Crocs, Inc. (CROX) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Crocs second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the call over to your speaker today, Cori Lin, VP, Corporate Finance. Thank you. Please go ahead.

Good morning everyone and thank you for joining us today for the Crocs second quarter 2020 earnings call. Earlier this morning, we announced our latest quarterly results and a copy of the press release may 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 potential impacts to our business related to the COVID-19 pandemic. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that all 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. Adjusted gross margin, income from operations, operating margin and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us today on the call 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 will turn the call over to Andrew.

Thank you Cori and good morning everyone. As you saw from our release issued this morning, our business both from a top and bottom line perspective performed exceptionally well during the second quarter of 2020 despite the worldwide challenges presented by the COVID-19 pandemic. Our extraordinary in the midst of the most business environment many of us have faced in our lifetimes demonstrates our ability to deliver increased profitability and underscores the work we have done expanding the desirability, relevance and consideration of our brand and product offering globally. Anne will review our financial results in more detail shortly. But here are a few highlights from the second quarter of 2020. Our global revenue for the second quarter declined by only 6% on a constant currency basis and revenue grew in four of our top five markets, the U.S., China, Korea and Germany. Our Americas business had a strong second quarter revenue of $172 million as the U.S. business delivered high single digit revenue growth despite stores being closed for half of the quarter. Note that retail comp store sales increased 18% after reopening. While Asia Q2 revenue declined, two of our most important markets in the region, China and Korea, each delivered modest revenue growth. Also e-commerce increased by 68% with strong performance across all three regions. E-commerce revenue for the Americas grew triple digits while Asia and EMEA each grew strong double digit. Adjusted operating margin increased by 800 basis points to 22%. Adjusted diluted earnings per share grew 71% to $1.01. We nearly doubled the amount of cash generated from operations relative to last year and we completed A Free Pair for Healthcare donation program, giving over 860,000 pairs of Crocs to frontline healthcare workers. Let's start by reviewing our performance for the quarter and the impact of COVID-19. Our thoughts continue to be with those who have been directly impacted as well as the many heroes on the frontline that continue to battle this pandemic. Our top priority throughout continues to be ensuring the well-being of our employees, our consumers and our partners. As we shared on the last earnings call, we focused on positioning our business for both short and long term success. Our defensive playbook that we began to implement in early March is complete and our offensive playbook is beginning to show results as evidenced by our strong Q2 performance. We have previously outlined that the current quarter will be most difficult one. While we hope the worst is behind us, we remain prudent cautious. During Q2, most retail locations across the globe including our wholesale customers, our own stores and partner stores were closed at some point. In the Americas, our company operated stores closed in mid-March and began reopening in mid-May. Many of our wholesale customers' brick-and-mortar stores were also closed during these times. Despite these closures, the Americas region grew 1% on a constant currency basis, strengthening from triple digit e-commerce growth. We are particularly pleased by our continued momentum in the United States which delivered a high single digit revenue growth. When our stores reopened, we saw declines in traffic but in both conversion and average transaction value. As a result, we saw 18% comp with softness in tourist markets such as Hawaii and Orlando but strength in markets reliant on local consumers. In Asia, the landscape was mixed and Q2 revenues declined 19% on a constant currency basis as growth in China and Korea was offset by declines in Japan, India and much of Southeast Asia. Outside of China and Korea, many stores were closed for the majority of Q2 and we continue to expect a slow recovery in our distributed markets. China and Korea were bright spots, each growing second quarter revenue and delivering positive comps. Korean stores were open throughout the quarter and we saw significant outperformance in retail. In China, our stores and the approximately 350 partner stores reopened in April and remained open throughout the quarter. We continue to improve brand relevance in China with an all-star live-stream event with Yang Mi and TMall, which exceeded our expectations. In June, we were pleased with our own brand performance during mid-season festival and we have also opened up our first energy store in Shanghai. The energy store features our new store concept and showcases both Classic and Jibbitz, with a large Jibbitz zone in the front of the store allowing for consumer's in-store personalization. As a result of these activities, our reach and engagement increased 50% on earlier month in June. We remain optimistic about our growth acceleration plan in China and the positive momentum we are driving. EMEA performed better than expected in light of retail closures. All of our direct markets experienced revenue growth with strong digital performance, offset by weakness in our distributor markets. Revenue declined roughly 2% on a constant currency basis. While many brick-and-mortar stores were closed for part of Q2, crocs.com and our third-party digital commerce platforms remained open. Americas delivered triple digit e-commerce growth, while Asia and EMEA grew double digits, resulting in 68% global growth. We also saw strong sell-through at our e-tailers, which show up in our wholesale revenues. Our digital business, which combines e-commerce and e-tail, represented 56% of our Q2 sales compared to 33% for the comparable period last year. While these strong growth rates have recently started to temper, it is clear that the pandemic has accelerated the shift to digital and that digital has been and will remain a high priority channel going forward. From a product perspective, our results continue to be driven by our focus on our four key product pillars, clogs, sandals, Jibbitz and visible comfort technology. Sales of our iconic clogs were particularly strong this quarter, increasing 10% year-over-year to represent 68% of total footwear revenues versus 56% last year. As anticipated, sandal performance was impacted by limited inventory and stores being closed for a good part of the summer season. In Q2, sandal revenues declined 33% and represented 22% of sales versus 30% of sales last year. We did see encouraging sell-through on our new sandal programs, Brooklyn, Tulum and the Classic Slide. We are very optimistic that we will be able to take full advantage of these programs in 2021. Product development was very strong, driven by improved gross margin. Our strong brand management resulted in high sell-through rates with significantly reduced discounting and clean inventories. The Crocs brand managed this crisis with incredible momentum and our brand relevance increased even further during the pandemic. We continue to fuel brand heat with collaborations throughout the world. In addition to the event I mentioned with Yang Mi, we teamed up Ruby Rose to create a colorful, one of a kind Classic Bae Clog to celebrate Pride. During Q2, we executed a number of collaborations in Japan and Korea. We have an exciting collaboration pipeline for the second half of the year, which kicked off with Luke Combs last week, showcasing a new Classics line. We believe brand momentum was also aided by our A Free Pair for Healthcare program, which helped to generate more than 29 million new visits to crocs.com. More importantly, in just 45 days, we donated more than 860,000 pairs of crocs with a retail value of nearly $40 million to frontline healthcare workers in need. On July 1, we launched our U.S. partnership with Feeding America, the largest domestic hunger-relief organization. This is an important step in our effort to continue to support our communities. I have seen the power of our organization when we come together for good. And I know that together, we will continue to make a meaningful impact globally. Crocs' vision is everyone comfortable in their own shoes. We are activating our vision through these donation programs and our Come As You Are campaign, now in its fourth year, which celebrates one-of-a-kind and reflects that we stand together with all different kinds. While it goes without saying that 2020 has been anything but predictable, I am tremendously proud of how we responded as a team and the results we have delivered for our employees, our customers, our communities and our shareholders. Now let's turn to the future. We are even more optimistic now about the Crocs brand and our long term growth potential than we were coming into the pandemic. Our brand has proven resilient through the crisis and we are demonstrating that we can deliver best-in-class profitability. While we are confident in the long term, we are managing the business cautiously for the balance of 2020. Global uncertainties remain with both the pandemic and the consumer, as stimulus programs potentially expire and unemployment persists. Specifically related to Crocs, we have constrained our inventory levels, which will limit our revenue upside in the back half of the year. These inventory constraints are deliberate. In March, we dramatically cut orders for summer deliveries, proactively managed working capital and preserved full holiday units. We sold through more than anticipated in Q2 and while we are reacting to shortages in core inventory, we feel it is more important to keep inventory lean and to turn up the majority of our focus to 2021. We are incredibly optimistic about 2021 and we will continue to execute our growth plan which is clearly working. Our four key product pillars, clogs, sandals, Jibbitz and comfort technology and our powerful social and digital marketing are clearly creating consumer engagement. From a channel and regional perspective, our digital-first strategy and our growth focus in Asia will lead our future growth. We believe we have a clear path to return to revenue growth in 2021. Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization for their hard work and commitment to delivering exceptionally strong results in the face of such adversity. Special thanks to those in our distribution centers and retail stores. Without you, it would not have been possible to serve our consumers and perhaps, more importantly, our frontline healthcare community for much of Q2. With that, Anne will now review our financial results in more detail.

Thank you Andrew and good morning everyone. I will begin with a short recap of our second quarter results. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. We had exceptional profit in the second quarter. The Americas delivered revenue growth even with retail stores closed in the region for half the quarter. Growth in Americas was offset by COVID-19-driven weakness in Asia and EMEA, resulting in softer topline results versus the second quarter of 2019. The bottomline results were outstanding as we grew operating margins and EPS versus the second quarter of 2019. Second quarter revenues came in at $331.5 million, compared to $358.9 million in the second quarter of 2019, a 7.6% decrease or 6% on a constant currency basis. Currency negatively impacted our revenues by approximately $5.9 million. We sold 16.3 million pairs of shoes, a decrease of 14.6% over last year's second quarter. Our average footwear selling price during Q2 increased 10.3% to $20.29, with the increase attributable to higher prices, lower discounting, increased sale of charms per shoe and channel mix. Second quarter wholesale channel revenue fell 19.5% following last year's reported growth of 9.4%. The Q2 softness was primarily driven by our Asia business, with the largest declines in Japan, EMEA and our Southeast Asia distributor markets. The declines in Americas and EMEA wholesale were less than anticipated as strong e-tail performance helped offset store closures of our brick-and-mortar partners and weakness in distributor markets. Second quarter retail sales fell 41.8% globally, driven by COVID-19 closures in all regions. However, retail comp store growth, which excludes store closures of more than three days in a given month, was an increase of 10.5%, on top of 11.8% comp growth in the prior year. We saw record breaking e-commerce sales growth of 67.7%, on top of 18% growth last year. As Andrew noted, Americas' e-commerce sales grew triple digit or 102.2%, while Asia and EMEA each grew strong double digits. This represents our 13th consecutive quarter of double digit e-commerce growth. Digital revenue as a percentage of total revenue, which includes crocs.com and marketplaces reported in e-commerce and our e-tail revenue included in our wholesale channel, was 56.1% in the second quarter as compared with 32.6% in the same period last year. Our strong digital sales were aided by brick-and-mortar closures. The pandemic accelerated digital penetration, though it is not clear yet if that trend will continue. Now let's review our results by region. As I mentioned earlier, the Americas had another strong quarter, with revenues up 0.7% to $171.6 million and minimal impact from currency. High single digit growth in the U.S. was somewhat offset by weakness in our Latin American distributor business. Retail comps increased 18.2% upon reopening. Growth was phenomenal in e-commerce and stronger than anticipated in wholesale, led by e-tail and the dotcom sites of our brick-and-mortar partners. Our performance in the U.S. is the direct result of our commitment to driving relevance to the consumer through great products and marketing. In Asia, Q2 revenues were $93.6 million, down 21% from last year's second quarter. Strong e-commerce growth of 31.7% was offset by a 44.8% decline in wholesale. We are encouraged by the growth we saw in China, in Korea and the more recent improvement we are seeing in Japan. All three markets had positive retail comps and overall, Asia delivered 8.5% retail comp growth versus last year's comp growth of 0.7%. EMEA revenues declined 5.1% or 2% on a constant currency basis versus last year's second quarter to $66.4 million. Revenue growth in all of our direct markets was offset by declines in our distributor markets. Declines of 60.8% in retail were partially offset by our double digit e-commerce sales, up 52.4% versus prior year and strong e-tail sell-through. Our EMEA business is benefiting from growing brand reach and our continued focus on digital commerce. Our second quarter adjusted gross margin was 55.2%, up 160 basis points from last year's 53.6%, driven by product mix, higher prices on certain products and lower levels of promotions and discounts in the Americas. One-time items that impacted reported gross margin by 100 basis points are largely attributable to COVID related inventory impairment charges in Asia. Our adjusted SG&A fell to 33% of revenue versus 39.4% in last year's second quarter. The decreases in adjusted SG&A is a result of the immediate actions we took to reduce costs in anticipation of lower revenue as the pandemic worsened. Some costs were added back when we reopened stores. So we expect more normalized SG&A levels going forward. Second quarter GAAP SG&A included $14 million of charges, most of which were recognized as a result of COVID-19, including donations of inventories of $8.2 million, employee separation costs and restructuring of $3 million and bad debt reserve of $1.7 million. Our second quarter operating income increased 18.3% to $56.6 million and operating margin increased 380 basis points to 17.1%. Adjusted operating margin increased 800 basis points to 22.3% as cost savings added to the positive leverage in gross margin. For Q2, we recorded a tax benefit of $1.9 million as we accrued more tax than necessary in Q1 in anticipation of weaker profitability than realized. Second quarter diluted earnings per share rose 50.9% to $0.83 compared to $0.55 last year. Excluding non-GAAP adjustments, diluted earnings per share increased 71.2% to $1.01 compared to non-GAAP earnings per diluted share of $0.59 a year ago. We significantly strengthened our balance sheet in the second quarter. We ended the quarter with $151.4 million in cash and $275 million in outstanding borrowings. Our strong performance and cash flow allowed us to reduce our borrowings by $75 million during the quarter. We did not repurchase any shares during the quarter as we sought to maximize liquidity and flexibility. We ended the quarter with over $375 million of liquidity between cash and available borrowings. Inventory at June 30, 2020 was $146.8 million, down from $195.8 million in the first quarter but up from $134.6 million in the second quarter last year. The decrease versus first quarter was aided by sell-through as well as cancellations of deliveries that were scheduled to arrive in mid-June. As Andrew touched on earlier, there are many uncertainties throughout the world and we also continue to lack visibility. As a result, we will not be providing the full third quarter 2020 guidance. However, I would like to share our current high-level outlook. Barring significant additional closures in the second half of 2020, we expect revenue to be approximately flat. We anticipate the sharpest revenue decline to be behind us in Q2. Our normalized tax rate is approximately 17%. However, we expect our tax rate to be 11% for 2020 as we project to utilize deferred tax assets that were subject to a valuation allowance. We now expect capital expenditures to be approximately $50 million, which reflects investment to support long term growth that we have initially deferred. As we have shared, we are relocating and expanding our EMEA distribution center in the Netherlands. We are also opening a facility adjacent to our Ohio distribution center that will significantly increase our capacity in the Americas. This new facility will be dedicated to e-commerce and will open later this year. We expect to generate strong positive cash flows throughout the remainder of the year. In summary, in spite of the COVID-19 disruption globally, the Crocs brand and our fundamentals are incredibly strong. At this time, I will turn the call back over to Andrew for his final thoughts.

Thank you Anne. As our 2019 performance indicated, we had great momentum in our business. Crocs brand has never been stronger, with iconic products at moderate price points with a great storytelling and global distribution. Our company quickly adapted to the COVID-19 crisis and has delivered exceptional Q2 top and bottom line performance in unprecedented times. We remain cautious for the second half of 2020 but incredibly optimistic about continuing to deliver long term profitable growth. Operator, please open the call for questions.

[Operator Instructions]. Your first question comes from the line of Erinn Murphy from Piper Sandler. Your line is open.

Great. Thanks. Good morning and congratulations on the solid results. I guess, Andrew, my question is really around inventory and just the constraints that you are seeing. I guess how are you thinking about prioritizing inventory between your partner doors as well as your own stores into the back half? And how quickly can you get back into style?

Yes. A great question, Erinn. So look, we just finished an incredible second quarter. and clearly, we exceeded both our expectations and the expectations of the external community. So we sold through more inventory than we anticipated selling through and planned for. So we are in a constrained position. I would say we are chasing pretty rapidly core inventory. So our core style is, I think, our Classic Clog, which you can see on our website, is stocked out at this point or is broken in certain colors and we are hopeful that we will get more inventory in a short period of time. In terms of how we are portioning that inventory, we are trying to be pretty democratic about that. We want to support our wholesale partners as well as make sure that we are representing the brand in the right way, both in our stores and on our website. So from time to time, we are stocked out on our own website, but we also think it's important to honor the commitments that we have made to all of our wholesale partners as well. So we are trying to balance that. So I think I would much rather be in this position, frankly. I would hate to be in a position where we had piles of excess inventory and discounting it. Obviously the position we are in has allowed us to ensure that our gross margins remain strong.

Okay. And just to maybe pile on to that, you said a short period of time. Can you clarify? Is that two months? Is that four months? And then have you needed or do you need to airfreight any product to keep up with where the demand has been?

Yes. In terms of timing, it's probably later in the third quarter into the fourth quarter is when we will get into a much better position. And I would say, at this point in time, airfreight is just not a practical option. With all of the passenger flights not operating, which is where a lot of the airfreight capacity resides below deck, airfreight rates are through the roof and for our price of product, that's just not enough.

Okay. And then my second question is just around digital. Clearly, very strong in the quarter. When you look longer term, what do you think digital should be as a percent of the mix? And then maybe for Anne, as you think about the expansion of the DC here in the United States, any puts and takes that we should to be aware of for the model as we think about that in the third quarter in particular? Thank you.

Yes. Let me just hit the digital point and then I will pass it over to Anne to talk about the DC expansion. So firstly, I would say I think our strength in digital and our commitment to digital over many years at this point is one of the really core factors that has allowed us to have such a great Q2. And I am really flourished in the environment that we are in today. We intend to continue to make that commitment. And as we look at the way we define digital, which is both our own e-commerce and our e-tail partners, obviously that was a very large percentage of our sales, over 50% of our sales in Q2. I think it has that potential in the long term. I don't think it won't be that high as we go forward because we obviously opened our stores and our other wholesale partners have opened up. But I think over the long term, we have that kind of potential and I think that is very much in sync with how the consumer wishes to shop in the future. So I will leave it to Anne to talk about our DC expansion, both here and in the Netherlands.

Yes. So from the perspective of the U.S., we are really excited about expanding of our DC in Ohio that we opened last year. I think what you have seen with the increased growth in our e-commerce business, even last year, as you remember, we experienced delays through Cyber Monday and just that huge ramp of volume was difficult to satisfy consumers in a reasonable SLA. And so while we are not going to build for the peak of our business, we do think that e-commerce will continue to become a bigger and bigger part of our mix and we need to support that. And so it made sense to build out additional capacity just dedicated to our e-commerce business. As far as margin impact, I wouldn't say that it really is going to impact the margin in a significant way because it's really going to be absorbed by additional e-commerce volume. So I wouldn't think about it in that way.

Great. Thank you both. All the best.

Thanks Erinn.

Your next question comes from the line of Laura Champine from Loop Capital. Your line is open.

Thanks for taking my question this morning. It's really to dig a little deeper into your revenue guide for the back half. How does that square with your current sales run rate? And maybe you can comment in more detail about percentage of stores that are closing again or what's your total? Because your press release says, almost all stores were open at the end of June, but now the majority are in the Americas. So I just want to get a sense of, are you being conservative about a potential resurgence closing some of your partner stores and your own stores? Or is this just a reflection of where the trend for topline is right now?

Yes. Hi Laura. So I think just starting with, we don't really give commentary within a month. But just stepping back and thinking about our stores, I think we have less than 15 stores closed at this point. Some of them are closed in the U.S., just having to do with the resurgence of the virus. And we expect that to continue just ongoing throughout small closures. We are not anticipating any large scale closures. And that was pretty consistent with where we ended June. I think at the end of June, we had all of our stores opened the minute that we closed a deal. From a run-rate perspective and how we are thinking about the back half, the best way to think about it is, we do believe that we will continue to see e-commerce continue to outperform and we are a little more conservative on the retail front. And then from a wholesale perspective, as we talked about, we will continue to see our e-tails part of our wholesale business outperform while our distributors will take a little bit longer to recover. And then just on a follow-up to Andrew when he was talking about chasing replenishment inventory, we are chasing replenishment inventory for core styles. So if we can secure that a little bit earlier than what we are thinking now and the timing works, we know that there's additional demand. And that could actually lead to some revenue upside versus the flat back half we guided.

Got it. So does that entail your guidance for flat in the back half? Would that still equate to Crocs gaining share in footwear overall? So you are saying the industry is going to be down, but we are going to be flat. Or what's happening from a share standpoint? I am just trying to square the long term growth outlook with the outlook for the back half.

Yes. Laura, I can say unequivocally, we are gaining share. We see that in the marketplace. We hear that from all of our wholesale partners. We are absolutely gaining share in the marketplace. I think we will see over the next week to 10 days the Q2 results from many of our competitors. And I highly doubt any of them will be close to our sales trajectory. So I think we are absolutely gaining share. In the back half of this year, demand will certainly exceed supply. So we will manage that carefully. And then, once again, I would much rather be in that situation than the opposite situation. And then as we look to 2021, we think we are very, very optimistic about continuing our growth trajectory in 2021.

Got it. Thank you.

Your next question comes from the line of Jonathan Komp from Baird. Your line is open.

Yes. Hi. Thank you. Andrew, maybe a bigger picture question. I mean it looks like Crocs lost momentum into the crisis and is regaining some momentum coming out. I am curious just how you think about the duration of this broader trend you are seeing for the brand? If anything has changed? Or in you shift back to offense, if anything will look different than you might have expected several quarters ago before this all started.

Yes. I think the way we think about it, Jonathan, is a few things. Number one, I think our defensive and offensive plans, our defensive playbook is really largely complete at this point and I think has served us very well in terms of making sure we have the right liquidity and we could get on the offense as soon as possible. As we think about the offensive playbook, I think we are seeing some of that play out, but a lot of that really leverages our core strategy. It really leverages our core strategy around clogs, around personalization, around sandals, et cetera. And I actually think that the pandemic and how the consumer is trending, puts us in an even stronger position than we might have thought we were in before, right. I think it's pushing the consumer to a very casual place. I think we see casual rapidly taking share from dress or more formula attire. So I think the consumer is becoming more casual. They are looking for comfort. They are looking for value. They are looking for great storytelling. They are looking for personalization and inspiration. And I think as a brand, perhaps uniquely among the footwear space, we provide a lot of those aspects. So I think the consumer is coming in our direction and I think all the work we have done on the company over the last several years puts us in a fantastic position to take advantage of that. So we think that provides a runway for sustainable growth over a subjective period of time.

Okay. Great. That's helpful. Maybe a follow-up then on margin. Just curious if anything has changed in your outlook for SG&A that you outlined the last quarter for this year and then some of the cuts there? And then Anne, I know you mentioned the return to topline growth next year. I don't think you commented on margin at all. So just any broader thoughts on how the margin outlook longer term may be impacted by some of the shifts you see?

Sure. So just starting with short term. From an SG&A standpoint, we had previously guided for $440 million to $460 million. And given that revenue was stronger than what we had originally anticipated and we did have a number of short term reductions in Q2 just related to our stores being closed and some defensive actions we took. So we do think that SG&A will return to more historical percentages in Q3 and Q4 of this year. And then from an operating margin standpoint, we are really pleased with the way that the quarter shaped out from an operating-margin perspective. I think it really shows all the work that we have done on the business, in particular scaling both SG&A and gross margin. So last year, we were excited to hit our double digit operating margins and we certainly think long term, there's further expansion to be had in margins.

Okay. And just to clarify, do you still expect to be within $440 million to $460 million? Just to clarify that comment.

So $440 million to $460 million was our previous guidance and we are now just saying that we think the back half will be in line with historical SG&A percentages.

Okay. All right. Thanks for all the perspective.

Thank you.

Thanks Jonathan

Your next question comes from the line of Mitch Kummetz from Pivotal Research. Your line is open.

Yes. Thanks for taking my questions. You may have addressed that. I had to step away from my phone for a couple of seconds to go chase the squirrel off my bird feeder. But when Laura was asking about back half growth, I was curious if you talked a little bit about Q3 versus Q4 because, Andrew, as it relates to your inventory comments, it sounds like, I mean, you would be better positioned with inventory in the fourth quarter than the third quarter. And then as it relates to Q3, I am just wondering how you guys are thinking about back to school and potentially schools being online versus in-person? And if that has any impact on your business.

Yes. Thanks Mitch. So we didn't actually give any specifics when you were chasing the squirrel. But I think your assumption is correct, right. So we think about top flat. But yes, if we get back in inventory position later in Q3 into Q4 and we feel much better about that. That would indicate that probably for Q4, will be a little stronger than Q3.

Yes. And back to school, yes?

Yes. So from a back to school perspective, look, it's incredibly uncertain as we are all experiencing right now. Those kind, we don't know what's going on and it's incredibly uncertain. I do think what we are in certain categories that it's still, even if kids don't go back to school in-person, it is still a pivot point that it is not necessarily required, but there is renewal award growth that goes on, right. And we still think that we will see a strong back to school period in terms of consumer shopping. So we are not overly concerned about whether kids go back or kids don't go back. We don't think that's a huge driver for us. I think it will be a little bit better if they did go back, but it's incredibly uncertain. And I think, look, school districts might be changing their minds on a daily or weekly basis right now.

Your next question comes from the line of Susan Anderson from B. Riley FBR. Your line is open.

Hi. Good morning. Thanks for taking my question. Nice job on the quarter. I guess just to follow-up on that last question. Have you guys talked about how much of your third quarter business historically came from back to school? And then I have a follow-up after that.

Yes. So the way we think about that and what we have seen over time is that last year was probably the first year we saw a very significant back to school bump. Historically, it hasn't been a critical shopping occasion for Crocs. But it has become certainly more important. And so I think it's really become more important for us, which is great because it gives us another critical shopping occasion and certainly was instrumental in improving our Q3 last year. So we think it's an important shopping occasion for us and we are very confident in terms of what we are like at this point in time.

Great. And then can you talk about the variances to the wholesale performance across the regions? And I guess if you were not chasing products right now, would you say that orders have returned to normal? Or how should we think about that?

Yes. I think orders, yes, so I think there is a few things I would call out in terms of the variance across the regions, then I will get to kind of order cadence. One of the biggest things that you see in terms of variance across regions is the amount of distributor business that shows up in our wholesale sales across regions. So the greatest impact in Asia where we serve a lot of wholesale distributors, particularly in Southeast Asia, which tend to be highly tourist-orientated markets, think about Thailand, think about Philippines, et cetera. Obviously, tourists are not traveling to those markets and those distributors have been severely impacted. We took a very deliberate decision to not ship to those distributors, right. So we took cancellations and in some cases, proactively canceled their orders because, frankly we could use the inventory elsewhere. We didn't want them to be overstocking inventory. We wanted them to be in a strong position going into 2021, where we think the markets will start to recover, although some of the non-tourist markets, I think, will recover slowly. So that's the biggest delta you see across the regions in terms of wholesale business. I think we highlighted in our prepared remarks, we have seen our business grow in four of our top five markets. So those are our direct markets. In terms of order cadence, I would say as we look at particularly our direct markets and our traditional e-tail and brick-and-mortar wholesalers, I think we are seeing a strong order book. We are seeing both orders for future seasons, we are booking into future seasons right now and replenishment orders. So I would say that's returned to a pretty traditional relationship. The biggest challenge, frankly, is our own availability of supply.

Great. That's very helpful. Thanks so much. Good luck next quarter.

Thank you.

There are no further questions. I would like to turn the call over to presenters for any closing comments.

All I would like to say is that we are thrilled that we had such an incredible quarter two and I want to thank everybody for their continued interest in the company.

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