best to hit the numbers that we give from a guidance standpoint. I unfortunately just don't think that there's anything this quarter given what happened weather wise that we could have forecast even when we gave guidance at the end of April. Okay. Well, thank you and good luck. We'll go next to Scott Craseck with BB and T Capital Markets. Yes. Thank you. Hi, everyone. Thanks for taking my question. So you talked about the global outlet comping up strongly and talked about the excellent results after you went to a BOGO event. And ASPs, I think you said were down this quarter. Is there a chance that even though a big part of the strategy is to introduce higher priced product that maybe this stuff is just a little bit too expensive to drive the volume you're looking for? Scott, I think you have to look at it on a global basis, right? So that's not what we see in markets like Japan and in markets like Asia. I think if you look at Asian comp at 6% in the Q2 based on last year, we comped up 5.2% in the quarter. And in some cases, Scott, we even sell the products at a higher level, a higher price than we do even in the U. S. Domestic marketplace. Pricing isn't an issue in those markets. Marketplace. Pricing isn't an issue in those markets. If we look at the European price products where we're at relative to the competition where we're at with comparable products, U. S. Dollar denominated company like us and products like us, we don't see that is to be a barrier. And so we come back and we look at what the issues are as we've said throughout the call today, being heavily an Americas centric issue. What our marketing data tells us, what we see in the feedback that we get is when we're in a price point between 25 dollars $60 $25 $70 we still see consumers not having a problem with buying products with the Crocs logo on it, with Crocs branded products because they know the quality, the comfort that it comes. When we get above that $60 $65 $70 kind of price point, then we do see that to be an area from both a marketing standpoint and from a consumer standpoint that we don't believe that right now the brand can take products up above that price point. But we don't have many products that go above those costs today. And so we don't see ASP for the majority of the products we sell today to be the issue. Most of our men's products run anywhere between $45 $65 price points. On a comparative basis, people are buying similar products for anywhere from $70 to $90 So we don't see pricing to be an issue in our core business. Okay. And then in terms of just reporting the numbers going forward, is it possible, I think you had talked previously about maybe putting out the quarters that show a breakout of Japan and Asia. Can we get that for Q3 and Q4 before you report the numbers? Is that possible? Yes, it is possible. Is that going to happen? Yes, we'll get that to you. Okay. Thank you. We'll go next to Sam Poser with Stern AG. Thank you for taking my call. I've got a few I've got three things. Number 1, what were you assuming the At Once business in Q2? And how and what are you looking for at the back half in especially in the Q4? And then secondly, you guided for 600 stores at the end of the year. Have you and that's less than the 90 store openings you planned on doing originally. So can you talk about that? And then I have one more thing. I'll let Jeff take that. Yes. Okay. So for at once orders, which was your first question. Right. We did assume in that once about a year over year increase globally and we did have some issues with at once demand in the quarter. As we looked at the quarter unfolding, especially in the later parts of the quarter, we have not seen the at once demand that we expected. And frankly, when you look at the data coming out of the wholesale accounts where they have relatively low inventory level, we would have expected more aggressive ordering patterns from our wholesalers based on this information. The wholesalers are taking conservative positions and that gives us hope for Q3, but we have a very conservative approach to Q3 guidance and assumption of at once demand that's relatively moderate for Q3. Yes. Normally, I think we would be in the 30%, 35% range for at once business for both Q2 and Q3. And what we've seen and what we're carrying over in backlog, we're forecasting 10% to 15% lower at once business now for the quarter. Yes. And then your second question about retail stores. We're up 91 stores June 30, 2013 versus June 30, 2012. We opened stores in the second half of last year at a fairly healthy clip especially over in Europe when we opened stores in Q4. This year our plan is to open a very modest amount of second half stores only 25 in Q3 and only a handful in Q4. So when we look at the year end, we're looking at 600 versus a starting point of 5 $37,000,000 So the year over year December 31, versus December 31,000,000 is where the $60,000,000 comes from. Right. But I mean but for the full year, you said you were going to open like $90,000,000 So your number is going to be lower than the 90 at the end of the year, the original plan, correct? Our estimate right now is that we'll be at 600 stores. And are you going to and when you look ahead into next year, are you going to put that down? Are you going to keep are you going to keep work more to get your current stores working better rather than opening new stores in a general sense? I think you have to go region by region. I think if you look at the Asian business today, for example, we have 50 of our own stores in China and our partners have 6.50 stores. So we will continue to add a certain number of stores in the Asian market like that. We anticipate that our partners will add another 150 stores in China going into 20 14. So today, when we look at our pipeline of stores for next year, we still feel that we're in the same range, 75 to 90 stores with 25 to 30 stores in each geography. Most of our U. S. Pipeline looks like outlet stores today in markets where we feel we need the presence. And you're going to still continue to see a certain amount of growth in warmer weather locations and in France and Germany and Europe for next year. So I think you see a little bit slower work maybe in growth in terms of stores in the pipeline. I think we're feeling with the retail systems in place, better retail systems in place now with the Oracle planning in place going into spring summer 2014. We're in a better system standpoint on how we merchandise, allocate and manage our stores on a global basis. The organizational construct is better. We've added talent throughout the world. We have a new Head of Asian Retail now for 6 months who came from Levi Strauss in the region. We've done that in other parts of the business in our retail business. So we're feeling people wise, systems wise, product wise. 2nd year is generally better. People weren't too sure about Hratchy going into the season. People weren't too sure about molded boat. People weren't too sure about Ailey. But second years are generally better for us. So we are maybe at a fault, but we're eternally optimistic that we think that this is we've got the right products in the right place at the right price point going into the next year. And then last okay. Lastly, I mean to the other question about the guidance and the global brand and the young global brand with all the differences. And I mean we've talked about this in the past. I mean there's guiding conservatively and guiding conservatively. Clearly, the eternal optimism seems to be overtaking adding some too much optimism to your conservatism. So the question is, are you guiding the balance of this year? Are you thinking about guidance for the balance of this year the same way you thought about it at the beginning of the year? I'm saying the same way you thought you were guiding at the beginning of the year because I mean beat and raise is guide and beat is good, guide and miss is not. And I don't it's very, very difficult to try to figure out should we listen to your guidance or should we just cut it by 10% to 20% because despite how conservative you say you are, it's very hard to figure out what's going on. I mean, are you taking when you said you're cutting your at once expectations, I guess, down to cutting it down by 10%, 10%, 15%. Does that is that enough? Or should you be guiding your at once expectations down 40% and then beat that? That's I mean have you changed the way you're thinking about the way you're delivering the message here? Because I mean your business is you're running good increases and stuff like that, but you're setting a very high bar for yourself and you're not always jumping over it. I think, we are more conservative as each quarter goes on. I know maybe that doesn't feel like that today. I think when we step back and we look at this business for the first half of the year, revenue growth has met expectations, has met our expectations, has met Street expectations. I think the unfortunate part of this and but we're not the only brand that suffers with seasonal seasonality of consumer behavior when we didn't have many winter seasons there for a couple of years. Brands that were heavily fallwinter based, they had to go through the same dynamic to move product, to move inventory, and to do the right thing for their business. And we felt this quarter Q1, we're very close, in line. Revenue was in line with the expectation. We had a choice to make whether we would kind of forego the promotional activity, take a chance on June being warmer and letting that come to fruition. And we made the decision this quarter that it was going to take a hit on profitability. You have to take out all those other one time charges. And it is what the hand that we got dealt with. We try to be conservative for the 3rd Q4 this year. We're giving guidance for the Q3. We feel is conservative based on what we see for at once buying patterns for the Q3. So we hear it loud and clear. We see it. We're working really hard at meeting, feeding and Hello? Hello? Did I get cut off? I don't know. You cut off for a second there. But anyway, I mean, let's talk about SAP and then I'll get off and I'll let everybody else have questions. But I mean SAP almost every company we've seen that does SAP hiccups while the implementation. You're telling you said publicly that you think that you've got a simplified version of SAP and when you flip the switch the lights are going to shine and it'll all be good. Again that may happen, but historically we've seen even the biggest companies in the world like Nike have significant problems as they've converted to SAP. So shouldn't you guide to be to say, look, we hope the light shine, but we're going to temper that a lot. I mean, again, regardless of how well you've planned it, because it's a difficult situation. I mean, again, maybe the optimism just really needs to be tempered more than you're currently tempering it. Well, I don't think, Sam, that we've given any guidance towards 14 at this point in time, what we think that impact could be or what it's going to look like. What we have said is that where Nike did a lot of customization to the SAP solution that they implemented, we're going with the straight APS solution with no customization to their apparel footwear solution. That's what we've said so far. As far as impact to the business, of course, you're going to have some kind of impact to the business. What we've said is, it's our goal to minimize this, to do this judiciously. We're not going to implement SAP until we've gone through proper testing globally to determine the impacts that it may have. And we can't give you any more guidance than that at this point in time. We're still somewhere as Karina asked earlier 9 to 12 months away from implementation. So we'll continue to give you updates. But all we've said so far is that we're not doing customization and we're working closely with SAP to be as vanilla as possible. All right. Well, thank you and good luck. And we have time for one more question. We'll take our last question from Steve Marotta with C. L. King and Associates. Good evening, everybody. You mentioned the delta in marketing spend in Q2 was $3,000,000 Can you offer that delta for Q3 and also remind us what aggregate spend is for this year versus last please marketing? Yes. The $3,000,000 was for Q3. We anticipate, as John said, the Q the second half of the year will be up slightly in marketing costs. So when we look back on the full year, we'll be up about 1 full percentage point in revenue at the end of the year, which is about what we said at the beginning of the year for our incremental marketing spend. Okay. And lastly, you mentioned in the prepared remarks that you endeavored to clear inventory by the end of the quarter. The inventory levels on the balance sheet would imply that you did it. But I just want to verify that was entirely successful that you are happy with where the inventory is and that there is no material carryover from Q2 to Q3? No material carryover Q2 to Q3. A lot of what we did during the quarter was to move as I said in my remarks. A lot of what we had procured for at once, a business that we thought would materialize in the quarter and we moved through a significant number of old small numbers of styles that were in our LADC warehouse. So we took the number of SKUs in the LADC warehouse down about 8,000 SKUs. So we're happy with the cleanup activity. It should be beneficial to the business going forward in terms of a supply chain management being more efficient and effective. We've made also significant improvement in the quality and level of inventory in Japan. We've reduced the amount of warehousing and distribution costs in that marketplace also. So we feel good about the progress that we made during the quarter. Okay. Thank you.