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Crocs, Inc. (NASDAQ:CROX)

Q1 2013 Results Earnings Call

April 24, 2013 5:00 PM ET

Executives

William Kent - Senior Director, Investor Relations

John McCarvel - President and CEO

Jeff Lasher - Senior Vice President and CFO

Analysts

Taposh Bari - Goldman Sachs

Erinn Murphy - Piper Jaffray & Co.

Jim Duffy - Stifel Nicolaus

Scott Krasik - BB&T Capital Markets

Corinna Freedman - Wedbush Securities

Sam Poser - Sterne Agee

Mitch Kummetz - Robert Baird

Mike Swartz - SunTrust

Lee Giordano - Imperial Capital

Steve Marotta - C.L. King & Associates

Operator

Please standby, we are about to begin. Welcome to the Crocs Incorporated First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time. We ask that all -- in the interest of time, participants limit themselves to one question each. I would like to remind everyone that this conference is being recorded.

And it is my pleasure to turn the conference over to Mr. William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead.

William Kent

Thank you. And thank you all for joining us for our first quarter 2013 earnings conference call. Participants from the company include John McCarvel, President and Chief Executive Officer; and Jeff Lasher, Senior Vice President and Chief Financial Officer.

Earlier this afternoon, we announced our first quarter 2013 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some of the information provided in this call will be forward-looking and accordingly are subject to the Safe Harbor provisions of the Federal Security Laws. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline.

We caution you that these statements are subject to a number of risks and uncertainties described in the risk factor section of the company’s 2012 report on Form 10-K filed on February 26, 2013 with the Securities and Exchange Commission.

Accordingly, actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs annual report on Form 10-K, as well as other documents filed with the SEC for additional discussion of these risk factors.

Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities and Exchange Act of 1934. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. The company may refer to certain non-GAAP metrics on this call, including adjusted net income, explanation of these metrics can be found on the earnings release filed earlier today.

I will now turn the call over to John McCarvel.

John McCarvel

Thanks Will. Thanks for joining us on our first quarter earnings call. With me today is Jeff Lasher, Crocs’ Chief Financial Officer. To start, I will be reviewing the performance of our business in the first quarter. Jeff will walk you through the financial elements of our business for the first quarter and the financial projections of our business for the second quarter. I’ll finish with some macro insights into the business for the coming quarter and we’ll then take questions. I would like to highlight that we will be splitting out Japan from Asia-Pac in our analysis and commentary.

On the whole, we are very pleased with our first quarter results. Revenue for the quarter was $312 million. This is $2 million above the high-end of our guidance and the highest first quarter in the history of the company. This business has been build on a first, global platform, second, multi-field channels, and third, product diversity, and the first quarter is indicative of our long-term vision.

Therefore big call outs from the first quarter call today that we’re going to focus on and discuss with you today. They are retail comps, the FX impact on the business, our increased marketing spend for the first quarter in going forward and lastly, updating you on where we are on the SAP project. To put this in perspective for the first quarter the impact on EPS was $0.02 per share for FX and $0.02 per share for the SAP project.

In summary, revenue increased 17% on a constant currency basis and EPS without these extraordinary events increased by 16% for Q1 2013. So let’s spend some time on wholesale.

Shipments of products to our wholesale channel were up significantly, up 15.5% from the first quarter of 2012 and up 17% on a constant currency basis. This is very important to us as we have slowly and methodically rebuilt our wholesale business in the U.S. market and continue to execute the same plan with our wholesale and distributor partners internationally.

Wholesale growth for the first quarter was a combination of new products in our core business. New products accounted for 34% of wholesale revenue in the first quarter of 2013.

Moving onto retail. Retail grew 17% in first quarter with 10 new retail locations and with retail comps at a negative 5% for the quarter. Retail comps for the first quarter 2012 were 10%, thus creating a high hurdle for comparison in Q1 2013.

A slower margin 2013 impacted the normal seasonality of our retail sales. As it has been well documented by other brands and retailers in U.S., external factors have negatively impacted consumer demand in the quarter. We have seen challenges in the U.S. retail market with weather in many parts of the country.

For example, it’s not in Colorado here over the weekend and again yesterday, the implementation of the -- reimplementation of payroll tax the late refund of tax checks and continued uncertainty in the unemployment market. These factor all impact our consumers buying decisions.

Moving to Europe. European retail was slower namely in the U.K. that’s drove negative comps of 7%. Japan grew 22% in the face of significantly weaker yen and we saw retail comps improved from the low levels of Q3 and Q4 in 2012.

Notwithstanding the pressures of lower traffic and weather, our new products were well accepted in warmer weather in tourist markets. Saving the best for last, Asia-Pac retail sales were up 24% for the quarter with retail comps up 7%.

New products have been key in the transformation of this brand from simple injection molded footwear to more well-rounded casual lifestyle footwear company. We were pleased with the unit and ESP growth in the first quarter.

In the short-term, the external pressures on retail performance will exist and internally, we continue to focus on building a strong retail leadership team globally, managing our retail store operations and growth carefully.

Significant investment, new management talent and retail systems will return to long-term benefit. Long-term positioning of the brand through our owned direct-to-consumer business coupled with an increase in marketing spend is imperative to changing the perception and bringing new consumers to Crocs.

I’ll now turn the call over to Jeff Lasher.

Jeff Lasher

Thank you, John. Hello, everyone, and thanks for joining us today. Our business continues to experience positive results primarily from higher sales volumes and higher average shoe prices. Results for the first quarter of 2013 reflect increases in both consolidated revenues, earnings driven by balanced international growth and customer focus.

To reiterate and expand on what John said, our first quarter EPS was $0.33, up $0.02 from prior year. It was impacted by $0.02 expense for SAP called out in our non-GAAP reconciliation in our press release this afternoon.

In addition, you should also consider that we incurred a $0.03 expense related to increased marketing and about a $0.02 negative impact from unfavorable currency headwinds. This was slightly offset by a $0.01 impact from lower share count in 2013. In total, we overcame $0.06 per share of items compared to last year to grow EPS in the first quarter.

Revenues increased $40 million, up 17% on a constant currency basis from Q1, 2012. Revenue growth was driven by increased volume as units increased 13% and increased average footwear selling prices by 4%.

Units were 15.3 million pairs, up from 13.6 million in the same period 2012. ASP was $19.89, up $0.77 from 2012. In addition, we were able hold gross margins flat for the first quarter even as unfavorable currency markets pressured margins by about 30 basis points.

As the yen declined 14% in the quarter, it alone had approximately 90 basis point impact on our overall gross margin and similar impact in our operating margins as a company. This was offset by increased margins in the first -- in the rest of our global business.

This pattern will present similar results over the year as the yen weakness is only partial offset by a slightly stronger euro. We used 99 yen to the U.S. dollar for our projections going forward in 2013 and that rate is 20% below last year’s average rate of 79 yen to the dollar.

SG&A expenses increased $24 million or 23% to $128 million, which consisted of $69 million in indirect expenses and $60 million in our direct channel expenses. SG&A expenses will continue to increase as we grow global locations, retain and expand our distribution around the globe, some of the key items that increase over 2012 are $11 million in retail related SG&A, $3 million of additional marketing and $2 million associated with the SAP project.

Notably our support cost and other SG&A increased slightly over half the rate of revenue growth. In the first quarter of 2013, we repurchased approximately 800,000 shares at an average price of $14.99 for a total value of $12.5 million.

We benefited from our year-over-year, I’m sorry, our year end backlog going into the season and wholesale revenue grew 18% on a constant currency basis with strong performance from Asia excluding Japan and Americas.

Americas wholesale business benefited from strong year-over-year sales increases in the family channel and reflected our new product introduction and carryover product from last year.

Our Asia business was fueled by strong results in China where our overall business increased 56% and in South Korea where our overall business grew 49% over 2012 level. Backlog at the end of second quarter is up 5% over 2012 level on a constant currency basis.

Our Japan wholesale business declined 6% in light of the recent slower growth in that region. However, our internet revenue in Japan grew Q1 increased 33% giving us confidence that the Crocs product line is well-positioned to expand our sales going forward.

Overall, our retail revenue increased 19% over 2012 levels, as we have added new locations in the quarter in advance of our peak selling season. We are entering our 2013 Q2 with 547 locations around the globe, up 25% from last year.

Global retail same-store sales decreased 5% over the last year with Americas down 10%, Asia-Pacific, up 7%, Japan down 6% and Europe down 7%.

Notably, our outlet stores around the globe had a same-store sales increase of 1% while our full price stores that converted to spring-summer new products early in the quarter, suffered as weather parent in Europe and Americas was slightly colder than 2012.

Our two year comp is 5% in total and 12% in outlets. Importantly, our first quarter retail revenue represents less than 16% of total annual retail revenue and as we comp in 2013 against easier comparisons for the remaining 84% a year, we believe that in 2013 we will average around 1% to 3% global comp for same store sales.

Net income increased 3% from $28 million in the first quarter of 2012 to $29 million in the first quarter of 2013, driving diluted earnings per share up $0.02 year-over-year. Our tax rate in the quarter was less than 17%, but we did have a currency translation loss of $2.6 million.

Turning to product data, our percentage of first quarter revenue derived from the Crocs Silhouette was down to 47% from 49%. This was in part driven by the launch of our new spring products including La Roche, our multiple two collections continue strengthen our men’s casual footwear. Also, our new product introductions globally represented about 34% of our Q1 unit sales.

Looking out into the remaining quarters of 2013, we expect to expand on the positive trends set in the first quarter of the year as the warm weather months approach. We planned to open approximately 80 more retail stores across the globe by the end of the year for a total increase of 90 for the year. As well as open new wholesale doors and order attractive customers and retain loyal as to visual merchandising and product driven expansions.

In summary, our Q2 2013 outlook which takes into consideration the challenging spring in North America, this is same currency headwinds from the yen and macro economic issues in Europe is now as follows.

We expect revenue of $360 million to $370 million and EPS of $0.60 to $0.63 per share. Global currency changes will impact revenue by about 2% or $6 million and operating income $4 million from the U.S. dollar translation of our global business in unfavorable purchasing power of local currencies.

We’ve projected more modest retail revenue growth in the U.S., which will impact the second quarter global growth rate by 1% or $3.5 million from our prior estimate and operating income $2 million.

As a reminder, we will have $2 million of SAP expense and $4 million of year-over-year marketing expense. Currency expectations are now $99 for the yen and $130 for the euro in an effective tax rate of 21%.

That said, we expect global revenue to grow on a constant currency basis, 11% to 13% for the quarter and positions the company for continued growth around the globe through a multi-channel geographically diverse revenue model.

Thanks, and I will now turn the call back over to John for some closing comments before taking questions.

John McCarvel

Thanks, Jeff. I would like to take these opportunities to talk further about the second quarter. Having just return from two weeks in Asian, I have a pretty good feel for the growth of the company globally.

In the Americas, we like the relationships we built in the wholesale space and continue to work closely with them on the growth and development of the brand through marketing and new products.

We have added a few additional key partners in 2013, the Rack Room being one of them. Initial sell through products has been similar to 2012 and we expect acceleration when spring-summer does actually arrive to the generally U.S. marketplace with an even more exciting product line for 2013.

We are increasing our investment in marketing in the U.S. marketplace in the second quarter and marketing focus is to drive traffic into our wholesale and to direct-to-consumer channels, attracting new consumers to the brand and lastly, increasing our conversion rates. We believe the incremental investment in Q2 will be about $4 million in 2013 versus 2012, and will be beneficial to the brand long-term.

It should also be beneficial to our wholesale and direct-to-consumer business in the second quarter but we haven’t built any impact into a revenue projection at this point. In addition, we have hired a new general manager for our growing and expanding business in Brazil and Lat-Am market continues to provide a very good growth opportunity for Crocs.

The European market continues to develop and grow in 2013 in a tough system and retail environment, and with the fairly defined product that defines the brand our original clog. The European management team drove our wholesale business 9.2% in the first quarter and retail increased 21.9%.

We know there is concern with our investment in retail in Europe but there was equal concern with our investment in retail in Asia-Pac, Japan and the Americas in prior years too.

We need the retail stores to assist in the evolution and perception of the brand in Europe, and we believe our retail stores are more efficient use of pure marketing spend at this point to bring new consumers to the brand.

The same dynamic in the U.S. and Asia markets led to stronger wholesale partnerships with us and led to the growth and development of the Crocs brands in those markets. We have the right leadership experience and talent in the European business to manage the larger store base that we developed in 2012, and we plan to continue to add a modest number of new stores in the first nine months of 2013.

Site selection and investments are done through a deliberate and thoughtful process in an effort to take advantage of the existing soft retail market there.

In Japan, we think the market is stabilizing for us after challenging second half of 2012. We normally experience strong demand for new products during April and May, which are key retail months ahead of and during golden week. So we have entered a key consumer period in Japan.

Our direct-to-consumer business is a smaller percentage of revenue in Japan, but our retail sales were up 42% in Q1 and our new Internet platform was operational in January and e-commerce revenue increased 33% on a constant currency basis. Consumer interest in the demand for the brand remained healthy.

Last but certainly not least, our overall Asia-Pac business continues to grow and develop. Asia-Pac grew 34% for the quarter on a broad range of initiatives in the region and countries namely China, Korea and the Middle East. All channels showed strong growth in the quarter, strong pre-books in the wholesale coupled with new products and better weather pattern assisted the region in the first quarter.

Sell-in and sell-through on a number of our core new products gives us confidence that we will see a strong second quarter in the business. I have the opportunity to meet and talk with three of our larger distributor partners in the region and all are experiencing a strong start to the year.

In closing, I think it’s important to reflect positive events for the first quarter and those that have enabled us to exceed and achieve our first quarter guidance. Even in the phase of less than normal retail environment here in the U.S. and Europe, the strength of this print comes through global diversity, our product portfolio and a dedicated Crocs team.

Given the same environmental factors early in the second part of Q2, we have given a broader range of guidance for the second quarter. Hopefully, Jeff has provided you with the clear bridge on the changes to revenue and earnings for the second quarter.

With that, I’d now like to turn the call back over to the operator and we’ll take our first call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Taposh Bari [Goldman Sachs]. Please go ahead.

Taposh Bari - Goldman Sachs

Hey. Nice job. I had a question on, first of all, I appreciate the added disclosures on the Japanese business. I wanted some more clarity though, so you no longer breakout Asia in aggregate, which is where the history lies and our model. So looking back, I guess, either for Asia total or Asia Pac ex Japan, so it seems clear that Japan is stabilized. The comps are getting less negative.

But what -- can you give us some context around the plus 7.3% comp in Asia Pac? I just try to back into the 3Q and 4Q comp so that region seems like that region is also markedly improved. So if you could just provide some color there?

John McCarvel

Yeah. I think in total when you look at the Asia Pac region, what we corporate in that basket of countries is Korea, China, Taiwan, Hong Kong, Singapore, Australia out to the Middle East. And I think what we have seen on the first quarter of this year is kind of general overall uptick in the brand Korea and China have done well in the first quarter. Middle East has also done well for us in the first quarter.

Market did struggle a little bit in the back half of last year that we talked about. Taiwan, Hong Kong, Singapore have all normalized back and actually some of them are comping up slightly with new products, rolling into warmer weather climate like those three markets.

Taposh Bari - Goldman Sachs

Okay. Thank you. I guess question on the backlog of 5% constant currency, can you break out the comp position of that? How much of that is second quarter, how much of that is the back half of the year?

John McCarvel

So if you look at our backlogs as of today, we’re up 5% in the constant currency basis. The predominate -- the first half of the year that spring summer is up about 3% to 5% and the second half is running in that same 3% to 5%. First half is a little bit stronger than 5% on a constant currency basis, on a normal basis like 3% to 5%.

Taposh Bari - Goldman Sachs

Okay. Thanks a lot. I’ll pass it on. Good luck.

Operator

And we will take our next question from Erinn Murphy [Piper Jaffray & Co.]

Erinn Murphy - Piper Jaffray & Co.

Great. Thank you and congrats on a solid first quarter. Jeff, I was really helpful for some of those comments in terms of the second quarter guidance? I was just hoping if you could just try anything pretty down quickly, just kind of rephrase kind of bracketing where we had been in terms of the order expectations versus where we are at right now in the second quarter from a top line perspective?

And then I guess tied to that, how should we think about it as we get through the second quarter at the at once business or the reorder business just given the later start to the spring?

Jeff Lasher

Okay. I’m going to break those into two buckets. And I’ll answer the first one and John will answer the at once. I think when we look at our Q2 guidance today versus where we were a while back, the number one issue is the currency change that we’ve seen on the sustained currency headwinds that we’ve seen since that estimate was given out.

So our global currency changes in Q2 will be about 2% headwinds or about $6 million. That trends license you about $4 million of operating income as you have the effect of both the translation of the business and the purchasing power of the local currency.

And then second, we are anticipating a slightly more modest growth rate in our same store sales base. And specifically in the U.S., we’re expecting flat comps. And as we make that change, we’re expecting the U.S. to drop our revenue forecast by about $3.5 million or $2 million of operating income in the quarter compared to where we were before. And I’ll let John answer the at once question.

John McCarvel

Yeah. So what we see so far through the first 14, 15 weeks of the year is the trend of sell-through at our key quarter accounts to be online consistent with last year’s sell-through, which was -- which is pretty grip. So I think the question kind of comes around backlog earlier from to push around where we’re at from a backlog standpoint. We think we’re equal to or maybe slightly ahead of where we were last year at this point in time on a relative basis.

We see some markets where backlog is already at 100% of order demand for the quarter. What we think is, it seems to be very -- I hate to say this weather driven from this point through the next 10s weeks of the quarter. The sun comes up, we truly do experience spring going into summer, maybe we don’t even have spring. It goes right into the summer and some markets when we think if there is some late demand up there.

But their sell-through has been indicative of what we have seen with new products and the uptick has been pretty brisk. Inventory wise, we’re prepared to support that demand in the second quarter. So hopefully we’ll a lot more sunshine and something that placed to the spring shrink a little bit better.

Erinn Murphy - Piper Jaffray & Co.

Okay. Now that’s helpful. And I guess in terms of the second half, you didn’t comment about the kind of top line. I think previously it was looking at about high single-digit. Should we think about the second half just given of the new expectation for both the yen at 99 and euro at $1.30. Should we just think about discounting that high single-digit by the incremental kind of plan headwinds for the currency, or how should we think about the cadence of that?

John McCarvel

Maybe Erinn, I’ll start and then Jeff can add on to that.

Erinn Murphy - Piper Jaffray & Co.

Sure.

John McCarvel

I think we look at the overall year. We still look at the first half of the year as Jeff talked about, it should be in that range that we had discussed before in the 13 or so percent range with our business being slightly bigger in the first half of the year and back half of the year. We still think given the strength of some of the other markets and from a product standpoint where we’re at. We still see that high single digit back half of the year. So we’re still looking at topline being in that 10%, 11% growth range for the year, maybe Jeff like to add to that.

Jeff Lasher

Yeah. Just as far as the headwinds from a currency adjustments. As we look at outings for the rest of the year, the headwinds will be about 2% in Q2. It will go up a little bit in the second half as we kind of lap some stronger currency numbers in the second half. The segments will be around about 2.5% to 3% headwinds in the second half, Erinn.

Erinn Murphy - Piper Jaffray & Co.

Okay. That’s tough one. And just last, could you just maybe share a little bit more, you talked about the new styles and increase of some of those. Just maybe more specifically on how you’re seeing the huaraches that has started to come through both the wholesale and retail now globally in ‘02 versus the expanded retro collection. What product are you most excited about and where you’re seeing kind of consumer gravity towards what product?

Jeff Lasher

Yeah. We love all our children equally. I think earlier in, the retro we launched a little better there. So we put some of that into the fourth quarter. That’s done well and it’s a little bit different, consumer is going to buy that product, watching behind that, first was the boat line. So series of products that we have launched there with the molded boat-pin, probably the most predominant product that women’s wardrobe has done extremely well also which is kind of after dill kind of like product.

But in that same kind of family of casual footwear for women’s -- that has come out earlier. We’re only starting to flow huarache out now late March and now into the April timeframe. And you’re going to see that kind of flow, if we think it will run all the way through the summer season.

In warmer markets, we’re going to continue to sell that other way into the late third and the fourth quarter timeframe. So huarache is a little bit behind, but I can’t leave out Alley, which is our whole new series of women’s watches that has also done extremely well. So the yearly products I’ve outlined in Alley have done really well. Now we think we’re in a catch of second way of here with huarache flowing into to most markets really at the beginning here of the second quarter.

Erinn Murphy - Piper Jaffray & Co.

Okay. Thank you and best of luck. I’ll let someone else jump in.

Operator

We’ll take our next question from Jim Duffy with Stifel Nicolaus.

Jim Duffy - Stifel Nicolaus

Thanks. Good afternoon. John, can you just speak to about the marketing spend. It sounds like maybe that’s incremental to previous to plans, is that accurate? And can you elaborate on where the dollars will be spent? Thanks.

John McCarvel

Yeah. So, Jim, we talked about this before. And I think we think it’s really important that we keep reiterating this point as we kind of go through the year. We said that really for the past three years, 10, 11 and 12, our marketing spend stayed in about that $45 million, that mid-40s range.

And we have just felt that with the products that we have, there’s still a lot of -- yeah, I know you made that product generally we made that product. Well, that’s pretty cool -- well that’s Crocs and we have really felt that this year given the retail footprint that we have the eCommerce, CRM database that we have and just the number of products that are on. Wholesale partners continue to take into the line that it’s a win-win proposition for us to get out behind is the little bit more -- little bit more marketing spend around products.

And it goes across fully integrated campaigns that start with print advertising, that run into social and digital campaigns tied to that. About two-thirds of that incremental spend will be here at the Americas marketplace, one-third of that rolls into our international marketplace.

So, building a strong brand here on, getting behind and some of these key stories is something that we just felt this is the right year given where we’re at, the marketing analytics that we have. We can get better feel for what that spend looks like as we go through the year.

So, we must talked about incremental spend in Q1. Now, we talked about that earlier. We just want to make sure that you guys think about that versus Q1, of ‘12 that you keep that in mind that every now since that incremental $0.02 per share in marketing which you would have actually seen as about 19% -- 18%, 19% increase in EPS added to where Jeff talked about earlier in the Q1 numbers.

And we expect about $4 million to go into our global market -- incremental marketing spend in the second quarter, which again will be spread heavily to the U.S. spend, but also global driver and kind of this whole idea of us as a more holistic casual lifestyle for Crocs brand.

Jim Duffy - Stifel Nicolaus

That’s helpful perspective. Thanks. And then a follow-up to that, Jeff, one of the thing I’ve struggled with in modeling looking forward would be incremental SG&A from additional retail store would be additional marketing spend. What would you think about as an appropriate growth rate for SG&A for the business in 2013?

Jeff Lasher

When we look at our SG&A spending internally, we do separate like we said on the call today. There is an indirect expenditure that is for marketing and for the corporate headquarters, the region offices, the sales organization and the wholesale business. And then there is the direct to consumer marketing which includes the Google, advertising, other online advertising addition to running our retail stores around the globe.

So when we kind of think of that way, we have had a line of site for long time of keeping our expenses running at about half the rate of revenue growth for the indirect channel excluding the marketing piece. And we did that in the first quarter and we maintain that as vision as we go forward and then the direct-to-consumer channel tends to be closer to the rate of revenue growth as -- except for the leverage that we get on the same store sales base for the existing cost structures. So that’s kind of how we think about it internally between SG&A indirect and direct.

Jim Duffy - Stifel Nicolaus

And what’s split between direct and indirect?

Jeff Lasher

We gave that in the call it was $69 million for indirect. And it was $60 million for direct channel.

Jim Duffy - Stifel Nicolaus

Great. Thank you.

Operator

We will take our next question from Scott Krasik with BB&T Capital Markets.

Scott Krasik - BB&T Capital Markets

Yeah. Hi everyone. Thanks. It looks like your European wholesale sales for the first time in about four or five quarters, does that have to do with taking in the distributors you did last year or was there just growth in organic markets?

John McCarvel

More just growth Scott in organic markets. So as an example I think we have been really shutout over lot of different retail channels and in the U.K. for example. And this is the first year and probably four, five years it were. And places like Debenhams, House of Treasures, stores -- we’re opening up more of the department stores, less of the sporting goods, more specialty retail.

To do this just like it was in U.S., it takes seasons. It takes the year. It takes two years to kind of get buyers to rethink about you in a different way. And I think the retail stores in the U.K. have helped change that brand perception of buyers in that marketplace. I also think that they get to see brand in their travels globally when it comes to the U.S. And so what we’re starting to see is more wholesale type of retailers starting to reengage with us in the marketplace.

That has very little to do with the Benelux marketplaces. We are the only marketplace that we took it back.

Scott Krasik - BB&T Capital Markets

So you took Spain.

John McCarvel

Spain is with the distributor. Spain and Italy is also with the distributor on wholesale. We took back our retail rates in those market places.

Scott Krasik - BB&T Capital Markets

Okay. In terms of the profitability, you took a big step back last year, I assume because of the shift from wholesale to retail. Do you expect the European operating margins then to start increasing year-over-year?

John McCarvel

I think that right now when we look at the business, it’s going to be flat -- flattish year-over-year. We haven’t built into our forecast that kind of improvements yet. But I do think that the stores that we’ve taken out that were there from 2006, ‘07, ‘08 and some of those we’ve got out of leases moved on from in store location. So just not really good for the brand into more outlet and into more tourist destinations.

There will be a transformation in those margins. But I don’t think we’re building blocks. I’ll think that we’re not building that into this year’s plan at this point in time. But I think its pretty good management team there. And I think that these people have a lot of retail experienced. And I think we’re seeing improvement quarter-over-quarter in the overall business and in retail. And so we’ll see.

Scott Krasik - BB&T Capital Markets

Okay. And then -- thank you. And then just last, I think you shipped over a 100% of your backlog in the first quarter relative to the constant currency backlog, you had reported. So when you look at a replenishment, I think you alluded to a little bit. But are there changes in the replenishment amount that you would expect versus let’s say last year even though your sell-through rates are similar?

John McCarvel

No. I think when you add additional door account, especially with Independents, we book 5%, 7%, 8% in Q1 in shipping Q1 orders. So we take inventory positions and flow well that some Independents are going to flow through.

I think again, our strength of the brand I think what people have seen from us, from a product standpoint they like. And so we have more early independent orders sell-throughs. So those accounts we have seen have been solid, have been good especially in normal weather areas.

And so as I said to the question earlier what we look at in terms of sell-through with our major accounts, where we have a lot of visibility is that their inventory position are higher this year then they were last year. We do have more space in most of the key retailers that we work with -- wholesalers that we work with. And what we see is that the sell-through percentages through the first 14, 15 weeks there is constant with last year.

So there is not an inventory build-up from our perception of what they have today. And like we said sun shinning here today in (inaudible) and we hope with that kind of continues. It’s going to continue to weekend here. We hope that it starts to continue in a more consistent basis throughout the U.S. And then I think we’re prepared to hopefully have a good second quarter.

Scott Krasik - BB&T Capital Markets

Okay. Okay. Thank you.

Operator

We’ll take our next question from Corinna Freedman with Wedbush Securities.

Corinna Freedman - Wedbush Securities

Hi, there. Good evening, guys. Just wondering if you could talk about what promotion might be baked into what sounds like flat comp guidance for the second quarter. We have seen a couple of retail promotions that were 2 for 40 or 2 for 30, are you back during in getting more promotional retail. And then also, there is the 3.5 million or the top line impact from the U.S., does that already include potential markdowns support?

John McCarvel

Lots of different questions, Corinna, thanks for that. Let me see if I can start it out, try to parse it out, mainly if I miss them, just tell me. So we were less promotional in the first quarter than we were in the first quarter of 2012. And I think what you’ve seen in the numbers is that our Internet business was down about 7% for the first quarter, but partly because the competitive environment out there in that space is one that really kind of induces you to give constant discounts or free freight. And we’ve left that kind of work for the wholesale accounts that we sell products to.

I think going forward into the second quarter, some are going to be about strength of product at this point in time. If we think that we’ve got three, four renters in addition to our core products and that’s moving briskly. Then I will think we’re going to be as promotional as maybe like you’ve seen in prior quarters. So we even see some other people today.

Of course, like any brand, we have EUL, inventory that builds up when we do go run programs that we want to match different products together or move kind of end of life products with those discounted kind of rates on colors even and in core products. And we’re going to continue to do that as any brand does to move inventory that we want to move. But I don’t see us being more promotional year-over-year in the second quarter.

I think as Jeff said and I touched on this briefly too. We’ve taken down our overall expectations and the plans to the quarter and it’s just being flat comp growth for the retail business. Some markets will be up. Some markets will probably be down, still depending upon the overall macroeconomics.

But, I think, we expected a much stronger March in both Europe and the U.S. But in both cases whether kind of we think more weather-related issues, we just didn’t see that, that materialized in our retail stores. So, we’ve taken a little bit more conservative view in our guidance for the second quarter.

Corinna Freedman - Wedbush Securities

Okay. And could you -- I might have missed it, but did you gave inventory plans for the second quarter and is there an update there?

John McCarvel

When we look at our inventory at the end of the second -- sorry, first quarter, our inventory for the first quarter levels was down versus the rate of revenue growth. So, we were up on an absolute dollar basis. When we look out into inventory and to the future quarters, our inventory management capabilities continued to improve, both in the retail and in the distribution centers that support the wholesale business. So, we consider internally opportunity that continued to manage our inventory better than last year.

Corinna Freedman - Wedbush Securities

Okay. And tax rate guidance for the second quarter, it looks little was a little bit lower than I think we were all expecting, is there enough space there?

John McCarvel

21%

Corinna Freedman - Wedbush Securities

21%. Okay. And then lastly, on the product side, I know you guys, I think we’re working on an athletic product. Is there anything you can share with us about expectations for that in fall or for the second half?

John McCarvel

How do you define an athletic product?

Corinna Freedman - Wedbush Securities

I did see at the Fanny, the last Fanny stuffing with laces.

John McCarvel

Yeah. There are products. I mean we do -- we have build sneaker, several (inaudible) past that’s super lightweight, super comfortable. And we have also just kind of on trend, more of a very light weight looking, casual walking but not a performance type product of (inaudible) wear. But, yeah, for people that are looking for kind of casual sneaker to walk in. Yeah, we do have that coming for the second half of the year for fall, winter ‘13.

Corinna Freedman - Wedbush Securities

Okay. Thanks.

John McCarvel

I want to make sure there is misunderstanding that we were becoming a performance brands.

Corinna Freedman - Wedbush Securities

Okay. I understand. Thanks.

Operator

We will take our next question from Sam Poser with Sterne Agee.

Sam Poser - Sterne Agee

Thanks for taking my questions. Good afternoon. I have got a few. Number one, you talked about the same-store sales getting -- improving somewhat in the second quarter so far to date. Can you give us some idea of the numbers, where it’s running exactly since you talked about it? Since you sort of brought it up, can you tell us where you are?

John McCarvel

Sam, we don’t comment on where we are at in the current quarter relative to performance. We kind of gave you what we think is, what we think the quarter is going to look like.

Sam Poser - Sterne Agee

All right. Number two, you talked about -- Jeff, I think you talked about the additional marketing spend and without it, you would have a few cents of earnings there. Can you tell us what kind of incremental sales you think you drove with that incremental marketing spend?

John McCarvel

I think in my comment Sam, I said that it was not really our intention to make that investment and to see and immediate returns in the quarter. And so we didn’t see any incremental uptick in revenue based on the out marketing spend. A lot of that came late in March and you’ll see a lot from -- really starting in late March, all the way through April and into early May in the U.S. marketplace.

Now in the Asian marketplace, we’ve been running a digital social campaign into our retail stores. It started back in January, so different markets have different cadence. But as we said, we didn’t build into this year. Any idea from a revenue standpoint that that was going to have to drive or would drive incremental revenue, so a bit of a haircut year-over-year.

Sam Poser - Sterne Agee

Great. And then, thank you. And then lastly, just on the tax rate Jeff, but could you walk us through why there should be a difference between the tax rate in Q1 and the tax rate in Q2, because I think a lot of those headwinds still exists if I heard you correctly or advantages that exists that would be there again?

Jeff Lasher

Yeah. The tax rate fluctuates, most importantly by the amount of operating income that we see in the United States, which is where one of our highest global tax rates are. So as year goes on, the earnings in the U.S. have a seasonal impact to our tax rate. And so that’s why we are guiding the 21% in Q2, whereas we ran a little bit under that in Q1.

Sam Poser - Sterne Agee

All right. I’m sorry. I’ll give one more than. You continued to open the stores. You went to the high -- close to the high end of your original range -- of the adjusted range of store openings. What you’re doing with the existing stores to get them? I mean to get the existing stores starting to comp and being more efficient?

And how is that the focus adjusting to start getting some -- to getting the comp and the productivity going. I know there was some weather issues in the quarter, but comps weren’t greater in the fourth quarter either. So can you give us some indication of what you’re doing to drive stores on I mean, like existing store sales to grow business?

John McCarvel

Yeah. I think we do a number of different things to drive traffic into stores. I think our fundamental belief and what we’ve seen is that we’ve had a broad portfolio of products to come in, shows our consumer the different products that we’re selling in. And unfortunately what happens is we’re a little too wide and a little too thin. And so as we continue to kind of dial-in the store performance.

In the old days, you could just stack them high and let them fly. You had a nominal number of styles that you were moving. And so that dynamic goes a little bit easier. So if you are dial-in a new work or retake planning system, adding in the additional merchants and buyers into the organization that we need to have. We think it’s a much more of an assortment issue and the depth of product in the stores then it is from a pure traffic standpoint.

We think we have good traffic, changing up a little bit the visual merchandising in the windows. If anybody comes we have, we contest that we think is that final new format of store in bolder that we really like the look and feel to it. And it just gives a lot more love to the products that we have designed and developed and it actually makes them look a little bit more valuable than the peer approach that we have taken in the past. So, there is a lot of things that, as you know having come from this business, that goes into making retail work. We don’t necessarily think it’s always the traffic issue. No, we think its uncertain planning challenge also.

Sam Poser - Sterne Agee

All right. Thanks very much. Good luck.

Operator

We’ll take our next question from Mitch Kummetz with Robert Baird.

Mitch Kummetz - Robert Baird

Yeah. Thanks for taking my questions. A few quick ones. Jeff, gross margin outlook for the year I think on the last call you’re talking about sort of 25 to 50 basis points of improvement and if we were expecting that to kind of consist in the Crocs quarter where does that stand now?

Jeff Lasher

Well, I think as we said in the script, the impact of the Japanese yen is really, highly impacting our gross margins overall for the year. And just to give you an example, the Japanese business for that quarter had a 90 basis points overall impact on our global gross margins.

So, as we look out into the year, we’ll see some gross margin improvement in the rest of the world. But that will be offset by the Japanese gross margins going down in relationship to the conversion of both, their operating income and their gross profit dollars as well as the purchasing power issue.

Mitch Kummetz - Robert Baird

So, Q1 gross margin was flattish, I mean does that mean you kind of expect gross margin to run flattish on the year then? I mean just based on kind of the impact that yen had on Q1, expected to continue to impact over the balance of the year?

Jeff Lasher

Yeah I would give you -- right now I’d say that gross margins for the year will be running in about the same rate as last year.

Mitch Kummetz - Robert Baird

Okay. And then on your comp outlook, I know you ticked that down a little bit based on the first quarter and then also you’re expecting for Q2. You’re seeing it’s up 1% to 3% on the euros, just starting to try to do the math to figure out what’s embedded in the back half. But maybe, can you spare me that hassle and just let me know kind of what you’re thinking in the back half or maybe Q3 versus Q4, I think comparisons get easier as we go through the back half.

Jeff Lasher

That’s exactly right. So we think that we had a 10% comp in the first quarter. 2% comp in the second quarter and then looking at negative comps in back half of the year. We think that there is going to be bit of an improvement in the back half of the year. As Sam just asked about planning systems, better merchants in the business, better products, flowing into Q3 and Q4?

Mitch Kummetz - Robert Baird

Okay. And then lastly just housekeeping, what was the average diluted share count on the quarter for Q1? I know you bought back stock in the quarter, but what was the share count that got you that EPS?

Jeff Lasher

It’s on the press release.

Mitch Kummetz - Robert Baird

It is.

Jeff Lasher

Yeah. So it was 88.1 outstanding at the end of the quarter.

Mitch Kummetz - Robert Baird

Sorry. Didn’t see it. Thank you. Good luck.

Operator

We’ll take our next question from Mike Swartz with SunTrust.

Mike Swartz - SunTrust

Hey. Good afternoon, everyone. I just wanted to take some time and touch on maybe the marketing spend and how you think about that longer term. I think in the previous call you said you’re increasing kind of marketing dollars for the year, be about $15 million. It looks like you’re going to spend about $6 million, $7 million in the first-half of the year. But as we look out to maybe 2014 and beyond, is this kind of the new normal for marketing or do we expect maybe to pullback on some of that as maybe we move into ‘14?

Jeff Lasher

Yeah. Mike, I think what we said was that we were going to kind of balance this out from an expense standpoint, so you’re exactly right. When you look at where dollars are flowing in the first half of the year versus last half year. And we never have really put in, never been in last four, five years, put in a significant amount of spend in the back half for the year. And so, to guess what, we don’t maybe always seller of our winter products as effectively as we could or should. Putting the right marketing dollars behind at this year, we do think it’s going to help and it will get consumers to think about us in different wearing occasion.

I think what we’ve said pretty clearly that this was a year where we were going to pick up our overall marketing spend for the business. So it was not going to be build into the sustained run rate of the business. It will come down. I think we’re going to see how effective that it is.

What it really does to the long-term psyche of the buyers out there. We have a lot of analytical data where consumers move much more to the neutral and considering the space for Crocs customer, they were three, four years ago and were pushing them up that change. We don’t think we’re going to need to frame the pump with this much marketing spend next year.

Mike Swartz - SunTrust

And I think you said, you really didn’t see any impact of the marketing per se in the first quarter just because it came certainly in March, I guess. When would you expect to see, maybe the benefits of the marketing spend in the second quarter, third quarter?

John McCarvel

You sound like me. So, I’m impressed. But where we’re going to see this? I think that there is a certain part of this that we spend money on Google or Yahoo or Bing and you’re looking for convert. I don’t think that we’re necessarily, go out looking for convert in this kind of spend.

What we’re looking for is it when, for example, people receive the new brochure that we send out in March. What we saw was by getting that a home flyer kind of the fourth channel to open up a way that we connect with and talk to consumers. We saw the uptick being 23%, 25% higher convert on that in home mailer, plus we are getting people to think about us in a different way.

So our convert this year was up 23%, 25%. But what we also saw was that people were looking through the magazine and buying a lot of new products. And on average they were buying three pairs per order. So what we have to do is we have to continue to change people’s perception of us, of the Crocs and we have hard enough time with the financial community, getting them to think about as Crocs. Now we’ve got hundreds of other million people out here, globally that we are trying to get them to see us in the different way.

I think, we all think that may occur. Some of that may occur this year. We may see that uplift with new consumers coming into the brand. But it may take six months, it may take year or two kind of continue to change that consumers thinking. So, hopefully, we see it start to pane out in Q2 and Q3 on new products. But it’s so early to make that call right now.

Mike Swartz - SunTrust

But I mean I guess it’s safe to say than you wouldn’t have any kind of benefit baked into the second quarter based on some kind of return on that marketing?

John McCarvel

That’s right. We don’t and as we…

Mike Swartz - SunTrust

Okay.

John McCarvel

…we tried to say that in my portion of the script.

Mike Swartz - SunTrust

Okay. Great. Thanks guys.

Operator

(Operator Instructions) We will take our next question from Lee Giordano from Imperial Capital.

Lee Giordano - Imperial Capital

Thank you. Can you talk a little bit about the long-term retail store growth opportunity by region? And then secondly, you anticipate opening at a similar place over the next two years or at what point do you see slowdown in your retail growth? Thanks.

John McCarvel

Yeah. I think, Lee, it kind of depends upon the market that you are asking. So, I think what we’ve said is that for this year, we’re kind on the same basic growth rate in the Americas and in Asia that we have for the last two, three years that we are adding in incrementally 25 to 35 stores.

When we spread that across two, three stores in Hong Kong, two, three stores in Singapore, two, three more stores in Australia and then you are adding 10 or 15 stores in China, 5, 10 stores in Korea. All of the sudden that number seems roughly small relative to the market that we are servicing, and of course in that market we have lot of distributors and sub-distributor partners that open up retail stores. We think we have in excess of 650 partner stores that are opened globally. So we have our own retail store investment, plus we are partnering with a lot of people in different geographies to continue to grow the brand.

I think our per view right now is over the next two years, for ‘13 and ‘14 that we have a pipeline that we’ve identified in certain locations with right demographics. Maybe, we don’t have the right locations, exactly pinpoint at this point in time, but that should continue in that same range of growth into ‘14 with U.S. market having some good opportunities in outlets and are expressed to continue to expand in a few certain other locations outside of outlets.

And opening up more outlets in Europe, but we’re still at about 100 plus stores in Europe. So we’re going to see how that grows and what the financials look like there. And then how the overall European economic is developing overtime too. So what we’ve, a view on really right now is what that looks like over the next two years. But at the end of the day if we had 700 stores globally, I don’t think we’re over penetrated by any stretch of the imagination.

Lee Giordano - Imperial Capital

Great. Thank you.

Operator

And we’ll take our final question from Steve Marotta with C.L. King & Associates.

Steve Marotta - C.L. King & Associates

Good evening, everyone. Just one question, as it relates to the increase in marketing spend in the back half of the year, can you talk a little bit about new products that might be going along with that? I know that your obviously desire is to get traction in fall winter product, can you talk about what’s new and what could be expected in the back half of this year?

John McCarvel

Yeah. It is a number of products that are a little bit more wearing occasion friendly when it gets colder, when its get wet. Whether it be in women’s heals that look a little bit nicer, but don’t have that soft light weight comfort of Crocs’ products. They can’t build on that, the ally that we’re selling to that same consumer for the spring summer timeframe.

And we’ve continue to niche out spaces in the boots, in kid boots kind of men’s casual shoes that slow nicely to the back half of the year so. It’s building that idea that we don’t feel products hold that and we’re not only relevant to the spring summer timeframe that just push about wearing occasions, plays into this idea that you can wear Crocs for winter days or the days that are bad also.

Steve Marotta - C.L. King & Associates

Right. Great. Thank you very much.

Operator

We have no further questions at this time. I’d like to turn the call back to our speaker.

John McCarvel

Thank you, Operator. And thanks to everyone for joining us today in our first quarter earnings call.

Operator

This concludes today’s conference. We thank you for your participation.

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