Welcome to the Q2 2017 Crocs Incorporated Earnings Conference Call. My name is Nicole, and I will 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. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Marisa Jacobs. Ms. Jacobs, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today for the Crocs second quarter 2017 earnings call. Earlier this morning, we announced our second quarter 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 is 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 revenues, gross margin or SG&A expenses, and our product pipeline. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that our forward-looking 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, 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 more information relating to these risk factors. The company may refer to certain non-GAAP metrics on this call. An explanation of those metrics and a reconciliation to the most closely related GAAP metric can be found in our earnings release which is filed earlier today, which has been posted on our investor website, located at crocs.com. Joining us on the call today are Andrew Rees, President and Chief Executive Officer; and Carrie Teffner, 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, Marisa, and good morning, everyone. I will begin with some comments on our results and on the strategic progress we made during the second quarter. Then I’ll turn the call over to Carrie who will go through the financials results for the quarter in greater detail and take you through our expectations for the third quarter and the full year. We will then take your questions. Overall, I’m very pleased with our second quarter results. We met or exceeded the guidance we provided you when we spoke in May. Equally important is that we continue to make progress against our strategic initiatives to strengthen the company and the brand. Revenues in the quarter were $313.2 million and a gross margin rose by180 basis points from Q2 last year to come in at 54.2%. SG&A at $140.4 million was $8.7 million lower than our last year’s second quarter and included $1.8 million of charges associated with our SG&A reduction plan. Our income from operations rose 42.9% over Q2 last year to $29.4 million, and our diluted EPS rose by 53.8% I also want to note that our inventory at the end of the second quarter was down $14 million or 8.3% compared to the same time last year. These results are tangible evidence that all of the hard work over the past few years to strengthen the company and position us for a new profitable growth is taken hold. On our last call, Gregg spoke about our ongoing initiatives to ensure that our product is fresh and relevant, our marketing builds engagement and drive sales; our wholesale, retail and e-commerce sales channels are being optimized to drive profitable growth; and corporate investments are concentrated in our core markets; and we continue to strengthen our organization from both an operational…

Thank you, Andrew. As Andrew mentioned, we are pleased with our second quarter results. The hard work of the past few years which involved transforming almost every aspect of our business is translating into tangible benefits. Second quarter revenues were $313.2 million, down $10.6 million or 3.3% from a year ago. These revenues came in at the high end of our guidance. Furthermore, this amount includes a negative impact of foreign currency translation, which decreased revenues by $2 million compared to Q2 last year. The $10.6 million or 3.3% decline from last year’s second quarter, primarily relates to the sale of our Taiwan business, store reductions and the additional actions taken to improve the quality of our revenues that we have discussed with you on previous calls. Adjusting for these items, Q2 revenues would have been up low single digits compared to Q2 last year. In terms of our channels, second quarter wholesale revenues declined 7.3%. This is attributed to our intentional pullback on sales into discount channels and reduce shipments to select overstocked distributors in Asia. We began those initiatives during the third quarter of 2016. And as a result, they will have less of an impact on our year-over-year comparisons in the back half of this year. Our global second quarter DTC comp was a positive 5.7%. While overall retail sales declined 4.4%, our retail comp was flat. We had 55 fewer stores compared to the end of last year’s second quarter ending the quarter with 503 stores. Our e-commerce business grew 14.5% compared to Q2 last year, while generating a 17.8% comp. I will discuss regional results in a moment. We sold 17.4 million pairs of shoes in the quarter, a 1.8% decrease from the prior year. The average selling price of our footwear was $17.66, down…

Thank you, Carrie. Throughout the quarter we continue to advance our strategic objectives and strengthen our brand. Our Spring/Summer 2017 product amplified by a successful Come As You Are marketing campaign, generated higher quality revenues and improved gross margins. Our focus on expense management led to a significant SG&A expense reduction. In combination, these resulted in a meaningful profit improvement. In summary, Q2 was another solid quarter. And I want to reiterate our confidence in the business and its ability to generate enhanced shareholder value in the future. Before closing, let me once again express my sincere thanks to our incredible associates around the globe, whose dedication and hard work is so essential to the success of our company. Now, operator, I’ll open the call up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Erinn Murphy from Piper Jaffray. Your line is open.

Great. Thanks, good morning, and nice to see some progress on some of the initiatives you guys have put together. I guess, first, Andrew, for you. I was curious on your comment, you talked about June’s promotional cadence, you made some adjustments there, drove some incremental improvement in the comp. I’d love to hear kind of what you learned about that and how that’s shaping your strategy in North America as you get into the back half?

Yes, thanks, Erinn. So that was specifically relating to e-commerce, right. So if you kind of look at our global e-commerce business, we are pleased with where we are in a global basis, obviously, our comps were up 17.8% on the global basis, really driven a lot by China and Japan. In Europe we made a lot of progress putting in place, key capabilities and adjusting our go-to-market strategy that’s led to double-digit comp in Europe as well of a relatively poorer performance in the back portion of last year. As we look at Americas, it started off slow, I mean, we started off slow in the quarter. And that was really driven by our overall strategy to drive higher quality revenues. We started off with a less aggressive promotional cadence than we had been last year, so we tried to pull back. And as we looked at where we were placed relative to everything else going on in the marketplace, it wasn’t driving the results that we expected, and it wasn’t competing effectively online, where the consumers obviously one click away from a different opportunity. So we didn’t really – we went back to where we had been historically and where we think the marketplace was. We didn’t go any further than that and that had the desired effect of really driving the revenues that we desire.

Okay. That’s helpful. And then I guess just on the wholesale side in North America. Can you just talk about the retailer appetites for products when they’re looking at taking kind of some of the fall winter product this year versus where it’s been in the past? We’ve just heard from some of the other kind of broader global vendors that you’re getting this calendar ship deeper into the sea. Just I’m curious, about impacts your third quarter at all, and just how you’re thinking about the guidance there?

Yes, I mean, I think one of the things – well, first, I think we’re focusing what we’re good at, right. So we’re focusing on our clogs, sandals, flips and slides. And similar to last year we are seeing that season go longer into the third quarter, so you can certainly sell that product through July through August and into September. And I think from your comment that’s – what’s the impact that’s having in the marketplace is those people who are trying to sell boots is constrained in that season for boots and transitional products. And consistent with that observation, we talked about derisking of our back half business. We’ve really cut fairly significant lazy proportion of our product that it is boots or transitional and are really focusing on selling our clogs and lime clogs in that period. So we actually think that’s going to work in our favor.

Got it. And then just last question for me is. On your store fleet optimization that’s been going a little bit faster than planned. Can you just talk about kind of what the ideal footprint you see for the business over time? And then I guess Carrie for you, was the faster -- I guess kind of further store closure, is that the biggest piece of the SG&A reduction for the full year in the guidance? Thanks.

Yes, I’ll take both of those, Erinn. So as we talk about the store footprint, obviously what we’ve guided to is approximately 400 stores by the end of 2018. And I really think having a perfect model right now is not possible. So our goal at this point is to continue to evaluate what the fleet should look like, what the footprint of mix of outlet, and it will be primarily outlet is about store base, but we will kind of keep reassessing, but right now our goal is to get to that 400 and then continue to evaluate from there. And then to your other question with respect to the SG&A for the quarter, certainly the accelerated store closures had impact. But we also saw just a much more higher focus on controlling costs in the business, so that played a part as well. But if I break down the kind of the $8-plus million that we’re favorable year-over-year, we did have some time benefits. So if you want to acknowledge that we had about $2 million of marketing expenses, it’s moving from Q2 into Q3. We also had a reduction in our estimate of charges associated with our SG&A reduction plans. We had originally thought it was going to be about $3 million, it came in a little bit under that at about $1.8 million. And then we also had essentially a one-time pickup that was unexpected related to the bad debt recovery in China. So in essence, we had about $4 million favorable and that was I think fairly split between additional store closures and then just continued cost focus.

Got it. Thank you for the details.

Thanks Erinn.

Our next question comes from Scott Krasik from Buckingham Research. Your line is open.

Thanks guys, this is Matt Gulmi on for Scott. Couple of questions. First off, just want to know kind of what you guys had planned for bookings for the Spring 2018 season?

Yes, thanks, Matt. Some time ago we stopped the disclosing, pre-booking or booking information. As we kind of look at Spring 2018, it’s really early in terms of the Spring 2018’s selling. We started meeting key accounts relative to that line. And I think the feedback we’re getting is very positive and supportive. So we feel good about where we are from Spring 2018 perspective.

Okay. And what is the hurdle rate to get the reorders in season and retailers interested in kind of optimizing sales with the products?

Not quite sure what you’re referring to around hurdle rate. But I think the way we plan our business is generally about 75% of our business is pre-booked. And about – in the back half about 25% is our at-once or in-season orders. And that’s generally kind of how the business flows in the back half.

Okay. And then lastly, do you mind just speaking to your strategy around pricing going forward for the rest of FY 2017?

Yes. Most of our margin improvement and the improvement in the quality of our revenues is really been coming from greater sell-throughs and more full price sell-through, so that has allowed us to firm up our net pricing if you like. We haven’t impacted our MSRP or our high level pricing. But we have seen some improvement in net pricing and margins from the more careful management of the business. As we look at the marketplace, we continue to evaluate opportunities for pricing and as we’ll introduce new products. We’ll look at what is the competitive environment in the competitive products that we’re comparing that too to ensure that we are delivering exceptional value to the consumer, but also getting paid for the amounts of innovation that we put into the product.

Okay, great. Thanks guys.

Thank you.

[Operator Instructions] Our next question comes from Benjamin Bray from Robert Baird. Your line is open.

Hi, thanks for taking our question. I wanted to ask a little more about the accelerated pace of retail closures. What impact is that having on the full year revenue guidance? I would imagine there’s some sort of negative impact. And if so is there a positive offset that is causing you to hold the guidance for the year?

Yes, great question. So we are still guiding at the low single digits, which is consistent with the guidance from last quarter, despite the fact that we do have accelerated store closures. Part of the offset there is really around, there’s been a favorable change in FX from the rates in place when we guided earlier after Q1. So really it’s kind of we’re holding because we have kind of a tailwind of FX against the headwind of accelerated store closures.

Okay, thanks. And then looking out at Q3 and Q4, just wanted to know if you could provide some perspective on what’s driving the decline in Q3, and then what gives you confidence that Q4 can return to growth. It looks like there’s a little bit of implied growth for Q4 and what the current guidance is. So any perspective on your outlook for the back half and what’s giving you confidence there would be helpful?

Yes. As I talked to Q3 first, so we are guiding at $230 million to $240 million. The major differences versus prior year essentially the business model changes and the store closings and transfers. If we take the midpoint of that range that means we’d be essentially flat to last year. So that’s kind of the assumptions we’ve made relative to Q3. And then as we get into Q4, we do have continued benefit of FX that we are – based on the current rates today. And then we’re lapping up kind of easier Q4 last year because what we saw there is people pulling back on some of the at-once business, we also had some challenges in e-comm performance in the fourth quarter last year as well. So we think it’s up against an easier compare.

Thanks very much.

[Operator Instructions] I’m showing no further questions at this time.

Okay. Well, just in closing, thank you everybody for your continued interest in the company, and we look forward to another strong quarter.

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