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…

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…

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.