Earnings Call: Q3 2012

Oct 24, 2012

Call. I would like to remind everyone that this 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 for our Q3 2012 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. During today's call, John McCarville will share some opening remarks, cover 3rd quarter highlights and talk briefly on Crocs' corporate strategy. Jeff Lascher will review our Q3 financial results in detail and cover guidance. John Mocarva will then wrap up our prepared remarks with a few closing comments. Earlier this afternoon, we announced our Q3 fiscal 2012 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 of the information provided in this call will be forward looking and accordingly are subject to the Safe Harbor provisions of the federal securities law. These statements include, but are not limited to statements regarding future revenue and earnings, backlog and future orders, prospects and product pipelines. 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 2011 report on Form 10 ks filed on February 29, 2012 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 provision of the Securities and 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 regarding currency on this call. Ex explanation of those metrics can be found on the earnings release filed earlier today. I will now turn the call over to John McCarbil. Thanks Will and thanks for joining us this afternoon as we discuss our Revenue for the quarter increased 7.5 percent to $296,000,000 Our sales on a constant currency basis grew 10.3% globally. Our gross margins increased 80 basis points from Q3 2011. Average global same store sales grew by 1% for the quarter. We earned $0.49 per diluted share on a net income of $45,000,000 inclusive of a one time tax benefit that was recognized in the quarter. Our global multi channel strategy continues to provide a platform to engage consumers wherever they shop. As we saw growth in all three channels wholesale, retail and Internet. On a constant currency basis, our direct to consumer business grew 12.7% in the Americas and 17.6% in Asia. The consumer's appetite for the brand and constantly seeking out our products in all three channels is extremely encouraging to all of us at Kratics. Revenue for the quarter increased revenue for the quarter increased slightly less than we had expected. I would like to discuss 2 key factors that affected our quarterly results. There were macroeconomic challenges in Japan and in the European markets that we are not immune to in the quarter. In Japan, we experienced a drop off in our own retail stores primarily from an overall consumer spending slowdown and partly from a comparison against significant gains in our same store sales in last year's results. In Europe, AtOne's demand for our wholesale accounts and distribution partners for our products was significantly down as most retailers experienced a cooler summer season and managed their inventory levels lower during the quarter. Before I talk about business factors, I would like to take this opportunity to talk about our Crocs Cares program. This is an important initiative at Crocs that gives to local and global charities and it's a very important part of our culture. In July, there was a terrible tragedy in our Colorado community. The shootings at the movie theaters in Aurora, Colorado, not far from Boulder, not far from where many of us live in the Greater Denver area. We felt that it was imperative that we do something for the people that were affected by this tragedy. We donated $5 from every pair of shoes that we sold online and in our Colorado stores for 1 week in August. We were honored to present a check to the Aurora Fund for $559,000 We've done similar things after other tragedies in Europe, a tsunami in Japan and here in the United States last year in Tuscaloosa, Alabama as well as Joplin, Missouri. Turning for a moment to some of the key positive events that we see in the business and those that impacted the quarter. First, we continue to see the investments that we have made in our diversified product line payoffs, specifically in products that carry higher price points in our clog business. In the Q3, more than 35% of our sales volume came from new styles. Our average sales price in the quarter increased by approximately 3%, while unit sales increased 6%. We're seeing excellent demand for a number of our new fall and winter products. In the U. S. Marketplace, we are seeing sell in and sell through of our cobbler collection, boot collections including the new rain flow and the newly reintroduced Mammoth product are all doing well. We see an improving U. S. Domestic marketplace for Crocs products. Increased demand for new products with all of our key U. S. Wholesale partners increased in the Q3. We experienced strong sell in and sell through of our 2012 springsummer products. Additionally, we are seeing solid sell through of our new fallwinter products too. The solid and improving performance of the brand can be seen both wholesale and our direct to consumer channels. Retail comp gains were above 9% in the U. S. Marketplace for August September. 2nd, we continue to focus our marketing campaign on bringing new consumers to think about us differently during spring summer, but also during fall winter. This is a gradual process and our marketing data shows that we are attracting new consumers to the brand at the highest levels in many years. Our new products are changing the minds of consumers globally who thought about us only as a clogged brand. And I remind you the growth rates in the back half of the year are lower than those in the front half of the year. 3rd, a lot has been written about the Asian marketplace and the changes that are occurring. The market is changing and it's changing rapidly. But to us toward the American, Brazilian and European market. Jeff is going to talk about the specific performance changes of various Asian countries later in his section. However, you can see in our increased pre book backlog levels for Asia in 2013 that we anticipate another solid year ahead of us. We also remain very positive about the growth prospects in the Middle East and in South America too. Lastly, while Europe is a difficult market for everyone today and the London Olympics had a large negative effect on our U. K. Stores except for the one in Stratford, which was there by the Olympic venue. We did scratch out a small comp store increase for the quarter. New stores and outlet locations in France, Germany and Russia are all performing well. Our new retail format was opened near London in the Bluewater Mall and is performing well. We like to improve brand image and the shopping experience. We're seeing more interest in European customers in Crocs' new product offering outside of the clog and the bookings for 2013 also reflect the change in confidence in the brand. Before I turn the call over to Jeff, I would like to say a few words about an important initiative at Crocs and that is our sustainability program. As we have consistently demonstrated over the years with our Crocs Cares program, we are committed to the well-being of our neighbors and social environment. Next month, we will further our commitment to the environment by publishing our 1st sustainability report planned for release on November 1, 2012. This report aligns to the Global Reporting Initiative, GRI, sustainability reporting guidelines. The GRI is a globally accepted sustainability reporting framework that is considered the gold standard and provides a flexible system that promotes incremental improvement over time. Our first report outlines our approach to sustainability and addresses key environmental and social issues, including both accomplishments and challenges. Through the public communication of our sustainability program, we will build on a strong platform from which to communicate and grow our sustainability efforts more formally. With that, I will turn the call over to Jeff. Thank you, John. Hello, everyone, and thanks for joining us. I will start with some financial highlights of the quarter before going into some detail. First, revenue for the quarter increased to a new record of $296,000,000 for Q3, up $20,000,000 or 7.5%. On a constant currency basis, revenue grew 10.3%. For 2012 year to date, our revenue has increased 13%, which on a constant currency basis represents a year to date revenue increase of 15%. 2nd, total retail sales grew 18% with same store sales on a constant currency basis, increasing 1% globally. For the year to date, same store sales were up 3%. 3rd, we were able to focus on enhanced profitability as we generated improvement in operating margins of 80 basis points driven by better product margins. 4th, we continue to focus on building up a strong balance sheet as we ended the quarter with $313,000,000 of cash and cash equivalents. Finally, in the quarter, we successfully defended certain tax positions globally that led to a release of a tax provision. This resulted in a non recurring tax benefit in the quarter of approximately $11,000,000 These factors all combined contributed to the $0.16 year over year increase in diluted EPS to $0.49 during the quarter. Looking at the results in more detail. As John communicated, sales in Asia were more challenging than expected in the quarter. Same store sales in Japan declined 15% in the quarter as the country experienced a general slowdown in consumer purchasing and was further challenged by strong sales growth last year. This unexpected slowdown in consumer demand in Japan was partially offset by the rest of the region. Overall same store sales in Asia dropped 6%. Our expectation for the region was for single digit growth. Our Internet growth was powered by a 12% improvement in Americas, while consumption in Europe continues to be challenged by macroeconomic factors impacting consumer confidence. Europe Internet was down 10% on a constant currency basis. We had higher than expected wholesale revenue of about $5,000,000 with lower than expected direct to consumer revenue of about $10,000,000 combined with a regional shift. The outcome of this revenue mix was reflected in our operating results. Notably in the Asia region notwithstanding the challenging retail market in Japan and the delayed shipment of $2,500,000 in wholesale orders following a strike at one of our manufacturing locations in the quarter, our overall sales in Japan were flat to last year. Outside of Japan in the region, China sales continues to show exceptional strength and increased 47%. Our Korea business expanded 18%. In Europe, our U. K. Business was impacted by lower than expected demand in August, but this was offset by stronger sales in Germany and Russia, which resulted in a 1% constant currency same store sales increase. Globally, retail channel revenues in the 3rd quarter increased 18% to $112,000,000 Global same store sales for the quarter increased 1% on an FX neutral basis. On a year to date basis, same store sales have increased 3% over last year with Americas at 4%, Asia at 1% and Europe at 8%. For the remainder of the year, we plan to open an additional 35 to 40 stores globally with most of these in Asia and Europe. Our direct to consumer model benefits us greatly in the peak selling seasons around the globe and sometimes requires perseverance during shoulder and trough seasons. We remain committed to expanding our direct to consumer portfolio and continue to assess individual location performance and act aggressively when detrimental data arises. This was evident in our decision last year to close underperforming kiosk locations and shift to more full line stores. Turning to product data. Our percentage of Q3 revenue derived from the clogged silhouette grew slightly to 48% from 46%. This was in part driven by the return of the Mammoth this season. Also, our new product introductions globally represented about 35% of our Q3 unit sales. As we highlighted at our Analyst Day early in the year, we continue to grow the clogged silhouette while diversifying into other important categories. Average selling price per footwear in Q3 increased $0.59 or 3% to $22.77 compared with last year in the same period. Global footwear unit sales in the quarter grew 6% to 12,400,000 pairs. For the 1st 9 months, total unit sales have been up 40,100,000 pairs, up 4% from 1st 9 months of 2011, while ASP has increased about 8%. Gross profit for Q3 2012 was $161,000,000 up from $147,000,000 Margin was 54.4% in Q3 versus 53.5% in the prior year. We benefited from key initiatives in controlling our cost of goods sold, lower promotional activity, improved economics from new product introductions, but our margin was slightly impacted by lower than expected retail growth in Asia. 3rd quarter 2012 SG and A increased 8% to $121,000,000 compared to $112,000,000 in Q3 2011. As a percentage of sales, SG and A was 40.8%, essentially flat to 20 11. The SG and A dollar increase was driven by investments in our direct to consumer channel as we continue to build our retail network globally. Our indirect SG and A declined 5% compared with last year as we tightly managed SG and A cost and leveraged our existing infrastructure at our corporate and regional locations. Overall, Q3 operating income increased 14% to $40,000,000 or 13.5% of sales, primarily driven by improved gross margins. In Q3, we had a non recurring tax benefit of $11,000,000 as we successfully defended certain tax positions around the globe and valuation allowances in the USA as our profitability here has improved substantially in 2012. Going forward into 2013, our rate will be impacted by improving USA net profit. It will be on the higher end of our forecasted rate range of 18% to 22%. Net income was $45,000,000 or $0.49 per diluted share on 91,100,000 shares compared with $30,000,000 or $0.33 per diluted share in the prior year. We ended with Q3 we ended Q3 with $313,000,000 in cash, nominal bank debt and inventory of $188,000,000 Our inventory increase was the result of timing of Q4 deliveries, higher priced new products for fall holiday and additional retail stores. Moving on to backlog. At the end of the quarter, backlog increased 33% from the same period a year ago to $395,000,000 Inside this result, Americas backlog is up 19%, Europe is up 49% and Asia is up 40%. On a quarterly basis, backlog for Q4 deliveries represented 71,000,000 up 5% from 2011. Backlog for Q1, 2013 stood at $217,000,000 as of September 30 and was up 38%. Backlog for Q2, 2013 deliveries totaled $107,000,000 and was up 50% from 2011 for the same date. Many of our wholesale accounts around the globe accelerated their ordering into Q3 in order to secure early season deliveries, which is a departure from historical pre book ordering patterns. Guidance for the Q4 of 2012, we expect to generate revenues of about 2 $20,000,000 up about 8% from last year or 9% on a constant currency basis. We expect our revenue will be moderated by continued weak consumer demand in Japan and the ongoing challenges to the consumer market in Europe. With additional retail store locations coming online and a challenging international macroeconomic environment, we estimate the company will breakeven on a net profit basis in the quarter. Currency estimates used for the quarter are $1.30 to the euro and $0.79 to the U. S. Dollar. On a year to date basis, EPS is $1.48 compared with $1.18 at the same time last year or 25% improvement. With our Q4 estimated EPS, we anticipate full year 20.12 to be $1.48 per share. Overall, we estimate that revenue growth in the U. S. Dollars will be about 12% over 2011. In constant dollar growth, that will be about 15%. Our second half revenue has been impacted by global consumer behavior changes impacting our operating margin for the year and is keeping us from hitting our goal of 15% full year operating margin. As we reflect on Q3, there are a number of key takeaways. We were able to increase revenue 10% on a constant currency basis in a challenging global market through the strength of our overall product line and the distribution network that we have developed around the world. While some specific markets were troubled and resulted in below expected levels of revenue, we are still able to grow our sales in those areas because of our investment in direct to consumer channels and the strength that our product line brings to our wholesale accounts around the globe. Our operating profit increased 14% compared to the same period last year. And for the year to date, our operating profit is up 20%. For the full year, we expect constant currency revenue growth of 15% and as such this will mark the 3rd year of 15 plus percent growth. The company's employees around the globe are focused on delivering outstanding results to our investors as we build a fantastic diversified footwear brand. Thanks. I will now turn the call back over to John for some closing comments before taking questions. Thanks, Jeff. As Jeff mentioned, our pre book business for spring summer 2013 product line has been received very well. Positive order flow bookings from all of our major wholesale partners. But as Jeff notes, we see order flow coming in slightly earlier than last year. When we look at the spring summer 2013 booking season when it's completed, we expect backlog to be somewhere between 15% to 18% higher than springsummer 2013. Springsummer products remain the foundation for our business. And while we are making steady progress to grow Crocs into a 4 season brand, we do believe that the growth in the back half of the year will continue to be slower than the first half. With these thoughts in mind, I would expect 2013 revenue growth and operating income to follow a similar trend to what we are exhibiting here in 2012. I think the whole industry will continue to see these kind of challenges with specific global markets being challenged and solid growth. We expect to see solid growth here in our Americas business. Thanks. And with that, we'll open up to questions. And we will take our first question from Erinn Murphy with Piper Jaffray. Good afternoon, gentlemen. John, I just had a question for you really, if we just want to dig in a little more to the Asian piece of the business and very helpful for that regional split out that both you and Jeff provided. But curious if you looked at the quarter how it started relative to your plan versus how it ended relative to plan? If you could just maybe provide some more detail and context around some of the major markets acknowledging Japan as you mentioned significant market for you and that's where you saw the most pressure. But hoping you could maybe help us understand how some of the quarter trended from the beginning to the end relative to plan? Sure. Happy to do it. And I think what Jeff and I will do is with this particular question, I think it's probably one that's on the minds of a lot of people when you look at the financials, not only revenue mix within the quarter, but then how that overall impact of mix change, geographic mix change affects the overall profitability business. I think what we'll do, Aaron, is we'll kind of tag team this. On the revenue side of this, I think we came out of the second quarter in most of our Asian countries on trend to where we thought the plan would be. And we saw very little change to that in the Japanese market sell in, sell through was on trend on track. Starting really in late July and then into the August timeframe, we just saw the amount of conversion in our retail stores starting to decrease at a level that we haven't seen before in that marketplace. I think you have to remember that last year that market, the Japanese market comped in retail at 15%. So you're comparing against a pretty strong quarter in your previous year in a marketplace that we would now start to consider semi mature from a growth standpoint. I think other brands, VF and others have talked about what they think the Japanese market looks like relative to the rest of Asia. And I adhere to that same belief that we will see growth in the Japanese market in that 5% to 10% range where we'll see much higher growth rates in other parts of Asia. So relative to our overall business there in Japan, the wholesale business as Jeff mentioned, our total sales in Japan in the Q3 was flat, but it was more that back end back portion of the Q3 where we saw retail Okay. That's helpful. And then I guess in terms of just speaking to the retail comp kind of going from a mid single digit positive to a mid single digit negative rate Q2 versus Q3, are you seeing more pressure just from traffic? Or are you seeing when the consumer comes in at the basket size, whether it's driven by units or pricing is actually coming down? Where are you seeing more of the pressure on the comp? And you talked about this in a global environment or Sorry, that was specific to Asia. So just kind of going from that kind of positive mid single digit to a negative mid single digit Q2 versus Q3, where was that incremental pressure coming from on the comp contributor side of it? I think that again a lot has been written. If you think about Japan, we're not converting and traffic is down. If you look at in some of the major Chinese studies and in Hong Kong, where you do depend on a lot of of consumer behavior during a tourist kind of outing or endeavor, what we are seeing is traffic is downspending is down across the board. I think specific to the U. S. Marketplace, there's the counterpart of that is that we're seeing traffic up in a lot of our outlet stores and we're seeing conversion at a higher rate. So I think it's depending upon the market and then depending upon really the situation that's specific to each of those countries. Okay. That's helpful. And then just last on Europe. You talked about clearly in the U. K. Market some pressure around the Olympics, but still able to have that positive comp. Did you see actually the comp trend improve after the Olympics? Or was it essentially in that kind of slightly positive, slightly negative range throughout the quarter? Trying to just again understand that the pattern of the quarter. I think without a doubt another brands that have reported before us and have talked about what has happened in their European business really around the Olympics, the 2, 3 weeks before that during the Olympic time and then really with the vacuum that was created thereafter, many of the U. K. Stores were impacted significantly just by this lack tourist traffic in London and in the U. K. Marketplace. I think in other destinations in Europe outside of the U. K. Then it was consistent comp performance throughout the quarter as I think we get better brand recognition now that we're more than just a clog product. So a lot of the new products that we're putting in our retail stores in Europe performed very well. Yes. And Aaron, maybe before we move past that too a little bit, I would like to come back and talk about this impact with Asia being down a little bit this quarter, which has been an anomaly for us. U. S. Americas business up and how that really flows through the P and S. Maybe I'll let Jeff kind of take that. Yes. Aaron, as we mentioned during the script and as John talked about just now, both of those areas Japan, the rest of Asia to a more limited extent and then the U. K. Sector of Europe were lower than what we had originally expected for the quarter. That resulted in about a $10,000,000 shift downward in the retail business overall. We did we were able to make some of that up with the wholesale demand that we saw during the quarter and about half of that revenue was made up through the wholesale demand and an at once basis during the quarter. But when you take retail with high margin product sales and replace that revenue with wholesale, unfortunately the operating income impact of that was around about $5,000,000 which is what you see in the operating results for the quarter. So $10,000,000 lower retail coming out at 70%, 75% margins, replaced with $5,000,000 higher wholesale, which comes in at around about $2,500,000 of margin for us results in about a $5,000,000 operating income. And we just wanted to clarify that yet again for everyone, so that everyone understands the impact of the revenue miss at the retail store line. But like John said, we're really happy with the performance, especially in the latter 2 months in the U. S. Business. As John said in his script, 9% growth in those 2 months in the Americas locations as we set ourselves up for the Q4 selling season. No. Thank you, guys. That's very helpful. And I'll let someone else jump in. Thank you. Our next question comes from Sam Poser with Stern AG. Hi, guys. A question about the your guidance and the results. When you guided for the quarter, did you know that this one time tax benefit was going to be there? No. It didn't, Sam. So then, and your guidance for the Q4, so that was about $0.12 if I did my math correct? Yes. As we talked about at the end of the second quarter Sam, we anticipated a normal quarter in taxes. We benefited from settlements of or not really settlements, but finishing up of audits around the globe. And our tax structure survived those audits around the globe, which we're really proud of, as you could tell from the script. We also benefited from a movement in the USA net profit to be profitable again in 2012, which results in us taking a look at our valuation allowances that we had set up in the prior years and those were reviewed and reduced in the quarter. Those were not planned activities, but they did take place in Q3. So if we think I mean, you've guided to about $1.48 to $1.49 in your last call for the full year, correct? Yes. Okay. So basically even though it's maintaining itself the guidance sort of on a recurring basis has been dropped to about $1.36 As we said Sam, we took into account the global consumer slowdown especially in Japan and parts of Europe as we talked about in the script. I understand. I mean, I guess it's just a question is am I thinking about that correctly? Yes, I think so. Okay. And then where in Q4, I mean, how do you look at the SG and A versus the gross margin on the revenue that you on the $220,000,000 to get to the flat earnings? We think we'll be at about $220,000,000 of revenue and our gross margin will be about 50%, a slight improvement from last year's gross margin attainment as we're able to control our discounting in the marketplace. When we look at the Q4 as we head into the Christmas selling season, the U. S. As John mentioned August, September was pretty strong and our same store sales comps were good. As we go into the back half of the year, there's a lot of optimism around the consumer behavior in the U. S, but that optimism can shift rather quickly if something was to happen in the U. S. Relative to the election or some other macro events impacting the Q4 consumer demand in the U. S. Okay. Well, thanks very much. I'll get back in. And we will take our next question from Jim Duffy with Stifel Nicolaus. Thanks. Hi, guys. So the backlog numbers really jump off the page. It seems there's some nuance to it. I'm not sure I understand why retailers will be ordering so much earlier this year than in the past. If you could provide some help there that would be great. And then momentum in the spring line clearly looks very good. Fall holiday progress seems to be more difficult to come by. So your revenue is becoming even more concentrated from a seasonality standpoint. Does that at all change your thoughts on how you plan expenses for the business or your go to market strategy? Thanks. Maybe start with kind of how we think about backlog first. And I think that this quarter is a bit of an anomaly where we would see in prior seasons order flow come in starting at 715 date all the way through 1015, 1115. We even get orders in 1215 for delivery in the second quarter. What we noticed this year and I think part of it has been, we're becoming more mature as a sales organization of the company. I think we're doing a better job of pre lining and preparing customers. I think that, in a lot of our more mature markets, Asia and the U. S, especially where we are working with major retailers that are booking in the eightfifteenninefifteen dates, what we're seeing is orders that sometimes would have trickled into the Q4 to be processed internally now were entered really in the Q3. So we think that it artificially inflates the actual growth in backlog to the point of 10% to maybe 15%. And I think you'll get a better feel for overall backlog for second 1st and second quarter when we report the twelvethirty one backlog. With all that said, I will come back to something that Jeff said and that is that as he gave the breakout for Q1, I mean Q2, you can see the strength of our springsummer line that we have put out and maybe that's part of the reason why we see retailers ordering it earlier with more delivery dates on 2.15 and 3.15. I think they think that if there is momentum with the brand and if we do have a solid spring sell through that they can actually get another turn maybe or 2 with the products for next year. So optimistically thinking, we think that there's some momentum there that's going to play itself out into 2013. I think that the skewing and the movement of the brand to springsummer is it's a natural phenomenon and that we have a place in most wholesalers' mine, where we sell and are taking more shelf space and opening more doors. There is great product that falls into that category, runs a longer period of time. And unfortunately, it's just a much shorter selling season for fallwinter and we just continue to work at boots and relevant indoor products and casual or leather upper products for men and women that try to find a place with consumers in the fall winter period. But I think it is clear that next year we will have a stronger first half again to the year just based on the momentum that we have in the products that are coming to market. And then to finish that, Jim, yes, it does. And I think what Jeff and I have said over the last 2, 2.5 years now is that we really do try to manage the business. And as we've communicated to the investors into the street that we do try to match expenses and revenue appropriately within each quarter where possible. I think one of the things that's going to impact our Q4 business, maybe a little bit more this year than it has in previous years is that we're going to open more stores in the Q4 than most brands would. And it's a matter of timing when the stores are coming open. A few of those stores should have opened in Q3 that have rolled over into Q4. But it's an investment that we believe that we have to make and that will pay off in the long term. So opening those stores will create a little bit of downward pressure on operating income in the Q4. Okay. That's helpful, John. Good answers. Does the concentration in springsummer change the go to market thought process at all? Clearly, wholesale has the potential to grow as a percent of the mix in springsummer 2013? I think every brand that struggles with this and I think other brands out there, Deckers, others, with UGGs, I think we all strive to be a 12 month brand. We all strive to be a 4 season brand. It just takes a lot of work and it takes a lot of focus and some things come more naturally. SpringSummer comes more naturally for us. That's where we started. And in the consumers' minds, that's where it resonates. But I just think you have to work harder both from a marketing and from a product standpoint to overcome those weaknesses. And we've got to keep working harder at the back to school and the fallwinter products. I appreciate that perspective. Thank you. Our next question is from Karina Friedman with Wedbush. Hi, there. Sorry, I jumped on late. I'm not sure if you gave the tax rate for Q4, what you're expecting. And if you could also talk about comp expectations for Q4, what's the comparison? Any color you can give us quarter to date? And then initial and additionally, if you could talk about the ASPs of the backlog? Sure. I'll take one at a time, maybe not in the order you gave them. So the comp guidance that we've included in our number, we basically try to take the year to date number and roll that in. So when the regions are sitting down to think about how their revenue is going to roll out in Q4, they try to use a year to date number and not be overly influenced by a 90 day period, because that's just not enough of a statistical trend to jump off of. So you can kind of use the year to date number. As far as the yes, 3% year to date is what we were using in that. As far as the taxes in Q4, we said that we expect revenue to be about 220%. We expect that our margin is going to be about 50%. That leaves the rest being SG and A and taxes. Tax rate in Q4 is kind of difficult to estimate as our operating income would be relatively small. So it's a relatively small tax expense that we're anticipating in Q4. And then the ASP and backlog, we're looking at about an 8.3% increase in our ASP in our springsummer backlog. So that's an improvement over last year's rate of about $18 We're looking at next year about $19.50 as far as ASP in our backlog for springsummer 2013. Thank you. Our next question is from Reed Anderson with Northland Securities. Hi, guys. Most of my questions have been answered, but a couple of follow ups just to that last one. Jeff, the ASP comment you made, is that 8.3% springsummer, is that relative to that kind of 15% number John was talking about when you look at your springsummer business? Or is it relative to more of the some other figure? No, I'll help you out with it. So as John said, we saw a little bit of activity in excess of what we've typically seen. So our units are actually a little bit higher at the end of September 30. But the ASP being about 8% that number that's a number that will probably continue to carry on. So it's going to be a pretty good balanced growth for springsummer based on the early results between ASP and unit growth. Okay. And then the answer you gave on the comp guidance, I mean, you've used the year to date numbers kind of the reference of how you plan that. But I mean, does that should we infer from that that you then are expecting a rebound in those Asian markets, Japan? Or is there something you've seen to suggest that will happen? Or is that going to play out differently? I think, Fareed, when you look at it on an aggregate base, as Jeff talked to that, we think on an aggregate basis, 3% is a reasonable comp growth number. I think that as I said in especially in my portion of the talk that I think we're going to continue to see Europe and we're going to continue to see Japan challenged in the short term. I think we don't know really what to expect in the U. S. Do we have 2 more weeks until the election? What's the consumer sentiment going to be? And how are our brands going to react in the holiday season? Last year became highly promotional early on. I think as Jeff said earlier, we think 80 basis points increase in gross margin in the Q4. We don't expect to be as promotional in the Q4 this year as we were last year. In the U. S. Or overall? In the U. S. And it's really a U. S. Phenomenon, the level of discounting in the Q4. So we think that we'll see good comp performance in the United States based on where we are at the products that we have in stores and the promotions that we have. I think certain parts of Asia will do well during the Q4 and I think Japan will remain challenged. So on average, we think 3% is a good estimate for the quarter. That's very helpful. And I don't forget the Reed also don't forget that in the Q4, the Americas represented last year $43,000,000 of $74,000,000 in total retail sales. So the game in the 4th quarter really is an Americas retail game. And on the Internet side, it was 19 of 25. So it's really important to us to have a strong Americas performance in Q4. And then just one last one I'll sneak in. Just because when I look at I get the mix thing the way you explained it Jeff very helpful in terms of the impact on the margin relative to direct declining etcetera. But I guess it still was a big differentiation. I'm just curious if you look at your margin structure in call it your Asian region between direct and wholesale or consumer and wholesale, however you want to look at it compared to the U. S, are they the same? Or is it actually a better margin in the Asian markets in that direct channel? It's a better margin in the direct channel, but it's a higher percentage that goes to wholesale in Asia. Okay. That makes sense. Thank you. Good luck. We will take our next question from Mitch Kummetz with Robert Baird. Yes. Thank you. Thanks for taking my questions. I got a few. I'll try to be quick. On your Q4 sales outlook, you're saying $220,000,000 I think that pencils out to be sort of high single digit growth. Can you give us any color as to how you think of that growth in terms of geographies or by channel? Yes. I think when you look at that $220,000,000 number, I just talked to Reed about, I mean, so much of our retail sales come from the Americas. Last year, we did $74,000,000 of $203,000,000 was associated with the retail and in that $40,000,000 or so was $43,000,000 or so was attributable to the Americas business. So when we look at the growth in the 203 to 220 number, a lot of that comes from the Americas investment in the retail infrastructure and converting those kiosks into full line stores. That's how we kind of developed that 220 revenue base. When we look out into Japan and the rest of the global marketplaces, frankly in the Q4 from the direct to consumers, it's not as important as the Americas business. It will be important in springsummer when those marketplaces get back to their seasonal uptrend. Jeff, let me ask the question a different way. I mean, again, when you look at your sort of 3 geographic segments or 3 channels of distribution, is there anything that you would expect to be down in Q4 versus last year? I think, Mitch, on that, the European market is still one to be determined. I think at this point in time, what we have seen is with new retail stores opening in outlet channels especially that resonates with consumers they performed well. Will the opening of our own retail stores offset the kind of the black cloud that is sitting over wholesale accounts today buying with only one purchase and not coming back and repeating or topping up, I think time is going to tell. And what we've done is we've taken what we think is a pragmatic look at Asia and Europe saying that they're going to be basically flat to last year. And the growth as Jeff said will come in the Americas business, especially with the investments that we've made in retail and to a lesser extent in Asia. Got it. And then John, you provided some initial color on 2013. I'm just wondering if you could give us some sense as to how many stores you plan to open next year? I think today we expect to finish the year somewhere north of 500 around 520 stores. Our plans right now are not completely set for 13. We're just in the process of finishing up our budgeting here at the end of this month early November. I think, Mitch, in the range of 75 to 125 stores in total globally next year, is an increase for us. With the caveat there that we will be down to somewhere between 10 to 15 kiosks left in 2013. Okay. There'll be a few places tourist markets where they work, but we will almost completely access the kiosk format. Okay. And one last quick one. On the backlog, I mean, even after you adjust the numbers for the early ordering, it still sounds like a very healthy number. Is there is that pretty much on an apples to apples basis in terms of accounts? Or is there anything new in that spring, summer number that we should be thinking about? No major addition anywhere globally. No addition of a major retailer in that, but continual growth in terms of doors and shelf space in many major accounts in the United States and in Asia. We're just kind of getting ourselves reestablished in Europe. So we will see cracks going to places like Debenhams and test in other major retailers in the European market that we haven't seen, in prior years. And do remember next year that we will have a full year of operations with Benelux being fully integrated in as a direct market for us in 2013. Got it. Okay. Thanks guys. Good luck. And we will take our next question from Kelly Houser with BB and T Capital Markets. Yes. Hey, this is Scott Krasik. Thanks for taking my question. The first one on the back log that it was a big European number. Does that actually is that one that's benefited from the shift early because of an easy compare from a year ago? I don't think it's a big number. It was big percentage. Sure. So I think what we've seen again, new management team has now been in place for about a year, really working with more major accounts. Last year, I think we went into the springsummer 2012 timeframe, just not being as well connected, as we are this year. So I think the increase in backlog is more new products, more diversity of the brand and some new accounts. But on a dollar basis, it's not a significant increase around $18,000,000 to $20,000,000 increase. But relative to a year ago, you were sitting there with too much clog inventory, slowing sell throughs. So in a year, you're able to convince people, even if it's not a big dollar contribution to take new product to try it even though your sell throughs were weaker this year. Is that fair? It is fair. And it's the same thing I think that happened here in 2,009. A lot of work going back in asking for forgiveness with accounts that we didn't do very well. All that went on in 2012 in Europe. But I think people see the strength of the brand and we sell a lot of products to Europeans in our own retail stores that also buy products overseas when they travel. I think retailers are smart when they look at global trends today of brands. I think that's also helping us strengthen the U. S, strengthen Asia, convinces retailers to take another look at us in Europe. So yes, I think it's slow process of hitting singles. Today is the first game of the World Series. It's a matter of kind of slowly easing into it and then they need to be convinced that we're a brand that they can work with and work for on a long term basis. Okay. And then Jeff just on the Q4 guidance, the difference between the $2.20 this year and the $200 last year you were able to do $0.06 Gross margins are going to be up. But I mean is that just a makeup of less Asian contribution to get to the breakeven? It just seems like a big swing. That's part of it for sure. And then as we said in the script, we are opening retail stores in Q4. As John just said in the last few questions ago, that's kind of a new thing for us as far as the quantity that we're going to be opening with 35 to 40 coming online in Q4. And we believe that's necessary to really position ourselves well for the first half. Okay. And then can you just say it again, I apologize, but John your last comments about your outlook for 2013, what you said about the sales growth and the operating income growth? So I think I when I answered Jim Duffy's question, talking about order timing, Scott is probably the best way to look at this. But when complete season is done, we think that it's going to be 15% to 18% overall growth in backlog relative to the springsummer season. To be surprised, it could be higher. We'll see what it looks like over the next 2 months as orders continue to flow in. And what I said was, is that operating income would follow a similar trend to what we're exhibiting in 2012 where we'll make a lot of money and we'll see higher growth rates in the first half of the year. And we're going to see slower growth rates and a little bit lower operating income in the back half of the year. And when you look at it on a holistic basis, we still believe that that 15% to 20% growth is still achievable. And we still believe that 14%, 15% mid teens operating income is how we want you to think about us and how we try to operate the business today. So you believe just I'm sorry just because I'm a little bit slow. So you believe you can do 15% annual operating income growth next year weighted above that for the first half? We've said that, yes. Okay. In many different forms, that's what we've been doing. Yes. Thank you. Okay. Thanks, Scott. Our next question is from Steve Marotta with C. L. King and Associates. Good evening, everybody. Quick question on inventory. Inventory was up 24% on a year over year basis. You mentioned that a large part of that was early 4th quarter deliveries as well as inventory for stores yet to be open. Is it possible to tease out those extra factors and compare inventory on an apples to apples basis year over year? Yes. I'll do it quickly because we're kind of running out of time. So we're thinking about 20% of that growth in inventory is associated with our retail stores, 20% is associated with our growth in our ASP. The product mix that we see in the overall and about the rest is related to building of inventory and timing of inventory receipts and other investments that we're making to position ourselves for strong revenue growth in the first half. But is it possible to again tease it out on a 4th quarter instead of being up 24% on an apples to apples it would have been up excluding those early deliveries as well as for the store openings? Well, as we said at the Analyst Day, we will have a little bit of an anomaly in Q4 because the inventory will be about $15,000,000 to $20,000,000 higher on a year over year basis simply because of the way we're receiving our shipments from our factories overseas. So we did talk about that at the Analyst Day. It's important to remember that when you guys do your analysis for the Q4 inventory expectations. But when you think about Q3, it's that 2020, 60 kind of split. Okay. Forgive me, I'm a little new to the story. Do you have have you ever given expectations for year end inventory levels? And if so, would you like to offer now? Well, I think the way that we've talked about this is our objective is that we would be between 3 and 3.5 turns per year. Great. Thank you. The turnover objective has been. Thank you very much. That's great. Our next question is from Mike Swartz with SunTrust. Hey, good afternoon, everyone. Could you maybe give us some more color on how the inventories look at the wholesale channels right now maybe even with the fall, winter and spring lines? Could you ask that one more time? Yes. Could you maybe give us some color on how inventory levels are at the wholesale channels? In the Asian and European markets, you don't have the same dynamics and vehicles in place to be able to look at inventory position. Here in the U. S, the systems are much more integrated, people are much more open with information. Today, our inventory levels on spring summer products is this work through the Q3 are quite lean in most of our major accounts. Placement of fall holiday orders relative to spring summer isn't that significant. So when we look at inventory levels today, they're fairly lean. In a couple of places, we're actually seeing the sell through, be it such a at a high rate relative to their buying that we're actually starting to see someone some at once orders for product. And I'll give you an example. So DSW for example, they've taken for the first time this year our cobbler collection of shoes. It's in a category kind of itself lot of more hunter style and equestrian style boots in market this year. And so that's a kind of a nice add on for them indoor lined type of clog product has done well. And so we see some at once business coming there. But overall, we don't see inventory levels in our wholesale accounts to be growing. Okay. And then one final question. Could you maybe give us some color as well on the of your backlog, how much of that would be new product versus some of the traditional or classic footwear? About 35% to 40% is what we see for SpringSummer 13 orders. And how does that I guess how does that line up versus last year and years prior? Slightly higher. In last year, we ran in maybe the lower 30% range, so slightly higher this year. Okay, great. Thank you. Our next question is from Jim Chartier with Lonest, Crespi and Hardwick. Good afternoon. John, I know you've been asked this in the past, but any update on your thinking on a share repurchase program at this point? Yes. I think I'll let Jeff maybe Jim take that. Yes. I think, Jim, when we look at our cash balances and our capital structure, we're pretty proud of the cash reserves that we built. They've increased substantially over the past few years. We continue to be very thoughtful on how we choose to deploy the cash. Stock repurchase is obviously one way to do so. The only comment I think we're willing to make today is we continue to evaluate our options to maximize the returns on the cash. And we maintain a very conservative and appropriate capital structure that we can weather the storms economically across the globe. We do have an existing authorization to repurchase up to 5,500,000 shares of our common stock. And we're just we're always looking at what's the best use of our capital is. Great. Thanks. Thank you. And our final question comes from Sam Poser with Stern AG. I just want to verify that when you're you're talking about operating income growth next year. So basically we're looking at basically the earnings growth off of that lower off that $1.36 number not off the 1.48 Yes. I mean Because you feel because there'll be a more normalized tax rate. Correct. Yes. The tax rate has been abnormally benefited by that non recurring income tax benefit in Q3, Sam. So when you look out into next year, you got to adjust for that. And as I said, you have that additional issue of the USA being more profitable next year again, which puts some upward pressure on the tax rate being that the U. S. Has such a very high tax rate relative to the rest of the world. So you expect the mix to grow into the U. S. A little more next year just based on the way things are growing? Yes. Just when you look at statutory accounting and the USA tax rate is impacted by the USA net profit. There's a lot of variables and those variables are all moving favorably for our business in the USA. Okay. Well, thank you very much. Good luck. Welcome, Sam. Thank you. We don't see any other questions in the queue at this point in time. So on behalf of us within the Crocs Management team, we thank you for joining us today on the call. We look forward to talking to you in January. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation.