Welcome to the Fourth Quarter 2016 Crocs Incorporated Earnings Conference Call. My name is Elaine and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Marisa Jacobs, Senior Director of Investor Relations. Ms. Jacobs, you may begin.

Good morning, everyone, and thank you for joining us today for the Crocs’ fourth quarter 2016 earnings call. I’m Marisa Jacobs and I’d like to start off this morning by introducing myself. I recently joined Crocs as the Senior Director of Investor Relations. I began my career as a securities lawyer before transitioning into investor relations and corporate communications. Most recently, I led the Investor Relations function at Express, the specialty parallel and accessory retailer. Since joining Crocs, I moved to Boulder and now fully immersed in the business and getting up to speed as quickly as possible. I’m delighted to be here and look forward to speaking with you shortly and working with you together in the months and years ahead. Earlier this morning, we announced our fourth quarter and fiscal year results. And a copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some of the information provided on this call will be forward-looking and accordingly, is 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, prospects and our product pipeline. We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the Company’s annual report on Form 10-K. 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 in the earnings release filed earlier today and on our investor website, located at crocs.com. Joining us on the call today are Gregg Ribatt, Chief Executive Officer; Andrew Rees, President; and Carrie Teffner, Executive 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, Marisa, and good morning, everyone. Please join me in welcoming Marisa to Crocs. We are delighted to have her on the team. This morning, we announced our fourth quarter and full year 2016 results and introduced guidance for the first quarter and full year of 2017. We also made some announcements that relate to the ongoing transformation of Crocs as we continue on the path towards sustained, profitable growth. I want to spend a bulk of my time talking about our ongoing transformation and Andrew and Carrie will speak to you in greater detail about our 2016 results and our 2017 guidance. Looking back on 2016, the year can be viewed from two perspectives, operational and financial. From an operation perspective, it was a successful year. We continued to reshape Crocs into a company that functions more efficiently and effectively, and we’re in a far better place now than two years ago. And while the operational work is critical, it is not yet, and I emphasize yet, translating into the financial gains we continue to believe are achievable. As some of you know, our efforts to reshape Crocs actually began more than two years ago when Andrew joined the Company as President. At that time, a strategic roadmap to unlock the full potential of the Crocs brand and business was put in place. Over the last two plus years, we’ve made significant progress with respect to our team and organizational structure; product; marketing; sourcing and distribution; inventory management; and sales channel capabilities. Let me briefly touch on each of these beginning first with our team and organizational structure. Over the past two years, we upgraded the talent in the organization with individuals possessing deep industry experience and essential skill sets across each of our regions and functions. The…

Good morning, everyone. I’d like to begin by thanking Gregg for the strong leadership he has provided to this organization. The Company has benefited from his footwear expertise, and he has inspired people all across the organization with his passion for this business and his vision for reenergizing the Company and the brand. On a personal note, I want to thank him for serving as a mentor during the time we have worked together. His guidance has been invaluable and I know I can count on his ongoing advice and support. As we focus on our business, we are all aware of the macro environment is clearly challenging. It is our job, whatever the circumstances, to grow shareholder value. Our focus in 2017 is to capitalize on the talented team we now have in place to continue driving improvements in our products and marketing, leveraging our more stable operating platform to create further efficiencies, and improving the profitability of the Company. While the focus of the management team is clearly forward-looking, I do want to begin by briefly looking back to 2016. It was a busy and productive year. As Gregg has already noted, from an operational perspective, we strengthened our organization, both from a people and process standpoint, dramatically improved our on-time and in-full performance, solidified relationships with our key wholesale partners, worked through excess inventory in each channel of our business, reduced the size of our full price retail fleet, exited certain company-owned businesses where we lacked the necessary scale and expertise to justify our presence, and shifted business to more qualified distributors. The last four actions just mentioned, depressed our revenues last year. We took those actions intentionally, however, because they are essential to improving the long-term health and profitability of the business. As it relates specifically…

Thank you, Andrew. Without repeating what Gregg and Andrew have already said, I hope it’s clear that despite a decline in revenues this year, the quality of our revenues and our underlying business has significantly improved, which positions us well going into 2017. Our 2017 guidance incorporates our ongoing commitment to our current strategy, which I believe will drive long-term growth and profitability. I also want to call out some of the financial progress we did make throughout 2016. We drove our gross margins higher; we improved our working capital and inventory management; we strengthened our internal controls; and we identified substantial cost savings opportunities, all of which create momentum. Let me turn now to the fourth quarter of 2016. Revenue in the fourth quarter was $187.4 million, down 10.2% from a year ago. This places us at the top end of our guidance after excluding the impact of currency, which reduced our revenues by $4.4 million. We sold 10 million pairs in the quarter, a 14.1% decrease from the prior year. The average selling price of our footwear in the fourth quarter was $18.59, a 5.3% increase. The increase was realized across all channels since we benefited from both, limiting sales into the discount channel and promotions that were not as deep as the prior year. During the quarter, we opened 21 stores, 16 of which were in Asia and we closed 17 stores, 14 of which were full price stores. We ended quarter with 558 stores, one fewer store as compared to Q4 last year. Turning to our regions, let me note first that given the limited impact of currency in the quarter, the following revenue amounts are as reported. Americas’ revenue was $93.1 million, down 9.3% versus prior year. Wholesale revenue in the Americas was down 9.9%,…

Thanks, Carrie. Throughout 2016, we continued to refine our business, so that we can succeed in the current retail environment. While our financial results did not improve to the degree anticipated when the year began, we did make meaningful, strategic and operational progress, transforming Crocs into a company that can more efficiently and effectively produce product that delights our existing consumers and bring new ones into the brand. This is a means by which we will improve our financial results and in turn, deliver enhanced shareholder value. Let me close by once again expressing my sincere thanks to our incredible associates around the globe whose dedication and hard work is so essential to our Company. Now, operator, we’ll open the call up for questions.

Before we take our first question -- this is Carrier, during my prepared remarks, I referenced an inaccurate number with respect to our cash from operating activities. Just to clarify, we generated $39.7 million of cash from operating activities, and that’s an increase of approximately $30 million over the prior year.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Steve Marotta with C.L. King & Associates.

Good morning, everybody. Carrie, one quick comment, regarding SG&A, you mentioned that it’s expected in the first quarter to be moderately above last year; there is a timing shift in marketing spend. Could you quantify that timing shift and is it from second quarter, I assume? And the other question related specifically to that is, did you say there is about $2 million in non-cash expenditures in there as well?

So, let me take the latter part of the question first. The $2 million of one-time charges are cash charges; so, they’re not non-cash. With respect to the increase in expense in Q1 relative to last year, it is marketing and that is approximately around $4 million incremental over prior year, and it’s really phasing across the quarters. And that’s really just related to the accounting treatment, as we got the celebrity campaign, which is different than what we’ve had in the past years.

Okay, that’s helpful. And the guidance for fiscal 2016 sales, relatively flat, but as you mentioned, you’re deemphasizing the discount channel, there will be a lower store count and the discontinued businesses internationally. What is up in the quarter; what’s -- where is the silver lining in the quarter to offset those that would get you to flat sales?

Yes. So, the relatively flat for the year, so let me take it against the year and then will come back to the quarter if that’s helpful. So, against the year, where we will offset the lower discount sales, the sale of South Africa and Taiwan in the stores, will really be more in the DTC area, primarily in the eCommerce business where we expect to get back to the double digit growth that we saw -- we’ve been seeing up until this year where we had high-single-digits due to some of the challenges in the back half of the year. We do see some growth in wholesale as well, but it will be primarily out of the eCom business. And then, if I go back to the quarter, we’re talking the revenue guidance of $255 million to $265 million. Again, as we think about the quarter, growth in the quarter will primarily be coming from the internet channels. If you think about the discount channel, the South Africa and Taiwan, those really were our wholesale channels; so, those channels will be down because of those areas.

Okay. But Q1 is expected to increase from an eCommerce standpoint?

Overall, we’re expecting it to be relatively -- we don’t guide specifically on the channels and the thing. But, I would say, we do expect to see -- it’s going to be a tough quarter. Look, we’re comping over a 30% comp from Q1 last year, because we’re exiting a lot of EOL products. So, we’re going to expect to be significantly softer than last year, obviously. I would model it more around the flat level from an eCommerce standpoint.

Yes. I think the important element, Steve, is that we’re planning the business conservative from a top-line perspective, but continuing to drive margin improvement.

The next question is from Erinn Murphy with Piper Jaffray.

Great, thanks. Good morning. Just a clarification I guess first on the guidance. How many stores are you closing, particularly in 2017? Sorry if I missed that. You said 25% over two years?

Yes. We said -- which is about 160% over two years; we’re closing a little, probably a little less than half of that in 2017.

Okay. And Carrie, do those store closures come out in any particular quarter, are they towards the end of the year, or how are you thinking about timing?

They’re actually spread throughout the year, Erinn.

Okay. And then, I guess just going back to Steve’s first question. I guess where we’re struggling a little bit is -- obviously closing doors and you talk about discontinuing discount sales as well. It’s just being that you must be seeing something in an order book that gives you that confidence to kind of see revenue acceleration in the back half. Can you maybe speak about whether you’re seeing on the wholesale side from your key partners, particularly North America?

Yes. Erinn, let me take that. So, if we look at wholesale, I mean, obviously the wholesale environment is challenging. But, as you look at our wholesale partners this year versus last year, we believe that coming into the year with cleaner inventories, they were very focused in the back end of the year in terms of working their inventories down; they’ve been cautious with their open-to-buy. And we believe we’re in a much better position relative to that. We’ve got better product, better marketing, we’re lapping a full year of dramatically improved service levels and we have much strong relationships. So, while we think the environment requires us to be continue to be cautious about our forward looking expectations in wholesale, we are seeing some positive signs of light. I think as you look additionally in the quarter, we continue to see good sell-through on our Classic and Crocband products, our core products; they are performing well. Early deliveries of sandals, which started to deliver in late Q4, have been selling well, particularly around some traditional styles, Capri, Sanrah and some new style Swiftwater. So that’s kind of how we see the wholesale environment, particularly in the U.S. And I would say that translates reasonably well to the rest of the world.

Okay. And then, maybe just on gross margin for 2017. You guys have it projected up again; just trying to understand some of the puts and takes. Because I’d imagine, if you close those stores, that’s going to be a negative headwind for gross margin. So, obviously, there is offset, I’m sure with discontinuing some of those discount sales; so, just curious on just the overall puts and takes there.

So, a couple of pieces. So, the discount channel sales, reducing those obviously reduces lower margin product. The other element there is continued focus on the core molded product, which is the highest margin product in our portfolio. And then, the last piece, as we’ve talked about the 2017 guidance, the growth really is going to come from DTC primarily from eCommerce. And so that mix shift is still going to be favorable for us. And so, we’ll get the channel mix benefit from a gross margin standpoint as well. And then, the final piece is again, we had in the first part of this year, a lot -- still had EOL and deep discounts trying to exit excess inventory, primarily more so in Q1 last year than later quarters. But, we don’t have that in this year.

Okay. And then, just last question from me on Asia; you talked about double-digit traffic decline. How does that looks like in a core country between Japan, Korea and China? And it seems I guess China must have decelerated I’d imagine, given that it was up mid-single in the third quarter, trying to understand the regional pieces. Thank you.

Yes. I mean, I think if we look at DTC traffic, it was down across Asia to be honest. It was really a pan-Asian impact. So, it was China, Singapore, Korea, Japan. So, we really saw a dramatic slowdown in traffic. So, I would say, it’s across the region.

Okay. And then China in particular, I mean, kind of how do you think about that going forward, just given you’ve made some progress towards the tail end of the third quarter? It seems like it’s obviously reversed. So, just curious on what you’re expecting in China for 2017.

Yes, good question. So, look, I think as you kind a more broadly about China, the issues that we had with problem distributors as we talked about last quarter, are very much behind us. We’ve moved on from those distributors. And we’ll focus on rebuilding our wholesale base and building quality wholesale growth. It did slip a little bit in Q4, a good part of that was actually driven by the eCommerce performance, and the Bachelor Day holiday or the 11/11 holiday, which didn’t perform as well for us this year that did last year, driven again by higher pricing and less discounting relative to the prior year, and also a little bit of shift in how Alibaba is approaching that particular event. As we look at China in general, we remain really confident that the business is stabilized and it represents an important opportunity for growth in the future.

The next question is from Sam Poser with Susquehanna Financial.

Good morning. Thanks for taking my question. I have a couple of follow-up -- I have a bunch of questions. Number one, the store closures -- is SoHo and the Green Monster on the list?

Yes. So, they are not on the list, Sam. We are actively in discussions and trying to sublet and get out of those stores, but we don’t have anything concrete. And as you know, our leases are long in those environments. And so, they are in the list until we have something concrete to report. But, we’re working on it.

Okay, thank you. And then, Carrie, when we look ahead to 2018 and the SG&A savings that you talked about, I mean, you’re not -- how much of those say -- and I know we’re looking way out, but I mean, are we going -- are you going to have the same situation where the SG&A savings from this redo is going to be offset by marketing spend or is this situation where we’ll see these numbers really start to go down significantly in absolute dollars?

Yes. You will see them go down in absolute dollars in 2018. This year, the reductions in SG&A are being offset by an investment in marketing that we are making this year, as well as the reset of variable compensation. But that flow through rate that Andrew mentioned of about 40%, we expect to see that come through to the bottom-line in 2018 and continue obviously in the 2019; this is not about taking that and reinvesting it further in the business. We expect that those reinvestments in the business will come from other savings.

Well, let me then ask you, even if we’re just talking about -- you’re talking about $495 million of SG&A in 2017. What would the number be, all other things being equal today, in 2018, given what you are planning?

Right. So, we’re talking -- again, using that approximate 40% flow-through rate and we’re assuming between 45 million and 50 million of SG&A reductions; what you would take off of that is basically you would bring through about $15 million to $20 million of that through in SG&A reductions of 2018. And obviously, all things being equal, and things change over time, but that’s the flow-through rate that we’re projecting.

Okay, thank you. And then, what tax rate should we be using on this year coming up?

Yes. So, you should assume around 24% for tax rate. Obviously, this year and a year of loss for tax rate is pretty goofy. But you should assume around 24% for 2017.

And when you talk about moderate in Q1 of -- you talk about moderate growth in SG&A in absolute dollars, what does moderate mean?

Yes. So, basically, what we’re talking about is we’re off a few million due to additional marketing spends. We also had some one-time cost of approximately $2 million in there. So, moderate is around $3 million to $4 million above prior year, nothing significant.

That’s on a GAAP basis or non-GAAP basis…

That is on a GAAP -- that’s on a GAAP basis. We don’t think we have much; I’ve got to look at it, but one-time…

You just said there was a one-time charge, but you said that this year there is a one-time charge…

Yes. In the number, it’s $2 million. And so, we’ve said we’re moderately up with the $2 million in there for this year.

So, basically it will be 4 less 2, give or take on a non-GAAP basis?

Yes.

Okay. Alright. Thank you very much, and Gregg congratulations, Andrew congratulations. Thank you.

Thank you, Sam.

Thanks Sam.

The next question is from Jim Duffy with Stifel.

Thanks. Good morning. Congratulations to you both. Two questions for me; many of mine have been already asked. Can you, Carrie, share 2016 operating loss figure for the stores earmarked for closure?

Yes. So, the stores we’ve closed that we’ve been operating essentially at low to no profit on a four-wall basis.

Okay.

It’s obviously a blend. So, there is some that are losing more money and there is some that are making a tiny bit, but they blend to essentially zero.

Fair enough. And then, Andrew, I am interested in your comments on focusing product efforts on clogs, sandals, flips, slides. What will be deemphasized, and does that have implications to the seasonality of the business?

Great, question. So, it’s really a question of where we’re going to put more emphasis. So, as we’ve looked at where we’re seeing success today and where we’ve seen the most success over the last year, it’s really in the core products and the clogs. We talk a lot about Classic and Crocband there, our two biggest franchises. But there are obviously others as well. And clog represents about 46%, high 40% of the business. The other place we see real traction is with the [technical difficulty] category, both here in the U.S. and overseas. So, those are the areas that we’re going to be focusing the greatest. Obviously, we have a range of products beyond that in terms of casual men shoes, casual women shoes, wedges. We believe that range has been narrowed to the point where it’s productive, it make sense, it adds to our mix, but we won’t be growing that. So, it’s really a question of where we’ll be growing on styles and putting emphasis around where we want incremental distribution.

And then, Carrie, last question is on the FX. Can you speak to just kind of the mechanics of how that flows into the model in 2017? I know, in past years, there has been, of course, the revenue impact, but in some instances a carryover impact on cost of goods and margin.

Yes. So, it’s actually interesting. If we look back at 2016, we basically saw about 1% change in currencies against the U.S. dollar. And the impact in 2016 was a revenue impact of about $3.4 million and a gross margin impact of a little over $2 million or 20 basis points on the rate. So, it’s -- we don’t have the situation we had, if you think back to 2014 2015 with the significant swings in currency rate. So, inventory is pretty steady going into 2017. Assuming the rates kind of stay where they are we feel, our guidance is based on that.

The next question is from Scott Krasik with Buckingham.

Yes. Hey, everyone. Thanks. I have a few questions. Just wondering, last year, your better delivery rate I think was supposed to lead to faster turns and perhaps sales growth without gaining shelf space. So, what happened there, as you were booked for spring 2017? And then, maybe can you comment how your delivery rates are going so far in the spring and will you continue to be up year-over-year?

So, let me the backend of that first, Scott. So, our deliveries, as we think about on-time and in-full, which is how we measure it, we’re in the 90s, across our U.S. portfolio and across our international business. And that compares to a history that unfortunately Crocs enjoyed where most of the customers would tell us that we were kind of the worst in class around deliveries; that made a dramatic improvement. And I think frankly, it did help particularly our U.S. business. So I think that was very successful and obviously an important stepping stone. And I think as you highlighted in your question that would obviously logically lead to potentially faster turns and greater selling. I think what we experienced, as you kind of went through the year is the market shifted and softened. The market shifted dramatically towards athletic and we saw our major wholesale customers cut open-to-buy to casual, shifted to athletic and that hurt us. And the second thing is we saw them trying to lower inventory levels and destock to the extent they could, and so, they were reluctant to place preorders. So, I think that’s how it played out for us in 2016. As we look at 2017 book, we are projecting that cautiously. And the guidance that we’ve giving you incorporates the amount of pre-orders that we have taken and we’re currently in the throes of delivering and what we believe is a cautious and sensible sell-through and reorder rate.

In terms of actually improving upon your on-time?

Yes. I think we’ve got little room to improve upon our on-time actually. I mean, I think most customers would tell us that we’re sort of best in class at this point.

Okay. And then, can you just, Carrie, go through, again obviously bigger gross margin improvement in 4Q, but missed my estimate at least by 450 basis points. So I’m just wondering, what were the sources of the shortfall, again by category?

Sure. You’re right. We’re up 550 basis points and we’ve talked a little bit about that. But, the gap what we’ve provided relative to guidance on the third quarter, half of that was due to the strengthening of the U.S. dollar essentially post the election. And then, we also had -- given the DTC performance, a lower DTC mix, which created a drag on the rate as well. The remaining shortfall was primarily due to an increase in our royalty expense, which is related to some clarification of new and existing royalty agreements and it resulted in a change in our estimates. So, while we’re disappointed with the incremental royalty expense that we took in the fourth quarter, it was the appropriate thing to do. And we feel that now the estimates are complete and accurate there.

Okay. And then, the $150 million that you have in cash on the balance sheet, how much of that is overseas, and do you view that as sort of the minimum level you need to operate with or how would you characterize the cash?

So, as usual, the majority of that is overseas. We’re heading into our peak working capital season now. I think it’s hard to say it’s the minimum capital, because all depends on where the cash actually sits. So, right now, we feel it’s the appropriate level to have on the balance sheet.

Okay. And then, just last, Andrew, I mean you essentially wrote the original turnaround plan a few years in, obviously excluding the currency impacts of the P&L. Sort of what hasn’t gone right relative to your original expectations?

It’s a good question, Scott. So, I think frankly a lot has gone right and we’ve hit since significant headwinds. I think as Gregg talked about at length, we’ve made a lot of progress in stabilizing and cleaning up the business, which has been -- which has taken longer than we originally thought it was going to take. But I think we feel like we’ve made a ton of progress on that. And then, as you kind of think about the headwinds that we ran into, there were significant. Number one is currency. And if you go back all the way to ‘14, late ‘14 early ‘15, the currency impact is huge in terms of the revenue impact and then the flow through of gross margins. Secondly, I think more recently, we’ve really seen the shift to athletic and a little bit of the softening of the market. What’s been interesting about ‘16 has been softening of the market here in the U.S., but frankly globally as well, we’ve seen a really change in terms of traffic patterns in Asia. And I’d say the think the third thing that had a very significant impact was China. I don’t think any of us anticipated the issues that we ran into China. I’m happy to say that we feel that those are behind us at this point. But those are the three big things that we faced. I think if we think about going forward, what we’re going to focus on, which will we think continue to drive the business and improve our financial performance significantly, it’s really quality sales, it’s driving growth and high quality sales and high margin business and not relaying so much on low margin and discount; it’s getting the cost structure further aligned with the SG&A reductions that we’ve announced today and that we’ll execute over the next two years; and it’s continuing to elevate products and marketing to drive demand for our high-margin molded products.

The next question is from Mitch Kummetz with B. Riley.

Yes. Thanks for taking my questions. Carrie, on the stores that you’re closing, could you say what the sales impact is for 2017, either in terms of percentage or actual dollars?

No. We didn’t call it out specifically. But what I did elaborate on was, as we adjusted for the eliminations of discount sales, the sale of Taiwan and South Africa as well as the impact with store closures, we’d actually be up mid-single digits in the bulk; that actually is related with store closures.

Right. Well, so, what piece of that is the store closures? I guess that’s what I’m trying to get at. Because that seems like it’s one component of that call it mid-single digit delta between the two. But, how much of that is actual store closures?

I would say the majority of it is.

Okay. And is that an impact that we would expect then to kind of continue over the next couple of years as you continue to close stores?

Yes. Basically over 2017 and 2018, you would expect to see that continue, but then, obviously, being offset as we continue to improve the business in wholesale as well as on the DTC side of the business, primarily in eCom.

And I know that you guys aren’t necessarily giving 2019 guidance or anything. But is there sort of a sales assumption that’s out there as well? I mean obviously you got the SG&A coming down. You talked about kind of 50% gross margin. I mean, sales are flat this year. There is going to be some pressure from stores next year. Are you assuming higher sales in 2019 than 2016? I don’t know if that’s a fair question.

It’s not. What I would say is, look, right now what we’re focused on in 2017 is quality revenue and driving profitability through driving up gross margins and reducing our SG&A. That’s going to be our focus in 2018; we are going to take a cautious line on revenue. And I think that’s the specifically responsible thing to do and make sure we’re managing our bottom line to drive toward that 10% EBIT margin.

Okay. You mentioned that molded product is your most profitable; can you say what percent of your sales these days is molded? And is that gross margin rate on that molded product still kind of like in that -- I think you used to say, it was maybe in the high 50s. Is that about right?

Say that last bit again, Mitch?

Is the gross margin on the molded product like in the high 50s or 60% and what percent of your overall sales are actually molded product?

Yes. We don’t break all of that out. But, I think to give you an indication, molded is well above 50%...

Okay.

And growing as a percentage of our overall business and it’s significantly high margin than our weighted average margin.

And then last question. You guys have obviously done a great job cutting the SKU count, you mentioned from 2,000 SKUs to 1,000 SKUs. I know that as you switched to a global line, there was a lot of sort of nuance that you sort of trimmed out of the business. When you look at the business today at 1,000 SKUs, I mean is there some low hanging fruit in there that you should be looking to get rid of in order to continue to improve the margins?

Yes. We looked very hard at the SKU productivity. As you look at sort of the poorer performance SKUs, you’re always looking at tail, right, you’re always looking at your tail to try and understand, is that an investment that you want to make, does this provide a strategic benefit to the business or is it just a poor performing SKU. And we actually recently went through an exercise on that and our conclusion was the majority in the tail, we’re making an incremental contribution and/or were strategically important. They were a color that was important to the overall story; they were an item that was new that needed more time et cetera. So, we’ve looked pretty hard at the tail and we really feel like that the overall portfolio is in a good place.

Our final question for today will come from Jim Chartier with Monness, Crespi, Hardt.

Good morning. Thanks for taking my questions. First, Carrie, on the EBITDA improvement. So, how much of these $30 million to $35 million in EBITDA improvement do you expect in 2017?

Yes. So what we’ve essentially -- we’ve not guided to the EBIT or EBITDA down line. Essentially with the improvement in gross margin, that’s basically going to be what we’ll see is the increase on the bottom-line, because SG&A is relatively flat once you factor in the one-time costs in there.

Of the $30 million to $35 million EBITDA improvement you’re expecting from the SG&A savings, is it $10 million, is that 40% flow through we should be thinking about?

No. For 2017, no. And that’s because in 2017, we are investing additional in marketing and we’re resetting our variable compensation and then we have the additions of the one-time costs. So, how you think about 2017 is you model that [technical difficulty] with the relatively flat revenue line, gross margins increasing to about 50% and essentially SG&A relatively flat year-on-year. And so, the improvement to EBIT and EBITDA is really going to come from the gross margin increase.

So, the question is, are you expecting to $30 million to $35 million of EBITDA margin improvement off of 2017 EBITDA?

I’m sorry, yes. I apologize. I did understand the question. Yes. It’s off of the 2017 guidance.

So, there is no EBITDA margin improvement from the SG&A savings baked into, in this year? You’re not expecting any of the SG&A to flow through?

Correct, because of being offset by that variable comp and stuff. Right.

Yes. It’s embedded in our SG&A guidance.

Yes, it’s in our guidance.

And then, last quarter, you talked about inventory excesses in the Middle East and I think Southeast Asia that you thought could take one or two quarters to work through. Where are you on that?

Yes. So, that’s a good question. Making good progress; I mean, I think through Q4, we made good progress, and that’s to just be clear, that’s inventory in the channels, inventory with our distributors in the Middle East and Southeast Asia. We’re making good progress and we anticipate being through that in the first two quarters of this year. And that impact is embedded in our guidance.

Okay. And then on China, how far down from the peak is your business in China and where do you think it ultimately can get back to?

We don’t break out China revenues specifically. It’s off the peak, it’s off the peak by a significant amount. We really feel it has stabilized. And the go forward distributor base, the eCommerce business and the DTC business that we have in China are well positioned for future growth.

And the only thing I’d add to that is when you see the K later today, we call out in it that China revenue represents about 7% of our overall revenue. I don’t have the prior year’s right in front of me but you should be able to reference it from there.

Okay, great. And then, finally, the store footprint, 400 stores after these closings, is that where you think you should be? Do you expect to maybe add some stores over time?

Look, I think the one thing that we all know is that the retail environment globally is shifting very rapidly. That’s that our current estimate of the stores that we need to exit. But, it’s something that we’re going to have to reevaluate on a constant basis. The consumer is shifting out of retail to eCommerce in this marketplace and many other marketplaces across the globe. And we think our DTC stores, full price and outlet play a strategic role, on the outlet side for obviously liquidation and cleaning up inventories, and on the full price side representing and showcasing the full breadth of the product line. But, our intent is not to -- run those stores at a level which is uneconomic, our intent is to make sure they make a valuable contribution to the bottom line and we’ll continue to adjust that.

This concludes the question-and-answer session. I’ll turn the call back to Gregg for closing remarks.

Thank you for joining us today and your continued interest in Crocs.

Thanks everyone.