Crocs, Inc. Q2 2009 Earnings Call Transcript

| About: Crocs, Inc. (CROX)

Crocs, Inc. (NASDAQ:CROX)

Q2 2009 Earnings Call Transcript

August 6, 2009 5:00 pm ET

Executives

Jennifer Almquist – Director, IR

John Duerden – CEO and President

Russ Hammer – CFO, SVP-Finance and Treasurer

Analysts

Jeff Klinefelter – Piper Jaffray

Reed Anderson – D.A. Davidson

Jim Duffy – Thomas Weisel Partners

Mitch Kummetz – Robert W. Baird

Jeff Mintz – Wedbush

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Crocs, Inc. Fiscal 2009 Second Quarter Earnings Call. (Operator instructions).

I will now hand the call over to Jennifer Almquist, Crocs' Director of investor relations.

Jennifer Almquist

Thank you. Good afternoon, everyone and welcome to our second quarter earnings conference call. It's a pleasure to speak with you today. On the call today are John Duerden, Crocs' President and CEO, and Russ Hammer, Crocs' CFO.

Earlier this afternoon, Crocs announced second quarter financial results. A copy of the press release can be found on the company's website www.crocs.com. Reconciliations of the non-GAAP measures mentioned in the press release and on the call today have been provided and can be found on the Investor Relations of Crocs website and in this afternoon's press release.

Before we begin I would also 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 federal securities laws. These statements concern plans, beliefs, forecasts, guidance, projections, expectations and estimates for future operations. Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of our 2008 Annual Report on Form 10-K, as well as other subsequent filings with the Securities and Exchange Commission.

Accordingly, actual results could differ materially from those described on this call. Those listening to this call are advised to refer to our 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 Exchange Act of 1934. Crocs is not obligated to updates its forward-looking statements to reflect the impact of future events.

I would now like to call the – turn the call over to John Duerden, Chief Executive Officer of Crocs. Please go ahead, John.

John Duerden

Thank you, Jennifer and welcome everyone. We are pleased to report to you today a better than expected operating results for the second quarter of 2009. We are also particularly pleased to announce that due to our strength in cash position at the end of the second quarter, we have completely paid off the outstanding balance on our credit facility this week.

And if I may take this opportunity to paraphrase a quote from the American author Mark Twain, "The rumors of our demise have been greatly exaggerated." And while we are certainly not celebrating here, you might forgive us for a few mid-fives given some of the recent media attention.

Our recent performance and improved financial position can be attributed to several factors, the extraordinary strength of Crocs brand and its continuing resonance with our core consumer. Secondly, the enthusiastic acceptance and sell-through of our new spring product line. Thirdly, our ability to effectively our assets including managing down our inventory levels. Fourthly, the successful execution of our turnaround strategy to date. And finally, and I think this is important, unwavering commitment to return this company to profitability and to dismiss the notion that Crocs is a fad.

Certainly, the company has its challenges, but as our revenue this quarter suggests, finding a solid consumer base doesn't appear to be one of them. And as I've said before, people seem to either love Crocs or hate them. But either way they're certainly talking about them. And the company will continue to battle naysayers. The Washington Post published our obituary in July, claiming we were simply a product of the economic boom, a one-shoe company and a dead brand.

Other media outlets in the U.S. and Europe picked up this story on jumped on the on the bandwagon. But our loyal consumer base tells a different story. In fact, it's the same story that I told you last quarter. The Crocs brand, perhaps more than any brand that I've been associated with, continues to resonate with a very passionate, very engaged worldwide consumer base.

And the negative press we received in July ignited the passions of this consumer base in a most extraordinary way, aided by our own social media response strategy. That's code the Internet. The day after the first article hit the wires, we had a record sales day on our U.S. Internet site. More than 16,000 pairs of shoes sold that day over the Internet. Our thanks to the Washington Post who will receive a pair of Crocs as a token of our appreciation.

The original Washington Post article incidentally about Crocs do more than four times the number of online comments as an article released the same day about the Sotomayor hearings. Evidentially, consumers around the world who recognize a feel-good product when they see one, react strongly when someone tries to tell them what not to wear. I like to call it the beginning of a feel-good revolution.

Our quarter two 2009 revenue of $198 million exceeded the high end of our forecast and was well ahead of the last two quarters. A strong indication of the brand's relevancy during its peak selling season remains in tact. Sales were driven by a positive reception to our 2009 spring line by above planned performance in our retail businesses and better than expected sales of impaired product and by continued strong performance in Asia.

We closely managed our assets and successfully reduced our inventory by another 15% since last quarter. We continue to work on rebuilding our relationships with key accounts and driving our company-owned retail business this quarter. In the meantime, we are focusing on those places where we are able to directly influence presentation of the brand and offer the full breadth of the Crocs product line of which many people are not fully aware.

As a result, sales from our company-owned retail locations increased 28% of revenue in quarter two, up from 28% in the first quarter. And I think it's important to note that we see this and this maybe a slight change in my own feelings about the business, that this is an area of great potential going forward and I'll talk more about that in a minute.

While we reported a net loss of $30.3 million in the quarter, if we exclude special items, we reported a net loss of $5 million compared with net income of $5.4 million in the same period 2008. I will let Russ go through the specifics in a moment. But I should point out that on an operational basis, our bottom line results were well ahead of our initial forecast.

I think we are encouraged by the progress we've made thus far, but I think it's also important to remind everyone that our turnaround remains in its infancy. Our results this quarter highlight some early accomplishments and put us ahead of schedule in a number of respects, but there is still a lot of work to be done over the next 12 to 18 months to bring this company back to profitability without in anyway minimizing our financial and operational progress.

I think that one of the conclusions or reflections on our most significant outcomes, if you like, of this quarter has been the amazing response from our consumers. The consumer has spoken and I'll give an update on specific programs against our core strategic initiatives in a moment.

But for now, I'm going to turn the call over to Russ who will review the financial results for the quarter.

Russ Hammer

Thanks, John. Hello to everyone on the call today and thanks for joining us. As I've done in the past, I'll provide you with year-over-year comparisons and where it makes sense to do so, in order to provide clarity on the progress of our turnaround I'll also provide some sequential comparisons, as well as channel and geographic breakdown to provide additional clarity.

But first, the big news. As John mentioned previously, we are pleased to say that we were able to pay off our debt using the cash we generated this quarter. We ended the quarter with $77.5 million in cash after generating cash from operations of $26.1 million. Our strong cash position enabled us to recently pay off the $17.3 million of debt we had sitting on our balance sheet at the end of the second quarter.

I am very pleased to say that today the company is completely free of bank debt. This provides us a significant amount of strategic capital flexibility recognizing that a good capital strategy always includes ready access to cash. We have also signed a nonbinding term sheet with a well-known vendor and are in a process of working through the diligence process to secure an asset-backed revolving credit facility allowing us greater liquidity. It's still early in the process, but we hope to finalize a new line by the end of the third quarter.

One key element of our cash management strategy that supported our increased cash balance is the strength of our balance sheet through our strong asset management. Notably, at the end of the second quarter was the improvement of our day sales outstanding, which declined from 40.4 days in Q1 to 31 days in the second quarter. Note this was a substantial improvement from Q2 of ’08 when our DSO was at 52.3 days. We ended the quarter with $67 million in accounts receivable.

We are also very pleased with the progress we made on bringing down our inventory during the quarter. Our inventory at June 30th, 2009 decreased to $111.6 million, down 22% from year-end and 15% since our March quarter. We are pleased to say this represents a decline in the inventory of 58% since our historical high at the end of the first quarter of 2008.

Equally important I might note is that we've reached our goal of 3 inventory turns ahead of schedule. Of the $111.6 million inventory, $84.9 million relates to net footwear finished goods. As you recall on our previous calls, our goal is to reduce footwear inventory to under $100 million by year-end 2009 and we accomplished that well ahead of schedule.

Most of the decline in our inventory balance this quarter was due to second quarter sales, particularly in the global consumer direct channels. We are at an industry norm of 3 turns. We do expect inventory to continue to decline in Q3, but we expect it to be at a much more modest rate. While the majority of the Q2 decrease in inventory was due to sales of product, we also contributed $800,000 pairs of shoes to our Crocs Cares program, which consisted of a mix of both impaired and full-priced products.

Notably, this earned the company a spot on the Today Show, through Al Roker's Lend-a-Hand series, where we donated more than 1,000 pairs of shoes to the Chance for Children Foundation, a charity that works with homeless and disadvantaged youth in the Los Angeles area. We've also donated to partners such as Big Brother Foundation, Feed the Children, and UNICEF, to name a few in developing countries such as El Salvador, Guatemala, Haiti, Guyana, Zimbabwe and the Grenadines. It is our intent to continue to establish Crocs as a strong community leader through our Crocs Cares program.

Now, turning to the income statement, this quarter included a few notable charges as one might expect given the amount of changes going on in our business. I will simplify the actions we've taken in order to clearly explain these charges and their effects on our results.

Total sales for the second quarter of 2009 were $197.7 million, exceeding our own internal expectations. This compares to $222.7 million in the same period last year. Notably, we experienced a 47% increase in revenue during Q2 2009 compared to our 2009 first quarter, outpacing most of our industry in sequential revenue growth.

Now, by channel review of revenue reflects the growing strength of our direct consumer demand as much of the increase in revenue this quarter was driven by our company-operated consumer direct retail and Internet channels. Retail channel sales increased 59% in second quarter 2009 to $55.3 million compared with Q2 2008. We ended the quarter with 310 company-operating retail locations worldwide, up from 290 last quarter, with the majority of the increase coming from our Asia and U.S. markets.

Retail sales accounted for 28% of our global revenue in second quarter of 2009. Also, strong international sales, particularly in the various Asian markets, helped drive our Q2 international sales to 64% of total global revenue.


We ended the second quarter with 121 kiosks, 67 store-in-stores, 46 outlet stores and 76 full-priced retail locations. We also have more than 200 third-party owned stores globally for a total of over 500 global consumer direct retail locations at the end of Q2 2009. Included in our Q2 2009 SG&A, were $25 million of retail related costs including salary, space and other retail related costs.

Our Internet channel also continued to perform well during the second quarter of 2009. Revenues generated by our Internet sales channel in Q2 2009 increased to $17.4 million or a 25.2% increase over Q2 of last year. Internet sales represented 8.8% of total worldwide revenue this quarter. We now have e-commerce enabled sites in 21 countries, spanning each of our geographic regions. Our Crocs online loyalty program now has more than 1 million subscribers worldwide.

Total wholesale revenue declined 28.2% compared to Q2 of last year to $125 million this quarter. Once again, the business was affected by depressed market conditions, weak wholesale consumer demand, and retailers operating with much leaner inventory levels. Sequentially, compared to Q1 ’09 wholesale revenue, we saw an increase of 31% quarter-over-quarter, primarily duet to stronger wholesale performance in Asia, reflecting the continuing strength of the brand in that region, as well as strong consumer response towards new spring line.

Now, turning to geographic regions. Q2 2009 sales in Asia increased 31% over Q2 of 2008 to $80 million. This increase was driven by robust sales in both retail and wholesale channels in this region. We were encouraged by the strength of our Crocs in Asia and hope to continue to capitalize on this strength in coming quarters. We added seven retail locations in the region during the quarter.


In Europe, revenue was down 42% to $32.2 million in the second quarter of 2009 compared to second quarter of 2008. We continue to be impacted by the strong presence of imitation products and parallel imports in this region, and continue to vigorously defend our intellectual property rights. We saw a strong acceptance of our Internet platform in the Europe region as Internet sales nearly doubled from Q2 ’08 to Q2 ’09. While this channel, we recognize, in its start-up phase, we were very encouraged by the strong direct consumer response and expect this to be a continued source of growth in the region.

Sales in the Americas were down 19% from Q2 ’08 to $85.5 million in Q2 ’09. These declines were fueled in large part by the ailing company, which as we've said previously, has lead to reduced demand in retailers operating at lower, leaner inventory levels. We continue to improve our relationships with our wholesaler customers and John will touch more on this subject in a moment. The Americas consumer direct channels I might note, sales were $42 million, up 47.7% over Q2 2008.

Total Q2 2009 footwear sales accounted for 94% of our global revenue and represented a 11.7 million units for an average selling price of $15.80 versus an average selling price in Q2 2008 of $18.39. Now, this represents an average selling price increase from our $15.11 in Q1 ’09 on a sequential basis. Core products, w1 include Beach, Cayman, Kids Cayman, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth and Kids Mammoth, represented 30% of our unit sales and sales of our classics, which include our Beach and Cayman models, represented approximately 16%.

As you may recall in Q3 last year, we impaired a portion of our inventory that we impaired a portion of our inventory that we believe we would not sell, or would sell at a discounted book value. In executing against our plan to thoughtfully reduce inventories, we've been able to sell a significant number of the shoes we impaired in 2008, many at higher prices than we had originally estimated.

As a result, we yielded higher revenue and margin on those units. These items generated $23.7 million in sales for the quarter. Excluding our impaired unit sales, our average selling price for unimpaired units in the second quarter of 2009 was $19.25, an increase over the 2008 second quarter.

Gross profit for the second quarter of 2009 was $101.1 million, up from $90.3 million in the second quarter of 2008. From a margin perspective, Q2 2009 gross margin was 51.1% compared to 40.5% of revenue in the second quarter of 2008. As I mentioned previously, we sold a significant amount of impaired product in the quarter. Because we were able to sell those products at prices substantially higher than we had previously estimated, would be realizable value, the effect was accretive to our gross margin during the quarter by $25.3 million.

Also, as we announced in the last call, we completed a tender offer for employee stock options during Q2 2009 that were deeply out of the money. As a result of this offering, we recorded charge of approximately $16.3 million in Q2 related to previously unrecognized share-based compensation expense for these tendered options. Of this total $16.3 million, $3 million was recognized as additional expense in cost of sales and the remaining $13.3 million was recognized in SG&A.

On a normalized basis, excluding the effects of previously impaired unit sales and the $3 million additional expense related to tender offer, our gross profit would have been $84.2 million or 48.4% of revenue. This increase in profit margin over Q2 2008 was due to an increase in our average selling price excluding impaired units.

And as I noted previously, offset somewhat by the short-term costs and efficiencies on a global basis, attributable to a consolidation of our U.S. warehouse space. We are pleased we have completed our U.S. warehouse consolidations and expect to complete our Europe and Asia warehouse consolidations by the end of the year. We anticipate that the cost benefits related to these consolidations will be realized starting in 2010.

Our second quarter SG&A expense was $91 million compared to $89.9 million in Q2 2008. As we stated last quarter, we have additional sponsorship related expenses during our second and third quarters. We are a sponsor of Crocs' AVP pro-volleyball tour for the 2009 season, and accordingly our Q2 and Q3 sponsorship expenses are higher in these quarters.

As part of our cost reduction initiatives, we will no longer be participating as an AVP sponsor after the 2009 season. While we've enjoyed our time as an AVP sponsor, we look forward to investing into more consumer-focused marketing programs. Included in SG&A for the second quarter of 2009 was $13.3 million in additional stock-based compensation expense related to our tender offer as I explained earlier.

Foreign exchange gains included in SG&A were $3.6 million in Q2 2009 compared to $1.1 million in Q2 2008. Excluding the effects of the tender offer and foreign exchanges, SG&A was $81.3 million compared to $91 million in Q2 2008. In order to lower our breakeven point to move into profitability more quickly, we continue to reduce our SG&A and cost of sales through various means including cost spend control, warehouse closings, centralization, and through continuing process improvements.

As part of the turnaround process and as the company's strategy evolves, we continue to take a hard look at our business aspects in order to assess where we foresee future value. As a result of our ongoing assessments this quarter, we incurred $34.8 million in restructuring and impairment charges, of which $5.3 million was recognized in cost of sales.

These charges were comprised of $11.2 million in restructuring charges and $23.7 million in impairment charges. I'll provide a little detail on each of those. The $11.2 million of restructuring charges consisted of $4.1 million related to global consolidation of our warehouse office and distribution space. Most of those costs related to the warehouse consolidation in the U.S. and into the new facility and duty-free zone outside Los Angeles, $2.2 million in severance costs, $1.1 million in earnout money related to our acquisition of Bite; and $3.8 million in the smaller restructuring charges including but not limited to cancellation fees on certain of our sponsorship agreements, as well as a cancellation of our warehousing arrangement in Bosnia.

The $23.7 million in impairment primarily consisted of the following. $13.1 million related to the write-off of obsolete molds, tooling equipment and other manufacturing assets; $6.5 million related to write-off of certain intangible assets, consisting of $3.7 million in impairment of capitalized software and $2.8 million in impairment of patents, trade names, and other intangible assets; $2.4 million related to the write-off of distribution equipment, fixtures, leasehold improvements, and other distribution assets no longer being used as a result of the consolidation of our warehouse space, and $1.1 million related to the write-off of certain sales and marketing assets no longer being used.

During the quarter, we recognized expense of $5.1 million related to donations we made through our Crocs Cares program and the corresponding gain related to this donation of $2 million. Since 2007, I might note, we have donated nearly 2.3 million pairs of shoes to people in the – both domestically and abroad. In the second quarter of 2009 alone, we donated 800,000 pairs consisting of both end-of-life product and full-priced items. We intend that this kind of program will continue, and that it becomes much more a part of the Crocs culture and reputation worldwide. John will also touch more on this in a moment.

The additional cash impact of the restructuring activities was a total of $8.5 million, of which $3.1 million was paid in the second quarter. The rest will be paid over the next three quarters. There was no cash impact related to the impairment and charitable contribution expenses.

We ended the second quarter of 2009 with a GAAP operating loss of $24.5 million compared to $2.9 million in the same quarter of 2008. On a normalized basis, excluding the effects of all the one-time items, we reported a non-GAAP profit before tax of $2.6 million. As a reminder, one-times include net gross profit impact of sales of previously impaired units, additional stock-based compensation related to the tender offer, foreign exchange gains, restructuring and impairment charges, and net charitable contribution expense.

We also reported tax expense of $7.6 million this quarter. This expense related entirely to withholding taxes on royalties and income tax in jurisdictions where we are profitable this quarter. These expenses will be applicable to the back half of the year as well.

On a GAAP basis, we reported a net loss of $30.3 million or $0.36 per diluted share in the second quarter of 2009 compared to net income of $2.1 million or $0.03 per diluted share in the second quarter of 2008. Excluding the effects of the previously mentioned one-time items, our non-GAAP net loss for Q2 2009 of $5 million of $0.06 per diluted share compared to net income of $5.4 million or $0.06 per diluted share in Q2 of 2008.

Net capital expenditures, which includes cash paid for fixed and intangible assets net of asset sales for the second quarter, totaled $9.7 million, a 54% reduction from the second quarter of 2008. We continue to actively manage our capital expenditures and anticipate that our capital expenditures for the remainder of this year will primarily be dedicated to tooling, retail and IT process improvements that will allow us to more effectively provide quality and efficient customer service.

Now, turning to guidance. We expect to generate between $150 million and $160 million of revenue during the third quarter of 2009. As I indicated earlier, we except to continue to have some duplicative costs during the third and fourth quarters related to the ongoing consolidation and reduction of our global warehouse space. The normal seasonality of our AVP sponsorship will also affect us through Q3. We expect a diluted loss per share between $0.14 and $0.06 excluding any one-time charges.

Overall, we are pleased with the progress we've made this quarter. We exceeded our sales expectation, our brand continues to show global – strong global appeal to our strong end consumer demand. We continue to lower our costs and SG&A after excluding one-time non-cash charges through our cost reduction efforts.

We significantly lowered our inventory levels by over 50% from Q2 2008, improved our DSO to 31 days from 52.3 days in Q2 2008, lowered CapEx by over 50% in Q2 2008. Our stronger operating results and improved asset management resulted in stronger cash performance, which allowed us to fully repay our debt facility. We also delivered against our commitment as we met or exceeded guidance for the third quarter in a row despite low visibility in this ailing economic environment. Very good progress; however, there is still much work to be done.

To discuss that, I'll turn the call back over to John.

John Duerden

Thank you, Russ. Maybe I should as a final end to this call, try and place the magnificent performance, if you like, within the context of our overall recovery strategy, which I took you through last time.

Last quarter I gave you my initial observations on the business after my first 60 days with the company. And I think it's true to say my general impression since then has not changed. First of all, this remains a vibrant brand. But I have a greater understanding of where the company truly stands now in the market and with its consumers and the challenges, which the company faces. I also have a better idea on where the company should be both operationally and financially with respect to its peers.

Most importantly, I see a clear path and how to get there, very similar to the last quarter. I've also had an opportunity to discuss the performance with the management team during the last four months. I'll share these points with you now.

Last quarter, I pointed out seven initiatives that I felt was required to build a solid foundation from which this company could grow profitably in the future. They were; first of all, improving our cash position. That was my highest priority 90 days ago. As we've highlighted on the call, we exceeded our own cash forecast as a result of higher sales and tight asset management in the second quarter and as a result, were able to pay off our debt. Candidly, I didn’t we would be in this position this early.

As a bank debt-free company, this puts us in an excellent position to negotiate favorable terms for a new facility that I think will give us greater flexibility in the long run. We will continue to actively manage our cash going forward so that we have the capital flexibility to make the critical strategic investments necessary to develop this business.

Second strategic objective was further inventory reduction. I identified this at the time as our single biggest challenge last quarter and it will remain a primary area of focus for the rest of this year. Our excess inventory is not only one of our cost drivers, but the manner in which we reduce our inventory has got to be managed with extreme care. It has a fundamental bearing on the perception of the brand, on our future price levels, our relationships with major wholesale customers, our ability to move new products into the market, and the speed with which we are able to respond the competition.

We made tremendous progress since last year. Inventories are half of what they were in the second quarter of 2008 and in the last six months have fallen by 20%. On an annualized basis, our inventory turns were 3 times this quarter due in large part to a healthy response to our spring 2009 line, as well as better than expected sell-through of our retail and Internet consumer direct channels.

Our global inventory, as Russ has already observed, decreased by more than 58% since its historical high in 2008. I think this is pretty good accomplishment. We still have work to do to bring us to our longer-term goal of a turn of a minimum of 4, but certainly we are pleased with the progress that we've made thus far.

I'd like to comment on a small, but I think an effective way, to help us to bring down our inventory level this quarter and that was through charitable giving. This quarter, we donated 800,000 pairs of shoes to charities both domestically and abroad and without being over altruistic about this or being subject to criticism for moving products in this way, it's been a very well organized program in which we've invested. And it's helped us spread a little goodwill the same time as we address a fundamental business challenge.

More significantly, it allows us to connect with consumers in ways that go beyond our traditional marketing. And I consider this an increasingly important element in our corporate business strategy and the program will be developed to form a central part of our future corporate responsibility program which we've entitled Crocs Cares. It's neither fleeting and it's not motivated by pure business. The Crocs Cares program will reinforce our overall aspiration to be a do good-feel good company for our customers, our employees, and for our investors.

The third point that I made last quarter was aligning our SG&A costs with lower sales volumes. While bringing down our inventory balance is a significant piece of the cost puzzle, particularly its impact on our gross margins, it is nevertheless only part of it. We must continue to be focused and rigorous about future cost reduction. And as a result of the company's explosive growth, our infrastructure is still burdened by both manual and duplicative processes.

As I said before, our 2009 capital expenditures give priority to initiatives, systems – IT initiatives that we foresee will bring about efficiencies in the business and the heightened customer service. We've accelerated these initiatives this year and expect many of these to be in place by the end of the year. And as these initiatives roll out, we will continue to restructure the company to achieve a business model, which compares favorably to best in class in this industry. But at the same time, it supports our own unique and evolving balance between the wholesale and retail businesses.

Ultimately, I believe that Crocs over time can consistently deliver gross margins in the mid-to-high 40s and SG&A levels in the low-30s as a percentage of our total revenue. These are longer-term goals and I don’t believe that they are metrics I expect will hit on an annualized basis in 2009.

The next initiative was to improve our wholesale operations. Last quarter, I indicated that one of our primary focuses would be repairing relationships with our key accounts at wholesale. While our wholesale business in Asia continues to grow, the wholesale business in North America and Europe, as Russ has indicated, suffered not only from the economic downturn, but was exacerbated by internal operational challenges during our hyper growth phase.

We are actively rebuilding these relationships, and are receiving positive feedback on our service levels, on our recently instituted in-store merchandizing program, which is a very important program in my view, and on the spring summer 2010 product line. I've met with a number of our larger accounts and believe from that feedback that we are on our way to restoring these relationships.

We remain absolutely committed to improving the level of service that we provide through our retailers. Another key factor in improving our relationships with our wholesale accounts has been the speed with which I think we've cleaned up our distribution. This is an ongoing process and I think we and our customers are pleased with the progress that we've made so far.

Customer service, we remain committed to improving the level of customer service to our loyal consumer base. During the second quarter, we launched an enhanced U.S. Internet site, which provides better merchandizing of all of our brands, as well as enhanced search capabilities that allow consumers to more easily browse through the breadth of our product line so they can see the wide variety of styles that we have to offer. We are also investing in the system – systems in the next two to three quarters that will significantly improve the level of service that we provide to our consumer base. We have prioritized our limited capital investments to include order entry, retail, and Internet system.

Finally, there's the product itself. With our technological capabilities and knowhow and proprietary Crocslite material, we are in a position to redefine how people think about injection-molded footwear. It's a strategic objective for Crocs to be number one in injection-molded footwear, perhaps not necessarily in volume but certainly in share of mind. We are attracting renewed, if reluctant, interest from the fashion media, particularly regarding our women's product line.


We are redefining our point of view. We are creating fewer, more compelling styles, grouped as collections, and creating stability in the product line as we tell a story over time instead of merely focusing on one season to the next. Our collections will continue to reflect the brand's unique DNA and will be based on our best selling styles in recent years. Crocs has had more than 14 styles that have sold more than 1 million pairs in the first five years. That's a pretty phenomenal achievement.

We are also successfully extending the product line to new areas, such as the successful Prepair athletic recovery shoe. We've had notable success with this product strategy in our own retail and Internet channels where we have direct guaranteed access to the consumer and where we can display the full power of our product line.

We've already finalized our spring 2010 line with an eye towards improving Q4 performance and mitigating seasonality. These designs are compelling, they are innovative and attractive and still keep to the core of what Crocs does best, designing and selling shoes that are comfortable, casual, affordable, and fun. That is the whole bark of Crocs products.

Our tremendous growth early in (inaudible) has presented us with a long to-do list, but I think we are making progress as our recent results demonstrate. We will continue to execute these seven initiatives over the next 12 to 18 months. Given the current economic circumstances and the fact that we remain in transition, there is limited visibility to the quarters ahead, but I remain confident in our goal of becoming profitable again sometime next year. I believe, most importantly, after four months working with Crocs that we have a senior management team in place that can achieve these objectives.

Just a final thought. There are those out that have written us off. This quarter's results, I think, financially, operationally, and qualitatively shows that this company and the brand are still very much alive. This quarter, the consumer rose up in defense of the brand. This has never been more clear than the consumer response to Washington Post article and others of its caliber. It was truly revolutionary behavior, unplanned, irrepressible, spontaneous, and incredibly powerful, and it illuminates the latent potential of this brand and our ability to cap in to that goodwill.

And I think it underlines that our challenges are things that we can fix, or will correct naturally as the economy recovers. Crocs is a brand that has achieved worldwide recognition on a par with some of the giants in this industry. Our task now is to improve our internal performance, while leveraging the power of our brand.

And with that, Russ and I will now take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). First, we'll hear from Jeff Klinefelter with Piper Jaffray

Jeff Klinefelter – Piper Jaffray

Yes. Congratulations to everyone on great management of the business in this environment, that's terrific.

John Duerden

Thanks, Jeff.

Jeff Klinefelter – Piper Jaffray

Couple of – few questions for you. John, maybe we could start with you a view towards short term on Q3, or John and Russ combined. Can you give us a little bit more sense for how you see the gross margin and SG&A lines shaking out with that top line and bottom line guidance that you provided for us?


And then, also in terms of the revenue, I think one of the keys here is getting a higher level of comfort with visibility and as you mentioned John, it's still difficult, but with your diversification of the model, the greater retail – the more retail that you have, the momentum in Asia, can you talk a little bit more about how you are coming up with your forecast for Q3, what geographic regions or channels and how confident you are in those – in that forecast?

Russ Hammer

Jeff, it's Russ. Let me – thanks first for the congratulations. And let me give a little color on that. So – I think first, your question regarding around the margins, so as I stated on the call, we did see some uplift in the margin on a GAAP basis. As we reported, that won't reoccur in Q2 and we are not giving specific margin guidance, but we will have the continuing inefficiencies of the consolidation of both our Europe and Asia warehouses in third and fourth quarters. So I do expect the third quarter margin will not be as robust as the second quarter margin sequentially, if that helps you.

And then as far as the revenues from the geographic and channels, the second quarter is normally our highest seasonality, I think 2007 was the only exception to that when we had the big build-up to Mammoth. So we normally see our second quarters 31%, 33% of our business and then we see a seasonality drop-off in the third quarter. Plus in our consumer direct after the back-to-school time, retail slows down in September. So we'll see those natural effects in our revenue.

So if you look at our – for example, our second quarter without the benefit of the impaired unit sales, which we identified when we said we were around $174 million, and then seasonality, that's how we got to our guidance. We do see strengths still in the Asian market and as we said, everywhere we see strength in the consumer direct channels of both retail and Internet. John, any other –?

John Duerden

Yes. I think – let me say Jeff, that we expect to see continued strength in the things that are moving pretty well. Recovery in the wholesale channel takes a little time, as I think everyone is aware. So we will continue to push on those things that are already moving. I believe very much in galvanizing the resources of the company behind the areas of opportunity or areas perhaps of competitive weakness. And I think that we've seen really good growth in Asia and I think the growth in our retail business and our understanding certainly of the retail business has been enhanced significantly during the last quarter. And I think we'll continue to push hard on those.

Jeff Klinefelter – Piper Jaffray

Okay. In terms of the balance of this year and I guess to the extent you already have things in the pipeline for next year, can you give us a sense for what sort of retail growth you have planned currently? I mean, how many stores do you plan on adding second half of this year and next year or at least directionally how you are thinking about store adds?

Russ Hammer

So Jeff, we are not thinking super-aggressive in that area. We are looking some modest growth in – particularly in the outlet areas in the U.S. and in Asia, but we are talking half a dozen type stores in each market type of a growth rate, so pretty modest.

John Duerden

We are going to put a full press, Jeff, on the operational efficiency of those stores. We've got some consultants working with us on that at the present time and I don’t think we'd see a massive growth in stores between now and the end of the year, in fact very marginal.

Russ Hammer

Jeff, one thing that we – as John commented on, we are focusing on the operational aspect. In the second quarter, we saw – just to give a little flavor, our same-store comps in the U.S. were down, but they are only down 1.9%. And we saw that, it was a significant accomplishment given that most comps in most markets were down more than that in the quarter. We are really focusing on the operational efficiencies in our stores and we are seeing the consumer demand is pretty strong in the consumer direct channel.

Jeff Klinefelter – Piper Jaffray

Okay. In terms of the SG&A run rate, Russ, could you just go through again what you would consider your core SG&A, what it was in Q2 and what you expect that to result in here for sort of second half into 2010? I mean, what's the base level SG&A that you are working down to?

Russ Hammer

As we said, we reported a GAAP $91 million (inaudible) we were down in the low-80s and we do have that AVP sponsorship, which is significant still in Q3. So we expect Q3 will continue to come down from Q2, but slightly. We'll see more significant drop-offs in the fourth quarter and as we go into first quarter, as we complete the changeover of our AVP, and then we are continuing our cost reductions in all areas of admin, corporate, and looking at all areas globally within the SG&A function.

Jeff Klinefelter – Piper Jaffray

Okay. Just a couple of housekeeping and then I'll take the rest offline. CapEx for full year and free cash flow forecast for full year at this point?

Russ Hammer

We are not going to give guidance on the full year, Jeff, but our CapEx is running tighter than what we thought here in the first half and – but as John said, we are investing in our IT systems on the order entry, the global Internet system platform and our global retail system. So we are going to spend a little less than what we thought on an annual basis, but we are not going to give any guidance on that right now.

Jeff Klinefelter – Piper Jaffray

Okay, great. Good luck, congrats to everyone. I will call you back offline for more questions.

Russ Hammer

Thanks, Jeff.

John Duerden

Thanks, Jeff.

Operator

And next from D.A. Davidson, we'll hear from Reed Anderson.

Reed Anderson – D.A. Davidson

Good afternoon. A couple of questions. On the sales of the impaired merchandise or previously impaired, just curious, I presume the majority that went through the U.S. and through your own retail or Internet, is that a fair assumption?

Russ Hammer

Actually, it's not. The channels – lot of it went through retail and Internet, but it was global.

Reed Anderson – D.A. Davidson

Okay.

Russ Hammer

It was in Asia, it was in Europe and it was in the U.S., not primarily in the U.S. We were thoughtful about how we did that. As John had mentioned on previous calls, we weren’t just going to go to channels where we knew we could jump through. And we actually found that by going through the consumer direct channel, we actually got higher price than what we have estimated at the time that we had impaired it.

Reed Anderson – D.A. Davidson

And is there additional carryover perhaps in the third quarter from a similar – because there is still more impaired merchandise out there that you are selling at better prices or was that all worked out in 2Q?

Russ Hammer

So if you recall, back in Q3 we had about 8.2 million units that we impaired and at the end of Q2 now, we are down to 2.2 million units. So it's way ahead of schedule of what we thought we would accomplish by this time, because we said that would take us 12 to 18 to 24 months to thoughtfully execute in the markets. So we will continue to see that in third and fourth quarters, but at a much smaller.

Reed Anderson – D.A. Davidson

Much smaller rate? Okay. That's very helpful. And then piggybacking on Jeff's question about just kind of getting at the core SG&A, I'm just curious if you just give us kind of a sense of direction relative to just kind of what you consider your marketing spend, what is that looking like today versus what it would have been maybe a year ago or a quarter ago? Just giving a sense of what you are spending there to drive the current level of business?

Russ Hammer

So we are spending a lot less in our marketing area and we are also going through a pretty dynamic change of our marketing. So as we said in the call, we are changing our sponsorship strategy, what we've enjoyed being an AVP sponsor over the years and now we are changing from doing that type of sponsorship to more direct consumer. And also as we've expanded our retail and that's become a significant part of our business, that is marketing is own with the stores that we have.

John Duerden

Yes, I'd like to make a comment on that. I am – we are not spending enough on marketing in my view and we need to make provision to spend more on marketing by reducing costs in other areas. We are realigning marketing spend, however, much more in support direct retail.

One of our big programs and most important programs and I think, proving to be one of our most successful programs this year has been in-store merchandizing. We set up a completely separate team in the company that has been very successful and we've seen some quite dramatic changes in sell-throughs as a result of installing this merchandizing in the store. So that's an area we are going to put money in there, we are certainly going to be behind direct support of our retailers and direct support of our retail operations and we get a good bang for the buck there, it appears.

I think there are other things we can do at the brand level, but as I've observed already, the brand recognition for Crocs is huge and that’s not an area I think now that we need to spend a lot of money on. What we need to do is we need to very carefully focus our spend in support of the retailers and in support of full merchandizing of our product line. But we are going to try and make provision to spend more on that next year.

Reed Anderson – D.A. Davidson

Very good. And Russ, you had – in your comments, you had given a number that you said that the expense to operate the retail business and I didn't write that down. Could you repeat that number, please?

Russ Hammer

Sure. In this quarter, it's $25 million, Reed.

Reed Anderson – D.A. Davidson

Okay. And then lastly, I'm just curious – I know it's a small piece of your business, but just a sense to what the trend is. Could you tell us what Jibbitz's sales would have been in the quarter versus – and what the change would have been either year-to-year or quarter-to-quarter?

Russ Hammer

Sure. Just give us a second here. It’s small, it's going down, but – we'll get that for you here in just a second. Well, Jibbitz in the quarter was $7.1 million.

Reed Anderson – D.A. Davidson

What would that have been like versus either the 1Q or last year's 2Q?

Russ Hammer

Second quarter last would have been $17 million, so down about $10 million.

Reed Anderson – D.A. Davidson

Okay. All right, that's it from me for now. Thanks, guys.

Russ Hammer

Thanks, Reed.

Operator

And next, we'll hear from Jim Duffy from Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

Thanks and very nice work on the quarter balancing and improving. It is very impressive, I congratulate you on that. Russ, you said a mouthful going through the numbers to say the least. I think you said 48% gross margin ex items.

Russ Hammer

That's correct.

Jim Duffy – Thomas Weisel Partners

Could you walk me through how you got to that number again, please?

Russ Hammer

Sure. So primarily Jim, if you look at the business, we had – we had $197 million sales and we had $23 million of sales in impaired product. So our standard, call it, product sales were $174 million.

Jim Duffy – Thomas Weisel Partners

Okay.

Russ Hammer

And our GAAP reported margin was at the $101.1 million. So what you back out of there is the impaired unit profit, $25.2 million. It's on our attached schedules that we sent out too, Jim. We put –

Jim Duffy – Thomas Weisel Partners

Okay.

Russ Hammer

And then we had the restructuring charges of $5.3 million. So the $25.2 million was a benefit. And then there is also additional stock-based comp of $3.1 million. That will get you down to $84.2 million, which is the 48% I referenced. And there is a bridge in the attachment just to walk you through that in detail.

Jim Duffy – Thomas Weisel Partners

Okay. I'll take a closer look at that.

Russ Hammer

And we attached it for your reference, so you can see what very normalized our GAAP to non-GAAP, we attached a profit bridge and SG&A bridge and the margin bridge.

Jim Duffy – Thomas Weisel Partners

Okay. And then, that 48% gross margin, do you see that as a good normalized gross margin to work with on a go-forward basis?

Russ Hammer

No. As I said, we are still going to have some inefficiencies in the third and fourth quarter as we are going to – the exercise that we completed in the U.S. of consolidating down the southern warehouses here in the Denver area, which I think you visited most of them, Jim, to L.A. We are doing that exercise in third quarter and fourth quarter in Asia and Europe. So we are going to have some inefficiencies there.

Jim Duffy – Thomas Weisel Partners

Okay.

Russ Hammer

Just – as John said, that's going to be more in getting out into 2010, that's our longer-term objective, just to get back up to those levels.

John Duerden

But I think we've got a line of attack on that margin, Jim, and I really think that we can get to those industry level margins.

Russ Hammer

Absolutely.

Jim Duffy – Thomas Weisel Partners

Okay. Great, you have a good growth in retail. I would assume that would be achievable. And then a point of clarification on the $25 million for retail operating expense, does that include the leases?

Russ Hammer

It does, Jim.

Jim Duffy – Thomas Weisel Partners

Okay.

Russ Hammer

All of our retail costs are in SG&A.

Jim Duffy – Thomas Weisel Partners

All right. And then the savings you expect from parting ways with the AVP and the closing of facilities, can you quantify that for us?

Russ Hammer

Actually – so actually, Jim, we are not going to – as John just articulated, we are not going to pour all that into the savings. We are going to invest more in marketing and our intention is to actually increase our marketing spend, not decrease it. We're just going to channel it into other areas, more consumer direct, as John articulated.

Jim Duffy – Thomas Weisel Partners

Okay. And then can you ask you guys to speak more specifically about the components of the Asia businesses? Which geographies are driving the growth, where you are seeing strength, where you expect to see strength to continue?

John Duerden

We’ve got – it's consistently fairly strong, I must say. But the biggest and most successful market is Japan. I was just there actually last week and we have a good management team there. The brand is extremely well received and I think that – I think we can see continued growth in Japan. Korea is a big potential market for us and China, of course, and we are really just organizing ourselves to go after the China market. And some of the markets, Singapore is very successful for us.

Russ Hammer

Thailand, Australia and Hong Kong.

John Duerden

We still look at Hong Kong obviously as a separate operation, as distinct from PRC, but they are all actually quite strong markets for us. The brand is very well positioned there, it's extremely well presented at retail and I think that there is a good potential for the growth there.

Russ Hammer

We also include, Jim, in our Asia markets from a geographic perspective, South Africa and Middle East and those are also doing very well, especially South Africa.

Jim Duffy – Thomas Weisel Partners

Okay. How is it that you are able to kind of fight off copycat product that there's been such a headwind for you in the European market? Does it just not exist? Do you have better branding, better trademark protection?

John Duerden

Yes. I – if I – it's interesting looking back on prior expense in this industry. Europe is always a very good of a market for some reason. First of all, price levels are higher there and it attracts knock-offs, grey market, like a magnet. And we've adjusted our price levels there to try and counteract some of that. But it comes down really the clever positioning of the brand and just staying after that real clear brand positioning.

And I think probably in Asia everybody knows you can get knock-offs, but they really want the branded product, whereas the Europeans tend to be cheaper, I can say that, and they'll take knock-offs and they are less concerned about brand and imagery than either the U.S. market or the Asian market. I think that's the truth of it.

Jim Duffy – Thomas Weisel Partners

Okay. And then final question. You mentioned some opportunity for SG&A savings, but plans to reinvest in advertising and marketing and John, on your comments you implies a long-run operating margin in the mid-teens. So if we kind of project out a $600 million, $650 million run rate, that implies $150 million or so reduction in SG&A from FY ’08 SG&A levels. Is that – as you think about it, is that achievable or do you foresee that you'd have to grow into that margin structure that you talked about?

John Duerden

No, I think that you got that – maybe I didn't communicate clearly. The number we are looking at is a 30% – 46% gross margin or the high-40s and the 30% SG&A percentage of revenue.

Jim Duffy – Thomas Weisel Partners

Okay. Wouldn’t that imply a mid-teens operating margin?

John Duerden

Yes, that's correct.

Jim Duffy – Thomas Weisel Partners

Okay. And how do you get –

John Duerden

– your question.

Jim Duffy – Thomas Weisel Partners

Well, no, I think we are both talking about the same thing using different numbers. My question is if you get SG&A rate to the 30% or so, if we assume a $600 million, $650 million revenue run rate, that's a huge reduction in SG&A from FY ’08 SG&A levels and I'm wondering whether to get that 30% SG&A rate, you think you need to grow into that or can you get there by cost cutting?

John Duerden

I think it will be some of both.

Russ Hammer

Yes. Jim, that –

John Duerden

We will grow revenues at a higher rate. I think that we will see modest growth in our revenues next year, but I think that once we stabilize the business, we can see accelerated – assuming that the economy continues to move in the right direction, I think we can higher growth rates in the years beyond that. So I do think that we can get to the number that we are talking about through a combination of revenue growth and cost reduction.

Jim Duffy – Thomas Weisel Partners

Very good.

Russ Hammer

Jim, I think one important aspect is to look at our SG&A, obviously retail SG&A as you asked the question has rent and everything else and runs a much higher percentage. Our retail SG&A runs up close to 50% – 48%, 50% globally. And our wholesale runs significantly lower than that. As we invest more in retail, we have to balance that.

Jim Duffy – Thomas Weisel Partners

I see. Thank you.

John Duerden

Thanks, Jim.

Operator

And next, we'll hear from Mitch Kummetz from Robert Baird.

Mitch Kummetz – Robert W. Baird

Thank you. Let me ask maybe Jim's last question in a different way, because John, you talked about expecting to achieve profitability at some point next year and correct me if I'm wrong, I believe that doesn’t assume that you are going to be profitable for the year.

John Duerden

That's correct.

Mitch Kummetz – Robert W. Baird

But is there a certain minimum level of revenue that you think you need to be at in order to have a breakeven or better business on an annual basis at some point? Do you have sort of top line target in mind whether – not 2010, but 2011 or –?

John Duerden

I think – not that I'm going to disclose at this stage.

Mitch Kummetz – Robert W. Baird

Okay. Right. I think I heard you say – I’m not sure, but I thought you said that your direct to consumer business in the Americas was $42 million in the quarter. Is that correct?

John Duerden

Let me tell you exactly what I said there, Jim.

Mitch Kummetz – Robert W. Baird

It's Mitch actually.

John Duerden

Sorry, Mitch. So on the Americas, the consumer direct channels, which is made up of both retail and Internet were $42 million, up 47%.

Mitch Kummetz – Robert W. Baird

Okay.

John Duerden

I did say that.

Mitch Kummetz – Robert W. Baird

So your – that’s nearly half your Americas business at this point?

John Duerden

That's correct.

Mitch Kummetz – Robert W. Baird

So let me ask you this. I haven’t backed into what that means wholesale was for the Americas in the quarter. Maybe you can give me that number, it's pretty easy math but I'm not going to do it right now. But it seems like your wholesale business in the U.S. is pretty challenged and I know you guys have made the comments about attempting to rebuild relationships there.

So can you talk a little bit about where you are in that process and I imagine you are having discussions at this point about spring 2010? Do you think that your wholesale business could actually – in the U.S. could actually be up year-over-year by the time you get to the first half of next year? I mean, kind of where are you in the process of rebuilding those relationships?

John Duerden

I – first of all, I think we are well engaged in rebuilding the relationships. And the response to spring '10 line has been actually very favorable. I believe that with our major accounts, our business should be up with all of our major accounts next year compared with this year.

I hesitate to give you a particular number for our wholesale business next year, but I am encouraged frankly but – the combination of our in-store merchandizing, the improved level of customer service, just getting out and talking with our customers and the spring product line next year is beginning to have an effect. I'm not sanguine about how difficult it is to rebuild those relationships, particularly in the market where retail generally is under huge pressure.

But I do think that we are making progress on it. We have more work to do on it certainly. And ironically, I think that the success of our own retail business may assist us in that process because we are able, through our own retail business, to demonstrate the full power of our product line and the merchandizing of our product line.

And when the Crocs product line is presented really well, it's very appealing. It's colorful, it is – it's a broad product line. It has products that addresses women, kids and men. And I think – so I think the work we are doing in that area – we are learning a lot from it frankly and it is ironic, but I think we can leverage our own experience at retail to help support reengaging the retail – the wholesale channel in the United States and in Europe.

Mitch Kummetz – Robert W. Baird

Okay.

John Duerden

It's a view that I formed over the last three months and spent quite a lot of time looking at it. So – yes, I think it's possible to restore our relationships. Is it going to happen overnight? Are you going to see 40% growth in our business with wholesale next year? I doubt it. But I do think you will see growth in the business with our major accounts in the United States.

Mitch Kummetz – Robert W. Baird

All right, that's helpful. And then Russ, you ran through some retail numbers in terms of units, kind of like classification whether it's kiosk or outlet or – I didn’t quite catch all of that. I think I could probably pull it off the transcript, but can you give me what those numbers were a year ago so I can get some sort of sense as to how much retail grew year-over-year?

Russ Hammer

Sure. So – one moment there, Mitch, I've got it right here. So our – year-over-year, he is asking. Our year-over-year Q2 ’09 – Mitch, you want same stores or just you're looking for the growth?

Mitch Kummetz – Robert W. Baird

I'm just looking for the units. How many do you – I think you said all in, you ended up with 500 –

Russ Hammer

Okay, sure, sure. So Q2 ’08, we had company-owned locations 243.

Mitch Kummetz – Robert W. Baird

Okay.

Russ Hammer

And Q2 ’09, the number I gave on the call was 310. So we went up about 67 and let me give you a little more color. That's about a 30% increase, Asia went from 80 to 123.

Mitch Kummetz – Robert W. Baird

Okay.

Russ Hammer

And the U.S. went from 145 to 158, a more moderate growth. But we went up over 50% in Asia and about – less than 10% in the U.S.

Mitch Kummetz – Robert W. Baird

And that overall 30%, is that more – I thought it was kiosk driven, is it?

Russ Hammer

No, no. I think as we said in the last call, we've changed our strategy and we are going heavier into the outlets.

Mitch Kummetz – Robert W. Baird

Okay.

Russ Hammer

So we are seeing very, very good success globally in the outlet area.

Mitch Kummetz – Robert W. Baird

Okay.

Russ Hammer

And it’s – merchandise, as John said, very well, I mean the sell-through is very strong.

Mitch Kummetz – Robert W. Baird

All right. So let me ask one last question.

Russ Hammer

Sure.

Mitch Kummetz – Robert W. Baird

Russ, I think you had the comment to that your direct business was strong in the Europe in the quarter. Was that correct?

Russ Hammer

I said the Internet piece of the direct business.

Mitch Kummetz – Robert W. Baird

The Internet piece?

Russ Hammer

Yes and it's a small piece, Mitch. I don't want to overemphasize that. I think I did say it was in a startup mode.

Mitch Kummetz – Robert W. Baird

Right.

Russ Hammer

But it more than doubled.

Mitch Kummetz – Robert W. Baird

Okay.

Russ Hammer

So – but it’s a small number, but – we are finding the Internet has global appeal and the retail has global appeal when we go direct to consumer and when you think about it, it gives us guaranteed access to our consumer base and as John said, when we have guaranteed access and we can show the whole portfolio, merchandize it correctly, but sell-through is strong.

Mitch Kummetz – Robert W. Baird

Okay. All right, that's all I had. Thanks and good luck.

John Duerden

Mitch, thanks.

Operator

And we'll take our final question from Jeff Mintz from Wedbush.

Jeff Mintz – Wedbush

Thanks very much. Just a couple of follow-up questions here. First of all, on the ASPs, you indicated that excluding the impaired product, the ASPs were actually up year-over-year. Is that primarily driven by the increased level of retail?

Russ Hammer

It is. We saw, as Jeff you I have talked about before, a full price there. And at our wholesale, we sold a lot of our units that were impaired at higher as well.

Jeff Mintz – Wedbush

Okay. And then on the wholesale side, do you have – can you give us some sense of the number of doors that you were in this spring? Obviously, it's come – could down, but just to get a sense of where you are in terms of door count on the wholesale business, U.S. and international.

Russ Hammer

Yes. So Jeff, as I said in the last call, we are no longer providing door information, it's not our industry relevant measurement that's used consistently and we are not providing it. But I will you a little color. We did clean up our distribution channel as John articulated, in the U.S. and we are pretty much through that exercise now and in the Asia, we did increase our doors, but we are not going to provide any specific numbers on those.

Jeff Mintz – Wedbush

Okay. So when you cleaned up your U.S. distribution, does that suggest accounts that you don't plan to get back into as you recreate these relationships?

John Duerden

That's correct.

Jeff Mintz – Wedbush

Okay.

John Duerden

Yes. We – for instance, we were in Hallmark Cards. We are not in Hallmark Cards any longer.

Jeff Mintz – Wedbush

Okay.

John Duerden

To give one example, there are others.

Jeff Mintz – Wedbush

And then Russ, just kind of a technical question. Were there in previous quarters or last Q2, were there expenses that you are now breaking out as charitable expenses because I know that obviously Crocs has been doing charitable projects for at least I believe a year and I'm just wondering kind of what the level of those expenses were in the past.

Russ Hammer

In Q2 last year, they were very, very minor. We have done them in the past, the year before too, ’07, we did more than we did last year and – but they were too minimal to actually break out and have an impact.

Jeff Mintz – Wedbush

Okay. Okay, great. Thanks very much and good luck.

Russ Hammer

Thanks, Jeff.

John Duerden

Thanks, Jeff.

Operator

And that does conclude our question-and-answer session. I would like to turn it back to our presenters for closing remarks.

John Duerden

Ladies and gentlemen, thank you for taking the time to listen to the call. I do believe that we are making progress here. I am cautiously optimistic about our ability to get the company to where we want it to be and I think we have a good management team in place to pull that off. Thank you.

Operator

And that does conclude today's call. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!