Of course, forward-looking statements are Safe Harbor for you guys to look at. I'd like to just frame today and talk about what we think our business looks like over the next 3 years, answer any questions that you guys have as we go through long-term. We're going to do some specific drill downs as we go through the presentation today on things that I think are concerning in the general market, things like Europe. What does that mean to Crocs FX? What is the foreign exchange impact to our business? We're going to do some specific drill downs, but I'd like you guys just to ask questions as things come up today, make this an interactive session as much as possible. When we think about our business at Crocs, I know we've said this many times before, and I think it is worth repeating.
We think about ourselves as moving from this clog company, which we've been, which we still have 40% revenue tied up in clogs, different types of clog products that we sell, kids, adults. How we move ourselves gradually but progressively towards being a much more of a casual lifestyle play. I think what you're going to see in the products around you, we have our Americas sales and marketing meeting going on right now for spring/summer 2013. What's going to happen is when it's an appropriate breaking point, then probably after Dale presents, we're going to take you into the rooms kind of cordoned off there, closed off, and we're going to show you what the line looks like. We're going to show you how it's going to market.
You're going to get a preview that we wouldn't normally show until we get into trade shows, but you're going to get a much better perspective here. There is about 140 people also on campus this week. Our U.S. sales force, our Canadian group, our distributors from Latin America, South America, too. This is something that we are working at hard. We think that it drives us to a far better place in the next 3 to 5 years, and we don't think we really have a lot of natural competitors in this $30-$60 price point that we really position the brand around today. Balanced international growth. Of the last 8 weeks, I've spent six weeks abroad, mainly because 65% of our revenue comes from abroad. I really need to be out there and working with understanding what's happening with the business.
I come back, I'll talk through it today. I'm really excited about what's happening in Asia, of course. Actually, I left Europe in both occasions very bullish about what's happening relative to our business. Like I say, we're going to talk about that. It's the smallest piece of our business today. Only 17% of our revenue comes from the European marketplace. If we think back five years ago, Europe was larger than Asia at that time. We kind of lost our way. We stayed with the clogs too long. We didn't distribute. We didn't build out, as you're going to see today in numeric terms, platforms either in retail or in e-commerce that drives our Asian and American business.
We made a mistake on the Q4 earnings call or Q1 earnings call that we didn't bookend this right up front and say, right out of the chute, we're really happy with where we're at, not only for the quarter, for the year. This top-line growth that we're going to talk about today on a constant currency normalized basis is driving what we set, 15%-20% top line growth. We're going to break it out in more granularity than we ever have for you. Hopefully that kind of gives you a better feeling. We're committed to running a good business. We're committed to the consistency that you've seen from us, how we manage SG&A. We're going to give you more details today on retail and all that and how that ties to how we financially manage a strong balance sheet here at Crocs.
I think that there's a little bit of concern sometimes, too, about inventory levels. I've said this from the day I became CEO, we'll never have an inventory problem here as long as I'm here. I am totally committed to this internally, to the board, and to the street. We don't have an inventory buildup issue here. We're going to talk through that in more detail with you today, too. We manage maybe at times too tightly. Maybe we're sacrificing a little bit of top-line growth, but we are not going to go out and chase business from an inventory standpoint. When we have our conversations, and I did this yesterday with the America sales group, we break it down in this simple of a way with them, that 5% of our growth has to come from geographic expansion.
I look at what we're doing in China today or what we're doing in India, what we're doing in the Middle East, which we'll talk about during the day today, what we do in Eastern Bloc countries. We're just going into Joe Z's favorite homeland. We're just going into Poland now, and there's a huge amount. Is that fair? Only one person writes me asking me if the website is in Polish, right, of all of our investors base. Not that you can read Polish but I think all kidding aside, I think Central and South America offers us huge growth. All we're asking our salespeople in any region that we talk to is 5% growth. That's all we ask for. 5% growth in new geographies. All we ask them is for 5% growth in ASP.
We're not trying to go from a $30 clog to an $80 nice dress shoe. We're inching up the brand, and you see some of the things in front of you, the Be Bold, the Huarache collection we're going to talk with you guys about today. You're going to see it in the other room. A whole new place where we can continue to expand our flats, our sandals, our women's wedge business into a whole new, more innovative space, building on our heritage of molded, cool, innovative product. 5% wholesale expansion. A few more doors and more placement of product in the doors that we have today. We're going to talk with you about our sales philosophy when it comes to adding new accounts versus building and defending the space that we have today.
Once you get space at wholesale, unless you really have a difficult time selling through product, which we have not had the last three to four years, wholesalers are conservative. They're not going to give up your space to someone else if you continue to do the right things. 5%, that's all we ask. Wholesale expansion. Lastly, in retail. We're expanding retail doors this year somewhere between 80 and 100 net doors for the year. We continue on this. That's 25% growth on door count. If you think about, again, our business, just 438, 439 retail doors that we have today generates a significant amount of revenue for our business. You're going to continue to see that investment in retail as we don't grow wholesale at a rapid rate.
You are going to see a little bit more of a shift to being direct-to-consumer, so we get the product placement that we want to have in the next two, three years. We're going to talk in more detail about that today. With that, I'm going to turn it over. Jeff's going to do a little retail review for 2012. I'm going to come back and talk about channels and regions.
Thanks, John. Welcome everybody. Hope everybody had a good trip out here. Nice to see everybody here. Thank you for coming. Just wanted to recap Q1, set off the tone for the day. As John mentioned, we've got a busy presentation over the next couple of hours for you, walking through a number of different topics. We'll talk about each one of these individually as we go through the next couple hours, specifically revenue. John will talk about revenue in the wholesale, retail, internet, as well as our international expansion. For the first quarter, as John mentioned, we were up 20% on a year-over-year basis. Gross margin, we'll talk about that later in the presentation. SG&A as a percentage of sales, we'll talk about that, give you a little bit more information on the SG&A aspect of our business.
Overall operating margin for first quarter of 14.6%, an improvement of 160 basis points in Q1 versus Q1 2011. You can see that on the bottom line. EPS was $0.31 versus $0.24 last year. Guidance for 2012 second quarter, $335-$340. Tax rate at that time, 22%. We'll talk a little bit more about taxes later in this presentation as well. Diluted EPS, the guidance was $0.61-$0.63. At that time, we estimated the euro to U.S. dollars would be $1.31, and the Japanese yen would be about JPY 82.5. I think that the key message today, you'll hear this from all three of us, is that our, consistent with prior meetings, we believe our long-term sustainable growth story continues as we penetrate international markets.
We look at our international footprint, driving a wholesale expansion, increased product portfolio driving ASP. Finally, our retail and internet investments around the globe, driving overall revenue up about 15%-20% on a constant currency basis. We haven't deviated from that message. We continue to maintain our objective of driving that long-term sustainable growth rate. I'm going to turn it back over to John to talk about both the international expansion as well as the channel expansions.
Thanks, Jeff. Just real quick, as we sit here today, different facility, maybe worth noting. We were in a building across the parking lot the last time you were there, people who came. This building here now is completely ours. We're renovating the back half where product development was, where we met last year. That'll be where marketing and our product development groups are at. As you do tour through here today, you're going to see finance, our supply chain management, e-com are all in this building. It's really quite nice. We're all interconnected today. This is all of our corporate organization here. Across the parking lot, there's one building that you'll see, kind of a mustard-colored building across the parking lot. That's our Americas business over there.
That parking lot's not big enough sometimes. At other times it's too big. We do try to separate church and state. What goes on in the regions is theirs to do. What we do at corporate is much more strategic, much more directed towards strategy systems, overall consolidation of product development. There's that separation in the building. Nice part about this is this is about 60%, this space here that we moved into after renovation, moving into this, about 60% of the price we paid for the building that we were in. It's a nicer space for us. It's much more conducive, as you're going to see. We have a little cafeteria here. 450 people basically on the campus between corporate and the Americas group today.
Jeff goes through this chart. I think that this is a really good representation of the management of this business. I know it doesn't look at the balance sheet side of this that would also look equally as good. When we put this up and we look at this internally, I can't determine what investors think about what this business is doing. What I can do, and what we as a management team can do, is control what's within our space. See that kind of revenue growth. We're going to talk about what that looks like within channels.
To see us have the ability to transform our business from just molded products into other products, holding those margins, driving operating margins up as we go, to control SG&A, which we had a little bit of history of issues early on with SG&A that we've overcome. I think this is a really nice place to start with where this business is at and where it's going. I think it's a testament to the management team that is here, that is focused on this and has delivered these results and are the same group that are committed to continuing to grow this business. Let's talk about channels first, then we'll go into regions after that. Again, as I get into this, you may have specific questions and things that you may want to ask.
Jeff might jump up and help me with specific things if need be. If you look at our overall business, if you look at 2011, 2012, and as we go into 2013, yes, there is a gentle shift here as we're putting more retail stores online in Europe. We're seeing an opportunity in specific key locations in the U.S. to add, and also in our Asian business where you're going to see we have a high mix of both Crocs stores as well as partner stores. I think the numbers might surprise you a little bit. We've talked about this before, but I think you're going to see it up on the screen today. It goes to show what drives, what is the underlying things that drive our business in Asia? What are the underlying things that drive our business in Europe and the U.S., Americas marketplace?
A little bit of shift we see in the next couple of years, a little bit more directed towards retail. As we continue to try to sell in, and we'll talk about our wholesale strategy, if we gain additional doors in wholesale, we don't over distribute, dilute the brand, which we're very cognizant of what the trade-offs are there, then we'll see what that balance comes back to be. It's our preference that we stay in that 60/40 split, but we're moving a little bit more towards the direct. If we look about growth, if we just take Q1 as an example of how that growth looks, remember that retail has a 10% comp growth on that year-over-year.
In our comp base today, you guys have asked this question before, we have about 72% of all retail doors fall in the comp base. There's a question of times, how many stores do you consider? Is it 80? Is it 50? You guys are changing format. You stay in a mall, but you move from a kiosk to a store. You're changing a store size inside a mall. 72% of our retail falls in that comp base, and we comped up 10%. Now, I think we all know, and I think this is pretty consistent with what you hear in the marketplace today, we do see some pull forward from April for holiday reasons and just for weather reasons between April and March. We talked about this even when we did the Q1 earnings call.
That's why when we talk about the first half of the year, we're very bullish that we're above plan of where we're going to be at the bottom line, and we think that it's going to equal out a little bit between Q1 and Q2 on the top-line revenue. A good strong start to the year from a growth standpoint, wholesale, retail, and internet business. Kind of showing that there's a good appetite for the brand in the marketplace today. If we think about channel sales, we've continued to build doors. I'm going to show you some of the things that we're doing with some retailers. I did not pull some of the same slides from Europe or Asia. I think sometimes we can relate here. Investors can relate a little bit more with what's happening with the brand with U.S. wholesale customers.
I'm going to show you some specific things that we're doing with key customers today and how when we talk about building these kind of wholesale partnerships, what do I mean? What are we actually doing there to gain more space, both in real estate and number of SKUs that we're distributing in those particular retailers. We are working really hard, and Dale's going to talk about this again, to continue to build a Q4 business. It's not going to happen overnight. We never said it would happen overnight. For us to be relevant, we have to continue to design cool, innovative products. You see some products up here. Our Mammoth collection comes back this year. Dale comes from Nike and Doug Hayes, who runs our Americas business, comes from Adidas, he was president of Adidas in Canada.
When we look at models and we ask them, "How many models in your history in those really key brands did you sell 10 million pairs of shoes of?" Our Mammoth collection of product, we sold over 10 million pairs of shoes of. This is a franchise for us not to go past or forget about, but to build on. We took the Mammoth out of the line last year in our U.S. marketplace. It got a little bit distributed, broken. It didn't really have the right maybe distribution and pricing around it. By taking it out, coming with a new series of products this year, a little bit upgraded, a little bit different design, then we believe we're building on a franchise that hopefully will do better. Cobbler collection and our boot line, we're committed to inching those forward each season.
Dale's going to give you some specific numbers today so you can see. What does that mean in terms of flats and boots and how is this coming together for Crocs as a brand? Again. I'm not a Mac person, so sorry. Big debate inside. Some people have Macs, others don't. I'm not capable yet of running a Mac. Any questions at this point? Yes.
With Easter and the weather, how much does that affect just the Americas, and how much did that impact on Asia and Europe?
Yeah. It's hard to tell, right? Clearly with Europe, same situation. There's clearly a pull forward on the European piece, nicer weather. I hate to say when we're at ICR, we talk about what weather does to a business. It does impact our business. The fact that Easter came earlier also had an impact on the business, and the fact that it has been cooler since then for both Europe and for the U.S. marketplace. It clearly moved some revenue forward in the process. Asia's a little bit different because you just have a spring kind of holiday in China. You have Golden Week in Japan that falls in the early part of Q2, and those don't fluctuate between seasons. We don't see it on the Asian side of the business when it comes to retail or comp store sales.
You do clearly see it on the Americas and the European side. Yeah.
Point of clarification on the comp store base. When you convert from a TUP to a store-
Yeah, do you follow those comps in? It does. Okay. Yeah. If we had a store in a mall, and let's say we took a smaller space or a larger space, then even though we're in the same mall, you don't put that in your comp base. We don't put it in our comp base. Okay.
Next question.
Yes.
When you went through the guidance numbers briefly, you used the past tense where the guidance was.
Guidance was for-
For Q2 was-
For Q2, just reiterated. Right at the beginning of this presentation, we put it up and said, "Here's our Q2 guidance.
I want to make sure that.
Nothing's changing.
Nothing's changed. I just want to be sure.
Nothing's changing.
You used the word past tense. I thought we might.
Okay
Doing a change later.
Okay. You got to cut me a break here. Ten years in Asia, I'm kind of a bit ESL at times, okay? English is a second language for me. You're going to have to. Tenses that I might get mixed up on.
We know about it, the media might not give you a break.
That's why we did it right up front. Just kind of putting up guidance for you in advance. Hopefully, that was clear that we're telling you right out of the chute and everything you're going to hear from us is nothing's changing for the quarter. Nothing's changing for Q2. If I look at kind of our core business today and I think about the Americas, we look at wholesale as a really important part of what we do, and we really look at how distribution works. Again, just to step back a little bit as kind of a history of what's happened. In the early days, a lot of our revenue stream came from sporting goods and came from department stores, bigger box people. That changed.
I think everybody understands that all changed three, four years ago. We don't have a significant presence in department stores today, with the exception of that channel that we do with Kohl's today and kids with Nordstrom. This offers us a huge opportunity. I think we have to prove brand relevance for a number of those retailers to stay engaged. Dillard's business has gone down for us in the department store space significantly over the years as we've transitioned. We're going to show you today what we're doing with Dillard's. We're going to show you what we're doing with Dick's and Academy to try to rebuild that space without getting into a distribution problem again and having proper channel segmentation, line segmentation from products that you find.
I think our European business needs rebuilding. I've been there twice now, as I said, in the last two months. I'm really happy with the group of people that we have hired. We're going to talk about Europe specifically a little bit later when we go through regions. I'm really happy with what we have. We had a sales meeting there two weeks ago. The energy, the enthusiasm for what's happening. I know that in the 2008, 2009 frame, from the outside, we're a little bit in disarray. The mantra inside was really how do we take market share and how do we not waste a recession? A recession is a bad thing to waste. That's the same kind of thinking that we have going with our European team today. Recession is a bad thing to waste. How do we take market share?
We're a 30-60 euro dollar price point product. How do we stay relevant to people where their spending is tighter and they are looking for value today? There's no question we've opened up new outlet stores here in the last two months. Our outlet stores have done extremely well. Foot traffic, conversion, the types of products that we're selling. You clearly see that that European consumer today is more concerned about the spending that they're making on consumer-type purchases than ever before. Whereas we're kind of that clog product that they go to, how do we become that casual lifestyle shoe in. Part of that is the upside for this brand is we don't have major partners in the U.K., France, or Germany today. We have a lot of independents. We have a lot of smaller chains that stuck with us through that period of time.
Our management focus in our European business today is just how we get one or two key accounts back on board with the brand as we go into spring, summer 2013. I think a lot of good work is being done there. Asia, I think Ted Lee, who's our VP General Manager for China, said this last week during the Asian sales meeting, we have the hook well planted in most of our Asian markets today. People are going through the stores, they're looking. Conversion rates in Asia are a little bit lower for most brands, but foot traffic is higher because people work, shop, and eat. Sometimes eat, then they shop, sometimes they shop, then they eat. Basically in that order. You get a lot of people that are always looking for what's new and what's fresh.
As long as we continue to stay on trend in that marketplace today and a lot of good programs with our key accounts in China, in Japan, in Korea, in our major market, then I think what you continue to see is activation is building, our business continues to stay strong. We have consumers that want to be in Crocs. Sometimes here in the U.S., sometimes we don't want to be seen maybe publicly in Crocs yet. We're getting closer to that. I think in our Asian markets, we're getting more real estate, we're getting more placement of product. You see it when we talk about NPI and what our new product % are in those markets. It carries over to other parts of our business.
This is how when we think about wholesale accounts today, I'm not dropping names in here, please don't ask me where certain accounts fit here today. Just think about this in terms of general terms. When we have gone to market, our main focus is right over here on the right. We have to go through and say, look, there are certain places we just can't be. Those are accounts that just the low potential, the lack of synergistic working relationship. We're a 20, as you guys know, $25 wholesale price point, and we can't afford to do pre-book discounts and stock rotations and end-of-season discounts and cleanup programs. It just doesn't fit for us and for that product. There's certain models that just by the people that work within those environments, it's not going to work for us.
On the right-hand side, those places where we have built relationships in any market globally, we want to continue to get a little bit more space because those buyers are going to continue to put us in channel, in space. How do we continue to optimize? Looking at product offerings today, much better business intelligence about what sell-through rates are on products, cross-pollinating information. How do we really optimize those key accounts that we have what we're going to get. We're not going to get any more space in certain accounts. Now, how do we make sure we're putting in the best products, the most appropriate products? As we go up, how do we protect the space that we already have, take additional shelf space, and how do we build those really good relationships, and how do we build that kind of connection?
Let me show you what that looks like. What does all that look like today? For two weeks, we did most recently a takeover campaign with Famous Footwear, and I think you guys see what the comp store sales numbers are like and the growth that we've had, the amount of product that they took in store this year was higher than the previous year, which was higher than the previous year. Getting more space, getting more mind share with the major retailer, and really five of their top models sold in those two weeks were Crocs products. Not only did we build this campaign with them from a visual standpoint, from a co-op marketing standpoint, but they saw the foot traffic and they see the conversion for a wider portfolio of lifestyle products.
This would be another shot you can kind of see how the stores were merchandised both in the window as well as in-store end caps. For us, this has been a major focus for the last two years with our U.S. wholesale business. Our brand presence in those wholesale accounts is either put to a rack or to a small corner. It doesn't look like that with a lot of our major accounts this year. We've put a lot of time and effort into doing co-op marketing and getting better space. This would be Belk. We are the Crocs destination in Florida. That's their pitch. We're your destination for Crocs in the Florida marketplace. They've given us significant space, kids, women's, and men's, end caps, complete rows of product placement, and boxed product here also.
If you look at Dillard's, this is 85 fixtures in 60 stores that are testing out. We've pulled all the product out of Dillard's that was there before. Some of the remnants of things that didn't sell that really made the brand not look very good last year, and still in some of their stores were not cleaned up completely yet for this year. We look much better for kids, for women, a much more lifestyle, emotional connection that we've talked about and that you see today. How do we get people to think about that? Visually, and how do we make that connection with the mom, who's our number 1 consumer, and with kids? Those are our primary consumers, loyalists of Crocs today. That accounts for about 75%-80% of what we sell today. How do we make that connection?
Academy, we've always had, for those of you that have been in Academy, they've been a long-term account. Academy is one of the few wholesalers, I think there's only two, that never decreased in business year-over-year with Crocs. Even in the difficult years, they stayed connected. This year, for the first time, we now get end caps at Academy stores in 2012. You're walking down this year, you get to see Nike, Adidas, all the different brands. This is the first year where we've earned the right to have our own end cap, really pushing more sandals and flip-flops in this marketplace. They're a long-term kind of partner for us, and what we're doing this year is kind of a fun campaign. If you guys have ever been in Academy stores, they're the only ones that just have these massive displays of camo products.
Have you guys seen this? Anything that we put camo or anything that we're willing to put camo on for them, they buy and they sell. That's who their consumer is. We're doing a fun program with them this year where we're giving away a Rubicon Jeep that's all camoed out, it's part of a co-op marketing program that we're doing with them. Dick's, the conversion rate on product with Dick's is about 60% higher once they committed and once we committed to doing end caps, and these were two that we did with the kids program in the spring, kind of late winter there, early spring, February, March timeframe.
What we see the conversion rate when they give us the space and we're able to go in there and merchandise the brand, we see a considerable uplift in what a shop in shop, what an end cap program looks like for the brand.
Have you seen other instances where getting the end caps makes that dramatic of an increase in sales?
Bealls, Famous, Dick's, those three this spring have really seen significant.
What does it take to get those end caps? Obviously, clearly you want to have everywhere you are, you want to have an end cap now, right?
Yeah, it depends, right? I think in the case of Academy, it's just part of that progression of our business with them. Dick's is kind of buying our space back in a little bit, spending some co-op marketing dollars, committing some of our own merchandising people to make sure that the product that is flowing in there isn't getting stuck in the back rooms, is getting merchandised on the line. Watching internally here, watching really what sells through and making sure that they stay in stock. Nothing hurts you more than being out of stock of core kind of colors and sizes, what's hot. An internal commitment and some dollars. No question. Same thing for Famous Footwear co-op spend.
How quickly at the retailers will you get a sell-through report knowing what is selling best?
Yeah, daily.
Daily. Okay.
On those. Weekly, we look at that with the planning group, with the wholesale planning group, if they're out of stock or if they need additional product pulled.
You will reship to the store how often?
Whatever they pull. It's kind of up to them. We're trying this year to really push that at once a little bit harder than we have for probably two, three years now. We have product in this year. We've bought a little bit more inventory that we have in Ontario, all geared towards this is what we think is going to sell through. Our A-Leigh line of new products, kind of the cork wedge flat. Sell-through on that runs anywhere from 14% up into the 30, and that's been a huge successful product for us. How do we take that and maybe put that into Famous Footwear, into some of the key accounts that will take that product even for end of Q2, early Q3? It's a little bit more proactive approach.
That was what it was years ago, but kind of rebuilding the business, we shied away a little bit from chasing too much on inventory.
It just seems from some of the slides, maybe you have a little bit more of an emphasis on department stores than perhaps in the past. You talked about, is that a change in philosophy? Do you think you can
No. I pulled what I thought was the best photography that we have. There's a marketing deck that comes out on a monthly basis. I think Shoe Carnival is one that we do a really good job with today. Good visual, good presentation. I think DSW, Shoe Carnival, Kohl's, Famous Footwear, the people that are in the middle there, that are that mid-tier channel, a lot of focus and a lot of brand building with them, more space, more styles this year than before. No, I just picked out a couple that we had. Bealls is kind of in between. Belk would also be somebody starting to kind of continue to work with us. No, it's just what I picked from the deck, and I tried to have a few from different Dick's and Academy, too. Yeah.
For the end caps, do those get changed out every season or do you keep them all year? Because it looks like they're
Yeah
going to be built for fall/winter.
Yeah. Some are committed throughout the year. Others we're still working on, right? We don't want to give up the retail space. How do we convince them that fall product is going to sell in their stores? Doug and I go out, we're going to go out again at the end of June, kind of look. We're humble. We're happy to go out and beg for space and see how we can work with key partners to get them to be convinced that we are going to sell into the fall and even for rain boots and some of the kind of core products that might fit their consumers if they stay with us. Some are committed through the year, others aren't. Yeah. Yes, Tim.
You talked about, we went just to follow up on department stores. Certain department stores
You have to pay off a lot more money than others. Are you staying away from the biggest-
Just like I say, in that lower left column, we have this challenge, right? I think that all brands go through it. We don't want to go back into the over-distribution stage again. Nor, that was on that left-hand side. I don't want to go into that upper left quadrant, which means that we're going to go chase something just to take doors. When I talk about this here. Oops, sorry. Down here, there's just certain ones that aren't going to fit the model and would we like to do business with Macy's and some of those? Yeah. There is a space of certain products that we'd like to put in there to continue to distribute flats and wedges and Dale's going to show you that product portfolio. Yes. Would we like to do that? Yes, we'd like to open that up.
Somehow, we go on this left side and there's some big potential growth plays out there. I don't know if we're relevant for JCPenney as they remake themselves, and I don't know if that's the right place for us to go and grow to. When we look at this left side, we are not going to sacrifice the right, the people that we built this with, the independents and the key people that we've worked really hard at over the last three years just to add door count. You know what? It'll pop us for one year, maybe two years, then we're going to have a problem that we're going to have to deal with. That's not our long-term interest to build a healthy brand here.
We could have grown Asia when I was there years ago at a more rapid rate, but that's not my philosophy. It's do things right. Don't have to redo them and don't have to ask your current partners for forgiveness for doing things that impact their business either. They've been pretty loyal to us over the last three years. DSW, Famous Footwear, Shoe Carnival have all been good partners, let's not disrupt that relationship just to go up the left side.
Okay. All right.
Hopefully, some of that kind of gives you a general feeling. I think our business, as I talked about, Asia would be very similar to that in terms of programs that we do with Murasaki Sports and ZBO and Pacific in China, some of the activation programs. The amount of space that we have in shop and their stores and those key accounts has been pretty significant and continues to build. On the retail side of this, we continue to look at our pipeline of stores, relevant stores, proper stores, right locations, not what we did before maybe to take locations because they were available or we thought that was a place where we could play. We've learned a lot about our retail business over the last three years.
Retail is up. We are going to continue on that path to add 80-100 stores this year. What does that look like when we think about growth today? We're doing a lot of transition, as we've said this year in the Americas. We're giving up space in kiosks. We're taking space in high traffic and outlets. This is the place where we do the best as we continue to look at this and study this. High street stores in N.Y. or Chicago, this is not a high enough traffic area for us. We don't get the branding that we need. Where we do well is in those right malls, right locations and outlets. Asia, as you see, such a large territory. Five or 10 stores here, five or 10 stores there, all of a sudden it becomes meaningful.
As you can see, our commitment in Europe is to continue to build that out. Just in the month of April, we opened up stores in Frankfurt, Nice in France, Roppenheim, also in France, outlet store, and Swindon in the U.K. We will open, I'll show you what our new retail format is going to look like. We're into phase 2 of what we are trying to do from a retail branding standpoint, and that will open in Bluewater in London in about three weeks. We'll see a new format store there. If we look at partners. Okay. There's always a question, what makes Asia go? What gives us such a growth dynamic in that marketplace? First off, it's a very large region.
Just remember that we include in our Asian numbers everything from Japan to Australia to South Africa and everything in between. That's a much larger format than maybe other markets. When you think about that Asian business, this all shows up, all these partner stores, we don't have any investment. They're not franchises. We have no investment in this. We work with them on branding guidelines. Those 436 stores there are built with our distributor partners or others in the wholesale space. That shows up as wholesale revenue. When you look at wholesale revenue in Asia and you say, "Wow, it's 70%," it's true. It's 70% as we sell into them. They also realize from a branding standpoint that they have to have retail to get the product distributed. I'll give you two data points here.
Anybody who's been to Israel will tell you that he is a marketing machine and he's transformed this business there. He's been with us for seven years, two brothers, Michael and Amos Horowitz. They've transformed that business there from wholesale to 59 retail locations. He's going to pare back retail a little bit this year. He's going to close five, he's going to open one. He's going to end the year with 55 retail stores. That's 436 stores. 55 of these are in Israel, where he sells about 600,000, 650,000 pairs of shoes a year. Obviously, the six million, seven million people who live there are not buying all those shoes. It's great brand building for us because so many people go through that marketplace, so many people see the breadth of products that he brings into it, and he's a great partner for us.
The story that I loved best last week in Asia during the sales meeting was, I've talked about this on the call, this just adds to my enthusiasm, is we're at a dinner after the first night. Our new Saudi distributor is there, and they brought in two containers of shoes with the intention that they were going to open two stores and start to do some wholesale. The first store opened in Riyadh. In the first week of sales, things just kept getting bigger and bigger, and a lot of word of mouth. They're not doing any marketing. There's no advertising out there. They open up the store on Friday, which is kind of our Saturday, right? Their Friday. They're off Friday, Saturday. Their Friday, they sold 700 pairs of shoes in one shop in one day.
They determined that the rate of shoes that they're selling is so great, they don't have enough shoes in women's line to open the second store. They're scurrying to pull product out of Dubai to open the stores. These guys now have two stores open. They're just ecstatic with what's happening, and they're committed to open six to seven stores by the end of this year, and they're planning to open 35 to 50 stores in that marketplace in the next three years. When we think about how that business dynamic works, it's not just the 80-plus stores that we have in Japan with partners in the southern portion of Japan. It's not just the stores in Israel, it's partner stores really throughout the entire region.
That gives us that huge drive in wholesale, and it gives us a huge drive in our retail business.
John, what's the difference between what are the best five selling items in Asia and the U.S.? Is it different between your company stores and your partner stores?
Massive. Massive. Santa Cruz, Walu, canvas deconstructed casual men's shoes. We're just starting to see some people in Europe, men kind of stores start to sell those in any meaningful way. Whereas both those are soon-to-be million club member products that we sell, which are great kind of go-to casual products in the U.S. Doesn't resonate anywhere in Europe whatsoever. If you go to Korea, you put any kind of brand message, even for adults, you put Mickey Mouse, Hello Kitty, that market is so licensed kind of thinking or driven. It's just this total anomaly. Yes, we sell other core products, but if you look at the volume of licensed products in that particular market, it's just a completely different dynamic. You have to kind of understand the consumers. Yes, Steve, there is a significant difference.
I think sometimes between Asia and the U.S., there's not always that much difference. They kind of look at U.S. trends. European footwear, and you guys have all seen, European footwear is a little bit different, and we're trying certain products that are a little bit more streamlined only or heavily in the European marketplace just for them. It's a little bit different dynamic, especially in men's shoes.
Let me ask you a question a little differently. You said at the beginning of your presentation, I think you said 40% of your business is still clogs?
A little over 40% is still clogs.
If you looked at that percentage, Americas, Asia, and Europe, what would the difference be?
Asia would be the least. America would be in the middle, Europe is still about 70% clogs. Our big push in the European space. I think what we see in our own retail stores, when we talk about European retail stores, I'm going to talk about this in a slide earlier, I'll just say it now. 30% of our sales in April in our own stores, getting in and really merchandising the line differently, popping the story differently is new products. That's one data point. I'm not saying it's a trend, but what we see by doing the right thing in April, all of our stores with new products in them, all of a sudden we see our NPI jump in in Europe to levels that we haven't seen before and non-clog on top of that. It's encouraging.
It says that we can sell a lifestyle product into this space. It's going to take some work. The moment you've all been waiting for. Let's talk about retail metrics, right? Sam, are you happy?
Sorry.
I know you're not hard of hearing. When we look at formats today, when we talked about this, we're talking about the general kind of curve, right? There are things on each end of this. Generally, our average store size in the U.S. today is in that 1,500-1,800 sq ft range. In Asia, as I said, Asia's a massive market when we talk about this. We have a store in Hong Kong that's 650 sq ft that does more than $2 million a year. You've got stores that are 650 sq ft that do $350,000 or $400,000 per year. On average, you get to an average store sales of right in that $750,000-$800,000 range per store. Yes, we have super performers in markets where it's well above that, it's also heavy foot traffic. It's also kind of a different retail dynamic.
The internal metrics, it has to hit a 20% or higher operating income hurdle rate before we say yes to sign off on it. Are there exceptions to this? Of course, there's exceptions to this. When we want to be in specific locations, or maybe we don't feel like the data is maybe just a little bit conservative, we're going to take a look at those particular locations or stores. In the past, when we opened SoHo or when we opened State Street in Chicago, those were opened more marketing kind of thinking, that we needed the branding, we needed the position, we needed to be in a certain location. You guys have seen this over time. Those days are long gone.
We're not looking for a $4 or $5 million investment in a location that we don't think generates the right kind of operating income revenue stream for the brand. Anything that you've seen, almost anything with a 95%, 98% surety, we've opened, like I said, we're looking for places like that in Florida or on the coast, Texas, Southern California, which is a market that's been building for us over the last few years. Our European, Asian locations all fall within the same criteria. We use retail consultants in every market that we operate in today to be relevant. The head of our U.S. retail development is in Las Vegas this week for ICSC. Return on investment, 35% or greater. Payback on some stores that we open today, they pay back within a year. Some stores take two and a half years.
Anything that we look at when it comes from an investment standpoint, that hurdle rate has to be within that one- to three-year range, preferably one to two years on most stores that we open today. Hopefully this helps give a little bit more granularity to how we think about retail, how we open retail from a financial metric.
John, what's happening to the Asia store cost? Is that factoring in some of the inflationary pressures in mainland China and other markets that's trending up year-over-year?
On the average store cost build-out, it doesn't really change that much. When we go in and we build out a store, labor costs are cheaper, all that material. We buy in volume for our stores in Asia, in China, so they can just pull directly out of a China DC when they open a store. The store fit-up costs are cheaper. We're looking how we do that same thing for our U.S. and European as we get to a new format, how we buy and get our initial build-out cost to be lower. The labor cost to build out stores and just that dynamic is just so much cheaper. That has a huge impact. Non-union labor, get it up, get it quick. It gets done, too. They're in and out where at times it takes months here in the U.S. to get stores built out.
On rent, Jeff, clearly in certain markets, rent is clearly jumping. Hong Kong, you're starting to see rent in prime locations, not so much out in the territories, but in prime locations if you want to be down there, oh yeah, rents are going 20%-50% in a lot of the locations. Most of our rents there are 3 years out, so we don't see that rent impact yet. Sell-through and margin, we have to believe are going to continue to work to offset some of that impact.
John, is there a regional difference in sort of the comp ramp over the first couple years of a store? How does that look?
Yeah. It's a very interesting thing. As I said, in a lot of our Asian stores, you're going into a brand new mall that's opening. Everybody wants to go there. Everybody wants to go try the new restaurants. Everybody wants to go see what it's like. I think that same dynamic, what I saw in the Middle East, I was in Dubai, Kuwait, Istanbul, same kind of feeding frenzy. The bad news is that you still have a year and a half left on your lease in the other mega mall that was built. Now everybody wants to rush to the new mega mall and be part of that dynamic.
Clearly, yes, your first years in most of your Asian markets are such that they're actually equal to maybe even higher first year than they are even second year, depending upon how the mall stays and what the flow looks like. Whereas I think for both our European and U.S. business, we see about a 10%-15% uplift between year one and year two as people come to know that you're there and come to shop it. That dynamic kind of changes a little bit in the U.S.
When you look at the profitability on the store, do you assume it loses money in the first seven years of it going into the first full, or how do you look at that?
Jeff, how do we look at that?
It would be the first year.
Maybe you stand up, if you don't mind.
I'm there.
Okay.
I think it's important to the people on the webcast, too.
Yeah.
When we look at a new store on a pro forma basis, we look at first year operating income over 20% as kind of the guideline we're looking for. Second year, third year, fourth year, all those years should be over 20%. As John said, sometimes Make an investment in a store where it's not going to be 20% the first year, maybe it is in the second year. Because of some issues in the first year, it doesn't hit it. Make judgment calls beyond the strict rule of 20%. Same too with return on capital employed and return on investment. We look at it internally at return on capital employed, which includes inventory, which is a little bit lower than return on investment, which is just the pure amount of money you're putting into the store.
You're opening 80 net stores this year.
Yeah.
That group of stores that are going to open this year, they're going to be profitable this year or even lose money because of the reopening expenses?
Profitable.
Profitable.
Profitable.
If the balance shifts like that and it's Asian stores, we know in years of experience of opening stores there, especially in new malls, it's going to drive higher than 20%. The benefit that it usually gives us is that when we look at the pool, we look at those 80 to 100 stores together. Yes, we assume, we work on, we talk to, we derive that they're going to be 15%-20% operating income as a group. We look at it every month. We work with the regions every month. We have a retail team that says, "If they're not hitting those hurdle rates, why is it like that?" You get it done. Let's face it, you get certain stores that sometimes just don't resonate in-market. As a grouping, that's the focus. Just real quick, Jim, you had a question.
I did. The numbers depicted on the slide there, what's included in the average store cost? Is that just capital expenditure?
Capital plus inventory.
The return on investment, is that calculated cash on cash, so is it inclusive of the depreciation?
That return on investment includes just the cost of the four-wall stores, the return that we're getting on that four-wall store, divided by the investment into that store. It's on a cash basis, so you would back out the depreciation amortization.
Okay.
We do the analysis on an IRR basis.
What are the terms of those leases? Are you subject to kick out stuff if they don't work going in?
Two to three in our Asian markets. Basically, three-three-three kind of European-style retail store you can kick out after three years. The U.S., well, we get a wide spectrum, don't we? We get outlet stores that are three years. We get some that are five, and we've kind of shied away from really those long-term lease commitments, and we've gone away from a lot of those high street stores or major kind of retail markets. Sam, there's always some that are out there that are going to be above five years. Do you want to add on that?
No.
Are you opening more stores in warmer places? In Asia, you do more in Beijing as opposed to the south tropical regions, or even in the U.S., do you do more stores, of course, in California than in Europe? Are you more in Spain than Italy?
Can I do that? The question for people on the phone, the question is really, do we open stores throughout the world in more warm weather locations? Obviously, we do better in warm weather locations. We don't have that same seasonality effect. When we open up in Woodbury Commons, there's a certain cyclicality to that business. People are going to shop at a certain times of the year. When we open in Miami or when we're in Orlando, clearly the dynamics are going to be a little bit different in warm weather. Yes, to our brand, it's more beneficial. I'm going to show you Nice, France, that we just opened. We try to focus in locations like that, tourist destinations in the Caribbean, in Florida, in California, warm weather. Southern California is better than Northern California for us from a marketing standpoint.
Yes, we're very cognizant of being in those locations. All that said, we do extremely well in Japan almost every month throughout the year. It's just how do we continue to build that connection with the consumers in other markets the way we have in Japan, in China, where they don't have as much drop-off. Sorry.
I was going to say that some of our best performing stores in Europe are in the Nordic region and in Russia.
Oh.
A lot of it, we overcome the weather issues in some cases of the world, too.
It's a really interesting dynamic that our highest penetration rate is actually in the Nordics, and our best-performing retail today, where we have nine stores, is in Russia. Again, how do you establish the brand? How do you make that connection? How do you get consumers to think about us? When I first went to Russia about a year and a half ago, I walked in, I said, "You guys have got to change this. It's clogs." It's so heavily clog-dominated. That's that European influence on the Russian model. If you go in those stores today, they're 30%-35% clogs. They've just gotten much more lifestyle proliferation of products.
Can you say what the break-even in terms of stores overall would be? The 20% is for the first year target.
Right.
After three years, what is it? Well, the target is the 20% is kind of the minimum, is a better way to put it than necessarily a target, because obviously, in some parts of the world, we're targeting for a much higher level. If you look at the four-wall returns on some of our stores, they range the gamut. We have some that are very strong-performing stores in some of our best markets like Orlando and in Hawaii and Hong Kong. Those stores do fantastically well. We have some very high ones, and then we've got some that bring the batting average down overall. In general, it's pretty good.
I think in general, we feel if we can run our retail business at above 20% operating income, and we can continue to drive that's a pretty good dynamic and that kind of return on invested capital. Yeah.
Well, on the topic of stores, you guys have opened a number within the U.S. Have you had any along the way that just haven't worked out, maybe you can share some common characteristics of those and why?
Yeah. The question from people on the phone is, have we opened stores in the U.S. marketplace that just didn't work very well? I'll give you a perfect example right here in our backyard. We opened in Cherry Creek, higher-end mall in Denver, nicer area of town. Our consumer doesn't shop there. That's not a place where it's really relevant. Rents are expensive. I don't know many people in that mall that make a whole lot of money. Saks pulled out of that mall about nine months ago. We've become much more understanding of who our consumer is and where they shop. We're no longer aspirational when we think we're going to go into these higher-end malls or higher-end locations and say, "This is a place where we're going to do well." Yes, we shy away from those high-end malls that we just don't do well there.
We can't sell enough. We're not on Main Street. A lot of times they'll park us off on the side streets, so we don't get the traffic through the stores to really make the connection. On the other hand, we go into a mall like Mall of America, where you get high traffic area, and we already have good brand presence there, and it does fine. That's the right kind of calibration for us. Okay? Thanks, Jeff. We tried the initial concept that we showed you before, which was a little bit woodier, a little bit greener, a little bit different kind of feel to it. What we come back to is that the store itself has to have a more female appeal to the store. That the greens, the woods, where we like it, and those three stores have done okay since they've opened.
We opened in The Streets at Southpoint in Durham, North Carolina, in Austin, and in Mall of America. We've found that for the brand and for our consumer, we have to lighten it up a little bit, stay true to what the roots were, having that little bit more outdoor feel to the product. What you see, this is the style of store that we're going to open in Bluew ater in London here in about four weeks' time. A little bit more open, a little bit lighter, much more user-friendly. What you're going to start to see is in the stores, there are display racks underneath, and these racks will also be merchandised where we can start to put box products into the stores as we move to a little bit higher price.
As we have more boot products, we need to have that kind of merchandising flexibility in the store. We're going to see the second generation, what that looks like for the brand. We like this feel a lot better than the initial take. Yes.
Is that a lower capital investment than the previous store format?
Lower capital investment on this store. Yeah. About $45 per square foot less when we build out like this. The idea that we're cleaning out fixtures and we're going to a more standardized model. We think it has a big impact, Jim. It's first just getting it out and getting the feel for it and then really then deciding how that cuts in. Our desire is we're going to stay with the existing format till the end of 2012. Any new stores really will be those stores that are in the pipeline that open after January 1st, 2013. We're going to see how this works in-
John, this is a prototype. Is the idea to take this prototype evolution and start taking features that work particularly well and trying to go back and do partial remodels for existing stores-
Yeah
before the leases run out? Is that the idea?
I don't know. Jeff, we're going to see how the dynamic works. We took certain things that we liked, certain things that worked from the first format, incorporated that into this, so we get a second generation of learning. I think, as you guys have chances to meet, maybe when we take a break here, we've got some of the other executives here, maybe we can introduce again and get better conversation with Andrew Davidson or Becky Gebhardt to talk about some of the work behind this. Angie is in Europe this week, so she's not here. A lot of thought, a lot of work has gone into this. We're going to see how the learnings apply. We're going to make those decisions then how we want to retrofit out stores on a going-forward basis.
If it's highly successful, we're going to be more incentivized to start to make some changes. A lot of times, we say that, if you look at mall store data today, if you look at outlet, sorry, mall store data, revenue per square foot, you guys get this, you see it, we see it. We're usually within the top five and certainly within the top 10. When we talk about taking revenue per square foot up per store, it's not like we're sitting in the bottom third trying to figure out how we're going to get to the middle half. We're generally, especially on outlets, in that upper quadrant in most of the locations that we're in. This is an actual picture. This is not just a rendering. This is actually the store in Nice, France. It's on two floors. It's in a really nice location.
It's done extremely well out of the chute. It goes back and gives you an idea of how we can connect, especially with tourists in this particular market, that think of the brand in a non-clog way. A lot of the products that you see out are women's flats, women's sandals, women's flip-flops, and it's done really well. It proves to us, again, back to the question asked, are you opening up in warm weather climates? Yes. This is a great destination and it's a great location for us. Why do we not open these stores sooner? We waited in Europe longer to get the right locations, and now we're getting better looks at locations in 2012 for 2013. Internet. If we think about what the internet is doing for the business, we have clearly backed off on the internet side in terms of discounting.
Have you guys noticed? We've clearly turned off the discount meter and we're really pushing new products. We're taking margins up in both Europe and in the U.S. when it comes to our internet business. Volume is not growing at a faster rate. We, as a company, have said, and I'll show you next, we have lots of people out here. 277 sites. This shows up as wholesale business in the U.S. that are buying product. Zappos, Shoebuy.com, Amazon, they're all pushing a significant amount of volume, and they're turning it on and turning it off. We also let Zulily and some of those do the discount promo to the brand instead of us doing it ourselves. We're trying to become much more brand conscious, much more focused in our internet business to kind of get off this chase revenue at a margin impact.
Now I put one caveat in there. That's all true until we get into the fourth quarter in the U.S. market. Right? Then it's kind of a free-for-all. You got to kind of go with what the flow is. You have to go with what that dynamic looks like at the macro level. Significant amount of development in the Americas and Europe with partner sites. Again, what drives the business in the U.S. today, what drives that brand perception, we've got great partners here today to kind of help get that messaging out. We think we're happy to see this thing continue to grow at a 10%-15% rate. We got a jump years ago on the competition when it came in getting the brand out.
This is still a pretty sizable business for us when you think of $120 million, $130 million through the internet site today, selling only footwear. It's not selling apparel or other accessories. What I'd like to do, if you guys are okay with this, is how about if we give you a 10-minute break? How about at this point, before we jump into the regional piece of this, how about if we give you guys 10 minutes? It's 1:30 P.M., maybe try to come back at about 1:40 P.M., and I'll go through regions, and then Dale's going to go into products after. I tried.
For those joining us on the webcast, we will resume at approximately 1:40 P.M. This line will be muted for the next 10 minutes. Thank you very much.
Did you guys like it? Yes? We have three different video clips, four different video clips. We show at the sales meetings. They get a lot more jazzed than financial people do about that kind of stuff. I'd like to maybe make that transition over in the regional piece, and I'm trying to consolidate down into the top kind of 3 to 5 things that we focus in on markets. A little bit more expanded on the European piece. If we don't get you enough details in here, please ask whatever you'd like to know on the European piece and I'll tell you to the best of my ability what we think, what we see. Before I jump into the regional piece, maybe if you don't mind, maybe we've got some of our executives in the back. Maybe first, Christy Saito.
Hi, everyone.
Christy, in all this great product that you see around you here, is a key member with Dale Bathum, who's going to talk next, head of product development, and bringing this to life with product development and merchandising role. Next to her is the woman with the camera eye here, Becky Gebhardt. Becky has been here about 15, 16 months. You guys have seen the transformation of our visual merchandising piece in conjunction with Andrew Davidson, who I think stepped out. She's made a huge impact on how we create this emotional connection with our consumers. Becky runs our creative group here. Katy Lachky has been here four months now. Katy's VP for communications, corporate communications, both internal and external, how we go to market. Make sure you introduce yourself to Katy while you're here. Dale's going to talk. Jeff, you know, and everybody else left.
If anybody else comes in, they've got work to do. They can't be sitting in here all day. We ask them to kind of bounce in and bounce out. With the sales meeting going on next door, they've got other things going on, too. From a regional standpoint, when we talk about the next three years, I don't think this is any surprise. I've said this repeatedly. I think our plans are that the growth rates in the U.S. are good, and what we're continuing to do in the U.S. is good. I think really by the end of 2013, Asia will be larger than the U.S., and that has various implications on our business as we move gradually towards a little bit more direct, as I talked about earlier.
As we move ourselves a little bit more towards Asia, Asian consumers, it gradually grows. I think that what you see is a little bit stronger performance at a gross margin and operating income level into 2013 if we drive them in this direction. We think based on what we see, sell-in, sell-throughs a little bit on the fall/winter. Well, actually, Jeff's going to go through backlog with you later in the presentation. He'll talk with you about what we see even for fall holiday 2012, where the uptake of the line is just more dynamic, and our brand presence is stronger. We didn't have the damage that we had in the U.S. in 2007, 2008 to recover from, so that path forward is a little bit more easier.
Regional results, again, if we think about the quarter, what we look at on a FX-neutral basis, it was 18% up in the Americas. Again, that growth drive in Asia, 39% up on a FX-neutral basis. Year-over-year, what makes me encouraged, and I'm going to talk about this later, what makes me encouraged, actually, on a FX-neutral basis, we're actually up 2% year-over-year in a pretty darn tough environment in Europe, partly because we're doing better in the direct-to-consumer space. We have a little bit more direct-to-consumer space. Even at that, we only have three stores, three incremental stores open from Q4 to Q1 in Europe. We didn't open as many stores as we wanted.
A lot of those stores did open in April, I think what we're going to see is we're going to see some of that start to play itself out through 2012 and into 2013. Let me talk about the Americas. Again, when you talk to people next door, when you see the energy that's going on in that room, they're building now on a base of a solid wholesale distribution channel. How do we take space? Where do we add certain accounts? Product segmentation, you're going to see that when you go in the room next door. You're going to hear that, and they're really focused on making sure that we've got the right products. You're not going to find Huarache in sporting goods. It's not going to happen.
There's a much more directed line assortment that Christy Saito is taking control over on a going-forward basis, where we've got a much greater focus on where we're placing products than ever before. Development of accounts in specific channels and additional doors. We've got certain accounts that we want to go open up that maybe we did business with before, that there were some hurt feelings or there was some things that we need to work through with them, places where maybe they didn't want to take our product before. With the assortments that we have now, it opens up new channels.
What we consistently say and what you see in the numbers is we ask them, "You got to give us greater presence." In the early days in Japan in 2005 and 2006, we tried to fight these battles with Murasaki and with ZBO and with BEAMS and with a lot of our major retailers in Japan, saying, "If we give you the product for spring/summer, you have to guarantee presence in fall/winter." Because we knew even back then that for us to get to four seasons, that we needed their commitment. Even if sell-through wasn't as good, they were blowing through products in the other six to eight months of the year. There has to be a certain amount of trade-off in there.
As I said earlier, a lot more work in the state to try to keep that brand presence into fall holiday 2012, definitely into 2013. 2012's going to have its own dynamics in the U.S. A lot of our marketing, as we showed you earlier, is really trying to drive new consumers to the brand.
Sorry, what does that mean, 2012's going to have its own dynamics in the U.S.?
Well, I think you all know what I mean. This is backed up. There's inventory backed up. A lot of retailers, when they look at what open-to-buy is based on their inventory position and brands that they already have in line, it's a little bit harder for them to wholesale accounts to bring in new brands into the marketplace. I think we have great product, and you're going to see it as you go through, and we can talk about that further. We have great new products. Our whole Cobbler collection, this kind of series down into the last, into this. I mean, for our products last year, this Cobbler collection of products didn't get placed enough. We're not seeing wholesalers willing to take open-to-buy dollars and open up new segments.
For our own stores, what you're going to see is them merchandised with Mammoth, with the Cobbler collection of products and boots and I don't know. Christy, do you guys have one of the RainFloe? Did we get one? I think the RainFloe is behind. Oh, RainFloe's behind. If you haven't seen this or felt this, I want you guys just to check this out, take the liner out of this. This is all-new technology, all-new kind of innovation when it comes to material development that Dale and his staff have gone through years to bring to market. It fits right into our category, the patented kind of hunter boot, where we think we're not trying to go into technical winter products. What we're trying to do is be really your go-to rain product for kids and for women.
When we look at this from a product standpoint, this is what we need to place. We need to have some confidence in the line when they array that. It's a beautiful-looking product and technically and fit, it's outstanding. Again, CrocsComfort, super lightweight on your foot with a whole different kind of feel. When they first did it, the original ones were in blue, the internal joke was it was Smurf skin. What's the price point? Price point on the RainFloe is $79.99. Yeah. New retail locations, as we just talked through the retail piece of this, I think we're taking larger retail space, and I think we're getting better sell-through on the stores that we brought online 2011, 2012.
I think, as I said earlier, part of what you're going to see is we've gone far less promotional, let other people be the promotional arm from the e-commerce site. If we sacrifice a little bit of growth, that's okay in the short term. We've got to recondition customers not to sit back and wait. We condition customers. We condition you. All you had to do is sit back and wait, every week, we give you some kind of promo, a BOGO, a buy one, get free shipping, whatever it was. It was too discount oriented. You have to, just like with JCPenney, it's the same space. You at some point in time have to get off this crack cocaine that you're on to just continue to try to drive the business. We've got pretty good product placement. How do we do that differently?
For the customers who are willing to spend, the allocation they buy.
Yeah
to some of those like Cobblers and the boots.
Yeah.
Is that something you're going to be willing to stock for the third and fourth quarter?
We are. Just those three, Steve, and only in selected colors and only in selected models where, A, the sell-through was good last year, or like on the Mammoth, where we're going to put it in our own stores. A little bit what's shorted our Q4 revenue the last two years is we didn't place strong enough bets on inventory. I'm not saying we're going to get crazy about inventory, but we're placing stronger bets for having stock available. Just those three. RainFloe, which is going through here today, which we think will do well based on early studies and tests. Mammoth, which I said is a 10 million-pair seller, getting that back out into the marketplace. That's a $35 in kids, it's $35, adults it's $45 price point. It's not an egregious amount.
Then also with Cobbler, where most of our Cobbler product was sold out by about the second week in November. We never even got to January with that product. It was pretty well picked over. We are going to place our bets this year. Yes.
You hinted earlier, well, it's not a question, you hinted earlier regarding at once business and you're expecting a little more at once business this year.
Right.
How does that I guess in the U.S. is what we're talking about now, how does that roll into the guidance you've given for the second quarter? What's that balance expectation, how do you look at that ongoing throughout the year relative to prior years?
Yeah, I think for second quarter, Sam, I think we have better kind of insight on what sell-throughs are going to be. That's not going to move materially. It could be up a little bit or down a little bit, probably up a little bit based on what we've seen in terms of products and sell-through and what we're kind of chasing to support wholesale retail partners there. On the back half of the year, I think it's too early for us to tell at this point in time how it's going to play out. There's a lot of work on our part yet ahead of us. I think there's a lot of senior management kind of has to go out and say, "Look, we've done really well together.
We need your help in the back half of the year." To Steve's point, because we are going to place bets on those. Those are carryover products for us. We're not doing anything that's going to be not in the line for 2013. All of those three products are in the line for 2013. Now it's really going out and really working hard to try to maybe get some additional wholesale orders for Q3, Q4.
Can I just follow up on these? Would you do a situation where you might have some larger account that is balking a little bit? Say, "Look, give us 30 doors early. Let's see how it does, and then we can roll from there.
Right.
Is that the kind of-
Yeah
work you're doing?
Absolutely. A lot of times, they're in that in between. The women's isn't really back to school, and it's kind of the end of the summer, and they're waiting for fall. Give it a shot. Yeah. When the stuff that's going to be in the line the next period, is that going to a model stock that just sits only during the seasonal? Yeah. Okay. Yeah. We do. Yeah. Those are all great. It's just the rapid sell-through sometimes your model stock is at 8% or 10%, but when A-Leigh is selling through somewhere 14%-30%, then those model stocks are out the window pretty quick. Yeah. Oh, Kevin. What'd I do? I hit the lower one. I hit this one. Oh, there we go.
See you, Kevin.
Starting to feel like Doug Hayes. For Asia, if there's three kind of key building blocks in our Asian marketplace, it's really continuing to stay relevant, staying on brand. In Asia, the brand perception is the strongest when it comes to how people think about this. In China, we're aspirational. We actually charge a slightly higher price in China than we do in other markets because when we position the brand, it's the same people that are buying Starbucks. It's the same people that are looking to say, "I want to be this. I want to communicate this." It's a whole different kind of marketing dynamic in a lot of our Asian markets today, in a lot of our Asian countries today. How to continue to keep it fresh and how to continue to do fast retailing in those markets, that's the key for us.
How we change over stock every six, eight weeks in stores or with our retail partners. Developing new wholesale accounts. There are certain markets where we're just under-distributed today. If you look at the number of actually doors that we have in Japan, we are under-distributed as a brand, even though it's $170 million worth of business, there's still a lack of distribution in certain locations and in certain areas. Again, leveraging brand strength and staying in season all four seasons. You guys saw the number of stores that our partners have built. They want to stay in season. They have to stay relevant with the product. They have to flow rain boots in, and you'll kind of see what backlog looks like for Asia for the third and fourth quarter. Retail expansion internally and with partners. I talked about this earlier. This is really important to us.
It's really important as part of brand building, it's really important in terms of staying connected with consumers as those markets grow and develop. Building e-commerce, the upside here in our business and something we're focused on any amount of business in today, which is about $12 million to $14 million per year is Japan. So we bring up our new Demandware site in Japan in the late third quarter. Korea only opens in about two weeks' time, so about the first week in June, and Taiwan started in the first quarter. We think that these are good markets for us from an e-commerce standpoint, where people do shop online, buy online, not just shop online, buy in stores. The other market for us is Australia when it comes to what we think from an e-commerce standpoint, where we continue to sell products.
Most of the other markets there, they're going to look at it online, they're going to buy in store. They're going to have dinner, they're going to buy at retail. We think that those can be good platforms for growth in Asia over the next three years.
You mentioned before that you wanted to grow new geographies by 5%.
Right.
When you open up countries like that, can that be
Should be simple, right? Should be basically simple. When you look at what's happening in the Middle East, when you look at opening up those channels, that's what gives us confidence that we should be able to drive top-line revenue 15%-20%. It's all about execution at this point, right? It's amazing. Another $1 million in Korea, getting Japan just to $3 million a month, up from a million and a half dollars a month, less than a million and a half dollars a month. That's key wins for us in the stage of development that we're at. Sometimes we always have to remember, we're about seven years old. This is maybe our eighth year of business, and we didn't really do much, if you think about this, 2004, we just had our 10-year anniversary. Not much happened.
We only sold a million, 1.2 million pairs of shoes in 2004. A lot of that was thanks to Alex Dillard, and Alex was river rafting in Colorado, found the shoes, started to put them in his stores in the fourth quarter of 2004. We didn't do much. Most of that revenue all came in the fourth quarter. The fact that the next year we only did seven million pairs of shoes. Sometimes it's hard to think about this in the terms of us. We have a hard time. I, as the staff will tell you, I have a hard time. The fact that in the last five years, we've shipped over 225 million pairs of shoes. It's a little bit phenomenal.
To open up three channels and to be in these markets and be as effective as we are today, I think that's really a lot of hard work by a lot of really good people. The opportunity as an investor and as a company exists. It's about continuing, not being lackadaisical and being happy to hit $1 billion. It's how you just say, "Okay, and how do you in the next four and a half years then get to $2 billion?" That's the internal constant push. The opportunities are there. All we have to do is go execute. We're not Adidas fighting with Nike. We don't have a natural predator in the space that we're fighting over market share with. We're fighting with local brands. We're fighting with smaller niches to be that brand of choice for casual lifestyle products.
You saw some of them. You're going to see more when Dale talks. The opportunity is there. You got to execute. Europe, I have two slides. Let's talk a little bit about Europe, and I know that there's a lot of questions, so if I don't cover it, please ask. When we think about building our wholesale channel, by far, go shop anything in Europe and tell me where you find Crocs today. Tell me where it's there in a meaningful way, because even some of the people that have Crocs today that would be deemed an independent are just selling through some of the old products that they have, or they've stayed connected just to the simple racks, one or two racks in a store. The opportunity for us to build a brand there with the new management team, again, is clearly in front of us.
New structure, Kimmo Salmi was our commercial director for Russia and the Nordics. He's a Finn, and him coming down and running all of our commercial operations in Europe is a great internal move for us, having somebody who really knows how to work. We've taken a much different approach in Europe over the last 18 months. Mike De Bell, who ran Asia, went and spent six months in Europe last summer restructuring it, getting the new general manager hired, and getting Kimmo to move down. In building that, we're really decentralizing out of where we were in the past in The Hague, not very convenient, not good work ethic, a number of different dynamics there. We've now moved the office closer to Amsterdam, so we're all of about six, seven miles from Amsterdam, really six minutes from the airport there in Schiphol. That dynamic changes.
We've pared down our headquarter operations in Holland. We've moved out jobs into Germany, into France, and into our U.K. London offices. We get a little bit more decentralized. The fourth point is the one that we're working through that will transpire. I can't really probably tell you more than what I'm about to tell you because we don't know any more than that. We have been working on the Benelux marketplace, but that would transition back to us in January of 2013. We've already said that's coming back to us as a direct market. Because we're now selling in spring/summer 2013, they've kind of come back and said, "You know what? It would be better if we transition this out sometime maybe in early Q3." As we know more, as that finalizes and crystallizes, we'll talk about it in the next earnings call.
That means we're going to take back about nine stores. In that partner list, they had 11 stores. We're going to take back nine stores in the process, and we will then take back the Benelux market on a direct basis. We've paired off some of our Holland staff. They've been working on this for about nine months now to put in our systems and to hire over staff and to make that transition. Spain is just kind of a recent occurrence where it's clear that they're struggling. The distributor partner that we have there is just struggling financially, and it's probably something better that we come to. We've got a long-standing relationship with them. They've been there since 2004, but I don't think it's not going to work for the long term. Again, we'll update you more on that.
That'll probably come back as a direct channel to us. Only two stores there that they have. They carry Speedo and six or seven other brands. They're going to take some of the existing stores, convert those to multi-brand stores of their own. Our existing distributor is going to continue to carry those brands. For us, we have two dedicated stores, one in Madrid and one in Barcelona. We'll tell you more about that. Just to put it in terms, 17% of our business is in Europe. Less than 1% is in Spain, and like 0.3% is in Greece. There's a lot of questions about what's happening in the European market. In those kind of key markets, there's not much movement, or there's not much impact to our Crocs Europe business.
You said on the Q1 call that you were flat. That was $1.43 that was out on the street for the full year. Was this in the knowledge base when you did that?
Yeah.
What % of the European business is Benelux?
What % of the European business is Benelux?
Okay.
Yeah, I got to say it's in the 5%-6% range. Maybe Jeff can come back to get that number.
How familiar of Europe right now with the weakening opportunity there?
Yes. If I think that, Mike, is the wholesale piece of this, e-commerce, we've again taken that same step back. We're maybe not comping up on our European e-commerce business, but from a margin standpoint, we're doing better. What we've done is we've traded off being promotional every weekend with some kind of campaign to trying to do more brand building, selling in the new line, getting consumers to think about us differently. Today, we have about 1.5 million people in our European CRM database. How do we kind of create that tipping point there when it comes to how people think about the brand, more lifestyle, less clog? Just real quickly, I'll see if I answer this in the next slide, when we think about then retail, we're going to basically double almost the number of doors year-over-year.
We're going to go from roughly 31 to 60 doors in Europe in 2012, again, opening up five or six in Russia. We just opened up in Stockholm and opening up doors in Germany and outlet store in France. Each one of these makes up a much bigger investment from a Crocs standpoint, but it's clearly what we should have done two, three years ago to get the brand message out there, and we're just significantly behind the rest of the company. What I say here is as we do the right thing, as we get in merchandise in the right way, as those stores come open, the consumer looks at this, 30% of our revenue came from new products for spring/summer 2012. We think we should be able to sell women's flats. We should be able to sell wedges.
We should be able to sell kind of our core products globally. Yes, there's some color nuances and a few changes, but really That's consistent and just doing a better job of it, working harder, asking for the business that we haven't had before, and outlets in high traffic areas I've showed you for those retail locations. Last, we think where we sit today, having gone and spent time with them, I spent five days in our European sales meeting. I talked to every possible group. I either sat with one group at lunch or another group at dinner and just really getting the feeling for it. The energy that's there, yes, the market is struggling, but I don't want to say that we're recession resilient, but we are a good price for value, and now we just have to get that message out.
Mike, in the total scheme, we're going to be on budget, on plan this year. We don't see a decrease to 2011 levels, we think based on where they're at today and some of the things that they're seeing real time, that they're going to be maybe even slightly up year over year.
With that 30 new stores.
That's with 30 new stores. Yep. Clearly, a little bit of wholesale shifting. Nothing that you're going to see until really in a meaningful way until 2013 on the wholesale side. I like the fact that we're trading off revenue at a higher margin and getting new consumers into the brand.
Once you get the situation straightened out in Spain, do you see maybe longer term allocating more capital towards that market? It seems like you have a, for the product-
Right
price point.
Yeah.
Significantly under penetration.
Yes, for Spain. Yes, for Italy. Those two markets are both places where I think we would do much better by having some of our own retail stores in the right location. Let's face it, rents are coming down in those markets pretty significantly. We are opening up outlet in Italy in two locations this year. We are going to start to build a little bit of brand presence. We've said this before. We took back our retail rights last year in Italy. He is going to open some stores in 2013, our existing distribution partner. He's a wholesaler. He carries other brands. He carries Teva, he's more focused on building out the wholesale.
The Italian situation was the one that's interesting in that actually our revenue to our distributor in Italy is going to go up this year, mainly because he was over-inventoried last year. He didn't buy a lot of product last year. One of the internal dynamics is, yes, the market is struggling, but for us, he's so low on inventory that he's actually going to buy more in 2012 than he did in 2011 just because of where he's at as a business.
How many stores in Spain support you?
We had Deloitte & Touche do work for us in their European consulting business. The number of stores that we look at in locations, anywhere between 30 and 40 stores over a five-year period. In Italy, slightly higher, 40 to 50. Interestingly enough, that quiet market that I referred to earlier, that Poland market, say ECCO has 50 stores of their own. People don't understand the spending and the kind of footwear marketplace that affords itself in Poland. Some brands do. Some brands are actively going into that space. For us, we think that this also offers a good potential to grow either directly or with our partner there.
John, you said, just going back to the European wholesale, you said you have a lot of independents and smaller chains that you're dealing with now. When do you build or when do you get visibility on their orders for spring of 2013, and is that a better order book than if you were dealing with department stores or big sporting goods?
I think we're going to find out. We're putting more work into, as I said earlier, into those mid-tier kind of chains like we did here years ago. We don't have a strong presence in shoes in Europe, even though we do some work with Genesco here in the U.S. and Journeys. We don't have a strong brand presence in a lot of the mid-tier footwear brands, where we should have a better presence. Just like we didn't three years ago, we had hardly any presence at the mid-tier, right? That's a big focus for our team there as far as getting product placed and then now continuing to build confidence as we sell through this year with the existing independent kind of lower, smaller kind of chains that we have. We're doing a test, for example, with Decathlon in France.
We start with 50 store tests with them to see kind of then how that's going to work. That's a good mid-tier for us kind of sports retailer. We segment the right kind of product into that space that offers an opportunity that we haven't had before.
Those are commitments already but they're
That's for 2012, then we work with a number of different key retailers today to try to get ourselves back in. Pre-books are just starting, they're just taking the line out now in Europe. Their sales meeting was two weeks ago, more of that work is being done. I think by the time we get to the end of July, we're going to have a much better feel for what that is. More pre-books still come in all the way through the end of the third quarter. We're going to have some indication of whether they're going to give us a look in some of the other retailers in Europe for 2013.
John-
We had a much bigger distribution. It's just imploded so much in Europe. Now it's how to go back and build that.
When you think about the wholesale distribution in the U.S. or in the Americas and in Europe, how much of the growth
Is going to come from broader assortments, I think broader and deeper assortments versus new distribution.
Yeah. I think what we said this year is we're going to see about 50% of our growth come from ASPs and about 50% are going to come from the units. I think we've got to continue to work at that unit growth. Ask that again.
Well, new distribution,
Yeah
new channels. How much can you expand with an existing distribution versus opening new accounts?
Yeah, it depends upon the channel. We're not looking for any additional mid-tier footwear players. We just want to continue to build our existing relationships in that space and just have better products suited for their consumers. I don't think you're going to see significant door growth in the U.S. in 2013, if that's where that question is. I don't think we think that we need that much more distribution. In certain markets, we need more, and in certain doors that we're in today, we need to engage them better. They need to have the right product in their stores.
Based on your internal plans, you probably have a good handle on what the retail business is going to grow at. Where is the wholesale business and what kind of lift does the wholesale business need to carry to get you to that 15%-20% type exit to top line objective? How do you see that mixing by geography?
Maybe Jeff, can we hold that?
Sure.
Jeff's going to go into and talk a little bit about that. We can mix that into what the numbers look like there.
Good.
Okay.
I was going to ask about the break it out by Europe or how everyone characterized it. You characterized profitability in Europe versus the other-
Jeff is going to cover that. He's going to give you guys back I know this is a big day today, guys. You're going to get actually backlog by region today, too, and Jeff's going to talk about profitability by region today, too. This is worth your trip. Any other questions on regions or kind of channels before Dale shifts over?
I guess, what's your expectation as you grow in Europe outside the clog? Do you expect units to grow incrementally or are you going to just replace the clog with new units from-
What we would like is we'd like it to be incremental. I don't know what the curve is going to look like where so much of it is clog today. If that can stay a strong channel for us and that we're going to add to it as we do in other markets today, which drives the top line growth or are we going to see a consumer come in and say, "Well, I'm not really interested in your existing models. I'm going to go with the new Retro runner product." I don't know. We don't know yet how much trade-off we're going to see in Europe with that consumer because we never pushed this hard to get them to think about us in a different way. Will they trade off a clog for a flat? It seems like a different application.
Seems like intuitively it should be an incremental sale. I came in to buy this clog. I found this really cool new women's flat. I'm going to buy this flat and it should be incremental. We're going to see. Okay. Thanks.
Hi, everyone. I'm Dale Bathum, Senior Vice President of Product. Today I'm just going to talk to you. I'm going to be pretty brief. How we think about product and how we think about diversification, how we've been doing on that, efforts in diversifying, just what the future looks like in this fall and next spring a little bit. Back in 2002, we started with our core Classic clog, nothing new or different for you there. I got this thing on backwards here, sorry. As we started to think about this in 2007 and 2008, we wanted to think about how we could start to diversify from that known clog. We still want to protect our core. We still wanted to protect that clog and our market share there and try to grow that. We also wanted to start to diversify.
We identified four new areas to think about outside of the core. Casual in the upper right-hand corner, stylish styles up there in the upper left, lower left active category and the lower right, how do we start to think about winter as a program? You start to look at the product line, and as you looked at winter, we lined the clog. Very simple. Mammoth, and John spoke to that already, and I think it was it 10 million pairs or 5 million? Sorry, I forget how many pairs, but maybe it was 10 million pairs of Mammoths that were sold. Santa Cruz was launched in 2008. Casual men's deconstructed shoes, still part of our line, still a big seller and well into the over 1 million pairs. Malindi women's flat style and flats have become a part of our base product line.
We started to look at how do we get into this active category, we looked at post-activity, so Prepair series after working out. That's really how we looked at how we start to think about diversifying. In 2009, 2010, 2011, we started to look at how can we go the next level. We've built these four new pillars around core, they all contain the same DNA of the original Crocs product. How do we start to look at this in a way that we can look at new channels, new markets? How do we start to segment our product? How do we find new consumers? That's how we really started to look at this program and following that same thought process, going out from the Santa Cruz, we looked at sneakers. Sneakers is the biggest category of shoes available out there.
We have to look at what the Crocs opportunity and take is in the sneaker category. In the upper product there, we actually made a specific sneaker for the European marketplace. They like their silhouettes a little slimmer, a little bit tighter on the foot. We're starting now to not only segment product by channel, but we're starting to make specific products for a particular region. In 2011, we introduced the Translucent series with the Adrina flat up there, a new injection molding material, in this case, TPUs, thermo plastics, start to take our leadership in injection molding to new places and starting to use new materials and softer materials. What this material allowed us to do is to make the shoe a lot sleeker on the foot, a lot sexier, and more colorful in different ways that can match with different outfits.
We continue to build on wedges and heels we had luck with in 2008. We looked at the toning category in the active area. We introduced our first boots in 2009 and 2010 and started to get a little bit of placement there, starting to get a little bit of a foothold in the wintertime. How we look at it going out in this new season, which you're going to see a lot of these products, is we're continuing to build that sphere around that original core. We're continuing to maintain that same DNA. We're continuing to stay in those same four new pillars, but do it in a more innovative way.
How do we do it in a new way that excites the consumer, brings innovation to the brand, and brings a little bit of a cool factor to what we do and changes the perception to Crocs and brings in new consumers? That's what we feel like when you look at the line, that's what we really feel like we're going to do in 2013 with this product line. We have a new sneaker up there. A lot of these products are in and around the room, but you'll also see them in a minute when we go into the other room. It's the lightest sneaker possibly ever built. It's got our DNA, it's fun, it's colorful, it's lightweight, and at the recent Asia sales meeting, they just went crazy over this product.
It's a combination of a casual Santa Cruz that we progressed from, yet it brings in that Crocs DNA with the Croslite bottom and lots of fun colors. A very exciting new project for us that we think is incremental. It's a new customer, a new consumer for us that had never thought about Crocs before. The Retro series, which you see on the wall here. Instead of just building off our traditional core clog in Retro, we actually now are launching the Retro with a flip, a Mary Jane, and a wedge and launching it all together as a complete collection. First time we've taken our core product like that and launched it as a complete collection. We can go in to a retailer and sell them the whole product line. Say, "This is your wall. This is what it's going to look like.
This is the story. This is the marketing." It's all integrated, it's all launching at the same time in a very effective way. That's new for us to be able to launch product in this type of way. Huarache, new flat right here. Back to the innovation, when you get a chance to feel this product, it's incredibly lightweight, very soft, malleable, forms to the foot, and it's an over-molding technology that's proprietary to us. We spent a lot of time developing this. This is from one tool. You can actually see on that product up there we have four or five colors, all from one tool. It's all injected. What that means is it's very cost-effective to produce this product. Yeah, you get bold, colorful, fun product that no one else in the marketplace has. It's very unique, and it's uniquely Crocs.
It's fun with sundresses and different outfits. If you look at it again, you wouldn't imagine that's a Croc. It's very slim and sexy on the foot and goes with lots of the outfits that are being on trend right now. This is a very exciting project to us, not just from the that it's great looking and comfortable, but just the pure innovation of it is just fantastic. What's the price point on these? I saw $60? $45. $45. There's different versions, yeah, $45 and $60. It's very cost effective to make with just the one tool. It's fantastic. As you can tell, I'm very passionate about this. It's really great. Believe me. Another fun thing is this company was founded by three guys on a boat. Just boil it down to the simplest denominator.
There's a lot of stories around those three guys on the boat and what was going on in their heads, but it was founded by three guys on a boat. We belong in this boating space. We had to think about it in a little bit different way. We have the shoe that I'm wearing, which is kind of a traditional leather, hard to compete with our competitors there. How do we think about this in a Crocs way? If you think about boat shoes, they've never really changed since Paul Sperry launched them in the early 1900s. They're leather with hand-sewn with a bottom on it, and you maybe tweak it a little bit.
We've been able to come up with a way, and you'll see them there, to mold this product and bring in those SKUs with the leather lacing and the siped outsole bottom and different other cues that make it a boat shoe, but in a Crocs way. It's really revolutionary within the boating category and ties it back to, again, our heritage of three guys on a boat. We feel like this is a fantastic new category for us. When you go into the other room, you'll see them displayed, they float, they're colorful, they're fun, and they're right in our DNA. We're very excited about this product line. We have it kind of grouped in here in the active category because it is got the sipe bottom that you could actually use these on the boat and use them for boating.
Then also, we've launched in a new category in golf. For you that know my background, Crocs bought my company, Bite Golf, back in 2007, this is particularly fond to my heart, but just a great opportunity. What it does is it brings a new consumer to Crocs that never would have considered us before. They hear about how comfortable that golf shoe is, and it's associated with a big name in golf. They start to think about Crocs in a different way. They start to think of not so much of us as this, but start to think of us as something that can be in this active category because it's so comfortable and fresh and different and new.
We're really excited about the golf category and what it's going to help us do with the men consumer that we don't have right now. They're going to think about us in a different way now. Finally, the winter category, John alluded to this already, but we're serious now about being an all-year-round brand. We got rain boots. We got more warm, functional boots. We're bringing the Mammoth down in here. We have lots of collection and really great products at a great value. Fantastic products at a great value. You can just see how fun and colorful it is, particularly the rain boots I feel strong about because it's right in our DNA. It's lightweight, it's made from our material, flexible, easy on and off. Then what's really neat is how you display these out and spread them out.
The color just pops. It's just fun, and you just want to gravitate and go check it out. Particularly with the RainFloe product, when you see that out there, when we put it out there in our initial reads to get on the test, people just want to touch it and feel it and see what this product is all about. It's a fantastic opportunity for Crocs, again, to find new consumers that we couldn't have gotten, and I believe new channels. You start to look at where you can place product like that, it's a new channel for Crocs. Does that roadmap resonate with everybody? Does that make sense in the way we think about things? Any questions on that?
When you show retailers the product, like rain boots, it does make a lot of sense. What is the pushback you get? Why don't they just take it off?
Honestly, I don't make that many sales calls. It would be a lot of conjecture for me to give you that answer. I've been in this business a long time. It takes persistence and consistency. They need to know you're going to stay at this, that you're going to be active. That's why I show the clock and the calendar on this too, is that we're going to plug away at this, and we're not going to give up, and we're going to keep showing that, hey, we mean it to be in this business. I think this one, we're going to get a lot of placement, but on some of the other more expensive type products, it's going to take us some time to build out that business. If you think about one of our competitors who's in sheepskin, they were the hockey stick.
They were here, they were staying there, then something triggered, in this case, it was Oprah Winfrey, triggered that, then it shot up. You have to be there. You have to be persistent and consistent, and we will be. We'll keep plugging away at this. We'll get our inch by inch, as John put it earlier. We'll get our space. Yes?
Can you talk about some of the things you guys have learned about You by Crocs online and involved in that?
That's a really great question. If you look at this map, where would You by Crocs fit? It's stylish, so it goes up in that category, but then it's not really in our DNA wheelhouse, right? We're not there yet as a brand to go there, but we have learned that we can get that consumer because the product that's on the marketplace now does sell. It just doesn't always sell to our expectations. We're just not there yet as a brand that we can start to talk about higher-end leathers and fashion and heels and wedges and we're just not there yet. It doesn't mean that our circle, as it starts to expand, we can get there in the right way. Does that answer your question?
Yes.
Anything else? Jeff's going to go into a lot more detail, but another way of looking at this is by silhouette, too. Most of these silhouettes would fall into one of those four pillars outside of core. Clogs, obviously, is our core business. Even though we talk about expanding away from the core, we don't want to not grow the core. We want to protect that and maintain it and actually grow it and stay very strong there, but we want to start to grow more aggressively or faster outside in those other pillars. You can see boots, that has a very nice growth curve, very manageable, very steady growth curve. Flats have been very strong for us in growth. We started with flats before we started with boots.
It grew, and now it's maybe starting to plateau a little bit, but I think it will continue to grow. Sandals will be a big growth area for us in the future as we develop out new products and particularly, I believe, this is my opinion, but the Huarache series particularly will start to really help us drive those sandals. Casual sneakers, again, nice steady growth there. Casual shoes has been real nice. Jeff will get more detail into that. The point is that it's working. Point that as we move into these other pillars and silhouettes outside of that core clog, we are growing our clog business, but we're also growing in those four pillars.
Are there regional differences between the growth that you're seeing? For instance, that sneaker you mentioned Asia, that's going to be an easier sell in Asia than it's probably going to be in the U.S., just based on the history you've had and so on, so forth, from what I understand.
I can't really say because I'm not out selling in all those different regions. Some products, as John mentioned earlier, clogs are still stronger in Europe. I just believe we're in different areas of maturity. Right now, Europe's a little bit more immature, so they have a lot of opportunity to start driving, say in this case, sneakers, and particularly the sneaker that if we design for them, it's still the more slim because that is a trend and it is one of their biggest categories. Asia right now is more open to all kinds of different possibilities of what Crocs could be, particularly China and Japan. They are looking for ways to expand the line. They're very aggressive in their mindset, and they view Crocs as a very comfortable, easy on and off brand. They're looking to expand outside the clog.
In America, it's very competitive on the sneaker type business. We're focused on casual sneakers, more of a lifestyle type product. I think we have a lot of opportunity there. We just have to be persistent, consistent, and keep telling that story that we belong there. When you try it on, it's so comfortable and so lightweight that it really does have a unique position. We just got to keep working at it, keep plugging away. It will come.
Are you building these products all to add or higher margins than the clog through a combination of high price? We get all marked down, I think, mark the initial mark-up.
Clog is a really profitable business because it's easy to make, it's simple to make. When you get into this area where there's a lot of competition, it gets more challenging to try to maintain that type of margin. They do have a higher dollar value per pair sold, right? Did that answer your question?
Yes. Just what's the rationale here? How do you balance that or as long as you can push the price, I guess it's.
We look at it as aggregate. We make sure that we maintain our aggregate gross margins depending on what the model mix is between sneakers, clogs, flats, other shoes that we maintain an overall aggregate gross margin. Anything else? Okay. The future, we're going to continue to hit this drumbeat and stay at it and keep driving into these new pillars. You'll see the Crocband Winter Boot come out this fall. You saw the earlier version. This is an updated version with the new material. It's really scrunchy and comfortable. We call it warm and toasty and fantastic colors, too. The new Mammoth series, we call it Mammoth EVO because it's an evolutionary product. It's not revolutionary for us, but it's keeping that that's protecting our core, that we make that Mammoth, that lined clog, and it's really a fantastic product.
RainFloe, we've already talked about, but purpose-built. First time for us really to go after a specific category being purpose-built, in this case, rain boots. As I said earlier, it really feels like this should be our sweet spot. We really feel comfortable here. We have a lot of fun product in rain boots. John already pulled out the Cobbler Clog, but like he said, last year, we sold out within weeks of dropping it into our stores. It's very stylish and it's comfortable and it's a great value and comes in an EVA version, a suede version, and then a good, better, best with a higher-end leather version that we can segment to different channels and different customers. When you look at it, we really do have a great story for fall/winter, and it builds off of that core.
For spring 2013, which you're going to go see here in a few minutes in the other room, we talked about the Boat Shoe series already, but it's emotive. It's back to our heritage, and it's a lot of fun colors, and it's a really simple design, but it's very difficult to execute, but it's just a fantastic product. You put it and you throw it in your hand. It's so lightweight, it floats on the pool. If it falls off in the water, it's going to float. It's just got a lot of neat dynamics about it. It's just a fun story to tell. Huarache, again, we talked about, very innovative. The Retro series, which is very much uniquely Crocs.
It's taking our core DNA with that clog, putting on a retro bottom from the 1970s type Nike or Adidas type original shoes, which is right on trend again. If you start looking at the magazines, you'll start to see retro originals starting to come back into the trendy lexicon. We're going to be right there on trend. The L.A. series, which we talked about already, but for us, it's our first array in the sandals with leather uppers and a little bit more stylish and fashionable bottoms and John already gave you the sell-through numbers, but they're fantastic, 10%-30%, depending on where they're located. We feel very strong about the future.
We've been diversifying, we've been successful at it, and we're going to continue to beat that drumbeat of those four new pillars outside of our core, and we're just going to keep working it and working it, and I just think it's by far, I believe, our best product line, and we're just really excited about the future. Any questions for me? Are they ready for us over there?
Yes.
All right.
We're going to go take Calvin's three groups. Kate, Becky, Christine, Becky, and Dale will switch off with three groups and we'll close with Dale. All right, we'll get you out the meeting room then. All right, we'll switch with that group.
we're going in the-
Go this way here.
Yeah, we're going to go out this door. We're going to the sales meeting room. They're going to have evacuated, hopefully. You'll see all the different stations of the new product lines, then we'll be there to answer questions.
We'll come back here and do financials.
Hey, Dale.
Hi, Christina.
Good afternoon for those joining us on our webcast. We will be breaking for a short break for about 15 minutes. We will resume a little after 3:00 P.M. Mountain Standard Time. Jeff Lasher will be presenting as well as we'll have a short question and answer period. Again, we will resume webcast at 3:00 P.M. Thank you very much. Good afternoon. This is Kevin Kim from Crocs as the investor relations officer. We will be starting our presentation with Jeff Lasher at approximately 3:05 P.M. Mountain Standard Time. Again, we will resume our presentation at 3:05 Mountain Standard Time shortly. Thank you very much.
For those of you that are still online with us, we will begin again momentarily.
Highlights on the finance side, then we'll have a special presentation, special guest to present to you, then we'll take some Q&A, then we've got some gifts for you guys before we break over to the Boulder store and enjoy dinner together. Investment highlights that John and Dale have taken you through. We really feel confident about our product-driven international growth expansion. The key message is, again, casual lifestyle footwear brand, balanced international growth, long term 15%-20% sales growth on a constant dollar basis, then resulting in strong balance sheet with strong financial results. You can see on this slide we've added tax rate and EPS. We're going to talk about each one of these particular 6 categories over the next 30 minutes or so, then open for questions as well as we go through them.
Talk a little bit about revenue, talk a little bit about operating margin, then we'll talk a little bit about the tax rate and the effect of FX on our business. Again, to reiterate, 15%-20% long-term sustainable FX neutral revenue growth. We think we can get that from a combination of increased ASP units. You can see those are Q1 numbers. Our new products, which represent 38% of total revenue in Q1. At the same time, we shouldn't miss that the clog space continues to grow for us. We still, even Q1, even if the percentage of clogs went down from 51%-49% versus prior year, the overall revenue increase in clogs was still 12%. When we look at the product categories, we see that still 7 product categories generate over $30 million in sales.
As Dale said, we're going to talk a little bit more about the investments that we've made around the marketplace. We can see this is how the pie chart kind of breaks out. 48% of our sales for 2011 were clog, 14% were the other category, specifically 4% were sandals, 5% casual sneakers and around the wheel to the 12% of our business that's flats. You can see on this particular chart, you can see the flats business that I just talked about has doubled since 2010, now represents about 11% of our total revenue in 2011, will be about $122 million business in 2012. Our boots category, a couple of years ago, we were real excited about our fall holiday 2010 sales success in boots. Came back in 2011, $47 million.
In 2011 was about 5% of our total sales generated out of the boots category. This year, that business will be a $74 million business. We've kind of quietly grown this boot category, which includes all the rain boots behind me, all the winter boots over on the left side into a $75 million business. Same time, the casual sneakers, casual shoe marketplace, now $155 million business, up from only about $60 million a couple of years ago. Terrific growth in all those categories. Sandals, $43 million-$86 million to a doubling of our overall sandal business. Again, from a clogs perspective, even as all these other categories are growing, we're still seeing the clog space grow from $520 million last year to $585 million in 2012. These are our projections for 2012. The 2011 numbers are obviously actuals.
What does this mean to our investment community? We think that the strength of our new products, the continuing growth of our molded products, as you saw in the spring/summer 2013 category over here in the Be Bold section, all of those products, the Translucents that we came out with, all of our strong spring/summer 2012 product line, together with the operating leverage from higher ASPs, strong international growth, all of those factors together should help us drive gross margin up to about 100 basis points improvement from 2011 levels. As we look at SG&A, there's been a lot of questions over time. What does our SG&A look like from a direct versus indirect? This chart was 2011. We'll show you 2012. You can see in 2011, we spent about $185 million in the direct channel.
That was broken out 46% of that spending was in rent, 23% was in other, which includes marketing costs, credit card fees, and other promotional aspects of running our retail stores, as well as our internet channel, which utilizes all of the bloggers and the Google of the world, where that's driving some of our revenue and activating that revenue online. Then labor, 31% for 2011. Indirect spending was 48%. Where do we think we're going in 2012? We think we're going to be able to leverage our indirect spending, drive that percentage down to 52%. At the same time, our direct spending going up to about 48%. How does that break out for 2012 SG&A cost? Rent, about 43%. We still think labor is going to be about 31%.
You see rent a little bit higher as a percentage of revenue as we move into Europe in a bigger way. Asia's shop-in-shops and lower rent structures dilute a little bit as we add retail stores around the globe. In other markets where the lease is a little bit more expensive. The other category, however, we continue to drive efficiencies and leverage that other spending, that marketing spend, across a broader portfolio of stores. You guys were in a race, I'll go with Steve first. Sorry, Joel.
Is the rent in the U.S. mostly fixed or variable?
The rent in the U.S., after the kiosks are completely closed out, will mostly be fixed. The kiosk model is a variable model.
If you're going to run the comps you've been running, you should be able to get.
Over time, we expect that we'll be able to grab some leverage on our rent base. Joel?
Sorry, just to take one step back to the gross margin, if you would, please. The upper bound there of the up 100 basis points, have you quantified that?
So I-
Have you been at upper bound before, or is this relatively new?
This is relatively new. I think what we said after the first quarter, we were up 70 basis points in the first quarter results. Last year, we were slightly better than the prior year. We've always thought that we'll be in that same ballpark as last year. We've got some confidence because of all these different factors to now call out that we think that our cost of goods sold structure is going to be able to generate a bit better improvement in margins next year, up to about a full point. Somewhere between zero and 100 basis points overall, where we should be able to see a positive improvement on margin.
If you hit the upper end of your range now, will that be because your input costs are lower than what was expected, or because there's been more leverage from the ASPs? What is the most important driver of hitting that upper end?
Yeah. As you know, there's a lot of variables behind the gross margin line, whether it's the discounting that goes on in the retail space, the gross to net walk on the wholesale space, all the returns that we have, the returns reserve assumptions, all of the different variables that go in. When we put it all together, Joel, we run it through all of the different algorithms, cost of goods sold, we think overall, it's going to be about 0 to 100 basis points improvement. A little bit of everything to answer your question, a little bit less discounting, a little bit more improvement on our supply chain, a little bit of leverage on ASP, a little bit better product margins internally. All those things are going to be a little bit better.
Offset by some minor things going the other way, we think overall we'll be able to improve that. Okay, what does the SG&A leverage look like at the consolidated level? We think we'll be able to leverage our SG&A expenses, somewhere again from 0 to 60 basis points, where we think we should be able to generate some positive leverage on our SG&A line. Because of the indirect SG&A, the direct SG&A leverage over the other costs, labor costs being held flat. This is offset by, again, in the fourth quarter, I think I just want to head off a question. In the fourth quarter, we do expect that the SG&A as a percentage of revenue will be in the low to mid-40s, similar to last year because of the lower revenue numbers in Q4. Questions on SG&A? Yeah, Jim?
You had a reclassification of your SG&A last year, taking the FX-
This all excludes that.
That's now full back in?
Yep. We took all that out of this analysis. What Jim's referring to is last year, we had a credit last year in the FX gain/loss account as we used to account for those gains in SG&A. We've moved those down into other income. Because of our hedging strategy, those are going to be netted out in the other income line, and over time, we think that's more relevant to show as other income than show you guys as a net credit to SG&A. Okay. Moving over to operating margin. Obviously, the math is fairly simple. Gross margin minus our expected SG&A, we think we'll be able to drive our operating margin improvement up to about 160 basis points. We think we'll be somewhere between 14%-15%.
We, as a management team, are still focused on driving a 15% return on sales at the operating margin line over the long term, and we think we can get that in the near term. We're focused on that as a management team. Questions on that? Corinne?
Longer-term operating margin goal?
We haven't set a longer term. Obviously, once we get to 15%, we will come back and say, "We would like to get to X." The next logical goal would be to move that goal line back 2 points and drive to 17%. At this point, we are just focused on getting to 15%. Some other financial information. There were a lot of questions about backlog. I would like to take you through a little bit about backlog by region. This is how it is split between Q2 and second half. You can see Q2 represented an 11% growth. Second half also represented an 11% growth. Americas at the time, we told you Americas was up 12%, Asia was up 18%, and Europe was down 13%. When you look at it on a constant currency basis. You want me to go back one, Scott? Sorry.
These are all the same information we gave at the end of Q1. There is no new information there. Good? Okay. On the backlog by region, breaking this out, you can see Americas at the end of Q1 2011 was $89 million. At the end of Q1 2012, it was $100 million, up to 12%, basically flat to the constant currency line to 12% as well. Europe, $42 million last year, $37 million U.S. dollars this year, a 13% nominal reduction, on a constant currency basis, it was down 6%. Asia, $129 million to $152 million, up 18% in both nominal and constant currency. At the bottom is the key information. Last year, Q1 2011, we sat with a euro at $1.41. This year, the euro is $1.33. Last year, the yen was JPY 82.87. This year, the yen is JPY 82.42.
Last year, we benefited in Q2 as those pre-books and that backlog revenue rolled into Q2 at a higher average rate. You can see both the euro and the yen both expanded relative to the dollar. We benefited from that on the revenue line. In 2012, we will see a little bit of that because the yen has improved significantly from JPY 82.42 at the end of March, the euro has gone back, and actually today, it fell even further down to $1.36. We are exposed to the euro line on that particular book backlog, on the yen line, we should benefit. How does that look when we look at foreign exchange overall? How does it look to you as an investor? You can see our total sales, 36% of our total sales are in U.S. dollar.
15% of our total sales are in the yen, about 17% is in the euro. Again, this is last year's numbers. You can see Korea was 3%, the Brazil real was 3%, the Canadian dollar was 3%. The other category was 23%. The other category includes many currencies that are actually tied to the U.S. dollar or basically float together with the U.S. dollar. Hong Kong dollar, Chinese RMB, and other like currencies that move together with the dollar.
Where is U.K. business?
Our U.K. business, actually, I'm going to show that to you in a second. Importantly, although from a yen and other category, 15% of overall sales is Japan, 23% other, about 50% of our operating income comes from Asia. 34% of our operating income comes from Americas, 16% comes from Europe. This excludes FX gain. This is just a pure operating income line. You can see we're highly profitable in the Asia marketplace, and as a % of revenue versus our operating income, Europe also generates some significant returns. We lifted this right out of the 10-K just to walk you through the effect of FX on our business so that we have a little bit of education for you about how the euro, how the yen, and other currencies affect us as a business.
You can see our revenues in Americas is $448, $381 in Asia, $171 in Europe. Operating income, $77 million in Americas, $126 in Asia, $38 million in Europe, again, right out of the 10-K. Importantly, though, for the first time, we're showing you what our local currency cost is as a % of our total cost base. 8.7% of that $371 million that we spend in the Americas associated with product cost, SG&A, and other cost of sales, 8.7% of that total cost base is local currency. Brazil real, Canadian dollar, Mexican peso. In Asia, 56.2% of our total cost structure is in local currency. Chinese RMB, Japanese yen, and other currencies like that. In Europe, 54.7% of our cost structure is in local currency.
Importantly, the operational costs are impacted by the currency movement, they move in the opposite direction of revenue, it's not 100% to one. When we look at it and we think, how does the key currencies impact our overall business, you can see the Brazil real, 6% of our overall Americas business, 6.5% of the Canadian dollar is in foreign currency. In Asia, 41% is Japanese yen, 9% is the Korean won, 92% is EUR of the Europe business, with 3% of our Europe business being denominated in British pound. Importantly, on the bottom, Americas, if we saw a 10% movement in the key currencies, the Canadian dollar and the Brazil real, we would see about a $2.5 million operating income impact off of a $5 million revenue hit.
In Asia, ±10% of those key currencies equates to about a $17 million revenue impact at 11.7% operating income. Finally, in Europe, ±10% results in a $16 million impact on revenue and a $9.6 million operating income impact. I think this is really important to you as investors to understand how we benefit from the Japanese yen getting stronger relative to the U.S. dollar and how we face some headwinds associated with the euro getting weaker against the U.S. dollar. Questions? This will all be available in about five minutes. 4:00 P.M. 35 minutes.
How does Mexico impact? Because you produce there. Mexico has the same swing.
Because we don't sell to the Mexican distributor in pesos. We do benefit. Ironically, we actually benefit from a stronger U.S. dollar relative to the peso because we do manufacture in Mexico. We benefit by having lower labor costs in Mexico as the U.S. dollar gets stronger.
Jumping back for a moment to the backlog. You suggested the backlog in growth should equate to wholesale growth going forward. As we see the trends in that at the end of Q2, should we be thinking about the U.S. and Asian businesses from a wholesale standpoint of 11% compound growth leaning forward? Or do you think that's in the backlog?
Well, we think that, as John mentioned in his particular conversation, there's some opportunities for us to go get at-once business in Q2, at-once business in the second half, especially in Q4. We're obviously not stopping our sales efforts. You can see all the sales meetings going on around us. We are driving for wholesale activities to increase that 12% over time. In the near term, this is probably the way it's going to roll out, but we're still hopeful that in the second half of the year, we can drive some additional revenue there. Sam?
Yes. Can I ask a question? Did you mean to say the 17% operating margin target that you threw out there long term?
Well, Sam, I think the direct-
I'm just-
No, it's fine. The direct answer was we're focused on 15% first. Then we'll reset the target once we get to 15%.
Right. You threw out a 17% number, if you end up resetting the target to 16%, everybody in here is going to think you said 17%. We know that already, I'm bringing it on the table.
We're always going to be driving for additional operating improvements. That's the message from John and I, is that we're never going to stop trying to drive the overall improvement in the organization. Once we get to 15%, we'll have a new target, it's logical that'll be.
The new target is 17, if the new target comes out at 16.5, everybody in here will be waiting in queue. I just want to make sure you're reaffirming that, or you want us to take it off the table right now.
The message is we're trying to get to 15%.
Definitely.
Joel had his hand up first, sorry.
What was that operating margin after excluding the FX gain?
It was 13.6% and then about 0.6% of that was FX gain, so about 13.1% was our operating margin in 2011. We're striving for about 2% improvement between this year and next year to get to that 15%. Okay, Alex. Scott had his hand up.
Can you just talk about, are there any moving parts within the backlog numbers, either businesses or parts of businesses that were hurt or things that might skew one way or the other that you're going to pull forward maybe that you didn't?
Well, as you know, as we talked about at the end of Q1, there was a big issue last year in Asia, about $3 million, so about $129 from last year was Japanese volume that slipped into Q2 because of the tsunami, and that's not repeating. Maybe the best way to look at Asia is coming off of a $126 base to $152, not necessarily $129 to $152. Those are kind of the big call-outs. I think, Jim?
Yeah. The percentage of cost in local currency, that's an 11 representation. Is there any reason it would change materially?
Great question. If you look at this particular chart, Jim, you can see Japan's at 15%, Europe's at 17%, as John talked about, the Asia rate of growth is significantly better than the global. We would actually anticipate that 2012 may have a little bit stronger Japanese yen on a pie chart basis. Then some of that other category would also grow significantly as well. As John was talking about, we've seen fantastic growth opportunities in the Middle East and the distributors throughout Southeast Asia as huge revenue opportunities for us.
That's perhaps more interesting even than the question that you answered the question that I asked, but I'm just talking about the cost. Is the percentage of cost represented in local currency, is that an 11 representation?
That is an 11 representation. That's straight out of the 10K.
Is there any reason to believe that will change materially in 2012?
Probably not. Nothing like a headline number one way or the other.
Okay.
We're not moving all of Dale's product development team into local markets.
Got it.
Okay. Other questions before I move to tax? I think in the past, we've always said we anticipated our tax rate to be somewhere in the 22% range for 2011. We've done a lot of work around the globe, putting our structure together. Frankly, the fact that the rest of the world is making a lot more money, as you saw in the slides earlier, even more so than we anticipated for 2012. We actually anticipate that our tax rate will get a little bit better for 2012. We should be in that 19%-21% range overall. That'll be different quarter by quarter. Most of the benefit will come in the second half of the year as we drive our tax structure down.
What was the original guidance?
22. Okay. What does that mean to you as an organization if you put all the pieces together? We see revenue growth 15%-20%. We see gross margins 53%-54.6%. We think our SG&A, somewhere between 40.2% and 39.6%. Therefore, we think our operating margins will be somewhere between zero and 160 basis points better. Tax rate now at 19%-21%. We believe our EPS for the year will be about $1.47 using all those midpoints. Importantly, that's based off of a currency as of 3/31. Again, we're seeing a little bit of pluses and minuses around the globe, yen getting better, euro getting weaker.
Did you take into account the product and FX rates?
I just did. Yeah. It's all based on those 3/31 numbers that we did. 132? Sorry, I got to go back. I wasn't prepped for that one, Jim. Sorry. Yeah, I just had it.
31.
131, thank you.
82.5.
82.5. Thanks, Jim.
Jeff, any impact that your hedging is having in financial performance or any changes that you're going to make in the hedging strategy?
Yeah. When we look at hedging, we look at it in two prongs. One is we go after the balance sheet first, and you can see in Q1, we were kind of surprised by the sudden movement by the yen. When it moved back, we were able to grab some off the table and take off some of that exposure on the balance sheet side, move that other income line. We think at the end of the day, we'll be able to offset most of that throughout the next three quarters. It'll be a little bit of noise that'll still flow through. On the other side, we are actively in the marketplace hedging some of our operating income on a quarter-to-quarter basis just to protect ourselves.
Once we tell you guys, this is where we think we're going to be for the quarter, we go out and protect ourselves in the operating income line. Those hedges actually this quarter will generate a little bit of revenue for us, and you'll see that in the other income.
Okay.
Backlog for a second. Somebody asked a question about apples to apples. Are there customers that you dropped this year that were in there last year? I understand from other retailers that you're booking tighter. Is it really apples to apples or are some of your customers holding their orders back and not committing for fall until they see spring?
You mean in the U.S. market?
Yeah.
Yeah, I think in the U.S. market, as John's talked about on the call, there's some risk aversion going on in the channel that we hope to be able to overcome as we get closer to the actual quarters. We do have the capability of fulfilling orders for the second half at this point. We're still hopeful we'll be able to drive that a little bit further. As far as big headline customers that dropped us or we dropped them, there's really no big headline number there.
You don't see the same phenomenon in Europe other than the one issue where John talked about of how we distribute these products. You're not seeing a delay in Europe where there's so much pressure.
I guess I should let Mike speak to that. Mike De Bell just joined us. He used to be over in Europe. He was in Europe for all of last year, and I'm going to call on him to help us out here. Mike heads up our global sales initiatives.
Hi. You were asking a question regarding changing customer
In the U.S., there are a lot of customers that are holding off or slowing their fall bookings till they see spring. I was wondering given the crisis in Europe, whether there were customers who just are on the book later and later, so it's not really apples.
I think in our leisure customers, we haven't seen too much of that. We haven't been hit in the bookings that we have. We do get feedback from Mike that we do, myself, doing a channel check with the extensively looking region by region, account by account, for the bookings we were expecting allowing the region as well. We do see pockets in certain areas. Some of our key core retailers, they're not fully loading. We see they're seeing some of the few account retailers where they're just down year-over-year, and they're holding out. They're saying, "I'm going to give you one drop, and if ships don't turn by this call, then we are going to be in a position with all these buy dollars. Tell me what your position is." They just kind of take that.
We've done a lot of meetings with companies together to figure out why. Because we have a really good line of products for fall/winter as well. Why the uptake wasn't greater? You all ask the same question. We're asking the same question. Why was the percentage throughout not as great as we collectively thought it would be? A lot of it was down to general inventory and so was even on our traffic. Fall has come back to them, and we haven't raised fall/winter, and we're not going to take a position in the fall. Does that help?
Joel was up first. Sorry. I'll come back to you.
Question on what if you're projected to end up at the higher end of either the revenue growth or the gross margin because of that one-time basis. Is that what grew, or is profit just flush up?
Yeah. The question for those who are on the call still, what's the flow-through impact of an additional revenue increase is basically what you're asking for. We don't see those correlated directly. There is that category of other in the direct channel where we talked about credit card fees and other kind of variable expenses, labor costs. There's a little bit of variability on our SG&A that's associated with revenue. The major variable cost is product cost associated with delivering that additional revenue.
The gross margin with, say, lower input costs. Does that flow through or do you invest it?
Those are kind of disconnected components. If we were able to see additional product cost savings, yeah, those would flow through. There wouldn't be any additional direct investment, so to speak, that we would take off. We might do other things that are not correlated to that, directly, it would come right through. You had a question first.
Are the tax changes that you instituted, are those permanent structural or going into 2023, how should we think about that? Annual events or-
One of the things about running a multinational company, as you guys all know, is that the more money you make in the U.S., the higher your tax rate. The lower your income in the U.S., the lower your tax rate in general. That's the same for anybody in the S&P 500 stood up here. The real game here is how much do we think next year's revenue and income will be in the USA. As the rest of the world is growing faster, that's generating additional tax savings. That's what you're seeing this year. As we get in closer to next year, we'll try to continue to be as transparent as possible about tax rate. This is real-time information. We're driving this forward. We're doing forecasts, we're coming back out to you guys, telling us where we think we're going to go.
19 and 21, that's next year-
'12.
You have 2012 or is that related to-
I'd say we're benefiting from our structure that we've changed in 2011 and the small changes we've made in 2012. There's no real big headline changes to our structure, if that's what you're referring to.
You laid out a pretty good story and some things look better than others. Where are you now with repatriating some of the cash?
God, you are great, Scott. He should come to all of these. We're going to talk about cash next.
Should I buy this?
We're going to talk about cash next. I think when we look at our balance sheet, we're not ignoring the balance sheet component of our financial statements. Here's some information about our cash structure. We do think that our cash will be about 40% higher at the end of 2012 than it was at 2011. We do think that we're going to be able to hold our inventory in line with our sales growth. We are going to have a little bit of modification for those of you that are aware of things that went on in the past. We actually take delivery of our product at the distribution centers. When we look out into 12/31/2012, we'll have a little bit more in our distribution centers than we have on the water at 12/31, the way we're planning it this year.
We'll have a little bit less in-transit inventory that does not reflect on our balance sheet at year-end versus as we change some terms with our plans. Okay. By the end of the day, we think our inventories will be about in line with our sales growth. As John talked about at the beginning of his presentation, this management team is committed to not run into an inventory problem. You see our inventory has kind of flexed over time, kind of moving along with our revenue growth.
I don't know if you want to speak about it, with the United Dollar. The dollar flow that I heard you talk about in the initial talk. John was talking about 20-- Q2 calendar year. Is the dollar flow going to be an assumption of some of the QBs are booking or?
It's our best probability of all of the different factors we've put in. Yes, there are some assumptions in there that we're going to be able to close some sales. It's the way we look at our crystal ball right now, we think that our revenue at the end will be about 15%-20% constant growth, this is what it looks like with all the midpoints of all the different points we put out there. Jeff.
I think Scott was asking a great question about repatriating cash. Could you-
As you know, the vast majority of our cash is overseas. We are watching the marketplace as far as what's the best usage of that cash, whether it's dividends or stock buybacks or a one-time dividend or some other usage of our cash. We're constantly reviewing the landscape for that. At this point in time, with all of our cash overseas, we still think the best thing for us to do at this point in time is to continue to reinvest in our business and have a strong balance sheet for any future investments that we want to make.
There are no limitations based on just the tax jurisdictions on how you can pull your capital for your investment needs.
There's a cash impact of us repatriating cash.
Right
Because we'd have to pay taxes. There's also potentially some tax rate impact if we started to repatriate money. There is some cash that's held overseas that is constrained by our abilities, specifically China and other markets around the globe, where we're constrained in our ability to flow the cash out. It's not like we could take all of that money back into the U.S. today, even if we wanted to. We also have a constraint on our debt coverage or debt covenants associated with how much we can buy back. And that's $25 million, Jeff.
With the Q, last Q you just disclosed, I believe you said the tax, if you repatriated all the cash, just to keep it out or about, it was $27 million.
That sounds about right, yeah
Restriction of due to foreign jurisdictions of $38 million?
Yep.
I guess that would.
Then we would not.
Does it overlap?
No. Those are $37 million+, $ 28 million+, we wouldn't want to bring all of the cash back and drain all the working capital required in the local markets either way. That's why we think when we look at the overall business and where it's invested around the globe, it's so important to us to have a strong balance sheet in those local markets as well.
That $27 million, in theory, if you brought all the cash back, you have to pay a tax bill of $27 million.
Correct. That's the cash impact of us repatriating the money.
In a scenario where you decided that you wanted to bring it back to, let's just pick an extreme example, the stock goes to $10 because things in the world explode, Jeff would love to buy back $1 million worth of stock. How fast could you bring it back?
Well, we've had conversations like that internally, and we continue to look at the best way to bring that back. We have the capability of doing that fairly quickly. We haven't really stress tested a $10 or $100 million level, but we've stress tested it at $25 million, for example, because that's our loan covenant cap.
I'm assuming that, for example, I saw you tapped into the revolving line of credit recently. Is that basically because you have cash needs in the U.S., but the cash is in other jurisdictions?
Yeah, that's exactly right. We ended up in Q1 with a line of credit balance because of the AP associated with the U.S. business. As Q2 rolls out, that cash comes in from collections as well as from intercompany settlements, and that'll go back to zero by year-end.
Just to understand what's possible, not what you've discussed or what's probable, but just from a possibility standpoint, if you wanted to buy back a bunch of stock, you could bring cash back, pay off the debt, so now you're no longer constrained by that covenant?
Well, our intention is to continue to manage the balance sheet and look at our debt position to start with. Those are kind of two separate conversations. We do intend on having a debt-free balance sheet here in the near term. That's kind of one focus. The second focus is if we decided to do anything on the stock repurchase, we could do something subject to constraints around the globe about repatriation and tax benefits and tax impacts of that, as well as the loan covenant.
Yeah, I was just getting at is it not what you plan to do, but is it actually possible to do that?
I think you have to The answer, Jeff, is we're not going to do it.
I'm not asking you. I'm just asking what's possible.
This is where the bakery thing starts to happen. He's asking, trying to dance around. The answer is we're not going to buy back stock.
I'm not asking that, John. I'm asking if it's possible. I mean,
Well, Jeff, there's a ton of hypotheticals here. There's a ton of hypotheticals how we could move cash and how we would pay for things. At the end of the day for us, when we look at this today, we say if we're going to bring it back, what are we going to do? We're going to bring back $25 million, and we're going to buy back 1 million shares of stock. It's not going to do a thing to the company.
John, I never even asked that. I was just asking-
I know, I'm just trying to be clear, Jeff, with this because where we've got in trouble with this, we got in trouble with this 2 quarters ago. When we got in a conversation and Jeff was trying to answer a question on a conference call and trying to dance around it and talk about hypotheticals and everything. What happened? What happened amongst the investment base is, Jeff, it got confused. Why are you guys-- What is your strategy? I'm not sure I understand your strategy. I'm telling you in our conversations with the board, when we look at the company today, for us to buy back 1 million shares of stock and take 1 million shares out or 2 million shares of stock out right now, we're not going to do it. I just want it to be clear and-
I just want to be clear, I never asked that.
I understand. I understand. I was sitting in the back room.
I was just curious what you could do.
I understand that,{audio distortion} Jeff, the answer is, yeah, you can do all sorts of things. The problem of it is that if you change the way your tax structure work and how we're doing tax planning to drive cash into the U.S., which you can do over a period of time, once you set that in motion, you're done. This is what it's going to be for years to come. You can't go in and change tax strategy that impacts cash. IRS doesn't kind of look at this and kind of say you're playing games. This isn't fundamentally right for your business. You're not doing the right thing. No, it's not a realm of possibility. It's not a realm of possibility. I think he's trying to be nice and trying to answer your question.
I'm just telling you as conversations with the board and our internal discussions. I don't want you to walk out of here going, "I don't know what they're going to do. Did Jeff say that they were going to buy it? What's the possibility? Is there a door open?" There is no door open. There is no door open at this point in time. It's not in our long-term strategy to buy back shares of stock. It is in our long-term strategy to continue to build cash, and when possible, then we'll go look at how we're going to invest it. Right now, we're investing it in retail stores in ways that we think that drive top-line revenue and bottom-line profitability. But what we'd really love is we'd really love the U.S. government to change and open up a window, then we bring in cash.
Jeff, it would be a possibility. Until that happens, it's not a possibility. It's not a possibility.
The primary rationale is just not to permanently change the tax structure?
Then you can't. To drive cash in, you'd have to do things that would impact. Oh, wow. The amount of work, we go spend probably millions of dollars trying to figure out if that's possible to do that, and then what it would mean and how that would look. Today, what we've done, we've put years into this with DLA Piper and Deloitte & Touche to create this. The fact that we're making more money in the Middle East today, more than what we thought, more money in Asia. I said to Joel in the back of the room, the answer to the earlier question was, if you want to look at gross margin, you look at the bottom line there. It's all happening because Asia becomes a larger piece of our business next year. We make more money.
Jeff showed you, we make more money in Asia than anywhere else. That's going to drive gross margin. That's going to drive operating income. In that, it's going to drive more cash outside the U.S. It's not our stated intent, nor is it management's interest to do this. I think it's better just to be honest and say to you, no. It's no. Not a possibility. Yeah. Hypothetically, we lose the Barnes & Noble sale for Q10, I don't want you to think that that's going to happen because it's not. Okay?
I have a question back on the bookings. You talked about the later kind of booking cycle for retailers here, for retailers in Europe, maybe some in Asia as well. I said to you before, I know we don't want to get into start talking about bookings every two or three weeks, but is there anything you can share in terms of what you've learned since the quarter ended, what you're learning now on a real-time basis from some of your retail partners?
It's not material. We see bookings coming in, I think to the question that Jen asked earlier, there is a certain amount of at-once business that, yes, we're counting on. Yes, we expect based on history. Whether that materializes or whether we see that as we get closer into third and fourth quarter, we'll give you more visibility. Where we sit today, we have a plan. We talked about top line. We actually talked about profitability we had on the previous slide. That's where we at. If it materializes, the top line goes and there's some upside potential. If it got even weaker and we have some kind of recession leading towards election, things start tightening up a little bit. We've got some downside risk there, too.
I think we felt when we talked about this at the end of last quarter for the earnings release, I think we feel comfortable enough to say this is where we are on a global basis for top line numbers.
Yeah. I was going to move on. Knowing, John and Jeff, what you guys have kind of been through and what we've all been through here in the last year with Europe and all the different volatility, when you think about that mid-point guidance that you put up on the slide, what would you say is your? What are the couple of things that you say, "This is what it could take to throw us off that trajectory"? Would it be something that you haven't been able to scrub a knot out of the European backlog? Would it be some pricing dynamic? Would it be promotional activity domestically? What do you think is the biggest risk to your performance?
War in the peninsula, Korea-
Yeah
could probably have the biggest impact for all companies. That pulls China into it. If something happens, they launch another missile, Japan, there comes some kind of tension there to change consumer behavior. I don't think the dynamic in the Asian market is going to be much disruption there. I think we have such low downside risk in Europe today. That's why we said what we said. There's very little downside in working with them again there. Twice in what we see. If there was something that was going to impact us, really, the U.S., I mean, it's pretty well down the path for Q2 if there was something dramatic happened. It would be more of that kind of dynamic in the U.S. or something like that in Korea that's got a whole net other major markets.
You think about that, what we talked about today, and Jeff showed you, that between China, Korea, and Japan on it. That's 30% of our overall revenue.
Brazil is currently a small part of your overall business. With all the events coming up down there over the next few years and because it's in a different hemisphere and a very large market that shoes fit your product quite well, what are you doing to build that business over time? That could take care of a lot of the seasonality problems-
Yeah
for you.
The challenge for us really for Brazil comes down to pricing. The reason that's just not growing faster, the number of products that we build either in Brazil or we bring in bottoms from China, Vietnam, have those products assembled and then sold into that market, it's a price point issue for brands that are importing in. The duties and tariffs are just so high, it's limited our growth there a little bit. Building shoes in Mexico in our own factory, now adding more capacity in Vietnam. We're shifting capacity to Vietnam. That can go in duty free to Brazil, that opens up the opportunity to grow a little bit more. We are opening up our own retail stores, we've opened up our own e-com site now in Brazil.
That starts to add the omni dimension, omni-channel dimension to what we're doing. I don't think it's fair to say we're not happy with 3% revenue in Brazil, part of what we're working on while they're here this week is how that grows at a more rapid rate. Really, Chile, Argentina, and Brazil should be one of those 5%, as I said at the beginning. 5% growth from all those emerging markets or opportunities out there is not a lot. $50 million over all those channels.
Are you working with a partner there or are you doing it on your own there?
We have for three and a half years now, we have our own operations in São Paulo, and we sell into agents and distributors in Chile and Argentina. We have our own people on the ground in São Paulo.
You want to-
I didn't mean to be argumentative or anything. I have to be clear. When you guys leave here, we just have to be clear. Have to be clear on what Sam said. It's 15%. It's not 17. Jeff's trying to be nice and he's trying to say, "Okay, you asked a direct question." The answer is 15% is the number that we would love to hit, and they're 17%. There's other ideas about how you get to gross margin goes a little bit more and more shifts to Asia. Yep, Jeff, back to a point here. As a hypothetical, it's of 17. You have the 17 thing floating out there. No, it's not 17, it's 15. That's what you should think about. That's what we think about. And that's pretty good for us.
When you look at the beginning of what we talked about directionally for our business, to get to close to $1.2 billion this year in revenue and get those incremental increases in gross margin, SG&A down, driving up two points in terms of gross margin, that's a good year. Operating income, sorry, 2% operating income this year. That's a good year for us, and if we can continue to do that year-over-year, we'll set those expectations accordingly. We have to be pragmatic, and we've got to be honest. That's what's reasonable. If other things fall in our favor, okay. If other things don't fall in our favor, that's different. Was that clear when Jeff walked through tax rate change? Did you guys all understand what he said? $1.47 is baked at 22% tax rate, right?
19.20.
Sorry, 6.19. 19.21. Sorry.
Say that again.
The $1.47 EPS assumes the midpoint of all those ranges that we gave. I'll walk you back to that. Including tax. 20% effectively, right? Because we did an absolute number based on that.
I follow.
Can you talk about the increases in marketing? There's a lot of great visuals in the room and changes are being made in the retail stores. I think you mentioned also adding some merchandise people in the field, help pass the order. Can you just talk about some of the costs with that?
Yeah. Actually, the surprising part is year-over-year, marketing goes down because if you remember last year, we talked about how much money we spent outside with Cramer-Krasselt. That money wasn't generating this kind of visual. Bringing it all in-house, bringing in Becky Gebhardt and a small team of people that developed this, we have better brand control. We have far better visual, far better kind of emotional connection at a cheaper price. Actually, our corporate marketing year-over-year, corporate marketing costs for people, raw costs down almost $1 million year-over-year. All by just doing it better, doing it in-house, and having better control over it. In different markets, they invest differently.
In the U.S., they have about 30 visual merchandisers that work for both the retail and for the wholesale channel that are out there working with our wholesale partners, replenishing, working with them, trying to pull in at one space. That's not up that much year-over-year. That's really the only major market where we put any money like that into visual merchandising people. Then the spend, part of that savings on $1 million in people costing outside services cost is going back to we're doing more ads this year in magazines. We're doing more things visually in the marketplace today than we have before. Actually, we think we're getting more impact for the same amount of money.
Could you be progress under budget or is it
No. You think about what we did two years ago. That was $8 million in the first half of the year and $5 million in the back half of the year. That's $13 million into a market, which at that point in time was $350 million. That's a huge spend just on television alone. How many brands of our size, when you think about this being a smaller market, do that amount of advertising? They just don't do it. They do it in other ways. I don't think television for us is going to be an effective medium going forward. If we have opportunities here and there, yes, but not that kind of brand spend. I'd like to maybe shift gears real quick. We have a guest here who's got rained out today, if there's such thing as getting rained out. Hank's with us. Hank Haney's here.
Maybe Hank could come up and say a few words.
How you doing?
I'm doing good, bud. How you doing?
Good, thank you.
No, good things happening.
Yeah. Okay.
Yeah. Well, I'm glad to be with everybody here. It's my pleasure. I just came in for the next couple of days, so it's a little cooler here and a little wetter than it is in Dallas, but I'm glad to be here anyways. I'm Hank Haney, and I'm the one that they thought about when they thought about doing some golf shoes, and I was really excited about the whole opportunity because obviously, I've been in golf for a long time, and everybody likes to be more comfortable. Crocs is known for making comfortable shoes. It's kind of a segment in the golf business that has just evolved in the last couple of years. For years, golf shoes were made where there was a lot of structure to them and they're basically very uncomfortable.
Fred Couples, who plays on the PGA Tour as a former Masters champion, one year he wore these comfortable-looking golf shoes at the Masters. All of a sudden, it just spawned this kind of whole new look in golf and also a feel in golf, too. Everyone started coming out with comfortable-looking golf shoes, especially all these companies that in the past had made very uncomfortable golf shoes with a lot of structure to them. I never really thought that you needed quite that much structure in a golf shoe. Technically speaking, I don't think it really matters. I've taught golf for 35 years, and it's not something I've really ever thought about, was how much structure you needed in your shoe. When Fred Couples wore these shoes, all of a sudden everybody started making more comfortable shoes. They really weren't that comfortable.
They were just kind of comfortable-looking. Crocs is known for making comfortable shoes. When I talked to John and talked to Dale, we talked about the idea of doing golf shoes and Crocs and would I be interested in being involved, it was very exciting for me. I came here to Boulder, and I think it was probably about a year and a half ago. We met with the whole design team and everybody was kind of worried that I was going to be a little too conservative and everything for Crocs because they're the guys, they showed me some samples, and I picked out all the ones I thought that were kind of stepping out the most, or the ones that I liked the most.
I'm kind of a casual guy, so it fit right in with what I like and what I like to see and feel. I own golf shops myself. I've done more than just teach golf. I've run golf operations. I have 4 facilities that I own and operate myself in Dallas. I have another golf course in East Texas, and I have a junior academy with 150 kids from 31 different countries in Hilton Head. I have another academy over in China that I just opened. I see a lot of golfers. I've given so many lessons in my life, it's amazing. I see a lot of golfers and teach a lot of golfers of different ages.
It was fun to work with the guys because they really wanted my input, everybody I think I drove them crazy with all my emails. I don't think they didn't quite know what they were getting into when they asked me to be involved. I've been deeply involved in the design and the giving them feedback and just telling them what I thought, they sent me sample after sample. It was an exciting process for me, being a golf professional, to be involved with this. I knew we were on the right track when we went to the PGA Merchandise Show, and we had just kind of gotten our samples. The PGA Merchandise Show in Orlando is the biggest merchandise show in golf by far. It's not even close.
The Orlando Convention Center, I think, is the biggest convention center in the U.S. The whole thing's just full with all golf companies, and some of them have incredibly big booths and just massive displays. We had a booth that was, like, 10 by 20. It was about like the back wall here. We had our display up and it looked really nice, but we were just kind of sticking our toes in the water a little bit down there at the PGA Merchandise Show, and we just had our samples.
On the second day of the show, they came up and they said, "You won the best new product of the show." We're like, "You mean the best new golf shoe?" They said, "No, you won the best new product of the whole show." That was just really an affirmation of the fact that we had a good idea, and Crocs is a great company, and the guys have done a great job with the design. We feel like, boy, we're on the right track. It's fun for me to be involved. I have a golf show on the Golf Channel called "The Haney Project," and I have all these different celebrities that I teach, and it's given me a kind of a platform to be able to promote Crocs and wear the logo.
People always ask me now, "What's Crocs Golf?" I tell them we have golf shoes and give us some good publicity, and it's been really nice and really fun, and it's something that I'm very excited about. I'm really excited about what we have coming out and the new shoes and all the new ideas that guys have, and I'm going to do a little golf clinic for those of you that'll be there tomorrow and any of you that golf and try to help you out a little bit with that. If you wear The one good thing is I know nobody will be as bad as Charles Barkley. He needs more than just comfortable shoes to help his game.
The best thing that ever happened about helping him is now nobody ever tells me, "Hank, you've never seen a swing like mine," because nobody could be as bad as him. I'm more interested in how people look now. I'm just as interested in how they look as how they swing. It's just been really good for me and fun. Is there any questions I can answer from anybody?
Yes.
How about release options?
I haven't been updated because I just walked in the door. From what I understand, I think June is when they're supposed to be delivered.
Yeah.
What's been the acceptance at golf retailers versus some of the bigger traditional name golf shoe companies across brands?
Yeah. That's a good point because golf, we've been doing really well in Asia, especially with our initial orders and everything. Golf in the United States hasn't been growing. It's been declining ever so slightly for a couple of years now. Now it's pretty much leveled out the last year. Obviously, you're kind of stealing market share if you're getting into this, but only to a certain extent because this is a kind of a new category, if you will. We're not only taking market share from other companies, but you're taking market share from the other styles of shoes, which obviously we're not the only one that's doing that, but I feel like we really have the edge because we do have the most comfortable shoe. There's shoes that are made out of different materials. Some shoes are really meshy, if you will.
It's kind of hard to really categorize, but I think just in general, we have the lightest golf shoe too. What I've seen so far is that the acceptance has been very good. When people just try them, and I did a clinic at, because Golfsmith has a huge. They're the biggest retailer in the United States. They have, I think, 85 stores. They're expanding. Then they have a big presence online. I also have a relationship with Golfsmith too. We are in their stores. I did a demo day for them, just a clinic at their Austin location, and they have a big demo day with a lot of people attend and everything.
On that particular day, and with every brand of shoes they had in there, I think they said they sold like 45 pair of shoes that day, and over 20 pair were ours. It was really exciting, just to be there and be a part of that. It's been really good so far. Golfsmith was just acquired by Golf Town, which is the biggest retailer in Canada, and I think they have over 50 stores in Canada. That's going to also be obviously very good for us. Just getting in with Golfsmith and being able to get in those stores and have a presence and start to see some sales, I think it's going to be really good.
I think because of what Hank does and how forward he is with the brand and really promoting, you get people like Academy now that would've never given us space. Because of Hank and because of what they see, people are asking for the shoes now. They're testing the Crocs golf shoes now in {audio distortion} to start with. I think this year what we said going into this was we'd be happy if we got into the green grass people, built a brand at the grassroots level, and be able to build height at that level with kind of certain relationships with various Golf Channel partners. I think next year will really be the year where we launched this in late January.
Actually, I know it feels like it's a lot longer, but we've only been doing this for about 11 months, 12 months because Dale and I met you in end of March. It's only, if you're actually 15 months from when Dale sketched it to when we launched those shoes, it was really. I know it feels like an instant, but it was only nine months really of development time. To win that award, we weren't really ready to ramp it up that fast this year. The fact of it is that we'll sell over 100,000 pairs of golf shoes in the first year. Then Hank was gracious enough last year to spend time with the Adidas Golf Academy in China, as well as in Hong Kong, as well as with two of our major partners in Japan, and they went nuts.
The business in Asia on the golf side of it is very much the younger people who are looking for something like that, and we've done extremely well in Asia launching them. That's not a bad start for a new shoe line to be more than 100,000 pairs of shoes in the first year. At the rate we're going, we're selling these new shoes at such a rapid rate, we're re-planning right now to capture the summer season. It's been a fabulous start, and I'm on TV all the time, and now reruns from the existing season starting to kick in and it's great. Yeah, it's been very good.
Do you think you'll ever see a player wearing Crocs on tour?
It hasn't been part of our discussion. You're seeing, though, now more touring pros that are wearing casual shoes like Matt Kuchar, who just won the TPC tournament, wearing a more casual style of shoe. It is changing because at first, it feels like there's not enough structure, but now guys are kind of getting over that, and they all wear these shoes when they're practicing. The more comfortable shoe, if you will. Part of through my connections with the entertainment industry, I do something at the American Century Championship. We're going to have a booth there. We're going to outfit everybody with shoes. I also obviously have my show on the Golf Channel called "The Haney Project," and we have different celebrities on there.
Then I'm going to China to do the tournament called the Star Trophy, which is a big tournament on that island at Mission Hills there too. We're going to try to do something there. A lot of what our thought was going in was more celebrity placement, if you will. Really that's kind of, I think, a better way to go than necessarily the pros. We've got a lot of celebrity friends of mine, most of them like entertainment and sports and music industry. That's kind of what we've been doing is placing the product with them and getting them interested in it and letting the kind of word of mouth grow from there. I wouldn't put it out of the realm of possibility that we might do something like that.
I think that the market that we see and that we're after, I think we can get there with a lot of the celebrities more efficiently, to be honest with you.
What are you doing for sales force for Green Grass? I've heard it's tough to reach as opposed to Golfsmith or Bogey's.
Well, we have a company
Yep
that is called H2, and they carry a couple different lines. It's a group of private distributors and salespeople, and they are distributing their product for us. They're calling on all of the golf shops. For the spring buy-in, if you will, we were actually a little bit late with getting some of our samples in everybody's hands that had already made some of their calls, I mean. They've been doing very good in terms of getting them in the shops. We kind of start off with a goal that when they called on those shops, they would be able to sell in it to a rate of just, say, 25%. I haven't been updated yet, again, like I said, but from what I had heard in the first month or two that we were going, we were selling it at 75%.
75% of the shops that we were calling in were placing an order for the shoes. It's been very good.
Yep. We have two people inside that support Hank and support that distributor channel today. We've got our own golf channel ourselves, we would work with Hank to sell into Bogey's now. A lot of those larger accounts we'll do direct with all the Green Grass people, they go through H2. Two guys have been with us, the Herbert brothers, have been with us for a long time, and they carry other brands today. When they call in a golf shop, they sell multiple products.
You can tell I'm not just a celebrity endorser. I actually kind of know something about what we're doing.
When you won the awards show, either based on what they told you or your impression of that show, what was the award based on? Is it the fact that they see this as a product that is going to reach a different audience that a typical golf product or golf shoe wouldn't reach? What part of the innovation or model of the product won the award?
That's a good question. I'm not exactly sure when we won that award, what enabled us to be successful there. I don't really know. I think just a little bit of what you said, Bo, though, that they're looking for something different. They're looking for something new. Not just a gimmick, but something that is truly different. People are enthused that Crocs is in the golf business too. Crocs has such a great reputation for making comfortable shoes. This is something that really has been a void in the golf business. It's amazing. Everyone is scrambling to try and make comfortable shoes right now in the golf business because it's taken a pretty big portion of the golf shoe business.
I agree.
Frankly, a lot of the shoes that you look at, they look comfortable, kind of in this category, but they're really not. I think that was people, all they could go by was just holding the shoe and looking at it and feeling it and how light it was and how comfortable it was when they tried it on and how cushy it was, I guess all the above that just led to us being fortunate enough to get that award.
Do you think outside of Crocs' participation or innovation, lots of people are talking about the youth movement in golf now on the pro side and color that they're wearing, the personalities that are coming in. Do you sense something shifting in general with the overall golf industry?
Yeah. That's a good point. I don't think there's any doubt about that everything is shifting in golf. It's getting brighter. You have to give a lot of credit already to Rickie Fowler. He's a young guy that's got a look. He wears bright colors. He's from California, and he's kind of surfer dude kind of thing, although he was a motocross racer. It's definitely changing. You see it with the kids. I think it's having a big influence. They talk about Tiger, and Tiger brought a lot of interest to the game. A lot of people watched golf that hadn't watched golf before. You didn't see, just because Tiger's in the game, you didn't see a lot of minorities playing golf. That didn't happen like people kind of thought it would happen.
Yeah.
You're definitely seeing, like with Rickie Fowler, you see just so many kids that come out to tournaments, and they're kind of dressed like him and casual. The whole golf business is changing that way. I belong at a few Discovery Land properties, and they're very prestigious properties. I live in one in Dallas, and I have another place, one in Cabo San Lucas. They're just really nice and incredibly exclusive, but yet super casual. Their whole deal is casual elegance. It's really a shift in golf. The more exclusive the club, the more prim and proper it was. Now you see this shift in golf that's really occurring and because there's a big focus on trying to grow the game of golf, and part of growing it is just making it more fun for people.
I think that's one of the things you see with Crocs is Crocs is a fun company. They make fun products. People like to wear them and it says something different when you wear it. I think we fit right into that whole movement in golf. All right? Thanks, guys. Any other questions that we have in closing?
Talk about that private equity.
We can talk about that private equity.
John, you keep saying you're not going to have an inventory problem, you're committed to not having an inventory issue and last summer, I guess third quarter, you had a shortage of product at your own outlet stores and you had a little issue there. When I look at your inventory and I look at your square footage growth and all that, I have a hard time and the fact that ASPs are up, so it's actually less pairs.
Yeah.
How do you drive the numbers and make up for last year's third quarter issue?
Yeah
on such low inventory rates?
I don't think 19% is very low. If you look at the number of pairs of shoes that we have in distribution centers today, coupled with what we have in retail stores today, if we're doing the right thing and we're staying attentive, our model is we can build 8, 9 million pairs of shoes on our own in Mexico. Our ability to go ahead and build product and ship it in region within four to six weeks really doesn't say that we have an inventory problem. The issues in how we plan retail and retail kind of collections for outlet, that was kind of the root of that whole thing. It wasn't our core business. It was outlet sales of really basically discounted product. I think we put some corrective actions in place to do that, to monitor that today.
I don't think when you look at the number of shoes that we have in inventory today, that we have a shortage in some season. I don't think, if you think about our business model today, that let's just say on average about 55% of what we ship to wholesale is direct shipments now. It's pre-booked. You then think that only 40, 45% is spending by the market that's spending throughout the year in outlet business, we only have four turns. I go about this one maybe a little bit different. Think four turns when I've already taken all the pre-book out means that I probably turn closer to three. Should have adequate pairs of shoes to have inventory, plus what I can pull forward from factories if we need to. A-Leigh sold through Alie at a tremendous rate.
We're pulling in 100,000 pairs of shoes on inventory day that we can sell all the way through Q2 to Q3. This goes back to kind of thinking about shoe manufacturing and product management a little bit different. That ability for us to be more outlet or work with factories was the really basis when we first started, is that we can be different. We can have a different supply chain management in this space. When things got tough, a lot of that stuff got shelved and we went to more traditional, let's be more standard in the industry. Let's make sure we're on time on development. Let's make sure we get our pre-book. Let's not steer this thing ditch to ditch either.
Let's not go, "Hey, we're not going to do any pre-books," and go from 2005 to 2006 to we're only a pre-book company and we're not interested in kind of thinking about other things. Of course, it's kind of getting it back into the center again. My opinion and the rest of management's opinion, they should have adequate product to support. We're not in that lane. I did want you guys to think again here with Jeff's debt.
We're going to have a huge uptick and we're going to talk about the inventory in Q4 because of the change in terms and what was in transit now moves to what's going to be on our inventory at the end of the year and we're going to explain this so when you get to the end of the year, you don't feel like all of a sudden inventory is out of control. It's just product that's built for Q1 that has to be in transit at the end of the year that's going to be reflected differently at the end of 12.
To your point, that's not a real change in your inventory, it's just a matter of where it's showing up.
Okay.
On your books versus on the outlet.
Right.
Okay.
John, you alluded to the outlet issue in Q3 last year, but now that you're more important in the family channel, the mid-tier channel, they are aggressively promotional around back to school running BOGOs. Does that change the margins potentially in Q3 in the American wholesale segment or what your retail mix is?
No, because we don't chase them. Like last year in Q3, when we went up to stores at the end of June and early July, product was already sold through. Kohl's wasn't chasing the replenishment. They're going to buy a certain amount of product, they're going to sell through it, and the mid-tier channel isn't chasing us into June, July and August hardcore to bring in additional product and then have it end up in a marked down state. That wasn't really the issue. The issue more was that we could have or should have more at once business in that June, July, August timeframe if we can get them to continue to place the orders and keep it in stock because last year they were pretty much out of stock. If you went into stores in July, they didn't have a lot of product.
That's my fear, too, again, with their sell-through rates this year, they're going to shrink a little bit more in Q2 into early Q3. You're going to walk into stores and there's not going to be a lot of product left. It's not a bad situation, right? Sell through, leave it a little bit hungry since it's finding that right balance.
Mike, you are close.
Other questions?
When are we going to see the presentation online?
So-
There we go. Yeah.
Thanks for coming today and for those of you that are staying, we are doing a nice happy hour with hors d'oeuvres and everything at the St Julien here, I think 5:30 is when we start. Hank is going to come and hang out for a while, so you can talk to him tonight. He's very humble. Dale will tell you he's very humble. He worked extensively with us on the products, came in here multiple times. I think his life's probably been a bit of a blur for the last two months, right? The time that he's spent on it, that perfectionist nature of golf has transformed into the shoes and he's been a great proponent for it. We're happy to have him here.
For those of you that going to play golf with him tomorrow, you're going to get lots of pointers.
Okay.
Trust me, when he's done with you tomorrow, you'll be, I hope, you'll be better off than when you started, but good luck with that. A couple of administrative things. We do have a gift package in the back. We have Crocs Classics in honor of our 10th anniversary this year. We thought it was appropriate that we have those available for each of you to grab a pair of our original classic shoe that set this ball in motion 10 years ago. As John mentioned, we'll have a happy hour and some hors d'oeuvres and some food at the St Julien at 5:30 P.M. Hank will be there. For anybody that's not planning on playing golf tomorrow but would like to play, please let us know. We do have some slots available.
If your plans have changed and you do want to play, we do have some slots available for tomorrow. Thank you all for coming.