Welcome to the Third Quarter 2017 Crocs Incorporated Earnings Conference Call. My name is Ellen 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, Senior Director of Investor Relations. Ms. Jacobs, you may begin.

Good morning, everyone and thank you for joining us today for the Crocs third quarter 2017 earnings call. Earlier this morning, we announced our third 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 laws. 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. Please 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. 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 will turn the call over to Andrew.

Thank you, Marisa and good morning everyone. I will begin with some introductory comments about our third quarter financial results, then I will discuss the strategic initiatives we are focusing on to drive the business and update you on the results of our three distribution channels, Carrie will then take you through our financial results for the third quarter in greater detail and our expectations for the fourth quarter of 2017. The third quarter was another strong quarter for us both in terms of financial performance and the progress we have made against our strategic initiatives. Consistent with our first half of this year, we again met or exceeded each of our financial metrics in Q3. Furthermore, the possession of our brand continued to rise with results from our latest annual brand survey showing double-digit increases in brand desirability, relevance and consideration compared to the same period last year. Our third quarter revenues were $243.3 million and we achieved a 50.8% gross margin which represented 100 basis point improvement over Q3 of last year. Our income from operations was $2.7 million compared to last year’s loss of $1.2 million. Our diluted loss per share was $0.03 compared to last year’s loss of $0.07. We ended the third quarter with $140.3 million in inventory, $29.1 million or 17.2% less than the end of the third quarter last year. We continued to execute against our SG&A reduction plan and we remain on target to eliminate between $75 million and $85 million of SG&A expenses annually and to deliver an incremental $30 million to $35 million in income from operations in 2019 as compared to 2016. These results continue to demonstrate that by focusing on our key strategic objectives, we are improving our financial performance and moving closer to our objective of generating…

Thank you, Andrew. As Andrew just mentioned, we are pleased with the strength of our third quarter results as we continue to execute against our key priorities and drive improved financial performance. Third quarter revenues were $243.3 million, down $2.6 million or 1.1% from a year ago. These revenues exceeded the top end of our guidance, which was $240 million. Foreign currency translation increased revenues by $1.3 million compared to Q3 last year. The modest decline in revenues from last year’s third quarter primarily relates to store closures and business model changes, specifically last year’s fourth quarter sale of our Taiwan business and this year’s second quarter sale of our Middle East business. Absent the business model changes, revenues would have been relatively flat year-over-year and e-commerce growth essentially offsets the decline in retail sales due to the rationalization of our store fleet. These results are consistent with our focus on driving higher quality revenues and improving our profitability. In terms of our channels, third quarter wholesale revenues declined 2.2%. I will discuss regional performance shortly, but the overall decline is primarily due to the business model changes I just mentioned. Our third quarter DTC comp was a positive 7.0%. At retail, our comp was up 0.4% illustrating the continued improvement in our underlying business. Overall, retail sales declined 7.2% reflecting the declining store count. Consistent with our store rationalization plans, we operated 80 fewer stores compared to the end of last year’s third quarter and ended the quarter with 474 stores. Our e-commerce business continued its rapid expansion as it grew by 25.2% over last year’s third quarter with double-digit comps in each region. We sold 13.1 million pairs of shoes in the quarter, a 7.5% increase from the prior year. The average selling price of our footwear was…

Thank you, Carrie. The third quarter was another strong quarter for us, both in terms of our financial performance and the progress we have made against our strategic initiatives. We have a strong Spring/Summer ‘18 collection and are excited about year two of our Come As You Are marketing campaign. Ongoing operational improvements will lead to greater efficiencies as we continue to focus on our SG&A cost reduction plan. We remain committed to delivering significant improvements in shareholder value in the coming years. Before closing, let me once again express my sincere thanks to our global team of associates. Their enthusiasm, dedication and hard work is essential to the success of our company. Now operator, I will open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Erinn Murphy with Piper Jaffray.

Great. Thanks. Good morning. I guess I had three questions for you guys. I wanted to focus first on the third quarter and just the Asia business overall, I think Carrie you talked about the transition in Japan in particular, if you could just provide a little bit more detail on kind of what you guys are trying to accomplish there and then maybe just help us understand the dynamic of what you are seeing in China, South Korea and then broadly on that region when should we start to revisit a growth thought there?

Great, Erinn. Let me take that. So, if we look at sort of Asia broadly, as a reminder it was down 12% in Asia for the quarter, where strong e-commerce growth wasn’t sufficient to offset the business model changes. Asia is our region that’s most significantly impacted by all of our changes, there are major strategic relative shifts relative to what lie and we plan those, but we have also incorporated those in our historic guidance and our future guidance. As a reminder, there is kind of three big elements to that transition, the transition of non-strategic markets where we sold Taiwan and the Middle East, significant store closures, the majority of our store closures this year have been in Asia, and lastly, we are undergoing a transition in Japan. I know that, that was a specific part of your question. But before I get to Japan, if you think about the transition of the non-strategic markets and the store closures, there is the majority of the decline, there is the majority of that 12% decline. Relative to Japan, consistent with our long run strategy of focusing our efforts on high-quality revenue and improving the overall profitability of the business, we are undergoing a transition in the Japan business from a single branded business to a business that’s far more focused on digital commerce, on e-commerce and on multi-brand wholesale. To that end, we are focusing on e-commerce growth and we have been successful in driving growth in that arena. We are also closing company-owned stores and partner single branded stores to reduce our reliance on single branded points of sale and we are gaining distribution and growing our distribution in multi-brand wholesale. So, accounts like ABC-MART, [indiscernible], would be great examples. We are making great progress on repositioning the business in Japan. And I think elements one and two in terms of growing e-commerce and downsizing our single branded business is going well. As we look at the multi-branded wholesale, it’s really going to take us through 2018 to achieve the growth we expect, but we are making good progress. This is pretty consistent with how other brands would operate in this marketplace and it’s really – it’s executing as we expected it.

Okay, great. That’s helpful. And then give me just a quick one for Carrie, on just the inventory at the end of the quarter, down 17%, I think a lot of that is some of your non-core categories, can you just talk about how that’s trending in the core categories?

Yes. So, as we think about the overall inventory numbers, certainly, we are pleased with the decline year-on-year and really the bulk of the decline is cleaning up excess and obsolete inventory. So, what’s in the line now or what’s in the inventory base now is primarily core inline product setting us up for fourth quarter and then leading into 2018. So, we are focused on overall improving the inventory turns in the business and this is just a result of that. So, I think you what you have seen all year long is us consistently coming in with inventory levels lower than the prior year and it’s just a matter of improving that flow of inventory to all of our channels.

Okay. And then just last question, you guys sounded still pretty confident on a double-digit EBIT over time, I mean, can you just, I know it’s early we are not quite at the end of this year, but can you just help us think about some of those puts and takes that you are assuming as you start the planning for fiscal ‘18? Thank you.

Yes. So, let me talk a little bit about how we are looking at ‘18 and then I will come back and talk about our mid-term guidance with respect to double-digit EBIT margins. As we look ahead at 2018, we are not giving detailed guidance at this time, but I think it’s important to kind of have an overview of how we are expecting that top line to develop. So, the biggest impact of 2018 will be the continuation of our store rationalization effort and really that’s the impact the stores that have closed partway through this year as well as the stores that we have planned to close in 2018. So, we expect the headwind in our revenue line of approximately $50 million associated with those store closures. We expect that, that revenue decline will be offset by growth in e-commerce as well as growth in wholesale. So, if we think about 2018 if we adjust for essentially the store rationalization effort and kind of the lapping of some of the business model changes, we would be up mid single-digits as compared to this year. So, when we think ahead to double-digit EBIT margins, we have said a few times we don’t expect to achieve that obviously in 2018, but we continue to be confident in our ability to get to that in the mid-term.

Okay, great. Thank you, guys.

Our next question is from Jonathan Komp with Baird.

Yes, hi. Thank you. First, Carrie, I just wanted to clarify last quarter I think you said the midpoint of the third quarter revenue guidance, what about flat on an underlying basis and now today I think you just said the results were roughly flat and I know you are above the high-end on the revenue. So I just wanted to clarify if that’s apples-to-apples or if there are any other changes going on during the quarter?

Yes. So, now, it’s essentially just adjusting for the business model changes if you had factored in store closures, it would have been up over prior year.

Okay, great. Thank you. And then when you look at the bridge to low single-digit growth in Q4, I was hoping you could maybe just give a little more clarity on what you are seeing there especially since I think you implied selling more spring and summer product into the third quarter than usual. So, I am wondering is that going to continue into the fourth quarter or just trying to walk through some of the puts and takes?

Yes. I mean, I think as we look at the fourth quarter, there is couple things that are important factors. From a product perspective, you have referenced, we are focused more and more on our 12% of flips and slides, obviously sandals, flips and slides drop off in the fourth quarter, but we think clogs and line clogs have significant traction in that period. We have de-risked our assortments. We have far less boots and assortments and far less seasonal products in the assortment. So, I think we are confident we have the right product mix. As we think about it from a channel perspective, obviously, it’s more of a DTC quarter both our e-commerce and our retail business become a larger share of the business and given our recent trajectory on e-commerce and the traction we are getting on a global basis, we feel confident in the guidance that we have provided.

Yes. To take you back to the mid – being up low single-digits, again, if you take the midpoint which will be $185 million, there are few million dollars related to the Taiwan business, the Middle East business and the China transfer stores that we have kind of outlined that gets you to that low single-digit number.

Okay, great. And then just a broader question on the Americas and the brand positioning and I know you shared some high level details on the brand survey you completed, I would be curious if you had anymore color there for the Americas specifically, but really just looking at 5% growth year-over-year for revenue even with the store closures, I think wholesale has been up now two quarters in a row for Americas for the first time in a while. So, is there anything other than some of that, I know you outlined the product and marketing initiatives, is there any sort of broader trends you can identify that’s helping the business just looking for anymore perspective there?

Yes. As we kind of focus on the Americas, yes, I think we are seeing some firmness and some strength in the business that we are excited about. We think that is largely driven by the product and marketing strategies we put in place as we look at the strength of that growth or the strength of the business it is driven by clogs and sandals that’s what’s driving the business in the Americas. We do see the marketing campaign being certainly well received in the marketplace, the use of digital and social to reach the consumers is clearly having an impact. And I guess the one other trend that we see is an increasing interest in the brand at the teen to college age, student age, we see a lot of athletes or a lot of athletes wearing the product pre and post sports events. So, I think that’s a trend that we see and we frankly were trying to accentuate with our – with our social media. And I think the additional thing relative to the brand survey that I would highlight that was certainly of interest to you and I am sure interest was and I am sure it would be of interest to you is the double-digit growth that we have seen in desirability consideration and relevance, we saw that across all of our five major markets, where we focus our advertising dollars. So, we really believe that the Come As You Are campaign and the marketing efforts that we have been undertaking this year is driving renewed interest in the brand.

Alright. That’s helpful. Thank you.

The next question is from Jim Duffy with Stifel.

Thanks. Good morning, everyone. Nice job in the quarter. Couple of questions. Andrew, you had mentioned positive response to the spring line, any sort of qualitative comments or quantitative comments you can add to this? And then related to that, I am curious is there any change to your plan shipments for Spring/Summer ‘18 that might hit in the fourth quarter relative to the previous year?

Yes. So, obviously, we don’t – we haven’t for sometime now released pre-order or backlog information. And what I can reiterate is that we are certainly seeing, we are pleased with the response we are getting relative to the Spring/Summer ‘18 line. Customers seem to be excited about it. I think they are particularly excited about LiteRide, we mentioned that in our prepared remarks. It’s a new, a new tier to our assortment where we are bringing a enhanced comfort, enhanced styling at a slightly higher price points. And I think that’s resonating with customers and we hope it will resonate with consumers too. In terms of fourth quarter shipments of Spring ‘18, I would say it’s roughly consistent with what it has been historically, we have the opportunity to deliver spring ‘18 for warm weather doors here in the United States and then obviously in Southeast Asia, a good amount of spring ‘18 gets delivered in the fourth quarter, but it’s pretty consistent with what it was last year.

Very good. Thanks. Carrie, question for you on the inventories very tight, was that a function of promotion during the third quarter or do you feel the third quarter from a gross margin standpoint is fairly normalized compare at this point?

Yes, I do think the gross margin rate is fairly normalized at this point. We had a big pop obviously in Q3 last year from a gross margin rate standpoint. So, I think we are at a good – pretty good landing place right now. In terms of the inventory, it’s really just a matter of having clean inventory. So, it was not a result of promotional – highly promotional activity, what it’s been is really our internal operation process around inventory planning has been very disciplined or open to by channel, by region has been very disciplined. So, it’s really just us managing our inventory better.

Very good. And related to that Carrie, can you comment on the view to operational improvements and gross margin opportunities into 2018, do you expect to be able to continue to make forward progress?

So, we are tracking at the 50% gross margin rate for this year. We do believe as we guided in our mid-term that we expect gross margins to be in the low 50s. I think we have made some significant improvements both in ‘16 and in ‘17 in our overall gross margin rate. I think the gross margin rate improvement going forward will be incremental as opposed to some of the step change that we have seen with the 150 basis points improvement year-over-year.

Very good. I will leave it at that. Thank you.

Okay.

Our next question is from Mitch Kummetz with Pivotal Research Group.

Yes, thanks for taking my questions. I wanted to go back to the double-digit EBIT margin, because in broad strokes, maybe I am getting a little ahead of myself here, but in broad strokes you guys have about $1 billion business and it sounds like your expected sales to be sort of flattish next year. If I kind of think of the business as $1 billion based on your SG&A reduction plan, you are talking about $30 million to $35 million of incremental operating income. I feel like when I do that math, it kind of puts me at a 3% to 4% EBIT margin business by 2019 and there is still a pretty big gap from there to double-digits. And I am just trying to understand how to think about where you guys have opportunity to bridge that gap over time, I am just is on the sales line, is on the gross margin line, is there long-term opportunity for SG&A reduction as maybe you tackle some additional stores that aren’t currently in the plan. Could just help me think about that a little bit?

Yes. The way we look at it, if you take start with 2016 as our base. And to your point, we are relative – we are slightly down low single-digits this year, we are guiding – we have talked about being relatively flat in 2018 with our SG&A reduction plan with some improvement in gross margin rate, we don’t think it’s going to take all that long for us get to double-digit EBIT margins, we feel like the mid-term get us – in the mid-term we can get there. So, I think we can talk after about your model, but I would say 3%, 4% in 2019 seems extremely conservative to me.

Yes, that’s definitely too low for ‘18, Mitch. And then obviously you have got really – if you believe margins are around 50%, low 50s, we have got our cost reduction plans which I think we have laid out and we can go through in more detail, but then you get a little bit of revenue growth and at 50% margins the flow-through is significant and the math works.

Okay. And then secondly you talked about some SKU and door expansion, can you talk a little bit about that and what that might mean to your wholesale business? I am guessing, that’s in reference to kind of spring ‘18 orders. Is that right?

Yes. I think the biggest thing there is it’s really look the way we think about it, wholesale partners are economic animals, they do what makes sense for them right. And as they look at their ‘17 business, they have seen better sell-throughs, they have seen stronger margins. And as a result to that, we feel like in key accounts where we are really focusing we have opportunities for greater share of shelf and we are receiving representation. It gives us greater share of shelf and some door expansion in key accounts where we may not being represented before. So, we feel good about the opportunity to grow the wholesale business with a little bit of door expansion, but I would say the majority of the dollars are actually driven by faster sell through and greater share of shelf in existing accounts.

Got it. And then maybe just one last quick one kind of housekeeping, Carrie, you mentioned I think it was about $50 million headwind on store closures next year, what does it end up being on 2017, because obviously there is some impact this year, can you just give us the number for 2017?

Yes. I have double check it, but give me a minute and I will just confirm, I think it’s around $40 million in revenue this year as compared to 2016 in terms of store closures.

Got it. Okay, thanks.

Yes. I think that’s what it is, Mitch and we will come back to you if that’s not correct.

Okay, great. Okay, good luck guys.

Thank you.

Our next question is from Sam Poser with Susquehanna.

Good morning. Thanks for taking my questions. Couple of things. As far as the inventory, I know that this is weighed down, but what’s the optimum sort of forward weeks of supply or optimum turn, because you are still using your numbers, you are still running with 17 weeks forward supply, which is well down from 16, 17 weeks of forward supply, well down from last year, but it still seems a bit elevated. Could you give us some color there as to what you think and what your targets are?

Yes, Sam. So, I mean, yes, I think we feel great about the progress we have made frankly around inventory. As Carrie talked about earlier, it was really around instituting some enhanced planning processes, planning this from the beginning and really planning each of our channels based on a turn and forward weeks of supply. I think the level we are at is a strong improvement of where we have been. Do we feel like we can make some incremental progress from here? Absolutely, we do. We can certainly see opportunities in certain places around the business. Are we going to see that kind of change again go forward? No, very unlikely. It’s going to be more incremental, but I don’t 100% disagree with you, there is – further opportunity.

Is there – what is the difference between your direct inventory turn retail and e-commerce versus your wholesale turn, I mean I would assume it’s as you shutdown more stores that should really help your inventory?

Yes, exactly. I mean, obviously our wholesale business turns faster than our DTC businesses and our e-commerce business turns faster than our retail businesses. So, all of the transitions we are making as you are highlighting will increase turns in the future.

Okay, thank you. And secondly sort of follow-up to the other questions asked, how do we get – to get to this low 50s growth and low 40s SG&A that’s all good and so on, but how do we start seeing that what’s going to trigger sort of real top line growth here as I think Mitch mentioned or I think that’s just going to be flattish next year. And then I mean where do we start seeing, when can we start seeing this business sort of expand from that $1 billion dollar base. As you look out, I mean what are you looking at because that’s really going to be the trigger to get the EPS to improve?

Yes.

Once you get through your other project?

Yes, absolutely, Sam. So I mean, obviously we have been doing a lot of hard work and very focused on our cost reduction program and we think that’s yielding very tangible and significant progress, but ultimately, we need to get the top line moving. I think what’s going to close that is product and marketing. Those are the key drivers. As we look at product, I think we gain more and more confidence around our focus on clogs and sandals. We see it working. We see our customers tell us it’s working, we get that feedback from consumers and we think that will continue to play forward into the future. We see our marketing initiatives working as well and we think that will continue to build and play forward into the future. The one thing I would point out if you look at this quarter we did see growth in both the Americas and Europe, right. So, two out of our three regions grew in absolute terms. Now, overseas, we are a little aided by some currency, but we have got 5% growth in the Americas and 6.2% growth in Europe in this quarter. And as I highlighted earlier in answer to Erinn’s question, Asia went backwards, because largely because of a lot of the strategic changes that we are making. So as we get through those changes, we think that we can continue – we can start to build the top line and drive growth in the brand and the revenue for the overall company.

And I think the key element to add to what Andrew just said is we will be building off a quality revenue base and that’s not always been the situation, right and so the cleanup of the discount channel sales getting out of this low margin business making sure that what we are selling is profitable. That’s a better place to grow from. And so part of that challenge is essentially getting through 2018 for the most part in terms of that headwind we faced from that cleanup. That said, we continue to improve profitability while we do that.

Just a quick follow-up on that, you said two things, you said hitting the double-digit EBIT in the next in the near – in the mid-term, but then what’s the actual target for ‘19, are you saying you are going to get the double-digit EBIT in ‘19 or is this – is that extended beyond that I just want?

Yes. So at this point, we are not even giving specific guidance on ‘18, so we are definitely not giving guidance on ‘19, but what we are reinforcing is that we do believe double-digit EBIT margin in the mid-term is achievable.

Thank you.

Thanks, Sam.

The next question is from Steve Marotta with C.L. King & Associates.

Good morning, everybody. Carrie, you mentioned in the fourth quarter that excluding the impact of the internal sales of the businesses, sales will be up in the low single-digit range, does that include store closures and if not what would the number be otherwise?

Yes. So, that does not include store closures. That’s essentially the business model change around the Middle East, Taiwan and those things and that’s taking it from the midpoint. The retail store closures we have not called out in the quarter how much that revenue decline is, but it is meaningful in terms of the overall and essentially what’s happening there is e-com and wholesale is compensating for that.

Okay. And I was going to ask the question as it pertains to 2018, I think you said that there is a $50 million headwind pertaining to retail, there is still some residual other internal actions that are occurring. Can you quantify that in total?

Yes. So, actually for the bulk of it, the bulk of the impact in terms of that, that’s $50 million headwind is store closures. So, we do have a little bit of – we did the Middle East transaction in spring, but that actually is embedded in the store closures, because we sold retail stores and we have essentially completed the lapping Taiwan. So, it’s pretty clean and when we get to 2018 in terms of it primarily just being store closures.

And what about – okay, that would include Japan, I understand okay.

Yes.

Yes. So the majority of the loss of revenue is store closures in Japan, yes, so in ‘18 that really captures the majority of the impact.

Great. One last little housekeeping question, when is the last time you repurchased shares?

So, we repurchased shares in Q2 and we repurchased shares in Q3. So Q3, we bought back 2.1 million shares for $17.1 million and did average cost of $8.31 a share and year-to-date, we have repurchased 3.4 million shares. So we have got about 27 – a little over $27 million in share buybacks year-to-date and the average cost was at $7.90. And prior to that, it had been – I think back to 2015 before you have been in the market.

Thank you very much.

We have no further questions at this time. I would like to turn the call back to Andrew Rees for closing remarks.

Yes. Thanks, everybody. So, thank you for joining our call today and your continued interest in the company. We appreciate it.

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