Crocs, Inc. (CROX) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Crocs First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I’ll turn the call over to Marisa Jacobs, Global Head of Investor Relations to begin the conference.

Good morning, everyone, and thank you for joining us today for the Crocs' first quarter 2019 earnings call. Earlier this morning, we announced our fourth quarter results, and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some 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, SG&A as a percent of revenues, operating margins, CapEx, and our product pipeline. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. Adjusted gross margin, SG&A, income from operations, net income and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterpart are contained in the press release issued earlier this morning. We caution you that our forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our 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 Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew.

Thank you, Marisa, and good morning, everyone. I’m particularly pleased with the strong first quarter growth we delivered as demand for our brand continues to accelerate. Our priority for 2019 is to drive sustainable profitable topline growth by delivering great products and by growing our business across our three channels and our three geographic segments, just as we did in Q1. On a constant currency basis, and excluding the $6 million impact of store closures, we grew global revenues more than 11% with gains in all channels and geographies. The geographic standout was EMEA where we had a truly remarkable growth. Our global retail comp of 8.7% was exceptionally strong, especially when you take into account the Easter shift to later in the second quarter. Our ecommerce business once again delivered double digit increases and our wholesale business grew mid-single digits even as demand for Classic clogs in Americas exceeded supply. Higher than expected revenue growth in combination with the higher than expected gross margin and lower than expected SG&A enabled us to grow our non-GAAP income from operations by 22% and deliver adjusted EPS of $0.36, up from $0.23 in the first quarter of last year. Consumers clearly like our spring summer 2019 collection, and our impactful marketing is resonating. As a result, our brand continues to strengthen. In 2018, we rolled out a number of new collaborations and ended the year with two incredibly successful Post Malone collaborations. This year, we have another great lineup, and importantly, we are expanding our reach by partnering with key regional brands and personalities that are prominent in our five core markets. In Q1, we focused on influential L.A. streetwear brands. Our collaborations with Pleasures, Left Hand LA, Chinatown Market, and PizzaSlime brought us great visibility with their fans. Moving into Q2, we directed our focus to Asia. The region with a greatest long-term growth potential. In China, we were thrilled with the buzz surrounding our appearance at Shanghai Fashion Week. Custom design Classic clogs made their way down the runway at Vivienne Tam show. Vivienne is an internationally recognized Chinese American designer known for her culture bridging East meets West designs. Last month, we delivered a new collaboration with Beams in Japan, a leading specialty retailer there, and it has received incredible worldwide attention. We have a great roster of additional collaborations that will stretch over the next couple of years to extend our reach and increase interest in the brand, so stay tuned. We officially unveiled our 2019 marketing campaign in April with a declaration that you should Come As You Are, and the response has been excellent. The five exciting new brand ambassadors selected for the relevance in our five key markets, the U.S., China, Japan, Korea, and Germany illustrate a global approach to brand expansion. We will be unveiling new content from each of them throughout the year. The extensive reach of this campaign is being supported by additional marketing investments with the biggest increase taking place right now in the second quarter. As we have elevated our product to marketing over the last couple of years, we’ve seen a clear impact with accelerating rates of brand relevance and engagement. In terms of product, we are continuing to focus on our four most important growth drivers; clog relevance, sandal awareness, visible comfort technology, and personalization. The response to our spring summer 2019 collection has been terrific. Clogs continue to be in high demand. First quarter clog revenues grew approximately 12% and represented 56% of our footwear sales. The excitement that now surrounds our Classic icon started in the U.S. and spread to EMEA, and we’re confident that we can ignite this trend in the rest of the world. In fact, rapidly accelerating demand for Classic clogs outpaced supply, particularly certain core colors. Our supply chain teams have been working hard to increase capacity at existing factories and bring new factories online. Classic clog inventories will be back to appropriate levels by the end of this quarter. Sandals remain a key area of focus. We estimate the annual addressable market for casual sandals to be approximately $23 billion globally and it’s highly fragmented. We see casual sandals a natural growth area for CROX and consumers are responding favorably to our spring summer 2019 collection. In Q1, sandal revenues grew approximately 12%, and generated 27% of our footwear revenues, up from approximately 26% in the first quarter of 2018. It is our eighth consecutive quarter of double-digit growth. Existing styles have been refreshed with the addition of new colors and embellishments. The new Serena style available in plain and embellish sandals and flips makes a nice new addition to our line. We are building on our heritage of continuing to innovate around comfort technology, an important consumer purchase criterion. In March of 2018, we unveiled LiteRide, a preview offering distinguished by enhanced comfort and streamline modern styling. It has been a tremendous success. For 2019, we expect LiteRide sales to more than double from 2018. Reviva is new to our spring summer 2019 sandal collection. It’s the latest example of how we’re incorporating comfort technology into our design process. We launched Reviva with flips and slides. The collection incorporates strategically placed bubbles in the footpad that massaged with every step. It’s just getting into the market and we’re pleased with the early response. Personalization is a trend that keeps growing in relevance and our expanding collection of Jibbitz charms is an important part of our brand proposition. The charms may provide consumers with a fund and unique way to make each pair of clogs their very own, and are contributing to the growth of our clog sales. Consumers are responding enthusiastically to our expanded assortment, while allowing the brand to lean in to the global megatrend of personalization. Turning briefly to our distribution channels. We continue to see growth across the board. Our DTC comp, which combines our retail and ecommerce results was approximately 12%. We grew our ecommerce business approximately 17%, our eighth consecutive quarter with double digit ecommerce growth. In the Americas and EMEA growth topped 20%. Our growing brand heat is continuing to drive traffic to our sites. We are upgrading the technology we used to analyze and manage our customer data. This is enabling us to deliver more targeted message to our consumers, which is boosting the effectiveness of our marketing spend. During the quarter, we added three new marketplaces and we’re very pleased with the other results. Our retail comp was approximately 9%, which was a seventh consecutive quarter of positive comps. First quarter wholesale revenues grew approximately 5% as customers refresh their assortment for spring. We saw the highest growth in our e-tail accounts followed by distributors. With respect to brick and mortar accounts we continue to add new customers and grow existing accounts through door and SKU expansion. On our last call, I laid out how we are driving sustainable profitable revenue growth through the lens of product, channel, and regions supported by marketing. From a product perspective, we are continuing to prioritize clogs, sandals, visible comfort technology, and personalization to our Jibbitz charms. From a channel perspective, we expect ecommerce to remain our fastest-growing channel. At wholesale, our e-tail [as in] distributors represent the greatest opportunity. And at retail, our decision to right size our store fleet and prioritize outlets is boosting productivity. From a regional perspective, we expect the positive momentum in the Americas and EMEA to continue, while we believe that the more significant long-term growth potential is in Asia. Lastly, under the umbrella of our “Come As You Are” Campaign, we will be unveiling new content and collaborations throughout the year, designed to further boost consumer awareness and engagement, particularly in our five key markets. 2019 is off to a strong start and with that we are reiterating our full-year guidance. Despite the fact that currency headwinds have continued to increase. Our excellent Q1 results are directly attributable to all the great work being done by our global team. And I want to say thank you to each team member for their contribution. With the successful Q1 behind us, and clear evidence that our brand momentum is accelerating, I’m even more confident in our prospects for continued long-term growth and increased shareholder value. At this time, I’ll turn the call over to Anne, to review our first quarter results and guidance.

Thank you, Andrew, and good morning everyone. I’ll begin with a short recap of our first quarter 2019 non-GAAP results. For a reconciliation of all non-GAAP amounts to their equivalent GAAP amounts please to refer to our press release. I’m very pleased with our Q1 results. We exceeded our guidance with outstanding performance in all channels. This sets us well for the rest of the year. First quarter revenues were $295.9 million, up 4.5% from $283.1 million in the first quarter of 2018, and well above our guidance of $280 million to $290 million. Currency negatively impacted our results by $12.7 million, about $3 million more than we had anticipated. Store closures and business model changes reduced revenues by approximately $6 million in the quarter. Absent these impacts, revenues would have grown 11.1%. We filled 18.4 million pairs of shoes, an increase of 8.2% over last year's first quarter. Our average selling price for footwear during Q1 decreased 3.4% to $15.73 as a result of currency. In an effort to streamline our prepared remarks I'm going to limit my segment commentary to key drivers of the business. Details of our sales by channel and comp performance are laid out in the tables found in our press release. In the Americas, first quarter revenues grew by 4.3% to $129.1 million, which included a negative currency impact of $1.3 million. Our wholesale sales results were bifurcated. We grew nicely in North America, despite limited Classic clog availability as demand for that product continued to accelerate. In Latin America, wholesale revenues declined as a result of the negative currency impact and ongoing economic disruptions. Our DTC business had another superb quarter and I’m pleased to note that we generated a 21% e-commerce growth and a 12% retail comp even without the benefit of Easter-related sales. In Asia, revenues for the first quarter were $91 million, just about flat with last year's first quarter. This includes a $4.3 million headwind from currency. Mid-single-digit increases in our wholesale and e-commerce channel were offset by the decline in retail, primarily due to the store closures and business model changes. In EMEA, revenues grew 11.6% over last year's first quarter to $75.7 million. This exceptional growth also occurred despite the fact that currency reduced reported revenues by $7.1 million. In constant currency, revenues grew more than 22%. The brand heat we are experiencing in the U.S. is spreading to EMEA, driving revenues and sell-throughs. Moving onto the rest of our P&L. Our adjusted gross margin was 46.9% above our guidance of 46%, but down 250 basis points to prior year. There were a number of contributing factors. So, let me walk you through them. Currency negatively impacted the quarter by 140 basis points, coming in worse than we had anticipated. Consistent with my remarks last quarter, the negative impact from currency move will be much more pronounced in the first and second quarters of this year, before moderating in the back half. Two other items also depressed our Q1 adjusted gross margin. First is, higher freight rates associated with inflation and the use of as shipments to speed up deliveries of Classic clogs. By relocating the Americas DC to Ohio, we will mitigate some of these freight pressures and as we restore Classic clog inventory to appropriate level, we will eliminate the use of air-freight. Second, cost at our L.A. distribution center rose as we operated above maximum capacity. The move to Dayton, Ohio will help to mitigate these pressures and translate into gross margin gains next year. We are making good progress on the built up of the new DC and have already successfully shifted fulfillment for the Americas retail business from L.A. to Dayton. Our adjusted SG&A expense was $104.4 million or 35.3% of revenues, better than our guidance primarily as a result of higher revenues effectively levering our cost base, as well as the shift to sum spend from Q1 into Q2. As the percent of revenues, our adjusted SG&A improved by 410 basis points over the first quarter of 2018 reflecting savings resulting from our recently completed SG&A reduction plan. Our adjusted income from operations was $34.5 million, up 21.5%, compared to the first quarter of 2018. Our adjusted earnings per share increased 57% to $0.36, compared to $0.23 in the first quarter of 2018. Our balance sheet continues to be very strong. Inventory at the end of the quarter was 6% lower than at the same time last year as we continued to carefully manage inventories across our various channels and replenish our Classic clogs. During Q1, we repurchased approximately 2.1 million shares of our common stock on the open market for $53.5 million, at an average share price of $25.07. That left us with approximately $102 million available under the plan for future share repurchases. This morning we announced that the board of directors has approved an increase of $500 million to our existing share repurchase program. Under the expanded plan, we have approximately $600 million available for future share repurchases. We ended the quarter with $86.3 million in cash and outstanding borrowings of $215 million. During the quarter, we amended our credit facility to raise our borrowing capacity from $250 million to $300 million. On January 1, 2019, we adopted new GAAP leased accounting rules, which resulted in a significant increase in our reported assets and liabilities associated with our leases. The recognition of rent expense and payments associated with these lease assets and liabilities will not result in material differences to operating income or cash flows, compared to the previous accounting rules, nor does it impact our banking covenant. As we turn to guidance, I want to remind you that our guidance is based on current currency rates. For 2019, we are reiterating the full-year guidance we provided in February, despite currency erosion. That guidance is contained in this morning’s press release. With respect to the second quarter, we expect revenues to be between $350 million and $360 million, compared to $328 million in last year’s second quarter. Our guidance incorporates the loss of approximately $10 million of negative currency impact and $6 million of revenues associated with our reduced store count. At the midpoint of our guidance, adjusting for currency and store closures, this represents underlying growth of approximately 13%. Adjusted gross margins for the second quarter is expected be approximately 52.2%, compared to 55.3% in last year’s second quarter. The variance reflects the negative impacts of approximately 150 basis points, resulting from the strengthening of the U.S. dollar, as well as the negative impact of approximately 160 basis points from higher freight and distributions in our cost in the Americas. As I mentioned earlier, the negative impact from currencies will be more pronounced in the first half and will diminish over the back half. Furthermore, the headwinds resulting from higher DC and freight costs will be partially mitigated as we ramp up operations in the new Ohio facility later this year. In 2020, we anticipate realizing approximately 100 basis points of improvement in our adjusted gross margin resulting from our move into the new facility. SG&A is expected to be approximately 40% of revenues, compared to 44% in last year’s second quarter. This concludes a significant increase in our marketing spend over last year’s second quarter, resulting from the shift of sum spent from Q1 into Q2, as well as incremental investments we are making to support and accelerate our growing brand momentum. Also, included is approximately $2 million of nonrecurring charges relating to various cost reduction initiatives. Given our strong performance in Q1 and our expectations for achieving our interim target of a double digit adjusted operating margin, I feel very good about the balance of the year. At this time, I’ll turn the call back over to Andrew for his final thoughts.

Thank you, Anne. As you heard this morning, 2019 is off to a great start and I’m confident in our ability to maintain the positive trajectory of our business. Our brand is continuing to strengthen. We are continuing to build on our strong clog tradition to expand our sandal business and to build our comfort technology offerings, and to give consumers more opportunities to personalize their Crocs. Upgrades to our supply chain will allow us to maximize the growth potential of each of our channels and geographic segments. We have a clear strategy for moving forward and by executing against that vision, we will continue to accelerate growth on both our top and bottom line. Operator, please open the call for questions.

[Operator Instructions] And your first question comes from the line of Jonathan Komp with Baird.

Hi, thank you. I want to follow-up first just the commentary around Europe and starting to see the brand heat, can you give a few more examples of what you’re seeing there and maybe what you think is driving the improved momentum and the outlook ahead.

Yes, thank you Jonathan. I think couple of things. One is I think, EMEA was particularly strong, obviously we had very strong currency headwinds in EMEA, so they kind of hit the numbers despite $7 million of FX drag as the Euro I think is down around [1.11, 1.12]. What we saw is, we saw strong performance across all channels, so wholesale, E-com, and retail. As we look at the shape of the business, we can see very strong traffic to our E-com sites and also to our E-teller sites. We see very strong interest in the brand coming through digitally. We see very strong interest in our stores and from a wholesale perspective, we’ve been able to sign new accounts and extend reach in existing accounts. So, I would say kind of is working on all dimensions and not mentioned in our remarks, we also opened a pop-up store today featuring just our Classic clog and featuring Jibbitz in Boxpark in Shoreditch England, so we’re also investing a lot in marketing to continue to heat up the brand in Europe.

Great, maybe a different subject then for Anne, but when you look at the gross margin look and kind of the implied improvement at least on a year-over-year basis relative to the first half when you look into the implied second half, can you just walk through the various puts and takes that are impacting the first two quarters that they expect to subside later in the year?

Absolutely. So, just starting with Q1, our adjusted gross margin was 46.9%, which actually was better than guidance by about 90 basis points, even as FX moved against it even stronger than what we expected. So, from first quarter perspective, FX drove margins down about 140 basis points and then the remainder was higher freight and DC cost, but when you think about from a guidance perspective, DTC outperformed, which has higher margin. Our promotions were lower because of that strong outperformance and then we did move a little bit of air freight from Q1 into Q2. So, walking to Q2, our adjusted gross margin guidance is 52.2% that includes – that’s down 310 basis points when you exclude the one-time for the DC of 120 basis points. And that decline again is very similar as we talked about on last quarter that FX would be really strong headwind in the first half of the year. So, in second quarter, FX is about 150 basis points and then the remainder is higher freight, including air and DC costs. All of those pressures start to mitigate throughout the year. In Q3, we expect gross margins to be down slightly. And in Q4, we expect gross margins to be up. And then overall for the full-year, we expect our adjusted gross margins as we reiterated our full-year guidance to be at 50.5%, which is down about 100 basis point on an adjusted basis from prior year.

Okay, great, very helpful. And maybe last one, just for me, when you look at the wholesale channel opportunities, especially in the Americas and seen some of the success with partners that are newer like journeys recently, could you just talk more broadly about where you see distribution going and whether or not the brand heat once you get the Classic clog supply back in-line whether or not there is any additional distribution opportunity to be had here?

Yes. I think, sort of priority number one for us in the Americas is fulfilling demand, particularly for Classic. It’s clearly our demand from our wholesale partners is outstripping supply. As we indicated, we will be in-line by the end of the quarter as we work really hard to bring on additional capacity. So, that’s the kind of priority number one. And then I think, priority number two will be obviously to leverage that brand heat to further extend the brand. I think as we look at all of our points of just distribution, we have a lot of points of distribution, we probably got a shortlist of incremental accounts where we’d like to be, we think would be good for the brand, we think it’s the right way to reach our consumers. I think our biggest dollar volume growth will come from door expansion and SKU penetration in major existing accounts. So, I think the door growth with new accounts is really not the big driver, the big driver is SKU penetration and door penetration in existing accounts.

That’s great to hear. Thank you very much.

Thanks Jon.

Your next question from Jim Chartier with Monness, Crespi.

Good morning. Thanks for taking my question. First, could you just talk about, as you have attracted new customers with the classic clog, are you seeing them buy other categories, or you being able to convert these new customers into sandals or other categories?

Yes. I think the, look the very strong growth of Classic is driven by, I would say view on existing customers. A lot of our marketing work, a lot of our collaboration work is obviously appealing to customer groups that may not have been – had a natural affinity to Crocs in the past, which has been great. We have seen great resonance with team, obviously we’re going through prom season right now and we see lots of exciting things happening with teams at prom. So, we see new customers coming, but I would also say the same marketing and social media activity is also encouraging existing customers to buy new clogs, to buy additional styles. So, we kind of see the growth on both dimensions and in terms of penetration of silhouette, obviously we’re very focused on sandals, we continue to grow sandals. We grew sandals at double digits in Q1 and we’re very optimistic for sandal growth going through the summer obviously. Right now, we’re seeing, particularly in the U.S., some cold and rainy weather, which is not helping sandals for us or really many other brands, but we’re optimistic about sandals through the rest of the year. So, we feel really good about the combination of clog sandals comfort and our personalization as a broad-based attack that’s allowing us to really engage consumers across multiple dimensions.

Great. And then on the ad spend, you mentioned a big increase in second quarter. How is that allocated by region? And then how do you balance the increase spending versus some of the inventory constraints that you are seeing?

Yes, from ad spend increase, we are spending a lot of our increase in Asia, particularly in Q2. I would say that we do have increases in all regions, but it is heavily directed at Asia as we work to extend the brand heat of Americas and Europe over to Asia. So, that’s the first part. The second part, can you repeat, what was your second part of your question?

Spending on increasing ad spend when you’re constrained by inventory in certain regions.

Oh, yes. Sure. Obviously, the Classic clogs in the U.S., it is really a U.S. clog wholesale constraint, so we really haven’t seen any inventory constraint impact Asia at all. It’s been less in Europe, so again, we think that ad spend is just as important to create brand heat and we do expect our classics to be back in stock by the end of Q2. So, we will continue to spend, so kind of continue that journey and we have been able to successfully drive our consumers two different products in our direct to consumer in the U.S. and you can see that in our Q1 results.

Okay. And then lastly, you are moving from a single brand ambassador for Asia last year to three countries specific ambassadors this year, what’s the early read on, on that change?

Yes, I think we are really happy with that change Jim. We’ve seen great resonance, last year our ambassador was really Korea centric, we are seeing great presence with Zozo in Japan and also with our ambassador in China. So, I think that was a really good move and we’re pleased with that.

Great, thanks and best of luck for rest of the year.

Thank you.

Your next question comes from Mitch Kummetz with Pivotal Research Group.

Hi, yes. Thanks for taking my questions. Andrew, you mentioned the Easter shift a couple of times in you prepared remarks, so I was hoping you could quantify that impact for us.

Yes. The way we thought about it, we were definitely worried about the Easter shift, obviously it moved from that kind of first weekend in April last year to well into April. So, it put both DTC business solidly into Q2 and also shifted back a little bit of your wholesale deliveries by a week or couple of weeks, but I have to say at the end of the day we frankly be comped it, right. We comped it from a DTC perspective, we had in Americas incredible comps in Q1 both in-store and online. So, we were able to make those dollars out. And as we look at Q2, and having Easter suddenly in Q2 that’s obviously embedded in my guidance. So, we feel really good about where our guidance is.

I’m going to push you a little bit on that; I mean, is it a few million dollars do you think, I mean you comped it in the quarter, but obviously it’s accretive in the second quarter or so?

We don’t think it’s a very large number. The best way to think about it is in our guidance.

It’s mostly U.S. right, a little bit in Europe, it doesn’t really impact Asia at all.

Okay. And then Anne on the SG&A you mentioned that there was a shift in some expenses from Q1 to Q2, can you quantify that?

Yes, I would say it’s less than $1 million. So, when you think about what we did from an SG&A perspective, if you think about how we over-performed to get it, it was really about levering our cost base and that drove about 140 basis point to the favorability to guidance and then the rest was a little bit of FX and a little bit of expense shift into Q2.

Okay. And then I guess lastly on the adjusted gross margin for the year, I come up with 50.5%, you just backed the 100 basis points on the DC, I think that’s down about 100 bips from last year on adjusted basis, can you say how much of that is freight and FX and is there any way that you are not giving 2020 guidance, is there any way you can kind of talk about how much of that freight you might get back or expect to get back next year?

Yes. So, for the – at current currency rates right now for the full-year, FX is about 130 basis point. So, we do have some things going the other way with mix that are pulling that back. If you think about what we’ve talked about for 2020, on an adjusted basis we’re down 100 basis points next year because of the U.S. DC relocation. We have said, we will get our 100 basis points back. So, that’s the best way to think about it. Is that, we still expect to call back 100 basis points from lower DC and better freights from where we are positioned in the country.

Is that 100 basis points call back that’s on an adjusted basis?

On adjusted basis. So, on a whole basis it would be 200 basis points, as you expect the 100-basis point at one time and 100 adjusted.

I just wanted to clarify. Alright. Thank you, good bye.

Thank you.

Your next question comes from Erinn Murphy with Piper Jaffray.

Hi, thanks. Good morning. A quick question on the second quarter sales guide, super strong at 9% at the midpoint, which would be a good acceleration from the 5% in the first quarter, so I’m just curious kind of what you’re seeing out there, just given this is a heavier at once there kind of reorder quarter, if you could just talk about what you’re seeing in the environment that gives you that confidence? And then Andrew, specifically you mentioned a little bit of rainy or colder weather in the Americas in particular, is that what you’re seeing currently out there post Easter or has anything picked up post Easter? Thank you.

Let me address the weather first. Obviously, the weather has been in the last couple of weeks in terms of impacting the U.S., so we are seeing a little bit of an impact from that, but nothing that concerns us relative to our guidance at all. In terms of what’s driving the overall guidance, I think there’s a few things. We’re expecting continued strong performance in EMEA. We have a very good revenue book and we’re seeing very strong continued at-once performance in EMEA. So, we feel really good about EMEA, although we don’t expect currency to mitigate, so that continues to be a pretty healthy headwind in EMEA. In Americas, we’re particularly enthusiastic about our wholesale business. Again, we’ve got strong book of deliveries in Q2 and again we’re seeing more at-once performance than we can satisfy, and so we anticipate as we go through the quarter being able to satisfy more and more of that, so we see pent-up demand in Americas. And then from an Asia perspective we see several key markets in Asia performing well. So, it’s really kind of across the board. I’d say from a product perspective it’s number 1 clog driven as it was in Q2, but we see sandals performance probably accelerating over what it did in Q1.

Okay that's actually very helpful. Thank you. And then, can you talk about how the work category is performing for you guys currently and where do you see the opportunity for that business longer-term?

Yes. It’s – that’s a very good question. We like that business. It’s a smaller business for us today, but it’s very, very stable. It’s very high margin. There is a quite a small SKU base. We think our product works really well. Almost all of our work shoes are clogs, so they are embedded in that clog performance. It was up double digits in quarter one and we see that being kind of continuing to build. It just doesn’t move the needle, a ton on the topline, but over time we think it will and it’s a strong margin contributor.

Okay. That’s helpful. And then Anne just a housekeeping question for you, you talked about ASP being down in the quarter, but that was really led by currency, what would ASPs have been at the currency impact in the quarter?

I think they would have been slightly up.

Okay, got it. Thank you, guys.

Your next question comes from Sam Poser with Susquehanna.

Good morning. Thank you for taking my question. For both Anne and Andrew, you talked about the demand for clogs despite the shortage of product, how much of that shortage of product may have helped the demand for clogs and how much of the actual demand do you think you missed and how much of the demand do you want to actually satisfy, as you bring inventories in the better shape?

Yes. Okay, there’s a lot there Sam. So, I think, you know we haven't really played the game of trying to figure out how much we miss. Obviously, we know we're getting at-once orders and request for product that we are not able to satisfy in the immediate timeframe, and we’re differing those some weeks out and in some cases some months out. So, we can see business that we would have been able to book that would be and that’s now getting booked in the future. And I think underlining your question is, do you want to satisfy all the demand? I think for a lot of our sort of core colors and we’re seeing, you can see it on our website, you can see the shortages are in black and white in a number of core colors that I think you frankly want to be able to satisfy that demand. Our approach to creating demand for clogs is essentially using a lot of our collaborations and marketing to create kind of interest in the category, but when it comes to core colors, we really feel like we want to satisfy that demand.

And then, I mean that’s a good transition to my next question, you’ve done, you’ve had some very strong responses to a number of these or if not almost all of these collaborations you’ve done recently. The question is this, what are you – how are you going to scale that? I mean clearly the, your supply was well below the demand, I guess do you see opportunities to scale these collaborations, but still, you know, people wanting for more. So, you can get – they can become more material to your business.

Yes, we do. We’d see different collaborations in [indiscernible] Sam. I think, you’ve seen a number of this year that have been very meaningful from the PR perspective, but clearly small, and that was their intent. You would see others later this year that are much larger in scale, and as we move into – frankly, we’re booking collaborations through 2020 and 2021 at this stage. So, as you look in the future we have a blend depending on what audience we’re trying to treat of smaller scale PR orientated brand, heat orientated and enticing new customers, and on larger scale collaborations that will drive full volume in that collaboration that would have to say, I think even the small scale collaborations are really impactful in driving just volume to the brand and to the core product.

Just a quick follow-up. I mean, let’s just take Post Malone, the pairs weren’t huge, the [indiscernible] pairs sold out. He has got an exceptionally large following. So, I mean it’s like as a Post Malone could that be scaled or are you with whatever you’re planning on doing more with is it more sort of towards your – whoever you’re partnering with more towards your core or what your viewership core Crocs customer?

I think Sam, obviously I had not – anxious to be drawn on this because that’s a little bit of a secret sauce and there are some of the high-profile collaborations that can scale, but there are some that can't and there are more core orientated collaborations that can scale. So, it will be a combination of both.

Alright. Thanks so much and continued success.

Thank you, Sam.

Thanks Sam.

Your next question comes from Steve Marotta with CL King & Associates.

Good morning, Andrew, Anne, and Marisa. Andrew you mentioned in Asia the market with the largest growth opportunity, although it was the weakest DTC comp in the first quarter, could you talk a little bit about that dislocation within the period and when you would expect that dynamic to reverse?

Yes. I think as we look at Asia, we strongly believe it’s a market with the greatest long-term growth potential. Obviously, we’re direct in a number of countries to have very large populations with indirect in other countries where we used distributors again have large and growing populations and we have the strongest generally GDP growth in that region. We don't break out, kind of our results by country, but I can say that few countries, so Japan, Southeast Asia, and India we’re seeing really encouraging results. We see China as our greatest opportunity long-term and you might have noticed in our proxy, we formed a committee with our board of directors to really accelerate growth in China and that’s a place where we are investing in marketing, we’re investing in celebs, we’re investing in co-labs to really recalibrate the market in terms of our merchandising. As we look to the merchandising strategy in China, historically, it wasn’t entirely in sync with our global merchandising strategy of clogs and sandals, it was, it kind of led with loafers for a long time, so we’re recalibrating that. So, we're retooling our merchandising strategy in China. So, some of our drag on DTC comes from some of that recalibration and that will take us a few quarters to work through, but we see really encouraging signs in some of our core markets and we think over the long-term as you will drive the greatest growth for the brand.

That’s very helpful. If you can comment a little bit on - Q1 and Q2 have historically been the seasonally strongest period, but you’ve also mentioned, obviously there is a resurgence from a used standpoint and the popularity of the brand amongst school age kids, can you talk a little bit about, maybe give us a sneak peek into this current back-to-school season, you’re your order book says, and if the third quarter might become significantly more important to you in the near term this year, next year and then it has been historically?

Yes. We’re excited about Q3. I think as the number review pointed out, we had a very strong Q3 last year, which was super encouraging and we’ve been really pushing really hard to get our supply constraints back in-line in time for Q3 because we think that’s critically important especially related to Classic clog in North America. So, we don't disclose order book. We haven't done that for many years, but I can say, we’re optimistic about Q3 and we’re doing a lot of the work associated with allowing us to comp Q3 performance very nicely.

Yes. I think from the overall shape of the business as Andrew just mentioned, we do expect Q3 to be much more of a material quarter [indiscernible] much more in-line with Q1 and Q2.

That’s very helpful. I’ll take the balance of my questions off-line. Thanks.

Thank you. Your next question comes from Jim Duffy with Stifel.

Thank you. Good morning. Hope you guys are doing well? I’m trying to better understand the supply constraints in clogs availability limitations, 6 million upside to the higher end of the guidance to the first quarter doesn't seem like a huge disconnect relative to expectations, what was the clog growth rate in the quarter? Was the mix of business higher than you expected in 1Q?

Yes. So, clogs grew 11.5% in Q1, obviously that’s all clogs not just the Classic, but the Classic was also up strongly. And it was pretty strong, I think it was 56% of our overall footwear revenues in Q1. What we were able to do, the beat in Q1 was really direct-to-consumer. So, e-commerce and retail both in Americas and EMEA had very strong comp even with the Easter shift. And part of that was shifting the consumer into Classic, you know Classics that we weren't constrained on colors. So, different colors or different, so we left altogether from or different style. So, I would say, in the direct-to-consumer business we were able to do that. Obviously, you can't do that from a wholesale perspective as easily. So, that’s really where the outperformance came and that’s really how the clog showed up in Q1.

Got it. And then with an eye towards alleviating constraints you get into the third quarter, where do you expect 2Q inventory balances at quarter-end?

So, from a Q2 inventory perspective, I’ll just talk about kind of the full-year where we think we’re at. So, we think from an inventory perspective about four turns is right for our business. We’re turning a little bit faster than that right now and again that reflects the constraint of clog. So, we do expect to be a little bit more back in stock in Q2, and especially what we're going to do this year is we're going to reshape our inventory a little bit in Q4. We’re going to bring in some inventory earlier than what we had in the past in order to be ready for Q1 so we don't run into the same type of issues that we had this year. So, you will see a little bit of a heavier inventory balance in Q4.

Okay. Shifting gears, a little bit, last question, can you speak to the capital structure strategy in context of repurchases and the new authorization? Where do you see this target leverage ratio, how do you think about borrowing for utilization of the share repurchase authorization, is that opportunistic or something you’re expected to do fairly consistently across the year?

Yes. So, we’re really excited that our board is very confident in our strategy in our business overall, an increase obviously our share repurchase authorization was 500 million, it’s now billion, which leaves us about 600 million available for future share repurchases. In Q1, as we talked about in our prepared remarks, we repurchased 2.1 million shares for $53.5 million with an average cost of $25.07. And we’re going to be very opportunistic about it. We have about, we have a $300 million revolver which we increased earlier this year, and Q1 is our highest working capital quarter. So, we’ll continue to look at our capital structure and we’ll continue to invest in where we think we get the best return whether that’s in the business, whether that’s buying back shares or paying down debt.

Thank you.

Thank you.

Your next question comes from Erinn Murphy with Piper Jaffray.

Great. Thanks for taking my follow-up. I just had one follow-up on the LiteRide business, I’m curious how it’s performing generally in the second year. We have been a little bit more promotional activity there in to and out of the Easter season both online, and as well as on Amazon, so I'm just curious that was planned or kind of what you’re seeing generally as that business gets into your Q? Thank you.

Yes. We’re really thrilled with where the business is in year two. As we kind of think about LiteRide in year two, we think it will end up to double what it was in 2018. So, 2018 was obviously the launch here. We launched March 1. So, we’re comping the overall business very well, and we see it strengthening throughout the year. I think the promotional activity we’ve seen is obviously – is largely being around closing out colors. We are kind of moving, we continue to refresh in terms of new colors, fashion colors et cetera and obviously we’ve generally closed out the old colors to make way for the new. So, we generally, you know we're very pleased with the business and I would say it’s mostly non-promotional.

Okay. Thank you.

Thanks.

At this time, I would…

Okay. Sorry. I was going to thank everybody for their continued interest in the company and we’re really thrilled at where we are and excited for the future.

This concludes today's conference call. You may now disconnect.