Crocs, Inc. (CROX) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Q1 2015 Crocs Incorporated Earnings Conference Call. My name is John. I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Brendon Frey.

Thank you. And thank you, everyone, for joining us today for the Crocs' First Quarter 2015 Earnings Conference Call. Earlier this morning, we announced our first quarter 2015 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward-looking, and accordingly, are subject to the Safe Harbor provisions of the federal securities law. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline. We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section on the company's 2014 report on Form 10-K, filed on March 02, 2015 with the Securities and Exchange Commission. Accordingly, all actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10-K, as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. The company may refer to certain non-GAAP metrics on this call. Explanation of these metrics can be found on the earnings release filed earlier today and on our investor website, once again, at crocs.com. Joining on the call today are Gregg Ribatt, Chief Executive Officer; Andrew Rees, President; and Jeff Lasher, Senior Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I'll now turn the call over to Gregg.

Thank you, Brendon. Good morning, everyone, and thank you for joining us today. This morning, we announced our first quarter 2015 financial results. Revenues were $262.2 million, in line with expectations and adjusted net income was $8.4 million. Excluding China, store closings and discontinued operations, our business was up slightly to last year on a constant currency basis. As we stated last quarter, we expect to see material progress in China in Q2 based on actions already taken and we are planning for growth in that market beginning in the third quarter. This is a dynamic time at Crocs as we transform our brand and business into one of the leading global casual lifestyle footwear companies in the industry. During the quarter, we continue to work through the internal challenges of the transformation while addressing the external challenges including a strong dollar and the West Coast port delays. Despite these issues, we continued to make great progress on the strategic initiatives we laid out in prior calls including: strengthening the Crocs brand; elevating our product stories; exiting non-core categories and businesses; evolving our international business model to focus on our six most important markets; strengthening our relationships with key wholesale partners; improving our direct-to-consumer capabilities and performance; simplifying our operations and processes; and building a best-in-class team. We are seeing meaningful results from our initial actions thus far. Andrew will walk you through some of the key milestones we are achieving in a few minutes. Having that said, there are four key strategic updates I would like to share with this morning. First, we launched our new marketing campaign (Find Your Fun) on March 30. We feel great about the new campaign and Andrew will share some of the details in a few minutes. Second, on our last call, I shared my excitement around the new style we launched the Freesail, a core molded plug with an updated or more tapered glass. The Freesail which was launched on a limited basis is performing extremely well at retail and is now in the process of being expanded upon both within our direct to consumer channels and throughout our retail partners. Today, I want to mention another new shoe we recently launched called the Sloane, a molded sandal on a low edge that was introduced a few weeks ago on a very limited basis and is also performing extremely well at retail. These two shoes demonstrate our ability to take our core molded category, reinvent products with updated styling and connect deeply with consumers evolving taste and style needs. We are very excited about the broader opportunities these shoes represent and our ability to continue to evolve a core molded footwear business in the future. Third, this past quarter we achieved a major milestone with our SAP implementation. Our ERP system went live on January 01 and we successfully closed our books on SAP this quarter. While not without some challenges and there is still more work to be done, conversion to the new system had no significant impact on our business for the quarter. Going forward, it will provide us better control of operations, faster global data aggregation, improved information for decision making and help us become more profitable across the globe. And finally, this morning, we announced externally a series of senior level organizational changes that were implemented earlier this week. As we shared in our release, Scott Crutchfield, Crocs' Chief Operating Officer, is leaving the company. Scott has played a pivotal role at Crocs' helping build the company into $1 billion plus global business over the past nine years and has built a strong team beneath him. We thank Scott for his lasting contributions and wish him the best. We also shared that Chap Kistler; Crocs’ Senior Vice President of Global Supply Chain is leaving the company. We wish Chap the best as well. As part of the revamped work structure, Phil Blake is joining Crocs as Senior Vice President of Global Sourcing. Phil previously served as the Vice President of Sourcing at Clarks Americas, as the Senior Vice President of Sourcing at Collective Brands Performance & Lifestyle Group, where he and I worked together and as General Manager of Asia Supply Chain at Timberland. Dennis Sheldon, an 8-year veteran of Crocs is transitioning to a new role Senior Vice President of Global Distribution & Logistics. Dennis led our successful ERP implementation. Before leading our SAP effort, Dennis served as Crocs Vice President of Distribution & Logistics. Phil, Dennis, and Steve Katsirubas, Crocs Chief Information Officer, will now all directly report to me. We believe these changes elevate our functional capabilities, streamline decision-making, and improve communications and linkages both within Crocs and between our customers and our suppliers. In summary, we are making great progress across a broad range of strategic fronts. We did continue to experience several challenges in the first quarter as we discussed in our last call, including our China business, the slowdown from the West Coast ports, and the strong U.S. dollar. Nonetheless, much of the groundwork to transform Crocs and reposition the business to the future is well underway. I remain confident in our strategy, our team, and our ability to transform the Crocs brand and business to reach its full potential. And now, Andrew, will highlight some of the key details of our turnaround efforts.

Thank you, Gregg. We previously outlined our strategy for repositioning Crocs, which is well underway. Let me reiterate the major initiatives, the progress we have made, and some of our plans going forward. Elevating the brand. We launched our new global campaign #FindYourFun, which build on our iconic Crocs silhouette. The campaign is designed to reignite excitement and relevance of Crocs, celebrate our core plug while inviting consumers to move into appropriate adjacent categories and give consumers, who are neutral and have attitudes towards Crocs, permission to engage with us. The campaign launched on March 30 supported by overall increase in marketing spend of $10 million in Q2 compared to last year and a 50% increase in working media spend directed at the end consumer, achieved through a reallocation of funds from our nonworking marketing spend. Today, you can see this campaign in our digital marketing and social media efforts and in out-of-home markets in major market across the United States. A new TV campaign in the U.S. began earlier this week. Focusing on our core product, having exited non-core businesses, Crocs Golf, Ocean Minded, apparel and accessories, we are focused on core-molded and casual lifestyle footwear. While these businesses represented $4 million in sales in Q1 of last year, we are now leaner and a more focused organization. We recently finalized our Spring/Summer 2016 line and I’m tremendously excited by the innovation and styling Michelle Poole and her team have brought to the table. We have just completed a series of top-to-top meetings with some of our largest customers, who are very supportive of our strategic marketing and product direction, in particular, expanding our Spring/Summer season from six months to eight months with full product flows and our infusion of style and the pace for our innovation. Focusing on six key markets. We are focusing our efforts in investments on our six largest markets, which represent roughly 70% of our overall revenues and profits – the U.S., Japan, China, Korea, Germany, and the United Kingdom. We continue to address our challenges in China. We are focused on driving sales per door and profitability to our business. We have closed stores, cleaned up distribution, and moved through excess inventory. During the quarter, we took back the business from our distributor in Wuhan and will operate that business on an interim basis as we identify a suitable business partner. Consistent with what we’ve shared in our last call, we saw a $25 million decline in Q1 in sales in China. The declines will moderate significantly in Q2 and we expect to return to growth in Q3. I just returned from hosting our first global distributor conference in Dubai. Our partners from around the globe were enthusiastic in their response to the plans we shared with a strategic transformation underway, building strong relationships with our wholesale accounts. As I mentioned, we have recently met with a number of major wholesale accounts across the globe to share our strategy and pre-align our initial Spring/Summer 16 product. We believe effective pre-aligns are critical to gathering feedback and strengthening relationships. We were encouraged by the positive responses and support we have received thus far, improving our direct-to-consumer capabilities and performance. We continue to trend our direct-to-consumer operations eliminating underperforming or inefficient stores. We continue to work on key initiatives to improve the performance of our stores, including new retail management systems, closer management of the inventory and in-stock and creation of continuous flow of new merchandize in stores to keep them fresh and drive consumer return with it. We are confident that when fully implemented these initiatives will lead to success in our retail operations. Centralizing and stream-lining operations while building a best in class team. We continue to stream the business in the last quarter as we completed a restructuring of our Asian, regional and country level overheads, resulting in a reduction of a 120 staff and providing $8 million in annualized savings. This is an addition to our assets in 2014, which are now yielding in excess of $10 million in annual SG&A savings. As I said earlier, we are redeploying the funds towards marketing, specifically consumer facing working media. While there is still much to be done in the balance of the year, I am pleased with the progress the team has made thus far and confident in our ability to execute the balance of our plans. Now, I will turn it over to Jeff to go into details of our performance.

Thank you, Andrew. Today, I will cover our first quarter 2015 results and then briefly review the expectations for second quarter, including the impact from changes in the foreign currency. Revenue in the first quarter was in line with our expectations at $262 million, down 8% from a year-ago on a constant currency basis. The revenue decrease in the quarter was due to lower China wholesale revenue, down $25 million as expected. The currency impact of the stronger U.S. dollar of $25 million, slightly more than expected, due to the further 11% decline in the euro during the quarter. The closure of retail stores, which impacted revenue $6 million compared to last year and a $4 million impact from discontinued products and segments. We saw some impact from the West Coast port delays, our teams had prepared for this situation and worked very hard to mitigate the delays and flow of products into our Ontario distribution center. Having said that, we did see some product less than $10 million slip from Q1 into Q2. All the revenue results that we will cover today are recorded in constant change versus prior year. Americas revenue was $106 million for the quarter, down 8%, caused mostly by continuation of the slowdown in the West Coast ports and strategic shift to more profitable product lines. Retail sales in the Americas decline 5% for the quarter, while e-commerce declined 3%, both of our direct-to-consumer segments were impacted by the strategic decision to exit direct business in Brazil. Same store sales at retail in the U.S. were down 6% for the quarter. In Europe, revenues were $56 million for the quarter, up 12% year-over-year with wholesale growth of 18% more than offsetting close retail stores and local language e-commerce sites. Same store sales were strong in Russia following the extreme drop in the ruble. Non-Russian same store sales were flat in the region. Combined same store sales were up 6% for the quarter. Asia revenues for the quarter were $100 million, down 19% versus prior year. With the exception of China, our Asia wholesale business was flat to prior year. We forecast China revenue declines of approximately $5 million in Q2 before growing in the second half. We saw exceptionally strong growth in e-commerce volume in China as that volume doubled over prior year. However, the shift to e-commerce in the market impacted same store sales in China and low visitor traffic to Hong Kong pressured same store sales in that market. Overall, Asia same store sales were down 8%. In addition, strategic decision to close many retail sites including all locations in Taiwan resulted in lower retail revenue of 17% overall. But we anticipate that lower fixed cost will improve profitability in the region during the seasonally low volume quarters. While no longer a separate region for the company, Japan revenues were $26 million for the quarter, flat with prior year. Retail sales were down as the market was up against tough comparisons with last year as the Japanese consumer in 2014 prepared for an increase in the consumption tax. Wholesale revenue in the quarter was $20 million, up slightly on a constant currency basis. We sold 14.8 million pairs in the quarter, a slight reduction from prior year. The average selling price of our footwear in the first quarter was $17.45, a 14% reduction from the prior year, primarily the result of currency. Turning to our retail operations, during the first quarter, we reduced our global store count by 27 stores as we closed 30 stores and opened just 3. We ended the year with 558 locations, down 65 from the same period last year. The stores that we closed in 2014 generated $6 million of revenue in Q1 of 2014. As discussed, in total, we plan on closing 65 locations in 2015, while only opening 30. Gross margin for the quarter was 48.6%, down 140 basis points from prior year, more than explained by currency as constant currency margins improved 100 basis points from favorable product mix. We expect a higher impact to our gross margins from currency in Q2 as we are up against the peak euro valuation of 2014 in the quarter. During the quarter, we have made significant progress on our strategic objectives announced in 2014. The major onetime items associated with these changes include: we reduced salary employment in the quarter by 120 positions through job eliminations primarily in Asia. This resulted in onetime expenses of $3 million and $8 million of annualized savings; cost associated with the development of launch for our new SAP system that Gregg discussed earlier which totaled $6 million in the quarter; the cost of closing retail stores total $2 million. Excluding these items, core selling and administrative structure expenses were $119 million, down from $131 million in the prior year, including a $6 million reduction in direct channel SG&A. We will be increasing our marketing spend in the second quarter and plan on spending $10 million over prior year in Q2. Including our marketing investments, we expect our operating SG&A to be flat in Q2 or down slightly versus prior year in Q3 and Q4. Turning to the balance sheet at the end of the quarter, global cash ended the quarter at $181 million. We used $20 million of cash to repurchase 1.7 million shares in the quarter. Inventory at the end of the quarter was $185 million, down from Q1 of 2014 ending inventory of $192 million. Two final notes on the financials, first, adjusted net income attributable to common stockholders was $4.7 million after preferred share dividends and equivalents of $3.5 million. Second, the weighted average share count used to calculate the loss per share attributable to common stockholders disclosed in the earnings release was $77.8 million. As a reminder, basic and diluted share counts are the same in the quarter that generated a net loss. As we discussed on the last call, for 2015 while we continue to make great progress in our strategic initiatives, there are external factors that will impact our global results. About 70% of our expense structure is denominated in U.S. dollars while only 35% of revenue is generated in U.S. dollars. We expect the revenue impact to currency in the second quarter to be about 8% at today’s rates or approximately $30 million. As a reminder, at this time last year, the Euro stood at approximately $1.39 compared with $1.10 today. Revenue in Q2 will be impacted by several strategic decisions we have made to improve the long term financial performance of the business. First, our retail footprint is lower by 65 stores. We plan on closing an additional 35 stores. This will reduce second quarter revenue by $13 million. We expect the net impact of store closings to be approximately $10 million in the back half of the year. Second, we exited several non-core product lines last year and this will reduce future revenue by $7 million. Third, as we mentioned, we anticipate that our China business will be down in second quarter approximately $5 million. We expect second quarter revenue to be between $340 million and $350 million down from last year on an as-reported basis, but showing modest growth in core revenue from continuing business lines on a constant currency basis. We continue to be very confident in our future and expect to show material progress in our results in coming quarters. Now, I will turn it back to Gregg for closing comments.

Thanks, Jeff. As I mentioned at the opening of the call, we are making great progress on the transformation of Crocs. We are nine months into an 18-month to 24-month process and our transformation is progressing well, it's on track, and it will set us up from long-term sustained success. Despite some headwinds in the business from currency to China to the West Coast ports, we are making great progress on focusing the business on core products and markets, elevating our product and marketing stories, and evolving our cost structure organization and talent. Over the course of 2015, particularly in the back half of the year, we expect to see some of the benefits of this work, while the real benefit of much of this work will be seen during the Spring/Summer 2016 season. I'm confident in the direction in which we're headed and our ability to execute successfully against our plans. Special thanks to the Crocs team across the globe for all of their hard work, passion, and commitment, to unlock the full potential of the Crocs brand and build one of the leading global casual lifestyle footwear companies in the industry. Now, operator, we will open the call up for questions.

Thank you. And we will now begin the question-and-answer session. [Operator instructions] And from Buckingham Research we have Scott Krasik online. Please go ahead.

Thanks. Hi, everyone. Good morning. Two questions on the outlook. First, I think, last conference call, you said that you believe you could achieve reported revenue growth by either the back half of the year or by fourth quarter. Just wondering how you view that, now your updated thoughts there? And then, if anything was a little bit disappointing this quarter, maybe it was the domestic revenue growth, the decline in domestic sales, can you talk a little bit about how your trends are looking now as the weather has more normalized both your wholesale sell-through trends as well as your own retail trends? Thanks.

Sure. Good morning, Scott. So, look, I guess, the way I would start is, I'm very pleased with the progress we’ve made in the transformation of Crocs so far. Last July, we shared our strategy to transform the business, including strengthening the Crocs brand, elevating product stories, exiting non-core categories, evolving our international business, strengthening relationships with key partners, improving direct consumer capabilities, simplifying our operations, and building the best-in-class team. And as you know and as everyone knows, the transformation to any of the brand or business in the industry is an 18-month to 24-month process. And over the last 9 months, we’ve accomplished a lot. We’ve narrowed our business focus, we’ve focused on our top markets, we’ve closed stores and shutdown websites, we’ve streamlined the business, centralized key functions such as product and marketing to create a consistent global brand, we’ve reduced headcount across regions and within corporate, we’ve implemented SAP, and we've added some great talent, talent with great industry and functional experience. So, a lot of the groundwork has been laid in terms of transforming the business and positioning us for the future. That said, our consumer facing initiatives are just starting to hit now. Our new marketing campaign just launched in the last few weeks. The impact of our product team is only just starting to appear in a very small way. Their full impact will be really seen beginning in the fourth quarter when we start to ship Spring/Summer 2016. Having said that, I am super encouraged, but by what I see in the line and by our retailers response so far and I am incredibly excited by the fantastic team we are building. So we feel increasingly good as we look at 2015 as the year progresses and, more importantly, about 2016 as the full impact of our transformation effort comes to fruition. So when we think about the business, we still expect to see some growth in the back half of the year on a constant currency basis. And I think as we hit 2016, we start to feel more and more confident in terms of the future direction where we are heading. I don't know, Andrew, if you want to kind of add anything on that.

Yeah, I mean, I think the only other thing – the second part of your question, Scott, was around the domestic business.

Right.

So, one note, remember that, when we report Americas, it includes Latin America and we've made some strategic shifts in our Brazil business where we moved away from being a direct participant in that market through distributors. Obviously, that has a net impact on our revenues, while the effects can be either equivalent. And I have to say, the retail quarter – the first retail quarter was a very challenging quarter, I think, for everybody with a lot of weather impacts and our wholesale business that we talked about in our prepared remarks was impacted by the port delay and some push out of volumes. So, I think, we feel like we are on track and we think the Americas will strengthen substantially as we go through the year.

And trends are getting better as the weather normalizes?

Trends are getting substantially better as the weather normalizes, absolutely.

Okay, thanks and good luck.

Thank you.

Thank you, Scott.

From Goldman Sachs, we have Taposh Bari online. Please go ahead.

Thanks. Good morning. Gregg, you spoke about the meetings you had with your big wholesale accounts and how they were supportive of your strategy. I was hoping you can elaborate more on what the feedback has been, and if you can elaborate more as far as what the order book looks like, how they are responding, any color would be great?

Yeah, it's interesting. We spent a lot of time with accounts over the last few weeks and obviously we've done that kind of worldwide. And as part of that process, we share the strategic direction, which we are heading. We've kind of unveiled some of our broader brand strategy changes. We've shared our marketing initiatives and prelaunch [ph] Spring 2016. And I’d say, as I just mentioned, while we are still in the early stages of all the consumer facing components of our strategy, in terms of our marketing, TV actually hit earlier this week, and product, we've only been able to hit a few key styles. The updates to our product and what we’ve shared has been extremely positive. When we walk through how we are engaging the consumer from a marketing perspective and how we are evolving our product range both within our core molded products and how we are evolving some of our more category lifestyle product, the reaction has been extremely positive and they buy into kind of the direction we are taking the brand and the business and are fully supportive. So, that gives us confidence. When you combine that with early [ph] reads (00:03:01) we have on small programs, like the preset in the [indiscernible] (00:03:05) where we have taken traditional molded product and we have updated and elevated the styling. And while these are small programs and we are just starting to expand them now, the performance of those products are great early indicators that we are really heading in the right direction. So we feel confident in terms of those early indicators. I don't know, Andrew, if you want to…?

The only thing I'd add, Taposh, is I just returned from our distributor conference. So as you kind of think about our important customer base, we have major customers in the U.S., we also have very significant distributors on a global basis. And I would say, their reaction was similar and that they see the product that we are putting forth has extremely commercial, very salable, and obviously as we push stronger – more strongly into molded products and balance that with a broader range of casual lifestyle, obviously, the margin picture is also extremely attractive for them. So, I think, very, very supportive, they see very, very commercial focus to the business and they see that it’s a business that they can really back and support.

A quick follow-up. How comfortable and how much of the ability do you have in for the inventory situation and retail, especially – maybe it’s international markets as you obviously transitioned from legacy into some of the new product?

So, that's something that we’ve talked about before. We've really been focusing [indiscernible] really focusing. And we – our mantra is moving from a culture which is more about selling to a culture that is more inclusive, it's about sell-through for retail partners and for our distributor partners. So we have increasing visibility to that as we get more and more metrics around that. So that's been a real strategy we’ve been pursuing and, I would say, it's improving. Absolutely, last year, we saw some retailers and some distributors with inventories [indiscernible] then we were like to have seen and we’ve really spent the last nine months working that down substantially.

And because of that the nature of our conversations with all of our partners worldwide is changing. So, it’s about driving sustained growth worldwide. It’s about developing deeper consumer connections, it’s about building out product and marketing initiatives that are long term sustainable programs that enable us to grow the business in a much more strategic way than we have in the past. So, the nature of all those conversations are changing and are under revolving and what we see is our partners around the worlds reaction has been very, very strong.

Great to hear. Good luck.

Thank you.

Thank you.

From Stifel we have Jim Duffy online, please go ahead.

Thanks good morning. Couple of questions. First, the constant currency improvement in the gross margins, I find very encouraging, particularly given the geographic mix is that principally a function of the SKU reduction in concentration of volumes in better margin styles and is there any way to characterize where you stand in that transition?

Yeah, thanks Jim. I think when we look at the margins for Q1, we saw 100 basis point improvement in constant currency margins, which we were pretty happy with and shows really the key drivers that we are focused on as a company between the merchandising mix and we discontinued some products that weren’t as high margin products for us and then the impact of China kind of coming to an end here for the second half of the year will also be a positive. And then finally, in for the second half of the year, which leads us to have the dataset to forecast that our margins are going to get better we are bringing in Spring/Summer 16 line in as early as November. So, really looking forward to that with our new product coming out for Spring/Summer 16. In the near term, Q2 we should see about that same 100 basis point improvement driven by merchandising mix and currency impact in Q2 margins will be about 350 basis points of a drag because of the peak evaluation of the euro last year.

Okay and then as you look out to the Spring 16 line, is there opportunity to build on that just given anticipated shift in product mix?

Yes Jim, so, hey it’s Andrew here. I think that’s right. As we look at our margin mix going forward, looking at our product mix going forward. The greater emphasis unmolded gives us definitely some stronger support in our margin. So, we see the margins building into 2016 and beyond.

And we are going to have a more stable business as we’ve kind of worked through lot of the business transformation over the last year. So, absolutely.

Great. And then Jeff. The ERP expense expectations as the year progresses, and then can you talk about the depreciation run rate at deployment?

Yeah. So, our depreciation in SAP went live this quarter. So, we do anticipate a year-over-year increase in our SAP expense that comes through on our depreciation and amortization line of about 10 million and you will see that throughout the year and that offsets some other depreciation. So, in general we expect deprecation to be about flat to last year to around $37 million. We expect to see a little bit lower CapEx in that $37 million number, but as far as the SAP specific expenses going forward, we will have a little bit residual in Q2 and then that will fade out throughout the year. So, I think the good news the headline is the team worked really hard on the global installation of SAP and we’re really proud of that team.

Great. And then lastly, despite the stock being lower during the quarter, the pace of share repurchases moderated pretty meaningfully versus the fourth quarter, what was the rationale behind that?

I think our feedback on that is probably consistent with the last quarter, which was, we’ve tried to put in place a very declined approach, I think as we reported, we’ve repurchased around $165 million worth of stock since the Blackstone investment. In the quarter, we brought back 1.7 million shares or $20 million of stock and we will continue to be patient and methodical, you know going forward we try to maintain a disciplined approach which will continue going forward.

Okay, thanks for that guys.

Thank you.

From Wunderlich we have Danielle McCoy online, please go ahead.

Good morning. Thanks for taking my question, I was wondering if you could just give us a little bit more detail on the West Coast port situation, a little bit more color on how you are seeing shipments today versus the beginning of the quarter, any cancellations at wholesale accounts and how much of the inventory decline was attributed to delay in shipments. Thank you.

Perfect, Danielle. So, yes, I think it was a very challenging quarter given the West Coast port situation. We saw at the peak of the quarter and towards the end of the quarter three or four week delays in terms of product flowing through the port to our warehouse. And as we reported in our remarks, we feel like we slipped to between $5 million and $10 million of potential Q1 revenue for North America wholesale from Q1 to Q2. I think a party of question associated with that was, do we expect to book that revenue or is there some cancellations. We feel like about half of that were potentially cancelled and the rest will carry forward. In terms of the impact today, it’s improving rapidly and the work that we’ve done over the last week or two indicates that we are approximately on time with our containers coming out of China arriving into the West Coast. So we feel like the situation has improved dramatically. And I think also another party of question was the impact on inventories. We don’t feel like that had a substantial impact on our energy levels and as you know from prior calls, this has been a strong area of focus in terms of working down our overall inventory levels.

Great. Thank you. And then just one follow up on the store closures. I guess could you just give us a little bit more color on the pace or location of some of the store closures or is it been easier to shut these stores or is it become a little bit more tough given availability of real estate in the market today?

Got it. We reported in Q1 that we’ve closed 30 stores and opened three, a net 27 closings. As we look through the balance of the year, we feel like we’re going to close about 30. That number may pick up a little bit, but we got about 25 openings. The bulk of the closings have been oriented towards Asia where the lease environment is a lot easier in terms of closing stores that we don’t feel like meet our expectations or our strategic focus. I would have to say also the bulk of the openings have also been in Asia where we are strategically opening outlet capacity in key markets to ensure that we can maintain healthy inventories in all cases. If I was to step back up to the very high level, as you know relative to the lease environments, the hardest place is to close stores is in Europe and that’s a place where over the next year or two we feel like we’ve got some stores that don’t need financial benchmarks or strategic intent and we’ll close a small number of stores going forward.

Great. Thank you. Good luck guys.

Thank you.

Thank you.

From Sterne Agee, we have Sam Poser online. Please go ahead.

Good morning. Thank you for taking my call [Audio Gap] product and then lastly would you expect more – a year-over-year comparison would you expect better improvement in Q4 than Q3 given that you’re going to be delivering spring early.

Thanks, Sam. I think as we mentioned, there is four key drivers that are going to benefit us in the back half of the year some of which have already started to benefit us, number one being the merchandize mix and number two being the discontinued products that we mentioned. So drop in those two often have been the real driver between 100 basis points improvement in the first half of the year. And then the currency started to lap in Q3 and even more so in Q4, we’ll start to see some of that degradation drift away. And then finally, in the fourth quarter, we will see the spring products being delivered in November which have higher margins than the traditional winter product. So we will get the benefit of that. So and then when we look out into next year, I think the second half of your question was, was really when you look out into next year as Andrew mentioned, we are focusing a lot of our attention on our core molded and injected products, which carry higher margins and allow us to mix our product line and improve our margins slightly because of that.

Okay. And then, I mean, I just have thought – the revenue growth, just think about the revenue growth in the back half of the year, you would expect, let's say, not in actual dollars, but in percent year-over-year, you would percent Q4 to increase more than Q3 because of that early delivery of spring?

Yeah, that's right. It’s is Gregg. Yeah, we would see Q4 being a stronger growth quarter in the back half of the year.

Okay. Thanks, guys. Good luck.

Thanks, Sam.

Thanks, Sam.

From Piper Jaffray, we have Erinn Murphy online. Please go ahead.

[Audio Gap]

[Audio Gap] we were in late February. So, I think, when we look out for the year that's kind of what we're projecting.

Thanks. And then in terms of the marketing campaign, it looks great, we've seen it in some of the international markets thus far. I mean can you just talk about any early responses you’ve seen and then have you’ve kind of think about the revenue items for the back half, let's assume, in terms of the kind of consumer response to the kind of repurposed marketing dollars?

Thanks, Erinn. It's Andrew. Yeah, I mean, I think, so far we are encouraged, right. So in the very short term, we are monitoring the impact on our e-com traffic, on our social media interactions, and a lot of our in-store traffic. And I think we have seen some pointed and very clear improvement in terms of traffic in all those environments and interactivity with the brands. That's extremely encouraging. The other impact of the marketing is the confidence that it provides your wholesale accounts and their ability to buy into product for future seasons and we’ve definitely seen that and heard that from our U.S. wholesales accounts as well as our international distributors. So it's providing a great sense of confidence and support from those environments. As we look forward into the back half of the year, which I think was another part of your question, how do we anticipate that impact, we think that will provide some tailwinds on some positives indicators in the back half of the year. So we are encouraged. I think we've largely built that into our forecast and how we think about it.

Great. So you see some steady progress. And then just last operating margin target kind of 10% to 12%. So kind of thinking about that longer-term in fact and so how you're thinking about the business over the next two years to three years?

Yeah, I think our long-term operating margin goal remains the same. And I think just building on the previous question, part of that is our ongoing commitment to marketing and continue to invest back into the business going forward. Obviously, when we look at our kind of longer-term range plan, near-term results have been impacted by the higher U.S. dollar, but we are confident we can improve our profitability and achieve those longer-term objectives and gross margin in the low-50s and operating margins in the 10% to 12% range in the intermediate future.

Got it. Great. Thank you, guys. Best of luck.

Thank you.

Thanks, Erinn.

From us CL King & Associates, we have Steve Marotta online. Please go ahead.

Good morning, everybody. Gregg, earlier in the call, you called out two new styles, which are working pretty well during the Spring season. Conceiving that fall/winter of 2015, it will be seasonally slower of course than Spring/Summer. Are there any new styles, which could ultimately improved to be unit drivers in the back half of this year?

So, thanks. A couple of things, I would say. So, first of all, we are excited about a number of programs we have coming into the fall. We've got an updated [indiscernible] that we got great reaction too, we have a kids shoe program called the [ph] Bump It and then we got a Star Wars program that we think is going to be fantastic and obviously that's going to be a big driver of business in the fall. And then we have some of updated line products, the presale in womens life, [ph] Amanda. So we have plenty of products to drive the fall business that we feel good about. In addition to that, we are very excited about bringing some of our spring summer 2016 line in early and retailers or partners reaction to that has been extremely positive. So in that November, December timeframe we will start to deliver early run spring 2016 to the one at retailers to the right geographies, and that’s going to be a big driver of business as Geoff mentioned earlier in the back half of the year.

And that leads me right to my follow-up, so some of the spring styles will be initially shipping in that November to December timeframe. Will they be hitting the shelves basically at the time? I assume there are more skewed to warm weather markets. Can you talk a little bit about when they’re going to hit the shelves? Is it really going to be during the holiday season?

Yes, Steve. So our November 15 delivery date is intended to be on flow to December 01, right. So that’s the first period. And what I would say in terms of when you will see them on floor, all of our big U.S. wholesale accounts all have a significant number of warm weather doors whether they will be in the southern United States or outside the country. So that particularly excited and carry basically spring summer product all year round in those stores. So they are excited to have us on the floor in that period. So, yes you will see them, but it is generally in selected stores. It will be the same for our own stores. We will skew that delivery towards our warm weather doors and none of them are stronger representation. But even some of our northern doors will have some representation of that spring summer product. The third thing I would say having just got back for a meeting with our distributors, many of our big distributors are in Southeast Asia and other climate where essentially warm all year round. So this is a tremendous boost to that business.

And obviously these approaches our big changes for Crocs and so - as we’ve spent time with our retailers and our partners across the globe, they make a ton of benefits for their businesses. So we expect to have a big impact from that and we will flow newness throughout the season. This is not just an early delivery, this is part of a broader strategic approach to flowing more new product throughout the entire season in multiple deliveries.

That’s very helpful. Thank you.

Thank you.

From Robert W. Baird, we have Jonathan Komp online. Please go ahead.

Thank you very much. Gregg, if I can make be just ask a bigger picture question on the organizational changes you announced this week and this morning. Maybe first just at the executive level, do you think the entire team currently there in place is kind of the team that is needed or there any other enhancements that you see looking out. And then below the executive level more across the structure, do you see anymore restructuring that is needed or you pretty much done there as well.

Look what I would say is, we feel great about our leadership team and how we are structured. We’ve made a lot of change over the last six months to nine months, both structurally and adding talent. We have been fortunate to add some great talent, great talent that has functional experienced great talent that has industry experience in the last week. We’ve actually had a number of new senior leaders joining the company including David Thomson, who is leading our Asia organization, and Phil Blake is our new SVP of Global Sourcing. As we look at structure, as we look at the organization, we look at both structural changes and how we are organized to support the business. And so we really designed our organizational structure to better position us for the future to support our border strategic objectives. We also look at making sure we’ve got the right specific functional capabilities and some of the changes we made adding Phil into his role give us more experience in terms of Global Sourcing expertise in footwear specifically. Likewise, David Thomson add similar capabilities in Asia. So we feel very good about our structure and the folks that we have in the key roles and we feel we are very well positioned for the future.

Great. Thanks. That’s helpful. And then maybe Jeff, just more of a clarification, sorry if I missed this, but on the gross margin performance in the quarter and more specifically the underlying product margin improvement, did you comment on how that trended versus your expectation?

I think that the 100 basis point improvement that we saw associated with the merchandising and mix of our product line was in line with our expectations. I think the only difference that we would have from where we were in February is the currency impact in Q2 will be a little bit more because the currency rates have trended down. We are pleased to see it kind of moving back the other way, but it is still below where we were in February.

Got it. Okay, thank you very much.

And we have a follow-up from Sam Poser, please go ahead.

You talked about the change in the leadership structure, as well as you mentioned how you are becoming more consumer and I guess more customer centric, can you give us a little more color on sort of where you were, where you are going with that and the people even on the manufacturing side, are they from that more customer centric focus, I guess is the question.

Thanks Sam. We’ve got great partners around the world in terms of the manufacturing side. We’ve got some of the best manufacturing partners that there are in the business. So, we feel very good about how we are positioned from a relationship standpoint and the longstanding relationships we have with our manufacturing partners. I think we are going to look at evolving some of our supply chain and adding, you know with the addition of Phil, we feel that we just add some great experience in the future. The other benefit that we’ve kind of focused on is we’ve evolved the org structure so that we now have an SVP of global sourcing and SVP of distribution and logistics, which is Dennis Sheldon, who is an 8-year company veteran, but who has deep experience in the global operations kind of arena and they direct reports to me now. And I think that also is the right structure for our brand and our business at this point and really enable us to be far more customer centric and evolve some of our - get closer to our customer needs than we may have in the past.

Alright and then just lastly, I mean you’ve - a lot of people there’s been quite a few departures from people that have been there a long time, there is still a couple of other people left at very high levels that are back from the very beginning, could you make any comments about how the company, the board and everything else is thinking about that in a general sense, without naming any names.

We feel great about the team we have and we are extremely appreciative of every one of their contributions.

Thank you.

Thank you.

We have no further questions at this time.

So, just to close we are very excited about the transfer. The ongoing transformation that’s going on across and I just want to take a moment and thank the Crocs team worldwide for all their fantastic contributions as we continue to evolve our business unlock the full potential of the Crocs brand and build one of the leading casual footwear companies in the industry. Thank you everyone.

Thank you for joining the call.

Ladies and gentlemen this concludes today’s conference, thank you for joining. You may now disconnect.