Earnings Call: Q4 2019

Feb 27, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Crocs Inc. 4th Quarter Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I now like to hand the conference over to Brandon Frey of ICR. Thank you. Please go ahead. Thank you, and good morning, everyone, and thank you for joining us today for the Crocs 4th quarter 2019 earnings call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward looking and accordingly is subject to the Safe Harbor provision of the federal securities laws. These statements include, but are not limited to, statements regarding future revenues, gross margin, SG and A as a percentage of revenue, operating margins, CapEx and our product pipeline. Crocs is not obligated to update these forward looking statements to reflect the impact of future events. We caution you that all forward looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10 ks. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for more information relating to these risk factors. Adjusted gross margin, income from operations, operating margin, net income and earnings per diluted common share are non GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us on the call today are Andrew Reese, President and Chief Executive Officer and Ann Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew. Thank you, Brendan, and good morning, everyone. This morning, we reported revenues of $263,000,000 which was slightly ahead of the upwardly revised guidance we provided in early January. This result marks an all time 4th quarter record high for the company and represents an increase of 22% over the same period last year. Our strong top line growth allowed us to drive significant SG and A leverage, which along with 3 10 basis points of adjusted gross margin expansion helped fuel adjusted earnings per share of $0.12 versus an adjusted loss of $0.10 per share a year ago. These achievements underscore the work we have done expanding the year round desirability, relevance and consideration of our brand and product offering. Our 4th quarter performance represents a strong finish to a record revenue year. Ann will review our financial results in more detail shortly, but here are just a few of the many highlights from 2019. Overall global revenues grew 13% to a record of $1,200,000,000 for the full year. Excluding store closings and currency, underlying growth was 17%. Adjusted operating margin of 11.6% was approximately 3.90 basis points over 2018, and adjusted EPS increased 87 percent to $1.61 We invested $15,000,000 back into the business via additional marketing programs. We returned cash to shareholders by buying back more than 6,000,000 shares, and we relocated our U. S. Distribution center to a new automated facility in Ohio. Importantly, the momentum we generated in 2019 has carried into the New Year, and we anticipate continuing to drive meaningful growth in 2020. To better understand where the business is headed, it's helpful to understand the key drivers of our recent performance since the same underlying strategies will propel us forward in the future. Starting with building brand heat. It was an incredibly busy and exciting year. Throughout 2019, we executed numerous programs and campaigns that further strengthened consumer affinity for the Crocs brand around the world. This was the 3rd year of our successful Come As You Are campaign, and we once again invested in the strong lineup of brand ambassadors, including Zooey Deschanel, Kim Sejeong and Suzu Hiroso. And late last year, we announced the addition of award winning actor, activist and entrepreneur, Priyanka Chopra Jonas, to our team for 2020. Priyanka will be featured in many of our marketing assets for 2020, both in the U. S. And in our international markets. More recently, we unveiled our newest brand ambassador, Yang Mai, an actress and singer and one of the top celebrities in China with over 100,000,000 followers across her social media platform. We're very excited to have Yang Mai on board as her reach and appeal is a key component of our growth strategy in this large and important market. We launched over 20 collaborations in 2019, each of which had an impact on enhancing brand relevance. These included partnerships with Post Malone, Luke Combs, Takashi Murakami and Vera Bradley in the U. S, Sai in Korea, Vivium Tam in China and Beam's in Japan. We'll reprise several of these collaborations in 2020, along with many partnerships that we're really excited about. Another important part of our 2019 marketing strategy in the U. S. Was the introduction of a Crocs profile on TikTok, a video sharing app popular with teens and young adults. The initial reception has been fantastic, evidenced by the fact that our hashtag $1,000 crocschallenge has received 2,800,000,000 views to date. The effect of our marketing efforts is clearly evident and measurable. In Piper Jaffray's most recent study, in just 1 year, Crocs moved from the number 13 most preferred footwear brand by teens to number 7. In our own annual brand strength survey, we saw double digit in both desirability and relevance. And according to Google, we had 2 of the top 10 most searched shoes in 2019, including the coveted number one spot with our Luke Comb collaboration. From a product perspective, our results continue to be driven by our focus on our 4 key growth pillars prioritizing clogs, sandals, visible comfort technology and personalization. Following strong springsummer and back to school seasons for clogs, we fueled demand during the holidays by refreshing our core assortment with on trend colors, prints and expanded our offering of line clogs for cold weather wearing occasions. The response from consumers was incredibly strong. Q4 clog revenues increased approximately 36% and represented 69% of our footwear sales, up from 62% during last year's Q4, providing further proof that our clog silhouette is a year round style. At the same time, our sandal business enjoyed a successful holiday, and we continue to build awareness of our presence in this category and inspire our female consumers with the breadth of our offering. Sales grew 7% over last year's Q4 and grew 10% for 2019, the 3rd consecutive year of double digit growth for this category. We have exciting plans to build on this momentum in 2020, including seeing more of our celebrities in our new sandals as well as featuring more sandals in our collaborations. We're also expanding a third component of our product strategy, Visible Comfort Technology, with the recent introduction of kids sizes into our LiteRite collection. Since launching LiteRite in early 2018, it has quickly become one of our top 5 franchises. Visible Comfort Technology is now a core part of Crocs DNA, and we believe it provides us with the compelling growth opportunities well into the future. With respect to our Jibbitz Charms business, we saw accelerated momentum as the year progressed, culminating in a rollout to select wholesale accounts during the Q4. We've made great progress in broadening the appeal of our unique charms by evolving the assortment and regularly refreshing the offering with on trend, relevant and localized designs. Personalization is a global megatrend and we are seeing growing numbers of consumers worldwide customize their Crocs footwear. We anticipate that our Givens business will continue to gain momentum in 2020 and beyond, driven by all channels. Let me now turn briefly to the Q4 performance of our sales channels. Our DTC comp, which combines our retail and e commerce results, increased 22% for the 4th quarter on top of 16% gain a year ago. E commerce sales were up 34% on top of 19% growth last year. This represents our 11th consecutive quarter of strong double digit e commerce growth. The increasing brand heat continues to drive more traffic to our own sites, plus we are seeing good traction on global marketplaces. Retail comps rose 16%, our 10th consecutive quarter of positive comps. On a 2 year stack, retail comps were up 29%. 4th quarter wholesale revenues increased 22%, following last year's 10% growth, led by strong sell through and replenishment orders from many of our leading wholesale partners around the globe. As we think about Q4 from a geographic perspective, Q4 revenues grew double digits in each of our three regions, with the strongest growth coming from the Americas led by the U. S. Our performance in our home market is the direct result of our commitment to execute the playbook we outlined a couple of years ago, one that centers on strengthening our relationship and driving relevance with the consumer through great product and marketing. We're confident that the work we've done further igniting brand heat and emphasizing our core clogs and sandals, along with our burgeoning gibbets business, has Crocs well positioned to drive sustainable growth in the U. S. We believe the same is true for EMEA and Asia, where we are in various stages of implementing the same strategies and playbook we've developed domestically. EMEA showed great progress in Q4, growing 17% in constant currency year over year. Asia represents our largest long term growth opportunity where clog relevance, particularly in China, lags our other key countries. With a much stronger foundation in place in China, we're starting to ramp up our efforts to accelerate growth. In the near term, however, our priority is to ensure that our employees in China, along with our partners and suppliers, safely navigate the health risks associated with the coronavirus. Our thoughts are with everyone affected. Many of our approximately 350 partner stores are closed temporarily. For those that remain open, they are operating on reduced schedules and experience lower than usual traffic. Despite this difficult situation, we continue to be very optimistic about our long term growth prospects in China. Finally, I'm pleased to announce that we recently appointed Elaine Baltz to the newly created position of Executive Vice President, Chief Operations and Transformation Officer. Elaine brings nearly 3 decades of leadership, operations, direct to consumer and marketing experience to Crocs, having served in senior leadership positions at the TJX Companies, Chico's and Ann Taylor during her career. In her new role, Elaine will have responsibility our operations functions globally, including information technology, supply chain and enterprise wide business transformation. I'm confident she'll play a key role enhancing execution of our long term strategies. Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization for delivering such a strong year of growth and profitability. We have come a long way over the past few years, and this wouldn't have been possible without the hard work and commitment we have seen demonstrated by our global teams on a daily basis. Normally, at this time of year, we would send New Year's greetings to all our associates, customers, family and friends in China. These are concerning times for many and we would like to wish them and all of their families good health over the coming weeks months. We look forward to healthier times ahead for everyone. With that said, Anne will now review our financial results in more detail and outline our guidance. Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our Q4 and full year 2019 results. For a reconciliation of the non GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. As you have already heard, we had a record setting 4th quarter, exceeding our revenue guidance and achieving a dramatic improvement in our bottom line. 4th quarter revenues came in at $263,000,000 compared to $216,000,000 in the Q4 of 2018, a 21.8% increase or 22.7% on a constant currency basis. Currency negatively impacted our revenues by approximately $2,000,000 In addition, store closures reduced revenues by approximately $2,000,000 absent which our sales would have been up 23.7%. This is our 11th consecutive quarter of organic sales growth and the 6th consecutive quarter of double digit organic sales growth. We sold 13,700,000 pairs of shoes, an increase of 18% over last year's Q4. Our average selling price per footwear during Q4 increased 3% to $18.44 with the increase attributable to less discounting and higher prices on certain product, which more than offset the impact of changes in our channel mix and the negative impact of currency. For 2019 in total, we sold 67,100,000 pairs of shoes, 12% more than 2018 at an average selling price of $17.81 up 1% from prior year or 3% in constant currency. The Americas had another phenomenal quarter with revenues up 28 percent to $155,800,000 and minimal impact from currency. Growth was robust across every channel. In addition, we completed the relocation of our Americas distribution center from California to Ohio during Q4. While there were some challenges getting product out in a timely manner, which required some additional spending to remedy, we are very excited about the great benefits we expect to receive from our new distribution center investment, including higher throughput, greater efficiency and an improved customer experience. In 2021, we intend to relocate our distribution center in the Netherlands supporting our EMEA region to a larger facility and are evaluating similar investments this year and beyond designed to support our anticipated growth. In Asia, Q4 revenues were $64,400,000 up 15% from last year's Q4. On a constant currency basis, revenues rose 15.4%. GTC comparable sales were up 5.7% driven by growth in our own.com and our expanding marketplace presence, somewhat offset by lower retail comp. EMEA revenues rose 15% over last year's 4th quarter to $43,000,000 On a constant currency basis, revenues grew 17.2%. Our business is benefiting from growing brand heat and our continued focus on digital commerce. Our 4th quarter adjusted gross margin was 49.3%, well above last year's 46.2%, driven by favorable product mix, lower levels of promotions and discounts and higher volumes, helping to leverage our fixed costs. This was partially offset by higher distribution center costs in the U. S. Related to the start up of our new USDC. Compared with our guidance, adjusted gross margin was lower by 70 basis points due to the cost of scaling activities at our new Ohio distribution center. Our adjusted SG and A improved by 620 basis points to 44.4 percent of revenue versus 50.6% in last year's Q4 and compared to our guidance of approximately 47% of revenue. The upside to our guidance was driven by our ability to leverage higher revenues in the quarter. Non recurring charges were $1,200,000 in Q4 compared to $4,600,000 in last year's Q4. The work done over the past 2 years to reduce cost is now enabling us to drive significant leverage from revenue growth even as we continue to invest more in marketing. Our operating margin improved dramatically to 3.2% or 4.9% on an adjusted basis. For Q4, we recorded a tax benefit versus a tax expense last year. Higher than anticipated U. S. Profits enabled us to use various tax benefits accumulated during prior years. 4th quarter diluted adjusted earnings per share, excluding the tax benefit and non GAAP adjustments were $0.12 compared to a non GAAP loss per diluted share of $0.10 a year ago. During Q4, we repurchased approximately 400,000 shares of our common stock on the open market for $13,700,000 at an average share price of $34.73 For the full year, we repurchased 6,100,000 shares of our common stock for $147,200,000 at an average cost of $24.20 per share. $508,600,000 remains available under our plan for future share repurchases. Our balance sheet continues to be very strong. We ended the year with $108,300,000 in cash and $205,000,000 in outstanding borrowings. Inventory at December 31, 2019 was $172,000,000 up 38.2% compared to $124,500,000 last year. The increase was driven in part by early receipts ahead of Chinese New Year. For the year, our inventory turns were 4.3x. As pleased as I am with our strong Q4 performance, I am equally excited by our full year results. We grew revenue by 13% or 17%, excluding approximately $28,000,000 of currency impact and about $17,000,000 of store closures. In addition, we have leveraged adjusted SG and A by approximately 4.30 basis points even as we increased our marketing spend by $14,500,000 For the year, adjusted operating margins were 11.6%, up 3.90 basis points. On a GAAP basis, operating margins were 10.5%. With this result, we achieved our goal outlined 2 years ago of double digit operating margin. Adjusted EPS for the full year was $1.61 versus $0.86 last year. Excluding the Q4 tax benefit, our underlying effective tax rate for the year was 13.5%. We plan to host an Investor Day during the second half of twenty twenty where we will lay out longer term financial targets for the company. As we turn to guidance, I want to remind you that our guidance is based on current currency rates and on the best information we have given the limited visibility with respect to the coronavirus impact. As Andrew touched on earlier, our thoughts and our focus on the well-being of our colleagues and partners in China as they deal with this very difficult situation. With a number of partner stores currently closed and other measures in place to try to prevent further spreading of the coronavirus, we shipped very little product in China so far this quarter. As a result, we've lowered our Q1 2020 revenue projection for our Asia region by $20,000,000 to $30,000,000 This includes the impact on our China business as well as the impact on other key markets in Asia as we are seeing declines in retail traffic in Singapore, South Korea, Japan and our Southeast Asia distributor markets. It also reflects our best estimates for supply delays out of our Asia factories in Q1. For the Q1 of 2020, we expect revenues to be between $305,000,000 $325,000,000 compared to $295,900,000 in last year's Q1, including a negative currency impact of $3,000,000 We expect operating margins to be between 9% 12%, including approximately $3,000,000 of one time expenses for store closures and other provisions in Asia. For 2020, we now expect our revenues to grow 8% to 12% over 2019. This includes a negative currency impact of approximately $10,000,000 as well as an estimated impact of $40,000,000 to $60,000,000 related to the coronavirus. To be clear, the impact from the coronavirus assumed in our guidance is related to store closures and overall consumer demand in Asia region and doesn't contemplate a further disruption to our supply chain nor continued softness in the region during the back half of the year. Our operating margin is expected to increase to approximately 11% to 13%, including estimated transition costs of about $3,000,000 for the new GC in the Netherlands and approximately $5,000,000 related to one time charges for store closures and other provisions in Asia. Interest expense for 2020 is expected to be approximately $9,000,000 In terms of income taxes, excluding the utilization of any discrete tax benefits, we expect a tax rate of approximately 17% in 2020. With respect to CapEx, we expect to invest between $50,000,000 to $60,000,000 in 2020, which includes expenditures related to our new distribution facility in the Netherlands scheduled to open in 2021 as well as some investments that shifted from last year into this year. In summary, although we are experiencing near term challenges with the disruption in our Asia business, the Crocs brand and our fundamentals are strong and we believe this disruption to be temporary. I remain very excited about our plans for 2020 as we continue to drive top and bottom line growth while making important investments to fuel the business over the long term. At this time, I'll turn the call back over to Andrew for his final thoughts. Thank you, Anne. As our 2019 performance indicates, we have great momentum in our business and our brand heat has never been stronger. While we decreased our 2020 guidance as a result challenges created by the coronavirus, our positive outlook for Crocs remains unchanged. We are confident there is a long runway of growth ahead of us and numerous opportunities to drive increased shareholder value for years to come. Operator, please open the call for questions. And our first question comes from the line of Erinn Murphy with Piper Sandler. Go ahead please. Your line is open. Great. Thanks. Good morning. I guess my question maybe just starting with the coronavirus and what you've embedded in your guidance of the 40 $6,000,000 for the full year. It sounds like you're already assuming kind of the broader impact you're seeing outside of the Asian markets outside of China. But what's your assumption on how long this pressure continues? And then maybe if we can just understand a bit more on the supply chain side, Can you talk about kind of what's being produced in China, if there's specific packaging or other input costs or inputs that go into maybe production lines elsewhere in Asia? And if you've seen any disruption on the supply side at this point? Yes. Thanks, Aaron. So firstly, I think I would like to say that our first focus is around health and well-being of our employees, our partners and our suppliers throughout the Asia region. So that's kind of how we've approached this. As we look at the business impacts, I think they're on 3 levels. Firstly, we've got direct impact in China, which I think is pretty clear to everybody. So stores are still substantially closed. Our e commerce was not operating through most of February because our distribution partner was closed at the request of the local government. They are now operating, but obviously, your business is at a reduced level. Almost as important as that is the impact in rest of Asia. So if you look at the 1 130,000,000 plus Chinese tourists that travel globally, 8 of their top destinations are in Asia, and we're seeing significant drops in traffic in Japan, in Korea, in Singapore. And as we look at our distributor businesses in Thailand and other parts of Southeast Asia, we're seeing big drops in traffic there. And then on top of that, you've got the supply disruption. So there's really three levels of impact that we're managing and monitoring. Part of your question was how long have we assumed that this goes on. Our assumption is essentially what we've built into the guidance that we have provided at this stage is that this goes on through 1st and second quarter. So we've got impact in the Q1 and second quarter, and we recover in the back half. In terms of the supply disruptions, again, the way to think about it is we're a little over 10% of our finished good production comes out of China, a little over 70% of our finished good production comes out of Vietnam. So that kind of gives you kind of where we're orientated. But as you rightly pointed out, Vietnam is not free from impacts, right? So we do get components that go into the product that we make in Vietnam out of China. Some of that is dual sourced, so we can switch to a Vietnam only source and some of it comes and some of it is sole sourced out of China. So we'll have to look for different sources around that. And you also see other impacts in terms of just the productivity of Vietnam facilities because many of these manufacturing groups are Chinese or Taiwanese owned. So we are seeing supply disruption. I think if you kind of look at February, for example, coming back from Chinese New Year, look, a lot of facilities came back very, very slowly or came back at far less productivity than they would have done. That is getting better, but there's definitely disruption going forward. I don't know if there's anything else you'd add on. Yes. I would just say that all of our factories have restarted in China just at varying levels of productivity. Okay. That's helpful. But then in terms of the disruption, just so I make sure I understand how you're kind of framing the guidance, you're not assuming any further disruptions from here on the supply chain side and really the impact is on kind of the cooler demand across APAC in the first half. Am I understanding that right or you have included supply chain? Yes, correct. Okay, got it. And then maybe just So just to put final point on that, if we see significant delays going into Q3 and Q4 deliveries, that would be a larger impact than we've outlined. Got it. And then in terms of like inventory on hand, particularly into the North American market, how comfortable are you as you look out through the first half just given that this is the region where you've been seeing the most significant piece of your growth? Yes. I would say from the U. S. Perspective a couple of things, right? Our inventory is up approximately 37% year over year and most of that is in our U. S. Market because we did bring about 50% of that is because we brought it in ahead of Chinese New Year, which proved prudent just because the Chinese New Year and the timing of that. And then the rest of it is because we were obviously light on supply last year and going into U. S. Growth, we wanted to make sure we had enough inventory. So we're less I would say we're less impacted at this point in the U. S. Right now because of our inventory. Got it. Okay. And then just last question for me. Just on the collaboration pipeline, Can you talk a little bit more about, how we should be thinking about the phasing of that here in 2020? And then what is the international opportunity on the CoLab that you guys have been introducing to the market? Thank you very much. Yes. Thanks, Aaron. So Co Labs, you've probably seen we've started to ramp up. The way to think about phasing is they are sort of now through summer, and then we have another pulse in late Q3, Q4. That's basically how we phase it. So through the summer and then leading up to holiday are our two periods that we focus on for collabs. I think we've seen those work most effectively in the past. In terms of kicking off 20 co labs, you saw we did KFC a couple of weeks ago, which I'd have to say, that was not really oriented around selling a lot of pairs. The pairs that we sell will actually be in March. We delayed that because we wanted to have access to the Chinese market for that because obviously KFC is very important in that marketplace. But I would say the media attention, the PR and the earned media we got from that was probably one of the best we've ever done, to be quite honest. It was really impactful. You also saw us tease 1 this week, which if you haven't figured it out, that will be coming out at the weekend. And then from an international perspective, absolutely. I would say today, we probably have on the schedule more than double what we did last year from an international And that's probably one of the key focuses is getting more international co labs, which would be China, Asia and Europe. Got it. Thank you guys and all the best. Thank you. Our next question comes from the line of Jonathan Komp from Baird. Go ahead please. Your line is open. Yes. Hi, great. Thank you. Just maybe first following up on the coronavirus impact and the guidance. Could you just remind us the size of China today? Is it still kind of 7% or 8% of sales? And then when you look at the trend in the rest of your Asia business, pretty clear that China saw a sharp fall off. Can you maybe just talk about kind of the direction of the recent trend you're seeing? And is it intensifying in terms of the traffic we don't normally we don't normally disclose China because it's not a disposable segment. But for purposes of this, it was about 5% of revenue in 2018 is the right way to think about it. And so obviously, we're seeing the impact in China. And then I would say from our direct markets, the biggest impact market that we're seeing are really Singapore, Korea and Japan. And that's really on mostly the retail side and pretty large drop offs of traffic. And then as far as the Southeast Asia market, we know that Thailand, as Andrew mentioned, is very exposed to from a tourism perspective. So we are also hearing from our distributor partners that certain of our markets in Southeast Asia are experiencing large drops in traffic. Okay. That's really helpful. And then more broadly on the earnings guidance, just two questions there. I think first, excluding kind of coronavirus impact looks like very strong growth still. So I wanted to ask maybe what's driving implied high end versus the low implied high end versus the low end. So what's like what are the major moving parts or assumptions that you're embedded in the range? Yes. So, Jon, let me give you kind of sort of what's the sort of flavor as to what's driving it and what we're assuming, and then Anne will dig into some of the components that you are alluding to there in terms of margin and SG and A. So if you think about, yes, we've still got underlying growth. So despite the coronavirus impact that we've called out, our full year guidance still directs you towards strong growth. That growth coming from the Americas and EMEA. And if you kind of look back at Q4, you really start to and I would say 2019 for the full year and certainly the latter period of the year, you start to see growth accelerating in EMEA. So we think Americas and EMEA are strong drivers of our growth. The causation of that growth is kind of what we've been talking about. So product marketing, connecting with our consumer, driving brand relevance and awareness, I think that's working extremely well, and we're seeing really clear evidence that, that's spreading. So we feel good about that. Obviously, without these impacts, we think that we would have started to see that in Asia, and we'll start to see that in the future in Asia. But I think we've got a clear game plan to drive growth. Yes. Just to reiterate what Andrew said, the underlying business is strong, and we wouldn't be updating guidance if it wasn't for the coronavirus. Taking that into account, when you think about gross margins And then, as discussed in our prepared remarks, we have 3,000,000 And then, as discussed in our prepared remarks, we have $3,000,000 of charges associated with our New Netherlands DC that we expect to open in 2021, but we had $12,000,000 in charges last year associated with our U. S. DC. And then we expect continued improvement throughout the year in our USDC and that ramping up. We don't expect the full impact this year from the 100 basis points, but we will get that on an ongoing basis on an annualized basis as soon as we're at full productivity levels. Okay. And chance of quantifying just kind of how much you think gross margin will be up or any more detail there? Thanks for taking the question. The way that I would think about that is that it's embedded in our overall EBIT margin guidance of 11% to 13%. So I would say gross margin is going to be up. SG and A, when we planned SG and A, we planned investments in marketing, China and capabilities in certain functions, obviously planning a pretty big growth year. And we also plan to invest an incremental $20,000,000 in marketing. So even though we have the impact of coronavirus on 2020, we really don't want to jeopardize our long term growth and still expect to invest. So we only expect modest leverage in SG and A. So with those pieces, you can get to the overall guidance. Okay, understood. Thank you. Thanks, Jonathan. Our next question comes from the line of Mitch Kummetz with Pivotal Research. Go ahead, please. Your line is open. Yes. Thanks for taking my questions. Just maybe a couple on coronavirus and then I got another one. So just to be clear, your $40,000,000 to $60,000,000 that's just Asia. You're not assuming anything for Europe even though Italy is a problem now? Yes. I mean that's broadly true. I think the thing that we're conscious of is potential supply disruption in the future, but we don't see that in the first half significantly. And as Ant alluded to earlier, I think we have some inventory buffer in the U. S. So that's really predominantly Asia. And then on the EBIT margin guidance for both Q1 and the full year, actually maybe the full year, the 11% to 13%. In the press release, you kind of talk about provisions in Asia as for the year is like 50 basis points, 100 basis points that you factored in for coronavirus? The line went dead in the middle of your second question. Sorry. Yes, I think I've got a bad line. How much are you factoring into EBIT margin on coronavirus? The flow through of our revenue plus, I would say the one time charges that we outlined of approximately $5,000,000 and that's really related to, some things around stores that we may want to take some store closures early just based on traffic levels. Okay. And then just last question. As you think about this Explore Consumer that I think is driving a lot of your incremental revenue growth, Have you started to see much demand outside of classic clogs yet? I know that like the Brooklyn Wedge collection is new. I think you're going to be focusing more on I think you said it on the call, some of the celebrities and collabs outside of just clogs. Are you starting to see demand pick up in other areas outside of clogs, particularly with that consumer? I would say the majority of the interest from that consumer is probably still on the core cloud at this stage. I think it's really early in our 2020 product introduction plans. And as you rightly point out, we have focused a set of products and a set of marketing strategies on engaging that consumer in a wider set of product strategies. I think it's really too early to say. I would say our sandals that we have planned for this year, I think we are really optimistic about and obviously very, very early. But where we see performance of some of those sandals on some of our DTC channels, I think we're feeling good about where we are. Got it. All right. Thanks. Our next question comes from the line of Jim Chartier with Monness Crespi. Go ahead please. Your line is open. Good morning. Thanks for taking my questions. So Andrew, earlier I think you said that you expect recovery in the second half of twenty twenty. Is that just the coronavirus impact goes away? Or do you expect some of the demand that's impacted related to the coronavirus to shift into 3rd or 4th quarter? I think it's mostly that we expect the lack of commercial activity, commerce activity, shopping and being in malls to subside in Q3 and Q4. People will be back out in the malls. I think most of the demand in the Asian countries is lost. I don't think it just pushes out. There's no reason to believe that they will buy more in the back half of the year because they didn't buy in the first half of the year. Okay. And then Ann, on the nonrecurring store closing costs, you quantified $3,000,000 in the Q1, but you didn't quantify it for the year. Is there additional cost beyond Q1 related to those store closings? Yes. So what we talked about related to Asia, mostly charges related to Asia, one time charges for the year is $5,000,000 $3,000,000 being in Q1. Okay. And then just by my math, the $40,000,000 to $60,000,000 impact is 3% to 5%. And when you add that to your sales guidance for the year, it comes out to 13% to 15%, which is 1% above your previous guidance. Is there an implicit raise to the underlying business? Or is that math off? Yes. I think it's within very close to our original range. Obviously, we continue to see strength in our underlying business as we talked about and we feel really good about the underlying business excluding kind of the extraordinary events with the coronavirus. Okay. That's all I have. Thanks. Best of luck. Yes. Thanks, Jim. Thanks. And our next question comes from the line of Sam Poser with Susquehanna. Go ahead please. Your line is open. Thank you for taking my question. Most of the stuff that I wanted to know about has been asked. But I guess the question is, in the Q4, did was Asia Pac how did Asia Pac do relative to your internal expectation from both a sales and margin perspective? Yes. Our Asia growth in the 4th quarter was 15%. So we were pleased with that growth. Some of it we're starting to see the pickup in wholesale. And then we had extremely strong e commerce growth, which was in line with our strategy of opening marketplaces and really focusing on digital. So we were pleased with our Asia growth in the 4th quarter. Yes, consistent with our plans, Tim. And so there's so if we think ahead a year, I mean once the dust settles and you're not going to make may not make up the sales this year, but you should make you should run a very healthy increase at the end at the beginning of next year theoretically as if the brand momentum continues as you have planned. Is that a fair statement? Yes. I'm not going to comment on long range growth expectations. I think we've highlighted we will definitely do that in the later this year when we plan to hold an investor conference. But yes, I think as we've talked about repeatedly, we definitely see Asia as our largest long term growth opportunity based on the size of the markets that we are participating in, the direct markets where we participate and also the indirect markets, the distributors that we have in those marketplaces. So it was important to us that we were able to achieve the growth that we did in Q4. And in the future, once the dust settles from coronavirus, we will be we are focused and we'll continue to be very focused on driving growth in Asia. And then just a follow-up on that. Other brands have talked about how business how their business was, let's say, for the 1st 3 weeks of January. Can you give us some idea of the trend prior to the advent of the coronavirus? Yes. So we don't thanks, Sam. We don't talk about trends within the quarter. But just going back to Q4, because I think that's relevant, with our 15% sales increase, we saw really strong growth within our Southeast Asia distributor markets in India especially and in e com. And I think that's the best way to think about it. Okay. And then just to follow-up on somebody else's questions. I mean, are you seeing or do you foresee any impact of the coronavirus in, let's say, Europe, Australia or the Americas within your is there any impact in markets other than in Asia baked into the sales reduction that you provided? Yes. So look, it's a very fluid situation, Sam, as you're aware of. From what you've highlighted, look, Australia, absolutely. I mean, Australia, we're already seeing that. It's a strong tourist destination out of China. And so you can see that impact already. I don't know about Europe, to be quite honest. Obviously, the explosion in cases in Northern Italy and potential for that spread in Europe is something that's very recent. It's really this week, and it's very hard to contemplate what that would have. And really, any impact in Europe is not built into our expectations. Yes. And if I could just elaborate just to clarify one thing. Australia is actually considered part of our Asia region. So that would be included in our guidance. It's actually pretty small for us. But that Australia is included in our Asia region in your guidance whereas Europe is not. And then lastly, I promise you, can you talk about like sort of the evolution of the management of the brand and what's really sort of besides the product and maybe it's the manner by which you're marketing the way you're segmenting the product and so on in North in the Americas, how that's working and how and where that is all other things being equal in Europe and Asia? Yes, that's a very good question, Sam. So I would say as we look at our marketplaces, obviously the U. S. Market is by far the most sophisticated. And I think what you're alluding to is we've definitely instituted and are focused on a marketplace management strategy, which allows us to manage which products go to which channels, how much they are allocated, if you like, and make sure that we have the right product in the right places for the right consumers. Clearly, there's different consumers going to different channels, and we are working actively on that. We're pleased with where we are on that. And I would say the vast majority of our retail partners are also pleased with that to see us very proactively managing the marketplace. That need is also a need in Europe, and we're transposing some of those marketplace management techniques to Europe. It's less relevant in other markets which are far less sophisticated. But it is a key element of our ongoing strategy and we think it's an important element because it drives it will drive longevity and sustain our growth over time. Thank you, and good luck with all this. Thank you, Sam. Our next question comes from the line of Jim Duffy with Stifel. Go ahead please. Your line is open. Thank you. Good morning. First, congratulations to the team on the terrific year in 2019. Good morning, guys. Anna, I wanted to ask, with respect to the 2020 guidance, can you guys speak to the wholesale growth rates and D2C comps assumed in the guide? And I'm specifically curious what's assumed for North American D2C comps? Yes, we don't break out the pieces. I would say that it's encompassed in our overall guidance. But from the Americas standpoint, we expect D2C comps to be positive and we expect good wholesale growth as well. Okay. And one of the reasons I asked, I'm curious expectations for mix and the influence there on ASP, would you expect ASPs to increase on a year to year basis? Yes. I would say all things being equal and ex currency because obviously that's a fluid situation, I would say yes. Okay. And then I wanted to ask some about inventories and the complexities of inventory management given the virus disruptions. What are some of the considerations and the differences as it relates to inventory management in Asia that you're seeing between distributor markets and direct markets? Had you yet sold into the distributors when the virus came about for direct markets? What are the considerations for channel inventories? Can you guys speak through that a little bit, please? Yes. I think this is one of the areas that internally we're incredibly focused on because it's going to be extremely fluid. I think the broad dynamics are that factories came back slower than we would have expected out of Chinese New Year because of the coronavirus. So you've got some delays coming out of those factories. You've also got reduction in demand, particularly in some of the Asian markets. So you've got future supply that's not going to be consumed. So would say we're very focused on kind of rescheduling supply that's coming out of the factories that are producing and also redirecting supply that was intended for China and some of those other markets. As Anne alluded to earlier, I think it's fortuitous that we improved that we brought in a good amount of inventory into our North America marketplace ahead of an early Chinese New Year because that puts us in a better position there. But this is going to be a very fluid situation, and we're going to be working very closely with our distributors and our wholesale accounts to manage this over the coming months. Andrew, with respect to those distributors, had you yet sold into them for the springsummer season? Or is that something that happens generally after the Chinese New Year? No, I would say different in different parts of the world. But in Asia, they've taken I think Anne mentioned it, they've taken quite a lot of supply in Q4 and very early Q1. In Latin America and EMEA, it's flowing as we speak. But so it's different, but different parts of the world. Okay. And then last one for me. I'm curious how you're phasing marketing investments in Asia. You'd made some investments in ambassadors for Asia. Can you talk about how you're leveraging those relationships? And have you delayed any programs or anything like that? You mentioned the KFC launch was delayed. Just how are you thinking about marketing investments in Asia? Are you able to delay that till later in the year when it may be more impactful? Yes. So I mean, I think that obviously China was a really big focus for us. It was, I think, a very big coup for the brand to be able to land Yang Mei as our brand ambassador. And as we revealed her and launched that really pre coronavirus, it had a great impact. We saw tremendous social media engagement, and we saw a nice impact from that. So but obviously, with stores being closed, we have pulled back on some of that activity and we'll push it into later in the year. Thank you. Thank you. Thank you. There are no further questions at this time. I'd like to turn the call back over to our presenters. Thank you very much. Appreciate everybody's interest in the company. Obviously, a difficult an interesting time and difficult time for all of those impacted by the coronavirus. But as a company, we're very much focused on the well-being of our employees and managing this situation go forward. So we appreciate everybody's ongoing interest in the company. And this does conclude today's conference call. You may now disconnect.