Earnings Call: Q1 2019

May 6, 2019

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Crocs First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. At this time, I'll turn the call over to Marissa Jacobs, Global Head of Investor Relations to begin the conference. Good morning, everyone, and thank you for joining us today for the Crocs' Q1 2019 earnings call. Earlier this morning, we announced our Q1 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 the information provided on this call is forward looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding future revenues, gross margin, SG and A as a percent of revenues, operating margins, CapEx and our product pipeline. Crocs is not obligated to update these forward looking statements to reflect the impact of future events. Adjusted gross margin, SG and A, income from operations, net income and earnings per diluted common share are non GAAP measures. A reconciliation of these amounts to their GAAP counterparts are contained in the press release issued earlier this morning. 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. 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, Marissa, and good morning, everyone. I'm particularly pleased with the strong Q1 growth we delivered as demand for our branding continues to accelerate. Our priority for 2019 is to drive sustainable profitable top line growth by delivering great product and by growing our business across our 3 channels and our 3 geographic segments, just as we did in Q1. On a constant currency basis and excluding the $6,000,000 impact of store closures, we grew global revenues more than 11% with gains in all channels and geographies. The geographic standout was EMEA, where we had a truly remarkable growth. Our global retail comp of 8.7% was exceptionally strong, especially when you take into account the Easter shift to later in the Q2. Our e commerce business once again delivered double digit increases and our wholesale business grew mid single digits even as demand for classic clogs in Americas exceeded supply. Higher than expected revenue growth in combination with a higher than expected gross margin and lower than expected SG and A enabled us to grow our non GAAP income from operations by 22% and deliver adjusted EPS of $0.36 up from $0.23 in the Q1 of last year. Consumers clearly like our springsummer 2019 collection, and our impactful marketing is resonating. As a result, our brand continues to strengthen. In 2018, we rolled out a number of new collaborations and ended the year with 2 incredibly successful Post Malone collaborations. This year, we have another great lineup, and importantly, we are expanding our reach by partnering with key regional brands and personalities that are prominent in our 5 core markets. In Q1, we focused on influential L. A. Streetwear brands, Our collaborations with Pleasures, Left Hand LA, Chinatown Market and Pizza Slime brought us great visibility with their fans. Moving into Q2, we directed our focus to Asia, the region with the greatest long term growth potential. In China, we were thrilled with the buzz surrounding our appearance at Shanghai Fashion Week. Custom designed classic clogs made their way down the runway at Vivien Tan's show. Vivien is an internationally recognized Chinese American designer known for her culture bridging East meets West designs. Last month, we delivered a new collaboration with Beam's in Japan, a leading specialty retailer there, and it has received incredible worldwide attention. We have a great roster of additional collaborations that will stretch over the next couple of years to extend our reach and increase interest in the brand, so stay tuned. We officially unveiled our 2019 marketing campaign in April with a declaration that you should come as you are, and the response has been excellent. The 5 exciting new brand ambassadors selected for their relevance in our 5 key markets, the U. S, China, Japan, Korea and Germany, illustrate our global approach to brand expansion. We will be unveiling new content from each of them throughout the year. The extensive reach of this campaign is being supported by additional marketing investments, with the biggest increase taking place right now in the Q2. As we have elevated our product to marketing over the last couple of years, we've seen a clear impact with accelerating rates of brand relevance and engagement. In terms of product, we are continuing to focus on our 4 most important growth drivers: clog relevance, sandal awareness, visible comfort technology and personalization. The response to our springsummer 2019 collection has been terrific. Clogs continue to be in high demand. 1st quarter clog revenues grew approximately 12% and represented 56% of our footwear sales. The excitement that now surrounds our Classic ICON started in the U. S. And spread to EMEA, and we're confident that we can ignite this trend in the rest of the world. In fact, rapidly accelerating demand for classic clogs outpaced supply, particularly of certain core colors. Our supply chain teams have been working hard to increase capacity at existing factories and bring new factories online. Plastic clog inventories will be back to appropriate levels by the end of this quarter. Sandals remain a key area of focus. We estimate the annual addressable market for casual sandals to be approximately $23,000,000,000 globally, and it's highly fragmented. We see casual sandals as a natural growth area for Crocs, and consumers are responding favorably to our springsummer 2019 collection. In Q1, sandal revenues grew approximately 12% and generated 27% of our footwear revenues, up from approximately 26% in the first quarter of 2018. It's our 8th consecutive quarter of double digit growth. Existing styles have been refreshed with the addition of new colors and embellishments. The new Serena style available in plain and embellished sandals and flips makes a nice new addition to our line. We're building on our heritage of continuing to innovate around comfort technology, an important consumer purchase criteria. In March of 2018, we unveiled LiteRide, a premium offering distinguished by enhanced comfort and streamlined modern styling. It has been a tremendous success. For 2019, we expect LiteRide sales to more than double from 2018. Reviva is new to our springsummer 2019 sandal collection. It's the latest example of how we're incorporating comfort technology into our design process. We launched Reviva with flips and slides. The collection incorporates strategically placed bubbles in the footbed that massaged with every step. It's just getting into the market, and we're pleased with the early response. Personalization is a trend that keeps growing in relevance, and our expanding collection of Jibbitz charms is an important part of our brand proposition. The charms may provide consumers with a fun and unique way to make each pair of clogs their very own and are contributing to the growth of our clog sales. Consumers are responding enthusiastically to our expanded assortment while allowing the brand to lean into the global megatrend of personalization. Turning briefly to our distribution channels. We continue to see growth across the board. Our DTC comp, which combines our retail and e commerce results, was approximately 12%. We grew our e commerce business approximately 17%, our 8th consecutive quarter of double digit e commerce growth. In the Americas and EMEA, growth topped 20%. Our growing brand heat is continuing to drive traffic to our sites. We're upgrading the technology we use to analyze and manage our customer data. This is enabling us to deliver more targeted message to our consumers, which is boosting the effectiveness of our marketing spend. During the quarter, we added 3 new marketplaces, and we are very pleased with the early results. Our retail comp was approximately 9%, which was our 7th consecutive quarter of positive comps. 1st quarter wholesale revenues grew approximately 5% as customers refresh their assortment for spring. We saw the highest growth in our e tail accounts followed by distributors. With respect to brick and mortar accounts, we continue to add new customers and grow existing accounts through door and SKU expansion. On our last call, I laid out how we are driving sustainable profitable revenue growth through the lens of product, channel and region supported by marketing. From a product perspective, we are continuing to prioritize clogs, sandals, visible comfort technology and personalization through our Jibbitz charms. From a channel perspective, we expect e commerce to remain our fastest growing channel. At wholesale, our e tailers and distributors represent the greatest opportunity. And at retail, our decision to right size our store fleet and prioritize outlets is boosting productivity. From a regional perspective, we expect the positive momentum in the Americas and EMEA to continue, while we believe that the most significant long term growth potential is in Asia. Lastly, under the umbrella of our Come As You Are campaign, we'll be unveiling new content and collaborations throughout the year, designed to further boost consumer awareness and engagement, particularly in our 5 key markets. 2019 is off to a strong start. And with that, we are reiterating our full year guidance, despite the fact that currency headwinds have continued to increase. Our excellent Q1 results are directly attributable to all of the great work being done by our global team, and I want to say thank you to each team member for their contribution. With the successful Q1 behind us and clear evidence that our brand momentum is accelerating, I'm even more confident in our prospects for continued long term growth and increased shareholder value. At this time, I'll turn the call over to Anne to review our Q1 results and guidance. Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our Q1 2019 non GAAP results. For a reconciliation of all non GAAP amounts to their equivalent GAAP amounts, please refer to our press release. I'm very pleased with our Q1 results. We exceeded our guidance with outstanding performance in all channels. This sets us well for the rest of the year. 1st quarter revenues were $295,900,000 up 4.5 percent from $283,100,000 in the Q1 of 2018 and well above our guidance of $280,000,000 to $290,000,000 Currency negatively impacted our results by $12,700,000 about $3,000,000 more than we had anticipated. Store closures and business model changes reduced revenues by approximately $6,000,000 in the quarter. Absent these impacts, revenues would have grown 11.1%. We sold 18,400,000 pairs of shoes, an increase of 8.2% over last year's Q1. Our average selling price for footwear during Q1 decreased 3.4% to $15.73 as a result of currency. In an effort to streamline our prepared remarks, I'm going to limit my segment commentary to key drivers of the business. Details of our sales by channel and comp performance are laid out in the tables found in our press release. In the Americas, 1st quarter revenues grew by 4.3 percent to $129,100,000 which included a negative currency impact of $1,300,000 Our wholesale sales results were bifurcated. We grew nicely in North America despite limited classic clog availability as demand for that product continued to accelerate. In Latin America, wholesale revenues declined as a result of the negative currency impact and ongoing economic disruptions. Our DTC business had another superb quarter and I'm pleased to note that we generated a 21% e commerce growth and a 12% retail comp even without the benefit of Easter related sales. In Asia, revenues for the Q1 were $91,000,000 just about flat with last year's Q1. This includes a $4,300,000 headwind from currency. Mid single digit increases in our wholesale and e commerce channels were offset by the decline in retail, primarily due to the store closures and business model changes. In EMEA, revenues grew 11.6% over last year's Q1 to $75,700,000 This exceptional growth also occurred despite the fact that currency reduced reported revenues by $7,100,000 In constant currency, revenues grew more than 22%. The brand heat we are experiencing in the U. S. Is spreading to EMEA, driving revenues and sell throughs. Moving on to the rest of our P and L. Our adjusted gross margin was 46.9%, above our guidance of 46%, but down 250 basis points to prior year. There were a number of contributing factors, so let me walk you through them. Currency negatively impacted the quarter by 140 basis points, coming in worse than we had anticipated. Consistent with my remarks last quarter, the negative impact from currency moves will be much more pronounced in the 1st and second quarters of this year before moderating in the back half. 2 other items also depressed our Q1 adjusted gross margin. 1st is higher freight rates associated with inflation and the use of air shipments to speed up deliveries of Classic clogs. By relocating the Americas DC to Ohio, we will mitigate some of these freight pressures as we restore Classic clog inventory to appropriate levels, we will eliminate the use of airfreight. 2nd, costs at our LA distribution center rose as we operated above maximum capacity. The move to Dayton, Ohio will help to mitigate these pressures and translate into gross margin gains next year. We are making good progress on the build out of the new DC and have already successfully shifted fulfillment for the Americas retail business from LA to Dayton. Our adjusted SG and A expense was $104,400,000 or 35.3 percent of revenues, better than our guidance primarily as a result of higher revenues, effectively leveraging our cost base as well as the shift of some spend from Q1 into Q2. As a percent of revenues, our adjusted SG and A improved by 4 10 basis points over the Q1 of 2018, reflecting savings resulting from our recently completed SG and A reduction plan. Our adjusted income from operations was $34,500,000 up 21.5% compared to the Q1 of 2018. Our adjusted earnings per share increased 57 percent to $0.36 compared to $0.23 in the Q1 of 2018. Our balance sheet continues to be very strong. Inventory at the end of the quarter was 6% lower than at the same time last year as we continue to carefully manage inventories across our various channels and replenish our classic clogs. During Q1, we repurchased approximately 2,100,000 shares of our common stock on the open market for $53,500,000 at an average share price of $25.07 That left us with approximately $102,000,000 available under the plan for future share repurchases. This morning, we announced that the Board of Directors has approved an increase of $500,000,000 to our existing share repurchase program. Under the expanded plan, we have approximately $600,000,000 available for future share repurchases. We ended the quarter with $86,300,000 in cash and outstanding borrowings of $215,000,000 During the quarter, we amended our credit facility to raise our borrowing capacity from $250,000,000 to $300,000,000 On January 1, 2019, we adopted new GAAP lease accounting rules, which resulted in a significant increase in our reported assets and liabilities associated with our leases. The recognition of rent expense and payments associated with these lease asset and liabilities will not result in material differences to operating income or cash flows compared to the previous accounting rules, nor does it impact our banking covenants. As we turn to guidance, I want to remind you that our guidance is based on current currency rates. For 2019, we are reiterating the full year guidance we provided in February despite currency erosion. That guidance is contained in this morning's press release. With respect to the Q2, we expect revenues to be between $350,000,000 $360,000,000 compared to $328,000,000 in last year's Q2. Our guidance incorporates the loss of approximately $10,000,000 of negative currency impact and $6,000,000 of revenues associated with our reduced store count. At the midpoint of our guidance, adjusting for currency and store closures, this represents underlying growth of approximately 13%. Adjusted gross margin for the Q2 is expected to be approximately 52.2% compared to 55.3% in last year's Q2. The variance reflects the negative impacts of approximately 150 basis points resulting from the strengthening of the U. S. Dollar as well as the negative impact of approximately 160 basis points from higher freight and distribution center costs in the Americas. As I mentioned earlier, the negative impact from currencies will be more pronounced in the first half and will diminish over the back half. Furthermore, the headwinds resulting from higher DC and freight costs will be partially mitigated as we ramp up operations in the new Ohio facility later this year. In 2020, we anticipate realizing approximately 100 basis points of improvement in our adjusted gross margin resulting from our move into the new facility. SG and A is expected to be approximately 40% of revenues compared to 44% in last year's Q2. This includes a significant increase in our marketing spend over last year's Q2, resulting from the shift of some spend from Q1 into Q2, as well as incremental investments we are making to support and accelerate our growing brand momentum. Also included is approximately $2,000,000 of non recurring charges relating to various cost reduction initiatives. Given our strong performance in Q1 and our expectations for achieving our interim target of a double digit adjusted operating margin, I feel very good about the balance of the year. At this time, I'll turn the call back over to Andrew for his final thoughts. Thank you, Adam. As you heard this morning, 2019 is off to a great start, and I'm confident in our ability to maintain the positive trajectory of our business. Our brand is continuing to strengthen. We are continuing to build on our strong clog tradition to expand our sandal business and to build our comfort technology offerings and to give consumers more opportunities to personalize their Crocs. Upgrades to our supply chain will allow us to maximize the growth potential of each of our channels and geographic segments. We have a clear strategy for moving forward, and by executing against that vision, we will continue to accelerate growth on both our top and bottom line. Operator, please open the call for questions. And your first question comes from the line of Jonathan Komp with Baird. Yes. Hi. Thank you. I want to follow-up first just the commentary around Europe and starting to see the brand heat. Can you give a few more examples of what you're seeing there and maybe what you think is driving the improved momentum and the outlook ahead? Yes. Thank you, Jonathan. I'd say a couple of things. One is to think, EMEA was particularly strong. Obviously, we had very strong currency headwinds in EMEA. So they kind of hit their numbers despite $7,000,000 of FX drag as the euro, I think, is down around $111,000,000 112. I think what we saw is we saw a strong performance across all channels, so wholesale, ecom and retail. As we look at the shape of the business, can see very strong traffic to our e com sites and also to our e teller sites. We see very strong interest in the brand coming through digitally. We see very strong interest in our stores. And from a wholesale perspective, we've been able to sign new accounts and extend reach in existing accounts. So I would say kind of is working on all dimensions. And not mentioned in our remarks, we opened a pop up store today featuring just our classic clog and featuring Jibbitz in Box Park in Shortest, England. So we're also investing a lot in marketing to continue to heat up the brand in Europe. Yes, great. So maybe a different subject then for Anne. But when you look at the gross margin outlook and kind of the implied improvement at least on a year over year basis relative to the first half when you look into the implied second half. Can you just walk through the various puts and takes that are impacting the 1st two quarters that you expect to subside later in the year? Absolutely. So just starting with Q1, our adjusted gross margin was 46.9%, which actually was better than guidance by about 90 basis points, even as FX moved against us even stronger than what we expected. So from a Q1 perspective, FX was drove margins down about 140 basis points and then the remainder was higher freight and DC costs. But when you think about from a guidance perspective, DTC outperformed, which has higher margins. Our promotions were lower because of that strong outperformance. And then we did move a little bit of airfreight from Q1 into Q2. So walking to Q2, our adjusted gross margin guidance is 52.2%. That includes so that's down 3.10 basis points when you exclude the one times for the DC of 120 basis points. And that decline again is very similar as we talked about on the call last quarter that FX would be really strong headwind in the first half of the year. So in the second quarter FX is about 150 basis points and then the remainder is higher freight, including air and DC costs. All of those pressures start to mitigate throughout the year. In Q3, we expect gross margins to be down slightly. And in Q4, we expect gross margins to be up. And then overall for the full year, we expect our adjusted gross margins as we reiterated our full year guidance to be at 50.5%, which is down about 100 basis points on an adjusted basis from prior year. Okay, great. Very helpful. And maybe last one just for me. When you look at the wholesale channel opportunity, especially in the Americas and seeing some of the success with partners that are newer like Journeys recently, could you just talk more broadly about where you see distribution going and whether or not the brand heat once you get the Classic clogs supply back in line, whether or not there's any additional distribution opportunity to be had here? Yes. So, yes, I mean, I think sort of priority number 1 for us in the Americas is fulfilling demand, particularly for Classic. Clearly, our demand from our wholesale partners is outstripping supply. As we indicated, we will be in line by the end of the quarter as we've worked really hard to bring on additional capacity. So that's kind of priority number 1. And then I think priority number 2, it will be obviously to leverage that brand heat to further extend the brand. I think as we look at all of our points of distribution, we have a lot of points of distribution. We've probably got I would say, a short list of incremental accounts where we'd like to be. We think it would be good for the brand. We think it's the right way to reach our consumers. I think our biggest dollar volume growth will come from door expansion and SKU penetration in major existing accounts. So I think the door growth with new accounts is really not the big driver. The big driver is SKU penetration and door penetration in existing accounts. Okay. That's great to hear. Thank you very much. Your next question comes from Jim Chartier with Monness Crespi. Good morning. Thanks for taking my question. First, could you just talk about as you've attracted new customers with the classic clog, are you seeing them buy other categories? Are you being able to convert these new customers into sandals or other categories? Yes, I think, look, the very strong growth in plastic is driven by, I would say, new and existing customers. A lot of our marketing work, a lot of our collaboration work is obviously appealing to customer groups that may not have been had a natural affinity to Crocs in the past, which has been great. We've seen great resonance with teen. Obviously, we're going through prom season right now and we see lots of exciting things happening in with teens at prom. So we see new customers coming. But I would also say the same marketing and social media activity is also encouraging existing customers to buy new colors, to buy additional styles. So we kind of see the growth on both dimensions. And in terms of penetration of other silhouettes, obviously, we're very focused on sandals. We continue to grow sandals. We grew sandals at double digits in Q1, and we're very optimistic for sandal growth going through the summer obviously. Right now we're seeing particularly in the U. S. Some cold and rain weather which is not helping sandals for us or really many other brands, but we're very optimistic about sandals through the rest of the year. So we feel really good about the combination of clogs, sandals, comfort and Great. And Great. And then on the ad spend, you mentioned a big increase in the second quarter. How is that allocated by region? And then how do you balance the increased spending versus some of the inventory constraints that you're seeing? Yes. So from an ad spend increase, we're spending a lot of our increase in Asia, particularly in Q2. I would say that we do have increases in all regions, but it is heavily directed at Asia as we work to extend the brand heat of Americas and Europe over to Asia. So that's the first part. The second part, can you repeat or what was your second part of your question? Just spending on increasing ad spend when you're constrained by inventory in certain regions? Yes, sure. So obviously the classic clogs in the U. S, it's really a U. S. Classic clog wholesale constraint. So it doesn't we really haven't seen an inventory constraint impact Asia at all. It's been less in Europe. So again, we think that ad spend is just as important to create brand heat. And we do expect our classics to be back in stock by the end of Q2. So we'll continue to spend to kind of continue that journey. And we have been able to successfully drive our consumers to different products in our direct to consumer in the U. S. And you can see that in our Q1 results. Okay. And then lastly, you're moving from a single brand ambassador for Asia last year to 3 country specific ambassadors this year. What's the early read on that change? Yes, I think we're really happy with that change, Jim. We've seen great resonance. Last year, our ambassador was really Korea centric. We've seen great presence with Suzu in Japan and also with our ambassador in China. So I think that was a really good move and we're pleased with that. Great. Thanks and best of luck for the rest of the year. Thank you. Your next question comes from Mitch Kummetz with Pivotal Research Group. Yes, thanks for taking my questions. Andrew, you mentioned the Easter shift a couple of times in your prepared remarks. I was hoping you could quantify that impact for us. Yes. Well, I think so the way we thought about it was we were definitely worried about the Easter shift. Obviously, it moved from that kind of 1st weekend in April last year to well into April. So it put both our DTC business But I But I'd have to say at the end of the day, we frankly we comped it, right. We comped it from a DTC perspective. We had in Americas incredible comps in Q1 both in store and online. So, we were able to make all those dollars up. And as we look at Q2 and having Easter suddenly in Q2, that's obviously embedded in our guidance. So, feel really good about where our guidance is. I'm going to push you a little bit on that. I mean, is it a few $1,000,000 do you think? I mean, you comped it in the quarter, but obviously it's accretive in the Q2 or so. Yes, we don't think it's a very large number. So it's embedded the best way to think about is in our guidance. Yes. I mean it's mostly U. S, right? A little bit in Europe, it doesn't really impact Asia at all. Yes. Okay. And then Anne on the SG and A, you mentioned that there was a shift in some expenses from Q1 to Q2. Can you quantify that? Yes. I would say it's less than $1,000,000 So when you think about what we did from an SG and A perspective, if you think about how we over performed again, it was really about leveraging our cost base and that drove about 140 basis points of the favorability to guidance and then the rest was a little bit of FX and a little bit of expense shift into Q2. Okay. And then I guess lastly on the adjusted gross margin for the year, I come up with 50.5 percent if you adjust back the 100 basis points on the DC, I think that's down about 100 bps from last year on an adjusted basis. Can you say how much of that is freight and FX? And is there any way I know you're not giving 2020 guidance, but is there any way you can kind of talk about how much of that freight you might give I mean get back or expect to get back next year? Yes. So for the full at current currency rates right now for the full year, FX is about 130 basis points. So we do have some things going the other way with mix and that are pulling that back. If you think about what we've talked about for 2020, on an adjusted basis, we're down 100 basis points next year because of the U. S. DC relocation, we have said we'll get 100 basis points back. So that's the best way to think about it is that we still expect to claw back 100 basis points from lower DC and better rate from where we're positioned in the country. Is that 100 basis point clawback, that's on an adjusted basis, that's not? On an adjusted basis. So on a full basis, it would be 200 basis points, because you expect the 100 basis points to one time and the 100 adjusted. Yes. I just want to clarify. All right. Thank you. Good luck. Thank you. Your next question comes from Erinn Murphy with Piper Jaffray. Great. Thanks. Good morning. A quick question on the Q2 sales guide, super strong, up 9% at the midpoint, which would be a good acceleration from the 5% in the Q1. So I'm just curious kind of what you're seeing out there just given this is a heavier at once or kind of reorder quarter. If you could just talk about what you're seeing in the environment that gives you that confidence? And then Andrew specifically you mentioned a little bit of rainy or colder weather in the Americas in particular. Is that what you're seeing currently out there post Easter? Is anything picked up post Easter? Thank you. Great. Yes, let me address the weather first. Obviously, the weather has been the last couple of weeks in terms of impacting the U. S. So we're seeing a little bit of an impact from that, but nothing that concerns us relative to our guidance at all. In terms of what's driving the overall guidance, I think there's a few things. We're expecting continued strong performance in EMEA. We have a very good revenue book and we're seeing very strong continued at once performance in EMEA. So we feel really good about EMEA, although we don't expect currency to mitigate. So that continues to be a pretty healthy headwind in EMEA. In Americas, we're particularly enthusiastic about our wholesale business. Again, we've got a strong book of deliveries in Q2. And again, we're seeing more at once performance than we can the Americas. And then from an Asia perspective, we see several key markets in Asia performing well. So it's really kind of across the board. I'd say from a product perspective, it's number 1 clog driven as it was in Q2, but we see sandal performance probably accelerating over what it did in Q1. Okay. That's actually very helpful. Thank you. And then can you talk about how the work category is performing for you guys currently and where do you see the opportunity for that business longer term? Yes, it's a very good question. We like that business. It's a smaller business for us today, but it's very, very stable. It's very high margin. There's quite a small SKU base and we think our product works really well. Almost all of our work shoots are clogs, so they are embedded in that clog performance. It was up double digits in quarter 1 and we see that being kind of continuing to build. It just doesn't move the needle a ton on the top line, but over time we think it will and it's a strong margin contributor. Okay, that's helpful. And then Anne, just a housekeeping question for you. You talked about ASPs being down in the quarter, but that was really led by currency. What would ASPs have been ex the currency impact in the quarter? I think they would have been slightly up. Okay, got it. Thank you, guys. Your next question comes from Sam Poser with Susquehanna. Good morning. Thank you for taking my question. For both Anne Andrew, you talked about the demand for clogs despite the shortage of product. Could how much of that shortage of product may have helped the demand for clogs? And how much of the actual demand do you think you've missed and how much of the demand do you want to actually satisfy as you bring your inventories into better shape? Yes. Okay. There's a lot of that, Sam. So I think, look, we haven't really played the game of trying to figure out how much we miss. Obviously, we know we're getting at once orders and requests for product that we are not able to satisfy in the immediate time frame and we're deferring those some weeks out and in some cases some months out. So we can see business that we would have been able to book that would be is now getting booked in the future. And I think underlying your question is, do you want to satisfy all the demand? I think for a lot of our sort of core colors and we're seeing, you can see it on our website, you can see the shortages are in black and white and a number of core colors that I think you frankly want to be able to satisfy that demand. Our approach to creating demand for clogs essentially using a lot of our collaborations and marketing to create kind of interest in the category, but when it comes to core colors, we really feel like we want to satisfy that demand. And then I mean that's a good transition to my next question. You've done you've had some very strong responses to a number of these or if not almost all of these collaborations you've done recently. The question is, is what are you how are you going to scale that? I mean, clearly, your supply was well below the demand. I guess, do you see opportunities to scale these collaborations, but still leave people wanting for more, so you can go they can become more material to your business? Yes, we do. We see different collaborations as well in different calls. And I think you've seen a number was their intent. You will see others later this year that are much larger in scale and as we move into frankly, we're booking collaborations through 2020 2021 at this stage. So as you look in the future, we have a blend depending on what audience we're trying to reach of smaller scale, PR orientated, brand heat orientated and enticing new customers and on larger scale collaborations that will drive more volume in that collaboration. I would have to say, I think even the small scale collaborations are really impactful in driving just volume to the brand and to the core product. Just a quick follow-up. I mean, let's just take Post Malone. The pairs weren't huge. The pairs sold out. He's got an exceptionally large following. So is I mean and I mean is like such as a post Malone, could that be scaled or when you're are you with whatever you're planning on doing more with, is it more sort of towards your whoever you're partnering with more towards your core what you view as your core Crocs customer? I think, Sal, obviously I'm not anxious to be drawn on this because that's a little bit of the secret sauce and but there are some of these high profile collaborations that can scale. There are some that can't and there are more core orientated collaborations that can scale. So it will be a combination of both. All right. Thanks so much and continued success. Thanks, Tim. Your next question comes from Steve Marotta with C. L. King and Associates. Good morning, Andrew, Anne and Marisa. Andrew, you mentioned in Asia, it's the market with the largest growth opportunity. Though it was the weakest DTC comp in the Q1. Could you talk a little bit about that dislocation within the period and when you would expect that dynamic to reverse? Yes. I think as we look at Asia, we strongly believe it's a market with the greatest long term growth potential. Obviously, we're direct in a number of countries that have very large populations. We're indirect in other countries where we use distributors that again have large and growing populations and we have the strongest generally GDP growth in that region. We don't break out kind of our results by country, but I can say that a few countries, so Japan, Southeast Asia and India, we're seeing really encouraging results. We see China as our greatest opportunity long term. And you might have noticed in our proxy, we've formed a committee with our Board of Directors to really accelerate growth in China. And that's a place where we're investing in marketing, we're investing in celebs, we're investing in co labs to really recalibrate the market in terms of our merchandising. As we looked at our merchandising strategy in China historically, it wasn't entirely in sync with our global merchandising strategy of clogs and sandals. It was they kind of led with loafers for a long time. So we're recalibrating that. So we're retooling our merchandising strategy in China. So some of our drag on DTC comes from some of that recalibration and that will take us a few quarters to work through. But we're seeing really encouraging signs in some of our core markets. And we think over the long term, Asia will drive the greatest growth for the brand. That's very helpful. If you can comment a little bit on Q1 and Q2 have historically been the seasonally strongest period, but you've also mentioned that obviously there's a resurgence from a youth standpoint and popularity of the brand amongst school age kids, can you talk a little bit about maybe give a sneak peek into this current back to school season, what your order book says and if the Q3 might become significantly more important to you in the near term and this year or next year than it has been historically? Yes. So, yes, we're excited about Q3. I think as a number of you have pointed out, we had a very strong Q3 last year, which was super encouraging. And we've been really pushing really hard to get our supply constraints back in line in time for Q3, because we think that's critically important, especially related to Classic clog in North America. So we don't disclose order book. We haven't done that for many years, but I can say, we're optimistic about Q3 and we're doing a lot of the work associated with allowing us to comp our Q3 performance very nicely. Yes. I think from the overall shape of the business, as Andrew just mentioned, we do expect Q3 to be much more of a material quarter in the past and much more in line with Q1 and Q2. That's very helpful. I'll take the balance of my questions offline. Thanks. Thank you. Your next question comes from Jim Duffy with Stifel. Thank you. Good morning. Hope you guys are doing well. I'm trying to better understand the supply constraints and cog availability limitations. Dollars 6,000,000 upside to the higher end of the guidance for Q1 doesn't seem like a huge disconnect relative to expectations. Was the clog growth rate in the quarter? Was the mix of clog business higher than you expected in 1Q? Yes. So clogs grew 11.5% in Q1. Now obviously that's all clogs, not just the classic, but the classic was also up strongly. And it was pretty strong. I think it was 56 percent of our overall footwear revenues in Q1. What we were able to do, the beat in Q1 was really direct to consumer. So e commerce and retail both in Americas and EMEA had very strong comps even with the Easter shift. And part of that was shifting the consumer into classics that either classics that we weren't constrained on colors. So different colors or different silhouettes altogether from or different styles. So I would say in the direct to consumer business, we were able to do that. Obviously, you can't do that from a wholesale perspective as easily. So that's really where the outperformance came and that's really how the clog showed up in Q1. Got it. And with an eye towards alleviating constraints as you get into that Q3, where do you expect 2Q inventory balances at quarter end? So from a Q2 inventory perspective, I'll just talk about kind of the full year where we think we're at. So we think from an inventory be a little bit more back in stock in Q2. And especially what we're going to do this year is we're going to reshape our inventory a little bit in Q4. We're going to bring in some inventory earlier than what we have in the past in order to be ready for Q1, so we don't run into the same type of issues that we had this year. So you will see a little bit of a heavier inventory balance in Q4. Okay. Shifting gears a little bit, last question. Can you speak to the capital structure strategy in the context of the repurchases and the new authorization? What do you see as target leverage ratio? How do you think about borrowing for utilization of the share repurchase authorization? Is that opportunistic or something you expect to do fairly consistently across the year? Yes. So we're really excited that our Board is very confident in our strategy and our business overall and increased obviously our share repurchase authorization was $500,000,000 it's now $1,000,000,000 which leaves us about $600,000,000 available for future share repurchases. In Q1, as we talked about in our prepared remarks, we repurchased 2,100,000 shares for $53,500,000 at an average cost of $25.07 And we are going to be very opportunistic about it. We have about we have a $300,000,000 revolver, which we increased earlier this year. And Q1 is our highest working capital quarter. So we'll continue to look at our capital structure and we'll continue to invest in where we think we get the best return, whether that's in the business, whether that's buying back shares or paying down debt. Thank you. Thank you. Your next question comes from Erinn Murphy with Piper Jaffray. Great. Thanks for taking my follow-up. I just had one follow-up on the LiteRide business. I'm curious how it's performing generally in Q2 or in the 2nd year. We have seen a little bit more promotional activity there into and out of Easter season both online and as well as on Amazon. So I'm just curious that was planned or kind of what you're seeing generally as that business gets into year 2? Thank you. Yes. We're really thrilled with where the business is in year 2. As we kind of think about Lightride in year 2, we think it'll end up the year double what it was 2018. So 2018 was obviously the launch year, we launched March 1. So we're comping the overall business very well and we see it strengthening through the year. I think the promotional activity you've seen is obviously is largely been around closing out colors. We're kind of moving we continue to refresh in terms of new colors, fashion colors, etcetera. And obviously, we generally close out the old colors to make way for the new. So we're generally we're very pleased with the business and I would say it's mostly non promotional. Okay. Thank you. Thanks. At this time, I look Okay. Sorry, I was going to thank everybody for their continued interest in the company and we're really thrilled with where we are and excited for the future. This concludes today's conference call. You may now disconnect.