Earnings Call: Q2 2012

Jul 25, 2012

Please standby. Welcome to the Crocs Incorporated Second Quarter Fiscal twenty twelve Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time. We ask that in the interest of time, participants limit themselves to one question each. I would like to remind everyone that this conference is being recorded. Earlier this afternoon, Crocs announced its 2nd quarter fiscal 2012 financial results. A copy of the press release can be found on the company's website at www.crocs.com. The company 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 pipeline. Crocs cautions you that these statements are subject to a number of risks and uncertainties Accordingly, actual results could 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's provision of the Securities and Exchange Act of 1934. Crocs is not obligated to update its forward looking statements to reflect the impact of future events. The company may refer to certain non GAAP metrics regarding currency on this call. An explanation of those metrics can be found in the earnings release filed earlier today. Now at this time, I would like to turn the call over to Mr. John McCarville, Chief Executive Officer of Crocs. Please go ahead, sir. Thank you. Thanks for joining us this afternoon as we discuss our Q2 results. I'm joined by Jeff Lascher, our Chief Financial Officer. After I share a few opening comments, Jeff will review our Q2 financial results and provide further detail on our guidance. Before we jump into a review of the quarter, I'd like to review a few of the key points we shared with many of you during our Institutional Analyst Day in late May. This is an opportunity for us to discuss in detail how the Crocs brand has evolved from one iconic product into a true casual lifestyle footwear brand by diversifying into other relevant categories such as sneakers, flats, boots, sandals to name a few. Critical to our global expansion as a casual lifestyle footwear brand is product innovation. This will help drive balanced channel balanced channel and geographic growth as we focus on the identical long term growth drivers we discussed at last year's Analyst Day. These 4 organic growth drivers are as follows: 1, sustained growth in all regions 2, product driven with ASP expansion 3, wholesale expansion and 4, investment in our direct to consumer channels in retail and the Internet. We're halfway through the year and we're very pleased with where we are today. In a far more difficult environment than 2011, we are on track to deliver our 3rd straight solid year of top line growth driven by global omnichannel operations. Our new products and marketing campaigns are driving new consumers to the brand. All this coupled with strong management of the business, we have exceeded our EPS target as we deliver on our commitment to profitable growth to our shareholders. Now to the Q2. Sales increased 12% to an all time record $331,000,000 This was achieved through 3 of the 4 growth drivers I just listed, new products with higher ASPs, wholesale growth and the expansion of our consumer direct channel. We realized sales fell short of our expectation and this came primarily from the inability to drive growth in all regions with the European markets becoming increasingly more challenging over the past couple of months. In addition, sales growth in our U. S. Retail stores fell short of our expectations in the Q2. While we were disappointed sales were slightly below plan, I am pleased with the restraint we showed in limiting discount markdown on products in order to perceive preserve margins. That's not to say we won't be promotional at times, we'll continue to utilize this lever going forward. However, our plan is to be more strategic and flow end of life product through our outlets and our price channel markets in a matter that is the least impact to the bottom line and it doesn't damage the brand's image. Getting back to what drove sales in the Q2 starting with new products. We continue to see our commitment to innovation pay off in newer collections of wedges, sandals, sneakers, boat shoes and flats, most of which in aggregate carry higher price points. In the Q2, more than 54% of the volume came from new styles and non clogged products, while less than 46% was generated by clogs. This trend should continue in the back half of the year as boots and other new colder weather products increase as a percentage of our overall mix. Wholesale expansion came from a combination of higher pre books and an increase in net one sales driven by by demand for a new springsummer product lines. This year, the breakdown between pre books and at once was approximately 80% 20%, respectively, compared to 77% 23% respectively last year. In the U. S, we continue to gain momentum, shelf space in the family footwear channel and mid tier department stores, which have emerged over the past 2 years as the brand's sweet spot. In Asia, where acceptance of new styles has consistently outpaced our other regions, wholesale gains are primarily coming from Japan, China and throughout the Middle East where our distributor partners continue to aggressively open wholesale accounts as well as their own stores. And finally, the economic situation in Europe has made it more difficult to turn around this one sizable business and recent wet weather in several key markets has compounded our issues in the Q2. With that said, we're optimistic that our current efforts to rebuild key wholesale relationships through a more complete product offering and improved execution will yield positive gains beginning next year. Turning to our direct to consumer business. Retail sales increased 23% over a year ago, fueled by the addition of 87 net new locations over the past 12 months. Over this period, we've closed 21 kiosks including 3 in the second quarter as we focused on opening larger more productive store format. Year to date, we've opened a net of 0 net retail locations in the United States, 35 in Asia and 19 in Europe and we remain on track to open 100 net new locations in 2012. With regard to comps, as we expected, our momentum slowed from the Q1 due to the Easter shift in the United States and the warm start to the season, which we believe hold some sales forward out of Q2. Versus our expectations, comp sales were a little light in the Americas region, as I mentioned. Looking at the Americas region's comps for the 1st 6 months, which we think is a more accurate picture of the channel's recent performance were up 3%. Asian comps continued to outperform. The company averages 7%, while Europe was up 13%, which is a very encouraging trend under the current circumstances there. With that, I'll turn the call over to Jeff. Thank you, John. Hello, everyone, and thanks for joining us. This afternoon, I'll be discussing Q2 2012 results and I will start with some highlights before going into some detail. First, revenue for the quarter increased $35,000,000 or 12 percent to $331,000,000 and this level represents a record volume for any quarter in the company's history. On constant currency basis, revenue grew 15%. Same store sales on a constant currency basis increased 2% globally in our retail channel and Internet grew 10%. We also generated a record average selling price at $22.46 during the quarter. 2nd, we were able to focus on enhanced profitability as we generated improvements in our operating margin driven by gross margins, which expanded 170 basis points to 59.3% compared to Q2 last year. 3rd, we continue to focus on building up a strong balance sheet as we ended the quarter with cash of $279,000,000 and inventories up just 6% on a year over year basis. These factors combined contributed to the 0 point 7 dollars increase in diluted EPS to $0.68 per share during the quarter, which exceeded our quarterly guidance. Looking at the results in more detail. For the Americas region, we generated growth in each of our 3 channels. The direct to consumer channel grew during the quarter with increased sales of 9% in retail. We ended the quarter with 197 locations, up from 192 locations last year. At the end of the quarter, we operated 22 less kiosks than last year as we continue to open full line and outlet locations. Same store sales in Americas were down 1% on a constant currency basis compared to the same period last year. As we said in our Q1 call, we anticipated an impact from the earlier Easter and early onset of warm weather. For the 6 months of the year, our Americas same store sales have increased 3%. Internet sales in the Americas improved 13% and wholesale revenue improved 12%. Specific to United States, revenue has increased 11% for the quarter and represented 33% of total global sales. Sales in Asia were strong across all channels. Japan grew 6% during the quarter and was our largest revenue generating country in the region, representing 38 of sales in the Asia region and 17% of total global sales. Recall that last year in results for Japan, last year included $3,000,000 of revenue shift from Q1 to Q2 after the tragedy last year. Excluding this shift sales would have been in the low teens range. Asia retail sales increased 39% during the quarter as we ended with 2 33 stores up from 175 a year ago. Same store sales in Asia on a constant currency basis increased 5% from 2011 with strength in same store sales located in China and Korea. Internet sales in Asia continued to experience strong sales generating a 44% increase off of a relatively small base. Our China business grew 55% over last year and our Korean unit increased 53% over last year. Turning to Europe, total sales increased 5% on a constant currency basis during the quarter. A small decrease in our wholesale channel and Internet channel was more than offset by growth from retail. With the addition of stores and a 10% constant currency same store sales increase driven by results in Germany and Russia. In the retail channel, we ended the quarter with 54 locations, up from 30 a year ago. In the second half of twenty twelve, we will acquire 10 stores from our former Benelux distributor and we have plans to open to 20 to 30 additional locations throughout Europe. Wholesale sales on a constant dollar basis were about flat. Internet sales were down for the quarter as decreased as we decreased the promotional cadence and deeply discounted freight and returns. The weakening Europe currencies primarily led by the euro was offset by strength in the Asian currencies during the Q2 as compared to our expectations for the quarter. Globally, retail channel revenues in the in the 2nd quarter increased 23 percent to $112,000,000 While retail locations increased by 22% as we ended the quarter with a total of 440 sorry, 4 84 company owned retail locations globally, up from 397 last year. This includes 220 full price stores, 108 store in stores, 111 factory direct stores or outlets and 45 kiosks. Globally, same store sales for the quarter increased 2% during the quarter on an FX neutral basis. On a year to date basis, same store sales have increased 5% over last year with Americas at 3%, Asia at 7% and Europe at 13%. For the remainder of the year, we plan to open an additional 45 to 55 stores. At present, we project our full year store openings to be 100 to 110 net additions. This is broken down by region with Americas net openings of about 10, Asia of about 40 and Europe of about 50 to 60 including the 10 acquired partner stores. Turning to product data. Percentage of 2nd quarter revenue derived from clogged silhouette fell from 49% to 46% in the quarter. Also our new product introductions globally represented about 35% of our Q2 unit sales. As we highlighted at our Analyst Day earlier in the year, we continue to grow the clock silhouette by diversifying into other important categories. A few product highlights during the quarter included the strength from the Duet product, women's wedges and our translucent collection. Average selling price in Q2 increased $2.50 or 13% to $22.46 compared to last year in the same period. Globally footwear unit sales in the quarter were down 1% to 14,100,000 pairs. For the 1st 6 months total unit sales were 27,700,000 pairs, up 3 percent from 20 11 first half. Gross profit for Q2, twenty twelve was $196,000,000 up from $170,000,000 in the Q2 of 2011. Gross margin was 59.3 percent in Q2 versus 57.6% 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 and a continued overweight growth of our Asia business. Introductions and a continued overweight growth of our Asia business. 2nd quarter 2012 SG and A increased 15% to $125,000,000 compared to $108,000,000 in Q2 twenty 11. As a percentage of sales, SG and A was 37.7%. The SG and A dollar increase was driven by investments in our direct to consumer channel as we continue to build our retail build our retail network globally. Our indirect SG and A increased 5% compared to last year. Overall, operating income increased 15% to $71,000,000 or 21.5 percent of sales, primarily driven by improved gross margin and increased revenue. Additionally, gains on foreign currency transactions had a positive impact on Q2 results by $1,600,000 These gains were comprised of foreign currency gains and losses from the remeasurement of certain balance sheet items and intercompany settlements, net of the impact of foreign currency derivative instruments. Net income before taxes for Q2, 2012 improved 9,000,000 to $74,000,000 on $35,000,000 of additional revenue. Income tax expense for the quarter was $12,000,000 for an effective tax rate of 17%, slightly below our expectations as our country profit shifted to lower rate locations in the quarter. Net income was $61,500,000 or $0.68 per diluted share on 91,100,000 shares compared to $55,500,000 or $0.61 per diluted share in the prior year. Recall that last year we had a one time $3,600,000 tax benefit or $0.04 per share. Our balance sheet continues to be strong. We ended Q2 with $279,000,000 in cash, 55% improvement from 2011 levels of $180,000,000 Inventory was $166,000,000 up 6% from last year. And at the end of the quarter, we had essentially no bank debt. Moving on to backlog. Backlog at the end of the quarter increased 3% from the same period a year ago to $173,000,000 with ASPs of $20.21 This is up against the 2011 backlog increase of 42% experienced last year. Regionally, Americas backlog increased 12%, Asia was flat and Europe was down 11%. In constant currency, our backlog grew 6%. In June, the company made the decision to replace our current enterprise resource planning system. We have selected SAP as our platform and anticipate the new system will launch in 2014. The incremental costs in 2012 associated with this project are expected to be approximately $0.01 per diluted share per quarter and is included in our full year guidance. Moving on to guidance. For the Q3 of 2012, we expect to generate revenues of $300,000,000 We estimate diluted EPS in the $0.42 to $0.44 per share range. This compares to diluted EPS of $0.33 last year. Currency estimates used for the quarter are $1.24 to euro and $0.79 to the U. S. Dollar. Our guidance for Q3 2012 includes an assumed effective tax rate of 19% to 20%. We expect that in Q3, the relatively strong dollar compared to the same period in 2011 will represent a 5% headwind overall. In Europe, we expect that the stronger dollar will represent a 14% headwind in Q3. This stronger dollar will also impact our gross margin slightly, but we estimate that our cost controls and leverage will offset this impact. Back in May, during our Analyst Day, we provided full year guidance of $1.47 per share in earnings. Our year to date EPS of $0.99 combined with these Q3 estimates totaled 1 point $4.1 to $1.43 per share through the end of September. For the full year 2012, we project EPS to be between 1 $0.50 1 0.54 dollars which includes the benefit from Q2 and ongoing cost leverage that will offset our above mentioned $0.02 per share from the new enterprise system. This guidance assumes an effective tax rate at the low end of the 19% to 21 percent for the full year and continued exchange rates mentioned earlier. We estimate that full year growth in U. S. Dollars will be about 14% over 20.11, but in constant currency dollars, we estimate overall growth will be about 17.5% right in the middle of the range we provided earlier this year. Thanks. And now I'll turn the call back over to John. Thanks, Jeff. We're very pleased with our bottom line performance year to date as diluted earnings per share are up 16% compared with the 1st 6 months of 2011. This has been driven by record revenues coupled with meaningful gross margin expansion from higher product margins and supply chain efficiencies. Based on our revised guidance, we are expecting on improving our profitability trends to continue over the 2nd 6 months of 2012. With regard to top line trends, given the ongoing challenges in Europe, including currency headwinds, coupled with the tough sell in climate for fall products as a result of last winter's mild weather, we encourage we are encouraged by our backlog. We are optimistic about a wider portfolio of new fall winter products and expect they will generate excitement at retail, help further establish Crocs as a 4 season brand and give us good momentum heading into the year. Early indications on our spring summer 2013 line in various markets around the world have been very positive. We're just starting to take orders for spring summer 2013 now and we'll be able to give you more details during the Q3 call. Operator, we're now ready to take questions. Thank you. And we'll go first to Erinn Murphy with Piper Jaffray. Great. Thanks for taking my question. John, I just had a question for you actually at first. It sounds like unit sales were down about 1% in the quarter in the second quarter. I thought maybe it would be helpful if you could put this in context for us as with the comment that you made earlier on in your prepared remarks about just restraining some of that discount product as you focus truly on the profitability and the margin. So what would be helpful is maybe to look at that unit sale in Q2 you commented on versus maybe the first half in aggregate and then potentially your plans for the second half as you really focus on driving that profitability? Thank you. I'd be happy to. So the way that we look at our business in the first half of this year crux is that we sold 27,700,000 pairs of shoes in the 1st 6 months versus 26,800,000 pairs of shoes the previous year. Our stated objective has been and we've talked about this in prior calls and during the investor meeting, that we'd like to see 5% of our growth come from unit volume expansion. And in the 1st 6 months on a comparative basis, we're up 900,000 pairs of shoes or 3%. And there are 2, I think factors when you think about growth that are impacting that unit volume growth. And that is that in 2011, we sold 520,000 more pairs of shoes into the discount channels, the TJXs, the big loss into people to move our end of life product, which in this year as we've cleaned up our inventory and we continue to focus on our supply chain management systems. We have not taken product into the end of life kind of channel to dispose of that product. That's 500,020 pairs of shoes that we didn't carry over comp year over year. And if you look at the impact to our European business, we're down roughly 14% unit volume in Europe or about 700,000 pairs of shoes. So had Europe been neutral, had we sold the same amount of product into our kind of discount channel retailers coupled with the 900,000 shoe growth, we would have actually seen a growth of 2,100,000 pairs of shoes, which would be closer to about 8%, 9% growth in unit. So what does that tell us? It tells us that really today in our own existing channels, what we see at both wholesale globally with the exception of probably some markets in Europe and with our own products at retailers, our new products continue to resonate with consumers. That this transition from what we once were in the clog space to truly being able to get new consumers to think about us for flat, for wedges, for other men's products, casual lifestyle space are resonating and we are growing actual unit volume with those consumers. Okay. Thank you. That's very helpful. And just a quick separate question actually on the European macro environment. If you could just speak a little bit more to maybe some of the specific regional trends you're seeing. I know you've started some company management specific structure excuse me, country management structures in kind of U. K. And Germany. How are you seeing those markets contrast to potentially some of the other markets that you're in? Europe like Asia for us, it's a wide diversity of ethnic cultures and weather. When we look at the really Northern European marketplace from England, Holland and really above, we continue to see again a second season of really difficult weather, rainy season on record in Scotland and England. And this clearly has an impact both on the mood of the consumers as well as people shopping for summer products. I think the good news has been is that we have brought in additional management staff into Europe. We are seeing better upsell this year in Germany as we place more products into a wider diversity of retailers in the warmer weather climate where you still have a high number of tourists. We are seeing good sell through in those markets. The new stores that we've opened in France, 2 of the new stores that we've opened in France, the one in Nice that we've talked about is kind of a place where we need to be in Europe on a going forward basis is up 50% over what our expectations were for that store when we opened it. So I think the diversity in the marketplace, the economics in different countries. And just the ebb and flow of financial information also has tremendous impact on the people that live in those countries. And it's impacting consumer behavior and It's impacting the amount of product we're selling this year. Thank you guys very much and best of luck. And moving on, we'll go to Jim Duffy of Stifel Nicolaus. Thanks. Hello, everyone. John, I'm hoping you can share some insights about the changing cadence of the business across the quarter and into the early part of Q3 specific to each of the different regions? I'll give it my best shot. Shot. I think in our U. S. Business, we've kind of seen the ups and downs during the quarter with respect to retail. We've had some good weeks in warmer weather climate and it was clearly impacted by the early spring pull forward and the holidays. As the quarter has gone on, I think we see a little bit more appetite for product, leading into the Q3. For our wholesale accounts, I think across the board and I was out at the end of June visiting 6 of our top 10 accounts. I don't think we've ever had a better working environment. Sell throughs have been good. All of our core wholesale partners are happy with the product line, the traffic that it's driving. And I think that all indications are that we're going to continue to expand, doors presence in all of our major accounts going into 13. Our model as we touched on in both Jeff's presentation and mine has changed a little bit again this year where we have not sold as much or chased as much at once business as we did in the early days of the company. And that clearly impacted a little bit of our top line growth for Q2 just with a model change. I think kind of building on a little bit with what I said to Aaron with respect to Europe, it's a happy day there today in our Amsterdam office that they've actually had 3 straight days of sunshine. And with that people get out and there's some pent up demand, what will that look like in the Q3, coupled with the Olympics starting at the end of this week? The psyche of the consumer will hopefully be in a more positive mode. And I think we're still waiting to see what the impact will be with more people in England in the UK market during these 3, 4 weeks of the Olympics. It's a little bit early for us to tell there. Across our Asian business, you have a good summer going on in the Middle East. We continue to see that extend and expand from what we've talked about before and more store openings with our partners in the region and additional new products going into all of the Middle East countries for the 3rd Q4. A lot of conversations with respect to China and Hong Kong, I don't know that we're in the same realm when we're a casual lifestyle product in that $25 to $50 price point space, we continue to see good traffic across the board. Our business in China and in Korea has been very solid this year. Early indications for pre book for spring 2013 are very strong. And that whereas we don't have final numbers into the system yet, we think we're going to see solid growth in those markets. But we're at a different price point. We're an aspirational brand for the middle class. And we still have a lot of room to grow in China with the amount of wholesale and retail doors that we have in that country. So we're going kind of a little counter direction, Jim, there than maybe what other people have said. And our Hong Kong business has flattened out year over year just because of the same issues that people have seen that less we are seeing less footfall traffic in our Hong Kong stores. But nothing dramatic and that's not really impacting the overall business, just we're comping at a more neutral level year over year. That's very helpful. Thank you. And then in the context of the revenue trends you've seen in Asia during Q2, I was surprised by the Asia backlog numbers. Is there anything unique with respect to the comparison on those? I think that the Northern Asian marketplace is seeing the same kind of challenges weather wise that we saw in both the Americas and Europe. So we still see a little bit of growth with our Chinese wholesale partners. We see a little bit of flatness with our Japanese accounts when it comes to what the appetite for fall winter products are going to be at this point in time, because they also had a short winter there last year. So backlog growth in the Americas was up about 10%. Europe was down about 10% year over year. And our Asian business in total is flat right now with a lot of that, I think, still waiting to see what happens, weather wise in those markets. I think the other thing that happens for us just as we go to the back half of this year is that we're going to have 100 to 110 additional stores, retail locations online this year. And our back half of the year does shift to being a little bit more direct business than it has been wholesale as it's a little bit harder still for us to convince wholesalers to take Crocs as a full holiday brand. Okay. Last question, I'll let someone else jump in. Your inventory management looks really sharp, particularly in light of a sales number, which came in short of what you had previously thought. How did you manage to keep the inventory so tight? And what do you see from inventory levels in the channel into the Q3? So Jim, this is Jeff. When you look at our inventory levels on the balance sheet, we're up 6%. Sales are up 12%. So the team has done a good job of managing that growth in our total dollars of inventory. As far as the channel health of our inventory, we're pretty happy with the levels in the inventory channel. We don't really see any big surprises on either side. But I think that the real key for us from an organization perspective is the focus that this group has put on inventory over the past couple of years and the commitment that we all have to manage our inventory very conservatively and prudently. Great. Well done. Thanks. And as a reminder, ladies and gentlemen, please limit yourself to one question and we'll move on to Karina Friedman with Wedbush Securities. Hi there, guys. I'm just wondering if you could give us an update on your plans for fall and the family footwear channel and how you've been increasing shelf space and increasing your marketingPOS initiatives there. So if you could just give us an update for fall that would be great. Thanks. I think to the U. S. Wholesale market, a lot of conversation when we were out at the end of June with them with respect to 3 key stories, 3 key new product collections that we're launching this year plus 1 extension to last year's cobbler collection of products. It is a little bit harder for us on the sell in there given the inventory positions that most of our key wholesale accounts have in the mid channel and in that kind of mid tier department store arena. So I think we're going to get a little bit more placement based on our conversation out there that we're going to see some of those key stories show up in locations that will either end up in end caps on tabletops that will give us better feeling for whether these new selection of products do resonate with their consumers and if their consumers would truly shop Crocs on a fall holiday, fallwinter kind of basis. So I think the backlog is there. We're getting some additional base and orders going into 3rd and 4th quarters. And now we're going to see what the weather is like and how that executes. And if I can ask a follow-up, do you have an update on your licensing initiatives and what we could expect for fall or holiday? Licensing has continued to be with the primary key partners that we've had in the past with Disney with some of the other properties that we have had. I don't see any change really on licensed products. When it comes to some of the licensing initiatives that we've had around accessories and kids apparel and some other small pieces of apparel. We never thought that it would be a meaningful piece of business this year. It's really something that's in our 3 to 5 year growth initiative. And I think you're going to continue to hear more about that as that continues to grow and be meaningful really over the next 6 to 12 months. Okay. Thank you. And we'll take our next question from Sam Poser with Jurney. Good afternoon. Thanks for taking my call. Can you talk a little bit about the longer term growth plans specifically in South America and Brazil and how you're looking at that and timing of Latin America really? I think our Latin American market, we would consider everything from the Caribbean and Mexico really in the South, as part of that discussion equation. I think we feel that the business is continuing to grow nicely in many of the markets there. Today we sell into Ecuador, Venezuela, Chile, Argentina. We have our own operations in Brazil that allows us to open retail stores and we bring on our Crocs website here in the coming quarter. I think we feel like we have all the pieces in place. I think Jeff can talk to this a little bit. What we've seen really over the last 12 months is just the impact of the dollar to the real and what's happening there. We see a huge amount of Latin American consumers both in our Florida business as well as in our California business as people that are buying the brand taking it back with them because they we don't have enough distribution there and be because of the arbitrage in pricing and the cost to sell products there. It's more beneficial for them to buy it when they're in the U. S. So we see a real connection with the consumers there. And I think we have said that we think we're going to continue to grow that business at a rate of about $25,000,000 $30,000,000 per year for the next 2 years. And so we think that there's a good market there for across the board from Mexico, Caribbean all the way down to South America. Let me just follow-up specifically on Brazil and Chile and then in Europe in the Latin American countries there and Spain and Portugal as well, if you're seeing any improvement in those markets yet? I think we're going to see with the real what I said and what's going to happen with their springsummer coming forward here in the next 6 months. We're going to see what that looks like and what kind of impact we're going to have on the FX side of that in the larger markets like that. I think for the European market, I mean, a couple of things is going to happen for us there. 1, we, as Jeff said, have taken back our distribution rates now in the Benelux in a smooth transition with our distributor partner there for the past 7 years. And so we've been working at this for the last year and making sure that as we then take on both their retail and wholesale accounts, this is something that we feel that we can leverage going forward. We've done the same thing in Spain relative to retail. Now there's not a whole lot of retail in Spain today that the distributor had only 2 stores, 1 in Madrid and 1 in Barcelona. So that's a nominal impact. But again, it's a place where we think when we talk about opening locations in the back half of the year, those would be more outlet type centers in a warm weather tourist type climate where we just don't have enough distribution today for a product. Does that cover what you want in both areas? And moving on, we'll go to Scott Krzyzyk of BB and T Capital Markets. Hey, thank you. John, you sort of alluded to it, but it sounded like the comps are positive so far in the Q3. And are there any opportunities given your merchandise thing missteps in the outlet stores in the Q3? How good could the comps recover in Q3? And then I have a follow-up. Yes. I think what we feel is that we have built in the same growth rates in our business in the back half of the year for retail as we had in the first half of the year. We don't see anything meaningfully changing year over year. I know last year we had some difficulties in the Q3 in our U. S. Retail business. I think it's a little early to tell how that will affect our overall comp performance for the quarter. But the way that we have built our guidance and the way that we're looking at our business today is similar growth rates in retail comp level performance in retail from the first half of the year to second half of the year. Okay. And then just a question on thank you. And then a question on backlog. Are spring bookings in these numbers yet? And I know Japan, for instance, had a very cold wet early summer. What impact is that really having on a point basis on the backlog? So for the specific backlog that we totaled as of June 30, 2012 would have a very nominal amount of business beyond 2012. So it doesn't really represent the strong belief that we have that our SpringSummer 2013 product line is the strongest that we've ever had as a company. So we haven't seen those financial numbers come in, but we are looking forward to those this quarter and have a little bit more color for you in 90 days when we do the Q3 call and we'll be able to provide additional backlog color at that point. To your question about Japan and the backlog there, I think it's also important to recognize that last year they had a very strong year in Japan and we grew substantially in the Japan market last year. So they do have some tough comps. And in fact on a global basis, our backlog at the end of Q2 2012 was up 45% compared to Q2 2010. So if you look at it from a 2 year growth perspective, the global backlog is up significantly 45% over that 2 year period. Okay. Thank you. And our next question will come Mitch Kummetz with Robert W. Baird. Yes, thanks. Maybe along those lines, Jeff, on the backlog, I think in the past you've broken it out by kind of the next couple of quarters. So I was hoping you might be able to do that, break that out Q3 and Q4? Yes, sure. Q3 represents about a flat year over year growth. A lot of the growth in the backlog on a nominal basis is in Q4 about $46,000,000 versus last year's $41,000,000 Again, those are in nominal basis as far as the constant currency that growth would be stronger. So about 12% on a nominal basis in Q4, again, in Q3 about flat. Okay. And then just as a follow-up on the gross margin, obviously very strong in the quarter. You mentioned a number of drivers there. As you look out into the back half, I guess, maybe starting with Q3 given your overall sales and earnings guidance, I mean, what are you expecting for gross margin or what do you expect some of the similar drivers to be in place? I know your gross margin was a little tough last year given some of the issues that you guys had in Q3. Yes, Mitch, we are anticipating about the same kind of trends going forward. Like we said in the script earlier, we have benefited from improvements in our supply chain costs, a shift toward new products, the strength of our retail in Asia business. All of those trends continue into the back half. I think we said back in May that we anticipated 0 to 150 basis points of improvement in margins and we should be at the high end of that range as we look out for the end of the year. Sorry, 0 to 100 basis points is what we said in May. Okay. That's helpful. Thanks. Good luck. We'll go now to Reed Anderson of Northland. Good afternoon. Most of my questions have been answered. I was curious if you kind of look at the retail business and in the Americas, you continue to grow even though store count is flat and comps are kind of flat and it obviously reflects a transition from kiosks to stores. How long can that go on? I mean, where do we kind of anniversary that where you don't have the benefit of a bigger footprint? Just trying to get a sense of where the timing of that would be? Rita, I think one of the things that gets lost sometimes when we just look at the numbers is how much we've changed from a product portfolio presentation stand point connection with the consumer overall marketing aspect. I think when we think about any business, if this is a 10 year old business and 20 year old business and you had very established lines of product that consumers were shopping you for, then I think you're going to draw certain conclusions from that. The fact that we're getting more new consumers to come into our stores and come to the website and look at us like they've never looked at us before. Our consumer data that we have been building now for the last 18 months really kind of shows that the negative elements of our brand is dissipating at a pretty good rate. That consumers today do look at us in a different way that people who never considered us before from a product standpoint, from a consumer standpoint now look at both the mom level and as well as the dad level when it comes to products. There are male and female consumers are considering us in ways that they never have before. In the meantime, as we talk about this, the clog business is slowly starting to find, I think, a level that we're going to be happy with and I think is going to be sustainable. We all feel is going to be sustainable on an ongoing basis. Still the core foundation for the brand. So when I think about the impact and when we look at our retail business, say the fact that our revenue per square foot is still pretty significant relative to many of the other people in the marketplace. And our operating income, obviously, from our numbers as you can all see today, has been pretty solid again this quarter even with our nominal comp growth and even a negative comp growth in the Americas. I think you can see what's happening. We can see what's happening. So how does that look 12, 18, 24 months from now? I think the optimistic view of this is that we're going to continue to convert and attract new consumers to the brand and stores are going to perform better in the long term as people consider us in a different way. I think the negative aspect of that is that you are comping up some pretty good revenue basis in a number of stores. And you might be you might think about that in a way that can they really sustain that level of business. Okay. Fair enough. I completely understand. So okay, good. And then I guess, Jeff, just relative to store growth and the remaining stores we've got left to open, timing for that would likely be most of those in front of the holiday? Or do you think there'd be some that would slip further back into the Q4? Well, it's about same 2020 split Q3, Q4. So yes, the goal would be to get any of the Americas stores open in advance of the Christmas. But the European ones will kind of come in and the Asian ones will kind of come in throughout the Q4 period. Not a whole lot of stores open in the month of December. Okay, great. Thank you. Best of luck. We'll take our next question from Jonathan Grasey of Longbow Research. Good afternoon. Thank you for taking my calls. Just looking at the SG and A, I believe the initial expectation going into the year was to be flat to lever it. I guess with these top line headwinds, is that still possible? Or should we expect a similar amount of deleverage that we saw in 2Q over the balance of the year? Yes. I don't think it's going to be the similar amount of Q2 leverage, because we did have a lot of additional stores on a year over year basis in Q2 versus the revenue generated last year. So I don't think it's necessarily an indication of full year being deleveraging to the same extent. I think we said back in May that we anticipate a little bit of leverage. Now it's going to be close to a flat on the SG and A. I think the more important thing is for us the operating income leverage that we see over the overall organization, not necessarily the thinning of the cost of goods sold versus the SG and A. Okay, fair. And then could you guys just talk real quick about how your products at the highest price point level have performed and how it's shaping your approach to spring 2013? We had a sub brand called the U by Crocs that sold anywhere from $100 up to $200 more traditional footwear leather base trying to build comfort cushioning into the footbed. I mean, it's something that we have shuttled this year in the first half of the year. What that teaches us about the brand is really on the higher price points getting into that $100 range. We're still earning our way into those categories. It has to bring enough innovation to the consumer that they feel that Crocs plays in that space. I think probably one of the best places to kind of see that is the innovation that's built into the golf shoes. These are anywhere from $90 to $110 more than that in our Asian marketplace. But consumers are willing to pay for that, for comfort, for a true product in that space. So I think we look at majority of our products staying at $25 to $50, dollars 25 to $60 price point. I think our wholesale partners feel that that's also the place where we play where we can bring enough comfort, fun, innovation and color. And not much of our product goes above those price points. And so we're pretty comfortable goes above those price points. And so we're pretty comfortable where we play today. We think that there's a lot of opportunity to grow just within that space. Okay. Thank you. And we'll go now to Jim Cartier of Monness, Crespi and Hardt. Hi. Thanks for taking my call. You've talked at the Investor Day, I think last quarter about bringing back the mammoth for Q4. Can you just tell us why that has performed better than similar products like the Blitzen? And what channels and regions is this going to be most important for you? Jim, what we said there was that we really have 3 major pushes for the fall holiday season this year, which was a continuation in building on the cobbler collection of products that we came out with last year, which fell on those price points I just talked about, but getting in some cases up to the $80 price point. It's a place where we think we play, it's not an indoor product per se. And so that opens up again our product to new consumers. Same thing with the rain flow boots, which is a really nice new technology innovation based rain boot. We think again this puts us in a place where we don't have other people with similar kinds of products. And lastly to the point that you raised, which is the mammoth product, which was wildly successful in its early stage. Personally, Jim, I just think the product looks a lot better. The design of the Blitzen was a little bit more masculine than it was the unisex. This kind of goes back to our core heritage of the original clog and of the original mammoth and it brings a new liner story to it. So it's just it's a nicer looking more comfortable product and it's a place where consumers do look for products from Crocs in the space. So I just I think it will be a good hit for the upcoming fallwinter season for us. And are you going to keep that in your retail stores? I know you said it was used as a discounting product and then some wholesale accounts in the past? No. The Mammoth was one I think that as it got old and aged a little bit, it did end up another channel. It will be front center in our retail stores for this fall winter globally, as well as some of our key independents and other wholesale accounts. Great. Thank you. And we'll take our next question from Mike Swartz of SunTrust. Hey, good evening everyone. Just wanted to kind of dig into the inventory position at your company owned stores a little more? Maybe you can provide a little more granularity around those levels at your full price stores versus at some of the outlet channels? We don't really break down inventory by store. Maybe if there's something specific that I can answer for you or? Yes. Just I mean directionally, I mean maybe year over year what does it look like? I mean what does the inventory levels look like? Are you carrying a lot more inventory at your full price outlets this year versus last year? And kind of a similar question on the outlets. Across the board in Q1, we did clean up in our U. S. Business with respect to the amount of product that we have, the type of product that we had, where it was positioned And it reduced our inventory levels in stores and in backrooms by about 30%. And then with that product, we're able then to bring back and redirect it into the right channels, consolidate what might have been broken product in the marketplace. So all that was done in the Q1 of 2012 on the U. S. Side of the business. Okay. So nothing materially different in the Q2 then? Nothing materially different in Q2. And I think we're just starting to start to phase in certain markets into back to school and then back into the fall, time of the year. So what you'll see is inventory starting to change over depending upon location of the retail stores. A significant focus here in our business to be able to do auto replenishment and quick retail replenishment programs to our stores that we're staying as best we can in stock on core colors, sizes and products. Great, very helpful. And then just maybe jumping over to the European business. I mean, can you maybe provide some more color on your distributor wholesale distributor base over there? I know you guys use a lot of smaller kind of independent distributors. Maybe you could flush out some more color there? Actually, we don't really we're at a point now where we don't have a large number of distributors in that market actually at all anymore. We have a partner for wholesale in both Italy and Spain. We're direct in Portugal. We're direct in almost every other major Western European country, we're direct in the Nordic, in Sweden and Finland agents in the other Nordic countries. We're direct in Russia with their own office in Moscow. We do use distributor partners in the Balkans. We use distributors in Eastern block countries and CIS countries. But the major markets today are all direct. The Benelux market was really the last key market to to be direct for us. Okay. Thank you. And next we'll go to Stephen Marotta of C. L. King and Associates. Good evening, everyone. Most of my questions were asked and answered. Very quickly, your ASPs were up about 13% in Q2. What are your expectations quantitatively for the back half of the year, please? Can you say that one more time? I'm sorry. No worries. Your ASPs were up 13% in 2Q. I'm wondering quantitatively what your expectations are for ASPs in the back half of the current year? Well, I think what we say is ASPs in the backlog were $20.21 up from $19.79 last year. We saw a big improvement in our ASPs last year in the back half. In 2011, we saw 22.18 and 2,109 respectively in Q3 and Q4. So we already saw some pretty big increases and I think you'll see that kind of percentage increase in ASP, but probably not to the same extent that you saw in the first half of the year, where we were up against some lower ASP numbers. Sure. Great. Thank you. At this time, we have no further questions. I'll turn it back over to management for closing remarks.