I would like to remind everyone that this conference is being recorded. It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead.
Thank you, and thank you all for joining us for our third quarter 2012 earnings conference call. Participants from the company include John McCarvel, President and Chief Executive Officer, and Jeff Lasher, Senior Vice President and Chief Financial Officer. During today's call, John McCarvel will share some opening remarks, cover third quarter highlights, and talk briefly on Crocs' corporate strategy. Jeff Lasher will review our third quarter financial results in detail and cover guidance. John McCarvel will then wrap up our prepared remarks with a few closing comments. Earlier this afternoon, we announced our third quarter 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-K, 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-K 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 regarding currency on this call. Explanation of those metrics can be found on the earnings release filed earlier today. I'll now turn this call over to John McCarvel.
Thanks, Will, and thanks for joining us this afternoon as we discuss our third quarter results. The third quarter demonstrates how diversified Crocs is today. We're operating in a global marketplace with balanced distribution channels which benefit Crocs and our shareholders. Revenue for the quarter increased 7.5% to $296 million. 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 million, 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 Crocs. Revenue for the quarter increased slightly less than we had expected. I would like to discuss two 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, at once 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 one 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, the 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 pay off, specifically in products that carry higher price points in our clog business. In the third quarter, 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 are 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 RainFloe, 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 third quarter. We experienced strong sell-in and sell-through of our 2012 spring/summer products. Additionally, we are seeing solid sell-through of our new fall/winter products too. The solid and improving performance of the brand can be seen both wholesale and our direct consumer channels. Retail comp gains were above 9% in the U.S. marketplace for August and September. Second, 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. 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 clog brand. I remind you, the growth rates in the back half of the year are lower than those in the front half of the year. Third, a lot has been written about the Asian marketplace and the changes that are occurring. The market is changing, and it's changing rapidly. To us, so are 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 Asian 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, 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 the improved brand image and the shopping experience. We're seeing more interest in European customers in Crocs' new product offering outside of the clog. 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're committed to the well-being of our neighbors and social environment. Next month, we will further underscore our commitment to the environment by publishing our first sustainability report planned for release on November 1st, 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 million for Q3, up $20 million 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%. Second, 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 are up 3%. Third, we were able to focus on enhanced profitability as we generated improvement in operating margins of 80 basis points, driven by better product margins. Fourth, we continue to focus on building up a strong balance sheet as we ended the quarter with $313 million 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 million. 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 million, with lower than expected direct-to-consumer revenue of about $10 million, 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 a delayed shipment of $2.5 million 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 continued 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 third quarter increased 18% to $112 million. 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 third quarter revenue derived from the clog silhouette grew slightly to 48% from 46%. This was in part driven by the return of the Mammoth this season. Our new product introductions globally represented about 35% of our Q3 unit sales. As we highlighted at our Analyst Day earlier in the year, we continue to grow the clog 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 12.4 million pairs.
For the first nine months, total unit sales have been up 40.1 million pairs, up 4% from the first nine months of 2011. While ASP has increased about 8%. Gross profit for Q3 2012 was $161 million, up from $147 million. 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. Our margin was slightly impacted by lower than expected retail growth in Asia. Third quarter 2012 SG&A increased 8% to $121 million, compared to $112 million in Q3 2011. As a percentage of sales, SG&A was 40.8%, essentially flat to 2011. The SG&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&A declined 5% compared with last year, as we tightly managed SG&A costs and leveraged our existing infrastructure at our corporate and regional locations. Overall, Q3 operating income increased 14% to $40 million, or 13.5% of sales, primarily driven by improved gross margins. In Q3, we had a non-recurring tax benefit of $11 million as we successfully defended certain tax positions around the globe and released 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 and will be on the higher end of our forecasted rate range of 18%-22%. Net income was $45 million or $0.49 per diluted share on 91.1 million shares, compared with $30 million or $0.33 per diluted share in the prior year.
We ended Q3 with $313 million in cash, nominal bank debt, and inventory of $188 million. 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 million. Inside this result, Americas's backlog is up 19%, Europe is up 49%, and Asia is up 40%. On a quarterly basis, backlog for Q4 deliveries represented $71 million, up 5% from 2011. Backlog for Q1 2013 stood at $217 million as of September 30th and was up 38%. Backlog for Q2 2013 deliveries totaled $107 million 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 fourth quarter of 2012, we expect to generate revenues of about $220 million, 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 in a challenging international macroeconomic environment, we estimate the company will break even on a net profit basis in the quarter. Currency estimates used for the quarter are $1.30 US dollar to the euro and JPY 79 to the US 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 fourth quarter estimated EPS, we anticipate full year 2012 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. For a 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 third 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-booked business for spring/summer 2013 product line has been received very well. Positive order flow, bookings from all of our major wholesale partners. 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%-18% higher than spring/summer 2013. Spring/summer products remain the foundation for our business, and while we are making steady progress to grow Crocs into a four-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. With that, we'll open up to questions.
If you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off in order to allow your signal to reach our equipment. Also, if you pressed star one earlier during today's call, please press star one again to ensure our equipment has captured your signal. We will pause for just a moment to allow everyone an opportunity to signal. 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 bit more to the Asian piece of the business, and very helpful for that regional split out that both you and Jeff provided. 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. 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. 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, then how that overall impact of mix change, geographic mix change affects the overall profitability of the business. I think what we'll do, Erinn, 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. We saw very little change to that in the Japanese market. Sell-in and sell-through was on trend, on track.
Starting really in late July 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%. 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, I adhere to that same belief that we'll see growth in the Japanese market in that 5%-10% range, where we'll see much higher growth rates in other parts of Asia.
Relative to our overall business there in Japan, the wholesale business, as Jeff mentioned, our total sales in Japan in the third quarter was flat, it was more that back end, back portion of the third quarter where we saw retail degradation.
Okay, that's helpful. 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? 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?
You talked about this in a global environment or specific to?
Sorry, that was specific to Asia. 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 consumer behavior during a tourist kind of outing or endeavor, what we are seeing is traffic is down, spending 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. I think it's depending upon the market and depending upon really the situation that's specific to each of those countries.
Okay, that's helpful. 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 the pattern of the quarter.
I think without a doubt, other brands that have reported before us and have talked about what has happened in their European business, really around the Olympics, the two, three 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 of tourist traffic in London and in the U.K. marketplace. I think in other destinations in Europe outside of the U.K., 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. A lot of the new products that we're putting in our retail stores in Europe performed very well. Yeah.
Erinn, maybe before we move past the pillar, 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&L. Maybe I'll let Jeff kind of take that.
Yeah, Erinn, 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, the U.K. sector of Europe, were lower than what we had originally expected for the quarter. That resulted in about a $10 million shift downward in the retail business overall. We were able to make some of that up with the wholesale demand that we saw during the quarter, about half of that revenue was made up through the wholesale demand at an at-once basis during the quarter. 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 million, which is what you see in the operating results for the quarter.
$10 million lower retail coming out at 70%, 75% margins, replaced with $5 million higher wholesale, which comes in at around about $2.5 million of margin for us, results in about a $5 million operating income. 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. Like John said, we're really happy with the performance, especially in the latter two months in the U.S. business. As John said in his script, 9% growth in those two months in the Americas locations as we set ourselves up for the fourth quarter selling season.
Mm-hmm. No, thank you, guys. That's very helpful. I'll let someone else jump in. Thank you.
As a reminder, it is star one to be placed into the queue for questions. We ask that you limit yourself to one question. Our next question comes from Sam Poser with Sterne Agee.
Hi, guys. A question about 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. I did not, Sam.
Your guidance for the fourth quarter, that was about $0.12 if I did my math right, correct?
Yeah. 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. 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.
You've guided to about $1.48, $1.49 on your last call for the full year, correct?
Yeah.
Okay. 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 guess it's just the question is, am I thinking about that correctly?
I think so.
Then in Q4, how do you look at the SG&A versus the gross margin on the revenue, on the $220 million to get to the flat earnings?
We think we'll be at about $220 million 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. We look at the fourth quarter 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. 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 event impacting the Q4 consumer demand in the U.S.
Well, thanks very much. I'll jump back in.
We will take our next question from Jim Duffy with Stifel Nicolaus.
Thanks. Hi, guys. 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'd be great. Momentum in the spring line clearly looks very good. Fall holiday progress seems to be more difficult to come by. Your revenue's 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.
Let me start with kind of how we think about backlog first. I think that this quarter is a bit of an anomaly where we would see, in prior seasons, order flow come in starting at a 7/15 date all the way through 10/15, 11/15. We even get orders in 12/15 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, as a company. I think we're doing a better job of pre-lining and preparing our customers. I think that in a lot of our more mature markets, Asia and the U.S. especially, where we're working with major retailers that are booking in the 8/15 and 9/15 dates.
What we're seeing is orders that sometimes would have trickled into the fourth quarter to be processed internally now were entered really in the third quarter. We think that it artificially inflates the actual growth in backlog to the point of 10%-15%. I think you'll get a better feel for overall backlog for first and second quarter when we report the 1231 backlog. With all that said, I will come back to something that Jeff said, and that is that as he gave the breakout for Q2, you can see the strength of our spring/summer 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 two with the products for next year. Optimistically thinking, we think that there's some momentum there that's going to play itself out into 2013.
The skewing and the movement of the brand to spring/summer is a natural phenomenon in that we have a place in most wholesalers' minds where we sell and are taking more shelf space and opening more doors. There is great product that falls into that category. It runs a longer period of time, and unfortunately, it's just a much shorter selling season for fall/winter. 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. 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 and the products that are coming to market. Then to finish that, Jim, yes, it does.
I think, what Jeff and I have said over the last two and a half years now is that we really do try to manage the business. As we've communicated to the investors and to 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 fourth quarter than most brands would. It's a matter of timing when the stores are coming open. A few of those stores should've opened in Q3 that have rolled over into Q4. It's an investment that we believe that we have to make and that will pay off in the long term.
Opening those stores will create a little bit of downward pressure on operating income in the fourth quarter.
Okay. That's helpful, John. Good answers. Does the concentration in spring/summer change the go-to-market thought process at all? Clearly, wholesale has the potential to grow as a % of the mix in spring/summer 2013.
I think every brand that struggles with this, and I think other brands out there, Deckers, others, with UGG. I think we all strive to be a 12-month brand. We all strive to be a four-season brand. It just takes a lot of work, and it takes a lot of focus. Some things come more naturally. Spring/summer comes more naturally for us. That's where we started. In the consumer's minds, that's where it resonates. I just think you have to work harder, both from a marketing and from a product standpoint, to overcome those weaknesses. We've got to keep working harder at the back-to-school and the fall/winter products.
I appreciate that perspective. Thank you.
Our next question is from Corinna Freedman with Wedbush.
Hi there. Sorry, I jumped on late. I'm not sure if you gave the tax rate for fourth quarter, what you're expecting. If you could also talk about comp expectations for fourth quarter. What's the comparison? Any color you can give us quarter to date. Additionally, if you could talk about the ASPs of the backlog. Thanks.
Sure. I'll take one at a time, maybe not in the order you gave them. The comp guidance that we've included in our number, we basically try to take the year-to-date number and roll that in. When the regions are sitting down to think about how their revenue's 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. You can kind of use the year-to-date number. 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's going to be about 50%. That leaves the rest being SG&A and taxes.
Tax rate in Q4 is kind of difficult to estimate as our operating income would be relatively small. It's a relatively small tax expense that we're anticipating in Q4. The ASP and backlog, we're looking at about an 8.3% increase in our ASP in our spring/summer backlog. 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 spring/summer 2013.
Okay. Thank you.
Our next question is from Reed Anderson with Northland Securities.
Hi, guys. Most of my questions have been answered, a couple of follow-ups, just to that last one. Jeff, the ASP comment you made, that 8.3% spring/summer, is that relative to that 15% number John was talking about when you look at your spring/summer business, or is it relative to more some other figure?
I'll help you out with this. As John said, we saw a little bit of activity in excess of what we've typically seen. Our units are actually a little bit higher at the end of September 30th. The ASP being about 8%, that's a number that will probably continue to carry on. It's going to be a pretty good balanced growth for spring/summer based on the early results between ASP and unit growth.
Okay. The answer you gave on the comp guidance. You used the year-to-date numbers, the reference for how you plan that. Should we infer from that you then are expecting a rebound in those Asian markets, Japan? Is there something you've seen to suggest that will happen? Is that going to play out differently?
I think, Reed, when you look at it on an aggregate basis, as Jeff talked through that, we think on an aggregate basis.
Okay
3% is a reasonable comp growth number. I think that as I said, 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. We have three more weeks until the election. What's the consumer sentiment going to be, and how are brands going to react in the holiday season? Last year it became highly promotional early on. I think, as Jeff said earlier, we think 80 basis points increase in gross margin in the fourth quarter. We don't expect to be as promotional in the fourth quarter this year as we were last year. That's.
In the U.S. or overall?
In the U.S. It's really a U.S. phenomenon.
Yeah
discounting in the fourth quarter.
Yeah.
We think that we'll see good comp performance in the United States. Based on where we are, the products that we have in stores and the promotions that we have, I think certain parts of Asia will do well during the fourth quarter, and I think Japan will remain challenged. On average, we think 3% is a good estimate for the quarter.
Yeah.
That's very helpful.
Reed, also don't forget that in the fourth quarter, the Americas represented last year $43 of $74 million in total retail sales.
Yep
the game in the fourth quarter really is an Americas retail game. On the internet side, it was $19 of $25.
Yeah.
It's really important to us to have a strong Americas performance in Q4.
Just one last one I'll sneak in. 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, et cetera. I guess, it still was a big differential. 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.
Okay.
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 W. Baird.
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 million. I think that pencils out to be sort of high single-digit growth. Could you give us any color as to how you think of that growth in terms of geographies or by channel?
I think when you look at that 220 number, as I just talked to Reed about, so much of our retail sales come from the Americas. Last year we did $74 of $203 million was associated with the retail, and in that, $43 million or so was attributable to the Americas business. 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 fourth quarter from the direct to consumers, it's not as important as the Americas business.
It will be important in spring/summer, when those marketplaces get back to their seasonal uptrend.
Jeff, maybe let me ask the question a different way. Again, when you look at your sort of three geographic segments or three 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.
Okay.
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've 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. 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 investment that we've made in retail and to a lesser extent, Asia.
Got it. 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 2013. We're just in the process of finishing up our budgeting here at the end of this month, early November. I think I mentioned the range of 75 to 125 stores in total globally next year as 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 exit the kiosk format.
Okay. One last quick one. On the backlog, even after you adjust the numbers for the early ordering, it still sounds like a very healthy number. 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 U.S. and in Asia. We're just kind of getting ourselves re-established in Europe. We will see Crocs go into places like Debenhams and Tesco and other major retailers in the European market that we haven't seen in prior years. Do remember next year that we will have a full year of operations with Benelux now being fully integrated in as a direct market for us in 2013.
Got it. Okay. Thanks, guys. Good luck.
We will take our next question from Kelly Hauser with BB&T Capital Markets.
Hey, this is Scott Krasik. Thanks for taking my question. The first one on the backlog that it was a big European number. 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 a big percentage.
Sure.
Scott. I think what we've seen, again, new management team that's now been in place for about a year, really working with more major accounts. Last year, I think we went into the spring/summer 2012 timeframe just not being as well connected as we are this year. I think the increase in backlog is more new products, more diversity as a brand, and some new accounts. On a dollar basis, it's not a significant increase, around $18-$29 increase.
Relative to a year ago, you were sitting there with too much clogged inventory, slowing sell-throughs. 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. It's the same thing, I think, that happened here in 2009. 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. 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. Yes, I think it's a slow process. It's hitting singles. Today is the first game of the World Series.
It's a matter of kind of slowly easing into it, they need to be convinced that we're a brand that they can work with and work for on a long-term basis.
Okay. Jeff, just on the Q4 guidance, the difference between the 220 this year and the 200 last year, you're able to do $0.06. Gross margins are going to be up. Is that just a makeup of less Asian contribution to get to the break even? It just seems like a big swing.
That's part of it, for sure. As we said in the script, we are opening retail stores in Q4. As John just said on 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 35-40 coming online in Q4. We believe that's necessary to really position ourselves well for the first half.
Okay. Can you just say it again? I apologize, John, your last comments about your outlook for 2013, what you said about the sales growth and the operating income growth.
I think when I answered Jim Duffy's question, talking about order timing, Scott, is probably the best way to look at this. When a complete season is done, we think that it's going to be 15%-18% overall growth in backlog relative to the spring/summer season. Could be a surprise, could be higher. We'll see what it looks like over the next two months as orders continue to flow in. 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, we're going to see slower growth rates and a little bit lower operating income in the back half of the year. When you look at it on a holistic basis, we still believe that that 15%-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.
You believe, I'm sorry, just because I'm a little bit slow. 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. Awesome.
In many different forms, that's what we've said.
Yeah. Thank you.
Okay. Thanks, Scott.
Our next question is from Steve Marotta with C.L. King & 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 fourth quarter deliveries as well as inventory for stores yet to be opened. Is it possible to tease out those extra factors and compare inventory on an apples-to-apples basis year-over-year?
Yeah, I'll do it quickly because we're kind of running out of time. 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, timing of inventory receipts, and other investments that we're making to position ourselves for strong revenue growth in the first half.
Is it possible to, again, tease it out so on a fourth quarter, instead of being up 24% on an apples-to-apples, it would've been up excluding those early deliveries as well as for the store openings?
Well, as we said at the Analyst Day, we'll have a little bit of an anomaly in Q4 because the inventory will be about $15 million-$20 million higher on a year-over-year basis simply because of the way we're receiving our shipments from our factories overseas. 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. When you think about Q3, it's that 20/20/60 kind of split.
Okay. Forgive me, I'm a little new to the story. Have you ever given expectations for year-end inventory levels? 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 three and three and a half turns per year.
Great. Thank you.
That's what our internal 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?
Yeah. 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 as it's worked through the third quarter are quite lean in most of our major accounts. Placement of fall holiday orders relative to spring/summer isn't that significant. When we look at inventory levels today, they're fairly lean. In a couple places, we're actually seeing the sell-through be at a high rate relative to their buying, that we're actually starting to see some at-once orders for product. I'll give you an example. DSW, for example, they've taken for the first time this year our Cobbler collection of shoes.
That's a kind of a nice add-on for them, indoor lined type of clog product that's done well. We see some at-once business coming there. Overall, we don't see inventory levels in our wholesale accounts to be growing.
Okay, one final question. Could you maybe give us some color as well of your backlog? How much of that would be new product versus some of the traditional or classic footwear?
About 35%-40% is what we see for spring/summer 2013 orders.
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, slightly higher this year.
Okay, great. Thank you.
Our next question is from Jim Chartier with Monness, Crespi & Hardt.
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?
I think I'll let Jeff, maybe Jim, take that.
I think, Jim, when we look at our cash balances and our capital structure, we're pretty proud of the cash reserves that we've 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. 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 5.5 million shares of our common stock. We're always looking at what the best use of our capital is.
Great. Thanks. Thank you.
Our final question comes from Sam Poser with Sterne Agee.
I just want to verify that when you're talking about operating income growth next year, so basically, we're looking at basically the earnings growth off of that $1.36 number, not off the $1.48.
Yeah, I mean.
There'll be a more normalized tax rate.
Correct. Yeah. The tax rate has been abnormally benefited by that non-recurring income tax benefit in Q3, Sam. When you look at it in the next year, you got to adjust for that. As I said, you have that additional issue of the U.S.A. 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.
You expect the mix to grow into the U.S. a little more next year, just based on the way things are growing?
Yeah. When you look at statutory accounting and the U.S.A. tax rate is impacted by the U.S.A. net profit, there's a lot of variables, and those variables are all moving favorably for our business in the U.S.A.
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. 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.